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DCIN > SEC Filings for DCIN > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for DIGITAL CINEMA DESTINATIONS CORP.

Form 10-Q for DIGITAL CINEMA DESTINATIONS CORP.


8-Nov-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
(in thousands, except share data dollars)

At September 30, 2013, we operated 19 theaters located in New Jersey, Connecticut, Pennsylvania, California, Arizona and Ohio, consisting of 184 screens. Our theaters had over 1,077,000 and 416,000 attendees for the three months ended September 30, 2013 and 2012, respectively (for the portions of the periods we operated them).


Contents

Our theaters operated as of September 30, 2013 are:

Date Acquired     City/ State        Number of Screens   Approximate Number of Seats
  12/31/10        Cranford, NJ               5                       642
  12/31/10       Westfield, NJ               6                       956
  02/18/11       Bloomfield, CT              8                      1,119
  04/20/12       Bloomsburg, PA             11                      1,883
  04/20/12       Camp Hill, PA              12                      2,403
  04/20/12        Reading, PA               10                      2,035
  04/20/12      Selinsgrove, PA             12                      2,048
  04/20/12      Williamsport, PA             9                      1,721
  09/29/12         Lisbon, CT               12                      2,107
  12/14/12    Surprise, AZ (1) (2)          14                      2,696
  12/18/12    Apple Valley, CA (1)          14                      2,568
  12/18/12     San Diego, CA (1)             7                      1,404
  12/18/12      Bonsall, CA (1)              6                       867
  12/18/12       Poway, CA (1)              10                      2,217
  12/19/12     Oceanside, CA (1)            13                      1,659
  12/20/12      Temecula, CA (1)            10                      1,775
  01/01/13       Sparta, NJ (1)              3                       264
  02/01/13       Solon, OH (1)              16                      2,826
  07/19/13     Torrington, CT (1)            6                      1,021
                     Total                  184                    32,211

(1) Owned by JV.
(2) Includes one IMAX screen with approximately 212 seats.

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") whereby we have full day to day responsibility for all aspects of theater operations, and we receive a fee equal to 5% of the gross revenues of these theaters.

On July 19, 2013, JV acquired a six screen movie theater in Torrington, Connecticut. The theater was equipped with digital projection systems before JV began operating the theater. The theater is operated by us, under Management Agreements with JV, and included in our unaudited condensed consolidated financial statements.

At September 30, 2013, Digiplex and Start Media owned 33% and 67% of the equity of JV, respectively.
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 Digiplex or through our JV. 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.


Contents

• Creation of an all-digital theater circuit utilizing our senior management team's extensive experience in digital cinema and related technologies, alternative programming 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. Seven of our locations also offer D-Box™ motion seating available for certain movies.

• 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 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, DigiNext, to release specialty movie content, 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.

• Creation of strategic relationships to acquire exclusive distribution rights to content which
(i) can play at both our own theaters, and at additional non-competing theaters, and (ii) can be the source of additional revenues from non-theatrical revenue streams (such as DVD sales, digital downloads, cable TV, etc.).

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 Corp., Screenvision, DigiNext, and others as they offer their programs to us. Our 19 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.


Contents

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.

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

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 $13,131; with $8,108 in cash, of which $8,000 was provided by Start Media, 887,623 shares of Class A common stock with a fair value of $4,714 provided by us, and the assumption of a capital equipment lease. Both the cash and stock elements constitute our 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, and in July 2013 JV acquired one theater in Torrington, Connecticut having six screens. We expect to acquire other theaters through the JV, although this cannot be assured.


Contents

Management Agreements. We have entered into agreements (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 JV operating agreement.

Northlight Term Loan. On September 28, 2012, we entered into a loan agreement for $10,000 with Northlight Trust I ("Northlight"). The Northlight loan was used to fund our acquisition of the Lisbon theater for $6,014, pay for previously installed digital systems of $3,334, pay fees associated with the Northlight loan and the Lisbon acquisition, and to provide working capital.

Shelf Registration. In May 2013, we filed a $10,500 registration statement (the maximum amount is subject to adjustment), which has been declared effective by the Securities and Exchange Commission, and permits 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. In October 2013, we sold 1.1 million shares of our Class A Common Stock to several investors under the registration statement and received net proceeds of approximately $5,200.

Digital Projector Installation. At September 30, 2013, all of our 184 screens were equipped with digital projectors and related hardware and software. 120 of the 184 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 $6,400. We earn VPFs, described under Components of Operating Results, on 91 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, and sporting events, children's programming and other forms of alternative content in our theaters. Using our 184 digital systems (72 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 6.0 times Theater Level Cash Flow ("TLCF") for theaters we acquire. TLCF is calculated as revenues minus theater operating expenses (excluding depreciation and amortization and other non-cash items).

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


                                                                      Contents

                             Results of Operations

                                               Three months ended September 30,
(Amounts in thousands, except
per patron data)                              2013                          2012
Revenues:                               $               %             $               %
  Admissions                       $     7,758             68     $    3,009             69
  Concessions                            3,338             29          1,199             28
  Other                                    373              3            139              3
  Total revenues                        11,469            100          4,347            100

Cost of operations:
  Film rent expense (1)                  3,778             49          1,412             47
  Cost of concessions (2)                  602             18            164             14
  Salaries and wages (3)                 1,450             13            513             12
  Facility lease expense (3)             1,470             13            523             12
  Utilities and other (3)                2,386             21            768             18
  General and administrative (3)         1,318             11            737             17
  Change in fair value of
earnout (3)                                 59              1              -              -
  Depreciation and amortization
(3)                                      1,335             12            849             20
  Total costs and expenses (3)          12,398            108          4,966            114
  Operating loss (3)                      (929 )           (8 )         (619 )          (14 )
  Interest expense                        (427 )           (4 )          (25 )           (1 )
  Other                                     (9 )           (0 )            -              -
  Loss before income taxes (3)          (1,365 )          (12 )         (644 )          (15 )
  Income taxes (4)                           9             (1 )           17             (3 )
  Net loss (3)                     $    (1,374 )          (12 )   $     (661 )          (15 )
Net loss attributable to
non-controlling interest (10)              323             24              -              -
Net loss attributable to Digital
Cinema Destinations Corp. (10)     $    (1,051 )           76     $     (661 )           (3 )
Preferred stock dividends                   (5 )            0             (1 )            0
Net loss attributable to common
stockholders (10)                  $    (1,056 )           77     $     (662 )            0
Other operating data:
  Consolidated Theatre Level
Cash Flow (5)                      $     1,829             16     $    1,009             23
  Management fees (9)              $       286              2     $        -              -
Adjusted EBITDA of Digital
Cinema Destinations Corp (6)       $     1,007              9     $      358              8
  Attendance                         1,077,350              *        416,132              *
  Average ticket price (7)         $      7.59              *     $     7.23              *
  Average concession per patron
(8)                                $      3.27              *     $     2.88              *


__________


* Not meaningful

(1) Film rent expense percentage calculated as a percentage of admissions revenues.

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

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

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

(5) 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, deferred rent, 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. See page 30-32 for TLCF reconciliation.


Contents

(6) 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, other non-cash items, 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. See page 30-31 for Adjusted EBITDA reconciliation.

(7) Calculated as admissions revenue/ paid attendance of 1,077,350 in 2013 and 416,132 in 2012, respectively. Paid attendance excludes certain theater rental activity, such as parties and film festivals.

(8) Calculated as concessions revenue/ paid attendance of 1,077,350 in 2013 and 416,132 in 2012, respectively. Paid attendance excludes certain theater rental activity, such as parties and film festivals.

(9) Management Fees earned by Digiplex to operate the theaters of the JV.

(10) Percentage calculated as a percentage of net loss.

Three Months Ended September 30, 2013 and 2012

At September 30, 2013, we operated 19 theaters located in New Jersey, Connecticut and Pennsylvania, California, Arizona and Ohio consisting of 184 screens. We operated eight theaters with 73 screens for the entire three month period ended September 30, 2012. Therefore, many comparisons of the 2013 and 2012 periods will be skewed accordingly. Our theaters had over 1,077,000 and 416,000 attendees for the three months ended September 30, 2013 and 2012, respectively (for the portions of the periods we operated them). According to Box Office Mojo, the overall North American box office results for the three months ended September 30, 2013 had increased by approximately 6.4% from the comparable 2012 period.

Admissions and Concessions. Our admissions and concessions revenues increased by 164%, due to our increased screen count in the three months ended September 30, 2013 as compared to 2012. In addition, our emphasis on alternative content programming has resulted in incremental admissions and concessions revenue. Our average ticket and concession price increases was due to our entry into new markets with higher prices generally, our continued focus on alternative programming which generally has higher admission pricing, and new concession menu offerings.

Other Revenues. Other revenues consist of advertising revenues, theater rentals for parties, festivals, camps, ATM and game machine fees and other activities. Advertising revenue was $232 for the three months ended September 30, 2013 period compared to $107 in the 2012 period.

Film Rent Expense. Film rent expense is a variable cost that fluctuates with box office revenues. We generally expect film rent expense (excluding VPF's) 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 49% in the three months ended September 30, 2013 period as compared to 48% of box revenues in 2012. Our increased film rent expense was primarily 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 $290 of VPFs that we receive from a third party vendor, associated with digital titles that we play from the studios, as compared to $244 in 2012. Excluding VPFs, film rent expense would have been 53% and 56% of admissions revenues in the 2013 and 2012 periods, respectively. The decrease was largely due to the mix of content shown versus last year.


Contents

Cost of Concessions. At 18% and 14% of our concessions revenue for the three months ended September 30, 2013 and 2012, 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. In the current fiscal period, the cost of product promotions, giveaways, and concession supplies has increased over the prior period.

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 2012 period is due to our operation of a larger number of theaters during the three months ended September 30, 2013 versus 2012. However, as a percentage of revenue, the amounts are consistent from period to period.

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 . . .

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