Attached files
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EX-3.4 - EX-3.4 - Digital Cinema Destinations Corp. | d29262_ex3-4.htm |
EX-23.1 - EX-23.1 - Digital Cinema Destinations Corp. | d29262_ex23-1.htm |
EX-23.2 - EX-23.2 - Digital Cinema Destinations Corp. | d29262_ex23-2.htm |
EX-23.3 - EX-23.3 - Digital Cinema Destinations Corp. | d29262_ex23-3.htm |
EX-23.4 - EX-23.4 - Digital Cinema Destinations Corp. | d29262_ex23-4.htm |
As filed with the Securities and Exchange Commission on March
14, 2012
Registration No. 333-178648
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
DIGITAL CINEMA DESTINATIONS CORP.
(Exact name of registrant as specified in its
charter)
Delaware |
7830 |
27-3164577 |
||||||||
(State or other
jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
250 East Broad Street
Westfield, New Jersey 07090
(908) 396-1362
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Westfield, New Jersey 07090
(908) 396-1362
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Joseph L.
Cannella Eaton & Van Winkle LLP Three Park Avenue, 16th floor New York, New York 10016 (212) 561-3633 |
Richard H. Gilden Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 (212) 715-9486 |
Approximate
date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration
statement.
If any of the securities being
registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following
box. [ ]
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earliest effective registration statement for the same offering. [ ]
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act.
Large accelerated
filer |
[ ] |
Accelerated filer |
[ ] |
|||||||||||
Non-accelerated
filer |
[ ] |
Smaller reporting company |
[X] |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
Amount to be Registered |
Proposed Maximum Offering Price Per Share |
Proposed Maximum Aggregate Offering Price (1)(2) |
Amount of Registration Fee (3) |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Class A Common
Stock par value $0.01 |
4,830,000 | $8.00 | $38,640,000 | $4,428.14 |
(1) |
Includes 630,000 Class A common stock which may be issuable pursuant to the exercise of a 45-day option granted to the underwriters by the registrant to cover over-allotments, if any. |
(2) |
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933 (the Securities Act), based on a proposed aggregate offering of $33.6 million and a $5.04 million over-allotment option. |
(3) |
Of this amount, $3,294.75 was previously paid. |
The
Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting
pursuant to such Section 8(a), may determine.
The information in this prospectus is not complete and may
be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is
not permitted.
Subject To Completion, Dated March 14,
2012
PROSPECTUS
4,200,000 Shares
Digital Cinema Destinations Corp.
Class A Common Stock
This is our initial public
offering. We are offering 4,200,000 shares of Class A common stock.
We expect the public offering
price to be between $6.00 and $8.00 per share. Currently, no public market exists for the shares. We have applied to list our Class A
common stock on The NASDAQ Capital Market under the symbol DCIN.
Following this offering, we will
have two classes of outstanding common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and
Class B common stock will be identical, except with respect to voting and conversion. Each share of Class A common stock will be entitled to one vote
per share. Each share of Class B common stock will be entitled to ten votes per share and will be convertible at any time into one share of Class A
common stock. Outstanding shares of Class B common stock will represent approximately 61% of the voting power of our outstanding capital stock
following this offering (assuming no exercise of the underwriters over-allotment option).
Investing in our Class A common stock involves a high degree of risk.
See Risk Factors beginning on page 12.
See Risk Factors beginning on page 12.
Per Share |
Total |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Public
offering price |
||||||||||
Underwriting
discount (1) |
||||||||||
Proceeds to
us (before expenses) |
(1) |
See Underwriting for a description of compensation payable to the underwriters. |
We have granted the underwriters
an option to purchase up to an additional 630,000 shares of Class A common stock, less the underwriting discount, within 45 days from the date
of this prospectus to cover overallotments.
We have also agreed to issue one
of the underwriters a warrant to purchase up to 1% of the shares of Class A common stock sold in this offering. The warrant will have an exercise price
equal to 110% of the offering price of the shares of Class A common stock sold in this offering.
Neither the Securities and
Exchange Commission nor any state securities regulators have approved or disapproved of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to
deliver the shares to purchasers on or about , 2012.
Joint Book-Running Managers
DOMINICK & DOMINICK LLC |
MAXIM GROUP LLC |
---|
The date of this prospectus is
, 2012.
TABLE OF CONTENTS
Prospectus
Summary |
1 | |||||
The Offering
|
6 | |||||
Historical
Consolidated Financial and Operating Data and Summary Unaudited Pro Forma Combined Data |
8 | |||||
Risk Factors
|
12 | |||||
Special Note
Regarding Forward-Looking Statements |
22 | |||||
Use of Proceeds
|
23 | |||||
Dividend Policy
|
23 | |||||
Dilution
|
24 | |||||
Capitalization
|
25 | |||||
Unaudited Pro
Forma Combined Financial Information |
26 | |||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
34 | |||||
Business
|
51 | |||||
Directors and
Executive Officers |
66 | |||||
Director
Compensation |
70 | |||||
Executive
Compensation |
71 | |||||
Security
Ownership of Certain Beneficial Owners and Management |
75 | |||||
Related Party
Transactions |
78 | |||||
Description of
Capital Stock |
78 | |||||
Shares Eligible
For Future Sale |
82 | |||||
Underwriting
|
84 | |||||
Legal Matters
|
87 | |||||
Experts
|
87 | |||||
Where You Can
Find More Information |
87 | |||||
Index to
Financial Statements |
F-1 |
You should rely only on the
information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information that is different from
that contained in this prospectus. This prospectus may only be used where it is legal to offer and sell these securities. The information in this
prospectus is only accurate as of the date of this prospectus.
i
Market Data and Industry Information
Unless otherwise indicated,
information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources,
including information from independent industry analysts, the National Association of Theatre Owners, the Motion Picture Association of America (the
MPAA) and publications such as Film Journal International, Box Office Magazine and Variety, as well as our own estimates and research. None
of the independent industry publications used in this prospectus were prepared on our behalf, and none of the sources cited in this prospectus have
consented to the inclusion of any data from its reports, nor have we sought consent from any of them. Although we believe that the sources are
reliable, we have not independently verified market industry data provided by third parties or by industry or general publications. Similarly, while we
believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we are
not aware of any misstatements regarding any industry data presented by this prospectus, our estimates involve risks and uncertainties and are subject
to change based on various factors, including those discussed under Risk Factors in this prospectus.
ii
PROSPECTUS SUMMARY
This summary highlights
information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment
decision. Before investing in our Class A common stock, you should carefully read this entire prospectus, including our financial statements and
related notes included in this prospectus and the information set forth under the headings Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of Operations. As used in this prospectus, unless the context otherwise requires, the
words the Company, Digiplex, we, our, us and Successor and words of similar
import refer to Digital Cinema Destinations Corp. and its subsidiaries, references to Cinema Centers refer to Cinema Supply, Inc., and
references to Lisbon Cinema refer to Lisbon Theaters Inc. As used in this prospectus, the word Predecessor refers to two movie
theatres located in Westfield and Cranford, New Jersey which we acquired on December 31, 2010. As used in this prospectus, the term pro
forma refers to, in the case of pro forma financial information, such information after giving pro forma effect to: (1) our planned acquisition
of five Cinema Centers theatres, (2) our planned acquisition of the Lisbon Cinema theatre and (3) this offering and the use of the proceeds therefrom
(collectively referred to as the Transactions).
Our Company
Digital Cinema Destinations Corp.
is a fast-growing motion picture exhibitor dedicated to transforming movie theatres into digital entertainment centers. Pro forma for the Transactions,
we will own and operate 85 screens in nine theatres, up from our current 19 screens in three theatres prior to our planned acquisitions. Our goal is to
own and operate at least one theatre in each of approximately 100 locations throughout the United States, which, depending on the number of screens in
each theatre, may approximate 1,000 screens.
Acquisitions of historically cash
flow positive theatres are a key component of our strategy. We intend to create an all-digital national footprint by selectively pursuing multi-screen
theatre acquisition opportunities that meet our strategic and financial criteria. We expect to upgrade the theatres to digital platforms if they have
not already been upgraded. We believe that an all-digital theatre circuit serves as the backbone for creating a more entertaining movie-going
experience, providing us with significantly greater programming flexibility and enabling us to achieve increased operating efficiencies. We believe
that through a combination of operating practices, enhanced productivity resulting from the management of the new digital platforms and increased
alternative content supplementing the traditional theatrical exhibition schedule, we can produce improved financial results and customer experiences.
We can not assure you, however, that we will accomplish these goals. See Risk Factors.
We currently operate theatres
located in Westfield, New Jersey (the Rialto), Cranford, New Jersey (the Cranford) and Bloomfield, Connecticut (the
Bloomfield 8), consisting of three theatres and 19 screens. We acquired the Rialto and Cranford on December 31, 2010 and the Bloomfield 8
on February 17, 2011. All of our theatres are multi-screen theatres and contain auditoriums ranging from 90 to 275+ seats. We believe our theatres
appeal to a diverse group of patrons because, to the extent the number of screens allow, we offer a wide selection of films and convenient show times,
targeted to the demographics of the surrounding population. In addition, most of our theatres feature state-of-the-art amenities such as wall-to-wall
and silver 3D screens, digital stereo surround-sound, computerized ticketing systems and comfortable seating with cup holders and infrared security
cameras throughout the theatre along with enhanced interiors and exteriors.
In April 2011, we executed an
asset purchase agreement for the purchase of certain assets of Cinema Centers, which we refer to as the Cinema Centers acquisition. Cinema
Centers consists of 54 screens located in central Pennsylvania, with 11 screens in Bloomsburg, 12 screens in Camp Hill, 10 screens in the Fairground
Mall, 12 screens in Selinsgrove and 9 screens in Williamsport. The Cinema Centers theatres had approximately 1.4 million attendees for the twelve
months ended December 31, 2011. The Cinema Centers theatres have not yet been fully upgraded to digital projection platforms, which we plan to
accomplish following the consummation of the acquisition.
In February 2012, we executed an
asset purchase agreement for the purchase of certain assets of Lisbon Cinema, which we refer to as the Lisbon Cinema acquisition. Lisbon
Cinema consists of a single theater with 12 screens in Lisbon, Connecticut. The Lisbon Cinema theatre had approximately 388,000 attendees for the
twelve months ended December 31, 2011. The Lisbon Cinema theatre has been fully upgraded to digital projection platforms.
1
We expect to consummate the
Cinema Centers and Lisbon Cinema acquisitions by using a portion of the net proceeds from this offering to fund the purchase price.
We believe in our slogan,
cinema reinvented. Our philosophy is to buy and improve existing facilities rather than find and build new
theatres. We believe this approach provides more predictability, speed of execution and lower risk. We have enhanced the operations of the Rialto,
Cranford and Bloomfield 8 theatres by fully converting each of the 19 screens to digital projection platforms, with 12 screens equipped with
RealD 3D systems, installing proven state-of-the-art software and renovating the theatres. During fiscal year ended June 30, 2011, we installed
16 digital platforms, including digital projectors and related equipment in our three theatres. With three systems that were installed prior to our
acquisition of the theatres, all 19 of our screens are digital. The average cost that we have incurred with respect to the instillation of the 16
digital projectors and related equipment that we installed to date is approximately $74,000 per digital platform, inclusive of equipment and labor. Our
total cost of digital platform installations is $1.2 million. Pro forma for the Transactions, 37 of our screens will be digital. We expect to
convert the 48 remaining screens within four months from consummation of the offering at an estimated aggregate cost of $3.1 million and
expect to finance this conversion through capital lease or other secured financing from banks or vendors.
We believe that the historic
average capacity utilization of movie theatre seats for the industry has ranged between 10% and 15% and that average utilization falls to below 5% from
Monday through Thursday. An all-digital theatre circuit gives us the flexibility to target our programming to match and draw audience demand, which is
of particular importance during off-peak times. Properly programmed and advertised, we believe alternative content will increase the utilization of
theatres and generate higher theatre level cash flow. We expect that alternative content will vary with customer taste and that the breadth of
offerings will increase as alternative content gains traction in the market.
In addition to digital projection
platforms, we intend to use alterative content to supplement our traditional theatrical exhibition schedule. Alternative content can be as diverse as
the ballet from the Bolshoi, opera from the Metropolitan Opera, rock concerts and sporting events from around the world, which may be taking place in
different geographical regions, or even if locally, may be sold out. At a fraction of the ticket price of a major event, our customers are able to see
events occurring throughout the world, at times in live 3D. We have presented sporting events such as boxing matches, the World Cup, all-star games,
the NCAA basketball finals, and major college football bowl games. Tapping into the potential of alternative content could lead to use of our theatres
for auctions and fundraisers as well as a venue for meetings of corporate, religious, trade or professional organizations.
Our three theatres had, on a pro
forma basis, approximately 312,000 attendees for the twelve months ended December 31, 2011. For the same twelve-month period, and pro forma for the
Transactions, the nine theatres had an aggregate of approximately 2.1 million attendees.
For the Successor period from the
inception date (July 29, 2010) to June 30, 2011, we had revenues of $1.6 million and a net loss of $0.8 million. For the six month period
(unaudited) ended December 31, 2011, we had revenues of $1.9 million and a net loss of $0.6 million. Pro forma for the Transactions (unaudited),
for the twelve month period ended June 30, 2011 and the six month period ended December 31, 2011, the nine theatres had revenues of $22.0 million and
$11.0 million, and net loss of $0.9 million and $0.9 million, respectively. Approximately 7% of our admissions revenue was
attributable to alternative content for the six months ended December 31, 2011. Revenues related to alternative content have not been material to
date for the Cinema Centers and Lisbon Cinema theatres.
2
Our Strategy
Our business strategy is to
transform movie theatres into digital entertainment center destinations by acquiring cash flow positive theatres in strategic markets, converting them
to digital formats and actively programming and marketing alternative content in addition to first run 2D and 3D movies.
Organic
Growth
The principal factors that we
expect will contribute to our organic growth include:
|
Digital Implementation. We intend to create an all-digital theatre circuit utilizing our senior management teams significant experience in digital cinema deployment, alternative content selection and movie selection. We have converted all of our existing theatres and will convert those we acquire to digital formats with a mix of RealD 3D auditoriums in each theatre complex. We expect to finance our purchases of digital projection equipment in the theatres we acquire in part by leveraging virtual print fees that we receive from motion picture distributors. Motion picture distributors make these payments to motion picture exhibitors to encourage conversion of theatres to digital projection platforms. The virtual print fee program will be available to us with respect to installations of new digital platforms until September 30, 2012, at which time the program is scheduled to expire with respect to installations of new digital projection equipment. For additional information regarding virtual print fees, see Business Digital Cinema Implementation. |
|
Alternative Content. We expect to offer our customers popular movies and alternative content including sports, music, opera, ballet and video games. With the exception of video games for which we have acquired the necessary software (but have not yet implemented), we offer each of these alternative content presentations at our existing theatres. We advertise and implement these features as an event being presented so that our patrons can fully enjoy the presentation and return frequently to enjoy future presentations. We believe we can increase the utilization rates of our theatres and concession sales by matching content to audience demand during off-peak and some peak periods. Approximately 7% of our admissions revenue was attributable to alternative content for the six months ended December 31, 2011. |
|
Operating Efficiencies. We have deployed state-of-the-art integrated software systems for back office accounting and theatre management. This enables us to manage our business efficiently while providing maximum scheduling flexibility and reduced operational costs. |
|
Dynamic Programming. One of the major benefits of the industrys digital conversion is that it removes our reliance on single reels of film. With digital content, we are able to program multiple screens for playback from a single source file, based on ticket sales and customer demand, rather than being limited to one screen per reel. |
|
Marketing. We intend to actively market the Digiplex brand concept and programs to consumers using primarily new media tools such as social media, website design and regular electronic communications to our targeted audience, which should allow us to grow our attendance. We expect the combination of our marketing strategy with our blend of traditional cinema and alternative content will transform our theatres to entertainment centers. |
|
Pre-Show and Other Advertising. We expect to increase pre-show and other advertising revenue in our existing theatres and the theatres we acquire using National CineMedia LLCs services under a multi-year advertising contract that we executed in March 2011 and under which we commenced pre-show advertising in August 2011. |
External
Growth
The principal factors that we
expect to contribute to our external growth are a disciplined approach to acquisitions and our industry experience and relationships. We believe
there is a supply of smaller, family-owned chains and individual theatres currently available in the market in free zones, which are areas
that permit us to acquire movies from any distributor, compared to an area where film distributors establish geographic licensing zones and allocate
each available film to one theatre within that zone.
3
Smaller theatre owners are facing
significant capital investments due to the motion picture and theatre exhibition industrys ongoing digital conversion. Despite the availability
of the virtual print fee program, which provides payments to motion picture exhibitors from movie distributors to encourage and assist in the
conversion to digital platforms, we believe many operators are either unable or unwilling to make the necessary capital expenditures despite positive
historical cash flows. Our philosophy is to buy and improve existing facilities rather than find and build new theatres. We
believe this approach provides more predictability, speed of execution and lower risk. To remain competitive, we believe alternative content will
become increasingly important, and many smaller theatres will lack access to quality content. We intend to selectively pursue acquisitions where the
location, overall market and facilities further enhance the quality of our theatre portfolio.
Our acquisition policy is to
acquire theatres in free zones that provide significant opportunities for improved financial performance through our business model. We will typically
attempt to acquire cash flow positive theatres in attractive markets, convert them to a digital format where still necessary and actively program and
market alternative content in addition to running 2D and 3D movies. By marketing our theatres as all digital entertainment destinations, we expect to
realize increased cash flow from 3D films and alternative content programs aimed at targeted audiences, increased attendance, increased concessions and
sponsorship and advertising revenues.
Our Industry
Movie-going is a convenient and
attractively-priced form of out-of-home entertainment. On an average price-per-patron basis, movie-going continues to compare favorably to other out-of
home entertainment alternatives, such as the opera, concerts and sporting events. Movie theatres currently garner a relatively small share of
consumer entertainment time and spend. We believe that, despite the declining trend in attendance experienced in the U.S. motion picture exhibition
industry in recent years, there is significant room for expansion and growth in the U.S. movie exhibition industry. Our industry benefits from
available capacity to satisfy additional consumer demand without capital investment. As major studio releases have declined in recent years, we believe
that alternative content could fill an important gap that exists in the market today for consumers, movie producers and theatrical exhibitors by
providing a broader range of content and access to consumers.
We believe the following market
trends will drive the growth and strength of our industry:
|
Importance of Theatrical Success in Establishing Movie Brands and Subsequent Markets. Theatrical exhibition is the primary distribution channel for new motion picture releases in the domestic and international markets. We believe a successful theatrical release which brands a film is one of the major factors in determining its success in downstream markets, such as DVDs, network and syndicated television, video-on-demand, pay-per-view television and the Internet. As a result, we believe motion picture studios will continue to work cooperatively with theatrical exhibitors to ensure the continued importance of the theatrical window. |
|
Convenient and Affordable Form of Out-Of-Home Entertainment. Movie-going continues to be one of the most convenient and affordable forms of out-of-home entertainment, with an estimated average ticket price in the United States of $7.89 in 2010 and $7.96 in 2011 (according to boxofficemojo.com). Average prices in 2010 for other forms of out-of-home entertainment in the United States, including sporting events and theme parks, ranged from approximately $25.00 to $77.00 per ticket according to the MPAA. |
|
Innovation with Digital Technology. Our industry began its conversion to digital projection technology in 2006. This conversion has allowed exhibitors to expand their product offerings. Digital technology allows the presentation of 3D content and alternative content such as live and pre-recorded sports programs, opera, ballet, concert events and special live events. We believe that these additional programming alternatives should expand the industrys customer base and increase patronage for exhibitors. |
Risk Associated with Our Business
Our business is subject to
numerous risks and uncertainties, including those highlighted in the section titled Risk Factors immediately following this prospectus
summary. Some of these risks are:
|
We are a recently-formed enterprise, have incurred net losses to date and we cannot assure you that we can operate profitably in the future. |
4
|
We will need substantial additional funding to accomplish our business strategy and may be unable to raise capital on terms favorable to us or at all, which could increase our financing costs, dilute your ownership interests, affect our business operations or force us to delay, reduce or abandon our business strategy. |
|
We may not benefit from our business strategy of acquiring and operating multi-screen theatres. |
|
We may face intense competition in our business strategy of acquiring theatres. |
|
We are subject to uncertainties related to digital cinema, including insufficient financing to obtain digital projectors and insufficient supply of digital projectors. |
|
We depend on motion picture production and performance. |
|
Our business is subject to significant competitive pressures. |
|
The interests of A. Dale Mayo, our CEO and Chairman of the Board and controlling stockholder, may conflict with your interests, and the concentration of voting power in Mr. Mayo will limit your ability to influence corporate matters. |
Corporate Information
We are a Delaware corporation
organized on July 29, 2010. Our principal executive offices are located at 250 East Broad Street, Westfield, New Jersey 07090. Our telephone number at
this address is (908) 396-1362. You should direct all inquiries to us at this address and telephone number. Our website address is
www.digiplexdest.com. The information contained on our website is not part of this prospectus.
5
THE OFFERING
Common
Stock |
4,200,000 shares of Class A common stock(1) |
|||||
Offering
Price |
We
anticipate that the initial public offering price for our Class A common stock will be between $6.00 and $8.00 per
share. |
|||||
Common Stock to be Outstanding After this Offering |
5,821,607 shares of Class A common stock(1)(2) 900,000 shares of Class B common stock |
|||||
Use of
Proceeds |
We
estimate that the net proceeds to us from this offering will be approximately $26.5 million or approximately $30.5 million if the
underwriters exercise their over-allotment option in full, based on the assumed offering price of $7.00 per share (the midpoint of the estimated
initial public offering price range), and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us
related to this offering. We intend to use approximately $14.0 million of the net proceeds from this offering to consummate the Cinema Centers acquisition, approximately $6.0 million to consummate the Lisbon Cinema acquisition and $1.1 million to repay an outstanding obligation owed by us to Barco, Inc. (Barco) for purchases of digital cinema projectors equipment. We intend to use the balance of the net proceeds from this offering for general corporate purposes, including our working capital needs. If we fail to consummate the Cinema Centers acquisition and/or the Lisbon Cinema acquisition, we plan to use the portion of the net proceeds from this offering not used for the acquisition(s) we do not consummate for future acquisitions and general corporate purposes, including working capital needs. You should read the discussion in this prospectus under the heading Use of Proceeds for more information. |
|||||
Over-Allotment
Option |
We
have granted the underwriters an option for a period of 45 days to purchase, on the same terms and conditions set forth above, up to an additional
630,000 shares of Class A common stock to cover over-allotments. |
|||||
Lock Up
|
Our
officers and directors and major shareholders have agreed that, for a period of 180 days from the closing date of this offering, they will be subject
to a lock-up agreement prohibiting, without the prior written consent of Dominick & Dominick LLC, any sales, transfers or hedging transactions of
our securities owned by them. See Underwriting presented below. |
|||||
Listing
|
We
have applied to have our common stock listed on the NASDAQ Capital Market; however, we can not assure you that such listing will be
approved. |
6
Proposed
Symbol |
DCIN |
|||||
Risk
Factors |
See
Risk Factors and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to
invest in the common stock. |
(1) |
The number of shares of our common stock outstanding immediately after this offering gives effect to (1) the one-for-two reverse stock split of our Class A and Class B common stock which was approved by our Board of Directors in November 2011 and (2) the conversion of 2,104,882 shares of Series A preferred stock into 1,052,441 shares of Class A common stock (inclusive of 66,191 shares issuable as a dividend accrued on the preferred shares through December 31, 2011). Unless otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase up to 630,000 shares of our Class A common stock in this offering solely to cover over-allotments. |
(2) |
Excludes 42,000 shares of Class A common stock available for issuance in connection with warrants that we will issue to one of the underwriters in connection with this offering and future grants of options and restricted stock. Also excludes 33,333 unvested shares of Class A common stock underlying equity awards granted to employees and non-employees. |
7
HISTORICAL CONSOLIDATED FINANCIAL
AND OPERATING DATA AND SUMMARY UNAUDITED PRO FORMA COMBINED DATA
AND OPERATING DATA AND SUMMARY UNAUDITED PRO FORMA COMBINED DATA
Summary Consolidated Selected Financial
Data
This is only a summary of our
financial information and does not contain all of the financial information that may be important to you. Therefore, you should carefully read all of
the information in this prospectus, including the financial statements and their explanatory notes and the section entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations before making a decision to invest in our Class A common stock. The
consolidated statement of operations data for the period from inception (July 29, 2010) to June 30, 2011 (Successor) and the combined statement of
operations data for the years ended December 31, 2010 and 2009 (Predecessor) are derived from our audited financial statements and related notes
thereto included elsewhere in this prospectus. For the Successor, the consolidated balance sheet data as of December 31, 2011, the statement of
operations data for the six months then ended; and for the Predecessor, the statement of operations data for the six months ended
December 31, 2010 are derived from our unaudited consolidated financial statements and related notes thereto included elsewhere in this prospectus. Our
historical results presented below are not necessarily indicative of results to be expected in future periods.
Successor |
Predecessor |
Predecessor |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) |
Inception date (July 29, 2010) to June 30, 2011 |
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
|||||||||||
Statement
of operations data: |
||||||||||||||
Revenue
|
$ | 1,572 | $ | 2,156 | $ | 2,536 | ||||||||
Total costs
and expenses |
2,445 | 2,380 | 2,424 | |||||||||||
Income (loss)
before income taxes |
(776 | ) | (229 | ) | 109 | |||||||||
Net (loss)
income |
(790 | ) | (229 | ) | 109 | |||||||||
Other
operating data: |
||||||||||||||
Theatre level
cash flow (1) |
$ | 192 | $ | 358 | $ | 641 | ||||||||
Adjusted
EBITDA (2) |
$ | (373 | ) | $ | (83 | ) | $ | 229 |
Successor |
Predecessor |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended December 31, 2011 |
Six Months Ended December 31, 2010 |
|||||||||||||
Statement of operations data: |
||||||||||||||
Revenue
|
$ | 1,899 | $ | 1,114 | ||||||||||
Total costs
and expenses |
2,466 | 1,217 | ||||||||||||
Loss before
income taxes |
(567 | ) | (105 | ) | ||||||||||
Net loss
|
(587 | ) | (105 | ) | ||||||||||
Other
operating data: |
||||||||||||||
Theatre level
cash flow (1) |
$ | 368 | $ | 189 | ||||||||||
Adjusted
EBITDA (2) |
$ | (263 | ) | $ | (33 | ) |
(1) |
Theatre Level Cash Flow (TLCF) is a non-GAAP financial measure. TLCF is a common financial metric in the theatre industry, used to gauge profitability at the theatre level, before the effect of depreciation and amortization, general and administrative expenses, interest, taxes or other income and expense items. While TLCF is not intended to replace any presentation included in our consolidated financial statements under GAAP and should not be considered an alternative to cash flow as a measure of liquidity, we believe that this measure is useful in assessing our cash flow and working capital requirements. This calculation may differ in method of calculation from similarly titled measures used by other companies. This financial measure should be read in conjunction with the financial statements included in this prospectus. For additional information on TLCF, see pages 43-46. |
8
(2) |
Adjusted EBITDA is a non-GAAP financial measure. We use Adjusted EBITDA as a supplemental liquidity measure because we find it useful to understand and evaluate our results, excluding the impact of non-cash depreciation and amortization charges, stock based compensation expenses, and nonrecurring expenses and outlays, prior to our consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this prospectus. For additional information on Adjusted EBITDA, see pages 43-46. |
9
Summary Unaudited Proforma Combined
Data
This is only a summary of our
unaudited pro forma financial information and does not contain all of the financial information that may be important to you. The following summary of
our unaudited proforma combined financial information data is to be read in conjunction with the detailed Unaudited Pro Forma Combined Financial
Information, and notes thereto, beginning at page 26, in accordance with Article 11 of SEC Regulation S-X.
(dollars in thousands except per share
data) |
(1) Pro forma-19 screens 12 months ended June 30, 2011 |
(2) Pro forma-85 screens 12 months ended June 30, 2011 |
(2) Pro forma-85 screens 6 months ended December 31, 2011 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Statement
of operations data: |
||||||||||||||
Revenues
|
$ | 3,291 | $ | 22,020 | $ | 10,970 | ||||||||
Film rent
expense |
1,345 | 8,468 | 4,160 | |||||||||||
Cost of
concessions |
156 | 1,018 | 520 | |||||||||||
Salaries and
wages |
411 | 2,327 | 1,178 | |||||||||||
Facility
lease expense |
399 | 2,298 | 1,214 | |||||||||||
Utilities and
other |
558 | 3,598 | 1,847 | |||||||||||
General and
administrative |
1,150 | 2,477 | 1,376 | |||||||||||
Depreciation
and amortization |
330 | 2,859 | 1,526 | |||||||||||
Total costs
and expenses |
4,349 | 23,045 | 11,821 | |||||||||||
Operating
loss |
(1,058 | ) | (1,025 | ) | (851 | ) | ||||||||
Net income
(loss) attributable to Class A and Class B common shareholders |
$(975 | ) | $(942 | ) | $(871 | ) | ||||||||
Weighted
average shares of Class A and Class B common stock |
||||||||||||||
Loss per
share |
||||||||||||||
Other
operating data: |
||||||||||||||
Theatre level
cash flow (3) |
$422 | $4,311 | $2,051 | |||||||||||
Adjusted
EBITDA (4) |
$ | (393 | ) | $2,169 | $717 |
(dollars in thousands) |
Actual-19 screens As of December 31, 2011 |
Pro forma-85 screens As of December 31, 2011 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance
Sheet Data: |
||||||||||
Cash and cash
equivalents |
$ | 650 | $7,150 | |||||||
Property and
equipment, net |
2,328 | 20,828 | ||||||||
Total assets
|
4,841 | 31,341 | ||||||||
Total
liabilities |
2,167 | 2,167 | ||||||||
Total
stockholders equity |
$ | 2,674 | $29,174 | |||||||
Other
Data: |
||||||||||
Screens
|
19 | 85 | ||||||||
Locations
|
3 | 9 | ||||||||
Attendance
(12 months ended December 31, 2011) |
312,000 | 2,067,000 |
(1) |
Represents the actual results of our three theatres from the dates of acquisition (the Rialto and the Cranford) on December 31, 2010 and (the Bloomfield 8) on February 17, 2011 through June 30, 2011, plus the pre-acquisition results of these theatres from July 1, 2010 to the respective dates of acquisition. |
10
(2) |
Represents the pro forma results of our three theatres (the Rialto, the Cranford and the Bloomfield 8) as described in note (1) above, plus the pro forma results of the Cinema Centers acquisition and the Lisbon Cinema acquisition for the 12 and 6 month periods indicated. |
(3) |
TLCF is a non-GAAP financial measure. For additional information on TLCF, see page 33 and pages 43-46. |
(4) |
Adjusted EBITDA is a non-GAAP financial measure. For additional information on Adjusted EBITDA, see page 33 and pages 43-46. |
11
RISK FACTORS
An investment in our Class A
common stock involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties
described below and the financial statements and related notes included in this prospectus, before making an investment in our Class A common stock.
Any of the following risks could have a material adverse effect on our business, financial condition, results of operations, prospects or liquidity. In
any such case, the market price of our Class A common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We will need substantial additional funding to accomplish our business strategy and may be unable to raise capital on terms favorable to
us or at all, which could increase our financing costs, dilute your ownership interests, affect our business operations or force us to delay, reduce or
abandon our business strategy.
Our business strategy is to
create an all-digital national footprint by selectively pursuing multi-screen theatre acquisition opportunities that meet our strategic and financial
criteria, with upgrades to digital platforms as necessary. To successfully implement this strategy, we will need to raise substantial additional funds.
Our ability to fund potential theatre acquisitions and capital expenditures for theatre digitalization, expansion or renovation will require a
significant amount of cash, the availability of which depends on many factors beyond our control, including:
|
general economic and capital market conditions; |
|
the availability of credit from banks or other lenders; |
|
investor confidence in us; and |
|
the continued performance of our theatres. |
We cannot predict when, if ever,
our operations will generate sufficient cash flows to fund our capital investment requirements. Until they do, we will be required to finance our cash
needs through public or private equity offerings, bank loans or other debt financing, or otherwise. There can be no assurance that financing for future
theatre acquisitions and capital expenditures for theatre digitalization, expansion or renovation will be available on terms favorable to us or at all,
which could force us to delay, reduce or abandon our growth strategy, increase our financing costs, or both.
We may incur debt, if such
financing is available to us, in order to expand our business. Additional funding from debt financings may make it more difficult for us to operate our
business because we would need to make principal and interest payments on the indebtedness and may be obligated to abide by restrictive covenants
contained in the debt financing agreements, which may, among other things, limit our ability to make business and operational decisions and pay
dividends. Furthermore, raising capital through public or private sales of equity to finance acquisitions or expansion could cause earnings or
ownership dilution to your shareholding interests in our company.
We cannot assure you that our
business will generate sufficient cash flow from operations, that currently anticipated revenue growth will be realized or that future capital will be
available for us to fund our capital expenditure needs.
We may not benefit from our business strategy of
acquiring and operating multi-screen theatres.
Our business strategy is to
acquire and operate multi-screen theatres. In any acquisition, we expect to benefit from cost savings through, for example, the reduction of overhead
and theatre level costs, and from revenue enhancements resulting from the acquisition. There can be no assurance, however, that we will be able to
realize any anticipated benefits or that our profitability will be improved by any one or more acquisitions. Any acquisition may involve operating
risks, such as:
|
the difficulty of assimilating the acquired operations and personnel and integrating them into our current business; |
|
the potential disruption of our ongoing business; |
12
|
the diversion of managements attention and other resources; |
|
the possible inability of management to maintain uniform standards, controls, procedures and policies; |
|
the risks of entering markets in which we have little or no experience; |
|
the potential impairment of relationships with employees; |
|
the possibility that any liabilities we may incur or assume may prove to be more burdensome than anticipated; and |
|
the possibility that any acquired theatres or theatre circuit operators do not perform as expected. |
We have incurred net losses since inception, and we
cannot assure you that we will be profitable in the future.
We incurred a net loss of $0.8
million for the Successor period from the inception date (July 29, 2010) to June 30, 2011. We incurred a net loss of $0.6 million for the six months
ended December 31, 2011 (unaudited) and had an accumulated deficit of $1.4 million as of December 31, 2011 (unaudited). Following this offering, we
expect to consummate the Cinema Centers and Lisbon Cinema acquisitions. For additional information regarding these acquisitions, see Business
Acquisitions. We cannot assure you, however, that, following our consummation of the Cinema Centers and Lisbon Cinema acquisitions, we
will become profitable for fiscal year ending June 30, 2012 or in any other future period. Further, we cannot be certain that we will be able to
execute our business strategy of acquiring and operating multi-screen theatres on a profitable basis. As a result, we cannot assure you that we will be
able to attain or increase profitability on a quarterly or annual basis. If we are unable to effectively acquire theatres and manage the risks and
difficulties facing our business as we encounter them, our business, financial condition and results of operations may suffer.
We have a limited operating history which provides
limited reference for you to evaluate our ability to achieve our business objectives.
Since we have a limited operating
history, we are subject to the risks and uncertainties associated with early stage companies and have historically operated at a loss. Accordingly, you
will have a limited basis on which to evaluate our ability to achieve our business objectives. We were formed in July 2010 without any operating
business. We have acquired a total of three theatres and have entered into acquisition agreements to acquire six more. We plan to continue carrying out
our acquisition strategy of acquiring theatres. Our financial condition, results of operations and our future success will, to a significant extent,
depend on our ability to continue to acquire theatres throughout the United States and to achieve economies of scale. We cannot assure you that more
acquisitions can be consummated on terms favorable to us or at all, or that if we achieve those acquisitions we will be able to operate our expanded
business profitably. If we fail to achieve our business objectives, then we may not be able to realize our expected revenue growth, maintain our
existing revenue levels or operate at a profit. Even if we do realize our business objectives, our business may not be profitable in the
future.
We expect to incur long-term lease and debt
obligations, which may restrict our ability to fund current and future operations and that may restrict our ability to enter into certain
transactions.
In order to effect our business
plan, we expect to incur long-term debt service obligations and long-term lease obligations. We expect to assume outstanding or execute new operating
leases for theatres in connection with any acquisition that we may consummate. In addition, we may finance future theatre acquisitions through debt
financing, provided that such financing is available to us on acceptable terms. Any lease or debt obligations we incur will pose risk to you
by:
|
making it more difficult for us to satisfy our obligations; |
|
requiring us to dedicate a substantial portion of our cash flows to payments on our lease and debt obligations, thereby reducing the availability of our cash flows from operations to fund working capital, capital expenditures, acquisitions and other corporate requirements and to pay dividends; |
|
impeding our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate purposes; |
13
|
subjecting us to the risk of increased sensitivity to interest rate increases on any variable rate debt we incur; and |
|
making us more vulnerable to a downturn in our business and competitive pressures and limiting our flexibility to plan for, or react to, changes in our industry or the economy. |
Our ability to make scheduled
payments of principal and interest with respect to any indebtedness we incur will depend on our ability to generate positive cash flows and on our
future financial results. Our ability to generate positive cash flows is subject to general economic, financial, competitive, regulatory and other
factors that are beyond our control. We cannot assure you that we will generate cash flows at levels sufficient to enable us to pay any indebtedness we
incur. If our cash flows and capital resources are insufficient to fund future lease and debt service obligations, we may be forced to reduce or delay
capital expenditures, sell assets or operations, seek additional capital or restructure or refinance indebtedness. We may not be able to take any of
these actions, and these actions may not be successful or permit us to meet any scheduled debt service obligations and these actions may be restricted
under the terms of any future debt agreements.
If we fail to make any required
payment under the agreements governing our leases and indebtedness or fail to comply with the financial and operating covenants contained in them, we
would be in default, and as a result, our debt holders would likely have the ability to require that we immediately repay our outstanding indebtedness
and the lenders under any secured credit facility that we execute could terminate their commitments to lend us money and foreclose against the assets
securing our borrowings. We could be forced into bankruptcy or liquidation, which could result in the loss of your investment. The acceleration of our
indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default and cross-acceleration
provisions. If our indebtedness is accelerated, we may not be able to repay any future indebtedness or borrow sufficient funds to refinance it. Even if
we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our debt holders require
immediate payment, we may not have sufficient assets to satisfy our obligations under our indebtedness.
We may face intense competition in our business
strategy of acquiring theatres.
We may have difficulty
identifying suitable acquisition candidates. Even if we do identify appropriate candidates, we anticipate significant competition from other motion
picture exhibitors and other buyers when trying to acquire these candidates, and we cannot assure you that we will be able to acquire identified
candidates at reasonable prices or on favorable terms. Many of our competitors are well established and have significant experience in identifying and
effecting acquisitions. Many of these competitors possess greater technical, human and other resources than we do and our financial resources will be
relatively limited when contrasted with those of many of these competitors. This inherent competitive limitation gives others an advantage in pursuing
the acquisition of certain target theatres. Because of this competition, we cannot assure you that we will be able to successfully compete for
attractive theatre acquisitions. In addition, while we believe that there are numerous potential target theatres that we can acquire, our ability to
compete in acquiring certain sizable target theatres will be limited by our available financial resources. As a result of competition, we may not
succeed in acquiring suitable candidates or may have to pay more than we would prefer to make an acquisition. If we cannot identify or successfully
acquire suitable acquisition candidates, we may not be able to successfully expand our operations and the market price of our securities could be
adversely affected particularly since acquisitions are an important part of our strategy.
Resources could be wasted in researching acquisitions
that are not consummated.
It is anticipated that the
investigation of each specific target theatre and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other
instruments will require substantial time and attention and substantial costs for accountants, attorneys and others. In addition, we may opt to make
down payments or pay exclusivity or similar fees in connection with structuring and negotiating an acquisition. If a decision is made not to complete a
specific acquisition, the costs incurred up to that point in connection with the abandoned transaction, potentially including down payments or
exclusivity or similar fees, would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target business, we may fail
to consummate the transaction for any
14
number of reasons, including those beyond our control. Any such event will result in a loss to us of the related costs incurred, which could adversely affect subsequent attempts to locate and acquire other theatres.
We are subject to uncertainties related to digital
cinema, including insufficient financing to obtain digital projectors and insufficient supply of digital projectors.
Some of our competitors began a
roll-out of digital projection equipment for exhibiting feature films during 2006 and most exhibitors plan to continue domestic roll-out of digital
cinema until it is completed. However, significant obstacles may exist that impact such a roll-out plan and our ability to convert the theatres we
acquire to digital projection platforms including the availability of financing, the cost of digital projectors and the supply of projectors by
manufacturers. We cannot assure you that we will be able to obtain sufficient additional financing to be able to purchase and/or lease the number of
digital projectors we will require or that the manufacturers will be able to supply the volume of projectors needed for the worldwide roll-out that is
now ongoing in our industry. As a result, our ability to deploy digital equipment in the theatres we acquire could be delayed. Accordingly, the
availability of financing, the cost of digital projection systems and manufacturer limitations may delay our deployment of digital
platforms.
We may not be able to obtain sufficient or compelling
alternative content.
Our ability to present
alternative content depends on the availability, diversity and appeal of alternative content and customer taste. This varies from geographic region to
region. Poor performance of, or any disruption in the production or supply of alternative content could hurt our business and results of operations. In
addition, the type of alternative content offered to us may not be accepted by the demographic base of movie-goers in our theatres.
The virtual print fee program is expected
to expire on September 30, 2012, after which we will no longer be able to use such fees to finance our purchases of digital projection
equipment.
Following the consummation of the
Cinema Centers and Lisbon Cinema acquisitions, and with respect to any future acquisitions that we may consummate, we expect to finance our purchases
of digital projection equipment through capital lease financing or secured loans provided by banks or vendors. We expect to repay our obligations under
these financing arrangements using virtual print fees that we recover from motion picture distributors, and we may also secure such
financing arrangements with the virtual print fees.
Virtual print fees are provided
to motion picture exhibitors from movie distributors, to encourage and assist exhibitors in the conversion to digital projection platforms, by
effectively lowering the film rent expense that exhibitors pay to the movie distributors. The virtual print fee program provides that all distributors
pay virtual print fees on a quarterly basis to motion picture exhibitors based on films scheduled by the exhibitors on approved digital projection
platforms until the earlier of ten years from date the digital systems in a particular theatre are installed or the date the exhibitor has recovered
its out-of-pockets costs, including any financing charges, for the digital conversion. The virtual print fee program is expected to expire for new
installations of digital projection systems made after September 30, 2012. We will continue receiving virtual print fees for approved digital
projection systems installed prior to September 30, 2012.
Following expiration of the
virtual print fee program, we will need to finance installations of digital projection platforms from other sources. The pending expiration of the
virtual print fee program may provide theatre owners who are otherwise inclined to sell their theatres an incentive to sell their theatres at a higher
price. We may seek to reduce our proposed purchase price or offer a lower purchase price with respect to any theatre that we seek to acquire which has
not been previously converted to a digital projection system prior to the discontinuance of the virtual print fee program. We cannot assure you,
however, that we will be able to secure the financing that we may require or that we will be able to obtain the proposed purchase price
reductions.
Disruption of our relationships with various vendors
could substantially harm our business.
We rely on our relationships with
several vendors in the operations of our business. These relationships include:
|
the film department of Clearview Cinema Group (Clearview), which handles our negotiations with film distributors; |
15
|
Cinedigm Digital Cinema Corp. (Cinedigm), from which we license the Exhibit Management System (EMS) back office management system and which, through a subsidiary, acts as our agent to collect virtual print fees from motion picture distributors (for a discussion of virtual print fees, see Business-Digital Cinema Implementation); |
|
National CineMedia, LLC (NCM) provides us with in-theatre advertising and alternative context; |
|
Barco, Inc. (Barco), which provides us with digital equipment; |
|
Continental Concession Supply, Inc. (Continental Concession), which provides us with most of our concessions; and |
|
RealD, Inc. (RealD), which provides us with our 3D cinema systems. |
Although our senior management
has long-standing relationships with each of these vendors, we could experience deterioration or loss of any of our vendor relationships, which would
significantly disrupt our operations until an alternative source is secured.
Deterioration in our relationships with any of the
major film distributors could adversely affect our access to commercially successful films and could adversely affect our business and results of
operations.
Our business depends to a
significant degree on maintaining good relationships with the major film distributors that license films to our theatres. Clearviews film
department handles negotiations with motion picture distributors on our behalf. Deterioration in our relationships with any of the major film
distributors could adversely affect our access to commercially successful films and adversely affect our business and results of operations. Since the
distribution of motion pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases, we
cannot ensure a supply of motion pictures by entering into long-term arrangements with major distributors. Rather, we must compete for licenses on a
film-by-film and theatre-by-theatre basis and are required to negotiate licenses for each film and for each theatre individually.
We rely on software we license from Cinedigm to
operate our accounting systems and a failure of this system could harm our business.
We depend on Cinedigms EMS
back office management software system to operate the accounting functions of our business. A substantial system failure could temporarily restrict and
limit our internal accounting functions. In addition, we rely on EMS to track theatre invoices and to generate operating reports to analyze film
performance and theatre profitability. The EMS system is also an intricate part of our financial reporting process and provides us with information
that, together with our other financial software program, allows us to prepare our periodic financial reports. Disruption in, changes to, or a system
failure of the EMS system could result in the loss of important data, and increase our expenses.
We rely on point-of-sale software that we
license from Ready Theatre Systems (RTS) to operate our back office management systems and a failure of this system could harm our
business.
We depend on RTSs
point-of-sale software to operate our point-of-sale transactions including issuing tickets to patrons at our theatres and selling concessions. A
substantial system failure could restrict and limit our ability to issue tickets timely to our patrons, sell concessions and could reduce the
attractiveness of our services and cause our patrons to visit other theatres. In addition, we rely on RTS to transmit data to our EMS software to
coordinate payroll, track theatre invoices, generate operating reports to analyze film performance and theatre profitability, and generate information
to quickly detect theft. Disruption in, changes to, or a system failure of the RTS system could result in the loss of important data, and increase our
expenses.
We depend on our senior
management.
Our success depends upon the
retention of our senior management, including A. Dale Mayo, our chairman and chief executive officer, Jeff Butkovsky, our chief technology officer, and
Brian D. Pflug, our chief financial officer. In particular, we rely on the relationships in the motion picture exhibition industry that Mr. Mayo has
fostered in his 24 year career in the industry. We cannot assure you that we would be able to find qualified replacements
16
for the individuals who make up our senior management if their services were no longer available. The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations. The loss of any member of senior management could adversely affect our ability to effectively pursue our business strategy.
Compensation may be paid to our senior management
regardless of our profitability which may affect our operating results.
We have entered into employment
agreements with each member of our senior management team. Mr. Mayo, our chairman and chief executive officer, is entitled to periodic salary increases
as well as bonuses based on our consolidated gross revenues and regardless of whether we operate at a profit or loss. Each of our other executive
officers is entitled to bonuses, as determined by our board of directors. Increases in compensation paid to our senior management will increase our
expenses, effect our results of operations and may make it more difficult for us to achieve profitable operations. For information relating to our
employment agreements with our senior management, see Executive CompensationEmployment Agreement.
If we do not comply with the Americans with
Disabilities Act of 1990, we could be subject to litigation.
Movie theatres must comply with
Title III of the Americans with Disabilities Act of 1990 (the ADA) and analogous state and local laws. Compliance with the ADA requires
among other things that public facilities reasonably accommodate individuals with disabilities and that new construction or alterations
made to commercial facilities conform to accessibility guidelines unless structurally impracticable for new construction or
technically infeasible for alterations. If we fail to comply with the ADA, remedies could include imposition of injunctive relief, fines, awards for
damages to private litigants and additional capital expenditures to remedy non-compliance. Imposition of significant fines, damage awards or capital
expenditures to cure non-compliance could adversely affect our business and operating results.
Risk Related to Our Industry
We depend on motion picture production and
performance.
As a motion picture exhibitor,
our ability to operate successfully depends upon the availability, diversity and appeal of motion pictures, our ability to license motion pictures and
the performance of such motion pictures in our theatres. We license first-run motion pictures, the success of which has increasingly depended on the
marketing efforts of the major motion picture studios. Poor performance of, or any disruption in the production of these motion pictures (including by
reason of a strike or lack of adequate financing), or a reduction in the marketing efforts of the major motion picture studios, could hurt our business
and results of operations. In addition, a change in the type and breadth of movies offered by motion picture studios may not be accepted by the
demographic base of moviegoers.
The motion picture exhibition industry has
experienced a declining trend in attendance during recent years.
The U.S. motion picture
exhibition industry has been subject to periodic short-term increases and decreases in attendance and, box office revenues. In recent years, the U.S.
motion exhibition industry has experienced a declining trend in attendance, and according to boxoffice.com, attendance during 2011 was 1.28 billion.
According to the MPAA, attendance during 2010 was 1.34 billion. For additional information regarding attendance levels and industry trends, see
Business Industry Overview and Trends. We expect the cyclical nature of the U.S. motion picture exhibition industry to continue for
the foreseeable future, and if the declining trend in attendance continues, our results of operations could be adversely affected. To offset any
decrease in attendance, we plan to offer products unique to the motion picture exhibition industry, such as 3D films and specially selected alternative
content. We cannot assure you, however, that our offering of such content will offset any decrease in attendance that the industry may
experience.
17
Our business is subject to significant competitive
pressures.
We face varying degrees of
competition from other motion picture exhibitors with respect to licensing films and attracting patrons. In those areas where real estate is readily
available, there are few barriers preventing competing companies from opening theatres near one of our existing or future theatres. Many of our
competitors have substantially more resources than we do and may therefore have a competitive advantage over us.
An increase in the use of alternative film delivery
methods, which may be enhanced if traditional release windows are shortened, may drive down movie theatre attendance and reduce ticket
prices.
We compete with other movie
delivery vehicles, including cable television, downloads and streaming video via the Internet, in-home video and DVD, satellite and pay-per-view
services. When motion picture distributors license their products to the domestic exhibition industry, they refrain from licensing their motion
pictures to these other delivery vehicles during the theatrical release window. The theatrical release window has shortened over the last decade. In
addition, proposals have been made from time to time, particularly in the last several years, which would further shorten the window substantially and
allow for premium video on demand and other alternatives that would be available during theatrical releases. These initiatives have not been instituted
due, in part, to the adverse reaction of motion picture exhibitors. We cannot assure you that these initiatives will not be instituted in the future.
We believe that a material contraction of the current theatrical release window could significantly dilute the consumer appeal of in-theatre motion
picture offerings, which could have a material adverse effect on our business and results of operations.
Our revenues vary significantly depending upon the
timing of the motion picture releases by distributors.
Our business is seasonal, with a
disproportionate amount of our revenues generated during the summer months and year-end holiday season. While motion picture distributors have begun to
release major motion pictures more evenly throughout the year, the most marketable motion pictures are usually released during the summer months and
the year-end holiday season, and we expect to generate more revenue and cash flows during those periods than in other periods during the year. As a
result, the timing of motion picture releases affects our results of operations, which may vary significantly from quarter to quarter and year to year.
If we do not adequately manage our theatre costs of operations, it could significantly affect our cash flow and potential for future growth. Due to the
dependency on the success of films released from one period to the next, results of operations for one period may not be indicative of the results for
the following period or the same period in the following year.
There can be no assurance of a supply of motion
pictures.
The distribution of motion
pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. Consent decrees resulting
from those cases effectively require major motion picture distributors to offer and license films to motion picture exhibitors, including us, on a
film-by-film and theatre-by-theatre basis. Consequently, we cannot assure ourselves of a supply of motion pictures by entering into long-term
arrangements with major distributors, but must compete for our licenses on a film-by-film and theatre-by-theatre basis.
Risks Related to Our Class A Common Stock and this
Offering
Our Class A common stock has no prior trading market.
We cannot assure you that our stock price will not decline or not be subject to significant volatility after this offering.
Before this offering, there has
not been a public market for our Class A common stock, and an active public market for our Class A common stock may not develop or be sustained after
this offering. The market price of our Class A common stock could be subject to significant fluctuations after this offering. The price of our stock
may change in response to variations in our operating results and also may change in response to other factors, including factors specific to companies
in our industry many of which are beyond our control. After the offering, our shares may be less liquid than the shares of other newly public companies
and there may be imbalances between supply and demand for our shares. As a result, our share price may experience significant volatility and may not
necessarily
18
reflect the value of our expected performance. In particular, we cannot assure you that you will be able to resell your shares of our Class A common stock at or above the initial public offering price. The initial public offering price will be determined by negotiations between the underwriters and us.
The interests of Mr. Mayo, our controlling
stockholder, may conflict with your interests, and the concentration of voting power with Mr. Mayo will limit your ability to influence corporate
matters.
Our Class A common stock has one
vote per share on all matters to be voted on by stockholders, while our Class B common stock has ten votes per share. Mr. Mayo owns all of our
outstanding Class B common stock. As a result, as of March 14, 2012, Mr. Mayo controlled approximately 94.1% of the voting power of all of our
outstanding capital stock with voting rights (calculated prior to conversion of our Series A preferred stock to shares of Class A common stock upon
consummation of this offering). Upon completion of this offering, we anticipate that Mr. Mayo will control approximately 61% of the voting power
of all of our outstanding capital stock with voting rights. Therefore, Mr. Mayo will have significant influence for the foreseeable future over
management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions,
such as mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any
additional shares of common stock or other equity securities and the payment of dividends on our common stock. Mr. Mayo will also have the power to
prevent or cause a change in control, and could take other actions that might be desirable to him but not to other stockholders. Because of this dual
class structure, Mr. Mayo will continue to be able to control all matters submitted to our stockholders for approval (other than changes to our
authorized capital stock) even if he owns less than 50% of the outstanding shares of our capital stock. This concentrated control will limit your
ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market
price of our Class A common stock could be adversely affected. We intend to amend our certificate of incorporation to provide that on transfer for any
reason, the Class B common stock will automatically convert to Class A common stock on a one-for-one basis.
Our stockholders do not have the same protections
generally available to stockholders of other NASDAQ-listed companies because we are currently a controlled company within the meaning of
the NASDAQ Marketplace Rules.
Upon completion of this offering,
we anticipate that Mr. Mayo will control approximately 61% of the voting power of all of our outstanding capital stock with voting rights.
Because of Mr. Mayos ownership interest and control of our voting power, we will be considered a controlled company within the
meaning of NASDAQ Marketplace Rules. As a controlled company, within the meaning of NASDAQ Marketplace Rules, we are not subject to the corporate
governance requirements of the Rule 5600 series of the NASDAQ Marketplace Rules that would otherwise require us to have:
|
a majority of independent directors on our board of directors; |
|
compensation of our executive officers determined, or recommended to the board of directors for determination, either by a majority of the independent directors or a compensation committee comprised solely of independent directors; or |
|
director nominees selected, or recommended for the board of directors selection, either by a majority of the independent directors or a nominating committee comprised solely of independent directors. |
Accordingly, our stockholders
will not be afforded the same protections generally as stockholders of other NASDAQ-listed companies for so long as Mr. Mayo controls more than 50% of
our voting power and we rely upon such exemptions. The interests of Mr. Mayo, our controlling stockholder, may conflict with your interests, and the
concentration of voting power with Mr. Mayo will limit your ability to influence corporate matters, for more information on the risks we face in
connection with Mr. Mayos ownership interest and control of our voting power.
Potential future sales of our Class A common stock
could cause the market price for our Class A common stock to decline.
We cannot predict the effect, if
any, that market sales of shares of our Class A common stock or the availability of shares of our Class A common stock for sale will have on the market
price of our Class A common stock prevailing
19
from time to time. Sales of substantial amounts of shares of our Class A common stock in the public market, or the perception that those sales will occur, could cause the market price of our Class A common stock to decline.
Based on the total number of
shares of our capital stock outstanding as of March 14, 2012, upon completion of this offering, we will have 5,821,607 shares of
Class A common stock and 900,000 shares of Class B common stock outstanding. All of the outstanding shares of Class B common stock are held by Mr.
Mayo, who may convert his shares of Class B common stock into shares of Class A common stock on a one-for-one basis.
All of the shares of Class A
common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended
(the Securities Act), except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Substantially all of
the remaining 1,621,607 shares of Class A common stock and 900,000 shares of Class B common stock outstanding after this offering, based on
shares outstanding as of March 14, 2011, will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions
that restrict transfers for at least 180 days after the date of this prospectus (or such earlier date or dates as agreed between us and Dominick &
Dominick LLC), subject to certain extensions. Dominick & Dominick LLC may, in its sole discretion, release all or some portion of the shares
subject to lock-up agreements prior to expiration of the lock-up period.
Our issuance of preferred stock could adversely
affect the market value of our common stock, dilute the voting power of common stockholders and delay or prevent a change of
control.
Our board of directors has the
authority to cause us to issue, without any further vote or action by the stockholders, up to 8,027,500 shares of preferred stock, par value $0.01 per
share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences
of such series.
The issuance of shares of
preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could
adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the
common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders
of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of
common stock.
Further, the issuance of shares
of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock either by diluting the
voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the
right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock.
The issuance of shares of preferred stock may also have the effect of delaying, deferring or preventing a change in control of our company without
further action by the stockholders, even where stockholders are offered a premium for their shares.
We do not intend to pay dividends on our Class A or
Class B common stock for the foreseeable future.
We intend to retain all of our
earnings for the foreseeable future to finance our operations and acquisitions of theatres and digital upgrades associated with any acquisitions. As a
result, we do not anticipate paying cash dividends on our Class A common stock or Class B common stock, and consequently, you can expect to receive a
return on your investment in our Class A common stock only if the market price of the stock increases.
Because our existing investors paid substantially
less than the initial public offering price when they purchased their shares, new investors will incur immediate and substantial dilution in their
investment.
Investors purchasing shares of
Class A common stock in this offering will incur immediate and substantial dilution in net tangible book value per share because the price that new
investors pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution is due in large part to
the fact that our existing investors paid substantially less than the initial public offering price when they purchased their shares of Class A common
stock. The initial public offering price for the shares sold in this offering was determined by
20
negotiations between us and the underwriters and may not be indicative of prices that will prevail in the trading market. See Underwriting for a discussion of the determination of the initial public offering price.
Provisions in our charter documents and under
Delaware law could discourage a takeover that stockholders may consider favorable.
Provisions in our certificate of
incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the
following:
|
Our certificate of incorporation provides for a dual class common stock structure. As a result of this structure, Mr. Mayo will have the ability to control all matters requiring stockholder approval (other than changes to our authorized capital stock), including the election of directors, amendments to our charter documents and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that other stockholders may view as beneficial. We intend to amend our certificate of incorporation to provide that on transfer for any reason, the Class B common stock will automatically convert to Class A common stock on a one-for-one basis. |
|
Our board of directors has the right to determine the authorized number of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to control the size of or fill vacancies on our board of directors. |
|
Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. |
In addition, we are governed by
the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range
of business combinations with any interested stockholder for a period of three years following the date on which the stockholder becomes an
interested stockholder. For a description of our capital stock, see Description of Capital Stock.
21
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
We make forward-looking
statements in the Prospectus Summary, Risk factors, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and Business sections and elsewhere throughout this prospectus. Whenever you read a statement
that is not simply a statement of historical fact (such as when we describe what we believe, expect, anticipate,
project, predict or forecast will occur, and other similar statements), you must remember that our
expectations may not be correct, even though we believe that they are reasonable. These forward-looking statements relate to:
|
future revenues, expenses and profitability; |
|
our ability to acquire and integrate theatres in our business; |
|
attendance at movies generally or in any of the markets in which we operate; |
|
the number and diversity of popular movies released and our ability to successfully license and exhibit popular films; |
|
national growth in our industry; |
|
competition in our markets; and |
|
competition with other forms of entertainment. |
We do not guarantee that the
transactions and events described in this prospectus will happen as described or that they will happen at all. You should read this prospectus
completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements made
in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation, beyond that required by law, to
update any forward-looking statement to reflect events or circumstances after the date on which the statement is made, even though our situation will
change in the future.
Whether actual results will
conform to our expectations and predictions is subject to a number of risks and uncertainties, many of which are beyond our control, and reflect future
business decisions that are subject to change. Some of the assumptions, future results and levels of performance expressed or implied in the
forward-looking statements we make inevitably will not materialize, and unanticipated events may occur which will affect our results. The Risk
Factors section of this prospectus describes the principal contingencies and uncertainties to which we believe we are subject.
This prospectus contains data
related to the motion picture exhibition industry. This market data includes projections that are based on a number of assumptions. The motion picture
exhibition industry may not grow at the rates projected by the market data, or at all. The failure of the markets to grow at the projected rates may
materially and adversely affect our business and the market price of our Class A common stock. In addition, the rapidly changing nature of our industry
subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or
more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions.
You should not place undue reliance on these forward-looking statements.
22
USE OF PROCEEDS
We estimate that we will receive
net proceeds from this offering of approximately $26.5 million, after deducting underwriting discounts and commissions and other estimated
offering expenses payable by us related to this offering. For the purposes of estimating net proceeds, we are assuming an initial public offering price
of $7.00 per share, the midpoint of the estimated range of the initial public offering price. A $1.00 increase (decrease) in the assumed public
offering price of $7.00 per share (the midpoint of the estimated range of the initial public offering price) would increase (decrease)
the net proceeds to us from this offering by $3.9 million. We intend to use approximately $14.0 million of the net proceeds from this offering
to consummate the Cinema Centers acquisition, approximately $6.0 million to consummate the Lisbon Cinema acquisition and $1.1 million of the net
proceeds to repay an outstanding obligation owed by us to Barco for purchases of digital cinema projector equipment, which obligation is not interest
bearing and has no specific maturity date. We intend to use the balance of the net proceeds from this offering for general corporate purposes,
including our working capital needs. If we fail to consummate the Cinema Centers acquisition and/or the Lisbon Cinema acquisition, we plan to use the
portion of the net proceeds from this offering not used for the acquisition(s) we do not consummate for future acquisitions and general corporate
purposes, including working capital needs.
The foregoing represents our
intentions as to the use and allocation of the net proceeds of this offering based upon our present plans, contractual obligations and business
conditions. The amount and timing of any expenditure will vary depending on the amount of cash generated by our operations and the rate of growth, if
any, of our business. Accordingly, our management will have significant discretion in the allocation of the net proceeds we will receive from this
offering. Depending on future events and other changes in the business climate, we may determine at a later time to use the net proceeds for different
purposes. Pending their use, we intend to invest the proceeds in a variety of capital preservation instruments, including short-term, investment-grade,
and interest-bearing instruments.
DIVIDEND POLICY
We currently intend to retain
all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness. Therefore, we do not
anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board
of directors, and will depend upon our results of operations, financial condition, capital requirements and other factors including
contractual obligations that our board of directors deems relevant.
23
DILUTION
If you invest in our Class A
common stock, your investment will be diluted immediately to the extent of the difference between the public offering price per share of our Class A
common stock and the pro forma net tangible book value per share of our Class A and Class B common stock after this offering. The following discussion
and tables treat our Class A and Class B common stock as a single class and gives effect to the one-for-two reverse stock split of our Class A and
Class B common stock which was approved by our board of directors in November 2011.
Dilution represents the
difference between the amount per share of Class A common stock paid by investors in this offering and the pro forma net tangible book value per share
of our Class A and Class B common stock immediately after this offering. Net tangible book value per share as of December 31, 2011 represented the
amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding at December
31, 2011.
After giving effect to our sale
of the 4.2 million shares of Class A common stock offered by us in this offering at an assumed price of $7.00 per share, the
midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us and the application of the net proceeds from this offering to us as described under the Use of
Proceeds section, our pro forma as adjusted net tangible book value as of December 31, 2011 would have been $26.1 million, or
$3.88 per share. This represents an immediate increase in net tangible book value to our existing stockholders of $3.48 per share and an
immediate dilution to new investors in this offering of $3.12 per share. The following table illustrates this per share dilution in net tangible
book value to new investors.
Assumed initial
public offering price per share |
$7.00 |
|||||||||
Net
tangible book value per share as of December 31, 2011 |
$0.40 | |||||||||
Increase per
share attributable to new investors in this offering |
$3.48 | |||||||||
Pro forma net
tangible book value per share after this offering |
$3.88 |
|||||||||
Dilution per
share to new investors |
$3.12 |
A $1.00 increase (or decrease) in
the assumed initial public offering price of $7.00 per share, the mid-point of the price range set forth on the cover page of this prospectus,
would increase (or decrease) net tangible book value by $3.9 million, or $0.58 per share, and would increase (or decrease) the dilution
per share to new investors by $0.42, based on the assumptions set forth above.
If the underwriters exercise in
full their option to purchase additional shares, the net tangible book value per share after the offering would be $4.10 per share, the increase
in net tangible book value per share to existing stockholders would be $3.70 per share and the dilution to new investors would be $2.90
per share.
The following table summarizes as
of December 31, 2011, on an as adjusted basis, the number of shares of common stock purchased, the total consideration paid and the average price per
share paid by the existing stockholders and by new investors, based upon an assumed initial public offering price of $7.00 per share (the
mid-point of the initial public offering price range) and before deducting estimated underwriting discounts and commissions and offering
expenses:
Shares Purchased |
Total Consideration |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands) |
Number |
Percent |
Amount |
Percent |
Average Price Per Share |
|||||||||||||||||
Existing
stockholders |
2,521,607 | 38 | $4,808 | 14 | $1.91 | |||||||||||||||||
New investors
|
4,200,000 | 62 | 29,400 | 86 | 7.00 | |||||||||||||||||
Total
|
6,721,607 | 100 | $34,208 | 100 | $5.09 |
24
CAPITALIZATION
The following table sets forth
our capitalization as of December 31, 2011:
|
on an actual basis; and |
|
on a pro forma as adjusted basis for conversion of 2,104,882 shares of Series A preferred stock to 1,052,441 shares of Class A common stock, the issuance and sale of shares of our Class A common stock in this offering, assuming an initial public offering price of $7.00 per share, the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters over-allotment option and no other change to the number of shares of our Class A common stock sold by us as set forth on the cover page of this prospectus. |
You should read this table
together with our financial statements and the related notes included elsewhere in this prospectus and the information under Managements
Discussion and Analysis of Financial Condition and Results of Operations.
As of December 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | |||||||||||
(in thousands) |
Actual |
Pro Forma As Adjusted |
|||||||||
Cash and
cash equivalents |
$ | 650 | $7,150 | ||||||||
Stockholders equity: |
|||||||||||
Series A
preferred stock, $.01 par value, 10,000,000 shares authorized; 1,972,500 and 0 shares issued and outstanding as of December 31,
2011 (actual) and on a pro forma as adjusted basis, respectively |
20 | | |||||||||
Class A
common stock, $.01 par value, 20,000,000 shares authorized; 569,166 and 5,821,607 shares issued and outstanding as of December
31, 2011 (actual) and on a pro forma as adjusted basis, respectively |
6 | 58 | |||||||||
Class B
common stock, $.01 par value, 5,000,000 shares authorized; 900,000 shares issued and outstanding as of December 31, 2011 (actual) and on a
pro forma as adjusted basis |
9 | 9 | |||||||||
Additional
paid-in capital |
4,001 | 30,733 | |||||||||
Accumulated
deficit |
(1,362 | ) | (1,362 | ) | |||||||
Total
stockholders equity |
2,674 | 29,438 | |||||||||
Total
capitalization |
$ | 2,674 | $29,438 |
25
UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
The following unaudited pro forma
combined balance sheet presents our financial position as of December 31, 2011, assuming that the acquisition of certain assets and assumption of
operating leases of Cinema Centers and Lisbon Cinema had been completed as of December 31, 2011.
The unaudited pro forma combined
statements of operations includes the results of operations of the Successor from inception date (July 29, 2010) to June 30, 2011, the twelve month
results of operations (July 1, 2010 to June 30, 2011) of the Predecessor (the Rialto and Cranford) (acquired as of December 31, 2010) and Bloomfield 8
(acquired as of February 17, 2011), and the twelve month results of operations (August 1, 2010 to July 31, 2011) of Cinema Centers and Lisbon Cinema as
if the acquisitions had been consummated on July 1, 2010. Also presented is the interim unaudited pro forma combined statement of operations, which
includes our results of operations for six months ended December 31, 2011 and results of operations for Cinema Centers for the six months ended January
31, 2012 and Lisbon Cinema for the six months ended December 31, 2011, as if the acquisitions had been consummated on July 1, 2011.
These unaudited pro forma results
are not necessarily indicative of the actual results of operations that would have been achieved, nor are they necessarily indicative of future results
of operations.
The historical financial
information has been adjusted to give effect to pro forma events that are directly attributable to the acquisition and factually supportable. Our
unaudited pro forma combined financial information and explanatory notes present how our combined financial statements may have appeared had the
businesses actually been combined as of the dates noted above. The unaudited pro forma combined financial information shows the impact on the combined
balance sheets and the combined income statements under acquisition accounting with Digiplex treated as the acquirer. Under this method of accounting,
the assets purchased and liabilities assumed of the acquirees are recorded by Digiplex at their estimated fair values as of the acquisition
date.
It is anticipated that the
acquisition of certain assets and assumption of operating leases of Cinema Centers and Lisbon Cinema will provide financial benefits such as, among
other factors, possible expense efficiencies; however, we cannot assure you that such benefits will actually be achieved. These benefits have not been
reflected in the unaudited pro forma financial information. As required, the unaudited pro forma combined financial information includes adjustments
for events that are directly attributable to the transaction, expected to have a continuing impact and are factually supportable; as such, any planned
adjustments affecting the balance sheet, statement of operations, or shares of Class A or Class B common stock outstanding subsequent to the assumed
acquisition completion dates are not included. The unaudited pro forma combined financial information is presented for illustrative purposes only and
does not indicate the financial results of the combined businesses had they actually been combined on the dates noted above. However, management
believes that the assumptions used provide a reasonable basis for presenting the combined pro forma information, that the pro forma adjustments give
appropriate effect to the assumptions and are properly applied in the unaudited pro forma combined financial information.
As explained in more detail in
the accompanying notes to the unaudited pro forma combined financial information, the allocation of the purchase price for the Cinema Centers and
Lisbon Cinema acquisitions that is reflected in our pro forma combined financial information is subject to adjustment. The actual purchase price
allocation will be recorded based upon final estimated fair values of the assets acquired and operating leases assumed, which are likely to vary from
the purchase price allocations adopted in the pro forma combined financial statements. In addition, there may be further refinements of the purchase
price allocation for the Cinema Centers and Lisbon Cinema acquisitions as additional information becomes available. The unaudited pro forma combined
financial information is derived from and should be read in conjunction with the financial statements and related notes included in this
prospectus.
26
Unaudited Pro Forma Combined Balance Sheets
December 31, 2011
December 31, 2011
Successor |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
Digiplex December 31, 2011 |
Lisbon Theaters, Inc. December 31, 2011 |
Cinema Supply January 31, 2012 |
Pro Forma Adjustment |
Pro Forma Footnotes |
Pro Forma Combined |
||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||
Cash and cash
equivalents |
$ | 650 | $ | 232 | $ | 78 | $26,500 | (1 | ) | $7,150 | ||||||||||||||||
(20,000 | ) | (2 | ) | |||||||||||||||||||||||
(310 | ) | (2 | ) | |||||||||||||||||||||||
Accounts
receivable |
149 | 60 | 10 | (70 | ) | (2 | ) | 149 | ||||||||||||||||||
Inventories
|
19 | 6 | 50 | | 75 | |||||||||||||||||||||
Deferred tax
assets |
| | 319 | (319 | ) | (2 | ) | | ||||||||||||||||||
Prepaid
expenses and other |
293 | | 93 | (93 | ) | (2 | ) | 293 | ||||||||||||||||||
Total current
assets |
1,111 | 298 | 550 | 5,708 | 7,667 | |||||||||||||||||||||
Property and
equipment net |
2,328 | 5,413 | 13,200 | (113 | ) | (2 | ) | 20,828 | ||||||||||||||||||
Intangible
assets net |
503 | | | 975 | (2 | ) | 1,478 | |||||||||||||||||||
Goodwill
|
896 | | | 469 | (2 | ) | 1,365 | |||||||||||||||||||
Other assets
|
3 | 28 | 25 | (53 | ) | (2 | ) | 3 | ||||||||||||||||||
Total assets
|
$4,841 | $5,739 | $13,775 | $6,986 | $ 31,341 | |||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||
Accounts
payable and accrued expenses |
$640 | $1,082 | $2,327 | $(3,409 | ) | (2 | ) | $640 | ||||||||||||||||||
Payable to
vendor for digital systems |
1,066 | | | | 1,066 | |||||||||||||||||||||
Earnout from
theatre acquisition |
124 | | | | 124 | |||||||||||||||||||||
Dividends
payable |
265 | | | | 265 | |||||||||||||||||||||
Notes
payable, current portion |
| 427 | 1,402 | (1,829 | ) | (2 | ) | | ||||||||||||||||||
Capital lease
obligations, current portion |
| 121 | 58 | (179 | ) | (2 | ) | | ||||||||||||||||||
Total current
liabilities |
2,095 | 1,630 | 3,787 | (5,417 | ) | 2,095 | ||||||||||||||||||||
Notes
payable, net of current portion |
| 3,819 | 5,459 | (9,278 | ) | (2 | ) | | ||||||||||||||||||
Deferred
taxes |
32 | | 903 | (903 | ) | (2 | ) | 32 | ||||||||||||||||||
Deferred rent
expense |
40 | 303 | 953 | (1,256 | ) | (2 | ) | 40 | ||||||||||||||||||
Capital lease
obligations, net of current portion |
| 334 | 125 | (459 | ) | (2 | ) | | ||||||||||||||||||
Total
liabilities |
2,167 | 6,086 | 11,227 | (17,313 | ) | 2,167 | ||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||||||||
Series A
preferred stock |
20 | | | (20 | ) | (5 | ) | | ||||||||||||||||||
Class A
common stock |
6 | | | 10 | (5 | ) | 58 | |||||||||||||||||||
42 | (1 | ) | ||||||||||||||||||||||||
Class B
common stock |
9 | | | | 9 | |||||||||||||||||||||
Common
stock |
| 5 | 4 | (9 | ) | (2 | ) | | ||||||||||||||||||
Additional
paid-in capital |
4,001 | | 108 | 29,358 | (1 | ) | 30,469 | |||||||||||||||||||
(2,900 | ) | (1 | ) | |||||||||||||||||||||||
(108 | ) | (2 | ) | |||||||||||||||||||||||
10 | (5 | ) | ||||||||||||||||||||||||
Retained
(deficit) earnings |
(1,362 | ) | (352 | ) | 2,436 | (2,084 | ) | (2 | ) | (1,362 | ) | |||||||||||||||
Total
stockholders equity |
2,674 | (347 | ) | 2,548 | 24,299 | 29,174 | ||||||||||||||||||||
Total
liabilities and stockholders equity |
$ | 4,841 | $ | 5,739 | $ | 13,775 | $6,986 | $31,341 |
27
Unaudited Pro Forma Combined Statements of Operations
Period from Inception (July 29, 2010) to June 30, 2011
Period from Inception (July 29, 2010) to June 30, 2011
Successor |
Predecessor |
|||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands except per share data) |
Digiplex from inception date (July 29, 2010) to June 30, 2011 |
Rialto/ Cranford (from July 1, 2010 to December 31, 2010) |
Bloomfield (from July 1, 2010 to February 17, 2011) |
Lisbon Theaters, Inc. (from July 1, 2010 to June 30, 2011) |
Cinema Supply (from August 1, 2010 to July 31, 2011) |
Adjustment |
Footnotes |
Pro forma Combined |
||||||||||||||||||||||||||
Revenues |
$ | 1,572 | $ | 1,150 | $ | 569 | $ | 4,355 | $ | 14,602 | (228 | ) | (7 | ) | $ | 22,020 | ||||||||||||||||||
Costs and
expenses: |
||||||||||||||||||||||||||||||||||
Film rent
expense |
598 | 506 | 241 | 1,418 | 5,753 | (48 | ) | (7 | ) | 8,468 | ||||||||||||||||||||||||
Cost of
concessions |
66 | 51 | 39 | 235 | 633 | (6 | ) | (7 | ) | 1,018 | ||||||||||||||||||||||||
Salaries and
wages |
235 | 137 | 39 | 464 | 1,613 | (161 | ) | (7 | ) | 2,327 | ||||||||||||||||||||||||
Facility
lease expense |
223 | 119 | 57 | 573 | 1,420 | (94 | ) | (7 | ) | 2,298 | ||||||||||||||||||||||||
Utilities and
other |
258 | 216 | 84 | 625 | 2,415 | | 3,598 | |||||||||||||||||||||||||||
General and
administrative |
900 | 170 | 80 | 168 | 779 | 380 | (7 | ) (8) | 2,477 | |||||||||||||||||||||||||
Depreciation
and amortization |
165 | 70 | 2 | 534 | 1,479 | 609 | (3 | ) | 2,859 | |||||||||||||||||||||||||
Total
costs and expenses |
2,445 | 1,269 | 542 | 4,017 | 14,092 | 680 | 23,045 | |||||||||||||||||||||||||||
Operating
income (loss) |
(873 | ) | (119 | ) | 27 | 338 | 510 | (908 | ) | (1,025 | ) | |||||||||||||||||||||||
Other
income (expense): |
||||||||||||||||||||||||||||||||||
Bargain
purchase gain from theatre acquisition |
98 | | | | | | 98 | |||||||||||||||||||||||||||
Interest
expense |
| 11 | | 369 | 501 | (11 | ) | (4 | ) | | ||||||||||||||||||||||||
(870 | ) | (7 | ) | |||||||||||||||||||||||||||||||
Other income
(expense) |
(1 | ) | | | | 16 | (16 | ) | (7 | ) | (1 | ) | ||||||||||||||||||||||
Income
(loss) before income taxes |
(776 | ) | (130 | ) | 27 | (31 | ) | 25 | (43 | ) | (928 | ) | ||||||||||||||||||||||
Income tax
expense (benefit) |
14 | | | | 12 | (12 | ) | (6 | ) | 14 | ||||||||||||||||||||||||
Net income
(loss) |
(790 | ) | (130 | ) | 27 | (31 | ) | 13 | (31 | ) | (942 | ) | ||||||||||||||||||||||
Preferred
stock dividends |
(112 | ) | | | | | 112 | (5 | ) | | ||||||||||||||||||||||||
Net income
(loss) attributable to common stockholders |
$ | (902 | ) | $ | (130 | ) | $ | 27 | $ | (31 | ) | $ | 13 | $81 | $(942 | ) | ||||||||||||||||||
Net income
(loss) per Class A and Class B common share basic and diluted |
$ | (0.84 | ) | $(0.14 | ) | |||||||||||||||||||||||||||||
Weighted
average number of Class A and Class B common shares outstanding: basic and diluted |
4,200,000 | (1 | ) | |||||||||||||||||||||||||||||||
1,073,207 | 1,282,209 | (5 | ) | 6,555,416 | ||||||||||||||||||||||||||||||
Other
Operating Data: |
||||||||||||||||||||||||||||||||||
Theatre
level cash flow (9) |
$ | 192 | 121 | 109 | 1,040 | 2,768 | 81 | $ | 4,311 | |||||||||||||||||||||||||
Adjusted
EBITDA (10) |
$ | (373 | ) | (49 | ) | 29 | 872 | 1,989 | (299 | ) | $2,169 |
28
Interim Unaudited Pro Forma Combined Statements of
Operations
Six Months Ended December 31, 2011
Six Months Ended December 31, 2011
Successor |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands except per share data) |
Digiplex (for the six months ended December 31, 2011) |
Lisbon Cinema (for the six months ended December 31, 2011) |
Cinema Supply (for the six months ended January 31, 2012) |
Pro Forma Adjustment |
Pro Forma Footnotes |
Pro Forma Combined |
||||||||||||||||||||
Revenues |
$ | 1,899 | $ | 2,395 | $ | 6,742 | $ | (66 | ) | (7 | ) | $ | 10,970 | |||||||||||||
Costs and
Expenses: |
||||||||||||||||||||||||||
Film rent
expense |
598 | 960 | 2,605 | (3 | ) | (7 | ) | 4,160 | ||||||||||||||||||
Cost of
concessions |
68 | 180 | 294 | (22 | ) | (7 | ) | 520 | ||||||||||||||||||
Salaries and
wages |
288 | 208 | 685 | (3 | ) | (7 | ) | 1,178 | ||||||||||||||||||
Facility
lease expense |
248 | 222 | 746 | (2 | ) | (7 | ) | 1,214 | ||||||||||||||||||
Utilities and
other |
329 | 300 | 1,231 | (13 | ) | (7 | ) | 1,847 | ||||||||||||||||||
General and
administrative |
673 | 71 | 474 | 158 | (7 | ) (8) | 1,376 | |||||||||||||||||||
Depreciation
and amortization |
262 | 281 | 652 | 331 | (3 | ) | 1,526 | |||||||||||||||||||
Total
costs and expenses |
2,466 | 2,222 | 6,687 | 446 | 11,821 | |||||||||||||||||||||
Operating
income (loss) |
(567 | ) | 173 | 55 | (512 | ) | (851 | ) | ||||||||||||||||||
Other
Income (expense) |
||||||||||||||||||||||||||
Interest
expense |
| 171 | 227 | (398 | ) | (7 | ) | | ||||||||||||||||||
Other expense
|
| | 69 | (69 | ) | (7 | ) | | ||||||||||||||||||
Income
(loss) before income taxes |
(567 | ) | 2 | (241 | ) | (45 | ) | (851 | ) | |||||||||||||||||
Income tax
expense (benefit) |
20 | | (172 | ) | (172 | ) | (6 | ) | 20 | |||||||||||||||||
Net income
(loss) |
(587 | ) | 2 | (69 | ) | (217 | ) | (871 | ) | |||||||||||||||||
Preferred
stock dividends |
(153 | ) | | | 153 | (5 | ) | | ||||||||||||||||||
Net income
(loss) attributable to common stockholders |
$ | (740 | ) | $ | 2 | $ | (69 | ) | $(64 | ) | $(871 | ) | ||||||||||||||
Net loss
per Class A and Class B Common Share Basic and Diluted |
$ | (0.50 | ) | | | | $(0.13 | ) | ||||||||||||||||||
Weighted
average number of Class A and Class B common shares |
4,200,000 | (1 | ) | |||||||||||||||||||||||
outstanding: Basic and Diluted |
1,469,166 | | | 986,250 | (5 | ) | 6,655,416 | |||||||||||||||||||
Other
operating data: |
||||||||||||||||||||||||||
Theatre
level cash flow (9) |
$ | 368 | $ | 525 | $ | 1,181 | $ | (23 | ) | $ | 2,051 | |||||||||||||||
Adjusted
EBITDA (10) |
$ | (263 | ) | $ | 454 | $ | 707 | $(181 | ) | $717 |
29
Notes to Pro Forma Combined Financial
Statements
(1) |
To record $29.4 million of gross proceeds from this offering, less estimated underwriting commissions and costs of the offering totaling $2.9 million, and the issuance of 4.2 million shares of Class A common stock at $7.00 per share. |
(2) |
To record the Lisbon Cinema and Cinema Centers assets acquired for a purchase price of $6 million and $14 million, respectively ($20 million total), based on estimated fair value. The operating leases of Cinema Centers and Lisbon Cinema for their theatre facilities are expected to be assumed at market rates in the acquisitions. No other liabilities, debt or capital lease obligations would be assumed under the asset purchase agreements nor is it anticipated that any significant liabilities would be created upon the acquisitions. Estimated fair value allocation of the purchase price (which is subject to change), and adjustment to reflect the removal of assets and liabilities not being acquired, is as follows: |
(Dollars in thousands): |
Lisbon Cinema |
Cinema Centers |
Total |
||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets: |
(1) Historical Basis |
(2) Adjustment for Components not being acquired |
(3) Purchase Accounting Adjustment |
(1)-(2)- (3) (4) Estimated Fair Value |
(5) Historical Basis |
(6) Adjustment for Components not being acquired |
(7) Purchase Accounting Adjustment |
(5)-(6)- (7) (8) Estimated Fair Value |
(2)+(3) + (6)+(7) Adjustments (to page 27) |
||||||||||||||||||||||||||||||
Cash and cash
equivalents |
$ | 232 | $ | (232 | ) | $ | $ | | $ | 78 | $ | (78 | ) | $ | | $ | $ | (310 | ) | ||||||||||||||||||||
Accounts
receivable |
60 | (60 | ) | | | 10 | (10 | ) | | | (70 | ) | |||||||||||||||||||||||||||
Inventories
|
6 | | | 6 | 50 | | | 50 | | ||||||||||||||||||||||||||||||
Deferred tax
assets |
| | | | 319 | (319 | ) | | | (319 | ) | ||||||||||||||||||||||||||||
Prepaid
expenses and other |
| | | | 93 | (93 | ) | | | (93 | ) | ||||||||||||||||||||||||||||
Total current
assets |
298 | 6 | 550 | 50 | |||||||||||||||||||||||||||||||||||
Property and
equipment-net |
5,413 | | 87 | 5,500 | 13,200 | | (200 | ) | 13,000 | (113 | ) | ||||||||||||||||||||||||||||
Intangible
assets-net (a) |
| | 275 | 275 | | | 700 | 700 | 975 | ||||||||||||||||||||||||||||||
Goodwill
|
| | 219 | 219 | | | 250 | 250 | 469 | ||||||||||||||||||||||||||||||
Other assets
|
28 | (28 | ) | | | 25 | (25 | ) | | | (53 | ) | |||||||||||||||||||||||||||
Total assets
|
$5,739 | $6,000 | $13,775 | $14,000 | |||||||||||||||||||||||||||||||||||
Liabilities:
|
|||||||||||||||||||||||||||||||||||||||
Accounts
payable and accrued expenses |
$1,082 | $(1,082 | ) | $ | $ | $2,327 | $(2,327 | ) | $ | $ | $(3,409 | ) | |||||||||||||||||||||||||||
Notes
payable, current portion |
427 | (427 | ) | | | 1,402 | (1,402 | ) | | | (1,829 | ) | |||||||||||||||||||||||||||
Capital lease
obligations, current portion |
121 | (121 | ) | | | 58 | (58 | ) | | | (179 | ) | |||||||||||||||||||||||||||
Total current
liabilities |
1,630 | (1,630 | ) | | 3,787 | (3,787 | ) | ||||||||||||||||||||||||||||||||
Notes
payable, net of current portion |
3,819 | (3,819 | ) | | | 5,459 | (5,459 | ) | | | (9,278 | ) | |||||||||||||||||||||||||||
Deferred
taxes |
| | | | 903 | (903 | ) | | | (903 | ) | ||||||||||||||||||||||||||||
Deferred rent
expense |
303 | (303 | ) | | | 953 | (953 | ) | | | (1,256 | ) | |||||||||||||||||||||||||||
Capital lease
obligations, net of current portion |
334 | (334 | ) | | | 125 | (125 | ) | | | (459 | ) | |||||||||||||||||||||||||||
Total
liabilities |
$6,086 | | $11,227 | $(17,313 | ) | ||||||||||||||||||||||||||||||||||
Stockholders equity: |
|||||||||||||||||||||||||||||||||||||||
Common Stock
|
5 | (5 | ) | | | 4 | (4 | ) | | | (9 | ) | |||||||||||||||||||||||||||
Additional
paid-in capital |
| | | | 108 | (108 | ) | | | (108 | ) | ||||||||||||||||||||||||||||
Retained
(deficit) earnings |
(352 | ) | 352 | | | 2,436 | (2,436 | ) | | | (2,084 | ) | |||||||||||||||||||||||||||
Total
stockholders equity |
(347 | ) | | 2,548 | | ||||||||||||||||||||||||||||||||||
Total
liabilities and stockholders equity |
$ | 5,739 | $ | | $ | 13,775 | $ | |
(a) |
Intangible assets consist of trade name and covenants not to compete. |
30
(3) |
To record estimated depreciation and amortization on the acquired assets, as follows (dollars in thousands): |
Inception date (July 29, 2010) to June 30, 2011 |
Historical Amount |
Adjustments |
Pro Forma as Adjusted |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Digiplex
(Successor) |
$ | 165 | $ | 165(a) | $ | 330 | ||||||||
Rialto/Cranford (Predecessor) |
70 | (70 | )(b) | | ||||||||||
Bloomfield
|
2 | (2 | )(b) | | ||||||||||
Lisbon Cinema
|
534 | (29 | )(c) | 505 | ||||||||||
Cinema
Centers |
1,479 | 545(c) | 2,024 | |||||||||||
Total
|
$ | 2,250 | $ | 609 | $ | 2,859 |
Six Months Ended December 31, 2011 |
Historical Amount |
Adjustments |
Pro Forma as Adjusted |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Digiplex
(Successor) |
$ | 262 | | $ | 262 | |||||||||
Lisbon Cinema
|
281 | (29 | )(c) | 252 | ||||||||||
Cinema
Centers |
652 | 360(c) | 1,012 | |||||||||||
Total
|
$ | 1,195 | $ | 331 | $ | 1,526 |
(a) |
To adjust depreciation and amortization on Digiplex-owned assets as if they had been in operation since July 1, 2010. |
(b) |
To remove prior depreciation on these theaters, as they are already owned by Digiplex and included in the Digiplex adjustment in (a). |
(c) |
To adjust depreciation on the newly acquired theatres as follows: |
Lisbon Cinema |
Cinema Centers |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Inception date (July 29, 2010) to June 30, 2011 |
Estimated Fair Value |
Estimated Useful Life (years) |
Depreciation |
Estimated Fair Value |
Estimated Useful Life (years) |
Depreciation |
|||||||||||||||||||||
Trade Name
|
$ | 200 | 5 | $ | 40 | $ | 500 | 5 | $ | 100 | |||||||||||||||||
Covenants not
to compete |
75 | 3 | 25 | 200 | 3 | 67 | |||||||||||||||||||||
Property and
equipment |
5,500 | 523 | 440 | 13,000 | 58 | 1,857 | |||||||||||||||||||||
Total
|
$ | 5,775 | $ | 505 | $ | 13,700 | $ | 2,024 | |||||||||||||||||||
Historical
Amounts |
534 | 1,479 | |||||||||||||||||||||||||
Adjustment
|
$ | (29 | ) | $ | 545 |
Lisbon Cinema |
Cinema Centers |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended December 31, 2011 |
Estimated Fair Value |
Estimated Useful Life (years) |
Depreciation |
Estimated Fair Value |
Estimated Useful Life (years) |
Depreciation |
|||||||||||||||||||||
Trade Name
|
$ | 200 | 5 | $ | 20 | $ | 500 | 5 | $ | 50 | |||||||||||||||||
Covenants not
to compete |
75 | 3 | 12 | 200 | 3 | 33 | |||||||||||||||||||||
Property and
equipment |
5,500 | 523 | 220 | 13,000 | 58 | 929 | |||||||||||||||||||||
Total
|
$ | 5,775 | $ | 252 | $ | 13,700 | 1,012 | ||||||||||||||||||||
Historical
Amounts |
281 | 652 | |||||||||||||||||||||||||
Adjustment
|
$ | (29 | ) | $ | 360 |
(4) |
To remove historical interest expense of acquired theatres, as there was no assumption of debt on the acquisition dates. |
(5) |
To reflect the conversion of all Series A preferred stock into Class A common stock and adjust the outstanding number of shares of Class A common stock as though such shares had been outstanding for the entire period. Excludes 132,382 shares of Series A preferred stock that are issuable as dividends to the holders of our Series A preferred stock through December 31, 2011, which will be converted into 66,191 shares of Class A common stock upon consummation of this offering. |
31
(6) |
To reflect income tax expense, although there were pretax losses, mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. |
(7) |
To remove the components of Lisbon Cinema and Cinema Centers operations that will not be acquired by us, as follows: (dollars in thousands) |
Lisbon Cinema (July1, 2010 to June 30, 2011) |
Cinema Centers (August 1, 2010 to July 31, 2011) |
Total |
|||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(1) Historical |
(2) Components to be acquired |
(3) (1)-(2) Adjustment |
(4) Historical |
(5) Components to be acquired |
(6) (4)-(5) Adjustment |
(3) + (6) Adjustment |
|||||||||||||||||||||||||
Revenues |
$ | 4,355 | $ | 4,355 | $ | | $ | 14,602 | $ | 14,374 | $ | (228 | ) | $ | (228 | ) | |||||||||||||||
Costs and
Expenses: |
|||||||||||||||||||||||||||||||
Film rent
expense |
1,418 | 1,418 | | 5,753 | 5,705 | (48 | ) | (48 | ) | ||||||||||||||||||||||
Cost of
concession |
235 | 235 | | 633 | 627 | (6 | ) | (6 | ) | ||||||||||||||||||||||
Salaries and
wages |
464 | 464 | | 1,613 | 1,452 | (161 | ) | (161 | ) | ||||||||||||||||||||||
Facility
lease expense |
573 | 573 | | 1,420 | 1,326 | (94 | ) | (94 | ) | ||||||||||||||||||||||
Interest
expense |
369 | | (369 | ) | 501 | | (501 | ) | (870 | ) | |||||||||||||||||||||
Other
|
| | | 16 | | (16 | ) | (16 | ) |
Lisbon Cinema (six months ended December 31, 2011) |
Cinema Centers (six months ended January 31, 2012) |
Total |
|||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(1) Historical |
(2) Components to be acquired |
(3) (1)-(2) Adjustment |
(4) Historical |
(5) Components to be acquired |
(6) (4)-(5) Adjustment |
(3) + (6) Adjustment |
|||||||||||||||||||||||||
Revenues |
$ | 2,395 | $ | 2,395 | | $ | 6,742 | $ | 6,676 | $ | (66 | ) | $ | (66 | ) | ||||||||||||||||
Costs and
Expenses: |
|||||||||||||||||||||||||||||||
Film rent
expense |
960 | 960 | | 2,605 | 2,602 | (3 | ) | (3 | ) | ||||||||||||||||||||||
Cost of
concession |
180 | 180 | | 294 | 272 | (22 | ) | (22 | ) | ||||||||||||||||||||||
Salaries and
wages |
208 | 208 | | 685 | 682 | (3 | ) | (3 | ) | ||||||||||||||||||||||
Facility
lease expense |
222 | 222 | | 746 | 744 | (2 | ) | (2 | ) | ||||||||||||||||||||||
Interest
expense |
171 | | (171 | ) | 227 | | (227 | ) | (398 | ) | |||||||||||||||||||||
Other
|
| | | 69 | | (69 | ) | (69 | ) |
Lisbon Cinema and Cinema Centers have incurred a total of $947 of general and administrative expenses for the annual periods presented above and a total $545 for the six months ended December 31, 2011. The Company will not be assuming these general and administrative expenses as part of the planned acquisitions. The Companys existing management team will be performing these tasks going forward; however, the Company expects to hire additional accounting personnel in connection the acquisitions, the cost of which is estimated to be approximately $70 on an annual basis. After taking in account these adjustments, our pro forma net loss and Adjusted EBITDA would have been $0.07 million and $2.6 million, respectively, for the annual periods shown above and $0.4 million and $1.2 million, respectively, the six months ended December 31, 2011. |
(8) |
Represents bonuses payable to Mr. Mayo under his employment agreement, upon the attainment of the pro forma revenues contained herein. See page 71 for a discussion of Mr. Mayos employment agreement. |
(9) |
TLCF is a non-GAAP financial measure. For additional information on TLCF, see page 33 and pages 43-46. |
(10) |
Adjusted EBITDA is a non-GAAP financial measure. For additional information on Adjusted EBITDA, see below and pages 43-46. |
32
A reconciliation of pro forma
TLCF and Adjusted EBITDA to our pro forma net loss is calculated as follows (in thousands):
Adjusted EBITDA reconciliation (dollars in
thousands):
(unaudited) |
Pro forma (19 screens) Fiscal 2011 Period |
Pro forma (85 screens) Fiscal 2011 period |
Pro forma (85 screens) Six Months Ended December 31, 2011 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income
(loss) |
$ | (975 | ) | $(942 | ) | $(871 | ) | |||||||
Add
back: |
||||||||||||||
Depreciation
and amortization |
330 | 2,859 | 1,526 | |||||||||||
Income tax
expense |
14 | 14 | 20 | |||||||||||
EBITDA
|
(631 | ) | 1,931 | 675 | ||||||||||
Add
back: |
||||||||||||||
Stock-based
compensation and expenses (1) |
186 | 186 | 33 | |||||||||||
Other expense
|
1 | 1 | | |||||||||||
Non-recurring
organizational and M&A related professional fees (2) |
149 | 149 | 9 | |||||||||||
Deduct: |
||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
(98 | ) | (98 | ) | | |||||||||
Adjusted
EBITDA |
$ | (393 | ) | $2,169 | $717 |
TLCF reconciliation:
(unaudited) |
Pro forma (19 screens) Fiscal 2011 Period |
Pro forma (85 screens) Fiscal 2011 period |
Pro forma (85 screens) Six months Ended December 31, 2011 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income
(loss) |
$ | (975 | ) | $(942 | ) | $(871 | ) | |||||||
Add
back: |
||||||||||||||
General and
administrative (4) |
1,150 | 2,477 | 1,376 | |||||||||||
Depreciation
and amortization |
330 | 2,859 | 1,526 | |||||||||||
Income tax
expense |
14 | 14 | 20 | |||||||||||
Other expense
|
1 | 1 | | |||||||||||
Deduct:
|
||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
(98 | ) | (98 | ) | | |||||||||
TLCF
|
$ | 422 | $ | 4,311 | $ | 2,051 |
(1) |
Represents the fair value of shares of Class A common stock issued to employees and non-employees for services rendered. As these are non-cash charges, we believe that it is appropriate to show Adjusted EBITDA excluding this item. |
(2) |
Primarily represents legal fees incurred in connection with start-up activities, and the creation of acquisition template documents that will be used by us for future transactions. While we intend to acquire additional theatres, we have laid the groundwork for our acquisition program and we expect to incur reduced legal fees in connection with future acquisitions. We therefore believe that it is appropriate to exclude these items from Adjusted EBITDA. |
(3) |
Represents the excess of the fair value of identified tangible and intangible assets from our purchase price of the Bloomfield 8. As a non-recurring item and unrelated to the operation of the theatre, we believe that it is appropriate to show TLCF and Adjusted EBITDA excluding this item. |
(4) |
TLCF is intended to be a measure of theatre profitability. Therefore, our corporate general and administrative expenses have been excluded. |
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
You should read the following
discussion together with the historical consolidated financial statements and related notes included elsewhere in this prospectus. The statements in
this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical
statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described in Risk Factors and Forward-Looking Statements. Our actual
results may differ materially from those contained in or implied by any forward-looking statements.
Our fiscal year ends on June
30 each year. References to fiscal year 2011 are for the inception period (July 29, 2010) to June 30, 2011.
Overview
We operate three theatres located
in Westfield, New Jersey (the Rialto), Cranford, New Jersey (the Cranford) and Bloomfield, Connecticut (the Bloomfield 8), consisting of 19 screens.
Our three theatres had over 148,000 attendees for fiscal year 2011, over 297,000 attendees for the twelve months ended June 30, 2011 on a pro forma
basis as though all three theatres were owned by Digiplex as of July 1, 2010, and over 163,000 attendees for the six months ended December 31, 2011. We
acquired the Rialto and the Cranford on December 31, 2010 and the Bloomfield 8 on February 17, 2011.
In April 2011, we entered into an
asset purchase agreement for our contemplated purchase of certain assets and assumption of theatre operating leases of Cinema Supply, consisting of a
chain of five theatres with 54 screens located throughout central Pennsylvania. Cinema Centers consists of:
|
an 11 screen theatre known as Cinema Center of Bloomsburg, located in Bloomsburg, Pennsylvania; |
|
a 12 screen theatre known as Cinema Center of Camp Hill, located in Camp Hill, Pennsylvania; |
|
a 10 screen theatre known as Cinema Center of Fairground Mall, located in Reading, Pennsylvania; |
|
a 12 screen theatre known as Cinema Center of Selinsgrove, located in Selinsgrove, Pennsylvania; and |
|
a 9 screen theatre known as Cinema Center of Williamsport, located in Williamsport, Pennsylvania. |
Cinema Centers had approximately
1.4 million attendees for the year ended December 31, 201l. Six of the 54 screens constituting Cinema Centers have been converted to digital cinema
platforms. We intend to convert the remaining 48 screens to digital platforms within approximately four months after consummation of this offering at
an estimated aggregate cost of $3.1 million and expect to finance this conversion through capital leases or other secured financing from
banks or vendors. We intend to use approximately $14.0 million of the net proceeds from this offering to consummate the Cinema Centers
acquisition.
In February 2012, we entered into
an asset purchase agreement for our purchase of certain assets of Lisbon Cinema. Lisbon Cinema consists of a single theater with 12 screens in Lisbon,
Connecticut. Lisbon Cinema had approximately 388,000 attendees for the year ended December 31, 2011. All of the Lisbon Cinema theatre screens have been
previously converted to digital formats. We intend to use approximately $6.0 million of the net proceeds from this offering to consummate the Lisbon
Cinema acquisition.
Our plan to expand our business
is based on our business strategy, centered on our slogan cinema reinvented, and includes:
|
Acquisitions of existing historically cash flow positive theatres in free zones. We intend to selectively pursue multi-screen theatre acquisition opportunities that meet our strategic and financial criteria. Our philosophy is to buy and improve existing facilities rather than find and build new theatres. We believe this approach provides more predictability, speed of execution and lower risk. |
|
Creation of an all-digital theatre circuit utilizing our senior management teams extensive experience in digital cinema and related technologies, alternative content selection and movie selection. We have |
34
converted all of our existing theatres and will convert those we acquire to digital projection platforms with an appropriate mix of RealD 3D auditoriums in each theatre complex. |
|
Offering our customers a program of popular movies and alternative content such as sports, concerts, opera, ballet and video games to increase seat utilization and concession sales during off peak and some peak periods. |
|
Deployment of state of the art integrated software systems for back office accounting and remote camera surveillance systems for theatre management which enable us to manage our business efficiently and to provide maximum scheduling flexibility while reducing operational costs. |
|
Active marketing of the Digiplex brand and our programs to consumers using primarily new media tools such as social media, website design and regular electronic communications to our targeted audience. |
|
Enhancing our alternative content programs with themed costuming for our theatre personnel, food packages, scripted introductions by theatre managers, and the use of selected staff members called ambassadors to employ various social media tools before, during and after each event to promote the event and the Digiplex brand. |
Other than the funds resulting
from this offering, there can be no assurance, however, that we will be able to secure financing necessary to implement our business strategy,
including to acquire additional theatres or to renovate and digitalize the theatres we do acquire.
We manage our business under one
reportable segment: theatre exhibition operations.
Components of Operating Results
Revenues
We generate revenues primarily
from admissions and concession sales with additional revenues from screen advertising sales and other revenue streams, such as theatre rentals, private
parties and vendor marketing promotions. Our advertising agreement with NCM has assisted us in expanding our offerings to domestic advertisers and will
be broadening ancillary revenue sources, such as digital video monitor advertising and third party branding. Our alternative content agreements with
NCM and others has assisted us in expanding our alternative content offerings, such as live and pre-recorded concert events, opera, ballet, sports
programs, and other cultural events. In addition to NCM, we select, market and exhibit alternative content from a variety of other sources, including
Emerging Pictures, Cinedigm, Screenvision, and others as they offer their programs to us. Our existing three theatres, and the five theatres we intend
to acquire from Cinema Centers, and the theatre we intend to acquire from Lisbon Cinema are located in free zones, or areas that permit us
to acquire movies from any distributor. As such, we display all of the leading movies and can tailor our offerings to each of our
markets.
Our revenues are affected by
changes in attendance and concession revenues per patron. Attendance is primarily affected by the quality and quantity of films released by motion
picture studios. Our revenues are seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, motion
picture studios release the most marketable motion pictures during the summer and holiday seasons. The unexpected emergence or continuance of a
hit film during other periods can alter the traditional pattern. The timing of movie releases can have a significant effect on our results
of operations, and the results of one fiscal quarter are not necessarily indicative of the results for the next or any other fiscal quarter. The
seasonality of motion picture exhibition, however, has become less pronounced as motion picture studios are releasing motion pictures somewhat more
evenly throughout the year. Our operations may be impacted by the effects of rising costs of our concession items, wages, energy and other operating
costs. We would generally expect to offset those increased costs with higher costs for admission and concessions.
Expenses
Film rent expenses are variable
in nature and fluctuate with our admissions revenues. Film rent expense as a percentage of revenues is generally higher for periods in which more
blockbuster films are released. Film rent expense can also vary based on the length of a films run and are generally negotiated on a film-by-film
and theatre-
35
by-theatre basis. Film rent expense is higher for mainstream movies produced by the Hollywood studios, and lower for art and independent product. Film rent expense is reduced by virtual print fees that we record from motion picture distributors.
Cost of concessions is variable
in nature and fluctuates with our concession revenues. We purchase concession supplies to replace units sold. We negotiate prices for concession
supplies directly with concession vendors and manufacturers to obtain volume rates. Because we purchase certain concession items, such as fountain
drinks and popcorn, in bulk and not pre-packaged for individual servings, we are able to improve our margins by negotiating volume
discounts.
Salaries and wages include a
fixed cost component (i.e., the minimum staffing costs to operate a theatre facility during non-peak periods) and a variable component in relation to
revenues as theatre staffing is adjusted to respond to changes in attendance.
Facility lease expense is
primarily a fixed cost at the theatre level as most of our facility operating leases require a fixed monthly minimum rent payment. Our leases are also
subject to percentage rent in addition to their fixed monthly rent if a target annual revenue level is achieved.
Utilities and other expenses
include certain costs that have both fixed and variable components such as utilities, property taxes, janitorial costs, repairs and maintenance and
security services.
For a summary of other industry
trends as well as other risks and uncertainties relevant to us, see Business Industry Overview and Trends and Risk
Factors.
Significant Events and Fiscal 2012
Outlook
|
New Jersey Theatre Acquisitions. On December 31, 2010, we acquired the Rialto and Cranford theatres in Westfield and Cranford, New Jersey having six and five screens, respectively, for a total purchase price of $1.8 million. We paid $1.2 million in cash and issued to the seller 250,000 shares of our Series A preferred stock, valued at $0.5 million, along with an earn-out. The fair value of the earn-out was recorded as additional purchase price, and as a liability with an estimated fair value of $0.1 million to be paid over 2 years. For additional information regarding the earn-out, see Business Acquisitions. Total goodwill resulting from the acquisition of the Rialto and Cranford was $0.9 million. |
|
Connecticut Theatre Acquisition. On February 17, 2011, we acquired the Bloomfield 8, an 8-screen theatre in Bloomfield, Connecticut, for $0.1 million in cash. The fair value of the theatre was determined to be $0.2 million, and we recorded a bargain purchase gain of $0.1 million during fiscal year 2011. |
|
Digital Projector Installation. During fiscal year 2011, we installed 16 digital projectors and related equipment in our three theatres. The average cost that we incurred with respect to the installation was approximately $74,000, inclusive of equipment and labor. Our total cost of digital platform installations to December 31, 2011 was $1.2 million. With the three systems that had been previously installed, all 19 screens were digitally equipped as of June 30, 2011. The remaining balance of the cost of the 16 digital systems was approximately $1.1 million and was included in property and equipment, net and as a current liability as of June 30, 2011 and December 31, 2011. We plan to repay the cost of this digital equipment with a portion of the net proceeds from this offering. |
|
Advertising Agreement. During the fiscal year 2011, we entered into a five year advertising agreement with NCM that entitles us to payments on a per patron basis for advertising displayed by NCM on our screens. We started recording the revenues per patron under this agreement during the six months ended December 31, 2011, and we expect revenues from this agreement to be accretive to our theatres revenues. |
|
Alternative Content Program Launch. Along with the continued display of traditional feature movies, a cornerstone of our business strategy is to exhibit opera, ballet, concerts, sporting events, childrens programming and other forms of alternative content in our theatres. Using our 19 digital systems (12 of which are equipped to show 3D events), we can show live and pre-recorded 2D and 3D events at off-peak times to increase the utilization of our theatres. |
36
|
Acquisition Strategy. We plan to acquire existing movie theatres in free zones over the next 12 months and beyond. We generally seek to pay a multiple of 4.5 times to 5.5 times TLCF for theatres we acquire. TLCF is calculated as revenues minus theatre operating expenses (excluding depreciation and amortization). See pages 43-46 for additional information regarding TLCF. For example, the Cinema Centers and Lisbon Cinema theatres had historical TLCF for their respective 2011 fiscal years of approximately $2.9 million and $1.0 million respectively, yielding multiples of 4.8 times and 6.0 times TLCF for Cinema Centers and Lisbon Cinema based on our agreed upon purchase prices of $14.0 million and $6.0 million. The higher multiple being paid for Lisbon Cinema is because the asset base being acquired includes 12 recently installed digital projection systems. |
The following table sets forth
the percentage of total revenues represented by statement of operations items included in our consolidated statements of operations for the periods
indicated (dollars and attendance in thousands, except average ticket prices and average concession per patron):
Results of Operations
Successor Fiscal Year Ended June 30, 2011 |
Predecessor Fiscal Year Ended December 31, 2010 |
Predecessor Fiscal Year Ended December 31, 2009 |
|||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$ |
% of Revenue |
$ |
% of Revenue |
$ |
% of Revenue |
||||||||||||||||||||||
Revenues |
|||||||||||||||||||||||||||
Admissions
|
$ | 1,158 | 74 | $ | 1,529 | 71 | $ | 1,876 | 74 | ||||||||||||||||||
Concessions
|
382 | 24 | 627 | 29 | 660 | 26 | |||||||||||||||||||||
Other
|
32 | 2 | | | | | |||||||||||||||||||||
Total
revenues |
1,572 | 100 | 2,156 | 100 | 2,536 | 100 | |||||||||||||||||||||
Cost of
operations: |
|||||||||||||||||||||||||||
Film rent
expense (1) |
598 | 51 | 841 | 55 | 1,032 | 55 | |||||||||||||||||||||
Cost of
concessions (2) |
66 | 17 | 94 | 15 | 143 | 22 | |||||||||||||||||||||
Salaries and
wages (3) |
235 | 15 | 273 | 13 | 234 | 9 | |||||||||||||||||||||
Facility
lease expense (3) |
223 | 14 | 238 | 11 | 111 | 4 | |||||||||||||||||||||
Utilities and
other (3) |
258 | 16 | 352 | 16 | 375 | 15 | |||||||||||||||||||||
General and
administrative expenses (including share-based compensation and expenses of $186, $0 and $0, respectively) (3) |
900 | 57 | 441 | 20 | 412 | 16 | |||||||||||||||||||||
Depreciation
and amortization (3) |
165 | 10 | 141 | 7 | 117 | 5 | |||||||||||||||||||||
Total costs
and expenses(3) |
2,445 | 155 | 2,380 | 110 | 2,424 | 96 | |||||||||||||||||||||
Operating
income (loss)(3) |
(873 | ) | (55 | ) | (224 | ) | (10 | ) | 112 | 4 | |||||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
(98 | ) | (6 | ) | | | | | |||||||||||||||||||
Interest
|
| | 5 | | 3 | | |||||||||||||||||||||
Other
|
1 | | | | | | |||||||||||||||||||||
Income
(loss) before income taxes (3) |
(776 | ) | (49 | ) | (229 | ) | (10 | ) | 109 | 4 | |||||||||||||||||
Income taxes
(4) |
14 | (2 | ) | | | | | ||||||||||||||||||||
Net income
(loss) (3) |
$ | (790 | ) | (50 | ) | $ | (229 | ) | (10 | ) | $ | 109 | 4 | ||||||||||||||
Other
operating data: |
|||||||||||||||||||||||||||
Theatre Level
Cash Flow (7) |
$ | 192 | 12 | $ | 358 | 17 | $ | 641 | 25 | ||||||||||||||||||
Adjusted
EBITDA (8) |
$ | (373 | ) | (24 | ) | $ | (83 | ) | (4 | ) | $ | 229 | 9 | ||||||||||||||
Attendance
|
148 | * | 206 | * | 258 | * | |||||||||||||||||||||
Average
ticket price (5) |
$ | 7.82 | * | $ | 7.42 | * | $ | 7.27 | * | ||||||||||||||||||
Average
concession per patron(6) |
$ | 2.58 | * | $ | 3.04 | * | $ | 2.56 | * |
* |
Not meaningful |
37
(1) |
Percentage of revenues calculated as a percentage of admissions revenues. |
(2) |
Percentage of revenues calculated as a percentage of concessions revenues. |
(3) |
Percentage of revenues calculated as a percentage of total revenues. |
(4) |
Calculated as a percentage of pre-tax loss. |
(5) |
Calculated as admissions revenue/attendance. |
(6) |
Calculated as concessions revenue/attendance. |
(7) |
TLCF is a non-GAAP financial measure. TLCF is a common financial metric in the theatre industry, used to gauge profitability at the theatre level, before the effect of depreciation and amortization, general and administrative expenses, interest, taxes or other income and expense items. While TLCF is not intended to replace any presentation included in our consolidated financial statements under GAAP and should not be considered an alternative to cash flow as a measure of liquidity, we believe that this measure is useful in assessing our cash flow and working capital requirements. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this prospectus. For additional information on TLCF, see pages 43-46. |
(8) |
Adjusted EBITDA is a non-GAAP financial measure. We use adjusted EBITDA as a supplemental liquidity measure because we find it useful to understand and evaluate our results, excluding the impact of non-cash depreciation and amortization charges, stock based compensation expenses, and nonrecurring expenses and outlays, prior to our consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this prospectus. For additional information on Adjusted EBITDA, see pages 43-46. |
Fiscal Year 2011 (Successor) and Fiscal Years 2010
and 2009 (Predecessor)
Our fiscal year 2011 results
include the Rialto and Cranford theatres for the six month period from the acquisition date of December 31, 2010 to June 30, 2011, and the Bloomfield 8
Theatre for the approximately four and a half month period from the acquisition date of February 17, 2011 to June 30, 2011. The fiscal year 2010 and
2009 results of the Predecessor include those of the Rialto and Cranford theatres for the respective 12 month periods, and do not include the results
of the Bloomfield 8.
Admissions and
Concessions. Our fiscal year 2011 revenues include our Rialto and Cranford theatres for the six month period from the acquisition date of
December 31, 2010 to June 30, 2011, and the Bloomfield 8 theatre for the approximately four and a half month period from the acquisition date of
February 17, 2011 to June 30, 2011. During that time, we adjusted admission and concession prices and our concession offerings, based on our review of
the local market conditions. The decline in revenues from 2009 to 2010 was primarily due to a stronger product mix in 2009 that included such
blockbuster titles as Avatar. We believe the year-over-year revenue decline was consistent with the industry average.
We believe the average ticket
prices and the average concession purchases at our theatres as shown in the table above are close to the averages among movie theatres in our operating
markets. During fiscal year 2011, approximately 148,000 patrons attended a movie or other event at our theatres. We believe each theatres
revenues are positioned to grow in the next fiscal year and beyond from our product offerings, including the addition of alternative content, such as
concerts, sporting events and childrens programming, when the theatres are not otherwise operating at peak levels.
Other Revenues.
Other revenues in fiscal year 2011 consist of theatre rentals for parties, camps and other activities. Additionally, although we had no revenues from
advertising during fiscal year 2011, we entered into an advertising agreement with NCM to receive ad revenues which commenced during the three months
ended September 30, 2011. We expect advertising revenues to be a component of our operating results in future periods. The Predecessor had no other
revenues in fiscal years 2010 and 2009.
Film Rent Expense.
Beginning in 2011, we utilize Clearviews film department as an external booking service to purchase (or rent) films at
each location from the movie studios (excluding alternative content). We expect that as we grow we will be able to obtain content at levels comparable
to our competitors, although we will
38
be subject to the same pricing trends that all exhibitors will experience. While film rent expense is a variable cost that fluctuates with box office revenues, we generally expect film rent expense to range from 45% to 55% of admissions revenues, with art and independent titles at the lower end of the range and mainstream movie titles at the middle to high end of the range. During the fiscal year 2011, we recorded virtual print fees of $35 thousand which reduced our film rent expense.
Cost of
Concessions. Beginning in 2011, we purchase concession items from two main national vendors, along with smaller vendors for specialty items. We
have been able to negotiate favorable concessions pricing for many items, typically only enjoyed by national theatre circuits, due to the
reputation of our senior management team and our growth expectations. Cost of concessions is a variable expense that will fluctuate with concession
revenues. We expect our cost of concessions to average between 15% to 20% of our concession revenues, with mainstream movies generating margins at the
higher end of the range, and art and independent movies at the lower end. Changes in the cost of concessions percentage from year to year are due to
the mix of products being sold and fluctuations in supply pricing.
Salaries and Wages.
Our theatre employees are mostly part-time hourly employees, supervised by one or more full-time managers at each location. Our payroll expenses
contain a fixed component but are also variable and will fluctuate, being generally higher during the peak summer and holiday periods, and also during
alternative content events, and lower at other times. The change from 2009 to 2010 was due to higher average wages paid to theatre personnel. Salaries
and wages were higher as a percentage of revenue due to reduced revenue in 2010 following a record year at the box office in 2009.
Facility Lease
Expense. Each of our facilities is operated under operating leases that contain renewal options upon expiration. The leases contain provisions
that increase rents in certain amounts and at certain times during the initial term, and the leases for our three theatres require additional rent to
be paid upon the achievement of certain revenue targets. For fiscal year 2011, there was no additional rent expense recorded because the revenue
targets had not been exceeded. Upon acquisition of each of our theatres, we entered into new leases with the landlords, with different lease rates and
terms than had existed under prior ownership. The change from 2009 to 2010 was due to a revision in the Predecessors lease arrangement with the
owner of the theatres.
Utilities and
Other. Utilities and other expenses consist of utility charges, real estate taxes incurred pursuant to the operating leases for our theatres,
and various other costs of operating the theatres. We expect these costs, which are largely fixed in nature, to remain relatively constant for the
theatres, with growth in these expenses as we acquire more theatres.
General and Administrative
Expenses. General and administrative expenses consisted primarily of salaries and wages for our corporate staff, legal, accounting and
professional fees associated with our startup and acquisition of theatres, marketing, and information technology related expenses. We expect these
costs to decrease as a percentage of revenue as many of the activities in fiscal year 2011, our first fiscal year, were related to laying the
groundwork for anticipated growth. Included in general and administrative expenses is stock compensation expense of $0.2 million related to issuance of
Class A common stock to employees, non-employees and non-employee directors for services rendered during fiscal year 2011. We expect to issue
additional stock-based awards in the future under stock compensation award plans, which may consist of stock options or restricted stock, subject to
vesting periods. As of June 30, 2011, we had 9 employees on our corporate staff, including our chief executive officer and other executive officers and
staff to support our business development, technology, accounting, and marketing activities. The Successors general and administrative expenses
are at higher levels than the Predecessors due to the Successors planned acquisitions of theatres at the Successor, and expanded content
offerings following the conversion to digital presentation.
Depreciation and
Amortization. We utilize straight line depreciation and amortization for property and equipment and intangible assets over the estimated useful
life of each asset class. Our largest fixed asset is our digital projection equipment, which has a gross cost of $1.2 million and is being depreciated
over a 10-year expected useful life. We expect digital projection equipment to be a large component of our asset base going forward following any
acquisitions that we may consummate, along with other theatre equipment and leasehold improvements. The change from 2009 to 2010 was due to renovations
to the Rialto theatre in 2009 and a resulting increased asset base. Fiscal year 2011 amounts are based on the fair values assigned to the assets
acquired on the respective theatre acquisition dates.
39
Operating Loss. Our
operating loss was primarily attributable to various startup costs, depreciation and amortization, general and administrative costs which will form the
basis for future growth, and the lack of a full year of operation from our theatres.
Bargain Purchase
Gain. We recorded a bargain purchase gain of $0.1 million in fiscal year 2011 resulting from difference between the cash paid for the
Bloomfield 8 theatre and the fair value of the acquired assets.
Income Taxes. We
recorded income tax expense in fiscal year 2011, although there were pretax losses, mainly because of the existence of a full deferred tax asset
valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be
recognized is offset by the change to the valuation allowance. However, we recorded an accrual of non-cash tax expense due to additional valuation
allowance in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset existing deferred tax
assets. The Predecessor had no income tax expense as it was a Subchapter S Corporation for tax purposes.
Successor | Predecessor | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Amounts in thousands, except per patron data) |
Six Months Ended December 31, 2011 (unaudited) |
Inception Period (July 29, 2010) to December 31, 2010 (7) |
Six Months Ended December 31, 2010 (unaudited) |
||||||||||||||||||||||||
$ |
% of Revenue |
$ |
% of Revenue |
$ |
% of Revenue |
||||||||||||||||||||||
Revenues |
|||||||||||||||||||||||||||
Admissions
|
$ | 1,392 | 73 | $ | 22 | 88 | $ | 820 | 74 | ||||||||||||||||||
Concessions
|
401 | 21 | 3 | 12 | 294 | 26 | |||||||||||||||||||||
Other
|
106 | 6 | | | | ||||||||||||||||||||||
Total
revenues |
1,899 | 100 | 25 | 100 | 1,114 | 100 | |||||||||||||||||||||
Cost of
operations: |
|||||||||||||||||||||||||||
Film rent
expense (1) |
598 | 43 | 9 | 41 | 430 | 52 | |||||||||||||||||||||
Cost of
concessions (2) |
68 | 17 | | | 62 | 21 | |||||||||||||||||||||
Salaries and
wages (3) |
288 | 15 | 2 | 8 | 132 | 12 | |||||||||||||||||||||
Facility
lease expense (3) |
248 | 13 | | | 119 | 11 | |||||||||||||||||||||
Utilities and
other (3) |
329 | 17 | 37 | 148 | 182 | 16 | |||||||||||||||||||||
General and
administrative expenses (including share-based compensation expenses of $33, $60 and $0, respectively) (3) |
673 | 35 | 155 | 620 | 222 | 20 | |||||||||||||||||||||
Depreciation
and amortization (3) |
262 | 14 | | | 70 | 6 | |||||||||||||||||||||
Total costs
and expenses(3) |
2,466 | 130 | 203 | 812 | 1,217 | 109 | |||||||||||||||||||||
Operating
income (loss)(3) |
(567 | ) | (30 | ) | (178 | ) | (712 | ) | (103 | ) | (9 | ) | |||||||||||||||
Other
|
| | | | 2 | | |||||||||||||||||||||
Loss
before income taxes (3) |
(567 | ) | (30 | ) | (178 | ) | (712 | ) | (105 | ) | (9 | ) | |||||||||||||||
Income taxes
(4) |
20 | (1 | ) | | | | | ||||||||||||||||||||
Net loss
(3) |
$ | (587 | ) | (31 | ) | $ | (178 | ) | (712 | ) | $ | (105 | ) | (9 | ) | ||||||||||||
Other
operating data: |
|||||||||||||||||||||||||||
Theatre Level
Cash Flow (8) |
$ | 368 | 19 | $ | (23 | ) | (92 | ) | $ | 189 | 17 | ||||||||||||||||
Adjusted
EBITDA (9) |
$ | (263 | ) | (14 | ) | $ | (97 | ) | (388 | ) | $ | (33 | ) | (3 | ) | ||||||||||||
Attendance
|
163 | * | 3 | * | 102 | * | |||||||||||||||||||||
Average
ticket price (5) |
$ | 8.54 | * | $ | 8.00 | * | $ | 8.00 | * | ||||||||||||||||||
Average
concession per patron (6) |
$ | 2.46 | * | $ | 1.09 | * | $ | 2.88 | * |
* |
Not meaningful |
(1) |
Percentage of revenues calculated as a percentage of admissions revenues. |
(2) |
Percentage of revenues calculated as a percentage of concessions revenues. |
(3) |
Percentage of revenues calculated as a percentage of total revenues. |
(4) |
Calculated as a percentage of pre-tax loss. |
40
(5) |
Calculated as admissions revenue/attendance. |
(6) |
Calculated as concessions revenue/attendance. |
(7) |
The Successors revenues and theatre operating expenses for the six months ended December 31, 2010 represent only one day of operating and are immaterial for discussion purposes. |
(8) |
TLCF is a non-GAAP financial measure. For additional information on TLCF, see pages 43-46. |
(9) |
Adjusted EBITDA is a non-GAAP financial measure. For additional information on Adjusted EBITDA, see pages 43-46. |
Six Months Ended December 31, 2011 (Successor) and
Six Months Ended December 31, 2010 (Predecessor)
For the six months ended December
31, 2011, the Successors results included the Rialto, Cranford and Bloomfield 8 theatres. For the six months ended December 31, 2010, the
Predecessors results included only the Rialto and Cranford theatres.
Admissions and
Concessions. For the six months ended December 31, 2011, our revenues included our theatres operations for the entire period. The
Successor had only one day of revenues for the six months ended December 31, 2010.
During the six months ended
December 31, 2011, approximately 163,000 patrons, attended a movie or other event at our theatres.
Other Revenues.
Other revenues for the six months ended December 31, 2011 consist of $74 thousand of theatre rentals to various groups including parties, camps and for
other activities, and $32 thousand of revenues under our agreement with NCM. We expect these revenues to be an ongoing component of our operating
results in future periods.
Film Rent Expense.
During the six months ended December 31, 2011, we recorded virtual print fees of $132 thousand, which reduced our film rent expense. Excluding this
reduction, film rent expense would have been 52% of admissions revenue, which we believe is close to the industry average of 50% to 55%. The movies
displayed during the peak summer and holiday months were mainly from the major movie studios, which require higher payments of film rent as a
percentage of revenue versus art and independent product which is more prevalent during the off-peak winter months.
Cost of
Concessions. At 17% of our concessions revenue, we believe our cost of concessions is close to the industry average of 15% to 20%. Our
concession costs as a percentage of concessions revenue can fluctuate based on the mixture of concession products sold, and changes in our supply
pricing.
Facility Lease
Expense. Facility lease expense represents the lease of our three theatre facilities for the six months ended December 31, 2011. We are subject
to additional lease payments based on the achievement of certain revenue targets. There was $6 thousand of additional rent expense recorded during the
six months ended December 31, 2011, in connection with the additional rent provisions in one of the leases.
Utilities and
Other. Included in utilities and other expense are administrative costs related to our agreement for virtual print fees, which amounted to $13
thousand for the six months ended December 31, 2011. Other significant expenses included are repairs and maintenance of $50 thousand, real estate tax
of $58 thousand, theatre supplies and cleaning of $52 thousand, utilities of $86 thousand, credit card processing fees of $23 thousand, and insurance
of $17 thousand directly related to theatre operations.
General and Administrative
Expenses. Included in general and administrative expenses is stock compensation expense of $33 thousand and $60 thousand for the
Successors 2011 and 2010 periods, respectively, related to issuance of Class A common stock to employees, non-employees and non-employee
directors for services rendered. As of December 31, 2011 and 2010, we had 9 and 4 employees, respectively on our corporate staff. As a percentage of
revenue, the Successors general and administrative expenses were at higher levels than we expect in the future, because the Company is staffed to
execute on its growth plans. We expect general and administrative expenses to be below 10% of revenue on an annual basis, once the Cinema Centers and
Lisbon Cinema acquisitions are complete.
Operating Loss. The
operating loss was primarily attributable to various startup costs, depreciation and amortization and general and administrative costs which will form
the basis for future growth, and the lack of a full year of operation from our theatres.
41
Income Taxes. We
recorded income tax expense for the six months ended December 31, 2011, although there were pretax losses, mainly because of the existence of a full
deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that
would otherwise be recognized is offset by the change to the valuation allowance. However, we recorded an accrual of non-cash tax expense due to
additional valuation allowance in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset
existing deferred tax assets. The Predecessor had no income tax expense as it was a Subchapter S Corporation for tax purposes.
Liquidity and Capital Resources
We expect our primary uses of
cash to be from continued theatre acquisitions, operating expenses, capital expenditures (for digital projection equipment and otherwise), general
corporate purposes related to corporate operations, and possible debt service on any debt or payments with respect to capital leases that we may incur
in the future. We expect our principal sources of liquidity to be from cash generated from operations, cash on hand, and anticipated proceeds from
equity or debt issuances.
We plan to use approximately
$14.0 million of the net proceeds of this offering to consummate the Cinema Centers acquisition, $6.0 million to consummate the Lisbon Cinema
acquisition, and $1.1 million to repay our obligation to Barco for prior installations of digital projection systems in our existing theatres. Upon
acquisition of the Cinema Centers locations, we will convert their remaining 48 screens to digital projection at an estimated cost of
approximately $3.1 million. We intend to finance this conversion through capital lease or other secured financing from banks or
vendors.
Operating Activities
Net cash flows provided by
operating activities totaled approximately $1.0 million, $48 thousand and $0.2 million for fiscal year 2011 (Successor) and fiscal years 2010 and 2009
(Predecessor), respectively. During fiscal year 2011, an increase in accounts payable and accrued expenses contributed to our cash flow from operating
activities, primarily related to the digital projection equipment we purchased and other payables we incurred in our first fiscal year including legal
and professional fees. The Predecessor operating activities for 2010 and 2009 were largely due to the net income or loss for the year less the impact
of depreciation. Net cash flows used in operating activities totaled approximately $0.5 million, $0.3 million and $0.1 million for the six months ended
December 31, 2011 (Successor) inception period (July 29, 2010) to December 31, 2010 and 2010 (Predecessor), respectively. In the 2011 interim period, a
net decrease in accounts payable and accrued expenses resulted from the payment of a portion of our fiscal year 2011 payables, and increases in
accounts receivable and prepaid expenses resulted from our new advertising and virtual print fee agreements. Operating activities for the 2010 period
(Successor) reflect the expenses we incurred during our first fiscal period since inception, as we had no theatre operations at that time. Our revenues
are generated principally through admissions and concessions sales from feature films with proceeds received in cash or via credit cards at the point
of sale and revenue recognized at the point of sale. Our operating expenses are primarily related to film and concession costs, rent, and payroll. Film
rent expense is ordinarily paid to distributors within 30 days following receipt of admissions revenues (though it can be faster during holiday and
summer periods), and the cost of our concessions are generally paid to vendors approximately 30 to 45 days from purchase. Included in our liabilities
at June 30, 2011 and December 31, 2011 is $1.1 million related to our installation of 16 digital projection systems in fiscal year 2011. We expect to
continue to have significant capital expenditures for digital projection equipment and other theatre upgrades as we acquire and improve
theatres.
Investing Activities
Our capital requirements for the
Successor have arisen principally in connection with acquisitions of theatres, upgrading our theatre facilities post-acquisition and replacing
equipment. Cash used in investing activities totaled $3.2 million, $0.01 million and $0.7 million during fiscal year 2011 (Successor) and
fiscal years 2010 and 2009 (predecessor), respectively. The fiscal year 2011 amounts resulted from the acquisition of the Rialto and Cranford theatres
(the cash portion of the purchase price was $1.2 million), the acquisition of the Bloomfield theatre for $0.1 million in cash, and capital expenditures
at our theatres of $1.9 million, including in connection with the
42
installation of digital projection equipment. The fiscal year 2009 amounts were primarily due to renovations to the Rialto theatre. Cash used in investing activities was $0.3 million during the six months ended December 31, 2011 (Successor) as we completed our upgrades to our three locations. The cash used in the period from inception date (July 29,2010) to December 31, 2010 was primarily for the acquisition of our New Jersey theatres. We do not anticipate further significant capital outlays for our three existing locations or for Lisbon Cinema for the next 12 months. We expect to incur up to $3.1 million of capital outlays for the Cinema Centers theatres in connection with the conversion of those theatres to digital projection systems. We may also incur significant capital outlays in connection with any other acquisition that we may consummate in the next 12 months, including digital projection equipment and other theatre upgrades.
We intend to continue to grow our
theatre circuit through selective expansion and acquisition opportunities. We have executed an asset purchase agreement to acquire the Cinema Centers
theatres, consisting of five theatres having 54 screens. All of the Cinema Center theatres are located in central Pennsylvania, and the total purchase
price is $14.0 million. On June 30, 2011, we amended the Cinema Centers asset purchase agreement to provide for an extension of the closing date until
December 31, 2011, and an option to extend the closing date to March 31, 2012 if we deposit $0.1 million into escrow, which we expect to do in the
first calendar quarter of 2012. We have also executed an asset purchase agreement to acquire the Lisbon Cinema theatre, consisting
of a single theatre having 12 screens. The Lisbon Cinema theatre is located in Lisbon, Connecticut and the purchase price is $6.0 million subject to an
earn out adjustment. We intend to fund the purchase prices of the Cinema Centers and Lisbon Cinema acquisitions with a portion of the net
proceeds from this offering.
Depending on the size of this
offering, and the availability of equity and debt financing following this offering, we have a pipeline of additional theatres that we may seek to
acquire, and we have been in discussions with other potential sellers. However, other than the Cinema Centers and Lisbon Cinema asset purchase
agreements, we do not have any executed agreements to acquire any other theatres and no other acquisitions are deemed probable. We are limited to our
available sources of financing to complete any such acquisitions.
Financing Activities
Our financing activities for
fiscal year 2011 and the six months ended December 31, 2011 consisted of the sale of Class A common and Series A preferred stock to investors,
including certain of our executive officers and board members, less the direct costs associated with these transactions. For fiscal year 2011, cash
provided by financing activities included the sale of 1,522,500 shares of Series A preferred stock for $3.0 million, and 1,469,166 shares of Class A
and Class B common stock for $0.4 million. We incurred $0.02 million of costs directly attributable to these equity issuances. During the six
months ended December 31, 2011, we issued 200,000 shares of Series A Preferred Stock for $0.4 million. In fiscal year 2009, cash flows from financing
activities for the Predecessor were approximately $0.3 million, as the predecessors owner invested capital and used a line of credit to
fund theater renovations.
Non-GAAP Financial Measures
Theatre Level Cash Flow and Adjusted
EBITDA
TLCF was $0.2 million, $0.4
million and $0.6 million for fiscal year 2011 (Successor) and fiscal years 2010 and 2009 (Predecessor), respectively. TLCF was $0.4 million and $0.2
million for the six months ended December 31, 2011 (Successor) and 2010 (Predecessor), respectively. Adjusted EBITDA was ($0.4) million, ($0.08)
million and $0.2 million for fiscal years 2011 (Successor), 2010 and 2009 (Predecessor) respectively and was ($0.2) million and ($0.03) million for the
six months ended September 30, 2011 (Successor) and 2010 (Predecessor), respectively.
TLCF is a common financial metric
in the theatre industry, used to gauge profitability at the theatre level, before the effect of depreciation and amortization, general and
administrative expenses, interest, taxes or other income and expense items. We use Adjusted EBITDA as a supplemental liquidity measure because we find
it useful to understand and evaluate our results excluding the impact of non-cash depreciation and amortization charges, stock based compensation
expenses, and nonrecurring expenses and outlays, prior to our consideration of the impacts
43
of other potential sources and uses of cash, such as working capital items. We believe that TLCF and Adjusted EBITDA are useful to investors for these purposes as well.
TLCF and Adjusted EBITDA should
not be considered alternatives to, or more meaningful than, GAAP measures such as net cash provided by operating activities. Because these measures
exclude depreciation and amortization and they do not reflect any cash requirements for the replacement of the assets being depreciated and amortized,
which assets will often have to be replaced in the future. Further, because these metrics do not reflect the impact of income taxes, cash dividends,
capital expenditures and other cash commitments from time to time as described in more detail elsewhere in this prospectus, they do not represent how
much discretionary cash we have available for other purposes. Nonetheless, TLCF and Adjusted EBITDA are key measures used by us. We also evaluate TLCF
and Adjusted EBITDA because it is clear that movements in these measures impact our ability to attract financing. TLCF and Adjusted EBITDA, as
calculated, may not be comparable to similarly titled measures reported by other companies.
44
A reconciliation of TLCF and
Adjusted EBITDA to GAAP net loss is calculated as follows (in thousands):
Adjusted EBITDA reconciliation:
(unaudited) |
Successor Fiscal Year 2011 |
Predecessor Fiscal Year 2010 |
Predecessor Fiscal Year 2009 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income
(loss) |
$ | (790 | ) | $ | (229 | ) | $ | 109 | ||||||
Add
back: |
||||||||||||||
Depreciation
and amortization |
165 | 141 | 117 | |||||||||||
Interest
|
| 5 | 3 | |||||||||||
Income taxes
|
14 | | | |||||||||||
EBITDA
|
(611 | ) | (83 | ) | 229 | |||||||||
Add
back: |
||||||||||||||
Stock-based
compensation and expenses (1) |
186 | | | |||||||||||
Other expense
|
1 | | | |||||||||||
Non-recurring
organizational and M&A related professional fees (2) |
149 | | | |||||||||||
Deduct: |
||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
(98 | ) | | | ||||||||||
Adjusted
EBITDA |
$ | (373 | ) | $ | (83 | ) | $ | 229 |
TLCF reconciliation:
(unaudited) |
Successor Fiscal Year 2011 |
Predecessor Fiscal Year 2010 |
Predecessor Fiscal Year 2009 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net income
(loss) |
$ | (790 | ) | $ | (229 | ) | $ | 109 | ||||||
Add
back: |
||||||||||||||
General and
administrative (4) |
900 | 441 | 412 | |||||||||||
Depreciation
and amortization |
165 | 141 | 117 | |||||||||||
Interest
|
| 5 | 3 | |||||||||||
Income taxes
|
14 | | | |||||||||||
Other expense
|
1 | | | |||||||||||
Deduct: |
||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
(98 | ) | | | ||||||||||
TLCF
|
$ | 192 | $ | 358 | $ | 641 |
45
Adjusted EBITDA reconciliation:
(unaudited) |
Successor Six Months Ended December 31, 2011 |
Successor Inception Period (July 29, 2010) to December 31, 2010 |
Predecessor Six Months Ended December 31, 2010 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net
loss |
$ | (587 | ) | $ | (178 | ) | $ | (105 | ) | |||||
Add
back: |
||||||||||||||
Depreciation
and amortization |
262 | | 70 | |||||||||||
Interest
|
| | 2 | |||||||||||
Income taxes
|
20 | | | |||||||||||
EBITDA
|
(305 | ) | (178 | ) | (33 | ) | ||||||||
Add
back: |
||||||||||||||
Stock-based
compensation and expenses (1) |
33 | 60 | | |||||||||||
Other expense
|
| | | |||||||||||
Non-recurring
organizational and M&A related professional fees (2) |
9 | 21 | | |||||||||||
Deduct: |
||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
| | | |||||||||||
Adjusted
EBITDA |
$ | (263 | ) | $ | (97 | ) | $ | (33 | ) |
TLCF reconciliation:
(unaudited) |
Successor Six Months Ended December 31, 2011 |
Successor Six Months Ended December 31, 2010 |
Predecessor Six Months Ended December 31, 2010 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net
loss |
$ | (587 | ) | $ | (178 | ) | $ | (105 | ) | |||||
Add
back: |
||||||||||||||
General and
administrative (4) |
673 | 155 | 222 | |||||||||||
Depreciation
and amortization |
262 | | 70 | |||||||||||
Interest
|
| | 2 | |||||||||||
Income taxes
|
20 | | | |||||||||||
Other expense
|
| | | |||||||||||
Deduct: |
||||||||||||||
Bargain
purchase gain from theatre acquisition (3) |
| | | |||||||||||
TLCF
|
$ | 368 | $ | (23 | ) | $ | 189 |
(1) |
Represents the fair value of shares of Class A common stock issued to employees and non-employees for services rendered. As these are non-cash charges, we believe that it is appropriate to show Adjusted EBITDA excluding this item. |
(2) |
Primarily represents legal fees incurred in connection with start-up activities, and the creation of acquisition template documents that will be used by us for future transactions. While we intend to acquire additional theatres, we have laid the groundwork for our acquisition program and we expect to incur reduced legal fees in connection with future acquisitions. We therefore believe that it is appropriate to exclude these items from Adjusted EBITDA. |
(3) |
Represents the excess of the fair value of identified tangible and intangible assets from our purchase price of the Bloomfield 8. As a non-recurring item and unrelated to the operation of the theatre, we believe that it is appropriate to show TLCF and Adjusted EBITDA excluding this item. |
(4) |
TLCF is intended to be a measure of theatre profitability. Therefore, our corporate general and administrative expenses have been excluded. |
46
Contractual Cash Obligations and
Commitments
We have entered into long-term
contractual lease obligations and commitments in the normal course of business. Other than the operating leases that are detailed below, we do not
utilize variable interest entities or any other form of off-balance sheet financing. As of December 31, 2011, our contractual cash obligations over the
periods presented below, are as follows (in thousands):
Payments Due By Period |
|||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total |
Current |
1336 months |
3760 months |
After 60 months |
|||||||||||||||||||
Contractual
Cash Obligations: |
|||||||||||||||||||||||
Purchase
commitments (1) |
$ | 1,066 | $ | 1,066 | $ | | $ | | $ | | |||||||||||||
Operating
leases (2) |
5,148 | 519 | 1,074 | 1,122 | 2,433 | ||||||||||||||||||
Total
|
$ | 6,214 | $ | 1,585 | $ | 1,074 | $ | 1,122 | $ | 2,433 |
(1) |
Includes estimated capital expenditures to which we were committed as of December 31, 2011, primarily the cost of digital projection equipment. |
(2) |
We enter into operating leases in the ordinary course of business. Such lease agreements provide us with the option to renew the leases at defined or then fair value rental rates for various periods. Our future operating lease obligations would change if we exercised these renewal options or if we enter into additional operating lease agreements. Our operating lease obligations are further described in the footnotes to our consolidated financial statements. |
We believe that the amount of
cash and cash equivalents on hand, the net proceeds from this offering and cash flow expected from operations will be adequate for us to execute our
business strategy and meet anticipated requirements for lease obligations, capital expenditures, and working capital for the next 12
months.
Critical Accounting Policies
We prepare our consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make
certain estimates and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting policies, which we believe are the most critical to aid in fully understanding and evaluating
our reported consolidated financial results, include the following:
Revenue and Film Rent Expense
Recognition
Revenues are recognized when
admissions and concession sales are received at the box office. Other revenues primarily consist of screen advertising, theatre rentals and parties.
Sales are made either in cash or in the form of credit cards, which settle in cash within three days. Screen advertising revenues are recognized over
the period that the related advertising is delivered on-screen. Theatre rentals and party revenue are recognized at the time of the event. We record
proceeds from the sale of gift cards and other advanced sale-type certificates in current liabilities and recognize admissions and concession revenue
when a holder redeems the card or certificate. We recognize unredeemed gift cards and other advanced sale-type certificates as revenue only after such
a period of time indicates, based on historical experience, that the likelihood of redemption is remote, and based on applicable laws and regulations.
In evaluating the likelihood of redemption, we consider the period outstanding, the level and frequency of activity, and the period of
inactivity.
Film rent expenses are accrued
based on the applicable admissions and either mutually agreed upon firm terms or a sliding scale formula, which are generally established prior to the
opening of the film, or estimates of the final mutually agreed upon settlement, which occurs at the conclusion of the film run, subject to the film
licensing arrangement. Under a firm terms formula, we pay the distributor a mutually agreed upon specified percentage of box office receipts, which
reflects either a mutually agreed upon aggregate rate for the life of the film or rates that decline over the term of the run. Under a sliding scale
formula, we pay a percentage of box office revenues using
47
a pre-determined matrix that is based upon box office performance of the film. The settlement process allows for negotiation of film rental fees upon the conclusion of the film run based upon how the film performs. Estimates are based on the expected success of a film. The success of a film can typically be determined a few weeks after a film is released when initial box office performance of the film is known. Accordingly, final settlements typically approximate estimates since box office receipts are known at the time the estimate is made and the expected success of a film can typically be estimated early in the films run. If actual settlements are different than those estimates, film rental costs are adjusted at that time.
Under our Exhibitor-Buyer Master
License Agreement, we earn virtual print fees from the movie studios when a new digital title is shown on our screens. We may receive virtual print
fees for up to the total costs of our digital systems, less a base amount of $9 thousand per system, but including any financing costs we may incur,
over a maximum period of ten years from the date of our installations. We are eligible to receive these payments through May 2021, or until the amount
of cumulative virtual print fees is equal to our costs. virtual print fees are treated as a reduction of film rent expense. Below is a summary of the
costs we incurred relating to the purchase of our digital projection systems to date less the base amount, the virtual print fees we have earned, and
the administrative fees incurred (which add to the amounts we can receive for virtual print fees).
(in
thousands) |
||||||
Balance, June
30, 2011 |
$ | 998 | ||||
Virtual print
fees earned |
(70 | ) | ||||
Administrative fees |
7 | |||||
Balance,
September 30, 2011 |
935 | |||||
Virtual print
fees earned |
(62 | ) | ||||
Administrative fees |
6 | |||||
Balance,
December 31, 2011 |
$ | 879 |
Depreciation and
Amortization
Theatre assets and equipment are
depreciated using the straight-line method over their estimated useful lives. In estimating the useful lives of our theatre assets and equipment, we
have relied upon our experience with such assets. We periodically evaluate these estimates and assumptions and adjust them as necessary. Adjustments to
the expected lives of assets are accounted for on a prospective basis through depreciation expense. Leasehold improvements for which we pay and to
which we have title are amortized over the shorter of the lease term or the estimated useful life.
Impairment of Long-Lived
Assets
We review long-lived assets for
impairment indicators whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We assess
many factors including the following to determine whether to impair long-lived assets:
|
actual theatre level cash flows; |
|
future years budgeted theatre level cash flows; |
|
theatre property and equipment carrying values; |
|
amortizing intangible asset carrying values; |
|
competitive theatres in the marketplace; |
|
the impact of recent ticket price changes; |
|
available lease renewal options; and |
|
other factors considered relevant in our assessment of impairment of individual theatre assets. |
Long-lived assets are evaluated
for impairment on an individual theatre basis, which we believe is the lowest applicable level for which there are identifiable cash flows. The
impairment evaluation is based on the estimated
48
undiscounted cash flows from continuing use through the remainder of the theatres useful life. The remainder of the useful life correlates with the available remaining lease period, which includes the probability of renewal periods for leased properties.
Impairment of Goodwill and Finite-Lived Intangible
Assets
We evaluate goodwill for
impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill may not be fully recoverable. We
evaluate goodwill for impairment for each theatre as a reporting unit, based on an estimate of its relative fair value.
Finite-lived intangible assets
are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be fully recoverable.
Income Taxes
We use an asset and liability
approach to financial accounting and reporting for income taxes.
Recent Accounting Pronouncements
In October 2009, the FASB issued
ASU 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which requires an entity to allocate consideration at the
inception of an arrangement to all of its deliverables based on their relative selling prices. This consensus eliminates the use of the residual method
of allocation and requires allocation using the relative selling-price method in all circumstances in which an entity recognizes revenue for an
arrangement with multiple deliverables. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We adopted ASU 2009-13 and its
adoption did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued
ASU No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires some new disclosures
and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, Fair Value Measurements and
Disclosures. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. We adopted the requirements for
disclosures about inputs and valuation techniques used to measure fair value. Additionally, these amended standards require presentation of
disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3) and is effective for
fiscal years beginning after December 15, 2010. We have adopted this guidance effective July 1, 2011 and its adoption did not have a material effect on
the consolidated financial statements.
In May 2011, the FASB issued ASU
2011-4, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS, to substantially converge the
fair value measurement and disclosure guidance in GAAP and International Financial Reporting Standards. The most significant change in disclosures is
an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning
after December 15, 2011. We will adopt this standard July 1, 2012, and we do not expect the adoption of this standard to have a material impact on our
consolidated financial statements and disclosures.
In June 2011, the FASB issued ASU
2011-5, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components
in the statement of stockholders equity. Instead, an entity will be required to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. We
will adopt this standard as of July 1, 2012, and we do not expect it to have a material impact on our consolidated financial statements and
disclosures.
In September 2011, the FAS issued
ASU 2011-8, Intangibles Goodwill and other. This guidance allows an entity an option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment
49
test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt the provisions of this guidance effective July 1, 2012, and we do not expect it to have a material impact on our consolidated financial statements and disclosures.
Off-Balance Sheet Arrangements
Other than the operating leases
described herein, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
Quantitative and Qualitative Disclosures about Market
Risk
We do not hold instruments that
are sensitive to changes in interest rates, foreign currency exchange rates or commodity prices. Therefore, we believe that we are not materially
exposed to market risks resulting from fluctuations from such rates or prices.
50
BUSINESS
The Company
Digital Cinema Destinations
Corp., a Delaware corporation organized on July 29, 2010, and its subsidiaries comprise a fast-growing motion picture exhibitor dedicated to
transforming movie theatres into digital entertainment centers. Digital Cinema Destination Corp. is the parent company of five wholly-owned
subsidiaries: DC Westfield LLC, DC Cranford LLC, DC Bloomfield LLC, DC Cinema Centers LLC and DC Lisbon Cinema, LLC.
Our executive offices are at 250
East Broad Street, Westfield, New Jersey 07090. Our telephone number is (908) 396-1362, and our fax number is (908) 396-1361. We maintain a corporate
website at www.digiplexdest.com.
We manage our business under one
reportable segment: theatre exhibition operations.
We operate three theatres and 19
screens located in Westfield, New Jersey, Cranford, New Jersey and Bloomfield, Connecticut. Our three theatres, on a pro forma basis, had approximately
312,000 attendees for the twelve month period ended December 31, 2011. We acquired the Rialto and the Cranford on December 31, 2010 and the Bloomfield
8 on February 17, 2011.
In April 2011, we entered into an
asset purchase agreement for our purchase of the assets of Cinema Centers, constituting a chain of five theatres with 54 screens located throughout
central Pennsylvania. Cinema Centers consists of:
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an 11 screen theatre known as Cinema Center of Bloomsburg, located in Bloomsburg, Pennsylvania; |
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a 12 screen theatre known as Cinema Center of Camp Hill, located in Camp Hill, Pennsylvania; |
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a 10 screen theatre known as Cinema Center of Fairground Mall, located in Reading, Pennsylvania; |
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a 12 screen theatre known as Cinema Center of Selinsgrove, located in Selinsgrove, Pennsylvania; and |
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a 9 screen theatre known as Cinema Center of Williamsport, located in Williamsport, Pennsylvania. |
Cinema Centers had approximately
1.4 million attendees for the twelve month period ended on December 31, 201l. We intend to use approximately $14.0 million of the net proceeds from
this offering to consummate the Cinema Centers acquisition.
In February 2012, we entered into
an asset purchase agreement for our purchase of the assets of Lisbon Cinema, consisting of a single theatre with 12 screens located in Lisbon,
Connecticut. We intend to use approximately $6.0 million of the net proceeds from this offering to consummate the Lisbon Cinema
acquisition.
We intend to create an
all-digital national footprint by selectively pursuing multi-screen theatre acquisition opportunities that meet our strategic and financial criteria,
with upgrades to digital platforms as necessary. We hope to own and operate at least one theatre in each of 100 locations throughout the United States
which, depending on the number of screens in each theatre, may approximate 1,000 screens. An all-digital theatre circuit serves as the backbone for
creating what we believe to be a more entertaining movie-going experience, providing us with significantly greater programming flexibility and enabling
us to achieve increased operating efficiencies. We believe through a combination of improved operating practices, enhanced productivity resulting from
the management of the new digital platforms and increased alternative content supplementing the traditional theatrical exhibition schedule, we can
produce improved financial results and customer experiences. We cannot assure you that we will realize these goals. See Risk
Factors.
Industry Overview and Trends
The U.S. motion picture
exhibition industry is a mature business that has historically maintained long-term growth in revenues. Between 2001 and 2010, total box office
revenues in the United States grew from $8.1 billion of revenues in 2001 to $10.2 billion of revenues in 2011. Against this background of growth in
revenues, the U.S. motion picture exhibition industry experienced periodic short-term increases and decreases in attendance and, consequently, box
office revenues. We expect the cyclical nature of the U.S. motion picture exhibition industry to continue for the foreseeable future.
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The following table represents
the results of a survey by the MPAA, published during February 2011, outlining the historical trends in U.S. box office performance for the ten year
period from 2001 to 2010.
Year |
U.S. Box Office Revenues ($ in billions) |
Attendance (in billions) |
Average Ticket Price |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2001
|
$ | 8.1 | 1.43 | $ | 5.66 | |||||||||
2002
|
$ | 9.1 | 1.57 | $ | 5.81 | |||||||||
2003
|
$ | 9.2 | 1.52 | $ | 6.03 | |||||||||
2004
|
$ | 9.3 | 1.50 | $ | 6.21 | |||||||||
2005
|
$ | 8.8 | 1.38 | $ | 6.41 | |||||||||
2006
|
$ | 9.2 | 1.40 | $ | 6.55 | |||||||||
2007
|
$ | 9.6 | 1.40 | $ | 6.88 | |||||||||
2008
|
$ | 9.6 | 1.34 | $ | 7.18 | |||||||||
2009
|
$ | 10.6 | 1.42 | $ | 7.50 | |||||||||
2010
|
$ | 10.6 | 1.34 | $ | 7.89 |
According to the Boxoffice.com,
year-to-date U.S. box office sales as of December 31, 2011 approximated $10.2 billion, compared to $10.6 billion for the same period in 2010, a
decrease of 3.7%. Attendance in 2011 was 1.28 billion, a decrease of 4.7% from 2010. According to the Boxofficemojo.com, quarter-to-date U.S. box
office sales through March 12, 2012 approximated $2.0 billion, compared to $1.7 billion for the same period in 2011, an increase of
18.5%.
We believe the following market
trends will drive the continued growth and strength of our industry:
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Importance of Theatrical Success in Establishing Movie Brands and Subsequent Markets. Theatrical exhibition is the primary distribution channel for new motion picture releases in the domestic and international markets. We believe a successful theatrical release which brands a film is one of the major factors in determining its success in downstream markets, such as DVDs, network and syndicated television, video on-demand, pay-per-view television and the Internet. As a result, we believe motion picture studios will continue to work cooperatively with theatrical exhibitors to ensure the continued importance of the theatrical window. |
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Convenient and Affordable Form of Out-Of-Home Entertainment. Movie-going continues to be one of the most convenient and affordable forms of out-of-home entertainment, with an estimated average ticket price in the U.S. of $7.89 in 2010 and $7.96 in 2011 (according to Box Office Mojo). Average prices in 2010 for other forms of out-of-home entertainment in the U.S., including sporting events and theme parks, ranged from approximately $25.00 to $77.00 per ticket according to the MPAA. |
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Innovation with Digital Technology. Our industry began its conversion to digital projection technology in 2006, which has allowed exhibitors to expand their product offerings. Digital technology allows the presentation of 3D content and alternative entertainment such as live and pre-recorded sports programs, the opera, ballet, concert events and special live events. These additional programming alternatives may expand the industrys customer base and increase patronage for exhibitors. |
Our Competitive Strengths
We believe the following
strengths allow us to compete effectively:
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Operating Philosophy. Our experienced management team has an operating philosophy that centers on acquiring theatres that meet our strategic and financial criteria while realizing improved theatre level economics on a same theatre basis by controlling operating costs and effectively reacting to economic and market changes. We have incurred net operating losses to date. We intend to carefully control our corporate and theatre operating expenses and to add additional staffing and other resources only as our business grows. |
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State-of-the-Art Theatre Circuit. We offer digitally equipped theatres, which, based on our analysis of the population and competition in the areas surrounding our theatres, we believe are appropriate in size |
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for the communities we serve. We believe this makes our theatres a preferred destination for moviegoers and other customers seeking entertainment in our markets. We have installed digital projection technology in all of our existing theatres, and we plan to install digital projection systems in the theatres we acquire, of which we estimate that 40% to 50% will be 3D enabled. |
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Experienced Management. We rely on our senior management teams significant experience in identifying, acquiring, upgrading and integrating our theatres. Our management has substantial experience in the acquisition and integration of theatre circuits. Our management team has many years of theatre operating experience, ranging from 10 to 25 years. Mr. Mayo, our chairman and chief executive officer, has had a successful career in the film exhibition industry having founded and led both Cinedigm, which provides back office management systems and financing for digital conversions in the exhibition industry and Clearview, a U.S. theatre circuit. Mr. Butkovsky, our chief technology officer, and Mr. Pflug, our chief financial officer, have worked with Mr. Mayo for several years, and each have a breadth of experience in their respective positions. We believe that our management team has the ability to successfully implement our business plan, allowing us to acquire theatres at appropriate valuations, and to turn those theatres we acquire into state of the art entertainment destinations integrated into our organization. |
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Strategic Alliances. Our management team is well known in the industry. Their relationships within the industry allow us to form important vendor relationships with industry leaders such as Clearviews film department, which handles negotiations with motion picture distributors for us, Cinedigm, which provides us with our EMS back office management system, RealD, which provides us with 3D cinema systems, Barco, which provides us with digital equipment, and NCM, which provides us with in-theatre advertising and alternative content. We believe that our ability to leverage our managements relationships in the industry will allow us to effectively manage our operating costs. |
Our Strategy
Our business strategy is to
transform movie theatres into digital entertainment centers or destinations by acquiring cash flow positive theatres in strategic markets, converting
them to digital formats and actively programming and marketing alternative content, in addition to first run 2D and 3D movies.
Organic
Growth
The principal factors that we
expect will contribute to our organic growth include:
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Digital Implementation. We intend to create an all-digital theatre circuit utilizing our senior management teams significant experience in digital cinema deployment, alternative content selection and movie selection. We expect to be able to finance our purchases of digital projection equipment in the theatres we acquire which are not yet converted to digital cinema in part by leveraging the virtual print fees we receive from motion picture distributors for up to 10 years from installation for each theatre. The virtual print fee program expires for new installations made after September 30, 2012, but we believe that financing will continue to be available, either from the distributors or more traditional financing sources. We have converted all of our existing theatres and will convert those we acquire to digital formats with typically 40% to 50% constituting RealD 3D auditoriums in each theatre complex. |
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Alternative Content. We expect to offer our customers popular movies and alternative content including sports, music, opera, ballet and video games. With the exception of video games for which we have acquired the necessary software (but have not yet implemented), we offer each of these alternative content presentations at our existing theatres. We advertise and implement these features as an event being presented so that our patrons can fully enjoy the presentation and return frequently to share in the experience of future presentation. We believe we can increase the utilization rates of our theatres and concession sales by matching content to audience demand during off-peak and some peak periods. Approximately 7% of our box office revenues were attributable to alternative content for the six months ended December 31, 2011. |
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Operating efficiencies. We have deployed state of the art integrated software systems for back office accounting and theatre management. This enables us to manage our business efficiently while providing maximum scheduling flexibility and reduced operational costs. |
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Dynamic programming. One of the major benefits of the industrys digital conversion is that it removes our reliance on single reels of film. With digital content, we are able to program multiple screens for playback from a single source file, based on movie-goer demand, rather than being limited to one screen per reel. |
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Marketing. We intend to proactively market the Digiplex brand and programs to consumers using primarily new media tools, such as social media, website design and regular electronic communications to our targeted audience, which should allow us to maximize attendance. Currently, we distribute e-mails and newsletters, which direct customers to our website, and use Facebook, Twitter and YouTube as part of our marketing program. While we cannot quantify the effect of these efforts, we believe it has resulted in increased attendance in our theatres. We expect the combination of our marketing strategy with our blend of traditional cinema and alternative content will transform our theatres to entertainment centers. |
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Alternative content events. We offer alternative content, such as sports, music, opera, and ballet, typically during nonpeak hours. We advertise and implement these features as an integrated theme event, often with costumed staff, to create the energy and atmosphere of the event being presented so that our patrons can fully enjoy the presentation and return frequently to share in the experience of future presentations. |
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Pre-Show and Advertising. We expect to increase pre-show and other advertising revenue in our existing theatres and the theatres we acquire using NCMs services under a multi-year contract that we executed in March 2011 and under which we commenced pre-show advertising in August 2011. |
External
Growth
The principal factors
contributing to our external growth are a disciplined approach to acquisitions and our industry experience and relationships. We believe there is a
supply of smaller, family-owned chains and individual theatres currently available in the market in free zones. These smaller theatre owners are facing
potentially significant capital investments due to the motion picture and theatre exhibition industrys ongoing digital conversion cycle. Despite
the availability of the virtual print fee program, we believe many of these operators are either unable or unwilling to make the necessary capital
expenditures despite positive historical cash flows. Our philosophy is to buy and improve existing facilities rather than find and
build new theatres. We believe this approach provides more predictability, speed of execution and lower risk. To remain competitive, we believe
alternative content will become increasingly important, and many of the smaller theatres may lack access to quality alternative content. We intend to
selectively pursue acquisitions where the location, overall market and facilities further enhance the quality of our theatre portfolio. Our acquisition
policy is to acquire theatres that provide significant opportunities for improved financial performance through our business model. We will typically
attempt to acquire cash flow positive theatres in attractive markets, convert them to a digital format where still necessary and actively program and
market alternative content in addition to running 2D and 3D movies. By marketing our theatres as entertainment destinations, we expect to realize
increased cash flow from 3D films and targeted alternative content, increased attendance, increased concessions and sponsorship and advertising
revenues.
Key elements of our external
growth strategy are:
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identify and target existing theatres in free zones in attractive markets; |
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visit each theatre to determine its physical condition and level of preparedness (or completion) for digital cinema conversion; |
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evaluate the suitability of theatre personnel for our business approach; |
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review lease terms and condition of all assets; |
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survey and evaluate all auditorium sizes, seat counts and projection booth equipment; |
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determine attendance levels and historical cash flows over the past 3 years from an evaluation of all tax returns and financial statements, to determine economic viability; |
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|
research the demographics surrounding each theatre with a view toward programming movies and genres of alternative content; |
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after estimating the costs of necessary improvements, screen additions and upgrades to meet our standards, formulate a purchase price based on a multiple of approximately 4.5 times to 5.5 times TLCF, after considering the potential for improvement in operating results under our management and business approach. |
Theatre Operations
We currently operate three
theatres, two in New Jersey and one in Connecticut, with a total of 19 screens. Two of our theatres, the Rialto and Cranford, were acquired in December
of 2010 and the third, the Bloomfield 8, in February of 2011.
The Rialto is a six-screen
theatre located in downtown Westfield, New Jersey, which has a population of approximately 30,000 people. The Rialto was built in 1922, substantially
renovated in 2009 and seats approximately 946 patrons. Three of Rialtos screens were converted to digital platforms with 3D capacity as part of
the 2009 renovation. The renovation also included new painting, carpeting, new lighting, a new concession stand and the installation of reclining seats
with additional leg room compared to those which previously existed in the theatre. We converted the three remaining screens to digital format in July
2011 and a total of five are now RealD 3D enabled. In addition, we installed new surveillance and point of sale systems in July 2011. The
Cranford is a five-screen theatre located in downtown Cranford, New Jersey, which has a population of over 22,500 people. The Cranford is a historic
theatre built in 1926, substantially renovated after we acquired it and seats approximately 642 patrons. In February 2011, we completed a renovation of
the theatre, including painting, lighting, new carpeting, seats, improved sound and signage, surveillance and new point of sale systems. We converted
all of the screens to digital projection platforms in July 2011, with two of them RealD 3D enabled. The Rialto and Cranford theatres are three
miles apart and 25 miles west of Manhattan. Both the Rialto and Cranford theatres each show first run films in a free zone. For a discussion of
free zones, see Business Film Exhibition. The Rialto and Cranford theatres primary competitors are a ten-screen
AMC theatre located in Mountainside, New Jersey and a five-screen Clearview theatre located in Summit, New Jersey, which are three and 10 miles away
from the theatres, respectively.
The Bloomfield 8 is an
eight-screen theatre located at the Wintonbury Mall in the town of Bloomfield, Connecticut, which is a New England town of over 20,000 people that is
home to many sites that are on the National Register of Historic Places and is approximately 5.5 miles from downtown Hartford, Connecticut. The
Bloomfield 8 theatre opened in 1996, was renovated in 2006, and seats approximately 1,119 patrons. This theatre draws from the greater Hartford area
which has a population in excess of one million people. All of the screens were converted to digital projection platforms in July 2011, with five 3D
enabled. We completed a significant renovation of this theatre in early 2011, including new seats, screens and sound systems. The Bloomfield 8 theatre
shows first run films in a free zone.
In April, 2011 we executed an
agreement for our purchase of certain assets of Cinema Centers constituting a chain of five theatres with 54 screens located throughout central
Pennsylvania. All of the Cinema Centers theatres are in free zones. For further information regarding the Cinema Centers acquisition, see
Business Acquisitions.
The 11-screen Cinema Center of
Bloomsburg theatre is located in Bloomsburg, Pennsylvania. Bloomsburg, a college town of approximately 13,000 people, is located midway between Wilkes
Barre and Williamsport, Pennsylvania. This all stadium seating theatre opened in 1993 and was renovated in April 2010. The renovation included the
installation of high back rocker seats and a new concession stand. The theatre seats approximately 1,864 patrons. The theatre has one digital projector
that is RealD 3D enabled.
The 12-screen Cinema Center of
Camp Hill theatre is located in Camp Hill, Pennsylvania, just outside of Harrisburg, Pennsylvania. Harrisburg is the state capital of Pennsylvania with
a population of approximately 50,000 people. This all stadium seating theatre opened in 2005 and seats approximately 2,400 patrons. The theatre has
high back rocker seats in each auditorium as well as two digital projectors, both RealD 3D enabled.
The ten-screen Cinema Center at
Fairgrounds Square Mall is located in Reading, Pennsylvania. Reading is the fifth largest city in Pennsylvania with a population of approximately
88,000 people. This all stadium seating theatre opened in 2003 and seats approximately 2,035 patrons. The theatre has high back rocker seats in each
auditorium as well as one digital projector that is RealD 3D enabled.
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The 12-screen Cinema Center at
Selinsgrove is located in Selinsgove, Pennsylvania. Selinsgrove is a historic town located on the Susquehanna River with a population of approximately
27,000 people located within five miles of the theatre. This all stadium seating theatre opened in 2002 and seats approximately 2,400 patrons. The
theatre has high back rocker seats in each auditorium as well as one digital projector that is RealD 3D enabled.
The nine-screen Cinema Center of
Williamsport is located in Williamsport, Pennsylvania. Williamsport is the seventh fastest growing city in the United States with a population of
approximately 30,000 people. This all stadium seating theatre opened in 2008 and seats approximately 1,721 patrons. The theatre has new high back
rocker seats in each auditorium as well as one digital projector that is RealD 3D enabled.
Following consummation of the
Cinema Centers acquisition, we plan to convert any screens of Cinema Centers that have not been previously converted to digital projection platforms,
with at least 40% of the Cinema Center screens expected to be RealD 3D enabled.
In February 2012, we entered into
an asset purchase agreement for our purchase of certain assets of Lisbon Cinema consisting of a single theater with 12 screens located in Lisbon,
Connecticut. The Lisbon Cinema is in a free zone. There is a population of approximately 89,000 people within a 10 mile radius of the Lisbon Cinema
theatre which is located approximately 16 miles from Mystic, Connecticut and New London, Connecticut and approximately 10 miles from Foxwood Casino in
Mashantucket, Connecticut. This all stadium seating theatre opened in 2005 and seats approximately 2,200 patrons. The theatre has highback rocker seats
in each auditorium and 26 D-Box motion seats in one auditorium. All of the auditoriums have been converted to digital projection platforms and six of
the auditoriums are RealD 3-D enabled. For further information regarding the Cinema Centers and Lisbon Cinema acquisitions, see Business
Acquisitions.
We believe our theatres will
appeal to a diverse group of patrons because, to the extent the number of screens in a theatre allow, we offer a wide selection of films and convenient
show times, targeted to the demographics of the surrounding population. In addition, most of our theatres feature state-of-the-art amenities such as
immersive wall-to-wall and silver 3D screens, digital stereo surround-sound, computerized ticketing systems, comfortable seating with cup holders,
infrared security cameras in every auditorium and throughout the theatre along with enhanced interiors and exteriors.
We also believe that our theatres
will be greatly enhanced with the installation of digital projection platforms. We believe that operating digital theatres will enable us to generate
incremental revenue from differentiated motion picture formats, such as digital 3D, generate additional revenue from exhibition of alternative content
offerings and provide greater flexibility in scheduling our programming content, which we expect will enhance the utilization of our seating capacity.
During fiscal year ended June 30, 2011, we installed 16 digital platforms, including digital projectors and related equipment in our three theatres.
The average cost that we have incurred with respect to the installation was approximately $74,000 per digital platform, inclusive of equipment and
labor. Our total cost of digital platform installations to date is $1.2 million.
Our theatres are operated with
improved economic performance on a same theatre basis by increasing revenues per square foot and reducing the cost per patron of operations. We vary
auditorium seating capacities within a single theatre, allowing us to exhibit films on a more cost effective basis for a longer period of time by
shifting films to smaller auditoriums in the theatre to meet changing attendance levels. In addition, since we operate multi-screen facilities, we
realize significant operating efficiencies as compared to single screen theatres by having common box office, concessions, projection and lobby and
restroom facilities, which enables us to spread some of our costs, such as payroll, advertising and rent, over a higher revenue base. We stagger movie
show times to reduce staffing requirements and lobby congestion and to provide more desirable parking and traffic flow patterns. We also actively
monitor ticket sales in order to quickly recognize surges in demand, which enables us to add seating capacity quickly and efficiently with the use of
our networked digital projection platforms and theatre management software. In addition, we offer various forms of convenient ticketing methods, themed
gift cards and e-gift cards. We believe that operating a theatre circuit with the use of state of the art software technology, remote surveillance, and
modern management methods will enhance our economic performance.
We have implemented best
management practices in each of our theatres, including daily, weekly and monthly management reports generated for each theatre, and we maintain active
communication between the theatres and
56
corporate management. We use these management reports and communications to closely monitor admissions and concessions revenues as well as accounting, payroll and workforce information necessary to manage our theatre operations effectively and efficiently. For any theatres we acquire in the future, including the Cinema Centers and Lisbon Cinema acquisitions, we plan to implement a similar best management practices in such theatres.
We seek experienced theatre
managers and require new theatre managers to complete a comprehensive training program on-site within the theatres and at our corporate headquarters
and with our digital hardware and software vendors. The program is designed to encompass all phases of theatre operations, including our operating
philosophy, policies, procedures and standards. Our mission statement is posted in our corporate offices and in every theatre. In addition, we plan to
adopt an incentive compensation program for theatre-level management and full-time staff that rewards theatre managers, and their staff for exceptional
performance. We expect to offer our salaried employees an opportunity to participate in any equity plan that we adopt after consummation of this
offering consistent with other public companies comparable to us and companies within our industry.
In addition, we have implemented
quality assurance programs in all of our theatres to maintain clean, comfortable and well maintained facilities. To maintain quality and consistency
within our theatre circuit, our managers regularly inspect each theatre. We also operate a mystery shopper program, which involves
unannounced visits by unidentified customers who report on and rate the quality of service, film presentation and cleanliness at individual
theatres.
We have also implemented a loss
prevention program in all of our theatres. We remotely monitor operations at each of our theatres through infra-red camera systems in every auditorium
and all common areas through which our theatre management and corporate executives can see almost everything going on with respect to
theatre operations without actually being present.
Digitalization
The U.S. motion picture
exhibition industry began its transition to digital projection technology in 2006 led by members of our management team while they were employed by
Cinedigm. Digital projection technology provides filmmakers the ability to showcase imaginative works of art exactly as they were intended, with
incredible realism and detail and in a range of up to 35 trillion colors. Because digital features are not susceptible to scratching and fading,
digital presentations will always remain clear and sharp every time they are shown. A digitally produced or digitally converted movie can be
distributed to theatres via satellite, physical media, or fiber optic networks. The digitized movie is stored on a central computer/server, known as a
library management server, which stores and serves it to a digital projector for programming each screening of the movie and, due to its
format, it enables efficient movement of films and other content between auditoriums within a theatre as demand increases or decreases for each
film.
Digital projection also allows
the presentation of 3D content and alternative content such as live and pre-recorded concert events, the opera, ballet, sports programs and special
live events. Twenty-two films released world-wide during 2010 were available in 3D format and at least 34 3D films were released during 2011, excluding
3D alternative content events. Three-dimensional technology offers a premium experience with crisp, bright, ultra-realistic images that immerse the
patron into a film. A premium is generally charged for a 3D presentation. We believe alternative entertainment presents a largely untapped resource for
increased business, and according to data supplied by Screen Digest dated January 2010, the alternative content market is expected to grow to
$526.5 million by 2014 from $104.6 million in 2009 and only $45.7 million in 2008.
The conversion of the theatre
projection systems in our theatres to digital platforms and the selective installation of 3D digital projection systems will allow us to offer our
patrons premium 3D movie and all-digital format experiences featuring alternative content such as sports, concerts, opera, ballet and video games,
which will generate incremental revenue and cash flows for us. We are optimistic regarding the benefits of digital cinema primarily as it relates to
future growth associated alternative content and 3D content and are pleased to see continued support of 3D film products by the major motion picture
studios as well as increased availability of special events such as concerts, opera and sports. We believe that alternative content is a largely
untapped resource which is a substantial potential source of incremental business for us.
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Alternative Content
We believe that the traditional
movie house model is inherently inefficient because of the daily demand curve, which we believe results in seating only 10% to 15% of capacity and less
than 5% from Monday to Thursday. We believe that all movies need not play five shows per day, seven days a week, but rather at specific show times
targeted to specific audiences, and alternative content can be shown during specific times that match audience demand. Typically, we will present
alternative content during non-peak hours. We believe that matching alternative content with audience demand, as cable and television stations do, is
important and will allow us to fill seats during times which are traditionally slow for theatres.
We believe that providing
alternative content, made possible as a result of digital projection platforms, will result in increased utilization of our theatres and higher theatre
level cash flow. Alternative content currently available includes sports, music, opera, ballet, lectures, religious content and video games. We expect
that alternative content will vary with customer taste and that the offerings will increase as the potential uses are expanded.
For example, our customers will
be able to see events occurring throughout the world, at times in live 3D, at a fraction of the ticket price of a major sporting event. Sports content
can include events such as the World Cup, all star games, the NCAA basketball finals, major college football bowl games, and we believe, eventually,
the World Series and the Super Bowl.
Alternative content can be as
diverse as the ballet from the Bolshoi and opera from the Metropolitan Opera to rock concerts and sporting events from around the world, which may be
taking place in different geographical regions, or even, if local, may be sold out. Our customers will be able to experience larger than life images of
these events with exceptionally comfortable seating at more convenient locations.
We also believe that corporate,
religious, trade and professional organizations may find that using our theatres as a meeting place is an efficient way to satisfy their
organizations goals. Tapping the potential of alternative content could lead to use of our theatres in auctions and fundraisers as well as for
other events.
Properly programmed and marketed,
we believe that alternative content, including live events, which may be shown in a 3D format, provide excellent opportunities for additional revenue
and we expect to use alternative content as part of our business strategy. Approximately 7% of our box office revenues were attributable to alternative
content for the six months ended December 31, 2011.
On March 14, 2011 we entered into
an agreement with NCM for alternative content provided through its Fathom network. NCM operates the largest digital in-theatre network in North America
and utilizes its in-theatre digital content network to distribute pre-feature advertising, cinema and lobby advertising, and entertainment
(alternative) programming content. Under our agreement with NCM, we receive 50% of the net box office receipts realized from presenting
alternative content at our theatres as provided to us by NCM. Net box office receipts is defined as the gross revenues realized from
admissions to a program of alternative content, reduced by taxes and other charges and out-of-pocket expenses, including payments to the creator of the
alternative content. Under this agreement, we have the option of selecting alternative content made available by NCM through its Fathom network, and we
have booked events, including boxing events, concerts and performances of the Metropolitan Opera from this source. Our agreement with NCM is not
exclusive.
In addition to NCM, we also
present alternative content provided by Emerging Pictures and Cinedigm, which provides us with, among other alternative content, Kid Toons. Our
agreements with Emerging Pictures and Cinedigm provide for revenue sharing, pursuant to which we retain 50% to 60% of net box office
receipts.
Most alternative content programs
are priced at a premium over movie ticket prices.
Digital Cinema Implementation
We have converted all of the
screens in our theatres to digital projection platforms. This conversion has been supervised by our chief technology officer. The digital cinema
projectors that we have installed have been purchased from Barco. As of December 31, 2011, our outstanding obligation to Barco for the purchase of this
digital cinema projector equipment was $1.1 million. We expect to repay this amount using a portion of the net proceeds from this offering. We have
executed an equipment warranty and support agreement with Barco, under which Barco
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provides warranty coverage and technical support for our digital projector equipment that we have purchased from Barco.
Six of the screens constituting
Cinema Centers have been converted to digital. Within four months after the consummation of this offering, we intend to convert the remaining Cinema
Center screens to digital projection platforms. For conversion of the 48 Cinema Center screens which are not digital and with respect to any future
acquisitions that we may consummate, we expect to finance our purchases of digital projection equipment through capital lease financing or secured
loans provided by banks or vendors. We expect to repay our obligations under these financing arrangements using virtual print fees that we
recover from motion picture distributors, and we may also secure such financing arrangements with virtual print fees.
All motion picture distributors
encourage conversion of theatres to digital projection platforms, in part because of the improved quality of the presentation, but also because of the
cost savings to the distributor as a result of not having to print and deliver actual physical film prints to motion picture exhibitors. To help
exhibitors finance the cost of conversion to digital projection, all distributors must pay fees to exhibitors based on films presented on approved
digital projection platforms, which are referred to as virtual print fees.
Under the virtual print fee
program, motion picture exhibitors receive a fee from motion picture distributors for each movie shown on approved digital projection equipment. These
fees are paid on a quarterly basis until the earlier of ten years from date the approved digital projection equipment in a particular theatre is
installed or the date the exhibitor has recovered its out-of-pockets costs, including any financing costs, for the digital conversion. The virtual
print fee is tracked and paid with respect to each approved digital projection system. As part of our acquisition process of theatres, we will seek to
receive the benefit of any virtual print fees paid by motion picture distributors to theatres that we may acquire.
The virtual print fee program is
expected to expire for new installations of digital projection systems made after September 30, 2012. The expiration of the virtual print fee program
will not, however, expire with respect to prior installations of approved digital projection equipment, and we will continue receiving virtual print
fees with respect to our approved digital projection systems and any approved digital projection systems that we may acquire until the earlier of ten
years or our recoupment of out-of-pocket costs for the digital conversion.
We have entered into a master
digital cinema and administrative agreement with a subsidiary of Cinedigm, pursuant to which Cinedigms subsidiary acts as our agent to collect
virtual print fees and enter into contracts on our behalf with distributors to provide for the virtual print fee payments. Under this agreement, we pay
Cinedigm (1) an activation fee of $2,000 per screen, (2) a fee of $60 per screen per month for each screen with which we exhibit in-theatre advertising
utilizing the same digital platforms as we use for films and (3) 10% of the virtual print fees that Cinedigms subsidiary collects on our behalf
from the distributors. We estimate collections from virtual print fees will range from $8,000 to $10,000 per screen per year through the earlier of ten
years or our recovery of our out-of-pocket costs for the digital conversions. We record the virtual print fees we collect as an offset to our film rent
expense.
In addition to relying on virtual
print fees and depending on our working capital requirements, we may acquire digital projection equipment using our working capital, including working
capital that we obtain from the net proceeds of this offering. We also seek financing for digital conversions to the extent such financing is available
to us on acceptable terms. We will determine the most efficient method of payment for the equipment on a theatre-by-theatre basis.
Acquisitions
In addition to converting our
theatres into state-of-the-art entertainment destinations, our strategy is founded on selective theatre acquisitions that meet our strategic and
financial criteria. We have acquired three theatres to date and have contracted to acquire five additional theatres located in central
Pennsylvania.
On December 31, 2010, we acquired
under an asset purchase agreement, all of the assets constituting the Rialto and the Cranford theatres for an aggregate purchase price of $1.8
million, which consisted of $1.2 million in cash, the issuance of 250,000 shares of our Series A preferred stock valued $0.5 million and an earn out
valued at $0.1 million. The asset purchase agreement provides that the cash purchase price will be increased by up to $1.0 million
59
if (1) the gross revenues from the Rialto and Cranford theatres exceed $2.6 million during the twelve month period ending on March 31, 2012, in which case our purchase price will increase $0.51 for every $1.00 of gross revenue in excess of $2.6 million during the twelve month period, up to a maximum adjustment of $0.5 million and/or (2) our average gross revenue for the two year period ending on March 31, 2013 exceeds $2.6 million, in which case our purchase price will increase $1.02 for every $1.00 that our average gross revenue exceeds $2.6 million, up to an maximum adjustment of $1.0 million, inclusive of the adjustment under (1). The fair value of the earn-out was recorded as additional purchase price and as a liability with an estimated fair value of $0.1 million to be paid over 2 years. As part of this acquisition, we entered into leases for each of the Rialto and Cranford theatres for an initial ten year term, each with four five-year renewal options. These leases provide for the payment of base rent plus additional rent based on a percentage of our gross revenues at these theatres.
On February 17, 2011, we acquired
under an asset purchase agreement all of the assets constituting the Bloomfield 8 theatre for $0.1 million. As part of this acquisition, we assumed and
amended the lease for the theatre, which has an initial term expiring on June 30, 2021 and one five year renewal option. The amended lease provides for
the payment of additional rent based on a percentage of our gross revenue at the theatre.
In April 2011, we executed an
asset purchase agreement to acquire certain of the assets constituting the Cinema Centers. For additional information regarding the Cinema Centers
theatres, see Business Theatre Operations. We will assume the operating leases for the Cinema Centers theatres. We are not assuming
any liabilities of Cinema Centers, all of which are being retained by the seller. The aggregate purchase price for the Cinema Centers acquisition is
$14.0 million. We intend to use a portion of the net proceeds from this offering to fund purchase price.
On June 30, 2011, we amended the
Cinema Centers asset purchase agreement to provide for an extension of the closing date until December 31, 2011, and an option to extend the closing
date to March 31, 2012 if we deposit $0.1 million into escrow, which will only be payable if the seller is prepared to close on such date and we are
not. We intend to make this deposit in the first calendar quarter of 2012. The amendment also provides that if the seller of the theatres desires to
purchase digital cinema equipment for any of Cinema Center screens, the seller will notify us, and we will provide advice and guidance regarding the
purchase of such equipment. We will reimburse the seller at the closing of the Cinema Centers acquisition for all costs related to acquisition of any
digital equipment that we have approved in writing. Our purchase of Cinema Centers is subject to certain conditions typical for transactions of this
type, including that there be no material adverse change in the business or assets we are acquiring.
In addition, we have agreed to
assume, effective as of the closing the Cinema Centers acquisition, the leases associated with the five Cinema Centers theatres. These leases have
expiration dates, taking into account renewal options, of between approximately ten and thirty years. Three of these leases provide for the payment of
additional rent based on a percentage of our gross revenue at the theatre in excess of specified thresholds.
In February 2012, we executed an
asset purchase agreement to acquire certain of the assets constituting Lisbon Cinema. For additional information regarding the Lisbon Cinema theatre,
see Business Theatre Operations. We will assume the operating lease for the land that the Lisbon Cinema theatre is on. We are not
assuming any liabilities of Lisbon Cinema, all of which are being retained by the seller. The aggregate purchase price for the Lisbon Cinema
acquisition is $6.0 million, plus an earn out. Under the earn out, the purchase price will be increased by amount equal to 5.5 times every $1.00 of
Theatre Level Cash Flow in excess of $1,090,000 during the twelve month period ending on the first anniversary of the closing date (the Lisbon
Cinema Earn Out). Theatre Level Cash Flow means earnings before interest, taxes, depreciation and amortization minus costs related to the
replacement of capital equipment and personal property related to the theatre in the ordinary course of business. The Lisbon Cinema Earn Out may, at
our option, be paid in our Class A common stock valued at 10% less than the thirty day average volume weighted average price of our Class A common
stock determined 10 business days after the amount of the Lisbon Cinema Earn Out is determined.
We have also agreed to assume the
land lease associated with the theatre, effective as of the closing of the Lisbon Cinema acquisition. The initial term of the lease expires in
approximately 18 years and the lease contains three five year renewal options. The lease provides for the payment of additional rent based on a
percentage of our gross revenue at the theatre in excess of specified thresholds. We intend to use a portion of the net proceeds from this offering to
fund the portion of the purchase price payable at closing.
Our acquisition policy is to
acquire theatres that provide significant opportunities for improved financial performance through our business model. We will typically attempt to
acquire cash flow positive theatres in strategic
60
markets, convert them to a digital format and proactively program and market alternative content in addition to running 2D and 3D movies. By marketing our theatres as entertainment destinations, we expect to realize increased cash flow from 3D films and alternative content, increased attendance, increased concessions and sponsorship and advertising revenues.
Depending on the size of this
offering, and the possibility of a follow-on offering, we have a pipeline of additional theatres that we may seek to acquire, and we have been in
discussions with other potential sellers. However, other than the Cinema Centers asset purchase agreement, we do not have any executed agreements to
acquire any other theatres and no other acquisitions are deemed probable.
Film Exhibition
Evaluation of Film.
We license films on a film-by-film and theatre-by-theatre basis. Negotiations with the film distributors are handled for us by Clearviews film
department. We have an oral agreement with Clearview to perform this work, and we pay Clearview a fee of $1,200 per month per location. The economic
terms of our licenses of films from film distributors are identical to those made available to theatres in the Clearview theatre chain. The license
fees vary from picture to picture and are at varying percentages of net box office revenue depending on the nature and success of the film and the
duration of the films exhibition at our theatres.
We select the films that we
present at our theatres, and prior to selecting a film, we evaluate the prospects for upcoming films. Criteria we consider for each film may include
cast, producer, director, genre, budget, comparative film performances and various other market factors. Successful licensing depends greatly upon the
motion picture exhibitors knowledge of trends and historical film preferences of the residents in markets served by each theatre, as well as the
availability of commercially successful motion pictures. We select the films we exhibit based on a demographic survey we conduct at each of our
theatres, which includes such items as ethnicity, age of the potential audience and economic strata of the proximate geographic area.
For alternative content, we
handle the booking with in-house personnel, and our director of special events selects, negotiates the license terms of and books our alternative
content programs.
Access to Film
Product. Films are licensed from film distributors owned by major production companies and from independent film distributors that distribute
films for smaller production companies. Often, film distributors establish geographic licensing zones and allocate each available film to one theatre
within that zone. Our theatres, the Cinema Centers theatres and the Lisbon Cinema theatre are in free zones which do not contain such
restrictions. We expect that most of the theatres that we acquire in the future will also be in free zones.
Film Rental Fees.
Film licenses typically specify rental fees or formulas by which rental fees may be calculated. The primary formulas used are the sliding
scale formula, a firm term formula and a review or settlement formula. Under a sliding scale formula, the distributor
receives a percentage of the box office receipts using a pre-determined and mutually agreed upon film rental template. This formula establishes film
rental predicated on box office performance and is the predominant formula used by us to calculate film rental fees. Under the firm term formula, a
specified percentage of the box office receipts are to be remitted to the distributor. Lastly, under the review or settlement method, distributor
receives a negotiated percentage of the box office receipts to be paid upon completion of the theatrical engagement.
Duration of Film
Licenses. The duration of our film licenses is negotiated for us by Clearviews film department on a film-by-film basis. In the case of
alternative content, licenses are negotiated for us by our in-house alternative content booking personnel. The terms of our license agreements depend
on the performance of each film or alternative content program. Marketable movies that are expected to have high box office admission revenues will
generally have longer license terms than movies with more uncertain performance and popularity.
Relationship with
Distributors. Many distributors provide quality first-run movies to the motion picture exhibition industry. For fiscal 2011 and the six months
ended December 31, 2011, six major film distributors accounted for approximately 73% and 75% of our admissions revenues, respectively. Of the six major
film distributors, each of them accounted for more than 10% of admissions revenues for fiscal 2011, and four distributors accounted for more than 10%
of admissions revenues for the six months ended December 31, 2011. No single film distributor accounted for more than 25% of admissions revenues for
fiscal year 2011 or the six months ended
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December 31, 2011. We license films from each of the major distributors through our relationship with Clearviews film department, and we believe that our relationships with Clearview and the distributors are good. From year to year, the revenues attributable to individual distributors will vary widely depending upon the number and popularity of films that each one distributes. For the twelve months ended December 31, 2010 and 2009, the Predecessor similarly relied upon six major film distributors for the majority of its box office revenues.
Concessions
We also recognize revenue from
concession sales in our theatres. We generated approximately 24% and 21% of our total revenues from concessions sales for fiscal year 2011 and the six
months ended December 31, 2011, respectively. The Predecessor generated approximately 29% and 26% of total revenues from concession sales in fiscal
years 2010 and 2009, respectively. We emphasize prominent and appealing concession stations designed for rapid and efficient service. We continually
seek to increase concessions sales by improving product mix and through expansion of our concession offerings, introducing special promotions from
time-to-time and offering employee training and incentive programs to up-sell and cross-sell products.
We do not have concession supply
contracts but have excellent relationships with many concession vendors and have developed an efficient concession purchasing and distribution supply
chain. Our management negotiates directly with vendors for many of our concession items to obtain competitive prices and to ensure adequate supplies.
We acquired most of our concessions to date from Continental Concession, which distributes products of many concession vendors, and which has provided
us with favorable pricing.
In Theatre Advertising
We also recognize revenue from
in-theatre advertising that we exhibit at our theatres. This advertising is sold and coordinated by NCM. Under our advertising agreement with NCM,
which we executed in March 2011, we receive 50% of net revenue (gross revenue collected less refunds and similar disbursements) realized from the sale
of all forms of advertising at our theatres provided to us by NCM, subject to a minimum guaranteed payment to us of $0.17 per customer per year. The
advertising revenue is collected for us by NCM pursuant to our contract with NCM. We began recording revenue under this agreement in August
2011.
Management Information Systems
We make extensive use of
information technology for the management of our business, our theatres, and other revenue generating operations. We have deployed software and
hardware solutions that provide for enhanced capabilities and efficiencies within our theatre operations. Our revenue streams generated by attendance
and concession sales are fully supported by information technology systems to monitor cash flow and to detect fraud and shrinkage in our concessions
inventory.
Our information technology
solutions enable us to sell gift cards and to redeem those gift cards at our theatre box offices and concession stands. We also sell tickets remotely
by using our Internet ticketing partner, movietickets.com, and our website. We can sell tickets for current and future shows from our box office,
concession stands and the Internet to reduce lines during peak periods.
We have entered into an Exhibitor
Management Services Agreement with Cinedigm, pursuant to which we have licensed the use of Cinedigms state-of-the-art EMS back office management
system and related support services on a non-exclusive basis. We believe this system will facilitate our addition of theatres to our business. The EMS
system interfaces with our accounting software, and it provides integrated back office functionality related to information from our
ticketing systems, our box office receipts, accounting, ticketing systems, revenue tracking, and payments and settlements with our distributors. The
scheduling feature of the EMS system supports the coordination needed to properly allocate our screens between film showings, while also ensuring that
movie audiences view the intended advertising. The sales and attendance information collected by the EMS system is used directly for film booking and
settlement, and it is the primary source of data for our financial systems. We also rely on point-of-sale software that we license from RTS
to operate our back office management systems.
We expect to continue to update
our technology to improve services to our patrons and provide information to our management, allowing them to operate our theatres
efficiently.
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Marketing and Advertising
To market our theatres, we have
developed a marketing strategy founded on the release of information through press releases, our website, social media (including Facebook, Twitter,
YouTube) and limited print advertising to inform our patrons of film selections and show times. We currently use each of these forms of advertising at
our existing theatres and currently approximately 3% of our ticket sales are through MovieTickets.com and our website. We may also employ special
interactive marketing programs for specific films and concession items. Our movie patrons are also able to find our film selections and show times
through various third party websites and search engines. In addition to our marketing and advertising efforts, we rely on film distributors to organize
and finance multimedia advertising campaigns for major film releases. Alternative content that we present may be sponsored by local or national
concerns which advertise the events or programs in order to advertise their products or services.
We are implementing a frequent
moviegoer loyalty program in each of our markets, and its members are eligible for specified awards, such as discounted or free concession items, based
on purchases made at our theatres. In addition, we seek to develop patron loyalty through a number of other marketing programs such as a summer
childrens film series, cross-promotional ticket redemptions and promotions within local communities. We have provided incentives for our
customers to sign on for our weekly newsletters to enable us to notify them of the new alternative content programs.
Insurance
We maintain property insurance
with respect to our operations that covers our theatres. We also maintain business interruption insurance. We do not maintain key person insurance. We
believe that our insurance coverage is customary for similar operations in our industry. However, we cannot assure you that our existing insurance
policies are sufficient to protect us from all losses and liabilities that we may incur.
Employees
As of March 14, 2012, we
employed approximately 55 employees, of whom 12 were full-time employees and four were executive management. Three of the full time employees are
theatre management personnel, and the remainder were hourly theatre personnel. We have nine employees in our corporate office, with the remainder being
theatre personnel. None of our employees are covered by collective bargaining agreements. We believe we have good relations with our
employees.
Seasonality
Our revenues are usually
seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, motion picture studios release the most
marketable motion pictures during the summer and holiday seasons. The unexpected emergence of a hit film during other periods can alter the traditional
trend. The timing of movie releases can have a significant effect on our results of operations, and the results of one fiscal quarter are not
necessarily indicative of results for the next fiscal quarter or any other fiscal quarter. The seasonality of motion picture exhibition, however, has
become less pronounced as motion picture studios are releasing motion pictures somewhat more evenly throughout the year.
Competition
The motion picture exhibition
industry is highly competitive. Motion picture exhibitors generally compete on the basis of the following competitive factors:
|
ability to secure films with favorable licensing terms to meet audience demand; |
|
availability of comfortable seating, location, reputation and seating capacity; |
|
quality of projection and sound systems; and |
|
ability and willingness to promote the films and other content that are being shown. |
We have several competitors in
our markets, which vary substantially in size from small independent exhibitors to large national chains, such as Regal Entertainment Group, AMC
Entertainment Inc., Clearview and Cinemark
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USA, Inc. Some of these competitors are substantially larger and have substantially more resources than we do, which may give them a competitive advantage over us. Our theatres are, and those we plan to acquire will be, subject to varying degrees of competition in the regions in which they operate. Our competitors, including newly established motion picture exhibitors and existing theatre chains, may build new theatres or screens in areas in which we operate or will operate in the future, which may result in increased competition and excess capacity in those areas. If this occurs, it may have an adverse effect on our business and results of operations. Based on the expertise of our senior management, however, we believe that we will be able to generate economies of scale and operating efficiencies that will allow us to compete effectively with our competitors.
In addition to competition for
our existing theatre operations, we may face competition from other motion picture exhibitors and other buyers when trying to acquire additional
theatres. Many of our competitors are well established and have extensive experience in identifying and effecting acquisitions. Many of these
competitors possess greater technical, human and other resources than we do and our financial resources will be relatively limited when contrasted with
those of many of these competitors. This inherent competitive limitation gives others an advantage in pursuing the acquisition of certain target
theatres.
We also compete with other motion
picture distribution channels, including home video and DVD, cable television, broadcast television and satellite, pay-per-view services and downloads
and streaming video via the Internet. Other technologies such as video on demand could also have an adverse effect on our business and results of
operations. However, in general, when motion picture distributors license their products to the motion picture exhibition industry, they refrain from
licensing those motion pictures to other distribution channels for a period of time, commonly called the theatrical release window.
In addition, we compete for the
publics leisure time and disposable income with other forms of entertainment, including sporting events, concerts, live theatre and
restaurants.
Regulation
The distribution of motion
pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. Consent decrees
effectively require major film distributors to offer and license films to exhibitors, including us, on a film-by-film and theatre-by-theatre basis.
Consequently, exhibitors cannot assure themselves of a supply of films by entering into long-term arrangements with major distributors, but must
negotiate for licenses on a film-by-film basis.
Our theatres must comply with
Title III of the ADA to the extent that such properties are public accommodations or commercial facilities as defined by the
ADA. Compliance with the ADA requires that public accommodations reasonably accommodate individuals with disabilities and that new
construction or alterations made to commercial facilities conform to accessibility guidelines unless structurally impracticable
for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of injunctive relief, fines,
an award of damages to private litigants and additional capital expenditures to remedy such non-compliance. We believe that we are in compliance with
all current applicable regulations relating to accommodations for the disabled. We intend to comply with all future regulations which apply to us in
this regard. Our business strategy includes acquiring additional theatres, and in pursuing this strategy, we may incur capital expenditures to remedy
any non-compliance in theatres that we acquire; however, we cannot predict whether such compliance will require us to expend substantial
funds.
Our theatre operations are also
subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation and environmental
protection requirements. We believe that we are in compliance with all relevant laws and regulations.
Description of Property
Our three theatres are occupied
under lease agreements with existing terms of approximately nine years and six months for the Rialto and Cranford Theaters and 10 years for the
Bloomfield 8. At our option, we can renew all of the leases at defined rates for various periods ranging from five to 20 years. All of the existing
leases provide for contingent rentals based on the revenue results of the underlying theatre and require the payment of taxes, insurance and other
costs applicable to the property. Also, all leases contain escalating minimum rental provisions.
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We have leased facilities
comprising our corporate office located at 250 East Broad Street, Westfield, NJ 07090, under a 10 year lease.
As part of the Cinema Centers
acquisition, we have agreed to assume all leases for the Cinema Centers theatres. The five theatres constituting Cinema Centers are occupied under
lease agreements with existing terms of between approximately 4 1/2 and 15 years. At its option, the tenant under these leases can renew all of the
leases at defined rates for various periods ranging from nine to 20 years. Three of five leases for the Cinema Centers theatres provide for contingent
rentals based on the revenue results of the underlying theatre and all require the payment of taxes, insurance, and other costs applicable to the
property. Also, all leases contain escalating minimum rental provisions.
As part of the Lisbon Cinema
acquisition, we have agreed to assume the lease associated with the theatre. The initial term of the lease expires in approximately 18 years and the
lease contains three five-year renewal options. The lease provides for the payment of additional rent based on a percentage of our gross revenue at the
theatre in excess of specified thresholds and requires the payment of taxes, insurance, and other costs applicable to the property. Also, the lease
contains escalating minimum rental provisions.
Legal Proceedings
We are not currently a party to
any material legal or administrative proceedings. We may, however, from time to time become a party to various legal or administrative proceedings
arising in the ordinary course of our business.
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DIRECTORS AND EXECUTIVE OFFICERS
The biographies of our Directors
and Executive Officers are as follows:
Name |
Age |
Positions and Offices |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
A. Dale
Mayo |
70 | Chairman, Chief Executive Officer and Director |
||||||||
Brian D.
Pflug |
45 | Chief
Financial Officer and Director |
||||||||
Jeff
Butkovsky |
52 | Chief
Technology Officer |
||||||||
Neil T.
Anderson |
65 | Director |
||||||||
Richard
Casey |
54 | Director |
||||||||
Charles
Goldwater |
60 | Director |
||||||||
Martin
OConnor, II |
52 | Director |
A. Dale Bud
Mayo. Mr. Mayo has served as our chairman and chief executive officer since our inception in July 2010. From April 2000 until his retirement in
June 2010, Mr. Mayo served as the chairman, president and chief executive officer of Cinedigm, a pioneer in the digital cinema industry. During his
tenure, Cinedigm completed financings in excess of $600 million and completed a successful initial public offering in 2003. Prior to founding Cinedigm,
Mr. Mayo was co-founder, chairman and chief executive officer of Clearview. During his tenure at Clearview from December 1994 through January 2000, Mr.
Mayo grew Clearview into the largest independent theatre circuit in the metropolitan New York area, successfully completing its initial public offering
in 1997, and was responsible for the sale of Clearview to Cablevision for $160 million in 1998. Mr. Mayo continued as CEO of Cablevision Cinemas until
January of 2000. From 1976 to 1993, Mr. Mayo was the founder, chief executive officer and sole shareholder of Clearview Leasing Corporation which
completed more than $200 million in equipment lease transactions. In recognition of his contributions to the industry, Mr. Mayo received the honor of
being inducted into the film exhibition Hall of Fame at the industrys Show East conference held in October 2010, Ernst & Youngs 2006
Regional Entrepreneur of the year award and a 2009 Telly award.
Brian D. Pflug. Mr.
Pflug has served as our chief financial officer since July 2011, and a member of our board of directors since February 2012. Mr. Pflug has over 20
years of finance and accounting experience. From August 2000 to June 2011, Mr. Pflug served as the senior vice president, accounting of Cinedigm.
During Mr. Pflugs tenure, Cinedigm completed its initial public offering and numerous additional financings, and his responsibilities at Cinedigm
included all accounting functions and SEC reporting requirements. From 1998 to July 2000, Mr. Pflug was the controller of Clearview, where he was
responsible for all accounting functions, including financial reporting, payroll and accounts payable. Mr. Pflug began his career as an auditor with
Coopers & Lybrand in 1988 and worked at several large corporations before joining Clearview.
Jeff Butkovsky. Mr.
Butkovsky has served as our chief technology officer since November 1, 2011. Mr. Butkovsky provided similar services to us as a consultant from January
1, 2010 until October 31, 2011. Mr. Butkovsky has a background in digital cinema and over 25 years in technology management, software development and
technology sales. From October 2000 to July 2010, Mr. Butkovsky was a senior vice president and chief technology officer of Cinedigm, where he managed
system integration with third party vendors such as Christie Digital Systems USA, Inc., Barco, NEC Display Cinema (a division of NEC Corporation) and
Doremi Cinema Labs, Incorporated, and oversaw the companys compliance with the Digital Cinema Initiative specification. Mr. Butkovsky was
Cinedigms technical liaison with Fox, Disney, Paramount, Sony, Universal and Warner Brothers for digital cinema deployment agreements, digital
system conformance, and content delivery. Prior to joining Cinedigm, Mr. Butkovsky held sales management positions at Logic Stream, Inc. and Micron
Electronics Inc. He has also held positions at Motorola as a senior systems engineer and at various technology companies in software
development.
Neil T. Anderson.
Mr. Anderson has served on our board of directors since January 2011. Mr. Anderson has been associated with the law firm of Sullivan & Cromwell LLP
since 1971. He became a partner in the firm in 1979 and of counsel to the firm in 2009. During the period he was a partner, Mr. Anderson was actively
involved in corporate matters, focusing primarily on merger and acquisition transactions, both domestically and internationally. Between 2000 and 2002,
Mr. Anderson served as the head of Sullivan & Cromwells M&A practice in Europe, resident in the firms London office. Mr. Anderson
has been a frequent speaker and faculty member on professional seminars and programs dealing with M&A and related matters.
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Richard Casey. Mr.
Casey has served on our board of directors since January 2011. Mr. Casey is the president of The Casey Group, which he founded in 1989 to leverage
information technology to deliver strategic advantage and operational efficiencies to its clients. Prior to founding The Casey Group, Mr. Casey held
various positions in the information technology industry, beginning his career at AT&T in 1980. In 2002, Mr. Casey was awarded the Small Business
Entrepreneur of the Year Award by the Morris County Chamber of Commerce (New Jersey), and more recently, he was elected to serve on the Affinity
Federal Credit Union Board of Directors.
Charles Goldwater.
Mr. Goldwater joined our board of directors in February 2012. Since January 2012, Mr. Goldwater has been providing consulting services to Cinedigm with
respect to the deployment of digital cinema systems. From 2006 to December 2011, Mr. Goldwater served as a senior executive vice president of Cinedigm
and president of Cinedigms Media Services group. During that period, he also served as the president of two limited liability companies
affiliated with Cinedigm which provided financing for deployment of digital cinema systems to theatrical exhibitors. From 2002 to 2005, Mr. Goldwater
was the chief executive officer of Digital Cinema Initiatives, LLC (DCI), a joint venture of seven motion picture studios. Prior to DCI,
Mr. Goldwaters 30-year career focused principally on the exhibition side of the film industry, where he held senior management positions with USA
Cinemas, National Amusements and Loews Theatres. Mr. Goldwater also served as president and chief executive officer of Mann Theatres in Los Angeles and
as President of Cablevision Cinemas.
Martin OConnor,
II. Mr. OConnor has served on our board of directors since December 2010. Mr. OConnor is the managing partner of OConnor,
Morss & OConnor, P.C., a law firm which was founded by his grandfather, Martin P. OConnor, in 1903. Mr. OConnor has served as
managing partner since 1989, and his practice focuses on advising clients, primarily in the financial, real estate, entertainment, sport and
agricultural sectors, regarding strategic planning, ownership and wealth management issues and serving as counsel to wealthy clients. Mr. OConnor
serves on the board of directors of Cinedigm and Rentrak Corporation, both of which are influential companies in the film exhibition sector. Mr.
OConnor also serves on numerous private and charitable Boards.
The address of our directors and
executive officers is c/o Digital Cinema Destinations Corp., 250 East Broad Street, Westfield, New Jersey 07090.
Director Qualifications
Our Board believes that the
qualifications of our directors as set forth in their biographies above provide our directors with the qualifications and skills to serve on our board
of directors. Three of our directors, Mr. Mayo, Mr. Pflug and Mr. Goldwater, have substantial experience in the film exhibition industry.
Mr. Anderson has substantial experience in finance and mergers and acquisitions which are important components of our business strategy. Mr.
Caseys experience in business and technology provides valuable insight in both areas, particularly with respect to information technology as we
seek to further digital conversions of future acquired theatres. Mr. OConnors skills in financial, entertainment and real estate matters,
among others, provide us with guidance in these areas.
Our board of directors also
believes that each of the directors has other key attributes that are important to an effective board, including integrity and demonstrated high
ethical standards, sound judgment, analytical skills, the ability to engage management and each other in a constructive and collaborative fashion, and
the commitment to devote significant time and energy to service on our board of directors and its committees.
Board of Directors
We are managed by our board of
directors. Our board of directors currently consists of six members. Our bylaws permit our board of directors to establish by resolution the
authorized number of directors, and seven directors are currently authorized. Each of our directors serve for a term, if any, specified in the
resolution of shareholders or directors appointing him, or until his earlier death, resignation, or removal. There are no family relationships between
any of our directors and executive officers. A director is not required to hold any of our shares by way of qualification. There are no severance
benefits payable to our directors upon termination of their directorships.
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NASDAQ Exemptions for a Controlled
Company
In general, NASDAQ Marketplace
Rules require that a NASDAQ listed company have a majority of independent directors on its board of directors, determine compensation of its executive
officers through a compensation committee of independent directors, and select nominee directors through a nominating committee of independent
directors. Upon completion of this offering, we anticipate that Mr. Mayo will control approximately 61% of the voting power of all of our
outstanding capital stock with voting rights. Because of Mr. Mayos ownership interest and control of our voting power, we will be considered a
controlled company within the meaning of NASDAQ Marketplace Rules. As a controlled company, within the meaning of NASDAQ Marketplace Rules,
we are not subject to the corporate governance requirements of the Rule 5600 series of the NASDAQ Marketplace Rules that would otherwise require us to
have:
|
a majority of independent directors on our board of directors; |
|
compensation of our executive officers determined, or recommended to the board of directors for determination, either by a majority of the independent directors or a compensation committee comprised solely of independent directors; or |
|
director nominees selected, or recommended for the board of directors selection, either by a majority of the independent directors or a nominating committee comprised solely of independent directors. |
However, because the controlled
company exemption does not extend to audit committee standards, we must maintain an audit committee that has at least three members and be comprised
only of independent directors, each of whom satisfies the respective independence requirements of the SEC and NASDAQ. In addition, the
independent members of our board of directors will need to have regularly scheduled meetings that are attended by only the independent
directors.
Committees of the Board of Directors
Our bylaws authorize our board of
directors to appoint one or more committees, each consisting of one or more directors. Our board of directors will form an audit committee prior to
completing this offering. Since Mr. Mayo currently owns and will, at the conclusion of this offering, own more than 50% of the voting power of our
company, we will be a controlled company within the meaning of the corporate governance standards of NASDAQ, and as a result, we are
neither required to have, nor will we have, a nominating and corporate governance committee. Accordingly, our stockholders will not have the same
protections afforded to shareholders of companies that are subject to all the NASDAQ corporate governance requirements. The functions normally handled
by a compensation committee and nominating committee are handled by our board of directors. Our board of directors does not have a charter that
addresses the nominating function.
Audit Committee
Upon the completion of this
offering, our board of directors will establish an audit committee and a charter for the audit committee. The audit committee will assist our board of
directors in its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and company policies
and controls. Under our audit committee charter, the audit committee will have the sole authority to, among other things:
|
selecting the independent auditors and pre-approving all audit and non-audit services permitted to be performed by the independent auditors; |
68
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reviewing with the independent auditors any audit problems or difficulties and managements response; |
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reviewing and approving in advance all transactions that might be considered related party transactions, or might present a conflict of interest; |
|
discussing the annual audited financial statements with management and the independent auditors; |
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reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; and |
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meeting separately and periodically with management and the independent auditors. |
The audit committee will also be
responsible for confirming the independence and objectivity of our independent registered public accounting firm. Our independent registered public
accounting firm will be given unrestricted access to the audit committee and our management, as necessary.
Upon completion of this offering,
our audit committee will be comprised of Messrs. Richard Casey, A. Dale Mayo and Brian Pflug. Mr. Casey satisfies the independence requirement of the
current SEC rules and the NASDAQ Marketplace Rules and will be the chairperson of our audit committee. Our board of directors has determined that each
member of the audit committee meets the financial literacy requirements under the rules and regulations of the NASDAQ and the SEC and each of them
qualifies as an audit committee financial expert under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. Within one year after
completion of the offering, we expect that our audit committee will be composed of three members that will satisfy the independence requirements of
current SEC rules and the NASDAQ Marketplace Rules, and all members of our audit committee will satisfy the financial literacy standards for audit
committee members under these rules.
Code of Business Conduct and Ethics
We intend to adopt a code of
business conduct and ethics, which will become effective immediately upon listing and will provide that our directors and officers are expected to
avoid any action, position or interest that conflicts with our interests or gives the appearance of a conflict. Our audit committee will be responsible
for reviewing and approving in advance all transactions that might represent a related party transaction or a conflict of interest. Directors and
officers have an obligation under our code of business conduct and ethics to advance our interests when the opportunity to do so
arises.
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DIRECTOR COMPENSATION
Our initial non-employee
director, Mr. O Connor, received 25,000 shares of our Class A common stock on December 31, 2010 for services rendered as a director. Each
non-employee director received 5,000 shares of our Class A common stock on June 30, 2011 for services rendered as a director for the period of July 1,
2010 to June 30, 2011. Our board of directors has not determined if any compensation or fees shall be paid to non-employee directors for the period of
July 1, 2011 through June 30, 2012. It is anticipated that there will be no quarterly fees or compensation due to the non-employee directors during
that period.
Director Compensation Table
The following table sets forth a
summary of the compensation we paid to our non-employee directors during fiscal year 2011. We do not provide any compensation to our directors who also
are serving as an executive officer.
(in thousands) Name |
Fees Earned or Paid in Cash |
Stock Options |
Stock Award (1) |
Total |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Neil T.
Anderson |
$ | 0 | $ | 0 | $ | 20 | $ | 20 | ||||||||||
Richard Casey
|
$ | 0 | $ | 0 | $ | 20 | $ | 20 | ||||||||||
Martin
OConnor, II |
$ | 0 | $ | 0 | $ | 37 | $ | 37 |
(1) |
The amounts reflect the fair market value of the stock on date of issuance as determined by an independent third-party appraisal using an analysis of our discounted cash flows, and gives effect to the one-for-two reverse stock split of our Class A common stock that was approved by our board of directors in November 2011. |
70
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth
compensation awarded to, earned by or paid to Mr. Mayo, our chairman and chief executive officer for fiscal year 2011. No other executive officers
received total compensation in excess of $100,000 for fiscal year 2011.
Name and Principal Position |
Year |
Salary |
Bonus |
Stock Awards |
Option / Warrant Awards |
All Other Compensation (1) |
Total |
||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(dollars in thousands) | |||||||||||||||||||||||||||||||
A. Dale
Mayo |
2011 | $ | 46 | $ | | $ | | $ | | $ | 13 | $ | 59 | ||||||||||||||||||
2010 | $ | 1 | $ | | $ | | $ | | $ | $ | 1 |
(1) |
Includes $6 paid for family health insurance coverage which is not provided without contribution to all Company employees and $7 attributable to a monthly vehicle allowance. |
We have issued an aggregate of
119,166 shares of our Class A common stock to our non-employee directors and certain employees, including 29,166 shares to each of Messrs. Pflug
and Butkovsky, 30,000 shares to Mr. OConnor and 5,000 shares to each of Messrs. Anderson and Casey. We have agreed to issue an aggregate of
16,666 shares of our Class A common stock to certain employees, including 4,162 shares to each of Messrs. Butkovsky and Pflug on each of June 30, 2012
and June 30, 2013, respectively (on aggregate of 16,666 shares), provided they are still employed by us on these dates.
Employment Agreements
We have entered into employment
agreements with Messrs. Mayo, Pflug and Butkovsky.
Mr. Mayo. Our
employment agreement with Mr. Mayo, effective September 1, 2010, is for an initial term ending on June 30, 2016 (the Initial Term) and is
subject to automatic extension for successive 12-month periods absent written notice of termination by either us or Mr. Mayo not less than six months
prior to expiration of the then existing term. The employment agreement provides for compensation as follows:
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for the 10-month period of September 1, 2011 to June 30, 2011, a salary not less than $100,000 (the Minimum Base Salary) plus a bonus of 2% of our consolidated gross revenues less sales and use taxes and refunds (Adjusted Revenues) in excess of $3.0 million; |
|
for the period from July 1, 2011 through June 30, 2012, a Minimum Base Salary of not less than $200,000 per annum and a bonus of 2% of our Adjusted Revenues in excess of $4.0 million (such bonus not to exceed $750,000 for such 12-month period); and |
|
for any subsequent 12-month period during the Initial Term or for any 12-month period after the Initial Term, a Minimum Base Salary of $300,000 per annum and a bonus of 2% of our Adjusted Revenue in excess of $5.0 million (such bonus not to exceed $1,000,000 for any such 12-month period). |
Mr. Mayo is also entitled to
reimbursement of expenses and an automobile allowance of $700 per month, adjusted for each 12-month period based on consumer price changes. We may not
terminate Mr. Mayos agreement and Mr. Mayos employment thereunder prior to the expiration of the Initial Term, or any extended term then
applicable, unless Mr. Mayo have been convicted of theft or embezzlement of money or property, fraud, unauthorized appropriation of our assets or other
felony involving dishonesty or moral turpitude (Termination for Cause). If Mr. Mayo is completely disabled or unable to perform his
services in a period in excess of 6 months or 180 days in any 12-month period, we are entitled to reduce Mr. Mayos consideration by the amount we
pay to any person hired to perform his duties and any amount Mr. Mayo receives from any disability insurance policy maintained by us (collectively,
Disability Reimbursement). In the event of Mr. Mayos death, his employment is terminated and Mr. Mayos estate is entitled to
payment of his salary plus bonus for a 6-month period following his death (Death Payment). The agreement contains a customary
confidentiality provision and a non-compete provision which prohibits, for a period of one year after termination of the agreement, Mr. Mayo from,
directly or indirectly, engaging becoming interested in (as owner, stockholder, partner or otherwise) the operation of any
71
business similar to or in competition (direct or indirect) with us within a 50-mile radius of any theatre then owned or operated by us.
Mr. Pflug. Our
employment agreement with Mr. Pflug, effective July 1, 2011, is for an initial term ending on June 30, 2014 (the Initial Term) and is
subject to automatic extension for successive 12-month periods absent written notice of termination by either us or Mr. Pflug not less than 6 months
prior to expiration of the then existing term. The employment agreement provides for an annual base salary of $150,000 per year plus any bonus
authorized by our chief executive officer or our board of directors. Mr. Pflug is also entitled to reimbursement of expenses and an automobile
allowance of $350 per month, adjusted for each 12-month period based on consumer price changes. We may not terminate Mr. Pflugs agreement and Mr.
Pflugs employment thereunder prior to the expiration of the Initial Term, or any extended term then applicable, except in the case of Termination
for Cause. Mr. Pflugs employment agreement contains Disability Reimbursement and Death Payment provisions substantially similar to those contain
in Mr. Mayos employment agreement and substantially similar confidentiality and non-compete provisions.
Mr. Butkovsky. Our
employment agreement with Mr. Butkovsky, effective November 1, 2011, is for an initial term ending on October 31, 2012 (Butkovskys Initial
Term), and is subject to automatic extension for successive 12-month periods absent written notice of termination by either us or Mr. Butkovsky
not less than 6 months prior to expiration of the then existing term. The employment agreement provides for an annual base salary of $90,000 per year
with future increases or bonuses to be determined by our chief executive officer or our board of directors. Mr. Butkovsky is also entitled to
reimbursement of expenses. We may not terminate Mr. Butkovskys agreement and Mr. Butkovskys employment thereunder prior to the expiration
of Butkovskys Initial Term, or any extended term then applicable, except in the case of Termination for Cause. Mr. Butkovskys employment
agreement contains Disability Reimbursement and Death Payment provisions substantially similar to those contain in Mr. Mayos employment agreement
and substantially similar confidentiality and non-compete provisions.
Potential Payments Upon Termination or a Change in
Control
As discussed above under the
heading Executive Compensation Employment Agreements, we have entered into employment agreements with Messrs. Mayo, Pflug and
Butkovsky, each which provide that we may not terminate the employee during the applicable Initial Term of the employment agreement, except
in limited circumstances, such as for death or Termination for Cause. The Initial Term expires on June 30, 2016 with respect to Mr. Mayo, on June 30,
2014 with respect to Mr. Pflug, and on October 30, 2012 with respect to Mr. Butkovsky. In the event of termination of the employment of Messrs.
Mayo, Pflug or Butkovsky during the applicable Initial Term, whether as a result of a change of control or otherwise, which does not result from the
limited circumstances in which termination is permitted under the relevant employment agreement, the terminated employee will be entitled to
continuation of the compensation provided for under his employment agreement until the expiration of the Initial Term, with such payments to be made in
accordance with our normal payroll practices, but in no event less frequently than monthly.
Equity Compensation Plan Information
2012 Stock Option and Incentive
Plan
We intend to adopt the 2012 Stock
Option and Incentive Plan which will be effective on completion of this offering and is referred to herein as the 2012 Plan. The purpose of the
2012 Plan is to advance the interests of the Company and its subsidiaries by providing a variety of Class A common stock equity-based incentives
designed to motivate, retain and attract employees, directors, consultants, independent contractors, agents, and other persons providing services to
the Company through the acquisition of a larger personal financial interest in the Company. The 2012 Plan primarily provides for the award of Class A
common stock, incentive stock options, nonqualified stock options, restricted stock and restricted stock units.
Administration. The 2012
Plan is administered by a committee designated by the Board, or, in the absence of such a committee, by the Board (the Administrator). The
Administrator has the full authority and discretion to determine the terms, conditions, performance targets, restrictions and other provisions of
awards under the 2012
72
Plan, including selecting those persons who will receive awards and the types of awards granted. Awards of stock options, restricted stock and restricted stock units under the 2012 Plan shall be evidenced by award agreements.
Grant of Awards; Shares
Available for Awards. Generally, awards under the 2012 Plan may be granted to employees, directors, consultants, advisors and other persons
providing services to the Company or any subsidiary, other than incentive stock options, which may only be granted to employees. An aggregate of
600,000 shares of our Class A common stock will be reserved for issuance under the 2012 Plan, however during the first 12-months we will not
issue more than 100,000 shares. The number of shares issued or reserved pursuant to the 2012 Plan may be adjusted by the Administrator as it deems
appropriate as the result of stock splits, stock dividends, and similar changes in our Class A common stock.
Stock Options. Under the
2012 Plan, the Administrator may grant participants incentive stock options, which qualify for special tax treatment under United States tax law, as
well as nonqualified stock options. The Administrator establishes the duration of each option at the time of grant, with a maximum duration of ten
years from the effective date of the grant. The Administrator also establishes any performance criteria or passage of time requirements that must be
satisfied prior to the exercise of options. Incentive stock option grants must have an exercise price that is not less than the fair market value of
our Class A common stock on the grant date. Nonqualified stock options must have an exercise price of not less than 85 percent of the fair market value
of our Class A common stock on the date of grant. Payment of the exercise price for shares being purchased pursuant to a stock option may be made by
check, or, if the Administrator permits, delivery of an undertaking by a stock broker to deliver the exercise price to the Company, by means of a
promissory note, shares of Class A common stock owned by the participant valued at fair market value, or such other lawful consideration as the
Administrator may determine.
Restricted Stock Awards.
Restricted stock awards under the 2012 Plan are awards of shares that vest in accordance with terms and conditions established by the Administrator.
Restricted stock when issued by the Company will be subject to the right of the Company to repurchase all or part of the shares for their issue price
or a formula set forth in the award document in the event the conditions specified in the award are not satisfied prior to the end of the restriction
period. Except as otherwise provided by an award agreement, recipients of restricted stock awards have all the rights of stockholders with respect to
the underlying shares, including the right to vote such shares and receive dividends on such shares.
Restricted Stock Units.
Under the 2012 Plan, the Administrator may grant participants restricted stock units, which are units representing the right to receive shares of our
Class A common stock, on a specified date in the future, subject to forfeiture of such right. The Administrator establishes the time or times on which
a restricted stock unit will vest.
Stock Awards. Under the
2012 Plan, the Administrator may grant participants awards of our Class A common stock as a bonus, in consideration for services rendered or to be
rendered to the Company or a subsidiary or affiliate of the Company or in lieu of obligations of the Company or a subsidiary or affiliate of the
Company.
Acceleration and Other
Provisions. The Administrator may provide that, in the event of a termination of a participants service in connection with a Change In
Control, or a participants death, an outstanding award will become fully vested and/or exercisable. In the event of an Acquisition of the
Company, the 2012 Plan provides that the surviving entity may assume or continue our rights and obligations under any outstanding award, or may
substitute substantially equivalent awards with respect to the surviving entitys stock. The Administrator may also, in its discretion, determine
that an outstanding award must be exercised or cashed out in connection with an acquisition of the Company.
Unless the Administrator
determines otherwise, a Change In Control is: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction
the principal purpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of the Companys subsidiary corporations) in connection with the
complete liquidation or dissolution of the Company; (iii) any reverse merger in which the Company is the surviving entity but in which securities
possessing more than fifty percent (50%) of the total combined voting power of the Companys outstanding securities are transferred to a person or
persons different from those who held such securities immediately prior to such merger; or (iv) an acquisition by any person or related group of
persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the
73
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Companys outstanding voting securities. An Acquisition of the Company is: (x) the sale of the Company by merger in which the shareholders of the Company in their capacity as such no longer own a majority of the outstanding equity securities of the Company (or its successor); or (y) any sale of all or substantially all of the assets or capital stock of the Company (other than in a spin-off or similar transaction) or (z) any other acquisition of the business of the Company, as determined by the Administrator.
Compliance with Laws. The
2012 Plan is designed to comply with all applicable federal, state and foreign securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934 and the rules of any applicable stock exchange or national market system.
Amendment and
Termination. Our board of directors may amend, suspend or terminate the 2012 Plan at any time. However, no amendment that requires the approval of
our stockholders shall be made without the approval of the Companys stockholders, provided, however, that the Administrator may amend the 2012
Plan or any award agreement for the purposes of conforming the 2012 Plan or the award agreement to the requirements of law, including the requirements
of Section 409A of the Internal Revenue Code of 1986, as amended.
74
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table presents
information regarding the beneficial ownership of our common stock by the following persons as of March 14, 2012:
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each of the executive officers listed in the summary compensation table; |
|
each of our directors; |
|
all of our directors and executive officers as a group; and |
|
each beneficial owner of more than 5 percent of any class of our voting securities. |
Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise
indicated below, to our knowledge the persons and entities named in the table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Shares of our Class A common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of March 14, 2012 are deemed to be outstanding and to be beneficially owned by the person
holding the options or warrants for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, the
address of each of the executive officers and directors named below is c/o Digital Cinema Destinations Corp., 250 East Broad Street, Westfield, New
Jersey 07090.
75
Class A and Class B common stock beneficially owned prior to this offering |
Percentage of Class A and Class B common stock treated as a single class owned prior to the offering (5) |
Percentage of voting power immediately before the offering (6) |
Class A and Class B common stock beneficially owned after this offering |
Percentage of Class A and Class B common stock treated as a single class owned after the offering (7) |
Percentage of voting power immediately after the offering (8) |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Directors
and executive officers: |
||||||||||||||||||||||||||
A. Dale Mayo
(1) |
900,000 | 61.3 | % | 85.3 | % | 900,000 | 13.4 | % | 61 | % | ||||||||||||||||
Brian D.
Pflug (3) |
29,166 | 2 | % | * | 29,166 | * | * | |||||||||||||||||||
Jeff
Butkovsky (3) |
29,166 | 2 | % | * | 29,166 | * | * | |||||||||||||||||||
Neil T.
Anderson (2) |
130,000 | 8.8 | % | 1.2 | % | 140,006 | 2.1 | % | * | |||||||||||||||||
Richard Casey
(2) |
130,000 | 8.8 | % | 1.2 | % | 139,658 | 2.1 | % | * | |||||||||||||||||
Charles
Goldwater |
| | | | | | ||||||||||||||||||||
Martin
OConnor, II |
30,000 | 2 | % | * | 30,000 | * | * | |||||||||||||||||||
All directors
and executive officers as a group |
1,248,332 | 85.0 | % | 88.6 | % | 1,267,996 | 18.9 | % | 63.2 | % | ||||||||||||||||
IJM Family
Limited Partnership |
450,000 | 30.6 | % | 4.3 | % | 450,000 | 6.7 | % | 3 | % | ||||||||||||||||
Ullman Family
Partnership (4) |
125,000 | 7.8 | % | 1.2 | % | 135,055 | 2 | % | * | |||||||||||||||||
Jesse Sayegh
(4) |
125,000 | 7.8 | % | 1.2 | % | 135,000 | 2 | % | * | |||||||||||||||||
*Less than
1% |
(1) |
Consists of 900,000 shares of Class B common stock. |
(2) |
Prior to the offering, consists of 5,000 shares of Class A common stock owned on the date hereof and 125,000 shares of Class A common stock which will result from the mandatory conversion of our Series A preferred stock on the closing of this offering based on a one-for-two conversion ratio. After the offering, also includes 10,006 shares of Class A common stock for Mr. Anderson and 9,658 shares of Class A common stock for Mr. Casey issuable as dividends accrued through December 31, 2011 on the Series A preferred stock owned by them. |
(3) |
Does not include 4,167 shares of Class A common stock that we agreed to issue on each of June 30, 2012 and June 30, 2013 if the grantee is employed by us on each such date. |
(4) |
Prior to the offering, consists of shares of Class A common stock which will result from the mandatory conversion of our Series A preferred stock on the closing of this offering based on a one-for-two conversion ratio. After the offering, also includes 10,055 shares of Class A common stock for Ullman Family Partnership and 10,000 shares of Class A common stock for Mr. Sayegh issuable as dividends accrued through December 31, 2011 on the Series A preferred stock owned by them. |
(5) |
Based on an aggregate of 1,469,166 shares of Class A and Class B common stock outstanding as of March 14, 2012. |
(6) |
Applicable percentage voting power set forth in the table immediately before the offering is based on an aggregate of 10,555,416 shares of Class A and Class B common stock voting together as a single class, which includes: |
|
569,166 voted represented by our Class A common stock issued and outstanding as of March 14, 2012 and 9,000,000 votes represented by Class B common stock issued and outstanding as of March 14, 2012. The Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of our stockholders, except as may otherwise be required by law. The Class B common stock is convertible at any time by the holder into shares of Class A common stock on a share-for-share basis. |
|
986,250 votes represented by our Class A common stock issuable upon conversion of 1,972,500 shares of Series A preferred stock. Shares of Series A preferred stock are convertible into the Companys Class |
76
A common stock on a two-for-one basis and will automatically convert upon consummation of this offering.
(7) |
Applicable percentage of Class A and Class B common stock treated as a single class owned immediately after the offering set forth in the table is based on an aggregate of 6,721,607 shares of Class A and Class B common stock, which includes (i) an aggregate of 1,469,166 shares of Class A and Class B common stock outstanding as of March 14, 2012, (ii) 986,250 shares of Class A common stock issuable upon conversion of 1,972,500 shares of Series A preferred stock on consummation of this offering, (iii) 66,191 shares of Class A common stock issuable as dividends accrued through December 31, 2011 on shares of our Series A preferred stock and (iv) 4,200,000 shares of Class A common stock to be issued in connection with this offering. |
(8) |
Applicable percentage voting power immediately after the offering set forth in the table is based on an aggregate of 14,821,607 shares which includes (i) the aggregate of 10,621,607 shares of Class A and Class B common stock referenced in footnote 7 above (treating the Class B common stock as 9,000,000 shares due to its ten to one votes per share), and (ii) 4,200,000 shares of Class A common stock to be issued in connection with this offering, voting together as a single class. |
77
RELATED PARTY TRANSACTIONS
Our audit committee, once
established, will review and approve all related party transactions on an ongoing basis. See Directors and Executive Officers Audit
Committee. Our code of business conduct and ethics will provide for mechanisms to avoid conflicts between the personal interests of our directors
and executive officers and our interests. See Directors and Executive Officers Code of business conduct and ethics for more
details.
In addition to the cash and
equity compensation arrangements of our directors and executive officers discussed above under Executive Compensation, the following is a
description of transactions since July 1, 2010 , to which we have been a party in which the amount involved exceeded or will exceed $45,000 within any
fiscal year and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock or entities affiliated with
them had or will have a direct or indirect material interest.
In December 2010, Mr. Sayegh, one
of our 5% shareholders, was issued 250,000 shares of our Series A preferred stock valued at $500,000 as part of the purchase price for the Rialto and
Cranford theatres. In addition, we have entered into operating leases with Mr. Sayegh for the Rialto and Cranford theatres. At December 31, 2011,
accrued dividends of $0.04 million were payable to Mr. Sayegh on his Series A preferred stock. For the six months ended December 31, 2011 and fiscal
year 2011, our total rent expense under the operating leases for the Rialto and Cranford theatres was $0.1 million and $0.2 million, respectively.
There was no rent expense for the period from inception (July 29, 2010) to September 30, 2010. For additional information regarding our acquisition of
the Rialto and Cranford theatres, see Business Acquisition.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock
consists of 300 shares of common stock, par value $0.01 per share, of which no shares are issued and outstanding, 20,000,000 shares of Class A common
stock, par value $0.01 per share, of which 569,165 shares are issued and outstanding, held of record by 12 stockholders, 5,000,000 shares of Class B
common stock, par value $0.01 per share, of which 900,000 shares are issued and outstanding, held of record by one stockholder and 10,000,000 shares of
Series A preferred stock, par value $0.01 per share, of which 1,972,500 shares are issued and outstanding, held of record by 22 stockholders.
The 300 authorized shares of our common stock were issued and subsequently exchanged for Class A common stock and Class B common stock and cannot
be reissued. Prior to the effective date we intend to amend our certificate of incorporation to reduce the number of shares of Class B common stock
that we are authorized to issue to the 900,000 shares now outstanding and to delete references to our common stock which has been redeemed and cannot
be reissued.
Common Stock
Our Class A common stock and
Class B common stock are substantially identical, except that holders of Class A common stock and the common stock have the right to cast one vote for
each share held of record and holders of Class B common stock have the right to cast ten votes for each share held of record on all matters submitted
to a vote of holders of common stock, except for stockholder votes to increase our authorized capital stock, where holders of Class B common stock
have voting rights of one vote per share. Our Class A common stock and Class B common stock vote together as a single class on all matters on which
stockholders may vote, including the election of directors, except when class voting is required by applicable law.
Prior to the effective date, we
intend to amend our certificate of incorporation to provide that if the shares of Class B common stock are transferred for any reason, such shares will
automatically convert into an equivalent number of fully paid and non-assessable shares of Class A common stock upon the sale or transfer of such
shares of Class B common stock by the original record holder thereof. Each share of Class B common stock also is convertible at any time at the option
of the holder into one share of Class A common stock. Shares of Class B common stock which are converted shall be retired and are not available for
reissuance.
Holders of Class A common stock
and Class B common stock have equal ratable rights to dividends from funds legally available therefor, when, as and if declared by our board of
directors and are entitled to share ratably, as a single class, in all of our assets available for distribution to holders of common stock on the
liquidation, dissolution or wind-up of our affairs. Holders of Class A common stock and Class B common stock do not have preemptive,
78
subscription or conversion rights. There are no redemption or sinking fund provisions for the benefit of the Class A common stock and Class B common stock in our certificate of incorporation. All outstanding shares of Class A common stock and Class B common stock outstanding on the date hereof are validly issued, fully paid and non-assessable.
The difference in voting rights
described above increases the voting power of the Class B common stockholders and, accordingly, has an anti-takeover effect. The existence of the Class
B common stock may make us a less attractive target for a hostile takeover bid or render more difficult or discourage a merger proposal, an unfriendly
tender offer, a proxy contest, or the removal of incumbent management, even if such transactions were favored by our stockholders other than the Class
B common stockholders. Thus, our stockholders may be deprived of an opportunity to sell their shares at a premium over prevailing market prices, in the
event of a hostile takeover bid. Those seeking to acquire us through a business combination will be compelled to consult first with the Class B common
stockholders in order to negotiate the terms of such business combination. Any such proposed business combination will have to be approved by our board
of directors, which may be under the control of the Class B common stockholder, and if stockholder approval is required, the approval of the Class B
common stockholders will be necessary before any such business combination can be consummated.
Preferred Stock
On December 29, 2010, we amended
our certificate of incorporation to establish a Series A preferred stock, $0.01 par value, and we have issued and currently have outstanding 1,972,500
shares of Series A preferred stock. The Series A preferred stock is convertible into such number of shares of Class A common stock as determined by
dividing the original issue price by the conversion price, which if all of the Series A preferred stock was converted, would result in the issuance of
986,250 shares of our Class A common stock. The preferred stock has no voting rights and, except for certain deemed liquidations as defined
in our certificate of incorporation, has a liquidation preference of $2.00 per share, or $3,945,000 million in the aggregate. Upon the closing of this
offering, each outstanding share of our Series A preferred stock will automatically be converted into one share of Class A common stock, with
approximately 986,250 shares of Class A common stock being issued in the aggregate as a result of the conversion.
Our certificate of incorporation
provides our board of directors with authority to issue shares of preferred stock in series and, by filing a certificate of designations, preferences
and rights under Delaware law, to establish from time to time the number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without any further vote
or action by the shareholders. Any shares of preferred stock so issued are likely to have priority over our common stock with respect to dividend or
liquidation rights. We have no current plans to issue any shares of preferred stock.
Any future issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the shareholders and may adversely
affect the voting and other rights of the holders of Class A common stock, Class B stock and common stock. The issuance of shares of preferred stock,
or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a
series of preferred stock might impede a business combination by including class voting rights that would enable the holder to block such a
transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In
addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common stock.
Although our board of directors is required to make any determination to issue such stock based on its judgment as to the best interests of our
stockholders, the board of directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market
price of such stock. Our board of directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized
preferred stock, unless otherwise required by law.
Underwriters Warrant
We have agreed to issue to one of
the underwriters a warrant to purchase a number of shares of our Class A common stock equal to an aggregate of 1% of the shares of Class A
common stock sold in the offering, other
79
than shares of our Class A common stock covered by the over-allotment option described above. The warrant will have an exercise price equal to 110% of the offering price of the shares of Class A common stock sold in this offering. For additional information regarding these warrants, see Underwriting Underwriting Compensation.
Limitations on Liability and Indemnification of Officers
and Directors
Our certificate of incorporation
eliminates the liability of our directors to us or our stockholders for monetary damages resulting from breaches of their fiduciary duties as
directors. Directors will remain liable for breaches of their duty of loyalty to us or our stockholders, as well as for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law, and transactions from which a director derives improper personal benefit.
Our amended and restated certificate of incorporation does not absolve directors of liability for payment of dividends or stock purchases or
redemptions by us in violation of Section 174 (or any Successor provision of the Delaware General Corporation Law).
The effect of this provision is
to eliminate the personal liability of directors for monetary damages for actions involving a breach of their fiduciary duty of care, including any
such actions involving gross negligence. We do not believe that this provision eliminates the liability of our directors to us or our stockholders for
monetary damages under the federal securities laws. Our amended and restated certificate of incorporation and our bylaws provide indemnification for
the benefit of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law as it may be amended from time to
time, including most circumstances under which indemnification otherwise would be discretionary
Our amended and restated
certificate of incorporation also provides that we will indemnify and hold harmless, to the fullest extent permitted by law any person made or
threatened to be made a party to or otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or was a director, officer, employee or agent of the Company or a trustee,
custodian, administrator, committeeman or fiduciary of any employee benefit plan, or a person serving another corporation, partnership, joint venture,
trust, other enterprise or nonprofit entity in any of the foregoing capacities at our request (collectively, an Authorized Representative).
Expenses covered by this indemnification include attorney fees and disbursements, judgments, fines (including excise and taxes) and amounts paid in
settlement actually and reasonably incurred by such person in connection with such proceeding (collectively, Expenses), whether the basis
of such persons involvement in the proceeding is an alleged act or omission in such persons capacity as an Authorized Representative or in
another capacity while serving in such capacity or both. We shall be required to indemnify an incumbent or former director or officer in connection
with a proceeding initiated by such person only if and to the extent that such proceeding was authorized by our board of directors or is a civil suit
by such person to enforce rights to indemnification or advancement of expenses.
Expenses shall be paid by us in
advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Authorized Representative to
repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by us. Such expenses (including
attorneys fees which are not advanced under the provisions of our amended and restated certificate of incorporation) incurred by an Authorized
Representative may be so paid upon such terms and conditions, if any, as we deem appropriate.
We may enter into agreements to
indemnify any Authorized Representative, in addition to the indemnification provided for in our amended and restated certificate of incorporation.
These agreements, among other things, could indemnify our directors and officers for certain expenses (including advancing expenses for attorneys
fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us or in our right,
arising out of such persons services as a director or officer of us, any subsidiary of ours or any other company or enterprise to which the
person provides services at our request.
In addition, prior to the
completion of this offering, we expect, to secure insurance providing indemnification for our directors and officers for certain liabilities. We
believe that these indemnification provisions and agreements and related insurance are necessary to attract and retain qualified directors and
officers.
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing, or
otherwise, we have been advised that, in
80
the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Transfer Agent and Registrar
The transfer agent and registrar
for our Class A common stock will be Broadridge Investor Communication Solutions Inc. Its address is 51 Mercedes Way, Edgewood, New York 11717, and its
telephone number is (631) 254-7400.
Stock Exchange Listing
We have applied to list our Class
A common stock on The NASDAQ Capital Market under the symbol DCIN.
81
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has
been no public market for our Class A common stock. Future sales of substantial amounts of our Class A common stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing market price of our common stock. No prediction can be made as to the
effect, if any, future sales of shares, or the availability of shares for future sales, will have on the market price of our Class A common stock
prevailing from time to time. The sale of substantial amounts of our Class A common stock in the public market, or the perception that such sales could
occur, could harm the prevailing market price of our Class A common stock.
Sale of Restricted Shares
Upon completion of this offering,
we will have approximately 5,821,607 shares of Class A common stock outstanding. Of these shares of common stock, the shares of common stock
being sold in this offering, will be freely tradable without restriction under the Securities Act, except for any such shares which may be held or
acquired by an affiliate of ours, as that term is defined in Rule 144 promulgated under the Securities Act, which shares will be subject to
the volume limitations and other restrictions of Rule 144 described below. The remaining shares of Class A common stock held or to be held by our
existing stockholders, including 1,052,441 shares of Class A common stock received by the holders of Series A preferred stock upon
conversion (inclusive of 66,191 shares issuable as a dividend accrued through December 31, 2011 on the preferred shares), as well as any shares
of Class B common stock which are converted to Class A common stock, will be restricted securities, as that term is defined in Rule 144,
and may be resold, subject to the lock-up period discussed below under the heading Underwriting Lock-Up Agreements, only after
registration under the Securities Act or pursuant to an exemption from such registration, including, among others, the exemptions provided by Rule 144
under the Securities Act, which rules are summarized below.
Rule 144
In general, under Rule144 as
currently in effect, persons who are not one of our affiliates at any time during the three months preceding a sale may sell shares of our common stock
beneficially held upon the earlier of (1) the expiration of a six-month holding period, if we have been subject to the reporting requirements of the
Exchange Act and have filed all required reports for at least 90 days prior to the date of the sale, or (2) a one-year holding period.
At the expiration of the
six-month holding period, a person who was not one of our affiliates at any time during the three months preceding a sale would be entitled to sell an
unlimited number of shares of our common stock provided current public information about us is available, and a person who was one of our affiliates at
any time during the three months preceding a sale would be entitled to sell within any three-month period a number of shares of common stock that does
not exceed the greater of either of the following:
|
1% of the number of shares of our Class A common stock then outstanding, which will equal approximately 58,216 shares immediately after this offering, based on the number of shares of our Class A common stock outstanding as of March 14, 2012; or |
|
the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
At the expiration of the one-year
holding period, a person who was not one of our affiliates at any time during the three months preceding a sale would be entitled to sell an unlimited
number of shares of our common stock without restriction. A person who was one of our affiliates at any time during the three months preceding a sale
would remain subject to the volume restrictions described above.
Sales under Rule 144 by our
affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about
us.
82
Stock Plans
We intend to file one or more
registration statements on Form S-8 under the Securities Act to register shares of our Class A common stock issued or reserved for issuance under the
2012 plan that we intend to adopt in connection with this offering. The first such registration statement is expected to be filed soon after the date
of this prospectus and will automatically become effective upon filing with the SEC. Accordingly, shares registered under such registration statement
will be available for sale in the open market following the effective date, unless such shares are subject to vesting restrictions with us, Rule 144
restrictions applicable to our affiliates or the lock-up restrictions described below.
Registration Rights
We have agreed to issue to
Dominick & Dominick LLC a warrant to purchase a number of shares of our Class A common stock equal to an aggregate of 1% of the shares of Class A
common stock sold in the offering, other than shares of our Class A common stock covered by the over-allotment option described above. The warrant will
have an exercise price equal to 110% of the offering price of the shares of Class A common stock sold in this offering. The warrant provides for
unlimited piggyback registration rights at our expense with respect to the underlying shares of Class A common stock during the five year
period commencing six months after the effective date of this offering. As a result, whenever we propose to file a registration under the Securities
Act, other than with respect to a registration statement on Form S-4 or Form S-8, the holders of these shares are entitled to notice of the
registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to
include their shares in the registration statement. Registration of the sale of these shares of our Class A common stock, were this to occur, will
facilitate their sell into the market period.
Lock-Up Agreements
In connection with this offering,
officers, directors and existing stockholders, who together hold substantially all of our outstanding capital stock, have agreed, subject to limited
exceptions, not to directly or indirectly sell or dispose of any shares of our Class A common stock, Class B common stock or common stock or any
securities convertible into or exchangeable or exercisable for these securities for a period of 180 days after the date of this prospectus (or such
earlier date or dates as agreed between us and Dominick & Dominick LLC), and in specific circumstances, up to an additional 34 days, without the
prior written consent of Dominick & Dominick LLC on behalf of the underwriters. For additional information, see Underwriting Lock-Up
Agreements.
83
UNDERWRITING
Dominick & Dominick LLC and
Maxim Group LLC are acting as joint book-running managers of this offering and representatives of the underwriters. Subject to the terms and conditions
set forth in an underwriting agreement among us and the underwriters, each of the underwriters named below has severally agreed to purchase from us the
following respective number of shares of Class A common stock:
Underwriter |
Number of Shares |
|||||
---|---|---|---|---|---|---|
Dominick
& Dominick LLC |
||||||
Maxim Group
LLC |
||||||
Total
|
4,200,000 |
The underwriting agreement
provides that the obligations of the underwriters are subject to certain conditions, including the approval of legal matters by their counsel. The
nature of the underwriters obligations is that they are committed to purchase and pay for all of the above shares of Class A common stock, other
than shares of our common stock covered by the over-allotment option described below, if any are purchased.
The underwriters do not expect to
sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
Public Offering Price and Dealers
Concession
The underwriters propose
initially to offer the shares of common stock offered by this prospectus directly to the public at the public offering price per share set forth on the
cover page of this prospectus, and to certain dealers at that price less a concession not in excess of $ per share.
The underwriters may allow, and these dealers may re-allow, a discount not in excess of $ per share on sales to
certain other dealers. After commencement of this offering, the offering price, discount price and re-allowance may be changed by the underwriters. No
such change will alter the amount of proceeds to be received by us as set forth on the cover page of this prospectus.
Over-allotment Option
If the underwriters sell more
shares than the total number set forth in the table above, the underwriters have a 45-day option to purchase up to an additional 630,000 shares
of Class A common stock from us at the offering price less the underwriting discounts and commissions to cover these sales. If any shares of Class A
common stock are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the
table above.
Directed Share Program
At our request, the underwriters
have reserved for sale at the initial public offering price up to 210,000 shares of Class A common stock offered hereby for officers, directors,
employees and certain other persons associated with us and members of their respective families. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares of Class A common stock. We have agreed with the underwriters that any
reserved shares of Class A common stock not so purchased will be offered by the underwriters to the general public on the same basis as the other
shares of Class A common stock offered hereby. We have agreed to indemnify the underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, in connection with the sales of the reserved shares of Class A common stock.
Underwriting Compensation
The underwriting fee is equal to
the public offering price per share of Class A common stock less the amount paid by the underwriters to us per share of Class A common stock. The
following table summarizes the compensation to be paid to the underwriters by us in connection with this offering, including the per share and total
underwriting discounts and commissions to be paid to the underwriters by us. These amounts are shown assuming both no exercise and full exercise of the
underwriters option to purchase up to additional 630,000 shares of Class A common stock.
84
Total |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Per Share |
No Exercise |
Full Exercise |
||||||||||||
Public
offering price |
||||||||||||||
Underwriting
discount and commissions |
||||||||||||||
Proceeds to
us (before expenses) |
We have also agreed to issue to
Dominick & Dominick LLC a warrant to purchase a number of shares of our Class A common stock equal to an aggregate of 1% of the shares of Class A
common stock sold in the offering, other than shares of our Class A common stock covered by the over-allotment option described above. The warrant will
have an exercise price equal to 110% of the offering price of the shares of Class A common stock sold in this offering. The warrant is exercisable
commencing six months after the effective date of this offering, and will be exercisable, in whole or in part, for five years after the effective date
of this offering. The warrant is not redeemable by us, and allows for cashless exercise. The warrant also provides for unlimited
piggyback registration rights at our expense with respect to the underlying shares of Class A common stock during the five year period
commencing six months after the effective date of this offering. Pursuant to the rules of FINRA, and in particular Rule 5110, the warrant (and
underlying shares) may not be sold, transferred, assigned, pledged, or hypothecated, or the subject of any hedging, short sale, derivative, put or call
transaction that would result in the effective disposition of the securities by any person for a period of 180 days immediately following the effective
date of this offering; provided, however, that the warrant (and underlying shares) may be transferred to officers or partners of the underwriters and
members of the underwriting syndicate as long as the warrant (and underlying shares) remains subject to the lockup.
Further, we have agreed (a) to
pay an advisory fee of $100,000 to Dominick & Dominick LLC, (b) to reimburse Dominick & Dominick LLC for reasonable legal fees not to exceed
$135,000, (c) to pay advances to Dominick & Dominick LLC in the aggregate of $40,000 refundable only to the extent expenses are not actually
incurred in excess of $40,000, and (d) to grant Dominick & Dominick LLC a right of first refusal to provide investment banking services in
connection with all capital raising transactions for which the Company seeks investment banking services for a period of 12 months following the
consummation of this offering.
Other Offering Expenses, Acceptance and
Delivery
We estimate that the total
expenses of the offering, excluding underwriting discounts and commissions, will be approximately $882,000. The offering of the shares of Class
A common stock is made for delivery, when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of our shares in whole or in
part.
Indemnification of Underwriters
We have agreed to indemnify the
underwriters against certain civil liabilities, including liabilities under the Securities Act, and, where such indemnification is unavailable,
contribute to payments the underwriters may be required to make in connection with these liabilities.
Lock-Up Agreements
We and certain of our directors,
executive officers and shareholders holding an aggregate of approximately 1,621,607 shares of our Class A common stock and 900,000
shares of Class B common stock have entered into lock-up agreements pursuant to which they have agreed not to, directly or indirectly, issue, sell,
agree to sell, grant any option or contract for the sale of, pledge or otherwise dispose of, or, in any manner, transfer all or a portion of any shares
of Class A common stock or Class B common stock or any securities convertible into or exercisable or exchangeable for such securities or any interest
therein owned as of the date hereof or hereafter acquired for a period of 180 days after the date of this prospectus without the prior written consent
of Dominick & Dominick LLC. If: (1) during the last 17 days of the lock-up period referred to above, we issue an earnings release or material news
or a material event relating to us occurs or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results or
become aware that material news or a material event will occur during the
85
16-day period beginning on the last day of the lock-up period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. Dominick & Dominick LLC has advised us that it has no present intention to release any of the shares subject to the lock-up agreements prior to the expiration of the lock-up period.
Price Stabilization, Short Positions and Penalty
Bids
In connection with this offering,
the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our Class A common stock. These
transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M under the Securities Exchange Act, pursuant to
which the underwriters may make any bid for, or purchase, common stock for the purpose of stabilizing the market price. The underwriters also may
create a short position by selling more shares of Class A common stock in connection with this offering than it is committed to purchase from us, and
in such case may purchase shares of Class A common stock in the open market following completion of this offering to cover all or a portion of such
short position. In addition, the underwriters may impose penalty bids whereby they may reclaim from a dealer participating in this
offering, the selling concession with respect to the shares of Class A common stock that such dealer distributed in this offering, but which was
subsequently purchased for the accounts of the underwriter in the open market. Any of the transactions described in this paragraph may result in the
maintenance of the price of shares of Class A common stock at a level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required and, if they are undertaken, they may be discontinued at any time.
Electronic Offer, Sale and Distribution of
Shares
In connection with this offering,
certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, one or more of the
underwriters may facilitate Internet distribution for this offering to certain of its Internet subscription customers. One or more of the underwriters
may allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet web site
maintained by certain underwriters. Other than the prospectus in electronic format, the information on such underwriters web sites is not part of
this prospectus.
NASDAQ Capital Market Listing
We have applied to list our Class
A common stock on The NASDAQ Capital Market under the symbol DCIN.
Pricing of this Offering
Before this offering, there has
been no public market for our Class A common stock. The initial public offering price will be determined through negotiations between us and the
underwriters. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price
are:
|
the valuation multiples of publicly traded companies that the representatives believe to be comparable to us; |
|
our financial information; |
|
the history of, and the prospects for, our company and the industry in which we compete; |
|
an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues; |
|
the present state of our development; and |
|
the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. |
An active trading market for the
shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public
offering price.
86
LEGAL MATTERS
Eaton & Van Winkle LLP, 3
Park Avenue, 16th Floor, New York, New York 10016 will pass upon the validity of the Class A common stock offered hereby on our behalf. The
underwriters are being represented by Kramer Levin Naftalis & Frankel LLP, New York, New York.
EXPERTS
The consolidated balance sheet as
of June 30, 2011 and the related consolidated statements of operations, stockholders equity and cash flows from the inception period (July 29,
2010) to June 30, 2011 of Digital Cinema Destinations Corp. and its subsidiaries (Successor), the combined balance sheet as of December 31,
2010 and the related combined statements of operations, stockholders equity and cash flows for each of the years in the two year period ended
December 31, 2010, of the Rialto Theatre of Westfield, Inc. and Cranford Theatre, Inc. (collectively, the Predecessor), the balance sheets
as of October 31, 2011 and 2010 and the related statements of operations, stockholders equity and cash flows for the two years then ended of
Cinema Supply, Inc, the balance sheets as of December 31, 2011 and 2010 and the related statements of operations, stockholders deficit and cash
flows for the two years then ended of Lisbon Theaters, Inc. and the statements of operations, members deficit and cash flows for each of the
years in the two-year period ended December 31, 2010 of K&G Theatres LLC, included in this prospectus have been audited by EisnerAmper LLP, an
independent registered public accounting firm, as stated in their reports appearing herein. Such consolidated and combined financial statements have
been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a
registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the shares of our common stock offered
hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules filed therewith. For further information with respect to us and the common stock offered hereby, reference is
made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of
any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is
qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration
statement.
Upon completion of this offering,
we will become subject to the information and periodic and current reporting requirements of the Exchange Act, and in accordance therewith, will file
periodic and current reports, proxy statements and other information with the SEC. The registration statement, such periodic and current reports and
other information can be inspected and copied at the Public Reference Room of the SEC located at 100F Street, N.E., Washington, D.C. 20549. Copies of
such materials, including copies of all or any portion of the registration statement, can be obtained from the Public Reference Room of the SEC at
prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room. Such materials may also
be accessed electronically by means of the SECs website at www.sec.gov.
87
INDEX TO FINANCIAL STATEMENTS
Digital Cinema Destinations Corp. and
Subsidiaries
Report of
Independent Registered Public Accounting Firm |
F- 3 | |||||
Consolidated
balance sheet as of June 30, 2011 (Successor); and combined balance sheet as of December 31, 2010 (Predecessor) |
F- 4 | |||||
Consolidated
statement of operations for the period from inception (July 29, 2010) to June 30, 2011 (Successor); and combined statement of operations for the years
ended December 31, 2010 and 2009 (Predecessor) |
F- 5 | |||||
Combined
statement of stockholders equity for the years ended December 31, 2010 and 2009 (Predecessor); and consolidated statement of stockholders
equity from inception date (July 29, 2010) to June 30, 2011 (Successor) |
F- 6 | |||||
Consolidated
statements of cash flows for the period from inception date (July 29, 2010) to June 30, 2011 (Successor); and combined statements of cash flows for the
years ended December 31, 2010 and 2009 (Predecessor) |
F- 7 | |||||
Notes to
consolidated financial statements |
F- 8 |
Digital Cinema Destinations Corp. and
Subsidiaries
Condensed
consolidated balance sheets as of December 31, 2011 and June 30, 2011 (Successor) |
F- 23 | |||||
Condensed
consolidated statements of operations for the six months ended December 31, 2011 and for the period from inception (July 29, 2010) to December 31, 2010
(Successor); and the condensed combined statement of operations for the six months ended December 31, 2010 (Predecessor) |
F- 24 | |||||
Condensed
consolidated statements of cash flows for the six months ended December 31, 2011 and for the period from inception (July 29, 2010) to December 31, 2010
(Successor); and the condensed combined statement of cash flows for the six months ended December 31, 2010 (Predecessor) |
F- 25 | |||||
Notes to
consolidated financial statements |
F- 26 |
Cinema Supply, Inc. Financial Statements as of October 31,
2011 and 2010 and for the years ended October 31, 2011 and 2010
Report of
Independent Registered Public Accounting Firm |
F- 35 | |||||
Balance
sheets |
F- 36 | |||||
Statements of
operations |
F- 37 | |||||
Statement of
stockholders equity |
F- 38 | |||||
Statements of
cash flows |
F- 39 | |||||
Notes to
financial statements |
F- 40 |
Cinema Supply, Inc. Condensed Financial Statements as of
January 31, 2012 and October 31, 2011 and for the three months ended January 31, 2012 and 2011.
Condensed
balance sheets |
F- 50 | |||||
Condensed
statements of operations |
F- 51 | |||||
Condensed
statements of cash flows |
F- 52 | |||||
Notes to
condensed financial statements |
F- 53 |
F-1
Lisbon Theaters, Inc. Financial Statements as of December 31,
2011 and 2010 and for the years ended December 31, 2011 and 2010
Report of
Independent Registered Public Accounting Firm |
F- 61 | |||||
Balance
sheets |
F- 62 | |||||
Statements of
operations |
F- 63 | |||||
Statement of
stockholders deficit |
F- 64 | |||||
Statements of
cash flows |
F- 65 | |||||
Notes to
financial statements |
F- 66 |
K&G Theatres LLC Financial Statements for the years ended
December 31, 2010 and 2009
Report of
Independent Registered Public Accounting Firm |
F- 74 | |||||
Statements of
operations |
F- 75 | |||||
Statement of
members deficit |
F- 76 | |||||
Statements of
cash flows |
F- 77 | |||||
Notes to
financial statements |
F- 78 |
F-2
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Stockholders of Digital Cinema Destinations Corp.
We have audited the accompanying consolidated balance sheet
of Digital Cinema Destinations Corp. and subsidiaries (Successor) as of June 30, 2011 and the related consolidated statements of
operations, stockholders equity, and cash flows for the period from inception (July 29, 2010) to June 30, 2011 (Successor Period). We have also
audited the combined balance sheet of Rialto Theatre of Westfield, Inc. and Cranford Theatre, Inc. (collectively, the Predecessor) as of
December 31, 2010 and the related combined statements of operations, stockholders equity and cash flows for each of the years in the two-year
period ended December 31, 2010 (Predecessor Periods). These financial statements are the responsibility of management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Successor and the Predecessor are not required to have, nor
were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinions on the effectiveness of the Successors and Predecessors internal control over financial reporting. Accordingly, we express no such
opinions. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinions.
In our opinion, the aforementioned Successor consolidated
financial statements present fairly, in all material respects, the consolidated financial position of Digital Cinema Destinations Corp. and
subsidiaries as of June 30, 2011 and the consolidated results of their operations and their cash flows for the Successor Period, in conformity with
accounting principles generally accepted in the United States of America. Further, in our opinion, the aforementioned Predecessor combined financial
statements present fairly, in all material respects, the combined financial position of Rialto Theatre of Westfield, Inc. and Cranford Theatre, Inc. as
of December 31, 2010 and the combined results of their operations and their cash flows for the Predecessor Periods, in conformity with accounting
principles generally accepted in the United States of America.
/s/ EISNERAMPER LLP
Edison, New Jersey
January 20, 2012
January 20, 2012
F-3
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Successor Company |
|
Predecessor Company |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
June 30, 2011 |
|
December 31, 2010 |
||||||||
ASSETS |
||||||||||
CURRENT
ASSETS |
||||||||||
Cash and cash
equivalents |
$ | 1,068 | $ | 160 | ||||||
Accounts
receivable |
35 | | ||||||||
Inventories |
19 | 19 | ||||||||
Prepaid
expenses and other |
65 | | ||||||||
Total current
assets |
1,187 | 179 | ||||||||
Properties
and equipment, net |
2,251 | 1,037 | ||||||||
Goodwill |
896 | | ||||||||
Intangible
assets, net |
573 | | ||||||||
Security
deposit |
3 | | ||||||||
TOTAL
ASSETS |
$ | 4,910 | $ | 1,216 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||
CURRENT
LIABILITIES |
||||||||||
Accounts
payable and accrued expenses |
$ | 586 | $ | 227 | ||||||
Payable to
vendor for digital systems |
1,066 | | ||||||||
Earn out from
theatre acquisition |
124 | | ||||||||
Dividends
payable |
112 | | ||||||||
Line of
credit |
| 29 | ||||||||
Total current
liabilities |
1,888 | 256 | ||||||||
NONCURRENT
LIABILITIES |
||||||||||
Deferred rent
expense |
20 | | ||||||||
Deferred tax
liability |
12 | | ||||||||
TOTAL
LIABILITIES |
1,920 | 256 | ||||||||
COMMITMENTS
AND CONTINGENCIES |
||||||||||
STOCKHOLDERS EQUITY |
||||||||||
Series A
Preferred Stock, $.01 par value: 10,000,000 shares authorized and 1,772,500 shares issued and outstanding |
18 | | ||||||||
Common Stock,
no par, 2,000 shares authorized and 200 shares issued and outstanding |
| 5 | ||||||||
Class A
Common stock, $.01 par value: 20,000,000 shares authorized and 569,166 shares issued and outstanding |
6 | | ||||||||
Class B
Common stock, $.01 par value, 5,000,000 shares authorized and 900,000 shares issued and outstanding |
9 | | ||||||||
Additional
paid-in-capital |
3,747 | 336 | ||||||||
Accumulated
(deficit) earnings |
(790 | ) | 619 | |||||||
Total
stockholders equity |
2,990 | 960 | ||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 4,910 | $ | 1,216 |
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Successor Company |
|
Predecessor Company |
|
Predecessor Company |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Inception date (July 29, 2010) to June 30, 2011 |
|
Year ended December 31, 2010 |
|
Year ended December 31, 2009 |
|
|||||||||||||
REVENUES |
||||||||||||||||||
Admissions |
$ | 1,158 | $ | 1,529 | $ | 1,876 | ||||||||||||
Concession |
382 | 627 | 660 | |||||||||||||||
Other |
32 | | | |||||||||||||||
Total
revenues |
1,572 | 2,156 | 2,536 | |||||||||||||||
COSTS AND
EXPENSES |
||||||||||||||||||
Cost of
operations: |
||||||||||||||||||
Film rent
expense |
598 | 841 | 1,032 | |||||||||||||||
Cost of
concessions |
66 | 94 | 143 | |||||||||||||||
Salaries and
wages |
235 | 273 | 234 | |||||||||||||||
Facility
lease expense |
223 | 238 | 111 | |||||||||||||||
Utilities and
other |
258 | 352 | 375 | |||||||||||||||
General and
administrative expenses |
900 | 441 | 412 | |||||||||||||||
Depreciation
and amortization |
165 | 141 | 117 | |||||||||||||||
Total costs
and expenses |
2,445 | 2,380 | 2,424 | |||||||||||||||
OPERATING
(LOSS) INCOME |
(873 | ) | (224 | ) | 112 | |||||||||||||
OTHER INCOME
(EXPENSE) |
||||||||||||||||||
Bargain
purchase gain from theatre acquisition |
98 | | | |||||||||||||||
Interest |
| (5 | ) | (3 | ) | |||||||||||||
Other |
(1 | ) | | | ||||||||||||||
INCOME (LOSS)
BEFORE INCOME TAXES |
(776 | ) | (229 | ) | 109 | |||||||||||||
Income
taxes |
14 | | | |||||||||||||||
NET (LOSS)
INCOME |
(790 | ) | (229 | ) | 109 | |||||||||||||
Preferred
stock dividends |
(112 | ) | | | ||||||||||||||
Net loss
attributable to common stockholders |
$ | (902 | ) | $ | (229 | ) | $ | 109 | ||||||||||
Net loss per
Class A and Class B common share basic and diluted |
$ | (0.84 | ) | $ | | $ | | |||||||||||
Weighted
average number of Class A and Class B common shares outstanding: |
||||||||||||||||||
Basic and
diluted |
1,073,207 | | |
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands, except share data)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands, except share data)
Common Stock | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Additional Paid-in capital |
Retained earnings (Deficit) |
Total Stockholders Equity |
||||||||||||||||||
Balance,
December 31, 2008 (Predecessor) |
$ | 200 | $ | 5 | $ | | $ | 739 | $ | 744 | ||||||||||||
Net
income |
| | 109 | 109 | ||||||||||||||||||
Capital
contributions |
| 280 | 280 | |||||||||||||||||||
Balance,
December 31, 2009 (Predecessor) |
200 | 5 | 280 | 848 | 1,133 | |||||||||||||||||
Net
loss |
| | (229 | ) | (229 | ) | ||||||||||||||||
Capital
contributions |
| 56 | | 56 | ||||||||||||||||||
Balance,
December 31, 2010 (Predecessor) |
$ | 200 | $ | 5 | $ | 336 | $ | 619 | $ | 960 |
Inception date (July 29, 2010) to June 30, 2011 (Successor) |
Series A Preferred Stock |
Class A Common Stock |
Class B Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders Equity |
||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||||||||||
Balance
(Inception date) July 29, 2010 |
| $ | | | $ | | | $ | | $ | | $ | | $ | | |||||||||||||||||||||||||||
Issuance of
common stock to founders |
450,000 | 5 | 900,000 | 9 | 401 | 415 | ||||||||||||||||||||||||||||||||||||
Issuance of
common stock to employees, board members and non-employees |
119,166 | 1 | 185 | 186 | ||||||||||||||||||||||||||||||||||||||
Issuance of
Series A preferred stock to investors |
1,772,500 | 18 | 3,527 | 3,545 | ||||||||||||||||||||||||||||||||||||||
Stock issuance
costs |
(254 | ) | (254 | ) | ||||||||||||||||||||||||||||||||||||||
Preferred
dividends |
(112 | ) | (112 | ) | ||||||||||||||||||||||||||||||||||||||
Net
loss |
(790 | ) | (790 | ) | ||||||||||||||||||||||||||||||||||||||
Balance, June
30, 2011 (Successor) |
1,772,500 | $ | 18 | 569,166 | $ | 6 | 900,000 | $ | 9 | $ | 3,747 | $ | (790 | ) | $ | 2,990 |
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Successor Company |
|
Predecessor Company |
|
Predecessor Company |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Inception date (July 29, 2010) to June 30, 2011 |
|
Year ended December 31, 2010 |
|
Year ended December 31, 2009 |
|
|||||||||||||
Cash flows
from operating activities |
||||||||||||||||||
Net (loss)
income |
$ | (790 | ) | $ | (229 | ) | $ | 109 | ||||||||||
Adjustments
to reconcile net (loss) income to net cash provided by (used in) operating activities: |
||||||||||||||||||
Bargain
purchase gain from theatre acquisition |
(98 | ) | | | ||||||||||||||
Depreciation
and amortization |
165 | 141 | 117 | |||||||||||||||
Deferred tax
expense |
12 | | | |||||||||||||||
Stock-based
compensation |
186 | | | |||||||||||||||
Changes in
operating assets and liabilities: |
||||||||||||||||||
Inventories
|
(19 | ) | (13 | ) | 1 | |||||||||||||
Accounts
receivable |
(35 | ) | | | ||||||||||||||
Prepaid
expenses and other current assets |
(65 | ) | | | ||||||||||||||
Security
deposit |
(3 | ) | | | ||||||||||||||
Accounts
payable and accrued expenses |
586 | 53 | 14 | |||||||||||||||
Payable to
vendor for digital systems |
1,066 | | | |||||||||||||||
Deferred rent
expense |
20 | | | |||||||||||||||
Net cash
provided by (used in) operating activities |
1,025 | (48 | ) | 241 | ||||||||||||||
Cash flows
from investing activities |
||||||||||||||||||
Purchases of
property and equipment |
(1,850 | ) | (84 | ) | (676 | ) | ||||||||||||
Acquisition
of Rialto/Cranford theatres |
(1,200 | ) | | | ||||||||||||||
Acquisition
of Bloomfield theatre |
(113 | ) | | | ||||||||||||||
Net cash used
in investing activities |
(3,163 | ) | (84 | ) | (676 | ) | ||||||||||||
Cash flows
from financing activities |
||||||||||||||||||
Capital
invested by owner |
| 56 | 280 | |||||||||||||||
(Repayments)
borrowings of line of credit |
| (64 | ) | 54 | ||||||||||||||
Proceeds from
issuance of common stock |
415 | | | |||||||||||||||
Proceeds from
issuance of Series A preferred stock |
3,045 | | | |||||||||||||||
Costs
associated with issuance of common and preferred stock |
(254 | ) | | | ||||||||||||||
Net cash
provided by (used in) financing activities |
3,206 | (8 | ) | 334 | ||||||||||||||
Net change in
cash and cash equivalents |
1,068 | (140 | ) | (101 | ) | |||||||||||||
Cash and cash
equivalents at beginning of period |
| 300 | 401 | |||||||||||||||
Cash and cash
equivalents at end of period |
$ | 1,068 | $ | 160 | $ | 300 |
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
1. |
THE COMPANY AND BASIS OF PRESENTATION |
Digital Cinema Destinations Corp.
(Digiplex) and together with its subsidiaries (the Company or the Successor) was incorporated in the State of
Delaware on July 29, 2010. Digiplex is the parent company of its wholly owned subsidiaries, DC Westfield LLC, DC Cranford LLC, DC Bloomfield LLC (the
Theatres), and DC Cinema Centers LLC., with the intent to acquire businesses operating in the movie exhibition industry sector. Digiplex,
through its subsidiaries, operates three theatres with 19 screens in Westfield (the Rialto) and Cranford, (the Cranford), New
Jersey and Bloomfield, Connecticut (the Bloomfield 8). As described in Note 8, the Company formed DC Cinema Centers LLC for the purpose of
acquiring certain theatres in Pennsylvania. As of June 30, 2011, DC Cinema Centers LLC had no assets or operations.
On December 31, 2010, the Company
purchased the assets of Rialto Theatre of Westfield, Inc. and Cranford Theatre, Inc. (collectively, the Predecessor). Digiplex had minimal
operations prior to the acquisition of the Predecessor. The Successors financial statements includes the operating results of Digiplex from the
inception date (July 29, 2010) and the operating results of the Predecessor from December 31, 2010 (acquisition date by the Company). The
Predecessors combined financial statements are presented and contain the operating results of the Predecessor for the two-year period ended
December 31, 2010. The Successor and the Predecessor are collectively referred to as the Companies.
As a result of the application of
acquisition accounting and valuation of assets and liabilities at fair value as of the date of acquisition, the consolidated financial statements of
the Successor are not comparable with the Predecessor.
On February 17, 2011, the
Successor acquired the assets of Bloomfield 8. The operating results of Bloomfield 8 from February 17, 2011 are included in the Successors
results of operations.
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Principles of Consolidation
and Combination
The consolidated financial
statements of the Successor include the accounts of Digiplex and its subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
The combined financial statements
of the Predecessor include the accounts of Rialto and Cranford.
Use of
Estimates
The preparation of consolidated
and combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated and combined financial statements and the reported amounts of revenues and expenses during the reporting period. Significant
estimates include, but are not limited to, those related to film rent expense settlements, depreciation and amortization, impairments, income taxes and
assumptions used in connection with acquisition accounting. Actual results could differ from those estimates.
Stock
Split
In November 2011, the
Successors Board of Directors approved a one-for-two reverse stock split of the Class A and Class B common stock. All share amounts and per share
amounts for the Successor periods presented have been adjusted retroactively to reflect the one-for-two stock split. See Note 15.
Revenue
Recognition
Revenues are generated
principally through admissions and concessions sales on feature film displays, with proceeds received in cash or credit card at the Companies point of
sale terminal at the Theatres. Revenue is recognized at the point of sale. Credit card sales are normally settled in cash within approximately three
business
F-8
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
days from the point of sale, and any credit card chargebacks have been insignificant. Other operating revenues consist of theatre rentals for parties, camps, civic groups and other activities. In addition to traditional feature films, the Companies also display concerts, sporting events, childrens programming and other non-traditional content on their screens (such content referred to herein as alternative content). Revenue for alternative content also consists of admissions and concession sales. The Companies also sell theatre admissions in advance of the applicable event, and sells gift cards for patrons future use. The Companies defer the revenue from such sales until considered redeemed, and such sales were insignificant for the period from inception (July 29, 2010) to June 30, 2011 and for the years ended December 31, 2010 and 2009.
Cash
Equivalents
The Companies consider all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents. At June 30, 2011 and December 31, 2010, the
Companies held substantially all of their cash in checking or money market accounts with major financial institutions, and had cash on hand at the
Theatres in the normal course of business.
Accounts
receivable
Accounts receivable are recorded
at the invoiced amount and do not bear interest. The Successor reports accounts receivable net of any allowance for doubtful accounts to represent the
Successors estimate of the amount that ultimately will be realized in cash. The Successor reviews collectability of accounts receivable based on
the aging of the accounts and historical collection trends. When the Successor ultimately concludes a receivable is uncollectible, the balance is
written off. The predecessor did not have accounts receivable.
Inventories
Inventories consist of food and
beverage concession products and related supplies. The Companies state inventories on the basis of the first-in, first-out method, stated at the lower
of cost or market.
Property and
Equipment
Property and equipment are stated
at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective
assets are expensed currently.
The Companies record depreciation
and amortization using the straight-line method, over the following estimated useful lives:
Furniture and
fixtures |
57
years |
|||||
Leasehold
improvements |
Lesser of
lease term or asset life |
|||||
Digital systems
and related equipment |
10
years |
|||||
Computer
equipment and software |
3
years |
|||||
Equipment |
7
years |
Impairment of Long-Lived
Assets
Long-lived assets, including
definite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the
assets may not be fully recoverable. The Companies generally evaluate assets for impairment on an individual theatre basis, which management believes
is the lowest level for which there are identifiable cash flows. If the sum of the expected future cash flows, undiscounted and without interest
charges, is less than the carrying amount of the assets, the Companies recognize an impairment charge in the amount by which the carrying value of the
assets exceeds their fair value.
The Companies consider actual
theatre level cash flows, future years budgeted theatre level cash flows, theatre property and equipment carrying values, amortizing intangible asset
carrying values, the age of a recently built
F-9
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
theatre, competitive theatres in the marketplace, the impact of recent ticket price changes, available lease renewal options and other factors considered relevant in its assessment of impairment of individual theatre assets. The fair value of assets is determined using the present value of the estimated future cash flows or the expected selling price less selling costs for assets of which the Companies expect to dispose. Significant judgment is involved in estimating cash flows and fair value.
Based on the Companies
analysis, there was no impairment charges recorded for any of the periods presented.
Leases
All of the Successors
operations are conducted in premises occupied under non-cancelable lease agreements with initial base terms approximating 10 years. The Successor, at
its option, can renew the leases at defined rates for various periods. All leases for the Successors Theatres provide for contingent rentals
based on the revenue results of the underlying theatre and require the payment of taxes, insurance, and other costs applicable to the property. All
leases contain escalating minimum rental provisions. There are no conditions imposed upon the Successor by its lease agreements or by parties other
than the lessor that legally obligate the Successor to incur costs to retire assets as a result of a decision to vacate its leased properties. None of
the leases require the Successor to return the leased property to the lessor in its original condition (allowing for normal wear and tear) or to remove
leasehold improvements. The Companies account for leased properties under the provisions of ASC Topic 840, Leases and other authoritative accounting
literature. The Successor does not believe that exercise of the renewal options in its leases are reasonably assured at the inception date of the lease
agreements because the leases: (i) provide for either (a) renewal rents based on market rates or (b) renewal rents that equal or exceed the initial
rents, and (ii) do not impose economic penalties upon our determination of whether or not to exercise the renewal option. As a result, there are not
sufficient economic incentives at the inception of our leases, or to consider that lease renewal options are reasonably assured of being exercised and
therefore, the Successor generally considers the initial base lease term under ASC Subtopic 840-10.
Goodwill
The carrying amount of goodwill
at June 30, 2011 was $896. The Successor evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate.
Under ASC Subtopic 350-20, Intangibles Goodwill and Other Goodwill, the Successor has identified its reporting units to be the designated
market areas in which the Successor conducts its theatre operations. The Successor determines fair value by using an enterprise valuation methodology
determined by applying multiples to cash flow estimates less any net indebtedness, which the Successor believes is an appropriate method to determine
fair value. There is considerable management judgment with respect to cash flow estimates and appropriate multiples and discount rates to be used in
determining fair value and such management estimates fall under Level 3 within the fair value measurement hierarchy. The Successors goodwill
impairment assessments as of June 30, 2011 indicated that the fair value of each of its reporting units exceeded their carrying value and therefore,
goodwill was not deemed to be impaired. The Predecessor did not have any goodwill.
Intangible
Assets
As of June 30, 2011, finite-lived
intangible assets totaled $641, before accumulated amortization of $68. Intangible assets to date are the result of acquisitions, are recorded
initially at fair value, and are amortized on a straight-line basis over the estimated remaining useful lives of the assets. See Note 3 for
acquisitions. The Successor did not record an impairment of any intangible assets as of June 30, 2011. The Predecessor did not have any intangible
assets.
F-10
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Concentration of Credit
Risk
Financial instruments that could
potentially subject the Companies to concentration of credit risk, if held, would be included in accounts receivable. Collateral is not required on
trade accounts receivables. It is anticipated that in the event of default, normal collection procedures would be followed.
Fair Value of Financial
Instruments
The carrying amounts of cash,
cash equivalents, accounts receivable and accounts payable, approximate their fair values, due to their short term nature.
Income
Taxes
Deferred tax assets and
liabilities are recognized by the Successor for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. The Successor records a valuation allowance if it is deemed more likely than not that its deferred income tax assets will not be
realized. The Successor expects that certain deferred income tax assets are not more likely than not to be recovered and therefore has established a
valuation allowance. The Successor reassesses its need for the valuation allowance for its deferred income taxes on an ongoing basis.
Additionally, income tax rules
and regulations are subject to interpretation, require judgment by the Companies and may be challenged by the taxation authorities. In accordance with
ASC Subtopic 740-10, the Companies recognizes a tax benefit only for tax positions that are determined to be more likely than not sustainable based on
the technical merits of the tax position. With respect to such tax positions for which recognition of a benefit is appropriate, the benefit is measured
at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions are evaluated on an
ongoing basis as part of the Companies process for determining the provision for income taxes. Any interest and penalties determined to result from
uncertain tax positions will be classified as interest expense and other expense.
No provision has been made in the
combined financial statements for income taxes for the Predecessor because the Predecessor reports its income and expenses as a Sub chapter S
Corporation, whereby all income and losses are taxed at the shareholder level.
Deferred Rent
Expense
The Successor recognizes rent
expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease
over its term. The Predecessor did not have rent escalation provisions and therefore had no deferred rent expense.
Film Rent
Expense
The Companies estimate film rent
expense and related film rent payable based on managements best estimate of the ultimate settlement of the film costs with the film distributors.
Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The length of
time until these costs are known with certainty depends on the ultimate duration of the films theatrical run, but is typically
settled within one to two months of a particular films opening release. Upon settlement with the film distributors, film rent expense
and the related film rent payable is adjusted to the final film settlement. The film rent expense on the statement of operations of the Successor for
the period from inception (July 29, 2010) to June 30, 2011 was reduced by $35 of virtual print fees (VPFs) under a master license agreement
exhibitor-buyer arrangement with a third party vendor. VPF represent a reduction in film rent paid to film distributors. Pursuant to this master
license
F-11
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
agreement, the Successor will purchase and own digital cinema projection equipment and the third party vendor, through their agreements with film distributors, will collect and remit VPFs to the Successor, net of a 10% administrative fee. The administrative fee is included in the statement of operations. The Successor also paid a one time activation fee of $2,000 per digital projection equipment upon installation. This amount is capitalized as part of property and equipment and is being amortized over the expected useful life 10 years for the digital projection equipment VPFs are generated based on initial display of titles on the digital projection equipment.
Advertising and Start-Up
Costs
The Companies expense advertising
costs as incurred. Start-up costs associated with establishing Digiplex and each subsidiary were also expensed as incurred. The amount of advertising
expense and start-up costs incurred by the Successor from the inception date (July 29, 2010) to June 30, 2011 was $8 and $39, respectively. For the
Predecessor, advertising costs incurred for the years ended December 31, 2010 and 2009 were $1 and $10, respectively.
Stock-Based
Compensation
The Successor recognizes
stock-based compensation expense to employees based on the fair value of the award at the grant date with expense recognized over the service period,
which is usually the vesting period for employees, using the straight-line recognition method of awards subject to graded vesting. The Successor
determined fair value based on analysis of discounted cash flows and market comparisons. The Successor recognizes an estimate for forfeitures of
unvested awards. These estimates are adjusted as actual forfeitures differ from the estimate.
The Successor has also issued
common stock to non-employees in exchange for services. The Successor measures at fair value at the earlier of the date the performance commitment is
reached or when performance is complete. The expense recognized is based on the fair value of the stock issues for services, determined by analysis of
discounted cash flows.
The Predecessor had no
stock-based compensation.
Segments
As of June 30, 2011 and December
31, 2010, the Companies managed its business under one reportable segment: theatre exhibition operations. All of the Companies operations are
located in the United States.
Acquisitions
The Successor accounts for
acquisitions under the acquisition method of accounting. The acquisition method requires that the acquired assets and liabilities, including
contingencies, be recorded at fair value determined on the acquisition date. The Successor determined the fair value of the assets acquired and
liabilities assumed using a number of estimates and assumptions that could differ materially from the actual amounts recorded. The results of the
acquired businesses are included in the Successors results from operations from the respective dates of acquisition (see Note 3). The Predecessor
did not acquire any businesses in 2010.
Recent Accounting
Pronouncements
In October 2009, the FASB issued
ASU 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which requires an entity to allocate consideration at the
inception of an arrangement to all of its deliverables based on their relative selling prices. This consensus eliminates the use of the residual method
of allocation and requires allocation using the relative selling-price method in all circumstances in which an entity recognizes revenue for an
arrangement with multiple deliverables. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Successor adopted ASU
2009-13 and its adoption did not have a material impact on the Successors consolidated financial statements.
F-12
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
In January 2010, the FASB issued
ASU No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires some new disclosures
and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, Fair Value Measurements and
Disclosures. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. The Companies have adopted the
requirements for disclosures about inputs and valuation techniques used to measure fair value. Additionally, these amended standards require
presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3) and is
effective for fiscal years beginning after December 15, 2010. The Successor will adopt this guidance effective July 1, 2011 and does not expect it to
have a material effect on the consolidated financial statements.
In May 2011, the FASB issued ASU
2011-4, Amendments to Achieve Common Fair value Measurements and Disclosure Requirements in US GAAP and IFRS, to substantially converge the
fair value measurement and disclosure guidance in US GAAP and IFRS. The most significant change in disclosures is an expansion of the information
required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The
Successor will adopt this standard July 1, 2012 and does not expect the adoption of this standard to have a material impact on the consolidated
financial statements and disclosures.
In June 2011, the FASB issued ASU
2011-5, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components
in the statement of stockholders equity. Instead, an entity will be required to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The
Successor will adopt this standard as of July 1, 2012 and does not expect it to have a material impact on the consolidated financial statements and
disclosures.
In September 2011, the FASB
issued ASU 2011-8, Intangibles Goodwill and Other. This guidance allows an entity an option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an
entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the
reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the
goodwill impairment test to measure the amount of the impairment loss, if any. This guidance is effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. The Successor will adopt the provisions of this guidance effective July 1, 2012 and
does not expect it to have a material impact on the consolidated financial statements and disclosures.
3. |
ACQUISITIONS |
On December 31, 2010, the
Successor acquired certain assets of the Rialto and the Cranford, two theatres with 11 screens, located in Westfield and Cranford, New Jersey,
respectively, from a third party seller, for a purchase price of $1,824, which consisted of a cash payment of $1,200, issuance of 250,000 shares of
Series A preferred stock at a fair value of $500 and an earn-out liability based upon targeted revenue over a 24 month time period, which the Successor
recorded at a fair value of $124. The expected range of the earn-out liability was $0 to $387. Accordingly, the total purchase price was allocated to
the identifiable assets acquired for each of the respective theatre locations based on their estimated fair values at the date of acquisition. The
goodwill of $896 represents the premium the Successor paid over the fair value of the net tangible and intangible assets acquired. Goodwill is mainly
attributable to the assembled work force and synergies expected to arise after acquisition of the business. The allocation of the purchase price is
based on managements judgment after evaluating several factors, using assumptions for the income and royalty rate approaches and the discounted
earnings approach, and projections determined by Successor management. The Successor incurred approximately $67 in acquisition costs which is expensed
and included in general and administrative expenses in the consolidated statement of operations.
F-13
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
On February 17, 2011, the
Successor acquired certain assets of the Bloomfield 8, a theatre with eight screens located in Bloomfield, Connecticut, for a purchase price of
approximately $113, paid in cash. The Successor incurred approximately $18 in acquisition costs, which is expensed and included in general and
administrative expenses in the consolidated statement of operations.
The Successor determined the fair
value of the assets acquired of the Bloomfield 8 to be approximately $211. The fair value of the net assets exceeds the fair value of the consideration
transferred. At the time of acquisition, the previous owners had not converted to digital systems and were not able to make the necessary capital and
infrastructure investments into the theatre. They were also in the process of renegotiating their lease arrangement with the landlord. The Successor
reviewed the procedures it used to identify and measure the assets acquired and to measure the fair value of the consideration transferred. The
Successor determined the procedures and resulting measures were appropriate based on the best information available at the date of acquisition and
therefore, recorded approximately $98 of bargain purchase gain in the statement of operations.
In 2011, the Successor formed DC
Cinema Centers, LLC for the purpose of acquiring five theatres located in Pennsylvania and on May 3, 2011 entered into an Asset Purchase Agreement with
Cinema Supply, Inc. The purchase price for the five theatres (Cinema Centers) is $14,000 in cash, in exchange for substantially all
operating assets and the assumption of operating leases. The Successor would assume no notes payable, capital lease obligations or any other
liabilities of Cinema Centers. The agreement is contingent upon the Successor obtaining the necessary financing to close the acquisition. If the
closing does not occur by December 31, 2011, the Successor can extend the termination date until March 31, 2012, in exchange for a non-refundable
payment to the seller of $100.
The purchase price for the Rialto
and the Cranford, collectively, and the Bloomfield 8 was allocated as follows:
(In thousands) |
Rialto/Cranford theatres |
Bloomfield 8 theatre |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||
Property and
equipment |
$ | 404 | $ | 94 | ||||||
Non-compete
|
60 | 33 | ||||||||
Trade names
|
464 | 84 | ||||||||
Goodwill
|
896 | | ||||||||
Total
purchase price |
1,824 | 211 | ||||||||
Liabilities
and other |
||||||||||
Earn out
payable |
124 | | ||||||||
Issuance of
Series A preferred stock |
500 | | ||||||||
Gain from
bargain purchase |
| (98 | ) | |||||||
Total
purchase price paid in cash |
$ | 1,200 | $ | 113 |
The results of operations of the
acquired Theatres are included in the consolidated statement of operations from the dates of acquisition. The following unaudited pro forma results of
operations of the Successor from the inception date (July 29, 2010) to June 30, 2011, assumes the acquisition of the Bloomfield 8 theatre had been
consummated on the inception date (July 29, 2010). These unaudited pro forma results are not necessarily indicative of the actual results of operations
that would have been achieved, nor are they necessarily indicative of future results of operations.
Pro Forma (unaudited) |
||||||
---|---|---|---|---|---|---|
Revenues (1)
|
$ | 2,040 | ||||
Net loss (2)
|
$ | (911 | ) |
(1) |
Includes revenues of $356 from Bloomfield 8, from the respective date of acquisition. |
(2) |
Includes net income of $109 from Bloomfield 8, from the respective date of acquisition |
F-14
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
4. |
CONSOLIDATED BALANCE SHEET COMPONENTS |
CASH AND CASH EQUIVALENTS
Cash and cash equivalents
consisted of the following:
Successor Company June 30, 2011 |
Predecessor Company December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash in banks
|
$ | 888 | $ | 19 | ||||||
Cash on hand
at theatres |
15 | | ||||||||
Money market
funds |
165 | 141 | ||||||||
Total cash
and cash equivalents |
$ | 1,068 | $ | 160 |
PROPERTY AND EQUIPMENT
Property and equipment, net was
comprised of the following:
Successor Company June 30, 2011 |
Predecessor Company December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Furniture and
fixtures |
$ | 751 | $ | 417 | ||||||
Leasehold
improvements |
249 | 1,236 | ||||||||
Computer
equipment and software (including digital projection equipment) and equipment |
1,348 | 791 | ||||||||
2,348 | 2,444 | |||||||||
Less
accumulated depreciation and amortization |
(97 | ) | (1,407 | ) | ||||||
Total
property and equipment, net |
$ | 2,251 | $ | 1,037 |
INTANGIBLE ASSETS
Intangible assets, net consisted
of the following for the Successor as of June 30, 2011:
Gross Carrying Amount |
Accumulated Amortization |
Net Amount |
Useful Life (years) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Trade names
|
$ | 548 | $ | 53 | $ | 495 | 5 | |||||||||||
Covenants not
to compete |
93 | 15 | 78 | 3 | ||||||||||||||
$ | 641 | $ | 68 | $ | 573 |
From inception date (July 29,
2010) to June 30, 2011, the Successor did not record any impairment of intangible assets.
The weighted average remaining
useful life of the Successors trade names and covenants not to compete is 4.52 years and 2.55 years, respectively.
Amortization expense on
intangible assets for the next five fiscal years is estimated as follows:
For the fiscal years ending June 30, |
||||||
---|---|---|---|---|---|---|
2012
|
$ | 141 | ||||
2013
|
141 | |||||
2014
|
126 | |||||
2015
|
109 | |||||
2016
|
56 | |||||
$ | 573 |
F-15
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued
expenses consisted of the following:
Successor Company June 30, 2011 |
Predecessor Company December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Professional
fees |
$ | 209 | $ | | ||||||
Film rent
expense |
139 | 55 | ||||||||
Theatre
equipment & improvements (other than digital projection equipment) |
104 | | ||||||||
Other
accounts payable and accrued expenses |
134 | 172 | ||||||||
Total |
$ | 586 | $ | 227 |
6. |
LEASES |
The Successor accounts for all of
its leases as operating leases. Minimum rentals payable under all non-cancelable operating leases with terms in excess of one year as of June 30, 2011,
are summarized for the following fiscal years (in thousands):
2012 |
$ | 516 | ||||
2013 |
526 | |||||
2014 |
539 | |||||
2015 |
539 | |||||
2016 |
560 | |||||
Thereafter |
2,726 | |||||
Total |
$ | 5,406 |
Rent expense under non-cancelable
operating leases was $223 from the inception date (July 29, 2010) to June 30, 2011. All of the Successors Theatre leases require the payment of
additional rent if certain future revenue targets are exceeded. However, the Successor has not exceeded those targets and no additional payments are
anticipated in the foreseeable future. Therefore, no additional rent expense has been recorded.
The owner of the Predecessor
entity also owns the real property the Theatres operate in. The Theatres paid rent expense on month to month leases to entities controlled by the
owner, totaling approximately $238 and $111 for the years ended December 31, 2010 and 2009, respectively.
7. |
INCOME TAXES |
The components of the provision
for income taxes for the Successor are as follows:
From inception date (July 29, 2010) to June 30, 2011 |
||||||
---|---|---|---|---|---|---|
Federal: |
||||||
Current tax
expense |
$ | | ||||
Deferred tax
expense |
10 | |||||
Total
Federal |
10 | |||||
State: |
||||||
Current tax
expense |
2 | |||||
Deferred tax
expense |
2 | |||||
Total
State |
4 | |||||
Total income
tax provision |
$ | 14 |
F-16
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
The differences between the
United States statutory federal tax rate and the Successors effective tax rate from the inception date (July 29, 2010) to June 30, 2011 are as
follows:
2011 |
||||||
---|---|---|---|---|---|---|
Provision at the
U.S. statutory federal tax rate |
(34.0 | )% | ||||
State and local
income taxes, net of federal benefit |
(5.8 | )% | ||||
Change in
valuation allowance |
41.5 | % | ||||
Other |
0.1 | % | ||||
Total income tax
provision |
1.8 | % |
Significant components of the
Successors net deferred tax liability consisted of the following (in thousands):
June 30, 2011 |
||||||
---|---|---|---|---|---|---|
Deferred tax
assets: |
||||||
Net operating
loss carry forward |
$ | 250 | ||||
Excess of tax
basis over book basis of intangible assets |
93 | |||||
Deferred
rent |
8 | |||||
Other |
2 | |||||
Total
deferred tax assets |
353 | |||||
Valuation
allowance |
(322 | ) | ||||
Total
deferred tax assets, net of valuation allowance |
31 | |||||
Deferred tax
liabilities: |
||||||
Excess of
book basis over tax basis of property and equipment |
(31 | ) | ||||
Excess of
book basis over tax basis of goodwill |
(12 | ) | ||||
Total
deferred tax liabilities |
(43 | ) | ||||
Net deferred tax
liability |
$ | (12 | ) |
At June 30, 2011, the Successor
had net operating loss carry forwards for federal and state income tax purposes of approximately $627 with expiration commencing in 2031. Under the
provisions of the Internal Revenue Code, certain substantial changes in the Successors ownership may result in a limitation on the amount of net
operating losses that may be utilized in future years.
In assessing the realizable value
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these
temporary differences become deductible. The Successor has recorded a valuation allowance against deferred tax assets at June 30, 2011, totaling
approximately $322, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods.
Future reductions in the valuation allowance associated with a change in managements determination of the Successors ability to realize
these deferred tax assets will result in a decrease in the provision for income taxes. Management will continue to assess the realizability of the
deferred tax assets at each interim and annual balance sheet date based on actual and forecasted operating results.
The Successor utilizes accounting
principles under ASC Subtopic 740-10 to assess the accounting and disclosure for uncertainty in income taxes. As of and for the period ended June 30,
2011, the Successor did not record any unrecognized tax benefits. The Successor files income tax returns in the U.S. federal jurisdiction, New Jersey
and Connecticut. For federal and state income tax purposes, the Successors year ended June 30, 2011 remains open for examination by the tax
authorities. The Predecessor has filed income tax returns in the United States and New Jersey. All tax years prior to 2008 are closed by expiration of
the statute of limitations. The years ended December 31, 2008 through and including 2010 of the Predecessor are open for examination. If the
Predecessor
F-17
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
did incur any uncertain tax positions for the years the Predecessor was a Subchapter S Corporation, the liability would be the responsibility of the shareholder of the Predecessor.
8. |
COMMITMENTS AND CONTINGENCIES |
The Companies believe that they
are in substantial compliance with all relevant laws and regulations that apply to the Companies, and the Companies are not aware of any current,
pending or threatened litigation that could materially impact the Companies.
The Successor has entered into
employment contracts, to which we refer as the employment contracts, with three of its current executive officers. Under the employment
contracts, each executive officer is entitled to severance payments in connection with the termination by the Successor of the executive officers
employment with the by the Successor without cause, by the executive officer for good reason, or as a result of a change
in control of the Successor (as such terms are defined in the employment contracts). Pursuant to the employment contracts, the maximum amount of
payments and benefits in the aggregate, if such executives were terminated (in the event of a change of control) would be approximately
$2,200.
Mr. Mayo, the Successors
Chief Executive Officer, is entitled to additional compensation based on the amount of revenues the Successor generates, as specified in his employment
contract. The Successor did not reach the required revenue levels as of June 30, 2011; thus, no additional compensation was recorded or paid under his
employment contract.
In 2011, the Successor converted
16 of its theatre screens to digital projection. In total, all of the Successors 19 screens have digital projection, as three screens were
already converted to digital at one location, paid for with the purchase of the theatre. The Successor received equipment for the remaining 16 screens
from a vendor pursuant to an equipment loaner agreement that terminated on October 31, 2011. In March 2011, the Successor paid $36 for certain of the
equipment, and in September 2011 the Successor issued purchase orders for the remainder, totaling $1.1 million, which negates the terms of the loaner
agreement.. The Successor plans to fund the purchase of the equipment from the proceeds of an equity offering, or from alternative sources as
circumstances warrant. The equipment is included in property and equipment, net and the payable is in the current liabilities section of the
consolidated balance sheet.
As described in Note 3, the
Successor and Cinema Supply, Inc. have executed an asset purchase agreement for the Successor to acquire five theatres from Cinema Supply, contingent
upon the Successor obtaining financing sufficient to fund the purchase price.
All of the Successors
current operations are located in New Jersey and Connecticut, with the customer base being public attendance. The Successors main suppliers are
the major movie studios, primarily located in the greater Los Angeles area. Any events impacting the region the Successor operates in, or impacting the
movie studios, who supply movies to the Successor, could significantly impact the Successors financial condition and results of
operations.
9. |
STOCKHOLDERS EQUITY AND SHARE-BASED
COMPENSATION |
Capital
Stock
As of December 31, 2010, the
Predecessor authorized capital stock consisting of 2,000 shares of common stock, no par value, and as of December 31, 2010, 200 shares were issued and
outstanding. All of the shares were held by one individual.
As of June 30, 2011, the
Successors authorized capital stock consisted of:
|
20 million shares of Class A common stock, par value $0.01 per share; |
|
5 million shares of Class B common stock, par value $0.01 per share; |
F-18
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
|
10 million shares of Series A preferred stock, par value $0.01 per share; |
|
300 shares of common stock, par value $0.01 per share |
Of the authorized shares of Class
A common stock, 569,166 shares were issued and outstanding as of June 30, 2011. Of the authorized shares of Class B common stock, 900,000 shares were
issued and outstanding as of June 30, 2011 all of which are held by Mr. Mayo. Of the authorized shares of Series A preferred stock, 1,772,500 shares
were issued and outstanding as of June 30, 2011. The material terms and provisions of the Successors capital stock are described
below.
Common
Stock
The Class A common stock and the
Class B common stock of the Successor are identical in all respects, except for voting rights and except that each share of Class B common stock is
convertible at the option of the holder into one share of Class A common stock. Each holder of Class A common stock will be entitled to one vote for
each outstanding share of Class A common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Each
holder of Class B common stock will be entitled to ten votes for each outstanding share of Class B common stock owned by that stockholder on every
matter properly submitted to the stockholders for their vote. Except as required by law, the Class A common stock and the Class B common stock will
vote together on all matters. Subject to the dividend rights of holders of any outstanding preferred stock, holders of common stock are entitled to any
dividend declared by the board of directors out of funds legally available for this purpose, and, subject to the liquidation preferences of any
outstanding preferred stock, holders of common stock are entitled to receive, on a pro rata basis, all the Successors remaining assets available
for distribution to the stockholders in the event of the Successors liquidation, dissolution or winding up. No dividend can be declared on the
Class A or Class B common stock unless at the same time an equal dividend is paid on each share of Class B or Class A common stock, as the case may be.
Dividends paid in shares of common stock must be paid, with respect to a particular class of common stock, in shares of that class. Holders of common
stock do not have any preemptive right to become subscribers or purchasers of additional shares of any class of the Successors capital stock. The
outstanding shares of common stock are, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of
common stock may be adversely affected by the rights of the holders of shares of any series of preferred stock that the Successor may designate and
issue in the future.
The 300 authorized shares of
common stock were issued and then exchanged for Class A common stock and Class B common stock during the period from the inception date (July 29, 2010)
to June 30, 2011 and cannot be reissued. At June 30, 2011, no shares are issued and outstanding.
Series A Preferred
Stock
The Successors certificate
of incorporation allows the Successor to issue, without stockholder approval, Series A preferred stock having rights senior to those of the common
stock. The Successors board of directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of Series A
preferred stock and to fix the rights, preferences, privileges and restrictions, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of these series. The issuance of
preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect
the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could also have the effect of
decreasing the market price of the Class A common stock. The Series A preferred stock earns dividends at a rate of 8% per annum, and through December
31, 2012 such dividends are payable in cash or additional shares of preferred stock, at the Successors option. For calendar years 2013, 2014 and
2015, such dividends are payable in cash, and afterwards, are payable in cash at a rate of 10% per annum. For the year ended June 30, 2011 the
Successor has accrued preferred dividends totaling $112 as required by the preferred stock Certificate of Designations. If the Successor chooses to pay
in shares, it would issue 55,918 shares in satisfaction of dividends for the year ended June 30, 2011. The Series A preferred stock was originally
convertible into Class A Common
F-19
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Stock at any time, at the option of the holder, on a one-for-one basis. However, following the one-for-two reverse stock split (see Note 15), the Series A preferred stock is now convertible into one share for every two shares of Series A preferred stock. The Series A preferred stock is required to be converted into Class A Common Stock, upon the occurrence of certain events, such as an underwritten public offering of the Successors common stock at a price greater than 150% of the original issue price of the Series A preferred stock, as adjusted. The original issue price was $2.00 per share, and is now adjusted to $4.00 per share following the one-for-two reverse split, making the price at which the Series A preferred stock is mandatorily convertible, at $6.00 per common share. The Successor incurred approximately $254 in legal and other costs, directly attributable to the issuance of the Series A preferred stock.
Dividends
No dividends were declared on the
Companies common stock during the periods presented and the Successor does not plan on paying dividends for the foreseeable future. As described
above, the Successor has accrued dividends on the Series A preferred stock.
Stock-Based
Compensation
During the year ended June 30,
2011, the Successor issued shares of Class A Common Stock to employees, directors and non-employees, as follows:
On December 31, 2010, the
Successor issued 87,500 shares of Class A Common Stock to non-employees for performance of services rendered during the fiscal year. On June 30, 2011,
the Successor issued awards totaling 15,000 shares to non-employees and 50,000 shares to employees. Of the awards granted to employees, 16,666 were
vested at issuance and 33,337 shares will vest over the following two years, ratably each year. The shares issued to employees (including board
members) and non-employees resulted in $111 and $75 of stock-based compensation expense respectively. This expense was recognized based on completion
of the required performance by the non-employees from the inception date (July 29, 2010) to June 30, 2011. The total stock based compensation expense
of $186 is included in general and administrative expenses in the statement of operations. Total expense of $65 will be recognized ratably over the
next two years, related to the 33,333 shares of unvested stock.
The following summarizes the
activity of the unvested share awards from the inception date (July 29, 2010) to June 30, 2011:
Unvested
balance, at inception date (July 29, 2010): |
| |||||
Issuance of
awards |
152,500 | |||||
Vesting of
awards |
(119,167 | ) | ||||
Unvested
balance, at June 30, 2011 |
33,333 |
The weighted average remaining
vesting period as of June 30, 2011 is 2.0 years.
10. |
RELATED PARTY TRANSACTIONS |
Upon the acquisition of the
Rialto and the Cranford theatres from the seller, the Successor entered into operating leases with the seller. The seller also owns 250,000 shares of
Series A preferred stock of the Successor which he obtained as partial consideration for the sale. At June 30, 2011, accrued dividends of $20 was
payable to the seller. The total rent expense under these operating leases from the inception date (July 29, 2010) to June 30, 2011 was
$165.
11. |
EMPLOYEE BENEFIT PLANS |
The Successor sponsors an
employee benefit plan, the Digiplex 401(k) Profit Sharing Plan (the Plan) under section 401(k) of the Internal Revenue Code of 1986, as
amended, for the benefit of all full-time employees. The Plan provides that participants may contribute up to 100% of their compensation, subject to
Internal Revenue
F-20
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Service limitations. The Plan allows employer discretionary matching contributions, however the Successor does not presently offer such matching contributions. The Successor also provides medical and dental benefit plans for its full time corporate employees with employer and employee cost sharing of premiums.
12. |
LINE OF CREDIT |
The Predecessor has a $100 credit
line with a third party financial institution, at an interest rate of 3.25%. The outstanding balance as of December 31, 2010 was $29. Interest expense
on the line of credit for the years ending December 31, 2010 and 2009 was approximately $5 and $3, respectively. The line of credit was repaid at the
closing of the acquisition of the Predecessor by the Successor.
13. |
NET LOSS PER SHARE |
Basic net loss per share is
computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted
average number of common shares and, if dilutive, common stock equivalents outstanding during the period.
The rights, including the
liquidation and dividend rights, of the holders of the Successors Class A and Class B common stock are identical, except with respect to voting.
Each share of Class B common stock is convertible into one share of Class A common stock at any time, at the option of the holder of the Class B common
stock.
The following table sets forth
the computation of basic net loss per share of Class A and Class B common stock of the Successor (in millions, except share and per share
data):
Basic net loss
per share: |
||||||
Numerator: |
||||||
Net
loss |
$ | (790 | ) | |||
Preferred
dividends |
(112 | ) | ||||
Net loss
attributable to common shareholders |
$ | (902 | ) | |||
Denominator |
||||||
Weighted
average common shares outstanding (1) |
1,073,207 | |||||
Basic and
diluted net loss per share |
$ | (0.84 | ) |
(1) |
The Successor has incurred net losses and, therefore, the impact of dilutive potential common stock equivalents totaling 919,585 shares are anti-dilutive and are not included in the weighted shares. The weighted average number of shares includes the effect of the one-for-two reverse stock split (see Note 14). |
14. |
SUPPLEMENTAL CASH FLOW DISCLOSURE |
Successor |
Predecessor |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, | |||||||||||||||
From inception date (July 29, 2010) to June 30, 2011 |
2010 |
2009 |
|||||||||||||
Issuance of
Series A preferred stock to seller of Rialto/Cranford theatres as part of acquisition |
$ | 500 | $ | | $ | | |||||||||
Accrued
dividends in Series A preferred stock |
$ | 112 | $ | | $ | | |||||||||
Interest
paid |
$ | | $ | 5 | $ | 4 | |||||||||
Taxes
paid |
$ | | $ | 58 | $ | 51 |
F-21
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
15. |
SUBSEQUENT EVENTS |
In August and September 2011, the
Successor issued a total of 200,000 shares of Series A Preferred Stock to third party investors, for cash proceeds of $400,000.
As described in Note 8, in
September 2011 the Successor issued purchase orders totaling $1.1 million to a vendor who installed digital projection equipment in the Theatres
pursuant to an equipment loan agreement. The Successor intends to fund the purchase price either from the proceeds of an equity offering, or from a
future debt facility.
In November 2011, the
Successors Board of Directors approved a one-for-two reverse stock split of the Class A and Class B common stock. All share numbers and per share
amounts for all periods presented have been adjusted retroactively to reflect the one-for-two stock split.
On December 19, 2011, the
Successor filed a Form S-1 with the United States Securities and Exchange Commission, related to an underwritten public offering of the
Successors Class A Common Stock.
F-22
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Successor Company |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2011 |
June 30, 2011 |
||||||||||
ASSETS |
(unaudited) | ||||||||||
CURRENT
ASSETS |
|||||||||||
Cash and cash
equivalents |
$ | 650 | $ | 1,068 | |||||||
Accounts
receivable |
149 | 35 | |||||||||
Inventories |
19 | 19 | |||||||||
Prepaid
expenses and other |
293 | 65 | |||||||||
Total current
assets |
1,111 | 1,187 | |||||||||
Properties
and equipment, net |
2,328 | 2,251 | |||||||||
Goodwill |
896 | 896 | |||||||||
Intangible
assets, net |
503 | 573 | |||||||||
Security
deposit |
3 | 3 | |||||||||
TOTAL
ASSETS |
$ | 4,841 | $ | 4,910 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
|||||||||||
CURRENT
LIABILITIES |
|||||||||||
Accounts
payable and accrued expenses |
618 | 586 | |||||||||
Payable to
vendor for digital systems |
1,066 | 1,066 | |||||||||
Earn out from
theatre acquisition |
124 | 124 | |||||||||
Deferred
revenue |
22 | | |||||||||
Dividends
payable |
265 | 112 | |||||||||
Total current
liabilities |
2,095 | 1,888 | |||||||||
NONCURRENT
LIABILITIES |
|||||||||||
Deferred rent
expense |
40 | 20 | |||||||||
Deferred tax
liability |
32 | 12 | |||||||||
TOTAL
LIABILITIES |
2,167 | 1,920 | |||||||||
COMMITMENTS
AND CONTINGENCIES |
|||||||||||
STOCKHOLDERS EQUITY |
|||||||||||
Series A
Preferred Stock, $.01 par value: 10,000,000 shares authorized and 1,972,500 and 1,772,500 shares issued and outstanding as of December 31, 2011 and
June 30, 2011, respectively |
20 | 18 | |||||||||
Class A
Common stock, $.01 par value: 20,000,000 shares authorized and 569,166 shares issued and outstanding |
6 | 6 | |||||||||
Class B
Common stock, $.01 par value, 5,000,000 shares authorized and 900,000 shares issued and outstanding |
9 | 9 | |||||||||
Additional
paid-in-capital |
4,001 | 3,747 | |||||||||
Accumulated
deficit |
(1,362 | ) | (790 | ) | |||||||
Total
stockholders equity |
2,674 | 2,990 | |||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 4,841 | $ | 4,910 |
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
F-23
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
Successor Company |
|
Predecessor Company |
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended December 31, 2011 |
|
Inception Period (July 29, 2010) to December 31, 2010 |
|
Six Months Ended December 31, 2010 |
|
|||||||||||||
REVENUES |
||||||||||||||||||
Admissions |
$ | 1,392 | $ | 22 | $ | 820 | ||||||||||||
Concession |
401 | 3 | 294 | |||||||||||||||
Other |
106 | | | |||||||||||||||
Total
revenues |
1,899 | 25 | 1,114 | |||||||||||||||
COSTS AND
EXPENSES |
||||||||||||||||||
Cost of
operations: |
||||||||||||||||||
Film rent
expense |
598 | 9 | 430 | |||||||||||||||
Cost of
concessions |
68 | | 62 | |||||||||||||||
Salaries and
wages |
288 | 2 | 132 | |||||||||||||||
Facility
lease expense |
248 | | 119 | |||||||||||||||
Utilities and
other |
329 | 37 | 182 | |||||||||||||||
General and
administrative expenses |
673 | 155 | 222 | |||||||||||||||
Depreciation
and amortization |
262 | | 70 | |||||||||||||||
Total costs
and expenses |
2,466 | 203 | 1,217 | |||||||||||||||
Operating
loss |
(567 | ) | (178 | ) | (103 | ) | ||||||||||||
Interest
Expense |
| | 2 | |||||||||||||||
Loss before
income taxes |
(567 | ) | (178 | ) | (105 | ) | ||||||||||||
Income
taxes |
20 | | | |||||||||||||||
NET
LOSS |
(587 | ) | (178 | ) | (105 | ) | ||||||||||||
Preferred
stock dividends |
(153 | ) | | | ||||||||||||||
Net loss
attributable to common stockholders |
$ | (740 | ) | $ | (178 | ) | $ | (105 | ) | |||||||||
Net loss per
Class A and Class B common share basic and diluted |
$ | (0.50 | ) | $ | (0.27 | ) | $ | | ||||||||||
Weighted
average number of Class A and Class B common shares outstanding: |
||||||||||||||||||
Basic and
diluted |
1,469,166 | 647,806 | |
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
F-24
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Successor Company |
|
Successor Company |
|
Predecessor Company |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended December 31, 2011 |
|
Inception Date (July 29, 2010) to December 31, 2010 |
|
Six Months Ended December 31, 2010 |
||||||||||
Cash flows
from operating activities |
||||||||||||||
Net
loss |
$ | (587 | ) | $ | (176 | ) | $ | (105 | ) | |||||
Adjustments
to reconcile net loss to net cash used in operating activities: |
||||||||||||||
Depreciation
and amortization |
262 | | 70 | |||||||||||
Stock-based
compensation |
33 | 60 | | |||||||||||
Deferred tax
expense |
20 | | | |||||||||||
Changes in
operating assets and liabilities: |
||||||||||||||
Inventories |
| (10 | ) | | ||||||||||
Accounts
receivable |
(114 | ) | (6 | ) | | |||||||||
Prepaid
expenses and other current assets |
(228 | ) | (325 | ) | | |||||||||
Accounts
payable and accrued expenses |
47 | 198 | (91 | ) | ||||||||||
Deferred
revenue |
22 | | ||||||||||||
Deferred rent
expense |
20 | | | |||||||||||
Net cash used
in operating activities |
(525 | ) | (259 | ) | (126 | ) | ||||||||
Cash flows
from investing activities |
||||||||||||||
Purchases of
property and equipment |
(269 | ) | (179 | ) | (7 | ) | ||||||||
Acquisition
of Rialto/Cranford theatres |
| (1,200 | ) | | ||||||||||
Net cash used
in investing activities |
(269 | ) | (1,379 | ) | (7 | ) | ||||||||
Cash flows
from financing activities |
||||||||||||||
Proceeds from
issuance of common stock |
| 418 | | |||||||||||
Proceeds from
issuance of Series A preferred stock |
400 | 1,475 | | |||||||||||
Costs
associated with issuance of stock |
(24 | ) | (19 | ) | | |||||||||
Net cash
provided by financing activities |
376 | 1,874 | | |||||||||||
Net change in
cash and cash equivalents |
(418 | ) | 234 | (133 | ) | |||||||||
Cash and cash
equivalents at beginning of period |
1,068 | | 293 | |||||||||||
Cash and cash
equivalents at end of period |
$ | 650 | $ | 236 | $ | 160 |
The accompanying notes are an integral part of the
consolidated financial statements
F-25
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. |
THE COMPANY AND BASIS OF PRESENTATION |
Digital Cinema Destinations Corp.
(Digiplex) and together with its subsidiaries (the Company or the Successor) was incorporated in the State of
Delaware on July 29, 2010. Digiplex is the parent company of its wholly owned subsidiaries, DC Westfield LLC, DC Cranford LLC, DC Bloomfield LLC (the
Theatres), and DC Cinema Centers LLC with the intent to acquire business in the movie exhibition industry sector. Digiplex operates three
theatres with 19 screens in Westfield (the Rialto) and Cranford (the Cranford), New Jersey and Bloomfield, Connecticut (the
Bloomfield 8) As described in Note 8, the Company formed DC Cinema Centers LLC for the purpose of acquiring certain theatres in
Pennsylvania. As of December 31, 2011, DC Cinema Centers LLC has no assets or operations.
The Successors consolidated
financial statements are presented from the inception date (July 29, 2010) to December 31, 2010, and for the six months ended December 31, 2011. The
combined financial statements of Rialto Theatre of Westfield, Inc. and Cranford Theatre, Inc. (collectively the Predecessor) are presented
for the six months ended December 31, 2010.
The accompanying unaudited
condensed consolidated financial statements of the Companies were prepared in accordance with generally accepted accounting principles in the United
States of America (U.S. GAAP) for interim financial information. Certain information and disclosures normally included in consolidated
financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial
statements should be read in conjunction with the Companys historical consolidated financial statements and accompanying notes for the period
from inception (July 29, 2010) to June 30, 2011 (Successor), and for the years ended December 31, 2010 and 2009 (Predecessor) included in this Form S-1
Registration Statement. In the opinion of management, all adjustments, consisting of a normal recurring nature, considered necessary for a fair
presentation have been included in the unaudited condensed consolidated financial statements. The operating results for the six months ended December
31, 2011 (Successor) are not necessarily indicative of the results expected for the full year ending June 30, 2012. The Successor and the Predecessor
are collectively referred to as the Companies.
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Principles of Consolidation
and Combination
The condensed consolidated
financial statements of the Successor include the accounts of Digiplex and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The combined financial statements
of the Predecessor include the accounts of Rialto and Cranford.
Use of
Estimates
The preparation of condensed
consolidated and combined financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated and combined financial statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include, but are not limited to, those related to film rent expense settlements, depreciation and amortization,
impairments, income taxes and assumptions used in connection with acquisition accounting. Actual results could differ from those
estimates.
Stock
Split
In November 2011, the
Successors Board of Directors approved a one-for-two reverse stock split of the Class A and Class B common stock. All share amounts and per share
amounts for all the Successor periods presented have been adjusted retroactively to reflect the one-for-two stock split. See Note 11.
F-26
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenue
Recognition
Revenues are generated
principally through admissions and concessions sales on feature film displays, with proceeds received in cash or credit card at the Companies
point of sale terminal at the Theatres. Revenue is recognized at the point of sale. Credit card sales are normally settled in cash within approximately
three business days from the point of sale, and any credit card chargebacks have been insignificant. Other operating revenues consist of theatre
rentals for parties, camps, civic groups and other activities. In addition to traditional feature films, the Companies also display concerts, sporting
events, childrens programming and other non-traditional content on its screens (such content referred to herein as alternative
content). Revenue for alternative content also consists of admissions and concession sales. The Companies also sell theatre admissions in advance
of the applicable event, and sells gift cards for patrons future use. The Companies defer the revenue from such sales until considered
redeemed.
Cash
Equivalents
The Successor considers all
highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2011 and June 30, 2011,
the Successor held substantially all of its cash in checking or money market accounts with major financial institutions and has cash on hand at the
Theatres in the normal course of business.
Accounts
receivable
Accounts receivable are recorded
at the invoiced amount and do not bear interest. The Successor reports accounts receivable net of any allowance for doubtful accounts to represent the
Successors estimate of the amount that ultimately will be realized in cash. The Successor will review collectability of accounts receivable based
on the aging of the accounts and historical collection trends. When the Successor ultimately concludes a receivable is uncollectible, the balance is
written off.
Inventories
Inventories consist of food and
beverage concession products and related supplies. The Successor states inventories on the basis of first-in, first-out method, stated at the lower of
cost or market
Property and
Equipment
The Successor states property and
equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently.
The Successor records
depreciation and amortization using the straight-line method, over the following estimated useful lives:
Furniture and
fixtures |
5
years |
|||||
Leasehold
improvements |
Lesser of lease
term or asset life |
|||||
Digital systems
and related equipment |
10
years |
|||||
Computer
equipment and software |
3
years |
|||||
Equipment |
7
years |
Goodwill
The carrying amount of goodwill
at December 31, 2011 was $896. The Successor evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate.
Under ASC Subtopic 350-20, Intangibles Goodwill and Other Goodwill, the Successor has identified its reporting units to be the designated
market areas in which the Successor conducts its theatre operations. The Successor determines fair value by using an enterprise valuation methodology
determined by applying multiples to cash flow estimates less any net
F-27
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
indebtedness, which the Successor believes is an appropriate method to determine fair value. There is considerable management judgment with respect to cash flow estimates and appropriate multiples and discount rates to be used in determining fair value and such management estimates fall under Level 3 within the fair value measurement hierarchy.
Concentration of Credit
Risk
Financial instruments that could
potentially subject the Successor to concentration of credit risk, if held, would be included in accounts receivable. Collateral is not required on
trade accounts receivables. It is anticipated that in the event of default, normal collection procedures would be followed.
Fair Value of Financial
Instruments
The carrying amounts of cash,
cash equivalents, accounts receivable and accounts payable, approximate their fair values, due to their short term nature.
Deferred Rent
Expense
The Successor recognizes rent
expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease
over its term.
Film Rent
Expense
The Companies estimate film rent
expense and related film rent payable based on managements best estimate of the ultimate settlement of the film costs with the film distributors.
Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The length of
time until these costs are known with certainty depends on the ultimate duration of the films theatrical run, but is typically
settled within one to two months of a particular films opening release. Upon settlement with the film distributors, film rent expense
and the related film rent payable are adjusted to the final film settlement. The film rent expense on the statements of operations of the Successor for
the six months ended December 31, 2011, was reduced by $132, related to virtual print fees (VPFs) under a master license agreement
exhibitor-buyer arrangement with a third party vendor. VPFs represent a reduction in film rent paid to film distributors. Pursuant to this master
license agreement, the Successor will purchase and own digital cinema projection equipment and the third party vendor, through their agreements with
film distributors, will collect and remit VPFs to the Successor, net of a 10% administrative fee. VPFs are generated based on initial display of titles
on the digital projection equipment.
Stock-Based
Compensation
The Successor recognizes
stock-based compensation expense to employees based on the fair value of the award at the grant date with expense recognized over the service period,
which is usually the vesting period for employees, using the straight-line recognition method of awards subject to graded vesting. The Successor
determined fair value based on analysis of discounted cash flows and market comparisons. The Successor recognizes an estimate for forfeitures of
unvested awards. These estimates are adjusted as actual forfeitures differ from the estimate.
The Successor has also issued
common stock to non-employees in exchange for services. The Successor measures at fair value at the earlier of the date the performance commitment is
reached or when performance is complete. The expense recognized is the fair value of the stock issues for services, determine by analysis of discounted
cash flows and market comparisons.
Segments
As of December 31, 2011, the
Successor managed its business under one reportable segment: theatre exhibition operations. All of the Successors operations are located in the
United States.
F-28
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Recent Accounting
Pronouncements
In May 2011, the FASB issued ASU
2011-4, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS, to substantially converge the
fair value measurement and disclosure guidance in US GAAP and IFRS. The most significant change in disclosures is an expansion of the information
required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The
Successor will adopt this standard July 1, 2012 and does not expect the adoption of this standard to have a material impact on the consolidated
financial statements and disclosures.
In June 2011, the FASB issued ASU
2011-5, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components
in the statement of stockholders equity. Instead, an entity will be required to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The
Successor will adopt this standard as of July 1, 2012 and does not expect it to have a material impact on the consolidated financial statements and
disclosures.
In September 2011, the FASB
issued ASU 2011-8, Intangibles Goodwill and Other. This guidance allows an entity an option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines if it not it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value
of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the
goodwill impairment test to measure the amount of the impairment loss, if any. This guidance is effective for annual and interim goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. The Successor will adopt the provisions of this guidance effective July 1, 2012 and
does not expect it to have a material impact on the consolidated financial statements and disclosures.
3. |
PROPERTY AND EQUIPMENT |
Property and equipment, net of
the Successor was comprised of the following:
December 31, 2011 |
June 30, 2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Furniture and
fixtures |
$ | 829 | $ | 751 | ||||||
Leasehold
improvements |
310 | 249 | ||||||||
Computer
equipment and software (including digital projection equipment) |
1,476 | 1,348 | ||||||||
2,615 | 2,348 | |||||||||
Less
accumulated depreciation and amortization |
(287 | ) | (97 | ) | ||||||
Total
property and equipment, net |
$ | 2,328 | $ | 2,251 |
4. |
INTANGIBLE ASSETS |
Intangible assets, net of the
Successor consisted of the following as of December 31, 2011:
Gross Carrying Amount |
Accumulated Amortization |
Net Amount |
Useful Life (years) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Trade names
|
$ | 548 | $ | 108 | $ | 440 | 5 | |||||||||||
Covenants not
to compete |
93 | $ | 30 | 63 | 3 | |||||||||||||
$ | 641 | $ | 138 | $ | 503 |
F-29
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Intangible assets, net of the
Successor consisted of the following as of June 30, 2011:
Gross Carrying Amount |
Accumulated Amortization |
Net Amount |
Useful Life (years) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Trade names
|
$ | 548 | $ | 53 | $ | 495 | 5 | |||||||||||
Covenants not
to compete |
93 | 15 | 78 | 3 | ||||||||||||||
$ | 641 | $ | 68 | $ | 573 |
The weighted average remaining
useful life of the Successors trade names and covenants not to compete is 4.02 years and 2.05 years, respectively as of December 31,
2011.
5. |
LEASES |
The Successor accounts for all of
its leases as operating leases. Minimum rentals payable under all non-cancelable operating leases with terms in excess of one year are summarized for
the following fiscal years (in thousands):
2012
|
$ | 260 | ||||
2013
|
526 | |||||
2014
|
539 | |||||
2015
|
539 | |||||
2016
|
560 | |||||
Thereafter
|
2,726 | |||||
Total
|
$ | 5,150 |
Rent expense under non-cancelable
operating leases was $248 for the six months ended December 31, 2011. There was no rent expense for the period from inception date (July 29,2010) to
December 31, 2010. Two of the Successors leases require the payment of additional rent if certain future revenue targets are exceeded. However,
the Successor has not exceeded those targets and no additional payments are anticipated in the foreseeable future, and therefore no additional rent
expense has been recorded.
The owner of the Predecessor
entity also owns the real property the theatres operate in. The theatres paid rent expense on month to month leases controlled by the owner, totaling
$119 for the six months ended December 31, 2010.
6. |
COMMITMENTS AND CONTINGENCIES |
The Companies believe that they
are in substantial compliance with all relevant laws and regulations that apply to the Companies, and the Companies are not aware of any current,
pending or threatened litigation that could materially impact the Companies.
In 2011, the Successor converted
16 of its theatre screens to digital projection. In total, all of the Successors 19 screens have digital projection, as three screens were
already converted to digital at one location, paid for with the purchase of the theatre. The Successor received equipment for the remaining 16 screens
from a vendor pursuant to an equipment loaner agreement that terminated on October 31, 2011. In March 2011, the Successor paid $36 for certain of the
equipment, and in September 2011 the Successor issued purchase orders for the remainder, totaling $1.1 million, which negates the terms of the loaner
agreement. The Successor plans to fund the purchase of the equipment from the proceeds of an equity offering, or from alternative sources as
circumstances warrant. The equipment is included in property and equipment, net and the payable is in the current liabilities section of the
consolidated balance sheet. The equipment payable is due on the sooner of March 31, 2012 or the completion of financing sufficient to pay the
balance.
In 2011, the Successor formed DC
Cinema Centers, LLC for the purpose of acquiring five theatres located in Pennsylvania and in April, 2011 entered into an Asset Purchase Agreement with
Cinema Supply, Inc., contingent upon the Successor obtaining financing sufficient to fund the purchase.
F-30
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
All of the Successors
current operations are located in New Jersey and Connecticut, with the customer base being public attendance. The Successors main suppliers are
the major movie studios, primarily located in the greater Los Angeles area. Any events impacting the region the Successor operates in, or impacting the
movie studios, who supply movies to the Successor, could significantly impact the Successors financial condition and results of
operations.
7. |
STOCKHOLDERS EQUITY AND SHARE-BASED
COMPENSATION |
Capital
Stock
As of December 31, 2011, the
Successors authorized capital stock consisted of:
|
20 million shares of Class A common stock, par value $0.01 per share; |
|
5 million shares of Class B common stock, par value $0.01 per share; |
|
10 million shares of Series A preferred stock, par value $0.01 per share; |
|
300 shares of common stock, par value $0.01 per share |
Of the authorized shares of Class
A common stock, 569,166 shares were issued and outstanding as of December 31, 2011. Of the authorized shares of Class B common stock, 900,000 shares
were issued and outstanding as of December 31, 201 all of which are held by A. Dale Mayo, the Successors CEO. Of the authorized shares of Series
A preferred stock, 1,972,500 shares were issued and outstanding as of December 31, 2011. The material terms and provisions of the Successors
capital stock are described below.
Common
Stock
The Class A common stock and the
Class B common stock of the Successor are identical in all respects, except for voting rights and except that each share of Class B common stock is
convertible at the option of the holder into one share of Class A common stock. Each holder of Class A common stock will be entitled to one vote for
each outstanding share of Class A common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Each
holder of Class B common stock will be entitled to ten votes for each outstanding share of Class B common stock owned by that stockholder on every
matter properly submitted to the stockholders for their vote. Except as required by law, the Class A common stock and the Class B common stock will
vote together on all matters. Subject to the dividend rights of holders of any outstanding preferred stock, holders of common stock are entitled to any
dividend declared by the board of directors out of funds legally available for this purpose, and, subject to the liquidation preferences of any
outstanding preferred stock, holders of common stock are entitled to receive, on a pro rata basis, all the Successors remaining assets available
for distribution to the stockholders in the event of the Successors liquidation, dissolution or winding up. No dividend can be declared on the
Class A or Class B common stock unless at the same time an equal dividend is paid on each share of Class B or Class A common stock, as the case may be.
Dividends paid in shares of common stock must be paid, with respect to a particular class of common stock, in shares of that class. Holders of common
stock do not have any preemptive right to become subscribers or purchasers of additional shares of any class of the Successors capital stock. The
outstanding shares of common stock are, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of
common stock may be adversely affected by the rights of the holders of shares of any series of preferred stock that the Successor may designate and
issue in the future.
The 300 authorized shares of
common stock were issued and then exchanged for Class A common stock and Class B common stock and cannot be reissued. At December 31, 2011, no shares
are issued and outstanding.
Series A Preferred
Stock
The Successors certificate
of incorporation allows the Successor to issue, without stockholder approval, Series A preferred stock having rights senior to those of the common
stock. The Successors board of directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of Series A
preferred stock and
F-31
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
to fix the rights, preferences, privileges and restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of these series. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could also have the effect of decreasing the market price of the Class A common stock. The Series A preferred stock earns dividends at a rate of 8% per annum, and through December 31, 2012 such dividends are payable in cash or additional shares of preferred stock, at the Successors option. For calendar years 2013, 2014 and 2015, such dividends are payable in cash, and afterwards, are payable in cash at a rate of 10% per annum. As of December 31, 2011 and June 30, 2011, the Successor accrued preferred dividends of $265 and $112, respectively, as required by the preferred stock Certificate of Designations. If the Successor chooses to pay in shares, it would issue 132,382 shares in satisfaction of dividends through that date. The Series A preferred stock was originally convertible into Class A Common Stock at any time, at the option of the holder, on a one-for-one basis. However, following the one-for-two reverse stock split (see Note 14), the Series A preferred stock is now convertible into one share for every two shares of Series A preferred stock. The Series A preferred stock is required to be converted into Class A Common Stock, upon the occurrence of certain events, such as an underwritten public offering of the Successors common stock at a price greater than 150% of the original issue price of the Series A preferred stock, as adjusted. The original issue price was $2.00 per share, and is now adjusted to $4.00 per share following the one-for-two reverse split, making the price at which the Series A preferred stock is mandatorily convertible, at $6.00 per common share.
For the six months ended December
31, 2011, the Successor incurred approximately $24 in legal and other costs, directly attributable to the issuance of the Series A preferred
stock.
During the six months ended
December 31, 2011, the Successor issued 200,000 shares of Series A preferred stock in exchange for $400,000 from multiple investors. The terms of the
stock issued are the same as those described above.
Dividends
No dividends were declared on the
Successors common stock during the year and the Successor does not anticipate doing so. As described above, the Successor has accrued dividends
on the Series A Preferred Stock.
Stock-Based
Compensation
There were no share awards
granted to employees and non-employees during the six months ended December 31, 2011. The following summarizes the activity of the unvested share
awards for the six months ended December 31, 2011:
Unvested
balance, at June 30, 2011: |
33,333 | |||||
Vested
awards |
| |||||
Unvested
balance, at December 31, 2011 |
33,333 |
During the six months ended
December 31, 2011, the Successor recorded expense of $25 and $8 related to the unvested awards granted previously to employees and non-employees,
respectively. During the six months ended December 31, 2010, the Successor recorded expense of $17 and $43 related to the unvested awards granted
previously to employees and non-employees, respectively. The weighted average remaining vesting period as of December 31, 2011 is 2.5
years.
8. |
INCOME TAXES |
The Successor recorded income tax
expense of approximately $20 for the six months ended December 31, 2011. The Successors tax provision for all periods had an unusual relationship
to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance at the beginning of each period. This
circumstance
F-32
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, consistent with the prior year, tax expense recorded for the six months ended December 31, 2011 included the accrual of non-cash tax expense of approximately $18, of additional valuation allowance in connection with the tax amortization of our indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a naked credit). The Successor expects the naked credit to result in approximately $6 of additional non-cash income tax expense over the remainder of the year.
The Successor calculates income
tax expense based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year. For the six months
ended December 31, 2011, the differences between the effective tax rate of 3.4% and the U.S. federal statutory rate of 35% principally resulted from
state and local taxes, graduated federal tax rate reductions, non-deductible expenses and changes to the valuation allowance. There was no income tax
provision or benefit for the 2010 periods for the Successor or the Predecessor.
9. |
RELATED PARTY TRANSACTIONS |
The Successors landlord for
the Rialto and the Cranford also owns 250,000 shares of the Successors Series A preferred stock, which he obtained as partial consideration for
the sale of those theatres. At December 31, 2011, accrued dividends of $40 was payable to the seller. The total rent expense under these operating
leases with this landlord was $127 for the six months ended December 31, 2011. There was no rent expense for the 2010 periods.
10. |
NET LOSS PER SHARE |
Basic net loss per share is
computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted
average number of common shares and, if dilutive, common stock equivalents outstanding during the period.
The rights, including the
liquidation and dividend rights, of the holders of the Successors Class A and Class B common stock are identical, except with respect to voting.
Each share of Class B common stock is convertible into one share of Class A common stock at any time, at the option of the holder of the Class B common
stock.
The following table sets forth
the computation of basic net loss per share of Class A and Class B common stock of the Successor (in millions, except share and per share
data):
Six Months Ended December 31, 2011 |
Inception Period (July 29, 2010) to December 31, 2010 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Basic net
loss per share: |
||||||||||||||
Numerator: |
||||||||||||||
Net loss
|
$ | (587 | ) | $ | (178 | ) | ||||||||
Preferred
dividends |
(153 | ) | | |||||||||||
Net loss
attributable to common shareholders |
(740 | ) | (178 | ) | ||||||||||
Denominator |
||||||||||||||
Weighted
average common shares outstanding (1) |
1,469,166 | 647,806 | ||||||||||||
Basic and
diluted net loss per share |
$ | (0.50 | ) | $ | (0.27 | ) |
(1) |
The Successor has incurred net losses and, therefore, the impact of dilutive potential common stock equivalents totaling 1,019,585 shares for the six months ended December 31, 2011 are anti-dilutive and are not included in the weighted shares. The weighted average number of shares includes the effect of the one-for-two reverse stock split (see Note 11). |
F-33
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. |
LINE OF CREDIT |
The Predecessor has a $100 credit
line with a third party financial institution, at an interest rate of 3.25%. Interest expense on the line of credit for the six months ended December
31, 2010 was approximately $2.
12. |
SUPPLEMENTAL CASH FLOW DISCLOSURE |
Successor Company |
|
Predecessor Company |
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six months ended December 31, 2011 |
|
From inception date (July 29, 2010) to December 31, 2010 |
|
Six months ended December 31, 2010 |
|
|||||||||||||
Accrued
dividends on Series A preferred stock |
$ | 153 | $ | | $ | | ||||||||||||
Issuance of
Series A preferred stock to seller of Rialto/Cranford theatres as part of acquisition |
$ | 500 | $ | | $ | |
13. |
SUBSEQUENT EVENTS |
In November 2011, the
Successors Board of Directors approved a one-for-two reverse stock split of the Class A and Class B common stock. All share amounts and per share
amounts for all periods presented have been adjusted retroactively to reflect the one-fortwo stock split.
On December 19, 2011, the
Successor filed a Form S-1 with the United States Securities and Exchange Commission, related to an underwritten public offering of the
Successors Class A Common Stock.
In February 2012, a wholly-owned
subsidiary of the Company executed an asset purchase agreement for the purchase of certain assets of Lisbon Theaters, Inc. doing business as the Lisbon
Cinema. Lisbon Cinema consists of a single theater with 12 screens in Lisbon, Connecticut. The purchase price for Lisbon Cinema is $6.0 million in
cash, and a contingent purchase price payable in future periods upon the achievement of certain profitability measures. The acquisition is contingent
upon the Company obtaining sufficient financing to fund the purchase price. The Company will purchase the assets of Lisbon Cinema and assume an
operating leave. All other liabilities and note obligations will not be assumed. The Lisbon Cinema theatre has been fully upgraded to digital
projection platforms.
F-34
Report of Independent Registered Public Accounting
Firm
The Stockholders of Cinema Supply, Inc.
We have audited the accompanying balance sheets of Cinema
Supply, Inc. (the Company) as of October 31, 2011 and 2010 and the related statements of operations, stockholders equity and cash flows for
each of the years in the two-year period ended October 31, 2011. The financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Cinema Supply, Inc. as of October 31, 2011 and 2010, and the results of its
operations and its cash flows for each of the years in the two-year period ended October 31, 2011, in conformity with accounting principles generally
accepted in the United States of America
/s/ EISNERAMPER LLP
Edison, New Jersey
December 19, 2011
December 19, 2011
F-35
CINEMA SUPPLY, INC.
BALANCE SHEETS
October 31, 2011 and 2010
(in thousands, except share and per share data)
BALANCE SHEETS
October 31, 2011 and 2010
(in thousands, except share and per share data)
October 31, 2011 |
October 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
CURRENT
ASSETS |
||||||||||
Cash
|
$ | 67 | $ | 50 | ||||||
Accounts
receivable |
11 | 12 | ||||||||
Inventory
|
61 | 60 | ||||||||
Income tax
refund receivable |
| 194 | ||||||||
Deferred tax
assets |
151 | 118 | ||||||||
Prepaid
expenses and other |
53 | 86 | ||||||||
Total current
assets |
343 | 520 | ||||||||
Property and
equipment, net |
13,509 | 14,920 | ||||||||
Deferred
financing costs, net |
27 | 35 | ||||||||
TOTAL ASSETS
|
$ | 13,879 | $ | 15,475 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||
CURRENT
LIABILITIES |
||||||||||
Accounts
payable |
$ | 843 | $ | 819 | ||||||
Accrued
expenses |
1,008 | 522 | ||||||||
Notes
payable, current portion |
1,782 | 2,521 | ||||||||
Capital lease
obligations, current portion |
56 | 46 | ||||||||
Total current
liabilities |
3,689 | 3,908 | ||||||||
Accrued
interest officers |
334 | 254 | ||||||||
Notes
payable, net of current portion |
3,601 | 4,765 | ||||||||
Note payable
officers |
1,760 | 1,760 | ||||||||
Deferred rent
expense |
957 | 967 | ||||||||
Deferred
taxes |
1,005 | 1,130 | ||||||||
Capital lease
obligations, net of current portion |
141 | 198 | ||||||||
Total
liabilities |
11,487 | 12,982 | ||||||||
COMMITMENTS
AND CONTINGENCIES |
||||||||||
STOCKHOLDERS EQUITY |
||||||||||
Common stock,
$100 par value: 100 shares authorized, 40 shares issued and outstanding |
4 | 4 | ||||||||
Additional
paid-in-capital |
108 | 108 | ||||||||
Retained
earnings |
2,280 | 2,381 | ||||||||
Total
stockholders equity |
2,392 | 2,493 | ||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 13,879 | $ | 15,475 |
See accompanying notes to the financial
statements.
F-36
CINEMA SUPPLY, INC.
STATEMENTS OF OPERATIONS
For the years ended October 31, 2011 and 2010
(In thousands)
STATEMENTS OF OPERATIONS
For the years ended October 31, 2011 and 2010
(In thousands)
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
REVENUES |
||||||||||
Admissions
|
$ | 10,329 | $ | 10,569 | ||||||
Concessions
|
3,990 | 3,892 | ||||||||
Other
|
351 | 416 | ||||||||
Total
revenues |
14,670 | 14,877 | ||||||||
COSTS AND
EXPENSES |
||||||||||
Cost of
operations: |
||||||||||
Film rent
expense |
5,750 | 5,920 | ||||||||
Cost of
concessions |
642 | 673 | ||||||||
Salaries and
wages |
1,501 | 1,645 | ||||||||
Facility
lease expense |
1,459 | 1,451 | ||||||||
Utilities and
other |
2,423 | 2,383 | ||||||||
Total cost of
operations |
11,775 | 12,072 | ||||||||
General and
administrative expenses |
898 | 796 | ||||||||
Depreciation
and amortization |
1,364 | 1,297 | ||||||||
Total costs
and expenses |
14,037 | 14,165 | ||||||||
OPERATING
INCOME |
633 | 712 | ||||||||
OTHER EXPENSE
(INCOME) |
||||||||||
Loss on
disposition of property and equipment |
83 | 42 | ||||||||
Interest
expense |
483 | 422 | ||||||||
Interest
income and other |
| (2 | ) | |||||||
Income before
income taxes |
67 | 250 | ||||||||
Income tax
expense |
32 | 102 | ||||||||
NET INCOME
|
$ | 35 | $ | 148 |
See accompanying notes to the financial
statements.
F-37
CINEMA SUPPLY, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
October 31, 2011 and 2010
(In thousands except share data)
STATEMENTS OF STOCKHOLDERS EQUITY
October 31, 2011 and 2010
(In thousands except share data)
Common Stock | Additional paid-in |
Retained | Total stockholders |
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
capital |
earnings |
equity |
|||||||||||||||||||
Balance,
October 31, 2009 |
40 | $ | 4 | $ | 108 | $ | 2,075 | $ | 2,187 | ||||||||||||||
Net income
|
148 | 148 | |||||||||||||||||||||
Contributions
from owner |
158 | 158 | |||||||||||||||||||||
Balance,
October 31, 2010 |
40 | 4 | 108 | 2,381 | 2,493 | ||||||||||||||||||
Net income
|
35 | 35 | |||||||||||||||||||||
Distribution
to owner |
(136 | ) | (136 | ) | |||||||||||||||||||
Balance,
October 31, 2011 |
40 | $ | 4 | $ | 108 | $ | 2,280 | $ | 2,392 |
See accompanying notes to the financial
statements.
F-38
CINEMA SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the years ended October 31, 2011 and 2010
(in thousands)
STATEMENTS OF CASH FLOWS
For the years ended October 31, 2011 and 2010
(in thousands)
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows
from operating activities |
||||||||||
Net income
|
$ | 35 | $ | 148 | ||||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation
and amortization |
1,364 | 1,297 | ||||||||
Loss from
disposition of property and equipment |
83 | 42 | ||||||||
Deferred
taxes |
(157 ) | 210 | ||||||||
Changes in
operating assets and liabilities: |
||||||||||
Income tax
refund receivable |
194 | (2 | ) | |||||||
Inventory
|
(1 | ) | 3 | |||||||
Prepaid
expenses and other assets |
40 | 21 | ||||||||
Accounts
payable and accrued expenses |
338 | 376 | ||||||||
Deferred rent
|
(9 | ) | 13 | |||||||
Net cash
provided by operating activities |
1,887 | 2,108 | ||||||||
Cash flows
from investing activities |
||||||||||
Purchases of
property and equipment |
(35 | ) | (2,422 | ) | ||||||
Proceeds from
disposition of property and equipment |
| 4 | ||||||||
Net cash used
in investing activities |
(35 | ) | (2,418 | ) | ||||||
Cash flows
from financing activities |
||||||||||
Accrued
interest officers |
80 | 80 | ||||||||
Distribution
to owner |
(136 | ) | | |||||||
Contribution
from owner |
| 158 | ||||||||
Change in
bank overdraft |
172 | (69 | ) | |||||||
Payments
under capital lease obligations |
(46 | ) | (46 | ) | ||||||
Borrowings of
notes payable |
30 | 2,041 | ||||||||
Payments of
notes payable |
(1,935 | ) | (1,899 | ) | ||||||
Net cash
provided by (used in) financing activities |
(1,835 | ) | 265 | |||||||
Net change in
cash and cash equivalents |
17 | (45 | ) | |||||||
Cash and cash
equivalents at beginning of year |
50 | 95 | ||||||||
Cash and cash
equivalents at end of year |
$ | 67 | $ | 50 |
See accompanying notes to the financial
statements.
F-39
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
1. |
THE COMPANY AND BASIS OF PRESENTATION |
Cinema Supply, Inc. (the
Company) was incorporated in 1975 under the laws of the Commonwealth of Pennsylvania. The Company primarily operates movie theatres in six
locations in central Pennsylvania and sells theatre concession supplies principally in Pennsylvania.
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Use of
Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, those
related to film rent expense settlements, depreciation and amortization, impairments and income taxes. Actual results could differ from those
estimates.
Revenue
Recognition
Revenues are generated
principally through admissions and concessions sales for feature films with proceeds received in cash or credit card at the Companys point of
sale terminals at the Theatres. Revenue is recognized at the point of sale. Credit card sales are normally settled in cash within approximately three
business days from the point of sale, and any credit card chargebacks have been insignificant. Other operating revenues consist of amounts earned from
advertising, vending commissions and theatre rentals for parties and other activities, which are recognized as services are performed or earned under
contractual terms. The Company also sells theatre admissions in advance of the applicable event, and sells gift cards for patrons future use. The
Company defers the revenue from gift cards until considered redeemed. The Company estimates the gift card breakage rate based on historical redemption
patterns. Unredeemed gift cards are recognized as revenue only after such a period of time indicates, based on historical experience, the likelihood of
redemption is remote, and based on applicable laws and regulations, in evaluating the likelihood of redemption, the period outstanding, the level and
frequency of activity, and the period of inactivity is evaluated.
Cash
Equivalents
The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents. At October 31, 2011 and 2010, the Company held
substantially all of its cash in demand deposit accounts and overnight investments, and cash held at the theatres in the normal course of
business.
Accounts
receivable
Accounts receivable are recorded
at the invoiced amount for theatre concession supplies and do not bear interest. The Company reports accounts receivable net of any allowance for
doubtful accounts to represent the Companys estimate of the amount that ultimately will be realized in cash. The Company will review
collectability of accounts receivable based on the aging of the accounts and historical collection trends. When the Company ultimately concludes a
receivable is uncollectible, it is written off.
Inventories
Inventories consist of concession
products and related supplies. The Company states inventories on the basis of first-in, first-out method, stated at the lower of cost or
market.
F-40
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
Property and
Equipment
The Company states property and
equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently.
The Company records depreciation
and amortization using the straight-line method over the following estimated lives:
Leasehold
improvements |
lesser of
lease term or estimated useful life of asset |
|||||
Machinery and
Equipment |
310
years |
|||||
Furniture and
fixtures |
310
years |
|||||
Vehicles
|
5
years |
|||||
Buildings
|
1040
years |
Impairment of Long-Lived
Assets
The Company reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. The
Company generally evaluates assets for impairment on an individual theatre basis, which management believes is the lowest level for which there are
identifiable cash flows. If the sum of the expected future cash flows, undiscounted and without interest charges is less than the carrying amount of
the assets, the Company recognizes an impairment charge in the amount by which the carrying value of the assets exceeds their fair market
value.
The Company considers actual
theatre level cash flows, future years budgeted theatre level cash flows, theatre property and equipment carrying values, the age of a recently built
theatre, competitive theatres in the marketplace, the impact of recent ticket price changes, available lease renewal options and other factors
considered relevant in its assessment of impairment of individual theatre assets. The fair value of assets is determined using the present value of the
estimated future cash flows or the expected selling price less selling costs for assets of which the Company expects to dispose. Significant judgment
is involved in estimating cash flows and fair value.
There were no impairment charges
recorded for the years ended October 31, 2011 and 2010.
Concentration of Credit
Risk
Financial instruments that could
potentially subject the Company to concentration of credit risk, if held, would be included in accounts receivable. Collateral is not required on trade
receivables. It is anticipated that in the event of default, normal collection procedures would be followed.
Leases
All of the Companys theatre
operations are conducted in premises occupied under non-cancelable lease agreements. The Company, at its option, can renew the leases at defined rates
for various periods. Certain leases for Company theatres provide for contingent rentals based on the revenue results of the underlying theatre and
require the payment of taxes, insurance, and other costs applicable to the property. Also, certain leases contain escalating minimum rental provisions.
There are no conditions imposed upon the Company by its lease agreements or by parties other than the lessor that legally obligate the Company to incur
costs to retire assets as a result of a decision to vacate its leased properties. None of the leases require the Company to return the leased property
to the lessor in its original condition (allowing for normal wear and tear) or to remove leasehold improvements. The Company accounts for all of its
facility leases as operating leases. The Company accounts for its leases under the provisions of ASC Topic 840, Leases and other authoritative
accounting literature. The Company does not believe that exercise of the renewal options in its leases are reasonably assured at the inception date of
the lease agreements because the leases: (i) provide for either (a) renewal rents based on market rates or (b) renewal rents that equal or exceed the
initial rents, and (ii) do not impose economic penalties upon our determination whether or not to exercise the renewal option. As a result, there are
not sufficient economic incentives at the inception of
F-41
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
the leases, to consider that lease renewal options are reasonably assured of being exercised and therefore, the Company generally consider the initial base lease term under ASC Subtopic 840-10.
The Company leases certain
equipment for use in its theatres, under agreements that expire through December 2014. The Company accounts for these leases as capital
leases.
Fair Value of Financial
Instruments
The carrying amounts of cash,
cash equivalents, accounts receivable and accounts payable, approximate their fair values, due to their short term nature.
Income
Taxes
Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. The Company records a valuation allowance if it is deemed more likely than not that its deferred income tax assets will not be realized. The
Company reassesses its need for the valuation allowance for its deferred income taxes on an ongoing basis.
Additionally, income tax rules
and regulations are subject to interpretation, require judgment by the Company and may be challenged by the taxation authorities. In accordance with
ASC Subtopic 740-10, the Company recognizes a tax benefit only for tax positions that are determined to be more likely than not sustainable based on
the technical merits of the tax position. With respect to such tax positions for which recognition of a benefit is appropriate, the benefit is measured
at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions are evaluated on an
ongoing basis as part of the Companys process for determining the provision for income taxes. Any interest and penalties determined to result
from uncertain tax position will be classified as interest expense and other expense.
Deferred Rent
Expense
The Company recognizes rent
expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease
over its term.
Deferred Financing
Costs
Deferred financing costs consist
of unamortized debt issuance costs amortized on a straight-line basis over the term of the respective debt and are included in interest expense. The
straight-line basis is not materially different from the effective interest method. The amount included in interest expense was $8 for each of the
years ended October 31, 2011 and 2010, respectively.
Film Rent
Expense
The Company estimates film rent
expense settlements and related film rent payable based on managements best estimate of the ultimate settlement of the film costs with the film
distributors. Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The
length of time until these costs are known with certainty depends on the ultimate duration of the films theatrical run, but is typically
settled within one to two months of a particular films opening release. Upon settlement with the film distributors, film rent expense
and the related film rent payable are adjusted to the final film settlement.
F-42
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
Advertising
Costs
The Company expenses advertising
costs as incurred. Advertising costs incurred for the years ended October 31, 2011 and 2010 was $133 and $157, respectively.
Segments
As of October 31, 2011 and 2010,
the Company managed its business under one reportable segment: theatre exhibition operations. All of the Companys operations are located in the
United States.
Recent Accounting
Pronouncements
In May 2011, the FASB issued ASU
2011-4, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS, to substantially converge the
fair value measurement and disclosure guidance in US GAAP and IFRS. The most significant change in disclosures is an expansion of the information
required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The
Company will adopt this standard November 1, 2012 and does not expect the adoption of this standard to have a material impact on the financial
statements and disclosures.
In June 2011, the FASB issued ASU
2011-5, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components
in the statement of stockholders equity. Instead, an entity will be required to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The
Company will adopt this standard as of November 1, 2012 and does not expect it to have a material impact on the financial statements and
disclosures.
3. |
BALANCE SHEET COMPONENTS |
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other
current assets consisted of the following:
October 31, 2011 |
October 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Rent
|
$ | 14 | $ | 25 | ||||||
Insurance
|
26 | 28 | ||||||||
Real estate
taxes |
2 | 9 | ||||||||
Common area
maintenance |
3 | 16 | ||||||||
Other
|
8 | 8 | ||||||||
Total
|
$ | 53 | $ | 86 |
PROPERTY AND EQUIPMENT
Property and equipment, net was
comprised of the following:
October 31, 2011 |
October 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Leasehold
improvements |
$ | 15,787 | $ | 15,890 | ||||||
Machinery and
equipment |
3,574 | 3,592 | ||||||||
Furniture and
fixtures |
3,409 | 3,439 | ||||||||
Vehicles
|
150 | 150 | ||||||||
Buildings and
improvements |
69 | 92 | ||||||||
Land
|
32 | 32 | ||||||||
$ | 23,021 | $ | 23,195 | |||||||
Less:
accumulated depreciation and amortization |
(9,512 | ) | (8,275 | ) | ||||||
Property and
equipment, net |
$ | 13,509 | $ | 14,920 |
F-43
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
ACCRUED EXPENSES
Accrued expenses consisted of the
following:
October 31, 2011 |
October 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash deficit
|
$ | 263 | $ | 91 | ||||||
Deferred
revenue gift cards |
372 | 291 | ||||||||
Accrued
interest |
9 | 16 | ||||||||
Accrued
payroll |
69 | 55 | ||||||||
Accrued taxes
payable |
159 | 31 | ||||||||
Other accrued
expenses |
136 | 38 | ||||||||
Total
|
$ | 1,008 | $ | 522 |
5. |
LEASES |
OPERATING LEASES
The Company leases five theatre
facilities under operating leases for initial terms of 15-20 years. Each lease provides for monthly payments subject to rent escalations at each
renewal date. Each lease offers options to renew for periods ranging from 4 to 5 years. The Company is also required to pay real property taxes and
common maintenance expenses. In addition, rent includes an amount equal to a percentage of revenue generated in excess of a base amount of total sales.
The Company leases the corporate office, warehouse, and a drive-in theatre from a related party for rent expense of $11 for each of the years ended
October 31, 2011 and 2010, respectively. There is no set lease maturity. The Company also leases theatre equipment and office equipment under operating
leases expiring at various dates through September 2013. Lease rent expense amounted to $1,459 and $1,451 for the years ended October 31, 2011 and
2010, respectively. Included in lease rent expense is percentage rent totaling $52 and $ 6 for the years ended October 31, 2011 and 2010,
respectively.
At year-end, future minimum lease
payments approximated:
Year |
Amount |
|||||
---|---|---|---|---|---|---|
2012
|
$ | 1,489 | ||||
2013
|
1,338 | |||||
2014
|
1,382 | |||||
2015
|
1,382 | |||||
2016
|
1,316 | |||||
Thereafter
|
7,580 | |||||
$ | 14,487 |
CAPITAL LEASES
The Company leases certain
equipment under capital leases that expire through December 2014. The assets are being amortized over the shorter of their lease terms or their
estimated useful lives. The applicable amortization is included in depreciation and amortization expense in the accompanying financial statements.
Amortization of assets under capital leases charged to expense during the years ended October 31, 2011 and 2010 was $62 and $52,
respectively.
The following is a summary of
property held under capital leases included in property and equipment:
October 31, 2011 |
October 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Equipment
|
$ | 312 | $ | 312 | ||||||
Less:
accumulated amortization |
114 | 52 | ||||||||
Net
|
$ | 198 | $ | 260 |
F-44
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
Future maturities of capital
lease payments as of October 31, 2011 for each of the next five years and in the aggregate are:
Year ending |
||||||
---|---|---|---|---|---|---|
2012
|
$ | 76 | ||||
2013
|
76 | |||||
2014
|
76 | |||||
2015
|
6 | |||||
Total minimum
payments |
234 | |||||
Less: amount
representing interest |
(37 | ) | ||||
Present value of
minimum lease payments |
$ | 197 | ||||
Less: current
maturity |
(56 | ) | ||||
$ | 141 |
6. |
NOTES PAYABLE |
NOTES AND LEASEHOLD MORTGAGES PAYABLE
Notes and mortgages payable at
October 31, 2011 and 2010 consisted of the following:
2011: |
|
|
Total |
|
Current portion |
|
Non-current portion |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
A |
Leasehold mortgage payable-bank |
$ | 54 | $ | 54 | $ | | |||||||||||
B |
Leasehold mortgage payable-bank |
211 | 211 | | ||||||||||||||
C |
Leasehold mortgage payable-bank |
2,038 | 661 | 1,377 | ||||||||||||||
D |
Leasehold mortgage payable-bank |
800 | 160 | 640 | ||||||||||||||
E |
Leasehold mortgage payable-bank |
1,748 | 175 | 1,573 | ||||||||||||||
F |
Note
payable Ford credit |
20 | 9 | 11 | ||||||||||||||
G |
Note
payable bank |
3 | 3 | | ||||||||||||||
H |
Note
payable-officers |
1,510 | | 1,510 | ||||||||||||||
I |
Note
payable-officers |
250 | | 250 | ||||||||||||||
J |
Line
of credit |
509 | 509 | | ||||||||||||||
Total |
$ | 7,143 | $ | 1,782 | $ | 5,361 |
2010: |
|
|
Total |
|
Current portion |
|
Non-current portion |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
A |
Leasehold mortgage payable-bank |
$ | 581 | $ | 581 | $ | | |||||||||||
B |
Leasehold mortgage payable-bank |
674 | 502 | 172 | ||||||||||||||
C |
Leasehold mortgage payable-bank |
2,668 | 632 | 2,036 | ||||||||||||||
D |
Leasehold mortgage payable-bank |
949 | 149 | 800 | ||||||||||||||
E |
Leasehold mortgage payable-bank |
1,900 | 165 | 1,735 | ||||||||||||||
F |
Note
payable Ford credit |
27 | 8 | 19 | ||||||||||||||
G |
Note
payable bank |
7 | 4 | 3 | ||||||||||||||
H |
Note
payable-officers |
1,510 | | 1,510 | ||||||||||||||
I |
Note
payable-officers |
250 | | 250 | ||||||||||||||
J |
Line
of credit |
478 | 478 | | ||||||||||||||
K |
Note
payable Town and country LLC |
2 | 2 | | ||||||||||||||
Total |
$ | 9,046 | $ | 2,521 | $ | 6,525 |
F-45
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
A) |
Leasehold mortgage payable bank, carries an interest rate of prime plus 1/2% based on the Wall Street Journal prime lending rate and requires monthly payments sufficient to amortize the loan until maturity. The maturity date of the loan is April 2011. The interest rate at year-end 2011 and 2010 was 4.50%. The note is collateralized by substantially all the assets of the Company and personally guaranteed by the corporate officers and a related partnership of which the corporate officers own 100%. In addition, the personal residence of the corporate officers is pledged as collateral for the notes as well as the assignment of a life insurance policy on one corporate officer totaling $2. The corporate officers may not encumber any personal investments they own without the Banks permission. The note is collateralized by 100% of the Company stock and an assignment of each theatre lease. The proceeds of the loan were used to build the Selinsgrove theatre, |
The Companys loan agreement with the bank contains certain restrictions and covenants. Under these restrictions, the Company must maintain a debt to net worth ratio of no more than 5.75 to 1 and maintain a debt service coverage ratio of a minimum of 1.20 to 1. The Company was in violation of this covenant. The Company has obtained a waiver of the 2011 and 2010 debt service coverage ratio which cures the debt covenant violation whereas the bank will not call the debt due. In addition, the corporate officers may not encumber their personal marketable securities without the banks consent. |
B) |
Leasehold mortgage payable bank, carries an interest rate of prime based on the commercial prime rate of Susquehanna Bank and requires monthly payments sufficient to amortize the loan until maturity. The maturity date of the loan is February 2012. The interest rate at year-end 2011 and 2010 was 4.5%. The note is collateralized as noted in A) above. The proceeds of the loan were used to build the Reading theatre. |
C) |
Leasehold mortgage payable bank, carries an interest rate of 6.5% for 48 months with a variable rate indexed to the Wall Street Journal prime lending rate thereafter. Current monthly payments total $ 62. The maturity date of the loan is March 2015. The interest rate at year-end 2011 and 2010 was 4.50%. The note is collateralized as described in A) above. The proceeds of the loan were used to build the Camp Hill theatre. |
D) |
Leasehold mortgage payable bank, carries an interest rate of 6.85% for 60 months with an adjustment to the prime rate of interest as published in the money rates column of the Wall Street Journal thereafter. Interest payments only commence for the first twelve months, followed by monthly payments of principal and interest totaling $ 2. After 54 months, the monthly installments will be increased or decreased in an amount necessary to amortize the principal of this loan until maturity in March 2016 at the then-prevailing rate of the index. The note is collateralized as described in A) above. The proceeds of the loan were used to purchase furniture and fixtures and equipment for the Williamsport theatre. |
E) |
Lease mortgage payable bank, carries an interest rate of 7.00% for six monthly payments of interest only, 54 monthly payments of $23 at an interest of 7.00%, 59 monthly payments of $22 with interest calculated based on the prime rate of interest as published in the money rates section of the Wall Street journal. The loan matures in January 2020. The note is collateralized as described in A) above. The proceeds of the loan were used to renovate the Bloomsburg theatre. |
F) |
Note payable Ford credit, payable at $776 monthly, 36 payments until December 31, 2013, including interest at 0.9% and collateralized by the vehicle purchased. |
G) |
Note payable bank, payable at $360 monthly, 36 payments until July 2012, including interest at 7.59% and collateralized by the vehicle purchased. |
H) |
Notes payable officers, carries an interest rate of 4.61%. Monthly payments of principal totaling $4 plus interest are required. The bank requires that the Company meet all financial covenants before the payment of principal on this loan unless approved by the bank. The loan matures in March 2016. The borrowings were used to finance theatre projects and to provide operating capital. The note is subordinated to the bank loans noted above and is unsecured. |
F-46
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
I) |
Notes payable officers, carries an interest rate of 4.35%. Interest payments are required at least annually. The loan matures in October 2016 and is unsecured. The note is subordinated to the bank loans noted above. The proceeds of the loan were used for operating capital. |
J) |
Line of credit The Company has an available line-of-credit from a bank for $600. The credit line carries an interest rate at prime based on the Wall Street Journal prime lending rate and is collateralized by the assets noted in A) above. The credit line is renewable annually. The interest rate at October 31, 2011 and 2010 was 4.50%. The Company had outstanding $ 509 and $ 478 at October 31, 2011 and 2010, respectively. The line of credit is guaranteed by officers of the Company. |
K) |
Note payable Town and Country LLC, payable at $338 monthly, 36 payments until March 2011, including interest at 6.68% and collateralized by the equipment purchased. |
Maturities of notes, mortgages payable and line of credit for each of the next five years based on amounts due at October 31, 2011 are as follows: |
Years Ending October 31, |
||||||
---|---|---|---|---|---|---|
2012
|
$ | 1,782 | ||||
2013
|
1,050 | |||||
2014
|
1,060 | |||||
2015
|
406 | |||||
2016
|
2,066 | |||||
Thereafter
|
779 | |||||
$ | 7,143 |
7. |
INCOME TAXES |
The components of the income tax
provision for the years ended October 31, 2011 and 2010 are as follows:
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Federal: |
||||||||||
Current
|
$ | 155 | $ | (91 | ) | |||||
Deferred
|
(140 | ) | 176 | |||||||
Total Federal
|
15 | 85 | ||||||||
State: |
||||||||||
Current
|
33 | (17 | ) | |||||||
Deferred
|
(16 | ) | 34 | |||||||
Total State
|
17 | 17 | ||||||||
Total income
tax provision |
$ | 32 | $ | 102 |
Significant components of the
Companys net deferred tax liabilities consisted of the following as of October 31, 2011 and 2010:
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Deferred tax assets: |
||||||||||
Accrued
expenses current |
$ | 151 | $ | 118 | ||||||
Accrued
expenses long term |
140 | 109 | ||||||||
Total
deferred tax assets |
291 | 227 | ||||||||
Deferred tax liabilities: |
||||||||||
Property and
equipment |
(1,146 | ) | (1,239 | ) | ||||||
Total
deferred tax (liabilities) |
(1,146 | ) | (1,239 | ) | ||||||
Net deferred
tax liabilities |
$ | (855 | ) | $ | (1,012 | ) |
F-47
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
The differences between the
United States statutory federal tax rate and the Companys effective tax rate are as follows:
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Provision at
the U.S. Statutory federal tax rate |
34.0 | % | 34.0 | % | ||||||
State income
taxes, net of federal benefit |
7.8 | % | 6.6 | % | ||||||
Non-deductible expenses |
5.5 | % | .2 | % | ||||||
Income tax
provision |
47.3 | % | 40.8 | % |
The Company utilizes accounting
principles under ASC Subtopic 740-10 to assess the accounting and disclosure for uncertainty in income taxes. The Company recognizes accrued interest
and penalties associated with uncertain tax positions, if any, as part of income tax expense. There were no income tax related interest and penalties
recorded for the fiscal years ended October 31, 2011 and 2010. Additionally, the Company has not recorded an asset for unrecognized tax benefits or a
liability for uncertain tax positions at October 31, 2011 and 2010. The Company files income tax returns in the U.S. federal jurisdiction and
Pennsylvania. For federal and state income tax purposes, the Companys years ended October 31, 2011 through 2008 remains open for examination by
the tax authorities.
8. |
COMMITMENTS AND CONTINGENCIES |
Management believes that it is in
substantial compliance with all relevant laws and regulations that apply to the Company, and is not aware of any current, pending or threatened
litigation that could materially impact the Company.
All of the Companys current
operations are located in Pennsylvania, with the customer base being public attendance. The Companys main suppliers are the major movie studios,
primarily located in the greater Los Angeles area. Any events impacting the region the Company operates in, or impacting the movie studios, who supply
movies to the Company, could significantly impact the Companys financial condition and results of operations.
9. |
STOCKHOLDERS EQUITY |
Capital
Stock
As of October 31, 2011 and 2010,
the Companys authorized capital stock consisted of 100 shares of common stock. As of October 31, 2011 and 2010, 40 shares were issued and
outstanding. All of the shares were held by one individual.
Dividends
No dividends were declared on the
Companys common stock during the years ended October 30, 2011 and 2010 and the Company does not anticipate doing so.
10. |
RELATED PARTY TRANSACTIONS |
The Company borrowed from its
officers under terms of the loan agreements described in Note 6. The Company used the funds for construction and expansion projects and for operating
capital. Interest accrued on these loans at October 31, 2011 and 2010 totaled $334 and $254, respectively. Interest expense was $80 for each of the
years ended October 31, 2011 and 2010.
The Company leases the corporate
office, warehouse, and a drive-in theatre from a related party for rent expense of $11 for each of the years ended October 31, 2011 and 2010,
respectively.
F-48
CINEMA SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
NOTES TO FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
(in thousands except share data)
11. |
RETIREMENT PLAN |
The Company makes contributions
to a SIMPLE IRA plan for the benefit of each eligible employee. The Company provides a match contribution equal to 3% of the covered employees
compensation. The Companys contribution for years ended October 31, 2011 and 2010 totaled $10 and $ 9, respectively.
12. |
SUPPLEMENTAL CASH FLOW DISCLOSURE |
October 31, 2011 |
October 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest paid
|
$ | 383 | $ | 341 | ||||||
Income taxes
paid |
34 | | ||||||||
Assets
acquired under capital leases |
| 290 |
13. |
SUBSEQUENT EVENTS |
In May 2011, Cinema Supply, Inc.
executed an asset purchase agreement for the Theatres for sale of Theatre assets and assumption of Theatre operating lease by a subsidiary of Digital
Cinema Destinations Corp. (Digiplex), an operator of movie theatres headquartered in New Jersey. The acquisition of the Theatres is
contingent upon Digiplex obtaining financing sufficient to fund the purchase price. The agreed upon purchase price for the Theatres is $14,000, payable
in cash. The asset purchase agreement may be terminated by the Company if the acquisition is not completed by December 31, 2011; however Digiplex may
extend this termination option to March 31, 2012, by paying the company $100 by December 31, 2011. The payment of $100 would be treated as a
non-refundable deposit against the purchase price. None of the Companys existing liabilities, notes payable and capital leases would be assumed
by Digiplex.
F-49
CINEMA SUPPLY, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
CONDENSED BALANCE SHEETS
(in thousands, except share and per share data)
January 31, 2012 |
October 31, 2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
(unaudited) |
||||||||||
ASSETS |
||||||||||
CURRENT
ASSETS |
||||||||||
Cash and cash
equivalents |
$ | 78 | $ | 67 | ||||||
Accounts
receivable |
10 | 11 | ||||||||
Inventory
|
50 | 61 | ||||||||
Deferred
taxes |
319 | 151 | ||||||||
Prepaid
expenses and other |
93 | 53 | ||||||||
Total current
assets |
550 | 343 | ||||||||
Property and
equipment, net |
13,200 | 13,509 | ||||||||
Deferred
financing costs, net |
25 | 27 | ||||||||
TOTAL ASSETS
|
$ | 13,775 | $ | 13,879 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||
CURRENT
LIABILITIES |
||||||||||
Accounts
payable |
$ | 769 | $ | 843 | ||||||
Accrued
expenses |
1,558 | 1,008 | ||||||||
Notes
payable, current portion |
1,402 | 1,782 | ||||||||
Capital lease
obligations, current portion |
58 | 56 | ||||||||
Total current
liabilities |
3,787 | 3,689 | ||||||||
Accrued
interest officers |
353 | 334 | ||||||||
Notes
payable, net of current portion |
3,346 | 3,601 | ||||||||
Note payable
officers |
1,760 | 1,760 | ||||||||
Deferred rent
expense |
953 | 957 | ||||||||
Deferred
taxes |
903 | 1,005 | ||||||||
Capital lease
obligations, net of current portion |
125 | 141 | ||||||||
TOTAL
LIABILITIES |
11,227 | 11,487 | ||||||||
COMMITMENTS
AND CONTINGENCIES |
||||||||||
STOCKHOLDERS EQUITY |
||||||||||
Common stock,
$100 par value: 100 shares authorized, 40 shares issued and outstanding |
4 | 4 | ||||||||
Additional
paid-in-capital |
108 | 108 | ||||||||
Retained
earnings |
2,436 | 2,280 | ||||||||
Total
stockholders equity |
2,548 | 2,392 | ||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 13,775 | $ | 13,879 |
The accompanying notes are an integral part of the unaudited
condensed financial statements
F-50
CINEMA SUPPLY, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2012 AND 2011
(In thousands)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2012 AND 2011
(In thousands)
2012 |
2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
REVENUES |
||||||||||
Admissions
|
$ | 2,574 | $ | 2,687 | ||||||
Concessions
|
1,175 | 1,091 | ||||||||
Other
|
131 | 175 | ||||||||
Total
revenues |
3,880 | 3,953 | ||||||||
COSTS AND
EXPENSES |
||||||||||
Cost of
operations: |
||||||||||
Film rent
expense |
1,525 | 1,514 | ||||||||
Cost of
concessions |
167 | 172 | ||||||||
Salaries and
wages |
360 | 361 | ||||||||
Facility
lease expense |
346 | 367 | ||||||||
Utilities and
other |
624 | 645 | ||||||||
General and
administrative expenses |
224 | 200 | ||||||||
Depreciation
and amortization |
310 | 341 | ||||||||
Total costs
and expenses |
3,556 | 3,600 | ||||||||
OPERATING
INCOME |
324 | 353 | ||||||||
Interest
expense |
99 | 125 | ||||||||
Income before
income taxes |
225 | 228 | ||||||||
Income tax
expense |
96 | 108 | ||||||||
NET INCOME
|
$ | 129 | $ | 120 |
The accompanying notes are an integral part of the unaudited
condensed financial statements
F-51
CINEMA SUPPLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2012 AND 2011
(in thousands)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 2012 AND 2011
(in thousands)
2012 |
2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows
from operating activities |
||||||||||
Net income
|
$ | 129 | $ | 120 | ||||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation
and amortization |
310 | 341 | ||||||||
Deferred
taxes |
(270 | ) | (535 | ) | ||||||
Changes in
operating assets and liabilities: |
||||||||||
Accounts
receivable |
1 | (11 | ) | |||||||
Income tax
refund receivable |
| (10 | ) | |||||||
Inventory
|
11 | 5 | ||||||||
Prepaid
expenses and other assets |
(38 | ) | 11 | |||||||
Accounts
payable and accrued expenses |
476 | 824 | ||||||||
Deferred rent
|
(4 | ) | (5 | ) | ||||||
Net cash
provided by operating activities |
615 | 740 | ||||||||
Cash flows
from financing activities |
||||||||||
Accrued
interest officers |
19 | 19 | ||||||||
Distribution
to owner |
| (150 | ) | |||||||
Contribution
from owner |
26 | | ||||||||
Payments
under capital lease obligations |
(14 | ) | (11 | ) | ||||||
Payments of
notes payable |
(635 | ) | (580 | ) | ||||||
Net cash used
in financing activities |
(604 | ) | (722 | ) | ||||||
Net change in
cash and cash equivalents |
11 | 18 | ||||||||
Cash and cash
equivalents at beginning of period |
67 | 50 | ||||||||
Cash and cash
equivalents at end of period |
$ | 78 | $ | 68 |
The accompanying notes are an integral part of the unaudited
condensed financial statements
F-52
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
1. |
THE COMPANY AND BASIS OF PRESENTATION |
Cinema Supply, Inc. (the
Company) was incorporated in 1975 under the laws of the Commonwealth of Pennsylvania. The Company primarily operates movie theatres in six
locations in central Pennsylvania and sells theatre concession supplies principally in Pennsylvania.
The accompanying unaudited
condensed financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States of America
(U.S. GAAP) for interim financial information. Certain information and disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted. Accordingly, these condensed financial statements should be read in conjunction with the
Companys historical financial statements and accompanying notes for the years ended October 31, 2011 and 2010, included in this Form S-1
Registration Statement. In the opinion of management, all adjustments, consisting of a normal recurring nature, considered necessary for a fair
presentation have been included in the unaudited condensed financial statements. The operating results for the three months ended January 31, 2012 are
not necessarily indicative of the results expected for the full year ending October 31, 2012.
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Use of
Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, those
related to film rent expense settlements, depreciation and amortization, impairments and income taxes. Actual results could differ from those
estimates.
Revenue
Recognition
Revenues are generated
principally through admissions and concessions sales for feature films with proceeds received in cash or credit card at the Companys point of
sale terminals at the Theatres. Revenue is recognized at the point of sale. Credit card sales are normally settled in cash within approximately three
business days from the point of sale, and any credit card chargebacks have been insignificant. Other operating revenues consist of amounts earned from
advertising, vending commissions and theatre rentals for parties and other activities, which are recognized as services are performed or earned under
contractual terms. The Company also sells theatre admissions in advance of the applicable event, and sells gift cards for patrons future use. The
Company defers the revenue from gift cards until considered redeemed. The Company estimates the gift card breakage rate based on historical redemption
patterns. Unredeemed gift cards are recognized as revenue only after such a period of time indicates, based on historical experience, the likelihood of
redemption is remote, and based on applicable laws and regulations, in evaluating the likelihood of redemption, the period outstanding, the level and
frequency of activity, and the period of inactivity is evaluated.
Cash
Equivalents
The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents. At January 31, 2012 and October 31, 2011, the
Company held substantially all of its cash in demand deposit accounts and overnight investments, and cash held at the theatres in the normal course of
business.
F-53
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
Accounts
receivable
Accounts receivable are recorded
at the invoiced amount for theatre concession supplies and do not bear interest. The Company reports accounts receivable, net of any allowance for
doubtful accounts, to represent the Companys estimate of the amount that ultimately will be realized in cash. The Company will review
collectability of accounts receivable based on the aging of the accounts and historical collection trends. When the Company ultimately concludes a
receivable is uncollectible, it is written off.
Inventories
Inventories consist of concession
products and related supplies. The Company states inventories on the basis of first-in, first-out method, stated at the lower of cost or
market.
Property and
Equipment
The Company states property and
equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently.
The Company records depreciation
and amortization using the straight-line method over the following estimated lives:
Leasehold
improvements |
lesser of
lease term or estimated useful life of asset |
|||||
Machinery and
equipment |
310
years |
|||||
Furniture and
fixtures |
310
years |
|||||
Vehicles
|
5
years |
|||||
Buildings
|
1040
years |
Concentration of Credit
Risk
Financial instruments that could
potentially subject the Company to concentration of credit risk, if held, would be included in accounts receivable. Collateral is not required on trade
receivables. It is anticipated that in the event of default, normal collection procedures would be followed.
Fair Value of Financial
Instruments
The carrying amounts of cash,
cash equivalents, accounts receivable and accounts payable, approximate their fair values, due to their short term nature.
Deferred Rent
Expense
The Company recognizes rent
expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease
over its term.
Film Rent
Expense
The Company estimates film rent
expense settlements and related film rent payable based on managements best estimate of the ultimate settlement of the film costs with the film
distributors. Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The
length of time until these costs are known with certainty depends on the ultimate duration of the films theatrical run, but is typically
settled within one to two months of a particular films opening release. Upon settlement with the film distributors, film rent expense
and the related film rent payable are adjusted to the final film settlement.
F-54
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
Segments
As of January 31, 2012, the
Company managed its business under one reportable segment: theatre exhibition operations. All of the Companys operations are located in the
United States.
Recent Accounting
Pronouncements
In May 2011, the FASB issued ASU
2011-4, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS, to substantially converge the
fair value measurement and disclosure guidance in US GAAP and IFRS. The most significant change in disclosures is an expansion of the information
required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The
Company will adopt this standard November 1, 2012 and does not expect the adoption of this standard to have a material impact on the financial
statements and disclosures.
In June 2011, the FASB issued ASU
2011-5, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components
in the statement of stockholders equity. Instead, an entity will be required to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The
Company will adopt this standard as of November 1, 2012 and does not expect it to have a material impact on the financial statements and
disclosures.
3. |
PROPERTY AND EQUIPMENT |
Property and equipment, net was
comprised of the following:
January 31, 2012 |
October 31, 2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Leasehold
improvements |
$ | 15,787 | $ | 15,787 | ||||||
Machinery and
equipment |
3,574 | 3,574 | ||||||||
Furniture and
fixtures |
3,409 | 3,409 | ||||||||
Vehicles
|
150 | 150 | ||||||||
Buildings and
improvements |
69 | 69 | ||||||||
Land
|
32 | 32 | ||||||||
$ | 23,021 | $ | 23,021 | |||||||
Less:
accumulated depreciation and amortization |
(9,821 | ) | (9,512 | ) | ||||||
Property and
equipment, net |
$ | 13,200 | $ | 13,509 |
4. |
LEASES |
OPERATING LEASES
The Company leases five theatre
facilities under operating leases for initial terms of 15-20 years. Each lease provides for monthly payments subject to rent escalations at each
renewal date. Each lease offers options to renew for periods ranging from 4 to 5 years. The Company is also required to pay real property taxes and
common maintenance expenses. In addition, rent includes an amount equal to a percentage of revenue generated in excess of a base amount of total sales.
The Company leases the corporate office, warehouse, and a drive-in theatre from a related party for rent expense of less than $1 for each of the three
months ended January 31, 2012 and 2011. There is no set lease maturity. The Company also leases theatre equipment and office equipment under operating
leases expiring at various dates through September 2013. Lease rent expense amounted to $346 and $367 for the three months ended January 31, 2012 and
2011, respectively. Included in lease rent expense is percentage rent totaling $4 for each of the three months ended January 31, 2012 and
2011.
F-55
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
At January 31, 2012 future
minimum lease payments over the next five years, including the remainder of Fiscal 2012 approximated:
Fiscal Year |
Amount |
|||||
---|---|---|---|---|---|---|
2012
|
$ | 1,072 | ||||
2013
|
1,338 | |||||
2014
|
1,382 | |||||
2015
|
1,382 | |||||
2016
|
1,316 | |||||
2017
|
988 | |||||
Thereafter
|
6,592 | |||||
$ | 14,070 |
CAPITAL LEASES
The Company leases certain
equipment under capital leases that expire through December 2014. The assets are being amortized over the shorter of their lease terms or their
estimated useful lives. The applicable amortization is included in depreciation and amortization expense in the accompanying financial statements.
Amortization of assets under capital leases charged to expense during each of the three months ended January 31, 2012 and 2011 was
$16.
The following is a summary of
equipment held under capital leases included in property and equipment:
January 31, 2012 |
October 31, 2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Equipment |
$ | 312 | $ | 312 | ||||||
Less:
accumulated amortization |
130 | 114 | ||||||||
Net |
$ | 182 | $ | 198 |
Future maturities of capital
lease obligations as of January 31, 2012 over the next five years, including the remainder of Fiscal 2012 is as follows:
Fiscal Year |
Amount | |||||
---|---|---|---|---|---|---|
2012
|
$ | 72 | ||||
2013
|
74 | |||||
2014 |
76 | |||||
2015
|
6 | |||||
2016
|
| |||||
Thereafter
|
| |||||
Total minimum
payments |
228 | |||||
Less: amount
representing interest |
(45 | ) | ||||
Present value of
minimum payments |
183 | |||||
Less: current
portion |
(58 | ) | ||||
$ | 125 |
F-56
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
5. |
NOTES PAYABLE AND LEASEHOLD MORTGAGES PAYABLE |
Notes payable and leasehold
mortgages payable at January 31, 2012 and October 31, 2011 consisted of the following:
January 31, 2012: |
|
|
Total |
|
Current portion |
|
Non-current portion |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
B |
Leasehold mortgage payable-bank |
$ | 52 | $ | 52 | $ | | |||||||||||
C |
Leasehold mortgage payable-bank |
1,875 | 668 | 1,207 | ||||||||||||||
D |
Leasehold mortgage payable-bank |
761 | 163 | 598 | ||||||||||||||
E |
Leasehold mortgage payable-bank |
1,697 | 165 | 1,532 | ||||||||||||||
F |
Note
payable Ford credit |
18 | 9 | 9 | ||||||||||||||
G |
Note
payable bank |
2 | 2 | | ||||||||||||||
H |
Note
payable-officers |
1,510 | | 1,510 | ||||||||||||||
I |
Note
payable-officers |
250 | | 250 | ||||||||||||||
J |
Line
of credit |
343 | 343 | | ||||||||||||||
Total |
$ | 6,508 | $ | 1,402 | $ | 5,106 |
October 31, 2011: |
|
|
Total |
|
Current portion |
|
Non-current portion |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
A |
Leasehold mortgage payable-bank |
$ | 54 | $ | 54 | $ | | |||||||||||
B |
Leasehold mortgage payable-bank |
211 | 211 | | ||||||||||||||
C |
Leasehold mortgage payable-bank |
2,038 | 661 | 1,377 | ||||||||||||||
D |
Leasehold mortgage payable-bank |
800 | 160 | 640 | ||||||||||||||
E |
Leasehold mortgage payable-bank |
1,748 | 175 | 1,573 | ||||||||||||||
F |
Note
payable Ford credit |
20 | 9 | 11 | ||||||||||||||
G |
Note
payable bank |
3 | 3 | | ||||||||||||||
H |
Note
payable-officers |
1,510 | | 1,510 | ||||||||||||||
I |
Note
payable-officers |
250 | | 250 | ||||||||||||||
J |
Line
of credit |
509 | 509 | | ||||||||||||||
Total |
$ | 7,143 | $ | 1,782 | $ | 5,361 |
A) |
Leasehold mortgage payable bank, carries an interest rate of prime plus 1/2% based on the Wall Street Journal prime lending rate and requires monthly payments sufficient to amortize the loan until maturity. The maturity date of the loan is April 2011. The interest rate at year-end 2011 and 2010 was 4.50%. The note is collateralized by substantially all the assets of the Company and personally guaranteed by the corporate officers and a related partnership of which the corporate officers own 100%. In addition, the personal residence of the corporate officers is pledged as collateral for the notes as well as the assignment of a life insurance policy on one corporate officer totaling $2. The corporate officers may not encumber any personal investments they own without the Banks permission. The note is collateralized by 100% of the Company stock and an assignment of each theatre lease. The proceeds of the loan were used to build the Selinsgrove theatre, |
The Companys loan agreement with the bank contains certain restrictions and covenants. Under these restrictions, the Company must maintain a debt to net worth ratio of no more than 5.75 to 1 and maintain a debt service coverage ratio of a minimum of 1.20 to 1 annually. The Company was in violation of this covenant as of October 31, 2011. The Company obtained a waiver of the October 31, 2011 debt service coverage ratio which cures the debt covenant violation whereas the bank will not call the debt due. In addition, the corporate officers may not encumber their personal marketable securities without the banks consent. |
F-57
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
B) |
Leasehold mortgage payable bank, carries an interest rate of prime based on the commercial prime rate of Susquehanna Bank and requires monthly payments sufficient to amortize the loan until maturity. The maturity date of the loan is February 2012. The interest rate for the three months ended January 31, 2012 and 2011 was 4.5%. The note is collateralized as noted in A) above. The proceeds of the loan were used to build the Reading theatre. |
C) |
Leasehold mortgage payable bank, carries an interest rate of 6.5% for 48 months with a variable rate indexed to the Wall Street Journal prime lending rate thereafter. Current monthly payments total $ 62. The maturity date of the loan is March 2015. The interest rate for the three months ended January 31, 2012 and 2011 was 4.5%. The note is collateralized as described in A) above. The proceeds of the loan were used to build the Camp Hill theatre. |
D) |
Leasehold mortgage payable bank, carries an interest rate of 6.85% for 60 months with an adjustment to the prime rate of interest as published in the money rates column of the Wall Street Journal thereafter. Interest payments only commence for the first twelve months, followed by monthly payments of principal and interest totaling $ 2. After 54 months, the monthly installments will be increased or decreased in an amount necessary to amortize the principal of this loan until maturity in March 2016 at the then-prevailing rate of the index. The note is collateralized as described in A) above. The proceeds of the loan were used to purchase furniture and fixtures and equipment for the Williamsport theatre. |
E) |
Lease mortgage payable bank, carries an interest rate of 7.00% for six monthly payments of interest only, 54 monthly payments of $23 at an interest of 7.00%, 59 monthly payments of $22 with interest calculated based on the prime rate of interest as published in the money rates section of the Wall Street journal. The loan matures in January 2020. The note is collateralized as described in A) above. The proceeds of the loan were used to renovate the Bloomsburg theatre. |
F) |
Note payable Ford credit, payable at $776 monthly, 36 payments until December 31, 2013, including interest at 0.9% and collateralized by the vehicle purchased. |
G) |
Note payable bank, payable at $360 monthly, 36 payments until July 2012, including interest at 7.59% and collateralized by the vehicle purchased. |
H) |
Notes payable officers, carries an interest rate of 4.61%. Monthly payments of principal totaling $4 plus interest are required. The bank requires that the Company meet all financial covenants before the payment of principal on this loan unless approved by the bank. The loan matures in March 2016. The borrowings were used to finance theatre projects and to provide operating capital. The note is subordinated to the bank loans noted above and is unsecured. |
I) |
Notes payable officers, carries an interest rate of 4.35%. Interest payments are required at least annually. The loan matures in October 2016 and is unsecured. The note is subordinated to the bank loans noted above. The proceeds of the loan were used for operating capital. |
J) |
Line of credit The Company has an available line-of-credit from a bank for $600. The credit line carries an interest rate at prime based on the Wall Street Journal prime lending rate and is collateralized by the assets noted in A) above. The credit line is renewable annually. The interest rate for the three months ended January 31, 2012 and 2011 was 4.5%. The Company had outstanding $343 and $509 at January 31, 2012 and October 31, 2011, respectively. The line of credit is guaranteed by officers of the Company. |
F-58
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
6. |
INCOME TAXES |
The Companys provision for
income tax was approximately $96 and $108 for the three months ended January 31, 2012 and 2011, respectively, or 42.6% and 47.2% of pre-tax income for
the three months ended January 31, 2012 and 2011, respectively The effective tax rates for 2012 and 2011 periods reflect provisions for both current
and deferred federal and state income taxes.
The Company utilizes accounting
principles under ASC Subtopic 740-10 to assess the accounting and disclosure for uncertainty in income taxes. The Company recognizes accrued interest
and penalties associated with uncertain tax positions, if any, as part of income tax expense. There were no income tax related interest and penalties
recorded for the three months ended January 31, 2012 and 2011. Additionally, the Company has not recorded an asset for unrecognized tax benefits or a
liability for uncertain tax positions at January 31, 2012 and 2011. The Company files income tax returns in the U.S. federal jurisdiction and
Pennsylvania. For federal and state income tax purposes, our years ended October 31, 2011 through 2008 remain open for examination by the tax
authorities.
7. |
COMMITMENTS AND CONTINGENCIES |
Management believes that it is in
substantial compliance with all relevant laws and regulations that apply to the Company, and is not aware of any current, pending or threatened
litigation that could materially impact the Company.
All of the Companys current
operations are located in Pennsylvania, with the customer base being public attendance. The Companys main suppliers are the major movie studios,
primarily located in the greater Los Angeles area. Any events impacting the region the Company operates in, or impacting the movie studios, who supply
movies to the Company, could significantly impact the Companys financial condition and results of operations.
8. |
STOCKHOLDERS EQUITY |
Capital
Stock
As of January 31, 2012 and
October 31, 2011, the Companys authorized capital stock consisted of 100 shares of common stock. As of January 31, 2012 and October 31, 2011, 40
shares were issued and outstanding. All of the shares were held by one individual.
Dividends
No dividends were declared on the
Companys common stock during the three months ended January 31, 2012 and 2011. The Company does not anticipate declaring dividends in the
immediate future.
9. |
RELATED PARTY TRANSACTIONS |
The Company borrowed from its
officers under terms of the loan agreements described in Note 5. The Company used the funds for construction and expansion projects and for operating
capital. Interest accrued on these loans at January 31, 2012 and October 31, 2011 totaled $353 and $334, respectively. Interest expense was $18 for
each of the three months ended January 31, 2012 and 2011.
The Company leases the corporate
office, warehouse, and a drive-in theatre from a related party for rent expense of $2 for each of the three months ended January 31, 2012 and
2011.
F-59
CINEMA SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share data)
10. |
SUPPLEMENTAL CASH FLOW DISCLOSURE |
Supplemental cash flow
disclosures for the three months ended January 31, 2012 and 2011 were as follows:
2012 |
2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest paid
|
$ | 79 | $ | 104 | ||||||
Income taxes
paid |
136 | |
11. |
SUBSEQUENT EVENTS |
In May 2011, Cinema Supply, Inc.
executed an asset purchase agreement for the Theatres for sale of Theatre assets and assumption of Theatre operating lease by a subsidiary of Digital
Cinema Destinations Corp. (Digiplex), an operator of movie theatres headquartered in New Jersey. The acquisition of the Theatres is
contingent upon Digiplex obtaining financing sufficient to fund the purchase price. The agreed upon purchase price for the Theatres is $14,000, payable
in cash. The asset purchase agreement was extended to March 31, 2012. None of the Companys existing liabilities, notes payable and capital leases
would be assumed by Digiplex.
F-60
Report of Independent Registered Public Accounting
Firm
The Stockholder of Lisbon Theaters, Inc.
We have audited the accompanying balance sheets of Lisbon
Theaters, Inc. (the Company) as of December 31, 2011 and 2010 and the related statements of operations, stockholders deficit and cash flows
for each of the years in the two-year period ended December 31, 2011. The financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Lisbon Theaters, Inc. as of December 31, 2011 and 2010, and the results of its
operations and its cash flows for each of the years in the two-year period ended December 31, 2011, in conformity with accounting principles generally
accepted in the United States of America
/s/ EISNERAMPER LLP
Edison, New Jersey
February 13, 2012
February 13, 2012
F-61
LISBON THEATERS, Inc.
BALANCE SHEETS
December 31, 2011 and 2010
(in thousands, except share and per share data)
BALANCE SHEETS
December 31, 2011 and 2010
(in thousands, except share and per share data)
December 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
CURRENT
ASSETS |
||||||||||
Cash and cash
equivalents |
$ | 232 | $ | 139 | ||||||
Accounts
receivable |
60 | 4 | ||||||||
Inventory
|
6 | 10 | ||||||||
Prepaid
expenses and other assets |
| 13 | ||||||||
Total current
assets |
298 | 166 | ||||||||
Property and
equipment, net |
5,413 | 5,596 | ||||||||
Deferred
financing costs, net |
28 | 53 | ||||||||
TOTAL ASSETS
|
$ | 5,739 | $ | 5,815 | ||||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||||
CURRENT
LIABILITIES |
||||||||||
Accounts
payable |
$ | 154 | $ | 41 | ||||||
Accrued
expenses |
210 | 244 | ||||||||
Payable to
vendor for digital systems |
354 | | ||||||||
Gift card
liability |
151 | 63 | ||||||||
Due to
affiliate |
213 | 446 | ||||||||
Line of
credit |
113 | 137 | ||||||||
Notes
payable, current portion |
314 | 295 | ||||||||
Capital lease
obligations, current portion |
121 | 108 | ||||||||
Total current
liabilities |
1,630 | 1,334 | ||||||||
Notes
payable, net of current portion |
3,819 | 4,133 | ||||||||
Capital lease
obligations, net of current portion |
334 | 455 | ||||||||
Deferred rent
expense |
303 | 288 | ||||||||
Total
liabilities |
6,086 | 6,210 | ||||||||
COMMITMENTS
AND CONTINGENCIES |
||||||||||
STOCKHOLDERS EQUITY |
||||||||||
Common stock,
no par value: 5,000 shares authorized, 5,000 shares issued and outstanding |
5 | 5 | ||||||||
Accumulated
deficit |
(352 | ) | (400 | ) | ||||||
Total
stockholders deficit |
(347 | ) | (395 | ) | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS DEFICIT |
$ | 5,739 | $ | 5,815 |
See accompanying notes to the financial
statements.
F-62
LISBON THEATERS, Inc.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2011 and 2010
(In thousands)
STATEMENTS OF OPERATIONS
For the years ended December 31, 2011 and 2010
(In thousands)
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
REVENUES |
||||||||||
Admissions
|
$ | 2,830 | $ | 3,145 | ||||||
Concessions
|
1,381 | 1,475 | ||||||||
Other
|
50 | 92 | ||||||||
Total
revenues |
4,261 | 4,712 | ||||||||
COSTS AND
EXPENSES |
||||||||||
Cost of
operations: |
||||||||||
Film rent
expense |
1,496 | 1,797 | ||||||||
Cost of
concessions |
248 | 262 | ||||||||
Salaries and
wages |
412 | 506 | ||||||||
Facility
lease expense |
478 | 572 | ||||||||
Utilities and
other |
629 | 663 | ||||||||
General and
administrative expenses |
183 | 205 | ||||||||
Depreciation
and amortization |
537 | 474 | ||||||||
Total costs
and expenses |
3,983 | 4,479 | ||||||||
OPERATING
INCOME |
278 | 233 | ||||||||
OTHER EXPENSE
(INCOME) |
||||||||||
Impairment of
property and equipment |
129 | | ||||||||
Interest
expense |
386 | 400 | ||||||||
NET LOSS
|
$ | (237 | ) | $ | (167 | ) |
See accompanying notes to the financial
statements.
F-63
LISBON THEATERS, Inc.
STATEMENT OF STOCKHOLDERS DEFICIT
December 31, 2011 and 2010
(In thousands)
STATEMENT OF STOCKHOLDERS DEFICIT
December 31, 2011 and 2010
(In thousands)
Common Stock | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Accumulated deficit |
Total stockholders deficit |
|||||||||||||||
Balance,
December 31, 2009 |
5,000 | $ | 5 | $ | (232 | ) | $ | (227 | ) | |||||||||
Net loss
|
| | (167 | ) | (167 | ) | ||||||||||||
Distribution
to shareholder |
| | (1 | ) | (1 | ) | ||||||||||||
Balance,
December 31, 2010 |
5,000 | 5 | (400 | ) | (395 | ) | ||||||||||||
Net loss
|
| | (237 | ) | (237 | ) | ||||||||||||
Contributions
from shareholder |
| | 285 | 285 | ||||||||||||||
Balance,
December 31, 2011 |
5,000 | $ | 5 | $ | (352 | ) | $ | (347 | ) |
See accompanying notes to the financial
statements.
F-64
LISBON THEATERS, Inc.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2011 and 2010
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2011 and 2010
2011 |
2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows
from operating activities |
||||||||||
Net loss
|
$ | (237 | ) | $ | (167 | ) | ||||
Adjustments
to reconcile net loss to net cash provided by operating activities: |
||||||||||
Depreciation
and amortization |
537 | 474 | ||||||||
Impairment of
property and equipment |
129 | | ||||||||
Changes in
operating assets and liabilities: |
||||||||||
Accounts
receivable |
(56 | ) | (4 | ) | ||||||
Inventory
|
4 | 4 | ||||||||
Prepaid
expenses and other assets |
38 | 40 | ||||||||
Accounts
payable, accrued expenses, and gift card liability |
176 | (5 | ) | |||||||
Payable to
vendor for digital systems |
354 | | ||||||||
Deferred rent
|
15 | 20 | ||||||||
Net cash
provided by operating activities |
960 | 362 | ||||||||
Cash flows
from investing activities |
||||||||||
Purchases of
property and equipment |
(492 | ) | (52 | ) | ||||||
Net cash used
in investing activities |
(492 | ) | (52 | ) | ||||||
Cash flows
from financing activities |
||||||||||
Due to
affiliate |
(233 | ) | (78 | ) | ||||||
Distribution
to shareholder |
| (1 | ) | |||||||
Contribution
from shareholder |
285 | | ||||||||
Borrowings
under line of credit |
10 | |||||||||
Payments
under line of credit |
(24 | ) | | |||||||
Payments
under capital lease obligations |
(108 | ) | | |||||||
Payments of
notes payable |
(295 | ) | (271 | ) | ||||||
Net cash used
in financing activities |
(375 | ) | (340 | ) | ||||||
Net change in
cash and cash equivalents |
93 | (30 | ) | |||||||
Cash and cash
equivalents at beginning of year |
139 | 169 | ||||||||
Cash and cash
equivalents at end of year |
$ | 232 | $ | 139 |
See accompanying notes to the financial
statements.
F-65
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
1. |
THE COMPANY AND BASIS OF PRESENTATION |
Lisbon Theaters, Inc. (the
Company) was incorporated on June 4, 2004 as a Connecticut Corporation, doing business as the Lisbon Cinema. The Company operates a
12-screen movie theatre located in Lisbon, Connecticut (the Theatre).
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Use of
Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, those
related to film rent expense settlements, depreciation and amortization, impairments and income taxes. Actual results could differ from those
estimates.
Revenue
Recognition
Revenues are generated
principally through admissions and concessions sales for feature films with proceeds received in cash or credit card at the Companys point of
sale terminals at the Theatre. Revenue is recognized at the point of sale. Credit card sales are normally settled in cash within approximately three
business days from the point of sale, and any credit card chargebacks have been insignificant. Other operating revenues are principally from amounts
earned under advertising contracts and games played in the Theatre, and are recognized as performed or earned under contractual terms. The Company also
sells theatre admissions in advance of the applicable event, and sells gift cards for patrons future use. The Company defers the revenue from
gift cards until considered redeemed. The Company estimates the gift card breakage rate based on historical redemption patterns. Unredeemed gift cards
are recognized as revenue only after such a period of time indicates, based on historical experience, the likelihood of redemption is remote, and based
on applicable laws and regulations, in evaluating the likelihood of redemption, the period outstanding, the level and frequency of activity, and the
period of inactivity is evaluated.
Cash
Equivalents
The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2011 and 2010, the Company held
substantially all of its cash in demand deposit accounts and cash held at the Theatre in the normal course of business.
Accounts
receivable
Accounts receivable represents
amounts due under its agreement with third party advertising providers and for virtual print fees (VPF) under a master license agreement
with a third party vendor. The Company reports accounts receivable net of any allowance for doubtful accounts to represent the Companys estimate
of the amount that ultimately will be realized in cash. The Company will review collectability of accounts, if any, receivable based on the aging of
the accounts and historical collection trends. When the Company ultimately concludes a receivable is uncollectible, it is written off.
Inventories
Inventories consist of food and
beverage concession products and related supplies. The Company states inventories on the basis of first-in, first-out method, stated at the lower of
cost or market.
F-66
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
Property and
Equipment
The Company states property and
equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently.
The Company records depreciation
and amortization using the straight-line method over the following estimated lives:
Equipment
|
310
years |
|||||
Furniture and
fixtures |
710
years |
|||||
Buildings and
improvements |
1540
years |
Impairment of Long-Lived
Assets
The Company reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. The
Company generally evaluates assets for impairment on an individual theatre basis, which management believes is the lowest level for which there are
identifiable cash flows. If the sum of the expected future cash flows, undiscounted and without interest charges is less than the carrying amount of
the assets, the Company recognizes an impairment charge in the amount by which the carrying value of the assets exceeds their fair
value.
The Company considers actual
theatre level cash flows, future years budgeted theatre level cash flows, theatre property and equipment carrying values, the age of a recently built
theatre, competitive theatres in the marketplace, the impact of recent ticket price changes, available lease renewal options and other factors
considered relevant in its assessment of impairment of individual theatre assets. The fair value of assets is determined using the present value of the
estimated future cash flows or the expected selling price less selling costs for assets of which the Company expects to dispose. Significant judgment
is involved in estimating cash flows and fair value.
During the year ended December
31, 2011, the Company had an impairment loss of $129 relate to 35 mm equipment that was no longer in use, due to the conversion to digital projection
equipment and the Company not deeming 35mm having a market. There was no impairment charge for the year ended December 31, 2010.
Concentration of Credit
Risk
Financial instruments that could
potentially subject the Company to concentration of credit risk, if held, would be included in accounts receivable. Collateral is not required on
accounts receivables. It is anticipated that in the event of default, normal collection procedures would be followed.
Leases
The Company leases the land on
which the Theatre is located, under a non-cancelable lease agreement for an initial 25 year term with three five year renewal options. The Company, at
its option, can renew the lease at defined rates for various periods. The lease provides for contingent rentals based on the revenue results of the
Theatre and require the payment of taxes, insurance, and other costs applicable to the property. Also, the lease contains escalating minimum rental
provisions. There are no conditions imposed upon the Company by its lease agreement or by parties other than the lessor that legally obligate the
Company to incur costs to retire assets as a result of a decision to vacate the lease. The lease does not require the Company to return the leased
property to the lessor in its original condition. The Company accounts for this lease as an operating lease and accounts for its lease under the
provisions of ASC Topic 840, Leases and other authoritative accounting literature. The lease does not transfer title to the land and does not contain a
bargain purchase option.
The Company leases certain
equipment for use in the Theatre, under agreements that expire through 2017. The Company accounts for these leases as capital leases.
F-67
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
Fair Value of Financial
Instruments
The carrying amounts of cash,
cash equivalents, accounts receivable and accounts payable, approximate their fair values, due to their short term nature.
Income
Taxes
No provision has been made in the
financial statements for income taxes because the Company reports its income and expenses as a Subchapter S Corporation whereby all income and losses
are taxed at the shareholder level. Income tax rules and regulations are subject to interpretation, require judgment by the Company and may be
challenged by the taxation authorities. In accordance with ASC Subtopic 740-10, the Company recognizes a tax benefit only for tax positions that are
determined to be more likely than not sustainable based on the technical merits of the tax position. With respect to such tax positions for which
recognition of a benefit is appropriate, the benefit is measured at the largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Tax positions are evaluated on an ongoing basis as part of the Companys process for determining the provision
for income taxes. Any interest and penalties determined to result from uncertain tax position will be classified as interest expense and other
expense.
Deferred Rent
Expense
The Company recognizes rent
expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense the lease
term.
Deferred Financing
Costs
Deferred financing costs consist
of unamortized debt financing costs amortized on a straight-line basis over the term of the respective debt and are included in interest expense. The
straight-line basis is not materially different from the effective interest method. The amount included in interest expense was $24 and $23 for years
ended December 31, 2011 and 2010, respectively.
Film Rent
Expense
The Company estimates film rent
expense and related film rent payable based on managements best estimate of the ultimate settlement of the film costs with the film distributors.
Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The length of
time until these costs are known with certainty depends on the ultimate duration of the films theatrical run, but is typically
settled within one to two months of a particular films opening release. Upon settlement with the film distributors, film rent expense
and the related film rent payable are adjusted to the final film settlement. The film rent expense on the statements of operations for the year ended
December 31, 2011, was reduced by $97, related to VPFs under a master license agreement exhibitor-buyer arrangement with a third party vendor. VPFs
represent a reduction in film rent paid to film distributors. Pursuant to this master license agreement, the Company purchased and owns digital
projection equipment and the third party vendor, through their agreements with film distributors, will collect and remit VPFs to the Company, net of a
10% administrative fee. VPFs are generated based on initial display of titles on the digital projection equipment. There were no VPFs collected in
2010.
Advertising
Costs
The Company expenses advertising
costs as incurred. Advertising costs incurred for the years ended December 31, 2011 and 2010 was $44 and $73, respectively.
F-68
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
Segments
As of December 31, 2011 and 2010,
the Company managed its business under one reportable segment: theatre exhibition operations. All of the Companys operations are located in the
United States.
Recent Accounting
Pronouncements
In May 2011, the FASB issued ASU
2011-4, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS, to substantially converge the
fair value measurement and disclosure guidance in US GAAP and IFRS. The most significant change in disclosures is an expansion of the information
required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The
Company will adopt this standard January 1, 2012 and does not expect the adoption of this standard to have a material impact on the financial
statements and disclosures.
In June 2011, the FASB issued ASU
2011-5, Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components
in the statement of stockholders equity. Instead, an entity will be required to present items of net income and other comprehensive income in one
continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. The
Company will adopt this standard as of January 1, 2012 and does not expect it to have a material impact on the financial statements and
disclosures.
3. |
BALANCE SHEET COMPONENTS |
PROPERTY AND EQUIPMENT
Property and equipment, net was
comprised of the following:
December 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Equipment
|
$ | 3,087 | $ | 2,880 | ||||||
Furniture and
fixtures |
95 | 95 | ||||||||
Buildings and
improvements |
4,936 | 4,936 | ||||||||
$ | 8,118 | $ | 7,911 | |||||||
Less:
accumulated depreciation and amortization |
(2,705 | ) | (2,315 | ) | ||||||
Property and
equipment, net |
$ | 5,413 | $ | 5,596 |
ACCRUED EXPENSES
Accrued expenses consisted of the
following:
December 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Accrued
payroll |
$ | 94 | $ | 91 | ||||||
Accrued
percentage rent |
13 | 74 | ||||||||
Other accrued
expenses |
103 | 79 | ||||||||
Total
|
$ | 210 | $ | 244 |
4. |
LEASES |
OPERATING LEASE
The Company leases the land on
which the Theatre is located under an operating lease with an initial term of 25 years. The lease provides for monthly payments subject to rent
escalations during the initial lease term and at each renewal date. The lease offers three options to renew for periods of five years. The Company is
reasonably
F-69
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
assured the lease renewals will be exercised. The Company is also required to pay real property taxes and common maintenance expenses. In addition, rent includes an amount equal to a percentage of revenue generated in excess of a base amount of total revenues, as defined. Facility lease expense amounted to $478 and $572 for the years ended December 31, 2011 and 2010, respectively. Included in facility lease expense is percentage rent totaling $13 and $74 for the years ended December 31, 2011 and 2010, respectively.
At year-end, future minimum lease
payments were as follows:
Year |
Amount |
|||||
---|---|---|---|---|---|---|
2012 |
$ | 300 | ||||
2013 |
300 | |||||
2014 |
300 | |||||
2015 |
314 | |||||
2016 |
319 | |||||
Thereafter |
9,879 | |||||
$ | 11,412 |
CAPITAL LEASES
The Company leases certain
theatre equipment under capital leases that expire through 2017. The assets are being amortized over the shorter of their lease terms or their
estimated useful lives. The applicable amortization is included in depreciation and amortization expense in the accompanying financial statements.
Amortization of assets under capital leases charged to expense during the years ended December 31, 2011 and 2010 was $92 and $41,
respectively.
The following is a summary of
property held under capital leases included in property and equipment:
December 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Equipment |
$ | 697 | $ | 697 | ||||||
Less:
accumulated amortization |
190 | 98 | ||||||||
Net |
$ | 507 | $ | 599 |
Future maturities of capital
lease payments as of December 31, 2011 for each of the next five years and in the aggregate are:
Year ending |
||||||
---|---|---|---|---|---|---|
2012 |
$ | 153 | ||||
2013 |
151 | |||||
2014 |
107 | |||||
2015 |
83 | |||||
2016 |
24 | |||||
Thereafter |
22 | |||||
Total minimum
payments |
540 | |||||
Less: amount
representing interest |
(85 | ) | ||||
Present value of
minimum payments |
455 | |||||
Less: current
portion |
(121 | ) | ||||
$ | 334 |
F-70
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
5. |
NOTES PAYABLE |
Notes payable at December 31,
2011 and 2010 consisted of the following:
2011: |
|
|
Total |
|
Current portion |
|
Non-current portion |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mortgage loan on building |
$ | 2,915 | $ | 74 | $ | 2,841 | ||||||||||||
Note
payable bank |
574 | 211 | 363 | |||||||||||||||
Note
payable SBA |
644 | 29 | 615 | |||||||||||||||
Total |
$ | 4,133 | $ | 314 | $ | 3,819 |
2010: |
|
|
Total |
|
Current portion |
|
Non-current portion |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mortgage loan on building |
$ | 2,984 | $ | 69 | $ | 2,915 | ||||||||||||
Note
payable bank |
773 | 199 | 574 | |||||||||||||||
Note
payable SBA |
671 | 27 | 644 | |||||||||||||||
Total |
$ | 4,428 | $ | 295 | $ | 4,133 |
The mortgage loan on building is
for the Companys Theater building. Interest is 6.25% and 6.0% for the years ended December 31, 2011 and 2010 and is based on the federal rate
plus 2.25%. The maturity date of the mortgage loan is March 2019. The mortgage loan is collateralized by the Theatre building and related improvements,
assignment of leases and rents, and all business assets of the Company. The mortgage is personally guaranteed by the shareholder and other entities in
which the shareholder has ownership or is a trustee. The proceeds of the loan were used to build the Theatre.
The mortgage loan, note payable
bank, and line of credit contains certain restrictions and covenants. The Company must maintain an annual debt service coverage ratio of at
least 1.25 among all the obligations, and the obligation of the shareholder and shareholders other affiliated entities. The Company was in
violation of this covenant as of December 31, 2011. The Company has obtained a waiver of the 2011 debt service coverage ratio which cures the debt
covenant violation, whereas the bank will not call the debt due.
Note payable bank carries
an interest rate of 6.25% and 6.0% for the years ended December 31, 2011 and 2010 and requires monthly payments sufficient to amortize the loan until
maturity. The maturity date of the loan is July 2014. The note is collateralized by the business assets of the Company, as defined. The proceeds of the
loan were used to purchase various items of equipment for the Theatre.
Note payable SBA, carries
an interest rate of 5.62% for the years ended December 31, 2011 and 2010. Monthly payments are required in amounts that are sufficient to amortize the
loan until maturity. The maturity date of the loan is September 2026.
Maturities of mortgages and notes
payable each of the next five years based on amounts due at December 31, 2011 are as follows:
Years Ending December 31, |
||||||
---|---|---|---|---|---|---|
2012
|
$ | 314 | ||||
2013
|
334 | |||||
2014
|
254 | |||||
2015
|
123 | |||||
2016
|
131 | |||||
Thereafter
|
2,977 | |||||
$ | 4,133 |
F-71
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
The Company has a $150 revolving
of credit with a third party financial institution, at an interest rate of 5% for the years ended December 31, 2011 and 2011. The outstanding balance
as of December 31, 2011 and 2010 was $113 and $137, respectively and matures in March 2012. Interest expense on the line of credit for the years ending
December 31, 2011 and 2010 was approximately $4 and $6, respectively. The line of credit is collateralized by business assets of the company, as
defined.
6. |
INCOME TAXES |
In July 2006, the FASB issued ASC
740-10, which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a return. ASC 740-10 provides guidance on the
measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. ASC 740-10
became effective as of January 1, 2007 and had no impact on the Companys financial statements. The Company has filed income tax returns in the
United States and Connecticut. All tax years prior to 2008 are closed by expiration of the statute of limitations. The years ended December 31, 2008
through and including 2011, are open for examination. If the Company did incur any uncertain tax positions for the years the Company was a Subchapter S
Corporation, the liability would be the responsibility of the shareholders of the Company.
7. |
COMMITMENTS AND CONTINGENCIES |
Management believes that it is in
substantial compliance with all relevant laws and regulations that apply to the Company, and is not aware of any current, pending or threatened
litigation that could materially impact the Company.
All of the Companys current
operations are located in Connecticut, with the customer base being public attendance. The Companys main suppliers are the major movie studios,
primarily located in the greater Los Angeles area. Any events impacting the region the Company operates in, or impacting the movie studios, who supply
movies to the Company, could significantly impact the Companys financial condition and results of operations.
The Company has a license
agreement with another vendor to license motion activated theatre seats. The license period is 7 years through October 2017 and the Company pays the
vendor a portion of the admissions ticket premium price during the license period.
8. |
STOCKHOLDERS EQUITY |
Capital
Stock
As of December 31, 2011 and 2010,
the Companys authorized capital stock consisted of 5,000 shares of common stock. As of December 31, 2011 and 2010, 5,000 shares were issued and
outstanding. All of the shares were held by one individual.
9. |
RELATED PARTY TRANSACTIONS |
The Company has a payable of $213
and $446 at December 31, 2011 and 2010, respectively, to an entity affiliated with the Companys shareholder. The affiliated entity is a
standalone theatre operation in which the shareholder has a 50% ownership interest. The Company does not have any equity ownership interest in this
entity and does not have any ability over this entitys operations. There are no interest or repayment terms.
The Company has a guarantee and
cross default agreement related to obligations for the shareholder and the shareholders other affiliated entities. The amount of obligations
under guarantee is approximately $3.2 million. The obligations of the shareholder and the shareholders affiliated entities have been funded
through operations and other sources. The Company does not have any obligation under this guarantee as of December 31, 2011 and 2010.
F-72
LISBON THEATERS, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
(in thousands)
10. |
SUPPLEMENTAL CASH FLOW DISCLOSURE |
December 31, 2011 |
December 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest paid
|
$ | 357 | $ | 381 | ||||||
Assets
acquired under capital leases |
| 395 |
11. |
SUBSEQUENT EVENT |
In February 2012, the shareholder
of the Company and Digital Cinema Destinations Corp. (Digiplex), an operator of movie theatres headquartered in New Jersey, signed an asset
purchase agreement for Digiplex to acquire the assets of the Theatre. The acquisition of the Company is contingent upon Digiplex obtaining financing
sufficient to fund the purchase price. The agreed upon purchase price for the Company is $6,000, payable in cash. There is also an additional purchase
price payable in the future, if certain profitability measures are exceeded. Digiplex will purchase the assets of the Company and assume the operating
leases. All other liabilities, capital leases and note obligations will not be assumed, including any guarantees or cross default arrangements on any
other debt of the Companys shareholder or the shareholders affiliated entities
F-73
Report of Independent Registered Public Accounting
Firm
The Members of K&G Theatres LLC
We have audited the accompanying statements of operations,
members deficit and cash flows of K&G Theatres LLC (the Company) for the years ended December 31, 2010 and 2009. The financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the statements of operations, members
deficit, and cash flows referred to above present fairly, in all material respects, the results of operations and cash flows of K&G Theatres LLC
for the years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of
America.
/s/ EISNERAMPER LLP
Edison, New Jersey
December 16, 2011
December 16, 2011
F-74
K&G THEATRES LLC
STATEMENTS OF OPERATIONS
For the years ended December 31, 2010 and 2009
(In thousands)
STATEMENTS OF OPERATIONS
For the years ended December 31, 2010 and 2009
(In thousands)
2010 |
2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenues
|
$ | 861 | $ | 1,057 | ||||||
COSTS AND
EXPENSES |
||||||||||
Cost of
operations: |
||||||||||
Film rent
expense |
326 | 423 | ||||||||
Cost of
concessions |
62 | 74 | ||||||||
Salaries and
wages |
77 | 89 | ||||||||
Facility
lease expense |
98 | 138 | ||||||||
Utilities and
other |
125 | 157 | ||||||||
Total cost of
operations |
688 | 881 | ||||||||
General and
administrative expenses |
108 | 118 | ||||||||
Depreciation
and amortization |
1 | 4 | ||||||||
Total costs
and expenses |
797 | 1,003 | ||||||||
OPERATING
INCOME |
64 | 54 | ||||||||
OTHER
EXPENSE |
||||||||||
Interest
|
13 | 14 | ||||||||
NET INCOME
|
$ | 51 | $ | 40 |
See accompanying notes to the financial
statements.
F-75
K&G THEATRES LLC
STATEMENTS OF MEMBERS DEFICIT
(In thousands)
STATEMENTS OF MEMBERS DEFICIT
(In thousands)
Balance,
December 31, 2008 |
$ | (66 | ) | |||
Net income
|
40 | |||||
Member
withdrawals |
(47 | ) | ||||
Balance,
December 31, 2009 |
(73 | ) | ||||
Net income
|
51 | |||||
Member
withdrawals |
(29 | ) | ||||
Balance,
December 31, 2010 |
$ | (51 | ) |
See accompanying notes to the financial
statements.
F-76
K&G THEATRES LLC
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010 and 2009
(in thousands)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010 and 2009
(in thousands)
2010 |
2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows
from operating activities |
||||||||||
Net income
|
$ | 51 | $ | 40 | ||||||
Adjustments
to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||
Depreciation
and amortization |
1 | 4 | ||||||||
Changes in
operating assets and liabilities: |
||||||||||
Prepaid
expenses and other current assets |
1 | 14 | ||||||||
Accounts
payable and accrued expenses |
(76 | ) | 51 | |||||||
Deferred rent
expense |
(4 | ) | (2 | ) | ||||||
Net cash
(used in) provided by operating activities |
(27 | ) | 107 | |||||||
Cash flows
from investing activities |
| | ||||||||
Net cash used
in investing activities |
| | ||||||||
Cash flows
from financing activities |
||||||||||
Return of
member capital |
(29 | ) | (47 | ) | ||||||
Repayments of
notes payable |
(4 | ) | (4 | ) | ||||||
Net cash used
in financing activities |
(33 | ) | (51 | ) | ||||||
Net change in
cash |
(60 | ) | 56 | |||||||
Cash at
beginning of year |
113 | 57 | ||||||||
Cash at end
of year |
$ | 53 | $ | 113 |
See accompanying notes to the financial
statements.
F-77
K&G THEATRES LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
1. |
THE COMPANY AND BASIS OF PRESENTATION |
K&G Theatres LLC (the
Company, or K&G) was incorporated in the State of Connecticut on December 14, 2007. K&G operates an eight screen movie
theatre located in Bloomfield, Connecticut (the Theatre).
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Use of
Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are
not limited to, those related to film rent expense settlements, depreciation and amortization, asset impairments and income taxes. Actual results could
differ from those estimates.
Revenue
Recognition
Revenues are generated
principally through admissions and concessions sales with proceeds received in cash or via credit card at the point of sale and revenue are recognized
at the point of sale. Credit card sales are normally settled in cash within approximately three business days from the point of sale, and any credit
card chargebacks have been insignificant. Revenues also include rentals to a group that regularly displays ethnic-oriented movies for a fixed monthly
sum. Collections of box office receipts above the fixed sum are remitted to the group, while any shortfall is paid by the group. Such revenue is
recognized monthly when earned based on the contract. The Company also sells theatre admissions in advance of the applicable event, and sells gift
cards for patrons future use. The Company defers the revenue from such sales until considered redeemed, however such sales were insignificant for
the years ended December 31, 2010 and 2009.
Cash
At December 31, 2010 and 2009,
the Company held substantially all of its cash in checking accounts with a major financial institutions, and had minor amounts on hand in cash at the
Theatre, in the normal course of business.
Property and
Equipment
The Company states property and
equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed currently.
The Company records depreciation
and amortization using the straight-line method over the following estimated useful lives:
Equipment
|
5
years |
|||||
Leasehold
Improvements |
lesser of
lease term or estimated useful life |
Impairment of Long-Lived
Assets
The Company reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the
sum of the expected theatre cash flows, undiscounted and without interest charges is less than the carrying amount of the assets, the Company
recognizes an impairment charge in the amount by which the carrying value of the assets exceeds their fair value.
The Company considers actual
theatre level cash flows, future years budgeted theatre level cash flows, theatre property and equipment carrying values, the age of the theatre,
competitive theatres in the marketplace, the impact of recent ticket price changes, available lease renewal options and other factors considered
relevant in its assessment
F-78
K&G THEATRES LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
of impairment of individual theatre assets.. The fair value of assets is determined using the present value of the estimated future cash flows or the expected selling price less selling costs for assets of which the Company expects to dispose. Significant judgment is involved in estimating cash flows and fair value.
There were no impairment charges
recorded for the years ending December 31, 2010 and 2009.
Leases
The Companys operations are
conducted in premises occupied under a non-cancelable lease agreement with an initial base term of five years. The Company, at its option, can renew
the leases at defined rates for another five years. There are no conditions imposed upon the Company by its lease agreements or by parties other than
the lessor that legally obligate the Company to incur costs to retire assets as a result of a decision to vacate its leased properties. The lease does
not require the Company to return the leased property to the lessor in its original condition (allowing for normal wear and tear) or to remove
leasehold improvements. The Company accounts for its leased property under the provisions of ASC Topic 840, Leases and other authoritative accounting
literature.
Income
Taxes
No provision has been made in the
financial statements for income taxes because the Company reports its income and expenses as a Limited Liability Company whereby all income and losses
are taxed at the member level.
Income tax rules and regulations
are subject to interpretation, require judgment by the Company and may be challenged by the taxation authorities. In accordance with ASC Subtopic
740-10, the Company recognizes a tax benefit only for tax positions that are determined to be more likely than not sustainable based on the technical
merits of the tax position. With respect to such tax positions for which recognition of a benefit is appropriate, the benefit is measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions are evaluated on an ongoing
basis as part of the Companys process for determining the provision for income taxes. Any interest and penalties determined to result from
uncertain tax position will be classified as interest expense and other expense.
Deferred
Rent
The Company recognizes rent
expense on a straight-line basis, after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease
over its term.
Film Rent
Expense
The Company estimates film rent
expense and related film rent payable based on managements best estimate of the ultimate settlement of the film costs with the film distributors.
Generally, less than one-quarter of film rent expense is estimated at period-end, with the majority being agreed to under firm terms. The length of
time until these costs are known with certainty depends on the ultimate duration of the films theatrical run, but is typically
settled within one to two months of a particular films opening release. Upon settlement with the film distributors, film rent expense
and the related film rent payable is adjusted to the final film settlement.
Advertising
The Company expenses advertising
costs as incurred. Advertising costs incurred for the years ended December 31, 2010 and 2009 were $9 and $27, respectively.
Segments
As of December 31, 2010 and 2009,
the Company managed its business under one reportable segment: theatre exhibition operations. All of the Companys operations are located in the
United States.
F-79
K&G THEATRES LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
3. |
CREDIT FACILITY |
In February 2008, K&G entered
into a credit facility with the Community Economic Development Fund (CEDF), with a maximum borrowing capacity of $150 (the
Loan). Borrowings under the Loan were evidenced by promissory notes and were used for initial rent and security payments to the property
owner, and various theatre improvements. All of the borrowings under the Loan were made in 2008, and aggregated $113. The Loan bears interest at the
rate of 10 % per annum, and requires payments of interest only for the six months from April 2008 through September 2008, with monthly payments of
principal and interest for 15 years thereafter. The loan is personally guaranteed by the owners of K&G and their spouses, and may be prepaid at any
time without penalty. The lease contains no financial covenants; however it imposes restrictions on the use of Loan proceeds, sale or transfer of the
business, and dividends or distributions from the business. No events of default occurred under the Loan during the fiscal years ended December 31,
2010 and 2009. Interest expense on the Loan for the years ended December 31, 2010 and 2009 was $13 and $14, respectively.
4. |
LEASES |
The Company accounts for its
lease as an operating lease. Minimum rentals payable for the non-cancelable term are summarized for the following fiscal years (in
thousands):
2011
|
$ | 65 | ||||
2012
|
68 | |||||
2013
|
76 | |||||
Thereafter
|
| |||||
Total
|
$ | 209 |
Rent expense under the lease was
$98 and $138 for the years ended December 31, 2010 and 2009, respectively.
5. |
INCOME TAXES |
In July 2006, the FASB issued ASC
740-10, which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a return. ASC 740-10 provides guidance on the
measurement, recognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. ASC 740-10
became effective as of January 1, 2007 and had no impact on the Companys financial statements. The Company has filed income tax returns in the
United States and Connecticut. All tax years prior to 2008 are closed by expiration of the statute of limitations. The years ended December 31, 2008
through and including 2010, are open for examination. If the Company did incur any uncertain tax positions for the years the Company was a disregarded
entity, the liability would be the responsibility of the members of the Company.
6. |
COMMITMENTS AND CONTINGENCIES |
The Companys management
believes it is in substantial compliance with all relevant laws and regulations that apply to the Company, and are not aware of any current, pending or
threatened litigation that could materially impact the Company.
The Companys operations are
located in Bloomfield Connecticut, with the customer base being public attendance. The Companys main suppliers are the major movie studios,
primarily located in the greater Los Angeles area. Any events impacting the region the Company operates in, or impacting the movie studios, who supply
movies to the Company, could significantly impact the Companys financial condition and results of operations.
F-80
K&G THEATRES LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
7. |
SUPPLEMENTAL CASH FLOW INFORMATION |
Supplemental cash flow
information for the years ended December 31, 2010 and 2009 are as follows:
2010 |
2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest paid
|
$ | 13 | $ | 12 | ||||||
Income taxes
paid |
| 1 |
8. |
SUBSEQUENT EVENTS |
On February 17, 2011, certain
assets of the Company were acquired by a subsidiary of Digital Cinema Destinations Corp. (Digiplex) pursuant to an asset purchase
agreement. Digiplex is an operator of movie theatres headquartered in New Jersey. Digiplex paid cash consideration of $113, representing the amount of
principal and accrued interest due under the Loan for the acquisition. The Loan was repaid in full on the acquisition date and Digiplex modified the
terms of the existing operating lease on the acquisition
F-81
Until
, 2012, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common
shares, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers
obligation to deliver a prospectus when acting as underwriters and with respect to unsold allotments or subscriptions.
TABLE OF CONTENTS
Page |
||||||
---|---|---|---|---|---|---|
Prospectus
Summary |
1 | |||||
The
Offering |
6 | |||||
Historical
Consolidated Financial and Operating Data and Summary Unaudited Pro Forma Combined Data |
8 | |||||
Risk
Factors |
12 | |||||
Special
Note Regarding Forward-Looking Statements |
22 | |||||
Use of
Proceeds |
23 | |||||
Dividend
Policy |
23 | |||||
Dilution
|
24 | |||||
Capitalization |
25 | |||||
Unaudited
Pro Forma Combined Financial Information |
26 | |||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
34 | |||||
Business
|
51 | |||||
Directors
and Executive Officers |
66 | |||||
Director
Compensation |
70 | |||||
Executive
Compensation |
71 | |||||
Security
Ownership of Certain Beneficial Owners and Management |
75 | |||||
Related
Party Transactions |
78 | |||||
Description of Capital Stock |
78 | |||||
Shares
Eligible For Future Sale |
82 | |||||
Underwriting |
84 | |||||
Legal
Matters |
87 | |||||
Experts
|
87 | |||||
Where You
Can Find More Information |
87 | |||||
Index to
Financial Statements |
F-1 |
4,200,000 Shares
of
Class A
Common Stock
of
Class A
Common Stock
PROSPECTUS
, 2012
Joint Book-Running Managers
Dominick & Dominick
LLC Maxim Group LLC
PART II
Information Not Required In
Prospectus
Item 13. Other Expenses of Issuance and
Distribution
The following table sets forth
the various costs and expenses to be incurred in connection with the issuance and distribution of the securities registered under this Registration
Statement, other than underwriting discounts and commissions. All such expenses are estimates, except for the SEC registration fee and the FINRA filing
fee. The following expenses will be borne solely by the Company.
SEC
Registration Fee |
$ | 2,636 | ||||
FINRA Filing
Fee |
$ | 2,800 | ||||
Nasdaq Filing
Fee |
$ | 50,000 | ||||
Printing and
Engraving Expenses |
$ | |||||
Legal Fees
and Expenses |
$ | |||||
Accounting
Fees and Expenses |
$ | |||||
Transfer
Agent and Registrar Fees |
$ | |||||
Miscellaneous
Expenses |
$ | |||||
Total |
$ |
Item 14. Indemnification of Directors and
Officers
Section 145 of the Delaware
General Corporation Law (DGCL) provides that a corporation may indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the corporation. The DGCL provides that Section 145 is not exclusive of other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.1 of
Article VI of the Companys bylaws provide for indemnification by the Company of its directors, officers, employees and agents to the fullest
extent permitted by the DGCL.
Article Ninth of the
Companys Amended and Restated Certification of Incorporation eliminates the liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted
under Delaware law. Under Section 102(b)(7) of the DGCL, a director shall not be exempt from liability for monetary damages for any liabilities arising
(i)from any breach of the directors duty of loyalty to the corporation or its stockholders, (ii)from acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)under Section 174 of the DGCL, or (iv)for any transaction from which the director
derived an improper personal benefit.
Prior to the completion of this
offering, the Company expects to purchase and maintain a director and officer insurance policy on behalf of any person who is or was a director or
officer of the Company. Under such insurance policy, the directors and officers of the Company will be insured, within the limits and subject to the
limitations of the policy, against certain expenses in connection with the defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits or proceedings, which may be brought against them by reason of being or
having been such directors or officers.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered
Securities
The following is information
furnished with regard to all securities sold by the Company within the past three years that were not registered under the Securities Act after giving
effect to a one-for-two reverse stock split of
II-1
our Class A and Class B common stock which was approved by the Companys board of directors in November 2011.
In connection with its formation
in August 2010, the Company issued 200 shares of its common stock to Mr. Mayo and 100 shares of its common stock to IJM Family Limited Partnership in
exchange for consideration of $415. On December 10, 2010 these shares were redeemed by the Company in exchange for 900,000 shares of the Companys
Class B common stock and 450,000 shares of our Class A common stock, respectively.
On December 31, 2010, the Company
issued 87,500 shares of Class A common stock to non-employees (who subsequently became employees) and a board member, for performance of services
rendered during the fiscal year. On June 30, 2011, the Company issued 15,000 shares of Class A common stock to directors and 16,665 shares to various
employees. The Company sold the following shares of its Series A preferred stock to the following entities and individuals on the dates set forth
below.
Name |
Date |
Number of Shares |
Consideration |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Richard P.
Casey |
12/28/2010 | 125,000 | $ | 250,000 | ||||||||||
Ullman Family
Partnership |
12/29/2010 | 250,000 | $ | 500,000 | ||||||||||
Neil T.
Anderson |
12/30/2010 | 200,000 | $ | 400,000 | ||||||||||
Jesse
Sayegh |
12/31/2010 | 250,000 | $ | 500,000 | ||||||||||
Dark
Bridge |
1/3/2011 | 50,000 | $ | 100,000 | ||||||||||
Roger
Burgdorf |
1/3/2011 | 37,500 | $ | 75,000 | ||||||||||
Sandy
Marks |
1/4/2011 | 25,000 | $ | 50,000 | ||||||||||
Neil T.
Anderson |
1/3/2011 | 50,000 | $ | 100,000 | ||||||||||
Spector
Family Trust |
1/6/2011 | 50,000 | $ | 100,000 | ||||||||||
Anthony B.
Cimino |
1/11/2011 | 75,000 | $ | 150,000 | ||||||||||
Robert
Klein |
1/17/2011 | 17,500 | $ | 35,000 | ||||||||||
Richard P.
Casey |
1/28/2011 | 125,000 | $ | 250,000 | ||||||||||
T. James
Newton III |
2/11/2011 | 5,000 | $ | 10,000 | ||||||||||
Gary
Spindler |
2/23/2011 | 50,000 | $ | 100,000 | ||||||||||
Las Aguillas
Holdings LLC |
2/25/2011 | 15,000 | $ | 30,000 | ||||||||||
Jeffrey
Gerson |
3/15/2011 | 25,000 | $ | 50,000 | ||||||||||
John
Nelson |
4/8/2011 | 50,000 | $ | 100,000 | ||||||||||
J. Richard
Suth |
5/12/2011 | 125,000 | $ | 250,000 | ||||||||||
Cyril J.
Goddeeris |
5/13/2011 | 125,000 | $ | 250,000 | ||||||||||
Vlad Y
Barbalat |
5/16/2011 | 62,500 | $ | 125,000 | ||||||||||
Dr. Steven
Struhl |
5/31/2011 | 10,000 | $ | 20,000 | ||||||||||
Arthur J.
Papetti |
6/3/2011 | 50,000 | $ | 100,000 | ||||||||||
Exeter
Investments (Papetti) |
8/16/2011 | 75,000 | $ | 150,000 | ||||||||||
Ellen
Doremus |
9/14/2011 | 50,000 | $ | 100,000 | ||||||||||
Arthur
Israel |
9/28/2011 | 75,000 | $ | 150,000 |
The securities issued in the
foregoing transactions were exempt from registration under Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder as transactions by
an issuer not involving a public offering. The Company placed legends on the certificates stating that the securities were not registered under the
Securities Act and set forth the restrictions on their transferability and sale. No general advertising or solicitation was used in selling the
securities. No commissions or underwriting fees were paid to any placement agents in connection with the sale or issuances of the
securities.
The Company has agreed to issue
to the underwriters warrants to purchase a number of shares of its Class A common stock equal to an aggregate of 1% of the shares of Class A common
stock sold in the offering, other than shares of its Class A common stock covered by the over-allotment option, if any are purchased. The warrants will
have an exercise price equal to 110% of the offering price of the shares of Class A common stock sold in this offering. For additional information
regarding these warrants, see Underwriting Underwriting Compensation.
II-2
Item 16. Exhibits and Financial Statement
Schedules
(a) |
Exhibits |
1.1** |
Form
of Underwriting Agreement |
|||||
2.1* |
Asset
Purchase Agreement dated of December 31, 2010, by and between Rialto Theatre of Westfield, Inc., Cranford Theatre, Inc., DC Westfield Cinema, LLC, and
DC Cranford Cinema, LLC. |
|||||
2.2* |
Asset
Purchase Agreement dated of February 17, 2011, by and between DC Bloomfield Cinema, LLC and K&G Theatres, LLC. |
|||||
2.3* |
Asset
Purchase Agreement dated of April 20, 2011, by and between Cinema Supply, Inc., d/b/a Cinema Centers, Martin Troutman, Doris Troutman, DC Cinema
Centers, LLC, McNees Wallace & Nurick LLC, as escrow agent, and, solely with respect to Sections 2.6(a), 2.8, 2.9 and 2.10, Gina DiSanto, Trudy
Withers, and Van Troutman. |
|||||
2.4* |
Amendment dated as of June 30, 2011 to the Asset Purchase Agreement dated of May 3, 2011, by and between Cinema Supply, Inc., d/b/a Cinema
Centers, Martin Troutman, Doris Troutman, DC Cinema Centers, LLC, McNees Wallace & Nurick, LLC, as escrow agent, and, solely with respect to
Sections 2.6(a), 2.8, 2.9 and 2.10, Gina DiSanto, Trudy Withers, and Van Troutman. |
|||||
2.5** |
Asset
Purchase Agreement dated as of February 13, 2012, by and between Lisbon Theaters, Inc., Daniel C. ONeil, Timothy M. ONeil, and DC Lisbon
Cinema, LLC. |
|||||
3.1* |
Amended and Restated Certificate of Incorporation dated of December 8, 2010. |
|||||
3.2* |
Certificate of Designation of Series A preferred Stock dated of December 29, 2010. |
|||||
3.3* |
Bylaws |
|||||
3.4 |
Form
of Second Amended and Restated Certificate of Incorporation |
|||||
4.1*** * |
Specimen of Class A Common Stock certificate |
|||||
4.2** |
Form
of Warrant |
|||||
5.1*** * |
Opinion of Eaton & Van Winkle LLP |
|||||
10.1* |
Employment Agreement dated as of September 1, 2010, by and between Digital Cinema Destinations, Corp. and A. Dale
Mayo. |
|||||
10.2* |
Employment Agreement dated as of June 2011, by and between Digital Cinema Destinations, Corp. and Brian Pflug. |
|||||
10.3 |
Intentionally Omitted |
|||||
10.4* |
Employment Agreement dated as of September 28, 2011, by and between Digital Cinema Destinations, Corp. and Jeff
Butkovsky. |
|||||
10.5* |
Exhibitor Management Services Agreement dated as of January 28, 2011, by and between Cinedigm Cinema, Corp. and Digital Cinema
Destinations, Corp. |
|||||
10.6* |
RealD System Leasing Agreement dated as of March 23, 2011, by and between RealD Inc., and Digital Cinema Destinations,
Corp. |
|||||
10.7* |
Agreement to Loan Equipment dated as of June 2011, by and between Barco, Inc. and Digital Cinema Destinations, Corp. |
|||||
10.8* |
Equipment Warranty and Support Agreement dated as of March 29, 2011, by and between Barco, Inc. and Digital Cinema Destinations
Corp. |
|||||
10.9* |
Special Events Network Affiliate Agreement dated as of March 14, 2011, by and between National CineMedia, LLC and Digital Cinema
Destinations Corp. |
|||||
10.10* |
Network Affiliate Agreement dated as of March 14, 2011, by and between National CineMedia, LLC and Digital Cinema Destinations
Corp. |
|||||
10.11* |
Lease
Agreement dated as of December 31, 2010, by and between Cranford Theatre Holding Co, LLC and DC Cranford Cinema, LLC. |
II-3
10.12* |
Lease
Agreement dated as of December 31, 2010, by and between Rialto Holding Co, LLC and DC Westfield Cinema, LLC. |
|||||
10.13* |
Lease
Agreement dated as of February 6, 2008, by and between Wintonbury Mall Associates, LLC and K&G Theatres, LLC. |
|||||
10.14* |
First
Amendment dated as of February 17, 2011, by and between Wintonbury Mall Associates, LLC, K&G Theatres, LLC and DC Bloomfield Cinema, LLC to
the Lease Agreement dated of February 6, 2008, by and between Wintonbury Mall Associates, LLC and K&G Theatres, LLC. |
|||||
10.15 *** |
2012
Stock Option and Incentive Plan. |
|||||
14.1 *** |
Code
of Ethics |
|||||
21.1** |
List
of Subsidiaries |
|||||
23.1 |
Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm. |
|||||
23.2 |
Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm. |
|||||
23.3 |
Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm. |
|||||
23.4 |
Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm. |
|||||
23.5** ** |
Consent of Eaton & Van Winkle LLP (included in Exhibit 5.1) |
|||||
24.1* |
Power
of Attorney (included on signature page). |
* |
Filed as an exhibit to the Companys registration statement on Form S-1, filed with the Securities and Exchange Commission on December 20, 2011 and incorporated herein by reference. |
** |
Filed as an exhibit to Amendment No. 2 to the Companys registration statement on Form S-1, filed with the Securities and Exchange Commission on February 15, 2012 and incorporated herein by reference. |
*** |
Filed as an exhibit to Amendment No. 3 to the Companys registration statement on Form S-1, filed with the Securities and Exchange Commission on March 7, 2012 and incorporated herein by reference. |
*** * |
To be filed by amendment. |
Item 17. Undertakings
The undersigned registrant hereby
undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or a controlling person of the registrant in
the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby
undertakes that:
(1) For purposes of
determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be a part of this registration statement at the time it was declared effective.
(2) For the purpose of
determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of
the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Westfield, State of New Jersey, on March 14 , 2012.
DIGITAL CINEMA DESTINATIONS CORP. |
||||||||||
By: |
/s/ A. Dale Mayo |
|||||||||
A. Dale Mayo |
||||||||||
Chief Executive Officer and Chairman |
||||||||||
By: |
/s/ Brian Pflug |
|||||||||
Brian Pflug, Chief Financial Officer, Principal Accounting Officer and Director |
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons on March 14 , 2012 in the capacities and on the dates
indicated:
Signature |
Title |
|||||
---|---|---|---|---|---|---|
/s/ A. Dale
Mayo A. Dale Mayo |
Chief Executive Officer and Chairman |
|||||
/s/ Brian
Pflug Brian Pflug |
Chief Financial Officer, Principal Accounting Officer and Director |
|||||
* Neil T. Anderson |
Director |
|||||
* Richard Casey |
Director |
|||||
* Martin OConnor, II |
Director |
|||||
/s/ Charles
Goldwater Charles Goldwater |
Director |
|||||
*By: /s/ Brian
Pflug Brian Pflug Attorney-in-fact |
II-5