Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DCIN > SEC Filings for DCIN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for DIGITAL CINEMA DESTINATIONS CORP.

Form 10-Q for DIGITAL CINEMA DESTINATIONS CORP.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words "may," "will," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "continue" and other similar expressions are intended to identify forward-looking statements. We have based these forward looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC, particularly those contained in the Section entitled "Risk Factors" in our Registration Statement filed on Form S- 1 (File No. 333-178648). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Our fiscal year ends on June 30 each year.


Table of Contents

Overview

At September 30, 2012, we operated nine theaters located in New Jersey, Connecticut and Pennsylvania, consisting of 85 screens. Our theaters had over 416,000 and 84,000 attendees for the three months ended September 30, 2012 and 2011, respectively (for the portion of the periods we operated them).

Our theaters operated as of September 30, 2012 are:

• a 6 screen theater known the Rialto, located in Westfield, New Jersey;

• a 5 screen theater known as the Cranford theater, located in Cranford, New Jersey;

• an 8 screen theater known as the Bloomfield 8, located in Bloomfield, Connecticut;

• an 11 screen theater known as Cinema Center of Bloomsburg, located in Bloomsburg, Pennsylvania;

• a 12 screen theater known as Cinema Center of Camp Hill, located in Camp Hill, Pennsylvania;

• a 10 screen theater known as Cinema Center of Fairground Mall, located in Reading, Pennsylvania;

• a 12 screen theater known as Cinema Center of Selinsgrove, located in Selinsgrove, Pennsylvania; and

• a 9 screen theater known as Cinema Center of Williamsport, located in Williamsport, Pennsylvania.

• a 12 screen theater known as the Lisbon theater, located in Lisbon, Connecticut.

We acquired the Rialto and the Cranford theater from one seller on December 31, 2010, the Bloomfield 8 on February 17, 2011, all of the five Pennsylvania locations, containing 54 screens ("Cinema Centers"), on April 20, 2012 and the Lisbon theater on September 29, 2012.

On September 28, 2012, we entered into a loan agreement with Northlight Financial, LLC for $10.0 million (the "Northlight Loan"). The Northlight loan was used to fund our acquisition of the Lisbon theater for $6.0 million, pay a digital systems vendor for systems we previously installed for $3.3 million, pay fees and expenses associated with the Northlight loan and the Lisbon theater acquisition, and to provide working capital.

We completed the Lisbon theater acquisition on September 29, 2012 in an all-cash transaction. The Lisbon theater is fully converted to digital projection systems and has over 388,000 attendees on an annual basis.

Our plan to expand our business is based on our business strategy, centered on our slogan "cinema reinvented," and includes:

• Acquisitions of existing historically cash flow positive theaters in free zones. We intend to selectively pursue multi-screen theater acquisition opportunities that meet our strategic and financial criteria. Our philosophy is to "buy and improve" existing facilities rather than "find and build" new theaters. We believe this approach provides more predictability, speed of execution and lower risk.

• Creation of an all-digital theater circuit utilizing our senior management team's extensive experience in digital cinema and related technologies, alternative content selection and movie selection. We will convert the theaters we acquire to digital projection platforms (if not already converted) with an appropriate mix of RealD™ 3D auditoriums in each theater complex.

• Offering our customers a program of popular movies and alternative content such as sports, concerts, opera, ballet and video games to increase seat utilization and concession sales during off peak and some peak periods.

• Deployment of state of the art integrated software systems for back office accounting and remote camera surveillance systems for theater management which enable us to manage our business efficiently and to provide maximum scheduling flexibility while reducing operational costs.

• Active marketing of the Digiplex brand and our programs to consumers using primarily new media tools such as social media, website design and regular electronic communications to our targeted audience.

• Enhancing our alternative content programs with themed costuming for our theater personnel, food packages, scripted introductions by theater managers, and the use of selected staff members called "ambassadors" to employ various social media tools before, during and after each event to promote the event and the Digiplex brand.


Table of Contents

Other than the funds resulting from our capital raised to date, there can be no assurance, however, that we will be able to secure financing necessary to implement our business strategy, including to acquire additional theaters or to renovate and digitalize the theaters we do acquire.

We manage our business under one reportable segment: theater exhibition operations.

Components of Operating Results

Revenues

We generate revenues primarily from admissions and concession sales with additional revenues from screen advertising sales and other revenue streams, such as theater rentals and private parties. Our advertising agreement with National CineMedia, LLC ("NCM") has assisted us in expanding our offerings to domestic advertisers and will be broadening ancillary revenue sources, such as digital video monitor advertising and third party branding. Our alternative content agreements with NCM and others has assisted us in expanding our alternative content offerings, such as live and pre-recorded concert events, opera, ballet, sports programs, and other cultural events. In addition to NCM, we select, market and exhibit alternative content from a variety of other sources, including Emerging Pictures, Cinedigm Digital Cinema Corp., Screenvision, and others as they offer their programs to us. Our existing nine theaters are located in "free zones," or areas that permit us to acquire movies from any distributor. As such, we display all of the leading movies and can tailor our offerings to each of our markets.

Our revenues are affected by changes in attendance and concession revenues per patron. Attendance is primarily affected by the quality and quantity of films released by motion picture studios. Our revenues are seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, motion picture studios release the most marketable motion pictures during the summer and holiday seasons. The unexpected emergence or continuance of a "hit" film during other periods can alter the traditional pattern. The timing of movie releases can have a significant effect on our results of operations, and the results of one fiscal quarter are not necessarily indicative of the results for the next or any other fiscal quarter. The seasonality of motion picture exhibition, however, has become less pronounced as motion picture studios are releasing motion pictures somewhat more evenly throughout the year. Our operations may be impacted by the effects of rising costs of our concession items, wages, energy and other operating costs. We would generally expect to offset those increased costs with higher costs for admission and concessions.

Expenses

Film rent expenses are variable in nature and fluctuate with our admissions revenues. Film rent expense as a percentage of revenues is generally higher for periods in which more blockbuster films are released. Film rent expense can also vary based on the length of a film's run and are generally negotiated on a film-by-film and theater-by-theater basis. Film rent expense is higher for mainstream movies produced by the Hollywood studios, and lower for art and independent product. Film rent expense is reduced by virtual print fees ("VPFs") that we record from motion picture distributors under an exhibitor-buyer agreement that entitles us to payments for the display of digital movies.


Table of Contents

Cost of concessions is variable in nature and fluctuates with our concession revenues. We purchase concession supplies to replace units sold. We negotiate prices for concession supplies directly with concession vendors and manufacturers to obtain volume rates. Because we purchase certain concession items, such as fountain drinks and popcorn, in bulk and not pre-packaged for individual servings, we are able to improve our margins by negotiating volume discounts.

Salaries and wages include a fixed cost component (i.e., the minimum staffing costs to operate a theater facility during non-peak periods) and a variable component in relation to revenues as theater staffing is adjusted to respond to changes in attendance.

Facility lease expense is primarily a fixed cost at the theater level as most of our facility operating leases require a fixed monthly minimum rent payment. Our leases are also subject to percentage rent in addition to their fixed monthly rent if a target annual revenue level is achieved.

Utilities and other expenses include certain costs that have both fixed and variable components such as utilities, property taxes, janitorial costs, repairs and maintenance and security services.

Significant Events and Outlook

• Completion of Initial Public Offering and Exercise of Overallotment. On April 20, 2012 we completed our initial public offering of 2,200,000 shares of Class A common stock at a price of $6.10 per share, for net proceeds of $11,400 after deducting underwriting commissions and offering expenses. On May 7, 2012, we sold 323,900 shares of Class A common stock upon the exercise of the underwriters' overallotment option, for net proceeds of $1,800 after deducting underwriting discounts and commissions.

• Pennsylvania Theater Acquisition. On April 20, 2012, we acquired certain assets of Cinema Centers, a chain of five theaters with 54 screens located in central Pennsylvania. The purchase price for Cinema Centers was $13.9 million, consisting of $11.1 million in cash paid at closing, a note for $1.0 million due on September 17, 2012 and 335,000 shares of Class A common stock with a fair value of $1.8 million. We also assumed the operating lease of each theater location. No debt or other liabilities were assumed.

• Lisbon Theater Acquisition. On September 29, 2012 we acquired certain assets of the Lisbon theater, a 12-screen theater located in north eastern Connecticut for a purchase price of $6.6, which consisted of a cash payment of $6.0, and an earn-out. The preliminary fair value of the earn-out was recorded as a liability with an estimated fair value of $0.6 million to be paid after the first year following the closing if certain earnings targets are met. We also assumed the lease for the land that the theater is situated on. No debt or other liabilities were assumed.

• Northlight Term Loan. On September 28, 2012, we entered into a loan agreement for $10.0 million with Northlight Financial, LLC. The Northlight loan was used to fund our acquisition of the Lisbon theater for $6.0 million, pay for previously installed digital systems of $3.3 million, pay fees associated with the Northlight loan and the Lisbon acquisition, and to provide working capital.

• Digital Projector Installation. At September 30, 2012, all of our 85 screens were equipped with digital projectors and related hardware and software. Twenty-one of the 85 systems had been installed before our acquisition of the theaters, and the remaining 64 systems were installed under our ownership, at a total cost of approximately $5.0 million.

• Alternative Content Program Launch. Along with the continued display of traditional feature movies, a cornerstone of our business strategy is to exhibit opera, ballet, concerts, sporting events, children's programming and other forms of alternative content in our theaters. Using our 85 digital systems (38 of which are equipped to show 3D events), we can show live and pre-recorded 2D and 3D events at off-peak times to increase the utilization of our theaters. Going forward we expect at least 40% of any new screens to be 3D-enabled.


Table of Contents

• Acquisition Strategy. We plan to acquire existing movie theaters in free zones over the next 12 months and beyond. We generally seek to pay a multiple of 4.5 times to 5.5 times Theater Level Cash Flow ("TLCF") for theaters we acquire. TLCF is calculated as revenues minus theater operating expenses (excluding depreciation and amortization).

The following table sets forth the percentage of total revenues represented by statement of operations items included in our consolidated statements of operations for the periods indicated (dollars and attendance in thousands, except average ticket prices and average concession per patron):

                             Results of Operations

                                               Three months ended September 30,
(Amounts in thousands, except
per patron data)                              2012                           2011
Revenues:                               $               %              $               %
 Admissions                        $     3,009             69      $      742             76
 Concessions                             1,199             28             199             20
 Other                                     139              3              39              4
 Total revenues                          4,347            100             980            100

Cost of operations:
 Film rent expense (1)                   1,439             48             328             44
 Cost of concessions (2)                   164             14              40             20
 Salaries and wages (3)                    513             12             143             15

 Facility lease expense (3)                523             12             120             12
 Utilities and other (3)                   741             17             158             16
 General and administrative (3)            737             17             321             33
 Depreciation and amortization
(3)                                        849             20             129             13
 Total costs and expenses (3)            4,966            114           1,239            126
 Operating loss (3)                       (619 )          (14 )          (259 )          (26 )
 Interest expense                          (25 )           (1 )             -              -
 Loss before income taxes (3)             (644 )          (15 )          (259 )          (26 )
 Income taxes (4)                           17              -               5             (1 )
 Net loss (3)                      $      (661 )          (15 )    $     (264 )          (27 )

Other operating data:                                   %                              %
 Theatre Level Cash Flow (7)       $       967             22      $      191             19
 Adjusted EBITDA (8)               $       339              8      $      (98 )          (10 )
 Attendance                            416,132              *          84,491              *
 Average ticket price (5)          $      7.23              *      $     8.78              *
 Average concession per patron
(6)                                $      2.88              *      $     2.36              *


___________

* Not meaningful

(1) Percentage of revenues calculated as a percentage of admissions revenues.

(2) Percentage of revenues calculated as a percentage of concessions revenues.

(3) Percentage of revenues calculated as a percentage of total revenues.

(4) Calculated as a percentage of pre-tax loss.


Table of Contents

(5) Calculated as admissions revenue/attendance.

(6) Calculated as concessions revenue/attendance.

(7) TLCF is a non-GAAP financial measure. TLCF is a common financial metric in the theater industry, used to gauge profitability at the theater level, before the effect of depreciation and amortization, general and administrative expenses, interest, taxes or other income and expense items. While TLCF is not intended to replace any presentation included in our consolidated financial statements under GAAP and should not be considered an alternative to cash flow as a measure of liquidity, we believe that this measure is useful in assessing our cash flow and working capital requirements. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this prospectus. For additional information on TLCF, see pages 26-27.

(8) Adjusted EBITDA is a non-GAAP financial measure. We use adjusted EBITDA as a supplemental liquidity measure because we find it useful to understand and evaluate our results, excluding the impact of non-cash depreciation and amortization charges, stock based compensation expenses, and nonrecurring expenses and outlays, prior to our consideration of the impact of other potential sources and uses of cash, such as working capital items. This calculation may differ in method of calculation from similarly titled measures used by other companies. This adjusted financial measure should be read in conjunction with the financial statements included in this prospectus. For additional information on Adjusted EBITDA, see pages 26-27.

Three Months Ended September 30, 2012 and 2011

At September 30, 2012, we operated nine theaters located in New Jersey, Connecticut and Pennsylvania, consisting of 85 screens. We operated our eight theaters for the three month period ended September 30, 2012 and the Lisbon theater from the date of acquisition of September 29, 2012. At September 30, 2011, we operated three theaters located in New Jersey and Connecticut, consisting of 19 screens. Our theaters had over 416,000 and 84,000 attendees for the three months ended September 30, 2012 and 2011, respectively (for the portion of the periods we operated them). Overall, the North American box office results for the three months ended September 30, 2012 had declined by approximately 5% from the comparable 2011 period, with fewer titles displayed in 2012 and general economic weakness contributing to the decline. For the three theaters we operated for the entire 2012 and 2011 three month periods, our box office results had decreased by 1.6% due to similar factors, offset by contributions from alternative content revenue and our presence in key affluent market areas.

Admissions and Concessions. Our admissions and concessions revenues increased by 347%, due to our increased screen count in the three months ended September 2012 as compared to 2011. In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Alternative content revenue comprised 4% of our box office revenue during the three months ended September 30, 2012 and 2011, for our original 3 theaters that we operated in both years.

Other Revenues. Other revenues consist of advertising revenues, theater rentals for parties, camps and other activities. We entered into an agreement with NCM to receive ad revenues in August 2011. Advertising revenue was $107 for the three months ended September 30, 2012 period compared to $9 in the 2011 period.

Film Rent Expense. Film rent expense is a variable cost that fluctuates with box office revenues. We generally expect film rent expense to range from 45% to 55% of admissions revenues, with art and independent titles at the lower end of the range and mainstream movie titles at the middle to high end of the range. Film rent expense as a percentage of box office revenues was 48% in the three months ended September 30, 2012 period as compared to 44% of box revenues in 2011. Included as a reduction of film rent expense in the 2012 period is $244 of VPFs that we receive from a third party vendor, associated with digital titles that we play from the studios, as compared to $70 in 2011. Excluding VPFs, film rent expense would have been 56% and 54% of admissions revenues in the 2012 and 2011 periods, respectively.


Table of Contents

Cost of Concessions. At 14% and 20 % of our concessions revenue for the three months ended September 30, 2012 and 2011, respectively, we believe our cost of concessions is close to the industry average of 15% to 20%. Our concession costs as a percentage of concessions revenue can fluctuate based on the mixture of concession products sold, and changes in our supply pricing.

Salaries and Wages. Our theater employees are mostly part-time hourly employees, supervised by one or more full-time managers at each location. Our payroll expenses contain a fixed component but are also variable and will fluctuate, being generally higher during the peak summer and holiday periods, and also during alternative content events, and lower at other times. The increase from the 2011 period is due to our operation of a larger number of theaters during the three months ended September 30, 2012 versus 2011. As a percentage of revenue, the decrease is due to our adjustment of the mix of theater staff shortly following our acquisition of the locations.

Facility Lease Expense. Each of our facilities is operated under operating leases that contain renewal options upon expiration. The leases contain provisions that increase rents in certain amounts and at certain times during the initial term, and the leases for our certain theaters require percentage rent to be paid upon the achievement of certain revenue targets. We incurred $15 in percentage rent expense as a result of these lease provisions during the three months ended September 30, 2012, and $0 in the 2011 period. The remainder of the increase from the 2011 period is due to our operation of more theaters in the 2012 period.

Utilities and Other. Utilities and other expenses consist of utility charges, real estate taxes incurred pursuant to the operating leases for our theaters, and various other costs of operating the theaters. We expect these costs, which are largely fixed in nature, to remain relatively constant for the theaters, with growth in these expenses as we acquire more theaters. The increase in these expenses is due to the operation of more screens during the three months ended September 30, 2012 as compared to 2011. Though many of these costs are largely fixed except for inflationary-type increases, we will experience growth in these expenses as we acquire more theaters.

General and Administrative Expenses. General and administrative expenses consisted primarily of salaries and wages for our corporate staff, legal, accounting and professional fees associated with our startup and acquisition of theaters, marketing, and information technology related expenses. The increase in these expenses is due to additional personnel hired to manage the Company's actual and planned growth, along with professional fees for auditing, legal, marketing and information technology. We expect these costs to decrease as a percentage of revenue as we grow and realize increased economies of scale. Included in general and administrative expenses is stock compensation expense of $43 and $16 in the 2012 and 2011 periods, respectively related to issuance of Class A common stock to employees and non-employees for services rendered. We expect to issue additional stock-based awards in the future under our 2012 stock option and incentive plan that was adopted in conjunction with our IPO. Awards may consist of stock options or restricted stock, with or without vesting periods. As of September 30, 2012 and 2011, we had 11 and 8 employees, respectively on our corporate staff, including our chief executive officer and other executive officers and staff to support our business development, technology, accounting, and marketing activities.

Depreciation and Amortization. The increase from 2011 is due to the operation of 85 screens as of September 30, 2012 versus 19 screens at September 30, 2011, including the addition of assets such as digital projection equipment, and other capital improvements made. We record depreciation and amortization for property and equipment and intangible assets over the estimated useful life of each asset class on a straight line basis. Our largest fixed asset is our digital projection equipment, which had a gross cost of $5.8 million as of September 30, 2012 and is being depreciated over a 10-year estimated useful life. We expect digital projection equipment to be a large component of our asset base going forward following any acquisitions that we may consummate, along with other theater equipment and leasehold improvements.

Operating Loss. The increased operating loss was primarily attributable to the higher general and administrative and depreciation and amortization costs, associated with the increased asset base and larger corporate infrastructure which will support our future growth.

Impact of Inflation. We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material effect on our business, financial condition or results of operations in the three month periods in 2012 and 2011, respectively.


Table of Contents

Income Taxes. We have income tax expense, although there were pretax losses, mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since . . .

  Add DCIN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DCIN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.