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
organization’s 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 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
58
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 Cinedigm’s 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 Cinedigm’s 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 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
59
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 consists of $1 1 .0 million in cash due at closing, a short-term note of $1.0 million due October 31, 2012, and the
issuance of 335,000 shares of our Class A common stock valued at $2.3 million, provided that the purchase price shall be increased by the amount of
petty cash and the value of inventory on hand at the close of business on the last business day prior to the closing date . We intend to use a
portion of the net proceeds from this offering to fund the cash portion of the purchase price.
W e amended the Cinema
Centers asset purchase agreement on June 30, 2011 and April 9, 2012 to provide for , among other things, extension s of the closing
date until December 31, 2011 and April 30 , 2012 , respectively. In connection with the extension of the closing date to
April 30, 2012, we issued a $100,000 promissory note payable on April 30, 2012, which note will be returned to us provided we consummate the
transaction. The June 30, 2011 amendment also provides that if the seller of the theatres desires to purchase digital cinema equipment for
any of the 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.
The seller of Cinema Centers
has agreed to enter into a lock-up agreement with respect to the 335,000 shares of our Class A common stock that we will deliver at the closing
of the Cinema Centers acquisition (the “ Cinema Centers Lock-Up Agreement”) . Under the Cinema Centers Lock- Up
Agreement, the seller will agree not to, directly or indirectly, offer, sell, agree to sell, grant any option or contract for the
sale of, such shares for a period of 180 days after the date such shares are issued without the prior written consent of Maxim Group LLC.
In addition, the seller of Cinema Centers has agreed that, following the 180-day lock-up period, it will not sell more than 33,500 shares
during any one 30-day period. The form of the Cinema Centers Lock- Up Agreement will be substantially similar to the
lock-up agreement described under the heading “Underwriting — Lock-Up Agreements.”
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 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.
60
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 Clearview’s 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 film’s 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 exhibitor’s 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 and the Cinema Centers theatres 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 Clearview’s 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 December 31, 2011. We license films from each of the major distributors through our relationship with
Clearview’s 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
61
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 Cinedigm’s 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.
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.
62
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
children’s 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.
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.
As of April 9 ,
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.
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.
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 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
63
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
public’s 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.
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.
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.
64
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
O’Connor, 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 industry’s Show East conference held in October 2010, Ernst & Young’s 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. Pflug’s 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 company’s compliance with the Digital Cinema Initiative specification. Mr. Butkovsky was
Cinedigm’s 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 & Cromwell’s M&A practice in Europe, resident in the firm’s London office. Mr. Anderson
has been a frequent speaker and faculty member on professional seminars and programs dealing with M&A and related matters.
65
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 Cinedigm’s 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. Goldwater’s 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 O’Connor,
II. Mr. O’Connor has served on our board of directors since December 2010. Mr. O’Connor is the managing partner of O’Connor,
Morss & O’Connor, P.C., a law firm which was founded by his grandfather, Martin P. O’Connor, in 1903. Mr. O’Connor 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. O’Connor
serves on the board of directors of Cinedigm and Rentrak Corporation, both of which are influential companies in the film exhibition sector. Mr.
O’Connor 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. Casey’s 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. O’Connor’s 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.
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
66
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.
Mayo’s 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; |
• |
|
reviewing with the independent auditors any audit problems or
difficulties and management’s response; |
• |
|
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; |
• |
|
reviewing major issues as to the adequacy of our internal
controls and any special audit steps adopted in light of material control deficiencies; and |
• |
|
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.
67
Upon completion of this offering,
our audit committee will be comprised of Messrs. Richard Casey, A. Dale Mayo and Brian D. 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.
68
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
O’Connor, 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. |
69
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. O’Connor 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 4,168 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:
• |
|
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. Mayo’s agreement and Mr. Mayo’s 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. Mayo’s 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. Mayo’s death, his employment is terminated and Mr. Mayo’s 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
70
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. Pflug’s agreement and Mr.
Pflug’s 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. Pflug’s employment agreement contains Disability Reimbursement and Death Payment provisions substantially similar to those contain
in Mr. Mayo’s 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 (“Butkovsky’s 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. Butkovsky’s agreement and Mr. Butkovsky’s employment thereunder prior to the expiration
of Butkovsky’s Initial Term, or any extended term then applicable, except in the case of Termination for Cause. Mr. Butkovsky’s employment
agreement contains Disability Reimbursement and Death Payment provisions substantially similar to those contain in Mr. Mayo’s 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
71
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
4 00,000 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 participant’s service in connection with a Change In
Control, or a participant’s 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 entity’s 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 Company’s 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 Company’s 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
72
(other than the Company or by
a Company-sponsored employee benefit plan) of beneficial ownership (within the 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 Company’s 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 Company’s 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.
73
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 April 9 , 2012:
• |
|
each of the executive officers listed in the summary
compensation table; |
• |
|
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 April 9 , 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.
74
|
|
|
|
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 |
|
|
|
17.5 |
% |
|
|
6 7.9 |
% |
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. 5 |
% |
|
|
1.0 |
% |
Richard Casey
(2) |
|
|
|
|
130,000 |
|
|
|
8.8 |
% |
|
|
1.2 |
% |
|
|
139,658 |
|
|
|
2. 5 |
% |
|
|
1.0 |
% |
Charles
Goldwater |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Martin
O’Connor, II |
|
|
|
|
30,000 |
|
|
|
2 |
% |
|
|
* |
|
|
|
30,000 |
|
|
|
* |
|
|
|
* |
|
All directors
and executive officers as a group |
|
|
|
|
1,248,332 |
|
|
|
85.0 |
% |
|
|
88.6 |
% |
|
|
1,267,996 |
|
|
|
2 4.6 |
% |
|
|
70.7 |
% |
IJM Family
Limited Partnership |
|
|
|
|
450,000 |
|
|
|
30.6 |
% |
|
|
4.3 |
% |
|
|
450,000 |
|
|
|
8. 7 |
% |
|
|
3 . 4 |
% |
Cinema
Supply, Inc. (9) |
|
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
335,000 |
|
|
|
6.5 |
% |
|
|
2.5 |
% |
Ullman Family
Partnership (4) |
|
|
|
|
125,000 |
|
|
|
7.8 |
% |
|
|
1.2 |
% |
|
|
135,055 |
|
|
|
2 . 6 |
% |
|
|
1 |
% |
Jesse Sayegh
(4) |
|
|
|
|
125,000 |
|
|
|
7.8 |
% |
|
|
1.2 |
% |
|
|
135,000 |
|
|
|
2 . 6 |
% |
|
|
1 |
% |
*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 4,16 8 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 April 9 , 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 vote s represented by our Class A common stock
issued and outstanding as of April 9 , 2012 and 9,000,000 votes represented by Class B common stock issued and outstanding as of April
9 , 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 Company’s
Class |
75
|
|
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 5, 156,607 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 April
9 , 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 , (iv) 2,300,000 shares of Class A common stock to be issued in connection with this offering , and (v) 335,000
shares of Class A common stock to be issued as part of the purchase price of th e Cinema Centers acquisition . |
(8) |
|
Applicable percentage voting power immediately after the
offering set forth in the table is based on an aggregate of 13, 256,607 shares which includes (i) the aggregate of 10,621,607 shares of
Class A and Class B common stock referenced in (i), (ii) and (iii) in footnote 7 above (treating the Class B common stock as 9,000,000 shares
due to its ten to one votes per share), (ii) 2,300,000 shares of Class A common stock to be issued in connection with this offering, and
(iii) 335,000 shares of Class A common stock to be issued on consummation of the Cinema Centers acquisition, voting together as a single
class. |
(9) |
|
Represents shares of Class A common stock to be issued to
Cinema Supply, Inc. upon consummation of the Cinema Centers acquisition. |
76
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 569,16 6 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,
77
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 s
We have agreed to issue to the
underwriters warrant s to purchase a number of shares of our Class A common stock equal to an aggregate of 2 % of the shares of Class A
common stock sold in the offering, other than shares
78
of our Class A common stock
covered by the over-allotment option described above. The warrant s will have exercise price s 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 person’s involvement in the proceeding is an alleged act or omission in such person’s 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 person’s 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
79
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.”
80
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 and the consummation of the Cinema Centers acquisition , we will have approximately 4, 256,607 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, and the shares
of our Class A common stock we will issue to the seller of Cinema Centers for part of the purchase price for the Cinema Centers
acquisition 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,” and with respect to the shares to be delivered to the seller
of Cinema Centers, the discussion of the Cinema Centers Lock-up Agreement under the caption “Business — Acquisitions,” 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 42,566 shares immediately after this offering, based on the number of shares of our Class A common
stock outstanding as of April 9 , 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.
81
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
each of Maxim Group LLC and Dominick & Dominick LLC a warrant to purchase a number of shares of our Class A common stock equal to 1% (2%
in the aggregate) 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. These warrant s 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 s provide 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 Maxim Group LLC ), and in specific circumstances, up to an additional 34 days, without the prior
written consent of Maxim Group LLC on behalf of the underwriters. For additional information, see “Underwriting — Lock-Up
Agreements.”
82
UNDERWRITING
Maxim Group LLC and
Dominick & Dominick 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
|
Maxim
Group LLC |
|
|
|
|
|
|
Dominick & Dominick LLC |
|
|
|
|
|
|
Total
|
|
|
|
|
2,3 00,000 |
|
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 345 ,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 1 15 ,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 345 ,000 shares of Class A common stock.
83
|
|
|
|
|
|
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
each of Maxim Group LLC and Dominick & Dominick LLC a warrant to purchase a number of shares of our Class A common stock equal to an
aggregate of 1% (2% in the aggregate) 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 s will have an exercise price equal to 110% of the offering price of the shares
of Class A common stock sold in this offering. These warrant s are 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 s are not
redeemable by us, and allow for “cashless” exercise. The warrant s also provide 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 s (and underlying shares) may not be sold,
transferred, assigned, pledged, or hypothecated, or be 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 s (and underlying shares) may be transferred to officers or partners of the underwriters and members of the
underwriting syndicate as long as the warrant s (and underlying shares) remain subject to the lockup.
Further, we have agreed (a) to
pay an aggregate advisory fee of $ 100,000 to Maxim Group LLC and Dominick & Dominick LLC (divided equally between
them) , (b) to reimburse them for reasonable legal fees and expenses not to exceed $ 140 ,000 in the aggregate , (c) to
reimburse them for marketing, syndication and travel expenses, provided that such expenses shall not exceed $ 50,000 in the aggregate,
and ( d ) to grant them 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 $ 940,735 . 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 Maxim Group
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 16-day
84
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. Maxim Group 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.
85
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, stockholder’s 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, 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 SEC’s website at www.sec.gov.
86
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 stockholder’s 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
K&G Theatres LLC Financial Statements for the years ended
December 31, 2010 and 2009
Report of
Independent Registered Public Accounting Firm |
|
|
|
|
F- 61 |
|
Statements of
operations |
|
|
|
|
F- 62 |
|
Statement of
members’ deficit |
|
|
|
|
F- 63 |
|
Statements of
cash flows |
|
|
|
|
F- 64 |
|
Notes to
financial statements |
|
|
|
|
F- 65 |
|
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, stockholder’s 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 Successor’s and Predecessor’s 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
F-3
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
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)
|
|
|
|
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)
|
|
|
|
Common Stock |
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional Paid-in capital
|
|
Retained earnings (Deficit)
|
|
Total Stockholder’s 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)
|
|
|
|
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)
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 Successor’s 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
Predecessor’s 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 Successor’s
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
Successor’s 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)
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, children’s 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
Successor’s 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 |
|
|
|
5–7
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)
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 Successor’s
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 Successor’s 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 Successor’s 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)
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 management’s 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 film’s theatrical run, but is typically
“settled” within one to two months of a particular film’s 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)
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 Successor’s 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 Successor’s consolidated financial statements.
F-12
DIGITAL CINEMA DESTINATIONS CORP. AND
SUBSIDIARIES
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.
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 management’s 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)
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)
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 Successor’s 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)
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 |
|
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 Successor’s 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.
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)
The differences between the
United States statutory federal tax rate and the Successor’s 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
Successor’s 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 Successor’s 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 management’s determination of the Successor’s 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 Successor’s 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)
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 officer’s
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 Successor’s
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 Successor’s 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 Successor’s
current operations are located in New Jersey and Connecticut, with the customer base being public attendance. The Successor’s 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 Successor’s 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
Successor’s 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)
• |
|
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 Successor’s 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 Successor’s remaining assets available
for distribution to the stockholders in the event of the Successor’s 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 Successor’s 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 Successor’s 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 Successor’s 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 Successor’s 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)
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 Successor’s 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)
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.
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.
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 Successor’s 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)
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
Successor’s 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
Successor’s Class A Common Stock.
F-22
DIGITAL CINEMA DESTINATIONS CORP. AND SUBSIDIARIES
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)
|
|
|
|
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)
|
|
|
|
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 |
) |
|
|
23 6 |
|
|
|
(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)
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 Successor’s 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 Company’s 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
Successor’s 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)
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, children’s 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
Successor’s 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)
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 management’s 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 film’s theatrical run, but is typically
“settled” within one to two months of a particular film’s 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 Successor’s 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)
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 |
|
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)
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 Successor’s trade names and covenants not to compete is 4.02 years and 2.05 years, respectively as of December 31,
2011.
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 Successor’s 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 Successor’s 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)
All of the Successor’s
current operations are located in New Jersey and Connecticut, with the customer base being public attendance. The Successor’s 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 Successor’s financial condition and results of
operations.
7. |
|
STOCKHOLDERS’ EQUITY AND SHARE-BASED
COMPENSATION
|
Capital
Stock
As of December 31, 2011, the
Successor’s 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 Successor’s 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 Successor’s
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 Successor’s remaining assets available
for distribution to the stockholders in the event of the Successor’s 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 Successor’s 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 Successor’s 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 Successor’s 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)
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 Successor’s 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 Successor’s 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
Successor’s 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.
The Successor recorded income tax
expense of approximately $20 for the six months ended December 31, 2011. The Successor’s 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)
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 Successor’s landlord for
the Rialto and the Cranford also owns 250,000 shares of the Successor’s 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.
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 Successor’s 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)
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 |
|
|
$ |
— |
|
|
$ |
— |
|
In November 2011, the
Successor’s 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-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
Successor’s Class A Common Stock.
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
Company’s 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 Company’s 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
Edison, New Jersey
December 19, 2011, except for
Note 13,
as to which the date is April 9, 2012
F-35
CINEMA SUPPLY, INC.
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)
|
|
|
|
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)
|
|
|
|
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)
|
|
|
|
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)
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 Company’s 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 Company’s 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)
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 |
|
|
|
3–10
years |
Furniture and
fixtures |
|
|
|
3–10
years |
Vehicles
|
|
|
|
5
years |
Buildings
|
|
|
|
10–40
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 Company’s 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)
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 Company’s 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 management’s 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 film’s theatrical run, but is typically
“settled” within one to two months of a particular film’s 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)
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 Company’s 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)
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 |
|
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)
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 |
|
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)
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 Bank’s 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 Company’s 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 bank’s 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)
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 |
|
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
Company’s 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)
The differences between the
United States statutory federal tax rate and the Company’s 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 Company’s 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 Company’s current
operations are located in Pennsylvania, with the customer base being public attendance. The Company’s 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 Company’s financial condition and results of operations.
Capital
Stock
As of October 31, 2011 and 2010,
the Company’s 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
Company’s 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)
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 Company’s 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 |
|
In April 2011, Cinema Supply,
Inc. executed an asset purchase agreement for the Theatres for sale of Theatre assets and assumption of Theatre operating leases by a subsidiary
of Digital Cinema Destinations Corp. (“Digiplex”), an operator of movie theatres headquartered in New Jersey for a purchase price of
$14,000, payable in cash. The acquisition of the Theatres is contingent upon Digiplex obtaining financing sufficient to fund the purchase price. On
April 9, 2012, Digiplex and Cinema Supply entered into an amendment to the asset purchase agreement, that modified the purchase price to
$14,300, consisting of $11,000 payable in cash, issuance of 335,000 Class A common stock valued at $2,300 and a note payable of $1,000
due October 31, 2012 and bearing interest of 6%. None of the Company’s 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)
|
|
|
|
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)
|
|
|
|
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)
|
|
|
|
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)
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
Company’s 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 Company’s 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)
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 Company’s 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 |
|
|
|
3–10
years |
Furniture and
fixtures |
|
|
|
3–10
years |
Vehicles
|
|
|
|
5
years |
Buildings
|
|
|
|
10–40
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 management’s 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 film’s theatrical run, but is typically
“settled” within one to two months of a particular film’s 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)
Segments
As of January 31, 2012, the
Company managed its business under one reportable segment: theatre exhibition operations. All of the Company’s 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 |
|
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)
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)
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 Bank’s 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 Company’s 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 bank’s consent. |
F-57
CINEMA SUPPLY, INC.
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)
The Company’s 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 Company’s current
operations are located in Pennsylvania, with the customer base being public attendance. The Company’s 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 Company’s financial condition and results of operations.
Capital
Stock
As of January 31, 2012 and
October 31, 2011, the Company’s 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
Company’s 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)
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 |
|
|
|
— |
|
In April 2011, Cinema Supply,
Inc. executed an asset purchase agreement for the Theatres for sale of Theatre assets and assumption of Theatre operating leases by a subsidiary
of Digital Cinema Destinations Corp. (“Digiplex”), an operator of movie theatres headquartered in New Jersey for a purchase price of
$14,000, payable in cash. The acquisition of the Theatres is contingent upon Digiplex obtaining financing sufficient to fund the purchase price. On
April 9, 2012, Digiplex and Cinema Supply entered into an amendment to the asset purchase agreement, that modified the purchase price to
$14,300, consisting of $11,000 payable in cash, issuance of 335,000 Class A common stock valued at $2,300 and a note payable of $1,000
due October 31, 2012 and bearing interest of 6%. None of the Company’s existing liabilities, notes payable and capital leases would be
assumed by Digiplex.
F-60
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 Company’s 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 Company’s 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.
Edison, New Jersey
December 16, 2011
F-61
K&G THEATRES LLC
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-62
K&G THEATRES LLC
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-63
K&G THEATRES LLC
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-64
K&G THEATRES LLC
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-65
K&G THEATRES LLC
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 Company’s 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 Company’s 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 management’s 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 film’s theatrical run, but is typically
“settled” within one to two months of a particular film’s 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 Company’s operations are located in the
United States.
F-66
K&G THEATRES LLC
NOTES TO FINANCIAL
STATEMENTS
For the years ended December 31, 2010 and 2009
(in thousands)
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.
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.
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 Company’s 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 Company’s 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 Company’s operations are
located in Bloomfield Connecticut, with the customer base being public attendance. The Company’s 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 Company’s financial condition and results of operations.
F-67
K&G THEATRES LLC
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 |
|
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-68
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.
|
|
|
|
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 |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
34 |
|
Business
|
|
|
|
|
5 1 |
|
Directors and
Executive Officers |
|
|
|
|
6 5 |
|
Director
Compensation |
|
|
|
|
6 9 |
|
Executive
Compensation |
|
|
|
|
70 |
|
Security
Ownership of Certain Beneficial Owners and Management |
|
|
|
|
7 4 |
|
Related Party
Transactions |
|
|
|
|
7 7 |
|
Description
of Capital Stock |
|
|
|
|
7 7 |
|
Shares
Eligible For Future Sale |
|
|
|
|
8 1 |
|
Underwriting
|
|
|
|
|
8 3 |
|
Legal Matters
|
|
|
|
|
8 6 |
|
Experts
|
|
|
|
|
8 6 |
|
Where You Can
Find More Information |
|
|
|
|
8 6 |
|
Index to
Financial Statements |
|
|
|
|
F-1 |
|
2, 3 00,000 Shares
of
Class
A
Common Stock
Maxim Group LLC Dominick
& Dominick 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 |
|
|
|
$ |
3,163 |
|
FINRA Filing
Fee |
|
|
|
$ |
4,364 |
|
Nasdaq Filing
Fee |
|
|
|
$ |
50,000 |
|
Printing and
Engraving Expenses |
|
|
|
$ |
22,884 |
|
Legal Fees
and Expenses |
|
|
|
$ |
325,000 |
|
Accounting
Fees and Expenses |
|
|
|
$ |
398,750 |
|
Transfer
Agent and Registrar Fees |
|
|
|
$ |
10,000 |
|
Miscellaneous
Expenses |
|
|
|
$ |
126,574 |
|
Total |
|
|
|
$ |
940,735 |
|
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 Company’s 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
Company’s 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 director’s 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 Company’s 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 Company’s
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 2 % 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
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 as 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 |
|
|
|
Amendment dated as of March 31, 2012 to the Asset Purchase Agreement dated as 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. |
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 s |
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. |
10.12* |
|
|
|
Lease
Agreement dated as of December 31, 2010, by and between Rialto Holding Co, LLC and DC Westfield Cinema, LLC. |
II-3
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 |
|
|
|
Intentionally Omitted |
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 Company’s 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 Company’s
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 Company’s
registration statement on Form S-1, filed with the Securities and Exchange Commission on March 7, 2012 and incorporated herein by
reference. |
**** |
|
Filed as an exhibit to Amendment No. 4 to the Company’s
registration statement on Form S-1, filed with the Securities and Exchange Commission on March 15, 2012 and incorporated herein by
reference. |
***** |
|
Filed as an exhibit to Amendment No. 5 to the Company’s
registration statement on Form S-1, filed with the Securities and Exchange Commission on March 30, 2012 and incorporated herein by
reference. |
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 April 9 , 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 April 9 , 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 O’Connor, II
|
|
|
|
Director |
|
/s/ Charles
Goldwater Charles Goldwater
|
|
|
|
Director |
|
*By: /s/ Brian
Pflug Brian Pflug Attorney-in-fact |
|
|
|
|
|
|
II-5