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DCIN > SEC Filings for DCIN > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for DIGITAL CINEMA DESTINATIONS CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for DIGITAL CINEMA DESTINATIONS CORP.


15-May-2013

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 Form 10-K. 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.

Overview

At March 31, 2013, we operated 18 theaters located in New Jersey, Connecticut, Pennsylvania, California, Arizona and Ohio, consisting of 178 screens. Our theaters had over 764,000 and 79,000 attendees for the three months ended March 31, 2013 and 2012, respectively, and 1,761,000 and 231,000 attendees for the nine months ended March 31, 2013 and 2012, respectively (for the portions of the periods we operated them).

Our theaters operated as of March 31, 2013 are:

• a 6 screen theater known as 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;

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


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

• a 14 screen theater known as the Surprise Pointe 14 theater, located in Surprise. Arizona;

• a 14 screen theater known as the Apple Valley theater, located in Apple Valley, California;

• a 13 screen theater known as the Mission Marketplace theater, located in Oceanside, California;

• a 10 screen theater known as the Temecula Tower theater, located in Temecula, California;

• a 10 screen theater known as the Poway theater, located in Poway, California;

• a 7 screen theater known as the Mission Valley theater, located in San Diego, California;

• a 6 screen theater known as the River Village theater, located in Bonsall, California.

• a 3 screen theater known as the Sparta theater, located in Sparta, New Jersey.

• a 16 screen theater known as the Solon theater, located in Solon, Ohio.

On December 10, 2012, we entered into a joint venture ("JV") with Start Media, LLC ("Start Media"), to acquire, refit and operate movie theaters. On December 21, 2012, wholly owned subsidiaries of JV completed the acquisition of seven movie theaters (six of which are located in southern California and one of which is near Phoenix, Arizona) (collectively, the "Ultrastar Acquisitions") with an aggregate of 74 fully digital screens from seven sellers affiliated with one another (collectively the "Ultrastar Sellers"). These seven theaters have annual attendance of over 2.0 million patrons.

The seven theaters acquired from the Ultrastar Sellers are operated by us pursuant to management agreements (the "Management Agreements") with the JV, whereby we have full day to day responsibility for all aspects of the theater operations, and we receive a fee equal to 5% of the gross revenues of these theaters.

On January 1 and February 1, 2013, wholly owned subsidiaries of JV entered into operating leases of a three screen theater in Sparta, NJ and a 16 screen theater in Solon, Ohio, respectively. Both theaters were equipped with digital projection systems before JV began operating the theaters. Both theaters are operated by us, under Management Agreements with JV, and included in our unaudited consolidated financial statements.

At March 31, 2013, Digiplex and Start Media owned 34% and 66% of the equity of JV, respectively.

On September 28, 2012, we entered into a loan agreement with Northlight Trust I for $10,000 (the "Northlight Loan"). The Northlight loan was used to fund our acquisition of the Lisbon theater for $6,000, pay a digital systems vendor for systems we previously installed for $3,300, 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.


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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.

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 either directly by Digplex or through our JV acquisitions vehicle. 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 joint venture to release specialty movie content, Diginext, and other 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.

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.


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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 18 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.

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.


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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 million, which consisted of a cash payment of $6.0 million, and an earn-out. The 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.

JV agreement and JV Acquisitions. As noted in Overview, in December 2012 we entered into a joint venture relationship with Start Media and the JV acquired 7 theaters from the Ultrastar Sellers in California and Arizona. The total purchase price for the Ultrastar Acquisitions was $12.8 million; with $8.1 million in cash being paid by Start Media and 887,623 shares of Class A common stock with a fair value of $4.7 million being paid by us. Each payment contributes to the JV as the members' respective initial capital contributions to the JV. Certain operating leases for the theater facilities, and certain capital leases and service contracts related to theater equipment were assumed. No other liabilities were assumed from the Ultrastar Sellers. On January 1 and February 1, 2013, JV entered into operating leases for a three screen theater in Sparta, NJ and a 16 screen theater in Solon, Ohio, respectively. We intend to acquire other theaters through the JV, although this cannot be assured.


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• Management Agreements. We have entered into agreements with JV (the "Management Agreements") to manage the theaters JV acquires, and we receive 5% of the total revenue of the theaters in each year as management fees in consideration for these management services. Under the Management Agreements, we have full day-to-day authority to operate the theaters owned by JV including: staffing, banking, content selection, vendor selection and all purchasing decisions. We are required to submit an annual operating budget to JV for each fiscal year ending June 30 for approval by the JV board of managers (which is comprised of four seats, two of which are controlled by us, and two by Start Media). In the event of any disagreements regarding the budget, there are dispute resolution procedures contained in the operating agreement ("JV Operating Agreement").

• Northlight Term Loan. On September 28, 2012, we entered into a loan agreement for $10.0 million with Northlight Trust I ("Northlight"). 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.

• Shelf Registration. In May 2013, we filed a $10.5 million registration statement, which has not yet been declared effective, that would permit the issuance of a broad range of securities. Any proceeds can be used for a variety of items including acquisitions, debt repayment and general corporate purposes.

• Digital Projector Installation. At March 31, 2013, all of our 178 screens were equipped with digital projectors and related hardware and software. 114 of the 178 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. We earn VPFs, described under Components of Operating Results, on 85 systems and do not earn VPFs on 93 digital systems, as these systems are owned by an unrelated digital cinema integrator. However, we have full use of these systems, under a master license agreement, and we have the option to purchase these systems at fair market value after the systems have been in use for a ten year period.

• 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 178 digital systems (57 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.

• 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):


                                                                      Contents

                             Results of Operations

                                                        Three months ended March 31,
(Amounts in thousands, except per patron data)          2013                    2012
Revenues:                                            $            %         $            %
 Admissions                                      $   5,985        68     $    695        71
 Concessions                                         2,461        28          213        22
 Other                                                 319         4           68         7
 Total revenues                                      8,765       100          976       100

Cost of operations:
 Film rent expense (1)                               2,844        48          304        44
 Cost of concessions (2)                               413        17           40        19
 Salaries and wages (3)                              1,155        13          109        11
 Facility lease expense (3)                          1,514        17          122        13
 Utilities and other (3)                             1,848        21          203        21
 General and administrative (3)                      1,365        16          409        42
 Change in fair value of earnout (3)                   (79 )      (1 )        (20 )      (2 )
 Depreciation and amortization (3)                   1,439        16          125        13
 Total costs and expenses (3)                       10,499       120        1,292       132
 Operating loss (3)                                 (1,734 )     (20 )       (316 )     (32 )
 Interest expense                                     (401 )      (5 )          -         -
 Other                                                 (38 )      (0 )         (1 )      (0 )
 Loss before income taxes (3)                       (2,173 )     (25 )       (317 )     (32 )
 Income taxes (4)                                      (22 )       1           (2 )       1
 Net loss (3)                                    $  (2,151 )     (25 )   $   (315 )     (32 )

Other operating data:
 Consolidated Theatre Level Cash Flow (7)        $   1,032        12     $    217        22
 Consolidated Adjusted EBITDA (8)                $     (42 )      (0 )   $   (165 )     (17 )
 Attendance                                        763,651         *       78,937         *
 Average ticket price (5)                        $    7.84         *     $   8.80         *
 Average concession per patron (6)               $    3.22         *     $   2.70         *



* 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.

(5) Calculated as admissions revenue/attendance.

(6) Calculated as concessions revenue/attendance.


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(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 report. For additional information on TLCF, see pages 39-41.

(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 report. For additional information on Adjusted EBITDA, see pages 39-41.

Three Months Ended March 31, 2013 and 2012

At March 31, 2013, we operated 18 theaters located in New Jersey, Connecticut and Pennsylvania, California, Arizona and Ohio consisting of 178 screens. We operated three theaters with 19 screens for the entire three month period ended March 31, 2012. We acquired five theaters with 54 screens in April 20, 2012, one theater with 12 screens in September 2012, seven theaters with 74 screens in December 2012, one theater with three screens in January 2013, and one theater with 16 screens in February 2013. Therefore, many comparisons of the 2013 and 2012 periods will be skewed accordingly. Our theaters had over 764,000 and 79,000 attendees for the three months ended March 31, 2013 and 2012, respectively (for the portions of the periods we operated them). Overall, the North American box office revenue results for the three months ended March 31, 2013 had declined by approximately 13% from the comparable 2012 period.

Admissions and Concessions. Our admissions and concessions revenues increased by 830%, due to our increased screen count in the three months ended March 31, 2013 as compared to 2012. In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Our average ticket price decrease was due to our entry into new and less urban geographical markets.

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 $163 for the three months ended March 31, 2013 period compared to $20 in the 2012 period. Theater rental activities also include film festivals and regular usage to display ethnic products such as Indian movies.


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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 50% to 60% 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 March 31, 2013 period as compared to 44% of box revenues in 2012. Our increased film rent was due to our entry into new markets and display of mainstream movie titles with higher film expenses and also because 93 systems are owned by a third party integrator for which we receive no VPFs . Included as a reduction of film rent expense in the 2013 period on the systems we own is $259 of VPFs that we receive from a third party vendor, associated with digital titles that we play from the studios, as compared to $56 in 2012. Excluding . . .

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