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As filed with the Securities and Exchange Commission on January 30, 1998
REGISTRATION NO. 333-36763
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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HOLLYWOOD THEATERS, INC.
HOLLYWOOD THEATER HOLDINGS, INC.
CROWN THEATRE CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 7832 75-2598844
DELAWARE 7832 75-2605571
MISSOURI 7832 43-1530337
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2911 TURTLE CREEK BOULEVARD, SUITE 1150
DALLAS, TEXAS 75219
(214) 528-9500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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THOMAS W. STEPHENSON, JR.
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
HOLLYWOOD THEATERS, INC.
2911 TURTLE CREEK BOULEVARD, SUITE 1150
DALLAS, TEXAS 75219
(214) 528-9500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
MICHAEL A. SASLAW
BAKER & BOTTS, L.L.P.
2001 ROSS AVENUE
DALLAS, TEXAS 75201
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 30, 1998
PROSPECTUS
HOLLYWOOD THEATERS, INC.
HOLLYWOOD THEATER HOLDINGS, INC.
CROWN THEATRE CORPORATION
OFFER TO EXCHANGE HOLLYWOOD THEATERS, INC. 10 5/8% SENIOR
SUBORDINATED NOTES DUE AUGUST 1, 2007 FOR ANY AND ALL OF ITS
OUTSTANDING 10 5/8% SENIOR SUBORDINATED NOTES DUE AUGUST 1, 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Hollywood Theaters, Inc., a Delaware corporation, (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 10 5/8%
Senior Subordinated Notes due August 1, 2007 (the "Exchange Notes"), which will
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this Prospectus
is a part, for each $1,000 principal amount of its outstanding 10 5/8% Senior
Subordinated Notes due August 1, 2007 (the "Old Notes"), of which $110,000,000
principal amount is outstanding. The form and terms of the Exchange Notes are
the same as the form and terms of the Old Notes (which they replace) except that
the Exchange Notes will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer, will not contain
terms with respect to the special interest payments described herein and will
not be entitled to registration rights or other rights under the Registration
Rights Agreement (as defined herein). See "The Exchange Offer." The Exchange
Notes will evidence the same debt as the Old Notes (which they replace) and will
be issued under and be entitled to the benefits of the Indenture (the
"Indenture") dated August 7, 1997 between the Company and U.S. Trust Company of
Texas, N.A., as Trustee (the "Trustee"), governing the Old Notes. See "The
Exchange Offer" and "Description of Exchange Notes."
Interest on the Exchange Notes will be payable on February 1 and August 1
of each year, commencing February 1, 1998. The Exchange Notes will mature on
August 1, 2007. The Exchange Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after August 1, 2002 at the
redemption prices set forth herein, plus accrued and unpaid interest to the date
of redemption. In addition, on or before August 1, 2000, the Company may, at its
option and subject to certain requirements, use an amount equal to the net cash
proceeds of one or more Public Equity Offerings to redeem up to an aggregate of
30% of the principal amount of the Exchange Notes originally issued at a
redemption price equal to 110.625% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption. Upon the occurrence of a
Change of Control, the Company is required to offer to repurchase all
outstanding Exchange Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
See "Description of Exchange Notes." If a Change of Control results in an
acceleration of indebtedness that is senior to the Exchange Notes, the Company
may not have sufficient resources to repurchase the Exchange Notes. See "Risk
Factors--Repurchase of Notes upon a Change of Control."
(Cover text continued on next page)
SEE "RISK FACTORS" ON PAGE 14 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE
EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is _____________, 1998
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The Exchange Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness
of the Company, and senior to or pari passu with all existing and future
subordinated indebtedness of the Company. At December 31, 1997, the Company's
pro forma ratio of indebtedness to total capital was approximately 46%. The
Exchange Notes, like the Old Notes, will be fully and unconditionally
guaranteed, jointly and severally, by the Company's parent, sole subsidiary and
any future Restricted Subsidiary of the Company. The Guarantees will be
subordinated obligations of the parent and subsidiary, will be junior to all
senior indebtedness of the parent and subsidiary, including the parent's and
subsidiary's guarantees of borrowings under the Senior Bank Facility, and each
of the Company, its parent, its subsidiary and any future Restricted Subsidiary
will be jointly and severally liable on such guarantees. At December 31, 1997,
the Company and its subsidiary had approximately $110.0 million of indebtedness
outstanding, none of which was senior indebtedness, and its parent had no
indebtedness outstanding. See "Description of Exchange Notes -- Subordination"
and "Description of Senior Bank Facility." The Company is a wholly owned
subsidiary (and the only subsidiary) of Hollywood Theater Holdings, Inc. The
indenture pursuant to which the Exchange Notes will be issued permits the
Company and the guarantors of the Exchange Notes to incur additional
indebtedness, including senior indebtedness, subject to certain limitations. See
"Description of Exchange Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York time, on ____, 1998, unless
extended by the Company in its sole discretion (the "Expiration Date"). Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration
Date. The Exchange Offer is subject to certain customary conditions. The Old
Notes were sold by the Company on August 7, 1997 to the Purchasers (as defined
herein) in a transaction not registered under the Securities Act in reliance
upon an exemption under the Securities Act. The Purchasers subsequently placed
the Old Notes in the United States with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act and outside the United States
with non-U.S. persons in reliance on Regulation S under the Securities Act.
Accordingly, the Old Notes may not be reoffered, resold or otherwise transferred
in the United States unless registered under the Securities Act or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Company under the Registration Rights Agreement entered
into by the Company in connection with the offering of the Old Notes. See "The
Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes. See "The Exchange Offer -- Purpose
and Effect of the Exchange Offer" and "-- Resale of the Exchange Notes." Each
broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Notwithstanding the
foregoing, any purchaser of Old Notes who is an "affiliate" of the Company or
who intends to participate in the Exchange Offer for the purpose of distributing
the Exchange Notes may be deemed to be an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
There has not previously been any public market for the Old Notes or the
Exchange Notes. Although the Purchasers have informed the Company that they
intend to make a market in the Exchange Notes, they are not obligated to do so,
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and any such market-making activities with respect to the Exchange Notes may be
interrupted or discontinued at any time without notice. The Company does not
intend to list the Exchange Notes on any securities exchange or to seek approval
for quotation through any automated quotation system.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and will be subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to the
existing restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for registration under the Securities Act
of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors -- Exchange Offer Procedures" and
"Exchange Offer -- Consequences of Failure to Exchange."
The Exchange Notes issued in exchange for Old Notes will be issued in the
form of one or more Global Notes (as defined herein), in fully registered form
without coupons, deposited with a custodian for and registered in the name of a
nominee of The Depository Trust Company. Beneficial interests in such Global
Note representing the Exchange Notes will be shown on, and transfers thereof
will be effected through, records maintained by DTC and its direct and indirect
participants. Except as described herein, the Exchange Notes will not be
available in definitive form. The Exchange Notes will be issued only in
registered form in denominations of $1,000 and integral multiples thereof. See
"Description of Exchange Notes -- Book Entry, Delivery and Form."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of , 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No dealer-manager is being used in connection
with this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of the Old Notes in any jurisdiction in which the
making of the Exchange Offer or acceptance thereof would not be in compliance
with the laws of such jurisdiction or would otherwise not be in compliance with
any provision of any applicable security law.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the Exchange
Notes being offered hereby. This Prospectus does not contain all of the
information set forth in the Exchange Offer Registration Statement. For further
information with respect to the Company and the Exchange Offer, reference is
made to the Exchange Offer Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices of
the commission at 75 Park Place, New York, New York 10007 and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Additionally, the Commission maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission including the
Company.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will be required to file periodic reports and
other information with the Commission. In addition, the Company has agreed that
prior to the time the Company becomes subject to Section 13(a) or 15(d) of the
Exchange Act, the Company shall provide to all holders and file with the Trustee
copies of the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to such
Section 13(a) or 15(d) or any successor provision thereto if the Company were so
required, such documents to be mailed to holders and filed with the Trustee on
or prior to the respective dates by which the Company would have been required
so to file such documents if the Company were so required. After the Company
commences filing such reports, and so long as any of the Notes are outstanding,
the Company shall file with the Commission the annual reports, quarterly reports
and other documents which the Company is required to file with the Commission
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 or any
successor provisions thereto. Under the Indenture, the Company will furnish
periodic reports to the Trustee, which will make them available upon request to
the holders of the Exchange Notes. To permit compliance with Rule 144A in
connection with resales of Old Notes, the Company will furnish upon the request
of a holder of an Old Note and a prospective purchaser designated by such holder
the information required to be delivered under Rule 144A(d)(4) under the
Securities Act if at the time of such request the Company is not a reporting
company under Section 13 or 15(d) of the Exchange Act nor exempt from reporting
pursuant to Rule 12g3-2(b) thereunder.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements included elsewhere in this
Prospectus. Unless the context otherwise requires, references in this Prospectus
to the "Company" include the Company and its subsidiary, Crown Theatre
Corporation ("Crown").
THE COMPANY
The Company is a leading operator of theaters in small and mid-sized
markets in the Southwestern and Midwestern regions of the United States. The
Company's strategy is to provide a superior entertainment experience to its
customers through the development and operation of theaters with stadium-style
seating, state-of-the-art digital sound systems and modern, attractive lobby and
concession areas. Management believes that this strategy has increased movie
attendance at its theaters and allowed the Company to increase the revenues it
receives from patrons both at the box office and at the concession stand. As of
December 31, 1997, the Company operated 81 theaters with a total of 469 screens,
located principally in Texas, Oklahoma, Kansas and Missouri. For the twelve
months ended September 30, 1997, on a pro forma basis after giving effect to
certain acquisitions, the Company generated revenue and EBITDA of approximately
$89.4 million and $12.3 million, respectively. During the same period, the
Company generated net losses, operating income and current deficiency of
earnings to combined fixed charges and preferred dividends of $11.8 million,
$360,000 and $15.6 million, respectively. EBITDA represents income before
interest, taxes, depreciation, amortization, and deferred rent. It is a
financial measure commonly used in the Company's industry and should not be
construed as an alternative to operating income (as determined in accordance
with GAAP), an indicator of operating performance, an alternative to cash flows
from operating activities (as determined in accordance with GAAP) or a measure
of liquidity. Additionally, EBITDA may not be calculated the same by all
companies and should not be viewed as an accurate comparative measure.
The Company actively targets small and mid-sized markets which it believes
are under-served and where the Company believes it can become the leading movie
exhibitor. Management believes that its new stadium-style multiplex theaters can
become the primary entertainment choice in such markets. In acquiring and
building theaters, the Company seeks to identify markets where it can develop
clusters of theaters, enabling it to realize operating efficiencies. By
strategically selecting its target markets and focusing on providing a superior
entertainment experience, the Company has been able to achieve a leading
position in many of the markets in which it operates. Based on market research
compiled by the company, management believes that, as of December 1, 1997,
Company theaters are the sole exhibitors in 71% of the film licensing zones in
which the Company operates.
Founded in June 1995, the Company has grown rapidly by: (i) acquiring
theaters and improving operations at these theaters; (ii) building new,
state-of-the-art stadium-style multiplexes in targeted markets and (iii) adding
stadium-style auditoriums and state-of-the-art sight and sound systems to its
existing theaters.
The Company's management has a proven record of integrating acquired
theaters and improving operations and profit margins. For example, for the two
major groups of theaters acquired by the Company in the fourth quarter of 1996,
per capita box office receipts and per capita concessions have increased by
approximately 6% and 10%, for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1997. In the Company's original first run
theaters (purchased in July 1995), the Company has increased per capita box
office receipts by 15% from September 1995 to September 1997 and per capita
concessions revenues by 33% over the same period. The Company believes that its
policy of offering incentive programs to its employees aligns their interests
with those of management in increasing revenues and improving operations.
The Company is a wholly owned subsidiary of Hollywood Theater Holdings,
Inc. ("Holdings") and enjoys strong equity sponsorship. The principal
stockholders of Holdings include The Beacon Group III -- Focus Value Fund, L.P.
("Beacon"), Stratford Capital Partners, L.P. (an affiliate of Hicks, Muse, Tate
& Furst) ("Stratford") and several entities associated with the Hoak
Communications Funds (the "Hoak Entities"). See "Principal Stockholders." Crown,
the Company's sole subsidiary, currently owns and operates 3 motion picture
theaters and has been wholly owned by either Holdings or the Company since Crown
was acquired on November 1, 1996.
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The Company is a Delaware corporation with its principal executive offices
located at 2911 Turtle Creek Boulevard, Suite 1150, Dallas, Texas 75219 and its
telephone number at that location is (214) 528-9500.
BUSINESS STRATEGY
The Company's strategy is to increase its revenues and cash flow by (i)
providing a superior entertainment experience designed to attract larger
audiences to its theaters, (ii) becoming the premier movie exhibitor in selected
small to mid-sized markets through the acquisition of existing theaters and the
development of new stadium-style seating multiplex theaters and (iii) increasing
per capita box office and concession revenues. Key elements of the Company's
operating strategy include:
PROVIDING A SUPERIOR SIGHT AND SOUND PRESENTATION. The Company's objective
is to create an entertainment experience in its theaters that is superior to its
local competitors. The Company believes it can achieve this goal through the
development and operation of state-of-the-art multiplex theaters featuring
stadium-style seating, which offers moviegoers clear, unobstructed sight lines
to the movie screen as a result of the steeper incline of the seating. The
Company has developed a new design for its multiplex stadium-style auditoriums
that utilizes "black-box" auditorium design elements (all black auditorium
interiors with maximum size screens to enhance the viewing experience). These
new stadium-style theaters offer digital sound in all of the currently available
formats (Digital Theater Sound Systems, Dolby(R) Digital Sound and SONY Dynamic
Digital Sound(TM)), THX(R) sound systems, comfortable high-back chairs with
wider seating and armrests with cupholders, modern, attractive lobby and
concession areas and attentive housekeeping both inside and outside the
theaters.
TARGETING SMALL AND MID-SIZED MARKETS AND DEVELOPING CLUSTERS OF THEATERS.
The Company focuses on small and mid-sized markets which it believes are
under-served. The Company aims to develop clusters of theaters in each of its
markets by acquiring theaters and developing new stadium-style multiplex
theaters in order to become the leading movie exhibitor in such markets. The
Company believes that its ability to develop stadium-style theaters in such
markets enables it to rapidly capture a significant share of such markets.
Before determining whether to develop a new theater in a particular location,
the Company carefully evaluates such market's potential.
CAPITALIZING ON THE COMPETITIVE ADVANTAGES OF STADIUM-STYLE MULTIPLEX
THEATERS. The Company intends to focus on the development of state-of-the-art
multiplex theaters featuring "black-box" auditoriums with stadium-style seating
configurations. By year-end 1997, the Company expects that its ratio of
stadium-style auditoriums to its total screen count will be among the highest in
the industry. The Company believes that the current trend in the United States
movie exhibition industry toward the development of multiplexes featuring
stadium-style auditoriums has put competitive pressure on many existing theaters
by setting new standards for moviegoers. The Company believes that customers
have clearly indicated their preference for the more attractive surroundings,
wider variety of films, better customer services and more comfortable seating
typical of stadium-style multiplexes. These theaters also enhance the Company's
ability to increase attendance and concession sales while taking advantage of
economies of scale by enabling it to exhibit concurrently a wide variety of
films.
INCREASING CONCESSION SALES THROUGH IMPROVED PRODUCT OFFERINGS, FACILITY
DESIGN AND STAFF INCENTIVES. Concession sales are the Company's second largest
revenue source after box office revenues and consistently yield gross margins in
excess of 80%. The Company actively works to promote concession sales. In order
to increase sales and margins at its concession stands, the Company has
introduced new products, offered larger sized products, improved presentation,
created additional satellite concession stands in its theaters and added color
video monitors and video walls featuring movie trailers at many of its
concession areas. In addition, the Company bases a portion of theater managers'
compensation on the level of concessions sales at their theaters.
PROVIDING INCENTIVES TO MANAGEMENT THROUGH PERFORMANCE-BASED, GOAL-ORIENTED
COMPENSATION PACKAGES. The Company maintains an incentive program for its
district managers and theater managers which rewards management for incremental
improvements in theater profitability. The Company believes that its incentive
program is an important source of motivation for its employees and aligns the
employees' interests with those of the Company.
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GROWING THROUGH STRATEGIC ACQUISITIONS AND ADDITIONS. The Company intends
to continue its program of acquiring and expanding theaters, primarily through
the opportunistic acquisition from regional or national chains of groups of
theaters located in the Company's target markets. Where appropriate, the Company
will also add "stadium- style" seating auditoriums and state-of-the-art audio
systems to selected existing theaters or reconfigure existing auditoriums to the
stadium-style seating format. The Company believes that such selective
acquisitions, add-ons and reconfigurations will enhance and protect the
Company's position as the sole or leading exhibitor in many of its markets and
enable the Company to become a leading exhibitor in other markets.
NEW THEATER DEVELOPMENT
The Company's construction program focuses on building stadium-style
seating multiplexes with an average of 10 to 14 screens and adding stadium-style
seating auditoriums to selected existing theaters. The Company times its theater
construction efforts to allow for theater openings that can take advantage of
peak summer and year-end holiday film seasons. In July 1996, the Company added
two auditoriums with stadium-style seating to its existing theater in Burleson,
Texas. In November 1996, the Company opened its first new multiplex theater with
all stadium-style seating and an aggregate of 10 screens in Midland, Texas.
In May 1997, the Company completed the construction of three additional all
stadium-style seating multiplex theaters with an aggregate of 34 screens in
Beaumont and Tyler, Texas and Lawrence, Kansas. These new theaters opened during
the 1997 Memorial Day holiday weekend.
In November 1997, the Company completed construction of four stadium-style
auditoriums at the Company's existing theater in Heath, Ohio.
During the 1997 year-end holiday season, the Company completed construction
of 10 of the 14 screens at each of two new theaters, and is continuing
construction of the 4 other screens at each theater.
At December 31, 1997, the Company had one new all stadium-style theater
under construction in Oklahoma with an aggregate of 12 screens. At December 31,
1997, the Company also had one stadium-style auditorium under development at the
Company's existing theater in Heath, Ohio. In addition, in early 1998, the
Company is scheduled to open one new theater and begin construction of two all
stadium-style theaters with 20 screens and seven stadium-style auditoriums at
two existing theaters. See "Business -- New Theater Development."
The actual and anticipated costs of the foregoing theater developments are
approximately $26.5 million and $19.3 million, respectively. These developments
have been funded through cash flow from operations, borrowings under the
Company's former bank facility, the proceeds of the Old Notes Offering and
capital contributions of the proceeds from the issuance of Common Stock and
Preferred Stock by Holdings. There can be no assurance, however, that the
Company will have sufficient resources to complete these anticipated capital
expenditures. See "Risk Factors -Substantial Capital Expenditures" and
"-Uncertainties Related to Future Expansion."
RECENT AND PENDING ACQUISITIONS
In May 1997, the Company acquired two theaters with an aggregate of 12
screens in Beaumont and Port Arthur, Texas from the United Artists Corporation
("United Artists") for a purchase price of $3.4 million (the "Beaumont/Port
Arthur Acquisition"). The Company expects these newly acquired theaters to
complement the Company's existing theaters in Beaumont.
In June 1997, the Company acquired two theaters with an aggregate of 14
screens in Killeen, Texas from Escape Theatres, Inc. ("Escape") for a purchase
price of $8.5 million (the "Killeen Acquisition").
In August 1997, the Company acquired from General Cinema Corp. of Oklahoma,
Inc. ("General Cinema") seven theaters with an aggregate of 50 screens located
in Tulsa and Oklahoma City, Oklahoma for a purchase price of approximately $15.8
million (the "Oklahoma Acquisition").
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In September 1997, the Company purchased a newly-built all stadium-style
seating multiplex theater with an aggregate of 16 screens in Waco, Texas for a
purchase price of $8.9 million (the "Waco Acquisition") plus an additional $2.7
million representing the cost of furniture and fixtures.
In October 1997, the Company exchanged six theaters with an aggregate of 31
screens it operated in Kansas and Missouri for five theaters with an aggregate
of 22 screens owned by Dickinson, Inc. ("Dickinson") in the same states, plus
cash in the amount of $1.1 million (the "Dickinson Exchange").
In October 1997, the Company acquired from Cineco Cinema Corporation one
theater with six screens located in Tomball, Texas for a purchase price of $1.8
million.
Upon completion of the opening of the new theaters and auditoriums that
were under construction or development as of December 31, 1997 as described
above, the Company will operate 84 theaters with a total of 517 screens.
These acquisitions have been funded through cash flow from operations,
borrowings under the Company's former bank facility, the proceeds of the Old
Notes Offering and capital contributions of the proceeds from the issuance of
Common Stock and Preferred Stock by Holdings. There can be no assurance,
however, that the Company will have sufficient resources to complete these
anticipated capital expenditures. See "Risk Factors-Substantial Capital
Expenditures" and "-Uncertainties Related to Future Expansion."
PRO FORMA PRESENTATION
Unless otherwise specified, the pro forma income statement data presented
herein reflects adjustments to the historical consolidated financial statements
of Holdings to give effect to (i) the Killeen Acquisition, (ii) the Oklahoma
Acquisition and (iii) the Dickinson Exchange, in each case, as if such events
had occurred on October 1, 1996.
The summary pro forma balance sheet data reflects adjustments to the
historical consolidated financial statements of Holdings to give effect to the
Dickinson Exchange, as if the event had occurred on September 30, 1997.
SENIOR BANK FACILITY
Concurrently with the consummation of the Old Notes Offering, the Company
repaid all of the existing indebtedness under its former bank facility and
entered into the Senior Bank Facility. The Senior Bank Facility provides for a
revolving credit facility of $50.0 million with a five year term, however, the
total available borrowings under the Senior Bank Facility may be less based on
leverage levels of the Company. On January 7, 1998, the Company entered into an
amendment of the Senior Bank Facility, amending among other things, certain
financial covenants. Based on the Company's current financial condition, the
Company believes it has the ability to borrow up to $30 million under the Senior
Bank Facility. The Senior Bank Facility is funded by a syndicate of banks for
whom Bank of America National Trust and Savings Association ("Bank of America
NT&SA") (an affiliate of BancAmerica Securities, Inc.) has acted as agent. The
Senior Bank Facility is secured by substantially all of the assets of the
Company and is guaranteed by Holdings and Crown (and any other future material
subsidiaries of the Company), which guarantees are secured by substantially all
of their respective assets. As of December 31, 1997, no amounts were borrowed
under the Senior Bank Facility. See "Use of Proceeds," "Capitalization" and
"Description of Senior Bank Facility."
4
<PAGE> 10
THE OLD NOTES OFFERING
Old Notes................................. The Old Notes were sold by the
Company on August 7, 1997 to
Goldman, Sachs & Co. and
BancAmerica Securities, Inc.
(the "Purchasers") pursuant to a
Purchase Agreement (the
"Purchase Agreement") dated July
31, 1997 (the "Old Notes
Offering"). The Purchasers
subsequently resold the Old
Notes in the United States to
qualified institutional buyers
in reliance on Rule 144A under
the Securities Act and outside
the United States to non-U.S.
persons in reliance on
Regulation S under the
Securities Act.
Registration Rights Agreement............. Pursuant to the Purchase
Agreement, the Company and the
Purchasers entered into an
Exchange and Registration Rights
Agreement dated August 7, 1997
(the "Registration Rights
Agreement"), which grants the
holders of the Old Notes certain
exchange and registration
rights. The Exchange Offer is
intended to satisfy such
exchange rights, which terminate
upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
Securities Offered........................ $110,000,000 principal amount of
10 5/8% Senior Subordinated
Notes due August 1, 2007 (the
"Exchange Notes").
The Exchange Offer........................ $1,000 principal amount of the
Exchange Notes in exchange for
each $1,000 principal amount of
Old Notes. As of the date
hereof, $110,000,000 aggregate
principal amount of Old Notes
are outstanding. The Company
will issue the Exchange Notes to
holders on or promptly after the
Expiration Date. See "The
Exchange Offer."
Based on an interpretation by
the staff of the Commission set
forth in Exxon Capital Holdings
Corp., SEC No-Action Letter,
available April 13, 1989, and
similar no-action letters issued
to third parties, the Company
believes that Exchange Notes
issued pursuant to the Exchange
Offer in exchange for Old Notes
may be offered for resale,
resold and otherwise transferred
by any holder thereof (other
than any such holder which is an
"affiliate" of the Company
within the meaning of Rule 405
under the Securities Act)
without compliance with the
registration and prospectus
delivery provisions of the
Securities Act, provided that
such Exchange Notes are acquired
in the ordinary course of such
holder's business and that such
holder does not intend to
participate and has no
arrangement or understanding
with any person to participate
in the distribution of such
Exchange Notes.
5
<PAGE> 11
Each Participating Broker-Dealer
that receives Exchange Notes for
its own account pursuant to the
Exchange Offer must acknowledge
that it will deliver a
prospectus in connection with
any resale of such Exchange
Notes. The Letter of Transmittal
states that by so acknowledging
and by delivering a prospectus,
a Participating Broker-Dealer
will not be deemed to admit that
it is an "underwriter" within
the meaning of the Securities
Act. This Prospectus, as it may
be amended or supplemented from
time to time, may be used by a
Participating Broker- Dealer in
connection with resales of
Exchange Notes received in
exchange for Old Notes where
such Old Notes were acquired by
such Participating Broker-Dealer
as a result of market-making
activities or other trading
activities (other than a resale
of an unsold allotment from the
original sale of Old Notes). The
Company has agreed that, for a
period of 180 days after the
Expiration Date, it will make
this Prospectus available to any
Participating Broker-Dealer for
use in connection with any such
resale. See "Plan of
Distribution."
Any holder who tenders in the
Exchange Offer with the
intention to participate, or for
the purpose of participating, in
a distribution of the Exchange
Notes could not rely on the
position of the staff of the
Commission enunciated in
no-action letters and, in the
absence of an exemption
therefrom, must comply with the
registration and prospectus
delivery requirements of the
Securities Act in connection
with any resale transaction.
Failure to comply with such
requirements in such instance
may result in such holder
incurring liability under the
Securities Act for which the
holder is not indemnified by the
Company. See "The Exchange Offer
-- Resale of the Exchange
Notes."
Expiration Date........................... 5:00 p.m., New York time, on
____________, 1997 unless the
Exchange Offer is extended, in
which case the term "Expiration
Date" means the latest date and
time to which the Exchange Offer
is extended.
Accrued Interest on the Exchange Notes Each Exchange Note will bear
and the Old Notes......................... interest from the most recent
date to which interest has been
paid or duly provided for on the
Old Note surrendered in exchange
for such Exchange Note or, if no
interest has been paid or duly
provided for on such Old Note,
from August 7, 1997. Interest on
the Exchange Notes is payable on
February 1 and August 1 of each
year, commencing on February 1,
1998.
Holders of Old Notes whose Old
Notes are accepted for exchange
will not receive accrued
interest on such Old
6
<PAGE> 12
Notes for any period from and
after the last date to which
interest has been paid or duly
provided for on the Old Notes
prior to the original issue date
of the Exchange Notes or, if no
such interest has been paid or
duly provided for, will not
receive any accrued interest on
such Old Notes, and will be
deemed to have waived the right
to receive any interest on such
Old Notes accrued from and after
the last date to which interest
has been paid or duly provided
for on the Old Notes or, if no
such interest has been paid or
duly provided for, from and
after August 7, 1997. See "The
Exchange Offer -- Interest on
the Exchange Notes."
Conditions to the Exchange Offer.......... The Exchange Offer is subject to
certain customary conditions,
which may be waived by the
Company. See "The Exchange Offer
-- Conditions."
Procedures for Tendering Old Notes........ Each holder of Old Notes wishing
to accept the Exchange Offer
must complete, sign and date the
accompanying Letter of
Transmittal, or a facsimile
thereof, in accordance with the
instructions contained herein
and therein, and mail or
otherwise deliver such Letter of
Transmittal, or such facsimile,
together with the Old Notes and
any other required documentation
to U.S. Trust Company of Texas,
N.A., as exchange agent, at the
address set forth herein. By
executing the Letter of
Transmittal, each holder will
represent to the Company that,
among other things, the Exchange
Notes acquired pursuant to the
Exchange Offer are being
obtained in the ordinary course
of business of the person
receiving such Exchange Notes,
whether or not such person is
the holder, that neither the
holder nor any such other person
has any arrangement or
understanding with any person to
participate in the distribution
of such Exchange Notes and that
neither the holder nor any such
other person is an "affiliate,"
as defined under Rule 405 of the
Securities Act. See "The
Exchange Offer -- Purpose and
Effect of the Exchange Offer"
and "The Exchange Offer --
Procedures for Tendering."
Untendered Old Notes; Consequences Following the consummation of
of Failure to Exchange.................... the Exchange Offer, holders of
Old Notes eligible to
participate but who do not
tender their Old Notes will not
have any further exchange rights
and such Old Notes will continue
to be subject to certain
restrictions on transfer.
Accordingly, the liquidity of
the market for such Old Notes
could be adversely affected. The
Old Notes that are not exchanged
pursuant to the Exchange Offer
will remain restricted
securities. Accordingly, such
Old Notes may be resold only (i)
to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the
Securities Act, (iii) pursuant
to some
7
<PAGE> 13
other exemption under the
Securities Act, (iv) outside the
United States to a foreign
person pursuant to the
requirements of Rule 904 under
the Securities Act, or (v)
pursuant to an effective
registration statement under the
Securities Act. See "The
Exchange Offer -- Consequences
of Failure to Exchange."
Shelf Registration Statement.............. In the event that (i) on or
before the Expiration Date,
existing Commission
interpretations are changed such
that the Exchange Notes are not
or would not be, upon receipt,
freely transferable (except for
the requirement that
Participating Broker-Dealers
deliver a prospectus), (ii) the
Exchange Offer is not
consummated within 210 days of
the closing of the Old Notes
Offering, or (iii) the Exchange
Offer is not available to any
holders of the Old Notes (other
than certain restricted
holders), the Company will use
its reasonable best efforts to
cause to be filed with the
Commission, no later than 60
days after the completion of the
Old Notes Offering, a shelf
registration statement (the
"Shelf Registration Statement").
If required, the Company will
use its reasonable best efforts
to cause the Shelf Registration
Statement to be declared
effective on or before the 180th
day after the Old Notes
Offering. The Company has agreed
to maintain the effectiveness of
the Shelf Registration
Statement, under certain
circumstances, for a maximum of
two years following the
effective date of the Shelf
Registration Statement.
Special Procedures for Beneficial Owners.. Any beneficial owner whose Old
Notes are registered in the name
of a broker, dealer, commercial
bank, trust company or other
nominee and who wishes to tender
should contact such registered
holder promptly and instruct
such registered holder to tender
on such beneficial owner's
behalf. If such beneficial owner
wishes to tender on such owner's
own behalf, such owner must,
prior to completing and
executing the Letter of
Transmittal and delivering its
Old Notes, either make
appropriate arrangements to
register ownership of the Old
Notes in such owner's name or
obtain a properly completed bond
power from the registered
holder. The transfer of
registered ownership may take
considerable time. The Company
will keep the Exchange Offer
open for not less than 30 days
in order to provide for the
transfer of registered
ownership. See "The Exchange
Offer -- Procedures for
Tendering."
Guaranteed Delivery Procedures............ Holders of Old Notes who wish to
tender their Old Notes and whose
Old Notes are not immediately
available or who cannot deliver
their Old Notes, the Letter of
Transmittal or any other
documents required by the Letter
8
<PAGE> 14
of Transmittal to the Exchange
Agent (or comply with the
procedures for book-entry
transfer) prior to the
Expiration Date must tender
their Old Notes according to the
guaranteed delivery procedures
set forth in "The Exchange Offer
-- Guaranteed Delivery
Procedures."
Withdrawal Rights......................... Tenders may be withdrawn at any
time prior to 5:00 p.m., New
York time, on the Expiration
Date. See "The Exchange Offer --
Withdrawal of Tenders."
Acceptance of Notes and The Company will accept for
Delivery of Exchange Notes................ exchange, subject to the
conditions described under "The
Exchange Offer -- Conditions,"
any and all Old Notes which are
properly tendered in the
Exchange Offer prior to 5:00
p.m., New York time, on the
Expiration Date. The Exchange
Notes issued pursuant to the
Exchange Offer will be delivered
promptly following the
Expiration Date. See "The
Exchange Offer -- Terms of the
Exchange Offer."
Use of Proceeds........................... There will be no cash proceeds
to the Company from the exchange
pursuant to the Exchange Offer.
See "Use of Proceeds."
Exchange Agent............................ U.S. Trust Company of Texas,
N.A. The Exchange Agent also
serves as trustee under the
Indenture.
THE EXCHANGE NOTES
General................................... The form and terms of the
Exchange Notes are the same as
the form and terms of the Old
Notes (which they replace)
except that (i) the Exchange
Notes have been registered under
the Securities Act and,
therefore, will not bear legends
restricting the transfer thereof
and (ii) the holders of Exchange
Notes will not be entitled to
certain rights under the
Registration Rights Agreement,
including the provisions
providing for an increase in the
interest rate on the Old Notes
in certain circumstances, which
rights will terminate when the
Exchange Offer is consummated.
See "The Exchange Offer --
Purpose and Effect of the
Exchange Offer." The Exchange
Notes will evidence the same
debt as the Old Notes and will
be entitled to the benefits of
the Indenture. See "Description
of Exchange Notes." The Old
Notes and the Exchange Notes are
referred to herein collectively
as the "Notes."
Securities Offered........................ $110,000,000 principal amount of
10 5/8% Senior Subordinated
Notes August 1, 2007.
Maturity Date............................. August 1, 2007
Interest Payment Dates.................... February 1 and August 1 of each
year, commencing
9
<PAGE> 15
February 1, 1998.
Optional Redemption....................... The Exchange Notes will be
redeemable, in whole or in part,
at the option of the Company at
any time on or after August 1,
2002 at the redemption prices
set forth herein, plus accrued
and unpaid interest, if any, to
the date of redemption. In
addition, on or before August 1,
2000, the Company may, at its
option and subject to certain
requirements, use an amount
equal to the net cash proceeds
from one or more Public Equity
Offerings (as defined) to redeem
up to an aggregate of 30% of the
principal amount of the Exchange
Notes originally issued at a
redemption price equal to
110.625% of the principal amount
thereof, plus accrued and unpaid
interest, if any, to the date of
redemption. See "Description of
Exchange Notes -- Optional
Redemption."
Change of Control......................... Upon the occurrence of a Change
of Control (as defined), the
Company is required to offer to
repurchase all outstanding
Exchange Notes at a price equal
to 101% of the principal amount
thereof, plus accrued and unpaid
interest, if any, to the date of
repurchase. See "Description of
Exchange Notes -- Covenants --
Change of Control."
Sinking Fund.............................. None
Ranking................................... The Exchange Notes will
constitute general unsecured
indebtedness of the Company,
subordinated in right of payment
to all existing and future
senior indebtedness of the
Company, including borrowings
under the Senior Bank Facility.
At December 31, 1997, the
Company had approximately $110.0
million of indebtedness
outstanding, none of which was
senior indebtedness. The
Indenture pursuant to which the
Exchange Notes will be issued
permits the Company and the
guarantors of the Exchange Notes
to incur additional
indebtedness, including senior
indebtedness, subject to certain
limitations. See
"Capitalization" and
"Description of Exchange Notes
-- Subordination."
Guarantees................................ The Exchange Notes will be
guaranteed by Holdings and Crown
and will be guaranteed by any
future Restricted Subsidiary (as
defined) of the Company. The
guarantees will be subordinated
obligations of Holdings and
Crown and will be junior to all
senior indebtedness of such
companies, including their
guarantees of borrowings under
the Senior Bank Facility. See
"Description of Senior Bank
Facility."
10
<PAGE> 16
Certain Covenants......................... The Indenture contains certain
covenants which, among other
things, place certain
restrictions on the ability of
the Company and its Restricted
Subsidiaries to incur additional
indebtedness, pay dividends or
make distributions in respect of
the Company's capital stock or
make other restricted payments,
sell assets, create certain
liens or enter into certain
transactions with affiliates.
See "Description of Exchange
Notes -- Covenants."
RISK FACTORS
For a discussion of certain factors that should be considered by
prospective purchasers in evaluating an investment in the Notes, see "Risk
Factors."
11
<PAGE> 17
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information for Holdings for the period from July 11, 1995 through December 31,
1995, for the fiscal year ended December 31, 1996 and for the nine month periods
ended September 30, 1996 and 1997 and pro forma financial information for the
twelve months ended September 30, 1997. The financial statements of Holdings are
identical to those of the Company, except for long-term debt (Holdings' balance
sheet includes an additional $137,000 of long-term debt at September 30, 1997)
and differences in the components of stockholders' equity. See "Capitalization."
The consolidated financial information for the two fiscal years in the period
ended December 31, 1996 and the balance sheet information as of December 31,
1996 and 1995 were derived from the audited consolidated financial statements of
Holdings which have been audited by Arthur Andersen LLP, independent public
accountants. The fiscal years ended December 31, 1996 and 1995 are not directly
comparable due to the shortened period Holdings and the Company were in
operation during 1995, the effects of theater acquisitions and theater
developments and the impact of the debt service associated with the debt
incurred in connection with theater acquisitions and development. This
information should be read in conjunction with "Selected Consolidated Financial
Information", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and pro forma financial
information, including the notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, PRO FORMA
------------------------ ------------------------ TWELVE MONTHS
ENDED
SEPTEMBER 30,
1995(1) 1996 1996 1997 1997(2)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ............................... $ 6,334 $ 24,879 $ 11,405 $ 54,852 $ 89,399
Direct theater costs ................... 5,296 20,798 9,952 44,566 73,148
General and administrative
expenses ............................. 743 1,601 1,158 3,992 4,651
Depreciation and amortization .......... 739 3,152 1,238 7,930 11,240
--------- --------- --------- --------- ---------
Operating income (loss) ................ (444) (672) (943) (1,636) 360
Interest expense, net .................. 463 2,121 713 4,482 12,127
--------- --------- --------- --------- ---------
Net income (loss) ...................... $ (907) $ (2,793) $ (1,656) $ (6,118) $ (11,767)
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA(3) .............................. $ 444 $ 2,954 $ 506 $ 6,713 $ 12,276
Cash flows from (used in) operating
activities ........................... 182 1,033 (367) 2,734
Cash flows used in investing activities (10,669) (69,720) (10,905) (76,949)
Cash flows from financing activities ... 10,934 71,800 11,174 79,763
Net long-term debt(4) .................. 7,978 46,941 13,786 100,892 99,800
Deficiency of earnings to combined fixed
charges and preferred dividends(5) ... (907) (3,215) (1,656) (8,971) (15,571)
PRO FORMA FINANCIAL DATA:
Ratio of EBITDA to net interest
expense .............................. 1.0x
Ratio of net long-term debt to
EBITDA ............................... 8.1x
OPERATING DATA (AT PERIOD
END):
Number of theaters operated ............ 11 72 19 84 83
Number of screens operated ............. 70 342 110 457 448
Average screens per theater ............ 6.4 4.8 5.8 5.4 5.4
</TABLE>
12
<PAGE> 18
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
------------------- --------------------------
1995 1996 HISTORICAL PRO FORMA(2)
-------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 447 $ 3,559 $ 9,108 $ 10,200
Properties and equipment-- net ................... 3,642 43,116 97,958 96,894
Total assets ..................................... 12,930 92,355 175,378 175,378
Total long-term debt, including current maturities 8,877 50,669 113,937 113,937
Convertible Preferred Stock ...................... -- 28,579 46,833 46,833
Stockholders' equity ............................. 1,838 6,544 4,173 4,173
</TABLE>
- ----------
(1) For the period from inception (July 11, 1995) through December 31, 1995.
(2) The summary pro forma income statement and other financial data presented
reflects adjustments to the historical consolidated financial statements of
Holdings to give effect to (i) the Killeen Acquisition, (ii) the Oklahoma
Acquisition and (iii) the Dickinson Exchange, in each case as if such
events had occurred on October 1, 1996. The summary pro forma balance sheet
data reflects adjustments to the historical consolidated financial
statements of Holdings to give effect to the Dickinson Exchange as if the
event had occurred on September 30, 1997. The summary pro forma financial
information presented is not necessarily indicative of either future
results of operations or the results that might have occurred had such
events taken place at such dates.
(3) Represents income before interest, taxes, depreciation, amortization, and
deferred rent. EBITDA is a financial measure commonly used in the Company's
industry and should not be construed as an alternative to operating income
(as determined in accordance with GAAP), an indicator of operating
performance, an alternative to cash flows from operating activities (as
determined in accordance with GAAP) or a measure of liquidity.
(4) Net long-term debt represents long-term debt minus cash and cash
equivalents.
(5) Earnings consist of net loss, plus fixed charges. Fixed charges consist of
interest expense, amortization of debt issuance costs and one-third of rent
expense on operating leases treated as representative of the interest
factor attributable to rent expense.
13
<PAGE> 19
RISK FACTORS
An investment in the Exchange Notes offered hereby involves a high degree
of risk. The following factors, in addition to the other information contained
in this Prospectus, should be carefully considered in evaluating an investment
in the Exchange Notes offered hereby.
SUBSTANTIAL INDEBTEDNESS
The Company is highly leveraged. At December 31, 1997, the Company had
$110.0 million of indebtedness outstanding, none of which was senior
indebtedness, and the Company's pro forma ratio of indebtedness to total capital
was approximately 46%. At December 31, 1997, no amounts were borrowed under the
Senior Bank Facility. Based on the Company's current financial condition, the
Company believes it has the ability to borrow up to $30 million under the Senior
Bank Facility, all of which would constitute senior indebtedness. For the year
ended December 31, 1996, and the nine months ended September 1997, the Company's
deficiency of earnings to combined fixed charges and preferred dividends was
$3.2 million and $9.0 million, respectively. During 1998, the Company expects to
pay approximately $11.7 million of interest on the Notes. Such amount of
interest expense would have constituted approximately 117% of the Company's cash
flows from operations before interest expense during 1997. The degree to which
the Company is leveraged could have important consequences to holders of
Exchange Notes, including an inability to fund future growth. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
SUBSTANTIAL DEBT REPAYMENT OBLIGATIONS
The Company's ability to make scheduled payments or to refinance its
indebtedness depends on its financial and operating performance, which, in turn,
is subject to prevailing economic conditions and to financial, business,
competitive and other factors beyond its control. Although the Company's cash
flow from operations has historically been sufficient to meet its debt service
obligations, there can be no assurance that the Company's operating results will
continue to be sufficient for payment of the Company's indebtedness, including
indebtedness under the Exchange Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources" and "Risk Factors-Limited Operating History; Net Losses."
SUBSTANTIAL CAPITAL EXPENDITURES
During 1997 the Company acquired 12 theaters with 82 screens, opened five
newly built theaters with 54 screens, purchased a newly-built all stadium-style
seating multiplex theater with 16 screens in Waco, Texas, and exchanged six
theaters for five theaters and $1.1 million in cash. During the 1997 year-end
holiday season, the Company completed construction of 10 of the 14 screens at
each of two new theaters, and is continuing construction of the 4 other screens
at each theater. At December 31, 1997, the Company had one theater with 12
screens under construction. In addition, the Company has completed construction
of four new screens, and has a fifth under construction at an existing theater
and is scheduled to begin construction in early 1998 of two additional theaters
with 20 screens and seven additional screens at two existing theaters. See
"Business -- New Theater Development" and "Business -- Recent and Pending
Acquisitions." The Company's capital expenditures in connection with such
acquisitions and theater development in 1997 was approximately $88.0 million.
The Company funded these capital expenditures through cash flow from operations,
borrowings under the Company's bank facility, the proceeds of the Old Notes
Offering and capital contributions of the proceeds from the issuance of Common
Stock and Preferred Stock by Holdings. The Company intends to continue its
expansion over the next several years. Any future theater development and future
acquisitions may require financing in addition to cash generated from operations
and future borrowings under the Senior Bank Facility. There can be no assurance
that such additional financing will be available to the Company on acceptable
terms or at all. See "--Substantial Indebtedness" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Senior Bank Facility."
14
<PAGE> 20
RESTRICTIONS IMPOSED BY THE SENIOR BANK FACILITY
The Senior Bank Facility requires the Company to maintain specified
financial ratios and to meet certain financial tests. In addition, the Senior
Bank Facility restricts among other things, the Company's ability to incur
additional indebtedness, make acquisitions or asset dispositions, create or
incur liens on its assets, make certain payments and dividends or merge or
consolidate. A failure to comply with the restrictions contained in the Senior
Bank Facility could lead to an event of default thereunder, which could result
in an acceleration of such indebtedness. At September 30, 1997, the Company was
not in compliance with two of the thirteen financial covenants in the Senior
Bank Facility. On January 7, 1998, the Company entered into an amendment of the
Senior Bank Facility, amending among other things, certain financial covenants.
Currently the Company is in compliance with all financial covenants in the
Senior Bank Facility. There can be no assurance that the Company will have
sufficient resources or have access to sufficient resources to pay its
obligations under the Senior Bank Facility or the Exchange Notes if such
indebtedness is accelerated. See "Description of Senior Bank Facility."
UNCERTAINTIES RELATED TO FUTURE EXPANSION
The Company intends to pursue a strategy of expansion that will involve the
development of new theaters certain of which may be larger and more costly than
those developed by the Company to date. In addition, the Company's strategy of
expansion may involve acquisitions of existing theaters and theater circuits.
There is significant competition for potential site locations and existing
theater and theater circuit acquisition opportunities. As a result of such
competition, the Company may be unable to acquire attractive site locations or
existing theaters or theater circuits on terms the Company considers acceptable.
The development of new theaters involves certain risks, including the
possibility of construction cost overruns and delays, uncertainty of site
acquisition costs and availability, uncertainties as to market potential, market
deterioration after commencement of development and the emergence of market
competition from unanticipated sources. Additionally, expansion of the Company's
theater circuit, whether through theater development or acquisitions, involves
the risk that the Company might not effectively manage such growth or that the
Company's information or other systems might not be sufficient in light of such
growth. Although the Company manages its theater development projects and
acquisitions with a view towards minimizing these risks, the Company may
determine not to proceed, or not be able to proceed, with its planned theater
development projects or acquisitions and, accordingly, no assurance can be given
that any of the projected new theater developments will open or that such
developments or any acquisitions will perform in accordance with the Company's
expectations, or that any failure to manage expansion generally will not have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business -- Competition."
DEPENDENCE UPON MOTION PICTURE PRODUCTION AND PERFORMANCE; RELATIONSHIP WITH
FILM DISTRIBUTORS
The Company's business is dependent upon a number of factors, among the
most important of which are the availability of suitable motion pictures for
exhibition in its theaters and the performance of such films in the Company's
markets. Poor performance of films or a disruption or reduction in the
production of motion pictures by the major studios and/or independent producers
could have a material adverse effect on the Company's business and its results
of operations. Since the major film distributors have historically released
those films which they anticipate will be the most successful during the summer
and year-end holiday seasons, poor performance of such films or a disruption or
reduction in the number of films released during such periods could adversely
affect the Company's results for a particular quarter. Moreover, to the extent
that certain "event" films are distributed more widely than in the past, the
Company's margins may be hurt as a result of the higher film licensing fees
payable during the early period of a film's run. In addition, the Company's
business depends to a significant degree on maintaining good relations with the
major film distributors who are responsible for allocating films to the
Company's theaters. If the Company's relationship with one or more of the major
film distributors were to deteriorate for any reason, the Company could find it
more difficult to schedule the most commercially successful films in its
theaters, thereby adversely affecting the Company's results of operations. See
"Business -- Film Licensing."
15
<PAGE> 21
COMPETITION
The motion picture exhibition industry is highly competitive. The Company
competes against a number of local, regional and national exhibitors, most of
which have been in existence significantly longer than the Company and many of
which have substantially greater financial resources than the Company.
The motion picture exhibition industry faces competition from a number of
motion picture exhibition delivery systems such as network, syndicated, cable
and satellite television, pay-per-view and home video systems. However, the full
extent to which these alternative motion picture delivery systems will compete
with traditional theatrical release may not be known for several years, and
there can be no assurance that these alternative motion picture exhibition
delivery systems will not in the future adversely affect attendance at the
Company's theaters. In addition, the entertainment industry is one which has
experienced rapid technological change. As a result, the Company may face
competition in the future from new technologies that are not yet developed.
Movie theaters also face competition from other forms of entertainment competing
for the public's leisure time and disposable income. See "Business --
Competition."
SUBORDINATION OF NOTES; PLEDGE OF COMPANY ASSETS
The Exchange Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness
of the Company, including indebtedness under the Senior Bank Facility. At
December 31, 1997, the Company had $110.0 million of indebtedness outstanding,
none of which was senior indebtedness. Subject to certain limitations, the
Indenture will permit the Company to incur additional indebtedness, including
senior indebtedness (including up to $75.0 million of senior indebtedness under
the Senior Bank Facility). See "Description of Exchange Notes -- Covenants". In
addition, under certain circumstances, if any non-payment default exists with
respect to indebtedness under the Senior Bank Facility, the Company may not make
any payments on the Exchange Notes for a specified period of time, unless such
default is cured or waived or such senior indebtedness has been repaid in full.
If the Company fails to make any payment on the Exchange Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would constitute an event of
default under the Indenture and would generally entitle the holders of the
Exchange Notes to accelerate the maturity thereof. As a result of the
subordination provisions contained in the Indenture, in the event of a
liquidation or insolvency of the Company, the assets of the Company will be
available to pay obligations on the Exchange Notes only after all senior
indebtedness and indebtedness of the Company's existing subsidiary (or any
future subsidiary) have been paid in full, and therefore there may not be
sufficient assets remaining to pay amounts due on any or all of the Exchange
Notes then outstanding. See "Description of Exchange Notes -- Subordination". In
addition, all of the stock and substantially all of the current assets of each
of the Company, its parent and its subsidiary will be pledged, and future assets
may be pledged, to secure indebtedness under the Senior Bank Facility. See
"Description of Exchange Notes" and "Description of Senior Bank Facility."
GUARANTEES
The Company's parent and its sole subsidiary, along with any future
Restricted Subsidiaries, are the only guarantors of the Exchange Notes. The
Company's parent is a holding company whose only significant asset in the
capital stock of the Company, of which it owns 100%. The Company's sole
subsidiary is an operating company, but its assets represent less than 1.75% of
the Company's parent's assets on a consolidated basis. Accordingly, in the event
the Company defaulted on its payment of principal or interest on the Exchange
Notes, and holders of the Exchange Notes looked to the guarantors thereof for
payment of the Exchange Notes, it is unlikely that the assets of such guarantors
would be sufficient to remedy any default by the Company with respect to
repayment of the Exchange Notes.
16
<PAGE> 22
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend, in large part, on the efforts, abilities
and experience of its executive officers, including its President, Chief
Operating Officer and Chief Financial Officer and other key employees of the
Company. The loss of the services of one or more of such individuals could have
a material adverse effect on the Company's business. See "Management."
REPURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined), the Company will
be required to make an offer to repurchase the Exchange Notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date or repurchase. Certain events involving a Change of Control
will result in an event of default under the Senior Bank Facility and may result
in an event of default under other indebtedness of the Company that may be
incurred in the future. An event of default under the Senior Bank Facility or
other future senior indebtedness could result in an acceleration of such
indebtedness, in which case the subordination provisions of the Exchange Notes
would require payment in full of such senior indebtedness before repurchase of
the Exchange Notes. See "Description of Exchange Notes -- Subordination," "--
Covenants -- Change of Control" and "Description of Senior Bank Facility". It is
unlikely that the Company would have sufficient resources to repurchase the
Exchange Notes or pay its obligations if the indebtedness under the Senior Bank
Facility or other future senior indebtedness were accelerated upon the
occurrence of a Change of Control. The inability of the Company to repurchase
all of the tendered Exchange Notes would constitute an Event of Default under
the Indenture. These provisions may be deemed to have anti-takeover effects and
may delay, defer or prevent a merger, tender offer or other takeover attempt.
Further, the provisions of the Indenture may not afford holders of Exchange
Notes protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company that may
adversely affect holders of Exchange Notes, if such transaction does not result
in a Change of Control. No assurance can be given that the terms of any future
indebtedness will not contain cross default provisions based upon Change of
Control or other defaults under such debt instruments.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's revenues have historically been seasonal, coinciding with the
timing of releases of motion pictures by the major distributors. Generally, the
most marketable films have been released during the summer and the year-end
holiday season. By way of example, for those theaters that were operated by the
Company during the entire 12-month period ended December 31, 1996, revenues for
such theaters during the third and fourth quarter of 1996 were $3.6 million and
$3.0 million, respectively, as compared to $2.7 million and $3.0 million for the
first and second quarter of the same year.
The Company's quarterly results may also be affected by the timing of the
development or acquisition of theaters. By way of example, the Company's
revenues during the second and fourth quarter of 1996 for all the Company's
theaters operated in 1996, including those acquired or opened during the year,
were $3.8 million and $13.5 million, respectively, as compared to $2.7 million
and $4.9 million for the first and third quarter of the same year.
LIMITED OPERATING HISTORY; NET LOSSES
The Company was organized in June 1995 and, accordingly, has a limited
operating history. In addition, the Company has experienced net losses since its
inception. Net losses for the period July 11, 1995 through December 31, 1995 and
the fiscal year ended December 31, 1996 were approximately $907,000 and $2.8
million, respectively, and the net loss for the nine months ended September 30,
1997 was approximately $6.1 million. There can be no assurance that the
Company's future operations will generate operating income, net income or
sufficient cash flow to pay its obligations. See "Selected Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
17
<PAGE> 23
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will constitute a new issue of securities for which
there is currently no established trading market. The Exchange Notes will not be
listed on any securities exchange and will not be approved for inclusion in any
automated quotation system. If the Exchange Notes are traded after their initial
issuance, they may trade at a discount from their principal amount, depending
upon prevailing interest rates, the market for similar securities, the
performance of the Company and other factors. The Company has been advised by
the Purchasers that they intend to make a market in the Exchange Notes after the
consummation of the Exchange Offer; however, the Purchasers are not obligated to
do so, and any such market making activities may be discontinued at any time
without notice. There can be no assurance that a trading market for the Exchange
Notes will develop.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including, without limitation, certain statements under "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" (including, without limitation, those
related to the acquisition and development of additional theaters by the
Company) may constitute forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus and under "Risk
Factors" (including, without limitation, the risk factors related to
"Substantial Capital Expenditures" and "Uncertainties Related to Future
Expansion"). All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements. SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT EXPRESSLY PROVIDE THAT THE
SAFE HARBOR PROVIDED FOR THEREIN DOES NOT APPLY TO STATEMENTS MADE IN CONNECTION
WITH A COMPANY'S INITIAL PUBLIC OFFERING. ACCORDINGLY, SUCH PROVISIONS MAY NOT
APPLY TO THE OFFERING.
EXCHANGE OFFER PROCEDURES; CONSEQUENCES OF FAILURE TO EXCHANGE
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, registration rights under the Registration
Rights Agreement generally will terminate. In addition, any holder of Old Notes
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transactions. Each Participating Broker-Dealer that receives Exchange
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution." To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected. See "The Exchange Offer."
18
<PAGE> 24
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. The Exchange Offer is intended to satisfy certain
of the Company's obligations under the Registration Rights Agreement. The Old
Notes surrendered in Exchange for the Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, the issuance of the Exchange Notes
will not result in any increase in the outstanding debt of the Company.
The net proceeds to the Company from the sale of the Old Notes were
approximately $105.7 million, after deducting discounts and estimated expenses
of the Old Notes Offering. The proceeds were used by the Company to repay all of
the outstanding indebtedness under the Company's former bank facility
(approximately $64.5 million at June 30, 1997) and to finance the Waco and
Oklahoma Acquisitions ($11.6 million and $15.8 million, respectively). The
balance of the net proceeds will be used to pay a portion of construction and
other expenses relating to the Company's 1997 theater building program and for
general corporate purposes.
Borrowings under the Company's former bank facility were incurred to repay
all of the indebtedness under the Company's 1995 bank facility and to finance
(i) the acquisition of Crown Theaters, Inc., (ii) the acquisition of certain
theaters from United Artists, (iii) the acquisition of two theaters from General
Cinema Corporation of Texas, Inc., (iv) the Beaumont/Port Arthur Acquisition,
(v) the Killeen Acquisition and (vi) the construction of certain theaters
described under "Business -- New Theater Development." At December 1, 1997, the
interest rate under the Company's former bank facility was approximately 8.5%
per annum.
19
<PAGE> 25
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the consolidated
capitalization of the Company. This table should be read in conjunction with
"Use of Proceeds," "Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements and pro forma financial information, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
ACTUAL
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C>
Cash and cash equivalent......................................................................... $ 9,108
=========
Long-term debt (including current maturities):
Existing Senior Bank Facility(1) .............................................................. --
Old Notes ..................................................................................... 110,000
Other debt(1) ................................................................................. 3,800
---------
Total long-term debt, including current maturities .................................... 113,800
Stockholder's equity:
Common stock, $.01 par value; 100,000 shares authorized; 9,250 shares issued and outstanding(3) 1
Additional paid-in capital(3) ................................................................. 64,594
Accumulated deficit ........................................................................... (13,589)
---------
Total stockholder's equity ............................................................ 51,006
---------
Total capitalization(2) ............................................................... $ 164,806
=========
</TABLE>
- ----------
(1) At December 1, 1997, the Company had no borrowings outstanding under its
former bank facility and no other debt outstanding.
(2) The consolidated capitalization of Holdings as of September 30, 1997 would
reflect an additional $137,000 in long-term debt. For more information
regarding Holding's capital structure, see "Description of Capital Stock --
Holdings Capital Stock."
(3) In November and December 1997, the Company received an additional capital
contribution of $12.0 million as a result of the sale of Holdings Series D
Preferred Stock. See "Description of Capital Stock--Holdings Equity
Issuances."
20
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information for Holdings for the period from July 11, 1995 through December 31,
1995, for the fiscal year ended December 31, 1996 and for the nine month periods
ended September 30, 1996 and 1997 and pro forma financial information for the
twelve months ended September 30, 1997. The financial statements of Holdings are
identical to those of the Company, except for long-term debt (Holdings' balance
sheet includes an additional $137,000 of long-term debt at September 30, 1997)
and differences in the components of stockholders' equity. See "Capitalization."
The consolidated financial information for the two fiscal years in the period
ended December 31, 1996 and the balance sheet information as of December 31,
1996 and 1995 were derived from the audited consolidated financial statements of
Holdings which have been audited by Arthur Andersen LLP, independent public
accountants. Other Financial Data, and Operating Data as well as Balance Sheet
Data, for the period from January 1, 1995 to July 10, 1995 and the years ended
December 31, 1994 and 1993 and have not been presented because during such
period the theaters were owned and/or operated by persons other than the Company
and management. The fiscal years ended December 31, 1996 and 1995 are not
directly comparable due to the shortened period Holdings and the Company were in
operation during 1995, the effects of theater acquisitions and theater
developments and the impact of the debt service associated with the debt
incurred in connection with theater acquisitions and development. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and pro forma financial information, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED PERIOD FROM YEARS ENDED NINE MONTHS ENDED TWELVE MONTHS
DECEMBER 31, JANUARY 1, 1995 DECEMBER 31, SEPTEMBER 30, ENDED
----------- THROUGH ------------ ----------------- SEPTEMBER 30,
1993 1994 JULY 10, 1995 1995(1) 1996 1996 1997 1997(2)
---- ---- ------------- ------ ---- ---- ---- -------------
(IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................ 11,883 12,542 6,990 $ 6,334 $ 24,879 $ 11,405 $ 54,852 $ 89,399
Direct theater costs................ 9,422 9,936 6,075 5,296 20,798 9,952 44,566 73,148
General and administrative 651
expenses.......................... 1,097 1,197 281 743 1,601 1,158 3,992 4,651
Depreciation and amortization 343 366 202 739 3,152 1,238 7,930 11,240
-------- -------- -------- -------- ---------
Operating income (loss) ............ 1,021 1,043 432 (444) (672) (943) (1,636) 360
Interest expense, net............... 148 103 69 463 2,121 713 4,482 12,127
-------- -------- -------- -------- ---------
Net income (loss)................... 873 940 363 $ (907) $ (2,793) $ (1,656) $ (6,118) $ (11,769)
======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
EBITDA(3)........................... $ 444 $ 2,954 $ 506 $ 6,713 $ 12,276
Cash flows from (used in) operating
activities........................ 182 1,033 (367) 2,734
Cash flows used in investing activities (10,669) (69,720) (10,905) (76,949)
Cash flows from financing activities 10,934 71,800 11,174 79,763
Net long-term debt(4)............... 7,978 46,941 13,786 100,892 99,800
Deficiency of earnings to combined
fixed charges and preferred
dividends(5) .................... (907) (3,215) (1,656) (8,971) (15,571)
PRO FORMA FINANCIAL DATA:
Ratio of EBITDA to net interest 1.0x
expense...........................
Ratio of net long-term debt to 8.1x
EBITDA............................
OPERATING DATA (AT PERIOD
END):
Number of theaters operated......... 11 72 19 84 83
Number of screens operated.......... 70 342 110 457 448
Average screens per theater......... 6.4 4.8 5.8 5.4 5.4
</TABLE>
21
<PAGE> 27
<TABLE>
<CAPTION>
AT DECEMBER 31, SEPTEMBER 30, 1997
----------------- -------------------------
1995 1996 HISTORICAL PRO FORMA(2)
------- -------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 447 $ 3, 559 $ 9, 108 $ 10,200
Properties and equipment-- net ........ 3,642 43,116 97,958 96,894
Total assets .......................... 12,930 92,355 175,378 175,378
Total long-term debt, including current
maturities .......................... 8,877 50,669 113,937 113,937
Convertible Preferred Stock ........... -- 28,579 46,833 46,833
Stockholders' equity .................. 1,838 6,544 4,173 4,173
</TABLE>
- ----------
(1) For the period from inception (July 11, 1995) through December 31, 1995.
(2) The selected pro forma income statement and other financial data presented
reflects adjustments to the historical consolidated financial statements of
Holdings to give effect to (i) the Killeen Acquisition, (ii) the Oklahoma
Acquisition and (iii) the Dickinson Exchange, in each case as if such
events had occurred on October 1, 1996. The summary pro forma balance sheet
data reflects adjustments to the historical consolidated financial
statements of Holdings to give effect to the Dickinson Exchange, as if the
event had occurred on September 30, 1997. The selected pro forma financial
information presented is not necessarily indicative of either future
results of operations or the results that might have occurred had such
events taken place at such dates.
(3) Represents income before interest, taxes, depreciation, amortization, and
deferred rent. EBITDA is a financial measure commonly used in the Company's
industry and should not be construed as an alternative to operating income
(as determined in accordance with GAAP), an indicator of operating
performance, an alternative to cash flows from operating activities (as
determined in accordance with GAAP) or a measure of liquidity.
(4) Net long-term debt represents long-term debt minus cash and cash
equivalents.
(5) Earnings consist of net loss, plus fixed charges. Fixed charges consist of
interest expense, amortization of debt issuance costs and one-third of rent
expense on operating leases treated as representative of the interest
factor attributable to rent expense.
22
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company. This discussion should be read in conjunction with
the financial statements, including the notes thereto, appearing elsewhere in
this Prospectus.
OVERVIEW
The Company's revenues are generated primarily from box office receipts and
concession sales which constituted approximately 62% and 35% of 1996 revenues,
respectively. Additional revenues are generated by electronic video games
located adjacent to the lobbies of certain of the Company's theaters and by
on-screen advertisements shown prior to each feature film. The Company's
revenues are principally affected by changes in attendance and average admission
and concession revenues per patron. Attendance is primarily affected by the
commercial appeal of the films released by distributors and, to a lesser extent,
by the comfort and quality of the theater and competition and population growth
in the geographic markets the Company serves.
The Company's principal costs of operations are film rentals, concessions
costs and theater operating expenses, such as theater lease rentals, payroll,
utilities, advertising costs and insurance.
The Company has experienced rapid revenue growth through theater
acquisitions and the development of new theaters. During fiscal year 1996, the
Company acquired 62 theaters with 270 screens, constructed one theater with 10
screens and added two screens to an existing theater. The results of operations
of the acquired and newly-built theaters are included in Holdings' Consolidated
Financial Statements from their respective dates of acquisition or opening
dates. The Company capitalizes costs associated with the opening of new theaters
and expenses such costs over a one year period.
The period from July 11, 1995 through December 31, 1995 and the fiscal year
ended December 31, 1996 are not directly comparable due to the shortened period
the Company was in operation during 1995, the effects of theater acquisitions
and theater developments and the impact of the debt service associated with the
debt incurred in connection with theater acquisitions and development.
The Company currently operates 20 discount theaters (theaters which exhibit
second run movies and charge lower admission prices) with an aggregate of 97
screens as compared to 5 theaters and 27 screens at the end of 1995. Discount
theaters represented a smaller percentage of the Company's total theaters in
1996 as compared to 1995. This reduction affected the comparability of the
Company's results of operation for such periods. Management believes that the
percentage of discount theaters in the Company's theater circuit will decline as
new multiplex theaters are opened.
Admission and concession revenues are subject to seasonal fluctuations
which affect all motion picture exhibitors. These fluctuations are the result of
the distribution practice of the major motion picture studios, which have
historically concentrated the release of the most marketable films during the
summer and year-end holiday seasons when more people have tended to go to the
movies. As a result, the Company's second and fourth fiscal quarters have been
historically stronger compared to its first and third fiscal quarters. By way of
example, for those theaters operated by the Company during the entire 12 month
period ended December 31, 1996, revenues during the third and fourth quarter of
1996 were $3.6 million and $3.0 million, respectively, as compared to $2.7
million and $3.0 million for the first and second quarter of the same year.
23
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth a summary of operating revenues and expenses
for the year ended December 31, 1996, the period from July 11, 1995 through
December 31, 1995 and for the nine months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- --------------------------------
1995(1) 1996 1996 1997
------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Admissions .................... $ 3,912,596 $ 15,334,877 $ 6,889,177 $ 35,579,664
Concessions ................... 2,304,860 8,709,985 4,369,969 18,894,933
Other operating revenues, net.. 116,205 834,378 145,384 377,452
------------ ------------ ------------ ------------
Total revenues ........ 6,333,661 24,879,240 11,404,530 54,852,049
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Film rental and advertising
costs ...................... 2,336,535 8,387,938 3,951,852 19,303,538
Cost of concessions and other.. 339,476 1,411,869 684,088 3,020,715
Theater operating expenses .... 2,620,045 10,998,455 5,315,744 22,241,814
General and administrative
expenses ................... 742,605 1,601,185 1,158,166 3,992,365
Depreciation and amortization.. 739,028 3,151,582 1,237,792 7,929,967
------------ ------------ ------------ ------------
Total operating
expenses ............ 6,777,689 25,551,029 12,347,642 56,488,399
------------ ------------ ------------ ------------
Operating Loss .................. (444,028) (671,789) (943,112) (1,636,350)
Interest Expense, Net ........... 463,464 2,120,722 713,371 4,481,661
------------ ------------ ------------ ------------
Net income (loss) ............... $ (907,492) $ (2,792,511) $ (1,656,483) $ (6,118,011)
============ ============ ============ ============
EBITDA(2) ....................... $ 443,940 $ 2,953,843 $ 506,237 $ 6,712,809
============ ============ ============ ============
</TABLE>
- ----------
(1) For the period from inception (July 11, 1995) through December 31, 1995.
(2) Represents income before interest, taxes, depreciation, amortization, and
deferred rent. EBITDA is a financial measure commonly used in the Company's
industry and should not be construed as an alternative to operating income
(as determined in accordance with GAAP), an indicator of operating
performance, an alternative to cash flows from operating activities (as
determined in accordance with GAAP) or a measure of liquidity.
Additionally, EBITDA may not be calculated the same by all companies and
should not be viewed as an accurate comparative measure.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
At the end of the nine months ended September 30, 1997 and 1996, the
Company operated 84 and 19 theaters, respectively, with an aggregate of 457 and
110 screens.
TOTAL REVENUES. Total revenues were $54.9 million for the nine months ended
September 30, 1997 as compared to $11.4 million for the nine months ended
September 30, 1996. Total revenues were $22.6 million in the third quarter of
1997 as compared with $4.9 million in the third quarter of 1996. This increase
in revenues during the nine-month period and the third quarter was principally
due to the Company's net acquisition of 61 theaters (with an aggregate of 303
screens) during the fourth quarter of 1996 and the first nine months of 1997,
and the construction of four all stadium-style seating theaters (with an
aggregate of 44 screens) one of which was opened in November 1996 and three of
which were opened at the end of May 1997. Of the $43.5 million increase in
revenues during the first nine months of 1997, $36.7 million was attributable to
theaters acquired by the Company after the third quarter of 1996, and $6.8
million was attributable to new theaters constructed by the Company and theaters
previously operated by the Company.
24
<PAGE> 30
The average price of a ticket for the Company's first run and discount
theaters was $4.30 and $1.23, respectively, during the first nine months of 1997
and $4.04 and $1.23, respectively, during the first nine months of 1996. This
increase was principally due to the Company raising ticket prices and acquiring
theaters with higher average ticket prices than those previously owned. Average
concession sales per customer in the Company's theaters increased approximately
7.7% during the first nine months of 1997, reflecting both an increase in
consumption and, to a lesser extent, an increase in prices.
DIRECT THEATER COSTS. Film rental and advertising costs were $19.3 million
for the nine months ended September 30, 1997 as compared to $4.0 million for the
nine months ended September 30, 1996. Film rental and advertising costs were
$7.9 million during the third quarter of 1997 as compared to $1.6 million in the
third quarter of 1996. Cost of concessions increased from $684,000 during the
first nine months of 1996 to $3.0 million during the first nine months of 1997.
Cost of concessions also increased from $320,000 during the third quarter of
1996 to $1.3 million during the third quarter of 1997. Theater operating
expenses increased from $5.3 million during the first nine months of 1996 to
$22.2 million during the first nine months of 1997 and from $2.2 million in the
third quarter of 1996 to $8.6 million in the third quarter of 1997. Each of
these increases was principally due to the Company's acquisition of theaters
during the latter part of 1996.
Direct theater costs (consisting of film rental and advertising costs, cost
of concessions and other theater operating expenses) as a percentage of total
revenues decreased from 87.3% in the first nine months of 1996 to 81.2% in the
first nine months of 1997 as a result of the decrease in discount theaters as a
percentage of the Company's total theaters and improved operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 1997 increased to $4.0 million from $1.2
million in the nine months ended September 30, 1996. General and administrative
expenses for the third quarter of 1997 increased to $1.6 million from $512,000
in the third quarter of 1996. This increase was principally due to the Company's
acquisition of theaters during the latter part of 1996.
General and administrative expenses as a percentage of total revenues
decreased to 7.3% during the first nine months of 1997 from 10.2% during the
first nine months of 1996 as a result of such expenses being spread over a
greater number of theaters in the 1997 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to $7.9 million in the first nine months of 1997 from $1.2 million in
the first nine months of 1996. Depreciation and amortization expense increased
to $3.0 million in the third quarter of 1997 from $413,000 in the third quarter
of 1996. The increase was principally due to Company's acquisition of theaters
during the latter part of 1996.
INTEREST EXPENSE, NET. Interest expense, net increased to $4.5 million for
the first nine months of 1997 from $713,000 for the first nine months of 1996
and to $2.2 million in the third quarter of 1997 from $276,000 in the third
quarter of 1996. The increase was due to increased borrowing by the Company to
finance acquisitions and the construction of theaters.
NET LOSS. The Company's net loss grew to $6.1 million for the first nine
months of 1997 from $1.7 for the first nine months of 1996. Net loss for the
third quarter of 1997 increased to $2.0 million from $373,000 in the third
quarter of 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD JULY 11, 1995
THROUGH DECEMBER 31, 1995
The period from July 11, 1995 to December 31, 1995 and the fiscal year
ended December 31, 1996 are not directly comparable due to the shortened period
the Company was in operation during 1995, the effects of theater acquisitions
and theater developments and the impact of the debt service associated with the
debt incurred in connection with theater acquisitions and development. At the
end of the year ended December 31, 1996 and the period July 11,
25
<PAGE> 31
1995 through December 31, 1995, the Company operated 72 and 11 theaters,
respectively, with an aggregate of 342 and 70 screens.
TOTAL REVENUES. Total revenues were $24.9 million in 1996 as compared to
$6.3 million in the shorter 1995 period. This increase was principally due to
the Company's acquisition of 62 theaters with an aggregate of 270 screens during
1996 and, to a lesser extent, to operating improvements in the Company's
theaters. Of the $18.5 million increase in revenues, $12.6 million was
attributable to theaters acquired by the Company during 1996 and $5.9 million
was attributable to theaters acquired by the Company in 1995.
The average price of a ticket at the Company's first run and discount
theaters was $4.13 and $1.26, respectively, during 1996 and $3.89 and $1.14,
respectively, during 1995. This increase was principally due to the Company
raising ticket prices and acquiring theaters with higher average ticket prices
than those previously owned. Average concession sales per customer increased
approximately 10% during the period, reflecting both an increase in consumption
and, to a lesser extent, an increase in concession prices. The contribution from
62 new theaters acquired by the Company in 1996 is not fully reflected in the
Company's results for 1996, as 54 of these theaters were not acquired by the
Company until after October 1996.
DIRECT THEATER COSTS. Film rental and advertising costs were $8.4 million
in 1996 as compared to $2.3 million in 1995. Cost of concessions in 1996 rose to
$1.4 million from $339,476 in 1995. Theater operating expenses also rose over
the period to $11.0 million in 1996 from $2.6 million in 1995. Each of these
increases was principally due to the Company's acquisition of theaters during
1996. Direct theater costs (consisting of film rental and advertising costs,
cost of concessions and other theater operating expenses) as a percentage of
total revenues remained constant at approximately 84% over the entire period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
1996 increased to $1.6 million from $742,605 in the shorter 1995 period. The
increase was principally due to the Company's acquisition of theaters during
1996.
General and administrative expenses as a percentage of total revenues
decreased to approximately 6% in 1996 from approximately 12% in 1995 as a result
of such expenses being spread over a greater number of theaters during 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to $3.2 million in 1996 from $739,028 in the shorter 1995 period. The
increase was principally due to the Company's acquisition of theaters during
1996.
INTEREST EXPENSE, NET. Interest expense, net increased to $2.1 million in
1996 from $463,464 in the shortened 1995 period. The increase was due to
increased borrowing by the Company to finance acquisitions and the construction
of theaters.
NET LOSS. The Company's net loss grew to $2.8 million in 1996 from $907,492
in the shorter 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, primarily through box office
receipts and concession sales. The Company's film rentals for a given film are
ordinarily paid to film distributors 15 to 45 days following receipt of
admissions revenues. As a result of this timing difference, as well as the lack
of significant inventory and accounts receivable, the Company has generally
operated with a negative working capital position for its ongoing theater
operations.
26
<PAGE> 32
Net cash provided by (used in) operating activities was $2.7 million, $(.4)
million, $1.0 million, and $.2 million for the nine months ended September 30,
1997 and 1996, and the periods ended December 31, 1996 and 1995, respectively. A
lower operating loss and an increase in accounts payable in the nine months
ended September 30, 1997 and the year ended December 31, 1996 accounted for the
primary increase in net cash provided by operating activities compared to the
nine months ended September 30, 1996 and the period ended December 31, 1995,
respectively. Net cash used for investing activities was $76.9 million, $10.9
million, $69.7 million, and $10.7 million for the nine months ended September
30, 1997 and 1996 and the periods ended December 31, 1996 and 1995,
respectively. Investing activities are theater acquisitions and development, and
remodeling and expansion of existing theaters. Net cash provided by financing
activities was $79.8 million, $11.2 million, $71.8 million, and $10.9 million
for the nine months ended September 30, 1997 and 1996 and the periods ended
December 31, 1996 and 1995, respectively.
The Company has historically funded its capital expansion needs through
capital contributions from its parent, the Company's bank lines of credit and
funds generated from its operations. On November 1, 1996, the Company entered
into a senior bank facility comprised of a $25.0 million revolving credit
agreement and a $50.0 million term note borrowing agreement. The Company used
the proceeds of the Old Notes Offering to repay all of the outstanding
indebtedness under SUCH facility (approximately $64.5 million at June 30, 1997).
Concurrently with the consummation of the Old Notes Offering, the Company
entered into the Senior Bank Facility to fund working capital requirements and
capital expenditures. The Senior Bank Facility provides for a $50.0 million
revolving credit facility, however, the total amount of available borrowings
under the Senior Bank Facility may be less based on leverage levels of the
Company. At September 30, 1997, the Company was not in compliance with two of
the thirteen financial covenants in the Senior Bank Facility. On January 7,
1998, the Company entered into an amendment of the Senior Bank Facility,
amending among other things, certain financial covenants. Currently, the Company
is in compliance with all financial covenants in the Senior Bank Facility.
Borrowings under the Senior Bank Facility are conditioned upon the Company
achieving and maintaining certain financial ratios. As of December 31, 1997, no
amounts were borrowed under the Senior Bank Facility. Based on the Company's
current financial condition, the Company believes it has the ability to borrow
up to $30 million under the Senior Bank Facility. See "Description of Senior
Bank Facility."
Since its inception in 1995, the Company has received capital contributions
from Holdings totaling $74.3 million. Since Holdings has no independent
operations, these capital contributions represented the proceeds of equity
issuances by Holdings. Holdings currently has three classes of preferred stock
outstanding, the Series B Convertible Preferred Stock (the "Holdings Series B
Preferred Stock"), the Series C Convertible Preferred Stock (the "Holdings
Series C Preferred Stock") and the Series D Convertible Preferred Stock (the
"Holdings Series D Preferred Stock"). See "Description of Capital Stock --
Holdings Equity Issuances". Each such series may be redeemed, under certain
circumstances, at the holder's option, no earlier than the fourth quarter of
2003. If all of the currently outstanding shares of Holdings Series B Preferred
Stock, Holdings Series C Preferred Stock and Holdings Series D Preferred Stock
were to be redeemed, it would result in a payment of approximately $55.9 million
by Holdings to the holders of such preferred stock. In the event of an initial
public offering by Holdings of Holdings Common Stock, each share of Holdings
Series B Preferred Stock, Holdings Series C Preferred Stock and Holdings Series
D Preferred Stock would be automatically converted into a fixed number of shares
of Holdings Common Stock. See "Principal Stockholders -- Redemption of Holdings
Series B Preferred Stock, Holdings Series C Preferred Stock and Holdings Series
D Preferred Stock." In addition, at any time on or after October 31, 2001, and
provided that an offering of Holdings Common Stock has not then occurred,
Richard M. Durwood and/or the Richard M. Durwood Revocable Trust may require the
Company to repurchase not less than all of the shares of Holdings Common Stock
held by each at the fair market value at the time of repurchase (which based on
recent valuations of Holdings Common Stock would have resulted in an aggregate
payment of approximately $3.2 million).
During 1997 the Company acquired 12 theaters with 82 screens, and opened
five newly built theaters with 62 screens. At December 31, 1997, the Company had
one theater with 12 screens under construction. In addition, the Company has
completed construction of four screens, and has one screen under construction at
an existing
27
<PAGE> 33
theater and is scheduled to begin construction in early 1998 of two additional
theaters with 20 screens and seven additional screens at two existing theaters.
See "Business -- New Theater Development" and "-- Recent and Pending
Acquisitions." The Company's capital expenditures in connection with such
acquisitions and theater development in 1997 was approximately $88.0 million.
The Company funded these capital expenditures though cash flow from operations,
borrowings under the Senior Bank Facility, the proceeds of the Old Notes
Offering and capital contributions of the proceeds from the issuance of Common
Stock and Preferred Stock by Holdings. In addition, the Company intends to
continue its expansion over the next several years. Any future theater
development and future acquisitions may require financing in addition to cash
generated from operations and future borrowings under the Senior Bank Facility.
There can be no assurance that such additional financing will be available to
the Company on acceptable terms or at all.
The Company is highly leveraged. At December 31, 1997, the Company had
$110.0 million of indebtedness outstanding, none of which was senior
indebtedness, and the Company's pro forma ratio of indebtedness to total capital
was approximately 46%. At December 31, 1997, no amounts were borrowed under the
Senior Bank Facility. Based on the Company's current financial condition, the
Company believes it has the ability to borrow up to $30 million under the Senior
Bank Facility. At December 31, 1996, and the nine months ended September 1997,
the Company's deficiency of earnings to combined fixed charges and preferred
dividends was $3.2 million and $9.0 million, respectively. The degree to which
the Company is leveraged could have important consequences to holders of
Exchange Notes. Such leverage could limit the Company's ability to fund future
growth. See "Risk Factors -- Substantial Indebtedness."
Based upon the Company's current level of operations and anticipated
growth, management believes that cash flow from operations, together with
available borrowings under the Senior Bank Facility, will be adequate to meet
the Company's requirements for working capital, capital expenditures, scheduled
lease payments and scheduled payments of interest on its indebtedness, including
the Exchange Notes during 1998. However, the Company's business may not generate
sufficient cash flow from operations and future borrowings may not be available
under the Senior Bank Facility in an amount sufficient to enable the Company to
service its indebtedness, including the Exchange Notes, or make anticipated
capital expenditures. Furthermore, the Company's theater development program and
future acquisitions may require financing sources in addition to cash generated
from operations and future borrowings under the Senior Bank Facility. There can
be no assurances that such additional financing will be available to the Company
on acceptable terms or at all.
28
<PAGE> 34
BUSINESS
The Company is a leading operator of theaters in small and mid-sized
markets in the Southwestern and Midwestern regions of the United States. The
Company's strategy is to provide a superior entertainment experience to its
customers through the development and operation of theaters with stadium-style
seating, state-of-the-art digital sound systems and modern, attractive lobby and
concession areas. Management believes that this strategy has increased movie
attendance at its theaters and allowed the Company to increase the revenues it
receives from patrons both at the box office and at the concession stand. As of
December 31, 1997, the Company operated 81 theaters with a total of 469 screens,
located principally in Texas, Oklahoma, Kansas and Missouri. For the year ended
December 31, 1996, the Company had an operating loss and a net loss of
approximately $670,000 and $2.8 million, respectively, as well as deficiency of
earnings to combined fixed charges and preferred dividends of $3.2 million. For
the twelve months ended September 30, 1997, on a pro forma basis after giving
effect to certain acquisitions, the Company generated revenue and EBITDA of
approximately $89.4 million and $12.3 million, respectively. During the same
period, the Company generated net losses, operating income and current
deficiency of earnings to combined fixed charges and preferred dividends of
$11.8 million, $360,000 and $15.6 million, respectively. EBITDA represents
income before interest, taxes, depreciation, amortization, and deferred rent. It
is a financial measure commonly used in the Company's industry and should not be
construed as an alternative to operating income (as determined in accordance
with GAAP), an indicator of operating performance, an alternative to cash flows
from operating activities (as determined in accordance with GAAP) or a measure
of liquidity. Additionally, EBITDA may not be calculated the same by all
companies and should not be viewed as an accurate comparative measure.
The Company actively targets small and mid-sized markets which it believes
are under-served and where the Company believes it can become the leading movie
exhibitor. Management believes that its new stadium-style multiplex theaters can
become the primary entertainment choice in such markets. In acquiring and
building theaters, the Company seeks to identify markets where it can develop
clusters of theaters, enabling it to realize operating efficiencies. By
strategically selecting its target markets and focusing on providing a superior
entertainment experience, the Company has been able to achieve a leading
position in many of the markets in which it operates. Based on market research
compiled by the Company, management believes that in 76% of the film licensing
zones in which the Company operates, its theaters are the sole exhibitor or hold
the leading market share.
Founded in June 1995, the Company has grown rapidly by: (i) acquiring
theaters and improving operations at these theaters; (ii) building new,
state-of-the-art stadium-style multiplexes in targeted markets and (iii) adding
stadium-style auditoriums and state-of-the-art sight and sound systems to its
existing theaters.
The Company's management has a proven record of integrating acquired
theaters and improving operations and profit margins. For example, for the two
major groups of theaters acquired by the Company in the fourth quarter of 1996,
per capita box office receipts and per capita concessions have increased by
approximately 6% and 10%, respectively, from the third quarter of 1996 to the
third quarter of 1997. In the Company's original first run theaters (purchased
in July 1995), the Company has increased per capita box office receipts by 15%
from September 1995 to September 1997 and per capita concessions revenues by 33%
over the same period. The Company believes that its policy of offering incentive
programs to its employees aligns their interests with those of management in
increasing revenues and improving operations.
The Company is a wholly-owned subsidiary of Holdings and enjoys strong
equity sponsorship. The principal stockholders of Holdings include Beacon,
Stratford and the Hoak Entities. See "Principal Stockholders". The Company is a
Delaware corporation with its principal executive offices located at 2911 Turtle
Creek Boulevard, Suite 1150, Dallas, Texas 75219 and its telephone number at
that location is (214) 528-9500.
29
<PAGE> 35
BUSINESS STRATEGY
The Company's strategy is to increase its revenues and cash flow by (i)
providing a superior entertainment experience designed to attract larger
audiences to its theaters, (ii) becoming the premier movie exhibitor in selected
small to mid-sized markets through the acquisition of existing theaters and the
development of new stadium-style seating multiplex theaters and (iii) increasing
per capita box office and concession revenues. Key elements of the Company's
operating strategy include:
PROVIDING A SUPERIOR SIGHT AND SOUND PRESENTATION. The Company's objective
is to create an entertainment experience in its theaters that is superior to its
local competitors. The Company believes it can achieve this goal through the
development and operation of state-of-the-art multiplex theaters featuring
stadium-style seating, which offers moviegoers clear, unobstructed sight lines
to the movie screen as a result of the steeper incline of the seating. The
Company has developed a new design for its multiplex stadium-style auditoriums
that utilizes "black-box" auditorium design elements (all black auditorium
interiors with maximum size screens to enhance the viewing experience). These
new stadium-style theaters offer digital sound in all of the currently available
formats (Digital Theater Sound Systems, Dolby(R) Digital Sound and SONY Dynamic
Digital Sound(TM)) THX(R) sound systems, comfortable high-back chairs with wider
seating and armrests with cupholders, modern, attractive lobby and concession
areas and attentive housekeeping both inside and outside the theaters.
TARGETING SMALL AND MID-SIZED MARKETS AND DEVELOPING CLUSTERS OF THEATERS.
The Company focuses on small and mid-sized markets which it believes are
under-served. The Company aims to develop clusters of theaters in each of its
markets by acquiring theaters and developing new stadium-style multiplex
theaters in order to become the leading movie exhibitor in such markets. The
Company believes that its ability to develop stadium-style theaters in such
markets enables it to rapidly capture a significant share of such markets.
Before determining whether to develop a new theater in a particular location,
the Company carefully evaluates such market's potential.
CAPITALIZING ON THE COMPETITIVE ADVANTAGES OF STADIUM-STYLE MULTIPLEX
THEATERS. The Company intends to focus on the development of state-of-the-art
multiplex theaters featuring "black-box" auditoriums with stadium-style seating
configurations. By year-end 1997, the Company expects that its ratio of
stadium-style auditoriums to its total screen count will be among the highest in
the industry. The Company believes that the current trend in the United States
movie exhibition industry toward the development of multiplexes featuring
stadium-style auditoriums has put competitive pressure on many existing theaters
by setting new standards for moviegoers. The Company believes that customers
have clearly indicated their preference for the more attractive surroundings,
wider variety of films, better customer services and more comfortable seating
typical of stadium-style multiplexes. These theaters also enhance the Company's
ability to increase attendance and concession sales while taking advantage of
economies of scale by enabling it to exhibit concurrently a wide variety of
films.
INCREASING CONCESSION SALES THROUGH IMPROVED PRODUCT OFFERINGS, FACILITY
DESIGN AND STAFF INCENTIVES. Concession sales are the Company's second largest
revenue source after box office revenues and consistently yield gross margins in
excess of 80%. The Company actively works to promote concession sales. In order
to increase sales and margins at its concession stands, the Company has
introduced new products, offered larger sized products, improved presentation,
created additional satellite concession stands in its theaters and added color
video monitors and video walls featuring movie trailers at many of its
concession areas. In addition, the Company bases a portion of theater managers'
compensation on the level of concessions sales at their theaters.
PROVIDING INCENTIVES TO MANAGEMENT THROUGH PERFORMANCE-BASED, GOAL-ORIENTED
COMPENSATION PACKAGES. The Company maintains an incentive program for its
district managers and theater managers which rewards management for incremental
improvements in theater profitability. The Company believes that its incentive
program is an important source of motivation for its employees and aligns the
employees' interests with those of the Company.
30
<PAGE> 36
GROWING THROUGH STRATEGIC ACQUISITIONS AND ADDITIONS. The Company intends
to continue its program of acquiring and expanding theaters, primarily through
the opportunistic acquisition from regional or national chains of groups of
theaters located in the Company's target markets. Where appropriate, the Company
will also add stadium-style seating auditoriums and state-of-the-art audio
systems to selected existing theaters or reconfigure existing auditoriums to the
stadium-style seating format. The Company believes that such selective
acquisitions, add-ons and reconfigurations will enhance and protect the
Company's position as the sole or leading exhibitor in many of its markets and
enable the Company to become a leading exhibitor in other markets.
NEW THEATER DEVELOPMENT
The Company's construction program focuses on building stadium-style
seating multiplexes with an average of 10 to 14 screens and adding stadium-style
seating auditoriums to selected existing theaters. The Company times its theater
construction efforts to allow for theater openings that can take advantage of
peak summer and year-end holiday film seasons. In July 1996, the Company added
two auditoriums with stadium-style seating to its existing theater in Burleson,
Texas. In November 1996, the Company opened its first new multiplex theater with
all stadium-style seating and an aggregate of 10 screens in Midland, Texas.
In May 1997, the Company completed the construction of three additional all
stadium-style seating multiplex theaters with an aggregate of 34 screens in
Beaumont and Tyler, Texas and Lawrence, Kansas. These new theaters opened during
the 1997 Memorial Day holiday weekend.
In November 1997, the Company completed construction of four stadium-style
auditoriums at the Company's existing theater in Heath, Ohio.
During the 1997 year-end holiday season, the Company completed construction
of 10 of the 14 screens at each of two new theaters, and is continuing
construction of the 4 other screens at each theater.
At December 31, 1997, the Company had one new all stadium-style theater
under construction in Oklahoma with an aggregate of 12 screens. At December 31,
1997, the Company also had one stadium-style auditorium under development at the
Company's existing theater in Heath, Ohio. In addition, in early 1998, the
Company is scheduled to open one new theater and begin construction of two all
stadium-style theaters with 20 screens and seven stadium-style auditoriums at
two existing theaters.
The following tables set forth the Company's completed and pending
stadium-style auditorium developments since its inception in July 1995,
including the development of new stadium-seat multiplex theaters and the
addition of stadium-style auditoriums to existing theaters.
STADIUM-STYLE THEATER DEVELOPMENT
NEW THEATERS
<TABLE>
<CAPTION>
OPENING DATE LOCATION NUMBER OF THEATERS NUMBER OF SCREENS
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
November 1996 Midland, Texas 1 theater 10 screens
May 1997 Beaumont, Texas 1 theater 12 screens
May 1997 Tyler, Texas 1 theater 10 screens
May 1997 Lawrence, Kansas 1 theater 12 screens
December 1997++ Norman, Oklahoma 1 theater 14 screens
December 1997++ Columbia, Missouri 1 theater 14 screens
April 1998* Tulsa, Oklahoma 1 theater 12 screens
May 1998* Killeen, Texas 1 theater 10 screens
May 1998* San Angelo, Texas 1 theater 10 screens
--------- ----------
Total 9 theaters 104 screens
Average number of screens per theater 11.6 screens
</TABLE>
- ----------
* Projected
++ The Company has opened 10 of the 14 screens at each location, and is
continuing construction of the 4 other screens at each theater.
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<PAGE> 37
SCREEN ADDITIONS
<TABLE>
<CAPTION>
NUMBER OF SCREENS
ADDED TO
OPENING DATE LOCATION EXISTING THEATERS TOTAL RESULTING SCREENS
- ------------ ---------------- ----------------- -----------------------
<S> <C> <C> <C>
July 1996 Burleson, Texas 2 screens 10 screens
February 1998++ Heath, Ohio 5 screens 11 screens
May 1998* Burleson, Texas 4 screens 14 screens
May 1998* Topeka, Kansas 3 screens 17 screens
---------
Total 14 screens
</TABLE>
- ----------
* Projected
++ The Company has opened 4 screens at this location in November 1997,
and is continuing construction of the fifth screen.
RECENT AND PENDING ACQUISITIONS
In May 1997, the Company acquired two theaters with an aggregate of 12
screens in Beaumont and Port Arthur, Texas from the United Artists Corporation
("United Artists") for a purchase price of $3.4 million (the "Beaumont/Port
Arthur Acquisition"). The Company expects these newly acquired theaters to
complement the Company's existing theaters in Beaumont.
In June 1997, the Company acquired two theaters with an aggregate of 14
screens in Killeen, Texas from Escape Theatres, Inc. ("Escape") for a purchase
price of $8.5 million (the "Killeen Acquisition").
In August 1997, the Company acquired from General Cinema Corp. of Oklahoma,
Inc. ("General Cinema") seven theaters with an aggregate of 50 screens located
in Tulsa and Oklahoma City, Oklahoma for a purchase price of approximately $15.8
million (the "Oklahoma Acquisition").
In September 1997, the Company purchased a newly-built all stadium-style
seating multiplex theater with an aggregate of 16 screens in Waco, Texas for a
purchase price of $8.9 million (the "Waco Acquisition") plus an additional $2.7
million representing the cost of furniture and fixtures.
In October 1997, the Company exchanged six theaters with an aggregate of 31
screens it operated in Kansas and Missouri for five theaters with an aggregate
of 22 screens owned by Dickinson, Inc. ("Dickinson") in the same states, plus
cash in the amount of $1.1 million (the "Dickinson Exchange").
In October 1997, the Company acquired from Cineco Cinema Corporation one
theater with six screens located in Tomball, Texas for a purchase price of $1.8
million.
Upon completion of the opening of the new theaters and auditoriums that
were under construction or development as of December 31, 1997 as described
above, the Company will operate 84 theaters with a total of 517 screens.
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<PAGE> 38
Since its inception, most of the Company's growth has come through the
acquisition of existing theaters. The following table sets forth the Company's
completed acquisitions since its inception in July 1995:
COMPLETED ACQUISITIONS SINCE INCEPTION
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
DATE OF ACQUISITION ACQUISITION THEATERS ACQUIRED SCREENS ACQUIRED LOCATION
- ---------------------- ----------------------- ----------------- ---------------- --------
<S> <C> <C> <C> <C>
July 1995 Trans Texas 11 Theaters 70 Screens Texas, Oklahoma
April 1996 Cinemore 6 Theaters 33 Screens Texas
August 1996 Beaumont Cinema Ventures 2 Theaters 5 Screens Texas
November 1996 Crown Theater 33 Theaters 138 Screens Kansas, Missouri, Ohio
November 1996 United Artists 19 Theaters 86 Screens Texas, Oklahoma, Idaho
November 1996 General Cinema 2 Theaters 8 Screens Texas
May 1997 United Artists 2 Theaters 12 Screens Texas
June 1997 Escape Theatres 2 Theaters 14 Screens Texas
August 1997 General Cinema 7 Theaters 50 Screens Oklahoma
September 1997 Waco City Lights 1 Theater 16 Screens Texas
October 1997 Dickinson 5 Theaters++ 22 Screens Kansas, Missouri
October 1997 Tomball 1 Theater 6 Screens Texas
</TABLE>
- -----------
++ Theaters were acquired in exchange for six theaters operated by the
Company.
The Company has a proven record of integrating acquired theaters and
improving operations and profit margins. The following table sets forth the
percentage growth of per capita box office receipts and concessions between the
first nine months of 1996 and the first nine months of 1997 for the two major
theater groups acquired by the Company in the fourth quarter of 1996:
OPERATING IMPROVEMENTS AT RECENTLY ACQUIRED THEATERS
<TABLE>
<CAPTION>
DATE OF PERCENTAGE GROWTH PERCENTAGE GROWTH
ACQUISITION ACQUISITION OF PER CAPITA BOX OFFICE RECEIPTS OF PER CAPITA CONCESSIONS
- ---------------------- ------------------------- ---------------------------------- -----------------------------
<S> <C> <C> <C>
Crown Theater November 1996 6.5% 11.9%
United Artists November 1996 6.1% 7.0%
</TABLE>
THEATER OPERATIONS
As of December 31, 1997, the Company operated 81 theaters with an aggregate
of 469 screens in six states. The following table profiles the Company's
theaters at December 31, 1997:
PROFILE OF COMPANY THEATERS
FIRST RUN THEATERS
<TABLE>
<CAPTION>
AVERAGE SCREENS
STATE TOTAL SCREENS TOTAL THEATERS PER THEATER
----- ------------- -------------- -----------
<S> <C> <C> <C>
Texas ................... 132 18 7.3
Oklahoma ................ 109 17 6.4
Kansas .................. 68 13 5.2
Missouri ................ 49 11 4.5
Ohio .................... 10 1 10.0
Idaho ................... 4 1 4.0
---------- ---------- ----------
Total First Run .... 372 61 6.1
</TABLE>
33
<PAGE> 39
DISCOUNT THEATERS
<TABLE>
<CAPTION>
AVERAGE SCREENS
STATE TOTAL SCREENS TOTAL THEATERS PER THEATER
----- ------------- -------------- -----------
<S> <C> <C> <C>
Texas ....................... 71 14 5.1
Oklahoma .................... 6 1 6.0
Kansas ...................... 9 2 4.5
Missouri .................... 5 1 5.0
Ohio ........................ 4 1 4.0
Idaho ....................... 2 1 2.0
-------- -------- --------
Total Discount ......... 97 20 4.9
-------- -------- --------
Total Circuit ..... 469 81 5.8
</TABLE>
The Company's first run theaters contributed approximately 76%, 94%, and
92% of the Company's revenues, EBITDA and net loss, respectively, in 1996 and
approximately 87%, 95%, and 94% of the Company's revenues, EBITDA and net loss,
respectively, in the twelve months ended September 30, 1997. EBITDA represents
income before interest, taxes, depreciation, amortization, and deferred rent. It
is a financial measure commonly used in the Company's industry and should not be
construed as an alternative to operating income (as determined in accordance
with GAAP), an indicator of operating performance, an alternative to cash flows
from operating activities (as determined in accordance with GAAP) or a measure
of liquidity. Additionally, EBITDA may not be calculated the same by all
companies and should not be viewed as an accurate comparative measure.
The Company is committed to providing customers in both its first run and
discount theaters with a premium movie going experience by emphasizing clean,
conveniently located and modern facilities with state-of-the-art equipment at
all of its theaters. The Company has undertaken improvements in screens and
projection systems, as well as lobby facilities and design. The Company has
added comfortable seats with armrests and cup holders in all of its first run
theaters. The Company also invests in high quality projection and stereo sound
equipment to enhance the movie going experience. Technical sound enhancements
adopted by the Company include Digital Theater Sound Systems, Dolby(R) Digital
Sound and SONY Dynamic Digital SoundTM. Management estimates that a majority of
the films produced in 1997 will have digital soundtracks available as an
alternative to the standard stereo soundtrack. At June 30, 1997, more than 80%
of the Company's first run auditoriums are equipped with stereo sound, and
nearly one-quarter of all auditoriums have digital sound capabilities. The
Company plans to add digital sound capabilities to additional theaters during
1997. In addition, the Company has an attentive housekeeping program to maintain
the cleanliness of both the inside and the outside of its theaters.
The Company operates 20 discount theaters with an aggregate of 97 screens
which exhibit second run movies and charge lower admission prices (typically
$1.00-$1.50). The terminology "second run" is an industry term for the showing
of movies after the film has been shown for varying periods of time at other
theaters. These movies are the same high quality films shown at the Company's
first run theaters but due to the film's second run status the Company pays
lower film rental costs. The Company's discount theaters contributed
approximately 24%, 6% and 8% of the Company's revenues, EBITDA and net loss,
respectively, in 1996 and approximately 13%, 5% and 6% of the Company's
revenues, EBITDA and net loss, respectively, in the twelve months ended
September 30, 1997. The Company has undertaken a program to upgrade the sound,
concessions and environment of its discount theaters. Management believes the
percentage of discount theaters in the Company's theater circuit will decline as
new multiplex theaters are opened.
The Company's corporate office, which employed approximately 56 individuals
as of September 30, 1997, is responsible for theater development and site
selection, lease negotiation, theater design and construction, film licensing
and settlements, concession vendor negotiations and financial and accounting
activities. The Company's theater operations are divided into six geographic
divisions, each of which is headed by a district manager. The Company's district
managers are responsible for implementing Company operating policies and
supervising the managers of the individual theaters. Theater managers are
responsible for the day-to-day operations of the Company's theaters including
optimizing staffing, developing theater promotions, ordering concession
inventory, maintaining a clean and functioning facility and training theater
staff. The Company maintains an incentive compensation program for its district
managers, theater managers and assistant managers, which rewards managers for
incremental improvements in theater profitability.
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<PAGE> 40
In addition, employees who directly sell concessions are also rewarded for
increased concession sales through theater- based bonuses and contests sponsored
by individual theater managers.
THEATER DEVELOPMENT
The Company's strategy emphasizes the development of new multiplex theaters
with stadium-style auditoriums showing first-run feature films. The Company has
designed prototype multiplex theaters, which can be adapted to suit the size
requirements of a particular location and the availability of parking. The
Company believes the fully designed prototypes will result in significant
construction and operating cost savings. The Company's multiplex theaters are
designed to create an inviting and patron-friendly experience for the customer.
The multiplex theaters typically contain auditoriums having from 100 to 300
seats each and feature stadium-style seating for enhanced viewing, comfortable
highback seats with cupholder armrests, "black-box" auditorium interiors (all
black auditorium interiors to enhance viewing), maximum size screens and digital
stereo surround-sound. The exterior and common areas of these theaters are
designed with neon and tile, and common areas include multiple concession
stands, video game areas and private party rooms adjacent to the theater lobby.
The Company believes that stadium-style auditoriums with black-box interior and
digital sound will provide an entertainment experience which is superior to that
available at a conventional theater. More importantly, the Company believes that
construction and operation of high quality theaters provides significant
competitive advantages as theater patrons and film distributors have
demonstrated a preference for multiplex theaters and the premium movie going
experience they can provide.
Multiplex theaters generally increase per screen revenues and operating
margins and enhance the Company's operating efficiency. Multiplex theaters
enable the Company to offer a wide selection of films attractive to a diverse
group of patrons residing within the drawing area of a particular theater
complex. Because the percentage amount of film rental fees decreases over the
course of a run, varied auditorium seating capacities within the same theater
enable the Company to reduce average film rental costs (and thereby increase
operating margins) by exhibiting films for a longer period of time through the
shifting of films to smaller auditoriums to meet changing attendance levels. In
addition, operating efficiencies are realized through the economies of having
common box office, concession, projection, lobby and restroom facilities, which
enable the Company to spread certain costs, such as payroll, advertising and
rent, across a higher revenue base. Staggered movie starting times also minimize
staffing requirements, reduce lobby congestion and contribute to more desirable
parking and traffic flow patterns.
The Company continually evaluates existing and new markets for potential
theater locations. The Company generally seeks to develop theaters in film
licensing zones that are underserved as a result of changing demographic trends
or that are served by aging theater facilities. Some of the factors the Company
considers in determining whether to develop a theater in a particular location
are the market's population and average household income, proximity to retail
corridors, convenient roadway access and proximity to competing theaters.
CONCESSIONS
Concession sales are the Company's second largest revenue source after box
office revenues, representing approximately 35% of total revenues for 1996. The
Company has devoted considerable management effort to increasing concession
sales and margins. The Company's primary concession products are Coca Cola(R)
beverages, popcorn, hot dogs, nachos and candy.
The Company has also continued to introduce new concession products
designed to attract additional concession purchases. New offerings have recently
included bottled water, specialty coffees and frozen carbonated beverages such
as Icees(R). In addition, the Company continues to look for new selling
techniques to boost concessions sales. For instance, in an effort to increase
concession revenues per patron, the Company has increased the sizes and upgraded
the containers in which its concession products are sold. The Company now also
includes sales tax in the price of its concession products, rounding up the
price to the nearest twenty-five cents, in order to serve customers more
rapidly.
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<PAGE> 41
The Company has found that the placement, design and appearance of
concession stands are also key factors in improving sales. Accordingly, the
Company's new theaters are designed to include larger concession stands, with
each stand having multiple service stations to make it easier to serve larger
numbers of customers rapidly. The optimal placement of large concession stands
within theaters also heightens their visibility, aids in reducing the length of
concession lines and improves traffic flow around the concession stands. The
Company has redesigned the concession areas in most of its older theaters to
incorporate many of these features. In addition, the Company has installed color
video monitors in the concession areas of most of its first run theaters so that
customers may watch trailers of coming attractions while waiting in line. The
Company bases a portion of theater managers' compensation on the level of
concession sales at their theaters. In addition, employees who directly sell
concessions are also rewarded for increased concession sales through
theater-based bonuses and contests sponsored by individual theater managers.
These improvements in the Company's concession operations have led to an
increase of 7.6% in the per capita concession revenues in the Company's theaters
during the nine month period ended September 30, 1997 as compared to the same
period in 1996. For the two major groups of theaters acquired by the Company in
the fourth quarter of 1996, per capita concessions have increased approximately
10% for the same period.
In order to control the cost of concession items, the Company negotiates
prices for its concession supplies directly with concession vendors on a bulk
rate basis and distributes its concession supplies through two concession
contract distributors. The Company's largest concession vendor is The Coca Cola
Company. In April 1997, the Company signed a five-year supply contract with The
Coca Cola Company to supply soft drinks and other products to all of its
theaters.
FILM LICENSING
The Company licenses films from distributors owned by major film production
companies and from independent film distributors that typically distribute films
for smaller production companies. Film licensing is done on a film-by-film and
theater-by-theater basis. Prior to negotiating for a film license, the Company's
film buyers evaluate the prospects for upcoming films. The criteria considered
for each film include cast, director, plot, performance of similar films,
estimated film rental expense, expected Motion Picture Association of America
rating and the outlook for other upcoming films. Successful licensing depends
greatly upon the exhibitor's knowledge of trends and historical film preferences
of the residents in markets served by each theater, as well as on the
availability of commercially successful motion pictures.
For first run films, film distributors typically establish geographic zones
and offer each available film to theaters within that zone. The size of a film
zone is generally determined by the population density, demographics and box
office potential of a particular market or region, and can range from a radius
of three to five miles in major metropolitan and suburban areas to up to 15
miles in small towns. Each film, regardless of the distributor, is generally
licensed to only one theater in each zone. New film releases are licensed at the
discretion of the film distributors on an allocation or previewed bid basis. In
film zones where the Company has little or no competition, the Company selects
films from among those offered, permitting the Company to exhibit many of the
most commercially successful films in these zones. In film zones where the
Company faces competition, the Company usually licenses films on an allocation
basis. Under an allocation process, a distributor will decide on a
picture-by-picture, theater-by-theater basis which exhibitor will be offered a
movie and then that exhibitor will negotiate directly with the distributor for
the film. In recent years, distributors have generally used this allocation
process rather than a bidding process to license their films. Based on market
research compiled by the Company, the Company believes that at September 30,
1997, approximately 63% of the Company's theaters were located in film licensing
zones in which the Company was the sole exhibitor, and approximately 13% of its
theaters were located in film licensing zones in which management believes that
the Company is the leading exhibitor. For second run films, film distributors
establish availability on a market-by-market basis after the completion of
exhibition at first run theaters, and permit each theater within a market to
exhibit such films without regard to film zones.
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<PAGE> 42
The Company licenses films through its booking office located at the
Company's corporate headquarters in Dallas, Texas. All of the major motion
picture studios and distributors also maintain offices in Dallas. The Company's
film bookers have significant experience in the theater industry and have
developed long-standing relationships with the film distributors. Each film
booker is responsible for a geographic region and maintains relationships with
representatives of each of the major motion picture studios and distributors
having responsibility for their respective geographic regions. The Company
licenses films from all of the major distributors and is not dependent on any
one studio for motion picture product.
A film license typically specifies rental fees to be paid to the
distributor based on the higher of either a gross receipts formula or a theater
admissions revenue sharing formula. Under a gross receipts formula, the
distributor receives a specified percentage of box office receipts, with the
percentage generally declining over the term of the run. First run film rental
percentages usually begin at 70% of box office receipts and gradually decline to
as low as 30% over a period of four to seven weeks. Under the theater admissions
revenue sharing formula (commonly known as the "90/10" clause), the distributor
receives a specified percentage (i.e., 90%) of the excess of box office receipts
over a negotiated reimbursement for theater expenses. Second run film rental
percentages typically begin at 35% of box office receipts and decline to 30%
after the first week. Most distributors follow an industry practice of adjusting
or renegotiating the terms of a film license after the exhibition of the film
based upon the film's success.
The Company's business is dependent upon the availability of commercially
successful movies and upon its relationship with motion picture distributors.
During 1997, there were seven major distributors whose films accounted for a
substantial portion of admission revenues and top grossing films. These are Sony
Releases, Buena Vista Distribution (Disney), Universal Film Exchanges, Warner
Bros. Distribution, Twentieth Century Fox, Paramount Pictures and New Line
Cinema. There are numerous other smaller distributors and no single distributor
dominates the market. From year to year, the Company's revenues attributable to
individual distributors may vary significantly depending on the commercial
success of such distributor's films in any given year. For the nine months ended
September 30, 1997, the percentage of the Company's admission revenues
attributable to each of its significant distributors were 25%, 19%, 15%, 12%,
12%, 9% and 6%, respectively. The Company believes that its relationships with
its film distributors are good.
MARKETING
In order to attract customers, the Company relies principally upon
newspaper display advertisements (substantially paid for by film distributors)
and newspaper directory film schedules (generally paid for the by the exhibitor)
to inform patrons of film titles and show times. Newspaper directory film
display advertisements are typically displayed in a single group for all of the
Company's theaters located in the newspaper's circulation area. Radio and
television advertising spots (generally paid for by film distributors) are used
to promote certain movies and special events. The Company also exhibits previews
in its theaters of coming attractions and films presently playing on the other
screens which it operates in the same theater or market. Upon the opening of a
new theater, the Company undertakes additional one-time marketing efforts, such
as special promotions, advertising and contests.
MANAGEMENT INFORMATION SYSTEMS
The Company has made a significant commitment to its management information
systems in order to enhance its ability to control costs and efficiently manage
the Company's theaters. The Company's management information system provides
corporate management by 8:00 a.m. each day with detailed admission and
concession revenue information as well as attendance figures from the previous
day. This information allows management to make quick adjustments to movie
schedules, including prolonging runs or adding screens for movies with higher
gross revenues and substituting films when gross revenues cease to meet goals.
Real-time seating and box office information is available to box office
personnel, making it possible for theater management to avoid overselling a
particular film and providing faster and more accurate response to customer
inquiries regarding showings and available seating. The information system also
tracks concession sales and total deposits, leading to better inventory
management and control.
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<PAGE> 43
INDUSTRY OVERVIEW
The North American motion picture exhibition industry is comprised of
approximately 475 exhibitors, approximately 250 of which operate four or more
total screens. At December 31, 1996, the ten largest exhibitors operated
approximately 50% of the total screens in operation, with no one exhibitor
operating more than 10% of the total screens. From 1986 through 1996, the net
number of screens in operation in the United States increased from approximately
20,000 to approximately 28,000.
One of the most important industry trends in recent years is the
development of multiplex theaters with stadium-style seating and digital sound.
These theaters set new standards for moviegoers, who have demonstrated a
preference for the more modern facilities, wider variety of films, better
customer service and more comfortable seating typical of these newer
multiplexes.
Theatrical exhibition is the primary distribution channel for new motion
picture releases. The Company believes that the successful theatrical release of
a movie abroad and in "downstream" distribution channels, such as home video and
pay-per-view, network, syndicated and satellite television, is largely dependent
on its successful theatrical release in the United States. The Company further
believes that the emergence of new motion picture distribution channels has not
adversely affected attendance at theaters and that these distribution channels
do not provide an experience comparable to the out-of-home experience of viewing
a movie in a theater. The Company believes that the public will continue to
recognize the advantages of viewing a movie on a large screen with superior
audio and visual quality, while enjoying a variety of concessions and sharing
the experience with a large audience. In addition, when compared with other
forms of entertainment, such as many sporting events and cultural events, movies
remain one of the best entertainment values for families.
According to data released by the Motion Picture Association of America,
the U.S. box office sales of approximately $5.9 billion in 1996 was a record for
the industry. Overall attendance has remained relatively stable during the most
recent seven year period. The Company believes that the primary reason for the
variances in the year-to-year attendance is the overall audience appeal of the
films released and to a lesser extent general economic conditions. The following
table represents the results of a survey by the Motion Picture Association of
America outlining the historical trends in U.S. theater attendance, average
ticket prices and box office sales for the last seven years.
<TABLE>
<CAPTION>
U.S. BOX
AVERAGE OFFICE
ATTENDANCE TICKET SALES
YEAR (MILLIONS) PRICE (BILLIONS)
- ---------------------------------------------------------- ---------- ------- -----------
<S> <C> <C> <C>
1990...................................................... 1,189 $4.23 $5.02
1991...................................................... 1,141 4.21 4.80
1992...................................................... 1,173 4.15 4.87
1993...................................................... 1,244 4.14 5.15
1994...................................................... 1,292 4.18 5.40
1995...................................................... 1,263 4.35 5.49
1996...................................................... 1,339 4.42 5.91
</TABLE>
The Company believes that as a result of increased revenues from the
successful release of films in both movie theaters and other distribution
channels, film production companies have increased the number of films being
produced in recent years. Film producers have increased their revenues from
these distribution channels by more than 250% over the past ten years to $20.0
billion in 1996. The increased revenue potential from film distribution in
recent years can be attributed to increased demand resulting from the domestic
and international growth of the movie theater industry and the home video
industry, and the significantly increased channel capacity created by enhanced
cable and satellite- based transmission systems. Moreover, the Company believes
independent producers and distributors, such as Gramercy Pictures, New Line
Cinemas, Castle Rock Entertainment and Dreamworks SKG, the highly-publicized
partnership among Jeffrey Katzenberg, Steven Spielberg and David Geffen, should
help increase motion picture production. The Company believes that an increasing
supply of quality feature films and "event" films exhibited with advanced
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<PAGE> 44
projection and stereo sound equipment, such as Digital Theater Sound Systems,
Dolby(R) Digital Sound and SONY Dynamic Digital Sound(TM) and THX(R) sound
systems will enhance the movie going experience and will increase the theater
attendance of exhibitors, such as the Company, with modern multiplex theaters
designed to exhibit such motion pictures. In addition, the Company believes that
the trend towards such films complements the Company's focus on the development
of multiplex theaters with stadium-style seating, "black box" auditoriums and
state-of-the-art projection and sound.
COMPETITION
The motion picture exhibition industry is highly competitive, particularly
in licensing films, attracting patrons and finding new theater sites. There are
approximately 475 participants in the North American motion picture exhibition
industry. Industry participants vary substantially in size, from small
independent operators of a single screen theater to large national chains of
multi-screen theaters affiliated with entertainment conglomerates. The Company
competes against local, regional and national exhibitors, most of which have
been in existence significantly longer than the Company and many of which have
substantially greater financial resources than the Company.
In film zones where the Company has little or no competition, the Company
selects films it thinks will be most commercially successful from those offered.
In film zones where the Company faces competition, the Company usually licenses
films on an allocation basis. The Company believes that the principal
competitive factors in licensing films include licensing terms, the seating
capacity, location, quality and reputation of an exhibitor's theaters, the
quality of projection and sound equipment at the theaters and the exhibitor's
ability and willingness to promote the films. See "-- Film Licensing."
Competition for patrons is dependent upon factors such as the availability of
popular films, the location of theaters, the comfort and quality of theaters and
ticket prices.
Some of the Company's competitors have also sought to increase the number
of theaters and screens in operation. Such increases may cause certain local
markets or portions thereof to have too many screens for the population, thereby
negatively affecting the earnings of all the theaters in the market. The Company
does not believe that to date overbuilding has affected the Company's business
to any material extent. At the same time, there has been a reduction in the
number of theater locations and a consolidation among exhibitors. At December
31, 1996, the ten largest motion picture exhibition companies operated
approximately 50% of the total screens in operation, with no one exhibitor
operating more than 10% of the total screens.
The motion picture exhibition industry faces competition from a number of
motion picture exhibition delivery systems such as network, syndicated, cable
and satellite television, pay-per-view and home video systems. Despite the
proliferation of these delivery systems, theater admission revenues have
increased during each of the last four years. However, the full extent to which
these alternative motion picture delivery systems will compete with traditional
theatrical release may not be known for several years, and there can be no
assurance that these alternative motion picture exhibition delivery systems will
not in the future adversely affect attendance at the Company's theaters. In
addition, the entertainment industry is one which has experienced rapid
technological change. As a result, the Company may face competition in the
future from new technologies that are not yet developed. Movie theaters also
face competition from other forms of entertainment competing for the public's
leisure time and disposable income.
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.
The consent decrees resulting from those cases, to which the Company was not a
party, bind certain major motion picture distributors and require the films of
such distributors to be offered and licensed to exhibitors, including the
Company, on a film-by-film and theater-by-theater basis. Consequently, the
Company cannot assure itself of a supply of motion pictures by entering into
long-term arrangements with major distributors, but must compete for its
licenses on a film-by-film and theater-by-theater basis. See " -- Film
Licensing."
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<PAGE> 45
The Company is subject to various general regulations applicable to its
operations including the Americans with Disabilities Act (the "ADA"). The
Company has evaluated the Company's existing theaters and its specifications for
new theaters and made changes to such theaters and specifications to comply with
the regulations of the ADA. The Company develops its new theaters in substantial
compliance with the ADA. The Company believes that the continuing cost of
complying with the ADA will not be material.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,750 employees, of
which approximately 90% are part time employees who are paid on an hourly basis.
None of the Company's employees are members of unions or covered by collective
bargaining agreements. The Company believes its relations with its employees are
good.
PROPERTIES
Of the 81 theaters operated by the Company at December 31, 1997, 14
theaters (104 screens) were owned and 67 theaters (365 screens) were leased. The
Company's leases typically have remaining terms from 4 to 20 years, with options
to extend the lease for up to ten additional years. The leases typically require
escalating minimum annual rent payments during the term of the lease which are
negotiated at the signing of the lease. During the next five years approximately
40 theater leases (representing 169 screens) will expire, representing
approximately 52% of all the Company's theaters (43% of all screens). Of those
coming due within the next five years, leases at 21 theaters (representing 97
screens) will be subject to renewal options. In addition, the Company has
purchased two lots for the development of new theaters and has entered into a
ground lease for another development site.
The Company leases office space in Dallas, Texas for its corporate
headquarters.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising from
the ordinary course of its business operations. The Company does not believe
that the resolution of these proceedings will have a material adverse effect on
the Company's financial condition and results of operations.
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MANAGEMENT
The following table sets forth certain information regarding the Company's
and Holdings' directors and executive officers, including their respective ages.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas W. Stephenson, Jr.................................. 43 President, Chief Executive Officer and
Chairman of the Board
Robert E. Painter......................................... 52 Chief Operating Officer and Assistant Secretary
James R. Featherstone..................................... 42 Chief Financial Officer, Vice President,
Secretary and Treasurer
John G. Farmer............................................ 50 Director
Thomas L. Harrison........................................ 46 Director
Thomas G. Mendell......................................... 51 Director
Harold W. Pote............................................ 51 Director
Eric R. Wilkinson......................................... 41 Director
Gary Golden............................................... 49 Head Film Buyer
</TABLE>
THOMAS W. STEPHENSON, JR. has served as a director and the President and
Chief Executive Officer of the Company and Holdings since June 1995. From 1987
to 1995, Mr. Stephenson was President of LSI Capital, L.L.C., an acquisition and
advisory group, which he founded in 1987. During 1986, Mr. Stephenson was
President of Inwood Capital, a real estate merchant banking firm. From 1984 to
1987, Mr. Stephenson was a partner and Chief Financial Officer of Criswell
Development Company, a real estate investment company. From 1978 to 1984, Mr.
Stephenson was employed by the investment bank of Merrill Lynch.
ROBERT E. PAINTER has served as Chief Operating Officer of the Company and
Holdings since September 1996. Prior to that time, Mr. Painter was a consultant
for the IMAX Corporation from 1995 to 1996. From 1991 to 1995, Mr. Painter was
employed by General Cinema Theatres as its Senior Vice President of Operations.
From 1989 to 1991, Mr. Painter served as Senior Operations Officer for Staff
Builders Health Care, Inc. From 1967 to 1989, Mr. Painter was employed by
General Cinema Theatres, most recently as its Senior Vice President of
Operations.
JAMES R. FEATHERSTONE has served as Chief Financial Officer of the Company
and Holdings since July 1996. From April 1996 to June 1996, Mr. Featherstone
served as a consultant to the Company. From June 1982 to July 1995, Mr.
Featherstone served as Vice President of Citicorp and later as Managing Director
of Citicorp Securities.
JOHN G. FARMER has served as a director of the Company and Holdings since
May 1996. In addition, since October 1994, Mr. Farmer has served as Managing
Director of Stratford Capital Partners, L.P. and Stratford Equity Partners, L.P.
From June 1990 to October 1994, Mr. Farmer served as Senior Vice President of GE
Capital Corporation, Corporate Finance Group.
THOMAS L. HARRISON has served as a director of the Company and Holdings
since May 1997. Since 1995, Mr. Harrison has also served as a Principal and
President of Hoak Capital Corporation. From 1989 to 1995, Mr. Harrison served as
a Principal and as Managing Director of Haas, Wheat & Harrison, Incorporated and
from 1984 to 1989, he served as a Principal and as Senior Vice President of
Hicks & Haas, Incorporated.
THOMAS G. MENDELL has been a director of the Company and Holdings since
September 1996. In addition, since April 1994, Mr. Mendell has been a Partner of
The Beacon Group, L.L.C. and serves as director of Catalina Marketing
Corporation (NYSE) and several private companies. From November 1986 to December
1993, Mr. Mendell was a Partner of Goldman Sachs & Co.
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<PAGE> 47
HAROLD W. POTE has been a director of the Company and Holdings since
September 1996. Since January 1993, Mr. Pote also has been a Partner of The
Beacon Group L.L.C. Prior to the formation of The Beacon Group, L.L.C., Mr. Pote
was Chief Executive Officer of First Fidelity Bancorporation. Mr. Pote currently
serves as a director of Norfolk Southern Corp. and previously served as director
of Smith Klein-Beecham, Inc.
ERIC R. WILKINSON has been a director of the Company and Holdings since
September 1996. In addition, since December 1995, Mr. Wilkinson has been a
Partner of The Beacon Group L.L.C. From March 1994 to December 1995, Mr.
Wilkinson served as a Principal of The Beacon Group L.L.C. From March 1989 to
March 1994, Mr. Wilkinson served as a Partner and a director of Apax Partners, a
$300.0 million private overseas equity fund.
GARY GOLDEN has been in the theater industry since 1968. He became Head
Film Buyer for the Company in October 1997. Prior to that time, he was Senior
Vice President/Head Film Buyer for Cobb Theaters from 1996-1997. From 1976-1979
he was a Film Buyer for General Cinema Theatres and then later returned to
General Cinema in 1990, where he was Regional Vice President of Film until 1995.
He was the Southern Division Manager for Lorimar Releasing from 1988-1989. Prior
to that time, he was with other film companies, including United Artists, Gulf
States Theatres, AMC, Commonwealth Theatres, Pacific Drive-Ins, Cinerama and
United Pictures.
Each director of Holdings and the Company holds office until the next
annual meeting of stockholders of the Company or until his successor is duly
elected and qualified. All officers are elected annually and serve at the
discretion of the respective Board of Directors. The number of members on each
Board of Directors is fixed by the affirmative vote of a majority of the members
at any time constituting such Board of Directors. Presently, the Board of
Directors of each of Holdings and the Company consists of six members. Directors
on each such Board are reimbursed for all expenses actually incurred for each
Board meeting which such directors attend. Each director may receive additional
compensation for his services as the respective Board of Directors may
determine. The executive officers of the Company and Holdings are elected by the
respective Board of Directors to serve at the discretion of such Board.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for fiscal year 1997
awarded to or earned by the chief executive officer of the Company and the two
other most highly compensated executive officers of the Company whose
contractual base salary and bonus exceeded $100,000 for services rendered in all
capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
----------------------------------------
ALL OTHER
NAME SALARY BONUS COMPENSATION
---- ---------- ----- -------------
<S> <C> <C> <C>
Thomas W. Stephenson, Jr.............................................. $ 285,577 -- $ 16,546
Robert E. Painter..................................................... 181,731 -- 11,462
James R. Featherstone................................................. 114,231 -- 11,681
</TABLE>
- ----------
(1) The named executive officers did not receive annual compensation not
properly categorized as salary or bonus, except for certain perquisites and
other personal benefits which are not shown because the aggregate amount of
such compensation for each of the named executive officers during the
fiscal year did not exceed the lesser of $50,000 or 10% of total salary and
bonus reported for such executive officer.
(2) The Board of Directors has not determined bonus awards for fiscal year
1997. In 1996, Mr. Stephenson, Mr. Painter and Mr. Featherstone received
bonus awards of $225,000, $60,000 and $50,000, respectively.
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The table below sets forth information concerning grants of stock options
for shares of common stock, par value $.01 per share, of Holdings ("Holdings
Common Stock") made by the Company to each of the executive officers of the
Company named in the Summary Compensation Table during 1996.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZED VALUE AT
SECURITIES % OF EXERCISE ASSUMED ANNUAL RATES OF
UNDERLYING TOTAL OPTIONS PRICE STOCK PRICE APPRECIATION FOR
NAME OPTIONS GRANTED GRANTED IN 1996 PER SHARE EXPIRATION DATE OPTION TERM
---- --------------- --------------- --------- --------------- ------------
5% 10%
---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas W. Stephenson, Jr.. 14,603 57.1% $175 September 30, 2006 $1,607,206 $ 4,072,777
Robert E. Painter......... 7,302 28.6% 175 September 30, 2006 803,658 2,036,527
James R. Featherstone..... 3,651 14.3% 175 September 30, 2006 401,829 1,018,264
</TABLE>
The table below sets forth information concerning each exercise of options
for Holdings Common Stock, during 1996 by the executive officers named in the
Summary Compensation Table, the number of exercisable and unexercisable options
for Holdings Common Stock held by them and the fiscal year-end value of such
exercisable and unexercisable options.
AGGREGATED HOLDINGS OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(1) AT FISCAL YEAR-END(1)
SHARES ---------------------------- ----------------------------
ACQUIRED VALUE
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Stephenson, Jr.. -- -- 2,921 11,682 $58,411 $233,646
Robert E. Painter......... -- -- 1,460 5,842 29,208 116,832
James R. Featherstone..... -- -- 730 2,921 14,604 58,416
</TABLE>
- ----------
(1) Assumes a current fair market value of $195 per share of Holdings Common
Stock, the price at which Holdings last issued shares of Holdings Common
Stock in May 1997.
1996 STOCK OPTION AND STOCK AWARD PLAN
Certain eligible employees and non-employee directors of the Company and
its subsidiaries may be granted stock options ("Options"), stock appreciation
rights ("SARS"), restricted stock, performance units or performance shares and
phantom stock rights (collectively, the "Incentive Awards") pursuant to the
Hollywood Theater Holdings, Inc. 1996 Stock Option and Stock Award Plan (the
"Stock Award Plan"). The aggregate number of shares of Holdings Common Stock
that may be issued, transferred or exercised pursuant to Incentive Awards under
the Stock Award Plan is 37,000 shares (subject to certain adjustments). The
Stock Award Plan is administered by a committee, the members of which are
appointed by the Board of Directors of the Company (the "Committee"). Presently,
the members of the Committee consist of John G. Farmer, Thomas L. Harrison,
Thomas G. Mendell and Thomas W. Stephenson.
The Committee has the ability to determine, among other things, which
individuals will be granted awards pursuant to the Stock Award Plan and such
Committee has the ability to determine the number of shares of Holdings Common
Stock, options, SARs, restricted stock awards, performance units or shares or
phantom stock rights that will be subject to each Incentive Award and to
determine the terms and provisions of each Incentive Award.
The Committee may grant either incentive stock options or non-qualified
stock options to eligible employees. The Committee will not grant any incentive
stock options to an eligible employee who owns or would own immediately after
the grant of such incentive stock option, directly or indirectly, stock
possessing more than 10% of the total
43
<PAGE> 49
combined voting power of all classes of stock of the Company (unless at the time
of such grant, the incentive stock option price is at least 110% of fair market
value and such option is not exercisable after the expiration of five years from
the date of grant). The purchase price for non-qualified stock options will be
equal to at least the greater of (i) the par value of the Holdings Common Stock
or (ii) 50% of the fair market value of the Holdings Common Stock on the date of
grant. The purchase price for an incentive stock option will be at least equal
to fair market value of the Holdings Common Stock on the date of grant and the
term of such option will not be greater than 10 years.
The Committee may grant an eligible employee SARs that are connected to an
Option or SARs without relation to an Option. Payment upon exercise of a SAR may
be made in shares of Holdings Common Stock valued at fair market value on the
date of exercise or in cash (or a combination of both). Payment upon exercise of
a SAR may be limited by the Committee on the date of the grant.
The Committee may grant an eligible employee shares of restricted stock
pursuant to the Stock Award Plan. Shares of restricted stock may not be disposed
of until the restrictions are removed or expire. The Committee may grant an
eligible employee Performance Units or Performance Shares. Such Units and Shares
may be granted in such a manner that more than one performance period may be in
progress simultaneously. The Committee may, at any time, modify the performance
measures as it considers appropriate and equitable. Payments will be made in
cash or Holdings Common Stock (or a combination of both) following the close of
the applicable performance period.
Pursuant to the Stock Award Plan, an eligible employee may be granted a
phantom stock right, which entitles such employee, upon conversion, to receive
payment of cash or in shares of Holdings Common Stock (or both). Such payment of
shares upon conversion of a phantom stock right may be made in shares of
restricted stock.
Incentive Awards (whether or not vested) shall expire immediately and/or be
forfeited upon termination of such employee's employment with the Company or any
subsidiary employing such employee for any reason other than death, disability
or retirement. If any employee ceases to be in the employ of the Company or any
of its subsidiaries by reason of death, disability or upon retirement, any
unexercised options or SARs or outstanding phantom stock units will terminate on
the date that is 90 days following the date of death, retirement or disability
(unless it expires by its terms on an earlier date). With respect to Performance
Units or Performance Shares, in the event of death, disability or retirement,
the Performance Units or Shares will continue after the date of the applicable
event for such period of time as determined by the Committee, subject to the
terms of any applicable agreement. Performance shares and phantom stock rights
will be exercisable for cash only in such events.
If an eligible employee who has purchased restricted stock under the Stock
Award Plan terminates employment with the Company for any reason, then all
shares of restricted stock that have not previously vested will be repurchased
by the Company at the cost paid by such employee. In addition, upon an eligible
employee's termination of employment with the Company and all of its
subsidiaries for any reason (including by reason of death or disability), the
Company has the right to purchase from such employee all shares of Holdings
Common Stock hereunder on the terms and conditions set forth in the applicable
Incentive Award.
Pursuant to the Stock Award Plan, upon the dissolution or liquidation of
the Company; certain types of reorganizations, mergers or consolidations; the
sale of all or substantially all of the assets of the Company; or a "change of
control," the Committee may determine (without shareholder approval) that all or
some Incentive Awards then outstanding under the Stock Award Plan will be fully
vested and exercisable or convertible, as applicable; determine that some or all
restrictions on restricted stock lapse immediately; or determine that there will
be a substitution of new Incentive Awards by such successor employer corporation
or a parent or subsidiary company thereof. In addition, in the event of a change
of control, the Committee may take certain actions, without shareholder
approval, including without limitation acceleration of the exercise dates of any
outstanding SARS or Options or immediate vesting; acceleration of the
restriction (lapse of forfeiture provision) period of any restricted stock
award; grants of SARs to holders of outstanding Options; payment of cash to
holders of Options in exchange for the cancellation of their outstanding
Options; payment for outstanding Performance Units or Shares; acceleration of
the conversion dates of
44
<PAGE> 50
outstanding phantom stock rights; grants of new Incentive Awards; or other
adjustments or amendments to outstanding Incentive Awards.
Pursuant to the Stock Award Plan, so long as the Holdings Common Stock has
not been publicly traded for at least 90 days, any Holdings Common Stock
obtained pursuant to an Incentive Award will be subject to the Company's right
of first purchase if the holder of such shares intends to transfer them. In
addition, upon an employee's death, the Company has the right to purchase all or
some of the Holdings Common Stock that such employee obtained pursuant to an
Incentive Award at its fair market value within nine months of the employee's
death.
401(k) PLAN
The Company maintains a 401(k) Savings Plan (the "401(k) Plan") under
Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code").
All salaried employees of the Company are eligible to participate in the 401(k)
Plan following such employee's attainment of age 21 and completion of 90 days of
employment with the Company. All hourly employees of the Company are eligible to
participate in the 401(k) Plan following such employee's attainment of age 21
and completion of one year of employment with the Company. Employees may elect
to make pre-tax contributions to the 401(k) Plan, subject to applicable
statutory maximum limits. The Company makes matching contributions (subject to
statutory limits) in an amount equal to a discretionary percentage of a
participant's contributions that does not exceed 4% of such participant's
compensation. In addition, the Company may make additional contributions in such
amounts as it may elect. Company contributions vest 20% in the third year, 40%
in the fourth year, 60% in the fifth year, 80% in the sixth year and 100% in the
seventh year of service. Contributions also will vest fully if the employee
reaches retirement age, becomes permanently disabled or dies (even if such
employee has not completed seven years of service). If employment is terminated
before such employee's contributions have fully vested, the nonvested portion of
such contributions will be forfeited.
EMPLOYMENT AGREEMENTS
Thomas W. Stephenson, the Company's Chairman of the Board, President and
Chief Executive Officer, James R. Featherstone, the Company's Vice President and
Chief Financial Officer and Robert E. Painter, the Company's Chief Operating
Officer (each an "Employee") have each entered into an employment agreement with
the Company.
Each of Messrs. Stephenson's, Featherstone's and Painter's employment
agreements with the Company will expire (unless renewed) on September 30, 1998.
Each of such employment agreements provides for a one year automatic renewal
(unless terminated for "due cause") and subsequent one year renewals by mutual
consent of the Employee and the Board of Directors. Each of the employment
agreements for Messrs. Stephenson, Featherstone and Painter provides for an
annual salary of not less than $275,000, $110,000 and $175,000, respectively,
each of which may be increased annually in the sole discretion of the Board of
Directors, and discretionary annual bonus awards based upon performance criteria
established from time to time by the Board of Directors. Each of Messrs.
Stephenson, Featherstone and Painter was also granted under the Stock Award Plan
options to purchase a number of shares equal to 6.0%, 1.5% and 3.0%,
respectively, of Holdings Common Stock (on a fully diluted basis) outstanding as
of November 1, 1996.
Pursuant to the terms of such employment agreements, if an Employee's
employment is terminated by the Company at the end of an employment term, such
Employee will be entitled to receive his full annual salary for a period of one
year from the date of termination. If the Employee's employment is terminated
for "due cause", the Employee will be entitled to receive his annual salary on a
pro rata basis to the date of termination. If the Company terminates the
Employee's employment other than for due cause or because of a disability, the
Company will be obligated to pay his full annual salary for a period of one year
from the date of termination. In the event of the Employee's death or
disability, the employment agreement will be terminated and the Employee's
estate or the Employee will be entitled to receive his annual salary through the
end of the month in which he died or became disabled and a cash payment equal
45
<PAGE> 51
to the pro rata portion (through the end of the month in which he died or became
disabled) of the annual bonus, if any, received by the Employee in respect of
the full calendar year next preceding his death or disability.
Pursuant to such employment agreements, if the Employee's employment is
terminated for due cause or by the Company's failure to renew the Employee's
employment agreement (after the first automatic renewal period), or if the
Employee voluntarily terminates his employment, for a period of one year
thereafter, the Employee will be prohibited from accepting employment or
rendering service to any person, firm or corporation that is engaged in a
business directly competitive with the business then engaged in by the Company
in the states of Texas, Oklahoma, Kansas, Missouri, Ohio, Idaho and any other
state in which the Company owns, leases or operates motion picture theaters at
the time of termination, and from directly or indirectly entering into or in any
manner taking part in or lending his name, counsel or assistance to any venture,
enterprise, business or endeavor, either as proprietor, principal, investor,
partner, director, officer, employee, consultant, advisor, agent, independent
contractor, or in any other capacity whatsoever, for any purpose that would be
competitive with the business of the Company in such states.
Pursuant to Mr. Painter's employment agreement, Mr. Painter is entitled to
reimbursement for certain costs associated with his relocation to Dallas, Texas.
INDEMNIFICATION AGREEMENT OF THOMAS W. STEPHENSON
Thomas W. Stephenson has entered into an indemnification agreement with the
Company and Holdings in connection with certain personal guarantees made by Mr.
Stephenson for obligations of the Company under certain agreements, including,
but not limited to theater leases and film rental agreements and other similar
agreements that Mr. Stephenson may be required to guarantee in the future (the
"Stephenson Guarantees"). Pursuant to such indemnification agreement, the
Company and Holdings have agreed to indemnify Mr. Stephenson against any and all
payments, liabilities, obligations, claims, losses, damages, commitments, costs,
deficiencies, expenses paid or incurred by Mr. Stephenson under any Stephenson
Guarantee and against any and all expenses (including attorneys' fees), costs,
liabilities and obligations paid or incurred in connection with or as a result
of such payments under the Stephenson Guarantees.
REGISTRATION RIGHTS AGREEMENTS
Holdings and certain of its stockholders, including Beacon, Stratford,
Richard M. Durwood, as trustee for the Richard M. Durwood Revocable Trust (the
"Durwood Trust") and the Hoak Entities, have entered into separate registration
rights agreements (the "Registration Rights Agreements"). Pursuant to the terms
of the Registration Rights Agreements, at any time after the earlier of either
the closing of an initial public offering of Holdings Common Stock or October
1999, such stockholders holding at least 10% of all of the outstanding Holdings
Common Stock (the "Demanding Stockholders") at such date, or the Durwood Trust
in certain limited circumstances, have the right to require Holdings (the
"Demand Registration Right") at Holdings' sole cost and expense, to register
under the Securities Act all or part of the Holdings Common Stock and Holdings
Preferred Stock and any shares issuable upon conversion of the Holdings
Preferred Stock, held by such Demanding Stockholders (the "Registrable
Securities"). Each Demanding Stockholder, other than the Durwood Trust, will
have three such Demand Registration Rights. The other stockholders holding
Registrable Securities are entitled to participate in such demand registrations,
subject to certain limitations. In connection with such registrations, Holdings
will agree to indemnify all holders of Registrable Securities against certain
liabilities, including liabilities under the Securities Act and applicable state
securities laws.
SHAREHOLDERS' AND VOTING AGREEMENT
Holdings entered into an Amended and Restated Shareholders' and Voting
Agreement (the "Shareholders' Agreement") with certain holders of Holdings
Common Stock (or securities convertible into, or exchangeable or exercisable for
Holdings Common Stock) which contains provisions with respect to the voting,
transfer and registration
46
<PAGE> 52
of the Holdings Common Stock (or securities convertible, exchangeable or
exercisable for Holdings Common Stock) held by the parties.
Pursuant to the Shareholders' Agreement, if at any time prior to a public
offering of the shares of Holdings Common Stock, Beacon holds (i) at least 50%
of the outstanding Holdings Common Stock or any shares of Holdings Series A
Preferred Stock, Beacon will have the right to designate three persons to serve
on the Board of Directors of Holdings, (ii) 25% or more of the outstanding
Holdings Common Stock but less than 50%, Beacon will have the right to designate
two directors to serve on the Board of Directors of Holdings and (iii) 5% or
more of the outstanding Holdings Common Stock but less than 25%, Beacon will
have the right to designate one person to serve on the Board of Directors of
Holdings. If at any time prior to a public offering of the shares of Holdings
Common Stock, Stratford holds 5% or more of the outstanding Holdings Common
Stock, Stratford will have the right to designate one person to serve on the
Board of Directors of Holdings. If at any time prior to a public offering of the
shares of Holdings Common Stock, the Hoak Entities hold 5% or more of the
outstanding Holdings Common Stock, the Hoak Entities will have the right to
designate one person to serve on the Board of Directors of Holdings. In
addition, the Chief Executive Officer of Holdings will serve as a member of the
Board of Directors of Holdings at any time prior to a public offering of the
Holdings Common Stock.
From and after a public offering of the Holdings Common Stock, so long as
Beacon holds 25% or more of the outstanding Holdings Common Stock, all of the
parties to the Shareholders' Agreement will be required to vote for at least two
persons who are designated by Beacon. If Beacon holds 5% or more (but less than
25%) of the outstanding Holdings Common Stock, all of the parties to the
Shareholders' Agreement will be required to vote for at least one person who is
designated by Beacon. Each stockholder that is a party to the Shareholders'
Agreement has granted Beacon an irrevocable proxy to vote such stockholder's
shares for the election of those directors that are designated by Beacon
pursuant to the Shareholders' Agreement. Pursuant to the Shareholders'
Agreement, the Board of Directors of Holdings will be composed of no more than
six directors. A director designated by Beacon, Stratford or the Hoak Entities
cannot be removed without the consent of Beacon, Stratford or the Hoak Entities
as applicable. Beacon, Stratford and the Hoak Entities may remove its designee
from the Board of Directors at any time with or without cause.
If, for any reason, a designee of Beacon or Stratford or the Hoak Entities
is not on the Board of Directors, and Beacon, Stratford and the Hoak Entities
each holds 5% or more of the outstanding Holdings Common Stock, each of Beacon,
Stratford and the Hoak Entities will be entitled to have one observer selected
by each of them present at all meetings of the Board of Directors of Holdings.
In addition, if a director of Holdings or an observer is a designee of Beacon,
Stratford or the Hoak Entities and such director or observer is not able to
attend the respective Board of Directors meeting, Beacon, Stratford and the Hoak
Entities have the right to designate a representative to attend and observe such
meeting on behalf of such director or observer.
The Shareholders' Agreement requires each party to give Holdings and each
other stockholder who is a party to the Shareholders' Agreement certain notices
with respect to any proposed sales or transfers of Holdings Common Stock (or
securities convertible, exchangeable or exercisable for Holdings Common Stock)
and to offer to Holdings and each of the stockholders who is a party to the
Shareholders' Agreement, the right to purchase such stock which the party
otherwise proposes to sell or transfer. In addition, if any stockholder desires
to sell a number of shares of Holdings Common Stock (or securities convertible,
exchangeable or exercisable for Holdings Common Stock) which in the aggregate
represent at least 5% of the outstanding Holdings Common Stock, then such
stockholder must give certain notices with respect to the proposed sale or sales
and each of the stockholders who is a party to the Shareholders' Agreement will
have the right to sell a proportionate amount of its Holdings Common Stock (or
securities convertible, exchangeable or exercisable for Holdings Common Stock).
If Beacon elects to transfer or exchange all of the shares of Holdings Common
Stock (or securities convertible, exchangeable or exercisable for Holdings
Common Stock) that it holds at a price of at least $200 per share, then, upon 30
days notice, each other stockholder (that is a party to the Shareholders'
Agreement) will be obligated to sell or transfer to such third party, all of his
or her shares of Holdings Common Stock (or securities convertible, exchangeable
or exercisable for Holdings Common Stock) in the same transaction.
47
<PAGE> 53
Pursuant to the Shareholders' Agreement, any stockholder that is a party to
the Shareholders' Agreement and that owns more than 5% of the Holdings Common
Stock at the time Holdings proposes to issue additional shares of Holdings
Common Stock or Holdings Preferred Stock (as defined), will have preemptive
rights with respect to such shares. In addition, at any time on or after October
31, 2001, and provided that an offering of Holdings Common Stock has not then
occurred, the Richard M. Durwood Revocable Trust may require Holdings to
repurchase not less than all of the shares of Holdings Common Stock held by each
at the fair market value at the time of repurchase.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company is
responsible for determining executive officer compensation. The members of the
Compensation Committee are John G. Farmer, Thomas G. Mendell and Thomas W.
Stephenson. Mr. Stephenson serves as both a member of the Compensation Committee
and the President and Chief Executive Officer of the Company.
48
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The Company is a wholly-owned subsidiary of Holdings. The following table
and the accompanying footnotes set forth, as of December 17, 1997, the
beneficial ownership of Holdings's capital stock by (i) each person who is known
to the Company to own beneficially more than 5% of outstanding (w) Holdings
Common Stock, (x) Holdings Series B Preferred Stock, (y) Holdings Series C
Preferred Stock or (z) Holdings Series D Preferred Stock, (ii) each director and
named executive officer of the Company and (z) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the persons
or entities set forth in the table below have sole investment and voting power
with respect to all shares shown as beneficially owned, subject to community
property laws, where applicable. The business address of each executive officer
is c/o Hollywood Theaters, Inc., 2911 Turtle Creek Blvd., Suite 1150, Dallas,
Texas, 75219.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
------------------------------------ ------------------------------------
PREFERRED STOCK PREFERRED STOCK
COMMON -------------------- COMMON -----------------
NAME AND ADDRESS STOCK SERIES B SERIES C SERIES D STOCK(1) SERIES B SERIES C SERIES D
- --------------------------------------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas W. Stephenson, Jr ............... 5,226(2) 111 -- -- 4.3% * -- --
John G. Farmer(3) ...................... -- -- -- -- -- -- -- --
c/o Stratford Capital Partners, L.P.
200 Crescent Court, Suite 1650
Dallas, Texas 75201
Thomas L. Harrison(4) .................. -- -- -- -- -- -- -- --
c/o Hoak Capital Corporation
One Galleria Tower
13355 Noel Road, Suite 1050
Dallas, Texas 75240
Thomas G. Mendell(5) ................... 868(6) 59 -- -- * * -- --
c/o The Beacon Group III-
Focus Value Fund, L.P.
399 Park Avenue, 17th Floor
New York, New York 10152
Eric R. Wilkinson(7) ................... -- -- -- -- -- -- -- --
c/o The Beacon Group III-
Focus Value Fund, L.P.
399 Park Avenue, 17th Floor
New York, New York 10152
Harold W. Pote(8) ...................... -- -- -- -- -- -- -- --
c/o The Beacon Group III-
Focus Value Fund, L.P.
399 Park Avenue, 17th Floor
New York, New York 10152
James R. Featherstone(9) ............... 730 -- -- -- * -- -- --
Robert E. Painter(10) .................. 1,460 -- -- -- 1.2% -- -- --
The Beacon Group III-
Focus Value Fund, L.P. ................. 280,800(11) 131,349(12) 35,897 41,026 85.6% 80.4% 45.5% 67.0%
399 Park Avenue, 17th Floor
New York, New York 10152
</TABLE>
49
<PAGE> 55
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hoak Communications Partners,
L.P.(13)(14)..................... 61,539(13) -- 35,897(14) 10,257(15) 36.8% -- 45.5% 16.7%
c/o Hoak Capital Corporation
One Galleria Tower
13355 Noel Road, Suite 1050
Dallas, Texas 75240
Stratford Capital Partners, L.P.... 36,357(16) 26,101 7,179 -- 23.7% 16.0% 9.1% --
200 Crescent Court, Suite 1650
Dallas, Texas 75201
Stratford Equity Partners, L.P..... 10,257(17) -- -- 10,257 7.9% -- -- 16.7%
200 Crescent Court, Suite 1650
Dallas, Texas 75201
Richard M. Durwood
Revocable Trust................... 16,413 -- -- -- 13.7% -- -- --
406 West 34th St., Suite 614
Kansas City, Missouri 64111
All of the directors and executive 8,284(18) 170 -- -- 6.6% * -- --
officers as a group..............
</TABLE>
- ----------
* Less than one percent (1%).
(1) The following reflects the total voting power represented by the capital
stock held by each of the indicated persons: Mr. Stephenson -- 0.5%; Mr.
Farmer -- 0%; Mr. Harrison--0%; Mr. Mendell -- 0.2%; Mr. Wilkinson -- 0%;
Mr. Pote -- 0%; Mr. Featherstone -- 0%; Mr. Painter -- 0%; Beacon -- 66.3%;
Hoak -- 14.5%; Stratford Capital Partners, L.P. -- 8.6%; Stratford Equity
Partners, L.P.--2.4%; Richard M. Durwood--3.9%; and all directors and
officers as a group -- 0.7%.
(2) Includes 111 shares of Holdings Common Stock that Mr. Stephenson has a
right to acquire at any time by converting the shares of Holdings Series B
Preferred Stock owned by Mr. Stephenson, and 2,921 shares of Holdings
Common Stock that Mr. Stephenson has a right to acquire at any time by
exercising outstanding employee stock options. Does not include the 11,682
shares of Holdings Common Stock that Mr. Stephenson has the right to
acquire pursuant to outstanding employee stock options which are not
presently exercisable.
(3) Does not include 3,077 shares of Holdings Common Stock, 26,101 shares of
Holdings Series B Preferred Stock and 7,179 shares of Holdings Series C
Preferred Stock, all of which are owned of record by Stratford Capital
Partners, L.P., an affiliate of Mr. Farmer, and the number of shares of
Holdings Common Stock issuable upon conversion of such shares of Holdings
Preferred Stock owned of record by Stratford Capital Partners, L.P., as to
which Mr. Farmer disclaims beneficial ownership. Also does not include
10,257 shares of Holdings Series D Preferred Stock owned or record by
Stratford Equity Partners, L.P., an affiliate of Mr. Farmer, and the number
of shares of Holdings Common Stock issuable upon conversion of such shares,
as to which Mr. Farmer disclaims beneficial ownership.
(4) Does not include 14,096 shares of Holdings Common Stock, 32,891 shares of
Holdings Series C Preferred Stock or 9,397 shares of Holdings Series D
Preferred Stock, all of which are owned of record by Hoak Communications
Partners, L.P. ("Hoak Communications"), an affiliate of Mr. Harrison, as to
which Mr. Harrison disclaims beneficial ownership.
(5) Does not include 72,528 shares of Holdings Common Stock, 131,349 shares of
Holdings Series B Preferred Stock, 35,897 shares of Holdings Series C
Preferred Stock and 41,026 shares of Holdings Series D Preferred Stock, all
of which are owned beneficially by Beacon, an affiliate of Mr. Mendell, as
to which Mr. Mendell disclaims beneficial ownership.
50
<PAGE> 56
(6) Includes 59 shares of Holdings Common Stock that Mr. Mendell has a right to
acquire at any time by converting the shares of Holdings Series B Preferred
Stock owned by Mr. Mendell.
(7) Does not include 72,528 shares of Holdings Common Stock, 131,349 shares of
Holdings Series B Preferred Stock, 35,897 shares of Holdings Series C
Preferred Stock and 41,026 shares of Holdings Series D Preferred Stock, all
of which are owned beneficially by Beacon, an affiliate of Mr. Wilkinson,
as to which Mr. Wilkinson disclaims beneficial ownership.
(8) Does not include 72,528 shares of Holdings Common Stock, 131,349 shares of
Holdings Series B Preferred Stock, 35,897 shares of Holdings Series C
Preferred Stock and 41,026 shares of Holdings Series D Preferred Stock, all
of which are owned beneficially by Beacon, an affiliate of Mr. Pote, as to
which Mr. Pote disclaims beneficial ownership.
(9) Consists of 730 shares of Holdings Common Stock that Mr. Featherstone has a
right to acquire at any time by exercising outstanding employee stock
options. Does not include the 2,921 shares of Holdings Common Stock that
Mr. Featherstone has the right to acquire pursuant to outstanding employee
stock options which are not presently exercisable.
(10) Consists of 1,460 shares of Holdings Common Stock that Mr. Painter has a
right to acquire at any time by exercising outstanding employee stock
options. Does not include the 5,842 shares of Holdings Common Stock that
Mr. Painter has the right to acquire pursuant to outstanding employee stock
options which are not presently exercisable.
(11) Does not include 809 shares of Holdings Common Stock owned of record by Mr.
Mendell, an affiliate of Beacon, as to which Beacon disclaims beneficial
ownership. Includes 208,272 shares of Holdings Common Stock that Beacon has
a right to acquire at any time by converting the shares of Holdings Series
B Preferred Stock, Holdings Series C Preferred Stock and Holdings Series D
Preferred Stock beneficially owned by Beacon.
(12) Does not include 59 shares of Holdings Series B Preferred Stock owned of
record by Mr. Mendell, an affiliate of Beacon, as to which Beacon disclaims
beneficial ownership.
(13) Includes 1,212 and 77 shares of Holdings Common Stock owned of record by
each of the Hoak Capital Fund, L.P. and the HCP 1997 Authorized Employee
Fund, L.P., respectively. Includes 32,891, 2,827 and 179 shares of Holdings
Series C Preferred Stock owned of record by each of Hoak Communications,
the Hoak Capital Fund and the Hoak Employee Fund, respectively, all of
which are immediately convertible into shares of Holdings Common Stock.
Also includes 9,397, 772 and 88 shares of Holdings Series D Preferred Stock
owned of record by each of Hoak Communications, the Hoak Capital Fund and
the Hoak Employee Fund, respectively, all of which are immediately
convertible into shares of Holdings Common Stock.
(14) Includes 2,827 shares of Holdings Series C Preferred Stock owned of record
by Hoak Capital Fund and 179 shares of Holdings Series C Preferred Stock
owned of record by Hoak Employee Fund, all of which are immediately
convertible into shares of Holdings Common Stock.
(15) Includes 772 shares of Holdings Series D Preferred Stock owned of record by
Hoak Capital Fund and 88 shares of Holdings Series D Preferred Stock owned
of record by Hoak Employee Fund, all of which is immediately convertible
into shares of Holdings Common Stock.
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<PAGE> 57
(16) Includes 33,280 shares of Holdings Common Stock that Stratford Capital
Partners, L.P. has a right to acquire at any time by converting the shares
of Holdings Series B Preferred Stock and shares of Holdings Series C
Preferred Stock owned by Stratford Capital Partners, L.P.
(17) Consists of 10,257 shares of Holdings Common Stock that Stratford Equity
Partners, L.P. has a right to acquire at any time by converting the shares
of Holdings Series D Preferred Stock owned by Stratford Equity Partners,
L.P.
(18) Includes 111 shares and 59 shares of Holdings Common Stock that Thomas W.
Stephenson, Jr. and Thomas G. Mendell, respectively, have a right to
acquire at any time by converting shares of Holdings Series B Preferred
Stock owned by them. Also includes 2,921, 730 and 1,460 shares of Holdings
Common Stock that Mr. Stephenson, James R. Featherstone and Robert E.
Painter, respectively, have a right to acquire at any time by exercising
outstanding employee stock options.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
COMPANY CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000 shares of
common stock, par value $.01 per share (the "Company Common Stock"). Currently
there are 9,250 shares of Company Common Stock outstanding, all of which are
owned of record and beneficially by Holdings.
HOLDINGS CAPITAL STOCK
At December 1, 1997, the authorized capital stock of Holdings consists of
1,500,000 shares of Holdings Common Stock, 400,000 shares of Holdings Series B
Preferred Stock, 400,000 shares of Holdings Series C Preferred Stock and 400,000
shares of Holdings Series D Preferred Stock. Of the authorized shares, (i)
119,877 shares of Holdings Common Stock are issued and outstanding, (ii) 163,319
shares of Holdings Series B Preferred Stock are issued and outstanding, (iii)
78,973 shares of Holdings Series C Preferred Stock are issued and outstanding
and (iv) 61,540 shares of Holdings Series D Preferred Stock are issued and
outstanding. Each outstanding share of Holdings Common Stock is entitled to one
vote. Each outstanding share of Holdings Series B, Holdings Series C Preferred
Stock and Holdings Series D Preferred Stock is also entitled to one vote based
on a conversion ratio, which is subject to adjustment from time to time.
CROWN CAPITAL STOCK
The authorized capital stock of Crown consists of 30,000 shares of common
stock, par value $1.00 per share ("Crown Common Stock"). Currently there are 500
shares of Crown Common Stock outstanding, all of which are owned of record and
beneficially by the Company.
HOLDINGS EQUITY ISSUANCES
Since its inception in July 1995, the Company has received capital
contributions from its parent, Holdings, totaling approximately $74.3 million.
To fund these capital contributions, Holdings has issued both its common stock
and several series of preferred stock in a number of transactions. The following
table sets forth the principal equity issuances by Holdings:
<TABLE>
<CAPTION>
DATE OF PROCEEDS PURCHASING
EQUITY ISSUANCES ISSUANCE TO HOLDINGS PRINCIPAL STOCKHOLDER(S)
---------------- -------- ----------- ------------------------
<S> <C> <C> <C>
50,000 shares of Holdings Series April 1996 $ 5,000,000 Stratford and Precept
A Preferred Stock(1) Investors, Inc. ("Precept")
128,240 shares of Holdings Series October 1996 $ 25,000,000 Beacon
B Preferred Stock and 57,143
shares of Holdings Common Stock
43,076 shares of Holdings Series April 1997 $ 12,000,000 Beacon and Stratford
C Preferred Stock and 18,462
shares of Holdings Common Stock
35,897 shares of Holdings Series May 1997 $ 10,000,000 Hoak Entities
C Preferred Stock and 15,385
shares of Holdings Common Stock
51,283 shares of Holdings Series November 1997 $ 10,000,000 Beacon and Stratford Equity
C Preferred Stock (2) Partners, L.P.
10,257 shares of Holding Shares December 1997 $ 2,000,000 Hoak Entities
D Preferred Stock
</TABLE>
- ----------
(1) Exchanged for Holdings Common Stock and Holdings Series B Preferred Stock
in October 1996.
(2) Exchanged for Holdings Series D preferred Stock in December 1997.
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<PAGE> 59
REDEMPTION OF HOLDINGS SERIES B PREFERRED STOCK, HOLDINGS SERIES C PREFERRED
STOCK AND HOLDINGS SERIES D PREFERRED STOCK
Holders of shares of Holdings Series B Preferred Stock, Holdings Series C
Preferred Stock and Holdings Series D Preferred Stock (the "Holdings Preferred
Stock") may, at their option, require Holdings to redeem any or all of such
shares under certain conditions. The Holdings Series B Preferred Stock may be
redeemed on or after October 31, 2003, if and only if an Initial Public Offering
(as defined below) has not occurred, for a redemption price of $175 per share,
plus accrued and unpaid dividends to the date of redemption. The Holdings Series
C Preferred Stock may be redeemed on or after November 1, 2003, if and only if
an Initial Public Offering has not occurred, for a redemption price of $195,
plus accrued and unpaid dividends to the date of redemption. The Holdings Series
D Preferred Stock may be redeemed on or after November 1, 2003, if and only if
an Initial Public Offering has not occurred, for a redemption price of $195 per
share, plus accrued and unpaid dividends to the date of redemption. Upon any
Initial Public Offering, each of the Holdings Series B Preferred Stock, the
Holdings Series C Preferred Stock and the Holdings Series D Preferred Stock
shall be automatically converted into a fixed number of shares of Holdings
Common Stock. As used herein, "Initial Public Offering" means an underwritten
offering by Holdings of Holdings Common Stock to the public pursuant to an
effective registration statement under the Securities Act resulting in at least
$25.0 million of net proceeds to Holdings (after deducting all underwriting
discounts and commissions and all other offering expenses) and a per share
offering price of at least $300 (subject to adjustment for stock splits,
combinations or reclassifications).
CERTAIN TRANSACTIONS
Holdings has entered into an agreement with The Beacon Group Capital
Services, L.L.C. ("Beacon Group Capital Services") pursuant to which Beacon
Group Capital Services has the right to perform certain investment banking
services for Holdings or any of its affiliates (including, without limitation,
in connection with the sale of Holdings of any of its subsidiaries), in each
case, upon customary terms. The retention of Beacon Group Capital Services is
subject to the approval of a majority of the members of the Board of Directors
of Holdings (excluding any directors who are designees of Beacon).
Precept Investors, Inc. ("Precept"), one of Holding's shareholders, has
been engaged by Holdings to construct various theaters. During 1996, Precept was
involved in the construction of one theater and the improvements to an existing
theater, and was paid approximately $4,600,000 for these services. During 1997,
Precept was involved in the construction of three theaters, and was paid
approximately $14,500,000. At December 1, 1997, approximately $2,900,000 was
owed to Precept.
DESCRIPTION OF SENIOR BANK FACILITY
The following description is a summary of the material terms and conditions
of the Senior Bank Facility. This summary does not purport to be complete and is
subject to the detailed provisions of the loan agreement and various related
documents entered into in connection with the Senior Bank Facility.
The Senior Bank Facility provides for a revolving credit facility of $50.0
million with a five year term, however, the total amount of available borrowings
under the Senior Bank Facility may be less based on leverage levels of the
Company. Borrowings under the Senior Bank Facility are also subject to various
conditions precedent. At September 30, 1997, the Company was not in compliance
with two of the thirteen financial covenants in the Senior Bank Facility. On
January 7, 1998, the Company entered into an amendment of the Senior Bank
Facility, amending among other things, certain financial covenants. Currently,
the Company is in compliance with all financial covenants in the Senior Bank
Facility. As of December 31, 1997, no amounts were borrowed under the Senior
Bank Facility. Based on the Company's current financial condition, the Company
believes it has the ability to borrow up to $30 million under the terms of the
Senior Bank Facility. Borrowings under the Senior Bank Facility bear interest,
at the option of the Company, at either (i) the Eurodollar Rate (as defined
therein) or (ii) the Base Rate (as defined therein), as the case may
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<PAGE> 60
be, plus the Applicable Margin (as defined therein). The Company is required to
pay certain fees in connection with the Senior Bank Facility, including a
commitment fee of up to 0.50% per annum on the undrawn portion of the revolving
credit facility commitment.
The Senior Bank Facility, as amended, includes several financial covenants.
The Company's trailing twelve month minimum operating cash flow (as defined in
the Senior Bank Facility) must be at least:
(i) $13 million until March 31, 1998,
(ii) $16 million from April 1, 1998 to June 30, 1998,
(iii) $20 million from July 1, 1998 to September 30, 1998,
(iv) not measured from September 30, 1998 and thereafter.
The Company's total leverage ratio (total debt less cash balances to operating
cash flow) shall not exceed:
(i) not measured until September 30, 1998,
(ii) 5.75x from September 30, 1998 to December 31, 1998,
(iii) 5.50x from January 1, 1999 to March 31, 1999,
(iv) 5.25x from April 1, 1999 to June 30, 1999,
(v) 5.00x from July 1, 1999 to December 31, 1999,
(vi) 4.75x from January 1, 2000 to December 31, 2000,
(vii) 4.50x from January 1, 2001 to December 31, 2001 and
(viii) 4.25x from January 1, 2002 and thereafter.
In addition, the Company's "senior leverage ratio" (senior debt to operating
cash flow) shall not exceed 2.0x.
The Company's "interest coverage ratio" (operating cash flow to cash interest
expense) shall not be less than:
(i) 1.10x until March 31,1998,
(ii) 1.25x from April 1, 1998 to September 30, 1998,
(iii) 1.50x from October 1, 1998 to December 31, 1998,
(iv) 1.75x from January 1, 1999 to March 31, 1999,
(v) 2.00x from April 1, 1999 to June 30, 1999,
(vi) 2.25x from July 1, 1999 to December 31, 1999,
(vii) 2.50x from January 1, 2000 to December 31, 2000, and
(viii)2.75x from January 1, 2001 and thereafter.
The Senior Bank Facility limits the "fixed charge coverage ratio" (operating
cash flow to fixed charges) to not less than 1.00x until March 30, 1998 and
1.10x from March 31, 1998 and thereafter. The Senior Bank Facility also provides
that screens under construction or under operation for less than six months must
represent no more than 30% of total screens through June 30, 1998 and no more
than 20% thereafter. Mergers and acquisitions are permitted provided that (i)
the merged or acquired properties are in the theatrical business, (ii) the
Company is the surviving entity in the case of a merger, (iii) no event of
default exists and (iv) acquisitions cannot exceed $40.0 million for any
consecutive 12 months.
As of December 31, 1997, the Company's trailing twelve month minimum
operating cash flow, interest coverage ratio and fixed charge coverage ratio
were $16.5 million, 1.41x and 1.16x, respectively. The senior leverage ratio
covenant is inapplicable in light of the fact that the Company had no Senior
Debt at December 31, 1997.
The Senior Bank Facility contains customary representations and warranties
and requires compliance by the Company and Holdings with certain other
covenants, including, among other things, covenants limiting (i) incurrence of
indebtedness, (ii) imposition of liens on assets of the Company, (iii) capital
expenditures, (iv) consolidations and mergers, (v) loans and investments,
including acquisitions of assets, (vi) payment of dividends and other
distributions, (vii) construction of new screens, (viii) land acquisition
contracts, (ix) transactions with affiliates and (x) use of proceeds to invest
in margin stock or other Ineligible Securities (as defined therein).
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<PAGE> 61
Events of default under the Senior Bank Facility include, among other
things, (i) non-payment of the principal amount of any loan, or amounts due
under any Specified Swap Contract (as defined therein) or any interest, fee or
any other amount payable under a Loan Document (as defined therein), (ii)
material inaccuracy of any representation or warranty given by the Company,
Holdings or any subsidiary in the Senior Bank Facility or any Loan Document,
(iii) breach by the Company, Holdings or any subsidiary of certain terms,
covenants or agreements in the Senior Bank Facility or any Loan Document, (iv)
acceleration of certain indebtedness prior to its stated maturity or the
occurrence of an event of default or early termination of certain contracts, (v)
insolvency of the Company, Holdings or any subsidiary, (v) certain liabilities
that exist or that arise with respect to a pension plan or a multi-employer
plan, (vi) certain monetary judgements involving in the aggregate a liability of
$2.0 million or more entered against the Company, Holdings or any subsidiary,
(vii) a "change of control," with respect to Holdings' ownership in the Company
and Beacon's and Mr. Stephenson's ownership in Holdings, (viii) Mr. Stephenson
ceasing to be the chief executive officer of the Company, and (ix) provisions of
any Collateral Document (as defined therein) ceasing to be valid and binding or
cease to create a valid security interest in the collateral covered thereby.
Bank of America NT&SA, the agent under the Senior Bank Facility, is an
affiliate of BancAmerica Securities, Inc., who was a Purchaser in the Old Notes
Offering.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on August 7, 1997 to the
Purchasers pursuant to the Purchase Agreement. The Purchasers subsequently
resold the Old Notes in the United States to qualified institutional buyers in
reliance on Rule 144A under the Securities Act and outside the United States to
non-U.S. persons in reliance on Regulation S under the Securities Act. As a
condition to the completion of the Old Notes Offering, the Company entered into
the Registration Rights Agreement with the Purchasers pursuant to which the
Company agreed to use its reasonable best efforts to cause to be filed with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to an offer to exchange the Old Notes for
Exchange Notes. The Exchange Notes will be substantially identical to the Old
Notes, except that the Exchange Notes will have been registered under the
Securities Act and, therefore will not contain terms with respect to transfer
restrictions (other than those that might be imposed by state securities laws),
will not contain terms with respect to the special interest payments described
herein and will not be entitled to registration rights or other rights under the
Registration Rights Agreement. In the event that (i) on or before the Expiration
Date, existing Commission interpretations are changed such that the Exchange
Notes are not or would not be, upon receipt, freely transferable (except for the
requirement that Participating Broker-Dealers deliver a prospectus), (ii) the
Exchange Offer is not consummated within 210 days of the closing of the Old
Notes Offering, or (iii) the Exchange Offer is not available to any holders of
the Old Notes (other than certain restricted holders), the Company will use its
reasonable best efforts to cause to be filed with the Commission, no later than
60 days after the completion of the Old Notes Offering, the Shelf Registration
Statement. The Company will use its best efforts to cause the Shelf Registration
Statement to be declared effective within 180 days after the closing of the Old
Notes Offering and shall maintain the effectiveness of the Shelf Registration
Statement, under certain circumstances, for a maximum of two years following the
effectiveness of the Shelf Registration Statement.
Under Exxon Capital Holdings Corp., SEC No-Action Letter, available April
13, 1989, and similar interpretations of the staff of the Commission, the
Exchange Notes would, in general, be freely transferable after the Exchange
Offer without further registration under the Securities Act. However, any
purchaser of Old Notes who is an "affiliate" of the Company or intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on the interpretations of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Old Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements.
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<PAGE> 62
Each holder who wishes to exchange such Old Notes for Exchange Notes in the
Exchange Offer will be required to make certain representations, including
representations that (i) it is not an affiliate of the Company, (ii) it is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, a distribution of the Exchange
Notes and (iii) it is acquiring the Exchange Notes in its ordinary course of
business. In addition, broker-dealers receiving Exchange Notes in the Exchange
Offer will have a prospectus delivery requirement with respect to resales of
Exchange Notes. The Commission has taken the position that such broker-dealers
may fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of Old
Notes) with this Prospectus. Under the Registration Rights Agreement, the
Company is required to allow such broker-dealers to use this Prospectus in
connection with the resale of such Exchange Notes for a period of 180 days after
the Expiration Date.
The Registration Rights Agreement provides that (i) the Company will use
its reasonable best efforts to file with the Commission an Exchange Offer
Registration Statement within 60 days after the completion of the Old Notes
Offering, (ii) the Company will use its reasonable best efforts to cause such
Exchange Offer Registration Statement to be declared effective under the
Securities Act by the Commission no later than 180 days after the completion of
the Old Notes Offering, (iii) the Company shall use its reasonable best efforts
to commence and complete the Exchange Offer promptly after the Exchange Offer
Registration Statement has become effective and to hold open the Exchange Offer
for at least 30 days, and (iv) the Company, if it is obligated to cause the
Shelf Registration Statement to be filed with the Commission, will use its
reasonable best efforts to file the Shelf Registration Statement with the
Commission no later than 60 days after the completion of the Old Notes Offering,
and use its reasonable best efforts to cause the Shelf Registration Statement to
be declared effective by the Commission within 180 days of the closing of the
Old Notes Offering. The Company also agreed to use its reasonable best efforts
to keep such Shelf Registration Statement continuously effective for two years
after the effective date of the Shelf Registration Statement or such shorter
period that will terminate when all the securities covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement.
In the event that (i) the Company has not filed the Exchange Offer
Registration Statement (or, if applicable, the Shelf Registration Statement)
within 60 days following the closing of the Old Notes Offering, (ii) such
Exchange Offer Registration Statement or Shelf Registration Statement has not
been declared effective by the Commission within 180 days following the Old
Notes Offering, (iii) the Exchange Offer, has not been consummated within 30
business days after the effective date of the Exchange Offer Registration
Statement, or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but shall thereafter either be
withdrawn or shall become subject to an effective stop order (except in certain
cases) without being succeeded immediately by an additional registration
statement filed and declared effective (each such event referred to in clauses
(i) through (iv) above, a "Registration Default" and each period during which a
Registration Default has occurred and is continuing, a "Registration Default
Period"), then the per annum interest rate on the Old Notes will increase, for
the period from the occurrence of the Registration Default until such time as no
Registration Default is in effect (at which time the interest rate will be
reduced to its initial rate) by 0.5% during the first 90-day period following
the occurrence of such Registration Default, and by an additional 0.5%
thereafter (up to a maximum of 1.0%).
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Exchange Offer Registration Statement of
which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
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<PAGE> 63
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York time, on the
Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the Exchange Notes have been registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof and (ii) the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement, including the provisions
providing for an increase in the interest rate on the Old Notes in certain
circumstances, all of which rights generally will terminate when the Exchange
Offer is terminated. See -- "Purpose and Effect of Exchange Offer." The Exchange
Notes will evidence the same debt as the Old Notes and will be entitled to the
benefits of the Indenture.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered. As of the date of this Prospectus, $110,000,000 aggregate
principal amount of Old Notes were outstanding.
Holders of Old Notes do not have any appraisal or dissenters rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York time, on
_________,1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange offer is extended, which in no event shall be later
than 40 days after the commencement of the Exchange Offer.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York time, on the
next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, to (i) delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) to terminate
the Exchange Offer if any of the conditions set forth below under " --
Conditions" shall not have been satisfied, or (iv) to amend the terms of the
Exchange Offer in any manner by giving oral or written
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<PAGE> 64
notice of such delay, extension, termination or amendment to the Exchange Agent.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from the most recent date to which
interest has been paid or duly provided for on the Old Note surrendered in
exchange for such Exchange Note or, if no interest has been paid or duly
provided for on such Old Note, from August 7, 1997. Interest on the Exchange
Notes is payable semi-annually on each February 1 and August 1 of each year,
commencing on February 1, 1998.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last date to which interest has been paid or duly provided for on the Old Notes
prior to the original issue date of the Exchange Notes or, if no such interest
has been paid or duly provided for will not receive any accrued interest on such
Old Notes, and will be deemed to have waived the right to receive any interest
on such Old Notes accrued from and after the last date to which interest has
been paid or duly provided for on the Old Notes or, if no such interest has been
paid or duly provided for, from and after August 7, 1997.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties
(for example, the letters of the commission to (i) Exxon Capital Holdings
Corporation, available May 13, 1988, (ii) Morgan Stanley & Co., Inc. available
June 5, 1991 and (iii) Shearson & Sterling, available July 2, 1993), the Company
believes that a holder or other person (other than a person that is an affiliate
of the Company within the meaning of Rule 405 under the Securities Act) who
receives Exchange Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available.
Each Participating Broker-Dealer that receives Exchange Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Based on the position taken by the staff of the Division of
Corporation Finance of the Commission in the interpretive letters referred to
above, the Company believes that Participating Broker-Dealers who acquired Old
Notes for their own accounts as a result of market-making activities or other
trading activities may fulfill their prospectus delivery requirements with
respect to the Exchange Notes received upon exchange of such Old Notes (other
than Old Notes which represent an unsold allotment from the original sale of the
Old Notes) with a prospectus meeting the requirements of the Securities Act,
which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such Exchange Notes. Subject to certain provisions set forth in the Registration
Rights Agreement, the Company has agreed that this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of such Exchange Notes for a period
ending 180 days after the Expiration Date. However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of Exchange Notes received in exchange for Old Notes pursuant to the Exchange
Offer
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must notify the Company, or cause the Company to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth in the
Letter of Transmittal. See "Plan of Distribution." Any Participating
Broker-Dealer who is an "affiliate" of the Company may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
PROCEDURES FOR TENDERING
For a holder of Old Notes to tender Old Notes validly pursuant to the
Exchange Offer, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantee, or (in the case of a
book-entry transfer), an Agent's Message in lieu of the Letter of Transmittal,
and any other required documents, must be received by the Exchange Agent at the
address set forth in the Letter of Transmittal prior to 5:00 p.m., New York
time, on the Expiration Date. In addition, prior to 5:00 p.m., New York time, on
the Expiration Date, either (a) certificates for tendered Old Notes must be
received by the Exchange Agent at such address or (b) such Old Notes must be
transferred pursuant to the procedures for book-entry transfer described below
(and a confirmation of such tender received by the Exchange Agent, including an
Agent's Message if the tendering holder has not delivered a Letter of
Transmittal).
The term "Agent's Message" means a message transmitted by the Depository,
received by the Exchange Agent and forming part of the confirmation of a
book-entry transfer, which states that the Depository has received an express
acknowledgment from the participant in the Depository tendering Old Notes which
are the subject of such book-entry confirmation that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant. In the
case of an Agent's Message relating to guaranteed delivery, the term means a
message transmitted by the Depository and received by the Exchange Agent, which
states that the Depository has received an express acknowledgment from the
participant in the Depository tendering Old Notes that such participant has
received and agrees to be bound by the Notice of Guaranteed Delivery.
By tendering Old Notes pursuant to the procedures set forth above, each
holder will make to the Company the representations set forth above in the third
paragraph under the heading " -- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instruction
to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
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<PAGE> 66
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
("DTC" or the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee, or, in the case of a
book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth in the Letter of
Transmittal on or prior to the Expiration Date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Old Notes to the Exchange Agent in accordance with
DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to the
Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends, to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificates representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth in the Letter of Transmittal prior to
5:00 p.m., New York time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number(s) and principal amount of such Old Notes, or,
in the case of Old Notes transferred by book-entry transfer, the name and number
of the account at the Book-Entry Transfer Facility to be credited), (iii) be
signed by the holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such Old
Notes into the name of the person withdrawing the tender and (iv) specify the
name in which any such Old Notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
" -- Procedures for Tendering" at any time prior to the Expiration Date.
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<PAGE> 68
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept any Old Notes for exchange, and may terminate the Exchange
Offer as provided herein before the acceptance of such Old Notes, if:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the sole judgment of the Company, would prohibit, restrict or otherwise
render illegal consummation of the Exchange Offer, or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than
broker-dealers and any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act provided that such Exchange Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of either of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its sole discretion, although the
Company has no current intention of doing so. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
EXCHANGE AGENT
United States Trust Company of Texas, N.A. has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
By Registered or
By Overnight Courier: By Hand: Certified Mail:
<S> <C> <C>
U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A. U.S. Trust Company of Texas, N.A.
770 Broadway 111 Broadway P.O. Box 841
13th Floor- Corporate Trust Operations Lower Level Cooper Station
New York, New York 10003-9598 New York, New York 10006-1906 New York, New York 10276-0841
Attn: Corporate Trust Services Attn: Corporate Trust Services Attn: Corporate Trust Services
By Facsimile:
(212) 420-6504
</TABLE>
The Exchange Agent also serves as Trustee under the Indenture.
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FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept. Holders of Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A, to
a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, (iii) pursuant to another
exemption from the registration requirements of the Securities Act, (iv) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (v) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
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<PAGE> 70
DESCRIPTION OF EXCHANGE NOTES
The Old Notes were issued and the Exchange Notes are to be issued under an
Indenture (the "Indenture") between the Company, U.S. Trust Company of Texas,
N.A., as trustee (the "Trustee"), and Holdings and Crown as guarantors. The
statements under this caption relating to the Notes and the Indenture are
summaries and do not purport to be complete, and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein. However, the
Company believes that all of the material terms of the Notes and the Indenture
are described herein. The Indenture is by its terms subject to and governed by
the Trust Indenture Act of 1939, as amended. Unless otherwise indicated,
references under this caption to sections, "ss." or articles are references to
the Indenture. Where reference is made to particular provisions of the Indenture
or to defined terms not otherwise defined herein, such provisions or defined
terms are incorporated herein by reference. Copies of the Indenture will be
available at the corporate trust office of the Trustee. The Old Notes and the
Exchange Notes are collectively referred to herein as the "Notes."
GENERAL
The Old Notes are, and the Exchange Notes will be, unsecured obligations of
the Company, limited to $110.0 million aggregate principal amount and will
mature on August 1, 2007.
The Old Notes are, and the Exchange Notes will be unconditionally
guaranteed by the existing Restricted Subsidiaries of the Company, and the
Company will covenant to cause any future Restricted Subsidiaries to
unconditionally guarantee the Exchange Notes, in each case, jointly and
severally on a subordinated basis (such guarantees, the "Guarantees" and such
guarantors, the "Guarantors"), provided that each such Restricted Subsidiary
will cease to be a Guarantor when it ceases to be a Restricted Subsidiary. The
ranking and effectiveness of the Guarantees are subject to certain legal
considerations and are therefore uncertain.
Exchange Notes will bear interest at the rate of 10 5/8% per annum and will
be payable semi-annually on February 1 and August 1 of each year, commencing
February 1, 1998, to the Person in whose name the Note (or any predecessor Note)
is registered at the close of business on the preceding January 15 or July 15,
as the case may be. Settlement for the Exchange Notes will be made in
immediately available funds and payments by the Company in respect of the
Exchange Notes (including principal, premium, if any, and interest) will be made
in immediately available funds. Interest on the Exchange Notes will be computed
on the basis of a 360-day year comprised of twelve 30-day months. (ss.ss. 301,
306 and 309)
Principal of and premium, if any, and interest on the Exchange Notes will
be payable, and the Notes may be presented for registration of transfer and
exchange, at the office or agency of the Company maintained for that purpose in
the Borough of Manhattan, The City of New York, provided that at the option of
the Company, payment of interest on the Notes may be made by check mailed to the
address of the Person entitled thereto as it appears in the Note Register. Until
otherwise designated by the Company, such office or agency will be the corporate
trust office of the Trustee, as Paying Agent and Registrar. (ss.ss. 301, 304 and
1002)
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 and integral multiples thereof.
Notes will not be issued in bearer form. Notes sold in the Exchange Offer will
be issued only against payment in immediately available funds.
GLOBAL NOTE. The Exchange Notes initially will be represented by one or
more Exchange Notes in registered, global form without interest coupons
(collectively, the "Global Note") and will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York. The Global Note will be held by DTC on behalf of its account holders (each
a "DTC Participant").
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EXCHANGES OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES. A beneficial interest
in a Global Note may not be exchanged for an Exchange Note in certificated form
unless (i) DTC (x) notifies the Company that it is unwilling or unable to
continue as Depositary for the Global Note or (y) has ceased to be a clearing
agency registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in either case the Company thereupon fails to appoint a
successor Depositary, (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of the Notes in certificated form
or (iii) there shall have occurred and be continuing an Event of Default with
respect to the Notes. In all cases, certificated Notes delivered in exchange for
any Global Note or beneficial interests therein will be registered in the names,
and issued in any approved denominations, requested by or on behalf of the
Depositary (in accordance with its customary procedures). Any such exchange will
be effected through the DWAC System and an appropriate adjustment will be made
in the records of the Security Registrar to reflect a decrease in the principal
amount of the relevant Global Note.
CERTAIN BOOK-ENTRY PROCEDURES. The descriptions of the operations and
procedures of DTC, Euroclear and CEDEL that follow are provided solely as a
matter of convenience. These operations and procedures are solely within the
control of the respective settlement systems and are subject to changes by them
from time to time. The Company takes no responsibility for these operations and
procedures and urges investors to contact the system or their participants
directly to discuss these matters.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised the Company that its current practice, upon the issuance of
the Global Note, is to credit, on its internal system, the respective principal
amount of the individual beneficial interests represented by such Global Note to
the accounts with DTC of the participants through which such interests are to be
held. Ownership of beneficial interests in the Global Note will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by DTC or its nominees (with respect to interests of participants).
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL NOTE,
DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND
HOLDER OF THE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE
INDENTURE AND THE NOTES. Except in the limited circumstances described above
under "-- Exchanges of Book-Entry Notes for Certificated Notes," owners of
beneficial interests in a Global Note will not be entitled to have any portions
of such Global Note registered in their names, will not receive or be entitled
to receive physical delivery of Notes in definitive form and will not be
considered the owners or Holders of the Global Note (or any Note represented
thereby) under the Indenture or the Notes.
Investors may hold their interests in the Global Note directly through DTC,
if they are participants in such system, or indirectly through organizations
(including Euroclear and CEDEL) which are participants in such system. All
interest in a Global Note, including those held through Euroclear or CEDEL, will
be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or CEDEL will also be subject to the procedures and
requirements of such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited to
that extent. Because DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants
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<PAGE> 72
and certain banks, the ability of a person having beneficial interests in a
Global Note to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing such
interests.
Payments of the principal of, premium, if any, and interest on Global Note
will be made to DTC or its nominee as the registered owner thereof. Neither the
Company, the Trustee nor any of their respective agents will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note representing any Notes held by
it or its nominee, will immediately credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Note for such Notes as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in "street name." Such payment will be the responsibility of such participants.
Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Note will trade in DTC's Settlement System and secondary
market trading activity in such interests will therefore settle in immediately
available funds, subject in all cases to the rules and procedures of DTC and its
participants. Transfers between participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in same-day funds.
Transfers between participants in Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer and exchange provisions applicable
to the Notes described elsewhere herein, cross-market transfers between DTC
participants, on the one hand, and Euroclear or CEDEL participants, on the other
hand, will be effected by DTC in accordance with DTC's rules on behalf of
Euroclear or CEDEL, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or CEDEL, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and CEDEL participants may
not deliver instructions directly to the depositories for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Note from a DTC participant
will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL participant, during the securities settlement processing day
(which must be a business day for Euroclear and CEDEL) immediately following the
DTC settlement date. Cash received in Euroclear or CEDEL as a result of sales of
interests in a Global Note by or through a Euroclear or CEDEL participant to a
DTC participant will be received with value on the DTC settlement date but will
be available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following the DTC settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below and the conversion of Notes) only at the direction of one or
more participants to whose account with DTC interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default (as defined below) under the
Notes, the Global Note will be exchanged for Notes in certificated form, and
distributed to DTC's participants.
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Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
in order to facilitate transfers of beneficial ownership interests in the Global
Note among participants of DTC, Euroclear and CEDEL, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee nor
any of their respective agents will have any responsibility for the performance
by DTC, Euroclear and CEDEL, their participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Note.
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of the Company, in
whole or in part, at any time on or after August 1, 2002 and prior to maturity,
upon not less than 30 nor more than 60 days' notice mailed to each Holder of
Notes to be redeemed at such Holder's address appearing in the Note Register, in
amounts of $1,000 or an integral multiple of $1,000, at the following Redemption
Prices (expressed as percentages of the principal amount) plus accrued interest
to but excluding the Redemption Date (subject to the right of Holders of record
on the relevant Regular Record Date to receive interest due on an Interest
Payment Date that is on or prior to the Redemption Date), if redeemed during the
12-month period beginning August 1 of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- -----------
<S> <C>
2002............................................................................. 105.312%
2003............................................................................. 103.542%
2004............................................................................. 101.771%
2005 and thereafter.............................................................. 100.000%
</TABLE>
(Sections 203, 1101, 1105 and 1107)
In addition, if on or before August 1, 2000 the Company receives net
proceeds from the sale of its Common Stock or the Common Stock of Holdings in
one or more Public Equity Offerings, the Company may, at its option, use an
amount equal to all or a portion of any such net proceeds to redeem Notes in an
aggregate principal amount of up to 30% of the original aggregate principal
amount of the Notes, provided, however, that Notes having a principal amount
equal to at least 70% of the original aggregate principal amount of the Notes
remain outstanding after such redemption. Such redemption must occur on a
Redemption Date within 90 days of such sale and upon not less than 30 nor more
than 60 days' notice mailed to each Holder of Notes to be redeemed at such
Holder's address appearing in the Note Register, in amounts of $1,000 or an
integral multiple of $1,000, at a redemption price equal to 110.625% of the
principal amount of the Notes plus accrued interest to but excluding the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date).
If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of $1,000. (ss.
1104)
The Notes will not have the benefit of any sinking fund.
SUBORDINATION
The indebtedness evidenced by the Notes will, to the extent set forth in
the Indenture, be subordinate in right of payment to the prior payment in full
of all Senior Debt. Upon any payment or distribution of assets to creditors upon
any liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors or marshaling of assets of the Company, whether voluntary
or involuntary, or any bankruptcy, insolvency, receivership or similar
proceedings of the Company, the holders of all Senior Debt will first be
entitled to receive payment in full of such Senior Debt, or provision made for
such payment, before the Holders of the Notes will be entitled to receive any
payment in respect of the principal of or premium, if any, or interest on, or
any obligation to repurchase, the Notes. In the event that
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notwithstanding the foregoing, the Trustee or the Holder of any Note receives
any payment or distribution of assets of the Company of any kind or character
(including any such payment or distribution which may be payable or deliverable
by the reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Notes), before all the Senior Debt is so paid
in full, then such payment or distribution will be required to be paid over or
delivered forthwith to the trustee in bankruptcy or other person making payment
or distribution of assets of the Company for application to the payment of all
Senior Debt remaining unpaid, to the extent necessary to pay the Senior Debt in
full.
No payments on account of principal of, premium, if any, or interest on, or
in respect of the purchase or other acquisition of, the Notes, and no defeasance
of the Notes, may be made if there shall have occurred and be continuing a
Senior Payment Default. "Senior Payment Default" means any default in the
payment of any principal of or premium, if any, or interest on Designated Senior
Debt when due, whether at the stated maturity of any such payment or by
declaration of acceleration, call for redemption or otherwise.
Upon the occurrence of a Senior Nonmonetary Default and receipt of written
notice by the Company and the Trustee of the occurrence of such Senior
Nonmonetary Default from any holder of Designated Senior Debt (or any trustee,
agent or other representative for such holder) which is the subject of such
Senior Nonmonetary Default, no payments on account of principal of, premium, if
any, or interest on, or in respect of the purchase or other acquisition of, the
Notes, and no defeasance of the Notes, may be made for a period (the "Payment
Blockage Period") commencing on the date of the receipt of such notice and
ending the earlier of (i) the date on which such Senior Nonmonetary Default
shall have been cured or waived or ceased to exist or all Designated Senior Debt
the subject of such Senior Nonmonetary Default shall have been discharged and
(ii) the 179th day after the date of the receipt of such notice. In any event,
no more than one Payment Blockage Period may be commenced during any 360-day
period and there shall be a period of at least 181 days during each 360-day
period when no Payment Blockage Period is in effect. In addition, no Senior
Nonmonetary Default that existed or was continuing on the date of the
commencement of a Payment Blockage Period may be made the basis of the
commencement of a subsequent Payment Blockage Period whether or not within a
period of 360 consecutive days, unless such Senior Nonmonetary Default shall
have been cured for a period of not less than 90 consecutive days. "Senior
Nonmonetary Default" means the occurrence or existence and continuance of an
event of default with respect to Senior Debt, other than a Senior Payment
Default, permitting the holders of the Designated Senior Debt (or a trustee or
other agent on behalf of the holders thereof) then to declare such Designated
Senior Debt due and payable prior to the date on which it would otherwise become
due and payable.
The failure to make any payment on the Notes by reason of the provisions of
the Indenture described under this caption "Subordination" will not be construed
as preventing the occurrence of an Event of Default with respect to the Notes
arising from any such failure to make payment. Upon termination of any period of
payment blockage the Company shall resume making any and all required payments
in respect of the Notes, including any missed payments.
"Senior Debt" means (i) the principal of (and premium, if any) and interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding) on, and
penalties and any obligation of the Company for reimbursement, indemnities and
fees relating to, the Senior Bank Facility and (ii) the principal of (and
premium, if any) and interest on Debt of the Company for money borrowed, whether
Incurred on or prior to the date of original issuance of the Notes or
thereafter, and any amendments, renewals, extensions, modifications,
refinancings and refundings of any such Debt and (iii) Permitted Interest Rate
Agreements and Permitted Currency Agreements entered into with respect to Debt
described in clauses (i) and (ii) above; provided, however, that the following
shall not constitute Senior Debt: (1) any Debt as to which the terms of the
instrument creating or evidencing the same provide that such Debt is not
superior in right of payment to the Notes, (2) any Debt which is subordinated in
right of payment in any respect to any other Debt of the Company, (3) Debt
evidenced by the Exchange Notes, (4) Debt evidenced by the Old Notes, (5) any
Debt owed to a Person when such Person is a Subsidiary of the Company, (6) any
obligation of the Company arising from Redeemable Stock of the Company, (7) that
portion of any Debt which is Incurred in violation of the Indenture
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and (8) Debt which, when Incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is without recourse to the
Company.
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Debt or of the Notes may recover less,
ratably, than holders of Senior Debt and more, ratably, than Holders of the
Notes.
The subordination provisions described above will not be applicable to
payments in respect of the Notes from a defeasance trust established in
connection with any defeasance or covenant defeasance of the Notes as described
under "-- Defeasance." (Article 13)
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, Incur any Debt unless immediately after giving pro forma effect to
the incurrence of such Debt and the receipt and application of the proceeds
thereof, the Consolidated Cash Flow Coverage Ratio of the Company would be
greater than 2.0 to 1; provided that if the Debt which is the subject of the
determination under this provision is Acquired Debt, the Consolidated Cash Flow
Coverage Ratio of the Company shall be determined by giving effect (on a pro
forma basis, as if the transaction had occurred at the beginning of the
immediately preceding four-quarter period) to both the incurrence or assumption
of such Acquired Debt by the Company and the inclusion in the Consolidated Cash
Flow Available for Fixed Charges of the Person whose Debt would constitute
Acquired Debt.
Notwithstanding the foregoing limitation, the Company may, and may permit
any Restricted Subsidiary to, incur the following Debt:
(i) Debt under the Senior Bank Facility in an aggregate principal
amount at any one time not to exceed $75.0 million, less any amounts by
which any revolving credit facility commitments under the Senior Bank
Facility are permanently reduced pursuant to the "Limitation on Asset
Dispositions" covenant below (so long as and to the extent that any
required payments in connection therewith are actually made);
(ii) the original issuance by the Company of the Debt evidenced by the
Notes (including any Exchange Notes);
(iii) Debt (other than Debt described in another clause of this
paragraph) outstanding on the date of original issuance of the Notes after
giving effect to the application of the proceeds of the Notes, as described
in a schedule to the Indenture;
(iv) Debt owed by the Company to any Wholly Owned Restricted
Subsidiary of the Company or Debt owed by a Subsidiary of the Company to
the Company or a Wholly Owned Restricted Subsidiary of the Company;
provided, however, that (a) any such Debt owing by the Company to a Wholly
Owned Restricted Subsidiary shall be Subordinated Debt evidenced by an
intercompany promissory note and (b) upon either (1) the transfer or other
disposition by such Wholly Owned Restricted Subsidiary or the Company of
any Debt so permitted to a Person other than the Company or another Wholly
Owned Restricted Subsidiary of the Company or (2) the issuance (other than
directors' qualifying shares), sale, lease, transfer or other disposition
of shares of Capital Stock (including by consolidation or merger) of such
Wholly Owned Restricted Subsidiary to a Person other than the Company or
another such Wholly Owned Restricted Subsidiary, the provisions of this
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clause (iv) shall no longer be applicable to such Debt and such Debt shall
be deemed to have been Incurred at the time of such transfer or other
disposition;
(v) Debt consisting of Permitted Interest Rate, Currency or Commodity
Price Agreements;
(vi) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of, outstanding Debt
Incurred pursuant to the preceding paragraph or clauses (ii) or (iii) of
this paragraph (each of the foregoing, a "refinancing") in an aggregate
principal amount not to exceed the principal amount of the Debt so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Debt so refinanced or
the amount of any premium reasonably determined by the Company as necessary
to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of the Company or the Restricted
Subsidiary, as the case may be, incurred in connection with such
refinancing; provided, however, that (A) Debt the proceeds of which are
used to refinance the Notes or Debt which is pari passu with or subordinate
in right of payment to the Notes shall only be permitted if (x) in the case
of any refinancing of the Notes or Debt which is pari passu to the Notes,
the refinancing Debt is made pari passu to the Notes or subordinated to the
Notes, and (y) in the case of any refinancing of Debt which is subordinated
to the Notes, the refinancing Debt constitutes Subordinated Debt; (B) the
refinancing Debt by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt is issued, (1) does not provide for
payments of principal of such Debt at the stated maturity thereof or by way
of a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof (including any redemption,
defeasance, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder), in each
case prior to the stated maturity of the Debt being refinanced and (2) does
not permit redemption or other retirement (including pursuant to an offer
to purchase) of such debt at the option of the holder thereof prior to the
final stated maturity of the Debt being refinanced), other than a
redemption or other retirement at the option of the holder of such Debt
(including pursuant to an offer to purchase) which is conditioned upon
provisions substantially similar to those described under "-- Change of
Control" and "-- Limitation on Asset Dispositions"; and (C) in the case of
any refinancing of Debt Incurred by the Company, the refinancing Debt may
be Incurred only by the Company, and in the case of any refinancing of Debt
Incurred by a Restricted Subsidiary, the refinancing Debt may be Incurred
only by such Restricted Subsidiary; provided, further, that Debt Incurred
pursuant to this clause (vi) may not be Incurred more than 45 days prior to
the application of the proceeds to repay the Debt to be refinanced;
(vii) Acquired Debt, provided that such Debt if incurred by the
Company would be in compliance with the first paragraph of this covenant;
and
(viii) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (vii) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (viii), has an aggregate principal amount
not in excess of $5.0 million at any time outstanding. (ss. 1008)
LIMITATION ON SENIOR SUBORDINATED DEBT
The Company may not Incur any Debt which by its terms is both (i)
subordinated in right of payment to any Senior Debt and (ii) senior in right of
payment to the Notes. (ss. 1009)
LIMITATION ON ISSUANCE OF GUARANTEES OF SUBORDINATED DEBT
The Company may not permit any Restricted Subsidiary, directly or
indirectly, to assume, guarantee or in any other manner become liable with
respect to any Debt of the Company that by its terms is pari passu or junior in
right of payment to the Notes. ( )) 1010)
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LIMITATION ON LIENS
The Company may not, and may not permit any Subsidiary to, create, incur,
assume or suffer to exist any Lien on or with respect to any property or assets
of the Company or any such Restricted Subsidiary now owned or hereafter acquired
except for (i) Liens incurred after the date of the Indenture securing Debt of
the Company that ranks pari passu or junior in right of payment to the Notes, if
the Notes are secured equally and ratably with such Debt, (ii) Liens outstanding
on the date of the Indenture, (iii) Liens for taxes, assessments, governmental
charges or claims not yet delinquent or which are being contested in good faith
by appropriate proceedings, provided, that adequate reserves with respect
thereto are maintained on the books of the Company or its Restricted
Subsidiaries, as the case may be, in conformity with generally accepted
accounting principles, (iv) landlords' carriers', warehousemen's, mechanics',
material men's, repairmen's or the like Liens arising by contract or statute in
the ordinary course of business and with respect to amount which are not yet
delinquent or are being contested in good faith by appropriate proceedings, (v)
pledges or deposits made in the ordinary course of business (A) in connection
with leases, performance bonds and similar obligations, or (B) in connection
with workers' compensation, unemployment insurance and other social security
legislation, (vi) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar encumbrances which, in the aggregate,
do not materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the Company or
such Restricted Subsidiary, (vii) any attachment or judgment Lien that does not
constitute an Event of Default, (viii) Liens securing Acquired Debt, provided,
that such Liens attach solely to the acquired assets or the assets of the
acquired entity and do not extend to or cover any other assets of the Company or
any of its Restricted Subsidiaries, (ix) Liens to secure Senior Debt, (x) Liens
in favor of the Trustee for its own benefit and for the benefit of the Holders,
(xi) any interest or title of a lessor pursuant to a lease constituting a
Capital Lease Obligation, (xii) pledges or deposits made in connection with
acquisition agreements or letters of intent entered into in respect of a
proposed acquisition; (xiii) Liens in favor of prior holders of leases on
property acquired by the Company or of sublessors under leases on the Company
property; (xiv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, banker's
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (xv) Liens (including extensions and renewals thereof) upon
real or personal property acquired after the date of the Indenture; provided
that (a) such Lien is created solely for the purpose of securing Debt incurred,
in accordance with the "Limitation on Consolidated Debt" covenant, (1) to
finance the cost (including the cost of improvement or construction) of the item
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property or (2) to
refinance any Debt previously so secured, (b) the principal amount of the Debt
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (xvi) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries, taken as a whole;
(xvii) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xviii) Liens on property of, or on shares of stock or Debt
of, any Person existing at the time such Person becomes, or becomes a part of,
any Restricted Subsidiary, provided that such Liens do not extend to or cover
any property or assets of the Company or any Restricted Subsidiary other than
the property or assets acquired; (xix) Liens in favor of the Company or any
Restricted Subsidiary; (xx) Liens encumbering deposits securing Debt under
Permitted Interest Rate, Currency or Commodity Price Agreements; (xxi) Liens
arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries; (xxii) Liens
on or sales of receivables; (xxiii) the rights of film distributors under film
licensing contracts entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of businesses on a basis customary in the
movie exhibition industry; and (xxiv) any renewal of or substitution of any
Liens permitted by any of the preceding clauses, provided that the Debt secured
is not increased (other than by any premium and accrued interest, plus customary
fees, expenses and costs related to such renewal or substitution of Liens or the
incurrence of any related refinancing of Debt) nor the Liens extended to any
additional assets (other than proceeds and accessions).
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This covenant does not authorize the incurrence of any Debt not otherwise
permitted by the "Limitation on Consolidated Debt" covenant. (ss. 1011)
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) may not, directly or indirectly, declare or pay any
dividend or make any distribution (including any payment in connection with any
merger or consolidation derived from assets of the Company or any Restricted
Subsidiary) in respect of its Capital Stock or to the holders thereof, excluding
any dividends or distributions by the Company payable solely in shares of its
Capital Stock (other than Redeemable Stock) or in options, warrants or other
rights to acquire its Capital Stock (other than Redeemable Stock), (ii) may not,
and may not permit any Restricted Subsidiary to, purchase, redeem, or otherwise
acquire or retire for value (a) any Capital Stock of the Company or any Related
Person of the Company or (b) any options, warrants or other rights to acquire
shares of Capital Stock of the Company or any Related Person of the Company or
any securities convertible or exchangeable into shares of Capital Stock of the
Company or any Related Person of the Company, (iii) may not make, or permit any
Restricted Subsidiary to make, any Investment other than a Permitted Investment,
and (iv) may not, and may not permit any Restricted Subsidiary to, redeem,
repurchase, defease or otherwise acquire or retire for value prior to any
scheduled maturity, repayment or sinking fund payment Debt of the Company which
is subordinate in right of payment to the Notes (each of clauses (i) through
(iv) being a "Restricted Payment") if: (1) an Event of Default, or an event that
with the passing of time or the giving of notice, or both, would constitute an
Event of Default, shall have occurred and is continuing or would result from
such Restricted Payment, or (2) after giving pro forma effect to such Restricted
Payment as if such Restricted Payment had been made at the beginning of the
applicable four-fiscal-quarter period, the Company could not Incur at least
$1.00 of additional Debt pursuant to the terms of the Indenture described in the
first paragraph of "Limitation on Consolidated Debt" above, or (3) upon giving
effect to such Restricted Payment, the aggregate of all Restricted Payments from
the date of issuance of the Notes exceeds the sum of: (a) 50% of cumulative
Consolidated Net Income (or, in the case Consolidated Net Income shall be
negative, less 100% of such deficit) of the Company since the date of issuance
of the Notes through the last day of the last full fiscal quarter ending
immediately preceding the date of such Restricted Payment for which quarterly or
annual financial statements are available (taken as a single accounting period);
plus (b) 100% of the aggregate net proceeds received by the Company after the
date of original issuance of the Notes, including the fair market value of
property other than cash (determined in good faith by the Board of Directors as
evidenced by a resolution of the Board of Directors filed with the Trustee),
from contributions of capital or the issuance and sale (other than to a
Restricted Subsidiary) of Capital Stock (other than Redeemable Stock) of the
Company, options, warrants or other rights to acquire Capital Stock (other than
Redeemable Stock) of the Company and Debt of the Company that has been converted
into or exchanged for Capital Stock (other than Redeemable Stock and other than
by or from a Restricted Subsidiary) of the Company after the date of original
issuance of the Notes, provided that any such net proceeds received by the
Company from an employee stock ownership plan financed by loans from the Company
or a Restricted Subsidiary of the Company shall be included only to the extent
such loans have been repaid with cash on or prior to the date of determination;
plus (c) $5.0 million. Prior to the making of any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate setting forth the
computations by which the determinations required by clauses (2) and (3) above
were made and stating that no Event of Default, or event that with the passing
of time or the giving of notice, or both, would constitute an Event of Default,
has occurred and is continuing or will result from such Restricted Payment.
Notwithstanding the foregoing, so long as no Event of Default, or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default, shall have occurred and is continuing or would result
therefrom, (i) the Company may pay any dividend on Capital Stock of any class
within 60 days after the declaration thereof if, on the date when the dividend
was declared, the Company could have paid such dividend in accordance with the
foregoing provisions; (ii) the Company may refinance any Debt otherwise
permitted by clause (vi) of the second paragraph under "Limitation on
Consolidated Debt" above or solely in exchange for or out of the net proceeds of
the substantially concurrent sale (other than from or to a Restricted Subsidiary
or from or to an employee stock ownership plan financed by loans from the
Company or a Restricted Subsidiary of the Company) of shares of Capital Stock
(other than Redeemable Stock) of the Company, provided that the amount of net
proceeds from such exchange or sale shall
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be excluded from the calculation of the amount available for Restricted Payments
pursuant to the preceding paragraph; (iii) the Company may purchase, redeem,
acquire or retire any shares of Capital Stock of the Company solely in exchange
for or out of the net proceeds of the substantially concurrent sale (other than
from or to a Restricted Subsidiary or from or to an employee stock ownership
plan financed by loans from the Company or a Restricted Subsidiary of the
Company) of shares of Capital Stock (other than Redeemable Stock) of the
Company; and (iv) the Company or a Restricted Subsidiary may purchase or redeem
any Debt from Net Available Proceeds to the extent permitted under "Limitation
on Asset Dispositions." Any payment made pursuant to clause (i) or (iii) of this
paragraph shall be a Restricted Payment for purposes of calculating aggregate
Restricted Payments pursuant to the preceding paragraph. (ss. 1012)
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary of the Company (i) to pay dividends (in cash or otherwise) or make
any other distributions in respect of its Capital Stock or pay any Debt or other
obligation owed to the Company or any other Restricted Subsidiary; (ii) to make
loans or advances to the Company or any other Restricted Subsidiary; or (iii) to
transfer any of its property or assets to the Company or any other Restricted
Subsidiary. Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, suffer to exist any such encumbrance or restriction
(a) pursuant to any agreement in effect on the date of original issuance of the
Notes as described in a schedule to the Indenture; (b) pursuant to an agreement
relating to any Debt Incurred by a Person (other than a Restricted Subsidiary of
the Company existing on the date of original issuance of the Notes or any
Restricted Subsidiary carrying on any of the businesses of any such Restricted
Subsidiary) prior to the date on which such Person became a Restricted
Subsidiary of the Company and outstanding on such date and not Incurred in
anticipation of becoming a Restricted Subsidiary, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person so acquired; (c) pursuant to an agreement
effecting a renewal, refunding or extension of Debt Incurred pursuant to an
agreement referred to in clause (a) or (b) above, provided, however, that the
provisions contained in such renewal, refunding or extension agreement relating
to such encumbrance or restriction are no more restrictive in any material
respect than the provisions contained in the agreement the subject thereof, as
determined in good faith by the Board of Directors and evidenced by a resolution
of the Board of Directors filed with the Trustee; (d) in the case of clause
(iii) above, restrictions contained in any security agreement (including a
capital lease) securing Debt of a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement; (e) in the case of
clause (iii) above, customary nonassignment provisions entered into in the
ordinary course of business consistent with past practices in leases and other
contracts to the extent such provisions restrict the transfer or subletting of
any such lease or the assignment of rights under any such contract; (f) any
restriction with respect to a Restricted Subsidiary of the Company imposed
pursuant to an agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of such Restricted
Subsidiary, provided that consummation of such transaction would not result in
an Event of Default or an event that, with the passing of time or the giving of
notice or both, would constitute an Event of Default, that such restriction
terminates if such transaction is closed or abandoned and that the closing or
abandonment of such transaction occurs within one year of the date such
agreement was entered into; or (g) such encumbrance or restriction is the result
of applicable corporate law or regulation relating to the payment of dividends
or distributions. (ss. 1013)
LIMITATION ON ASSET DISPOSITIONS
The Company may not, and may not permit any Restricted Subsidiary to, make
any Asset Disposition in one or more related transactions unless: (i) the
Company or the Restricted Subsidiary, as the case may be, receives consideration
for such disposition at least equal to the fair market value for the assets sold
or disposed of as determined by the Board of Directors in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee; (ii)
at least 75% of the consideration for such disposition consists of cash or
readily marketable cash equivalents or Qualifying Theater Assets or the
assumption of Debt (other than Debt that is subordinated to the Notes) relating
to such
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assets and release from all liability on the Debt assumed; and (iii) all Net
Available Proceeds, less any amounts invested within 360 days of such
disposition in assets related to the business of the Company, are applied within
360 days of such disposition (1) first, to the permanent repayment or reduction
of Senior Debt then outstanding under any agreements or instruments which would
require such application or prohibit payments pursuant to clause (2) following,
(2) second, to the extent of remaining Net Available Proceeds, to make an Offer
to Purchase outstanding Notes at 100% of their principal amount plus accrued
interest to the date of purchase and, to the extent required by the terms
thereof, any other Debt of the Company that is pari passu with the Notes at a
price no greater than 100% of the principal amount thereof plus accrued interest
to the date of purchase, (3) third, to the extent of any remaining Net Available
Proceeds following the completion of the Offer to Purchase, to the repayment of
other Debt of the Company or Debt of a Restricted Subsidiary of the Company, to
the extent permitted under the terms thereof and (4) fourth, to the extent of
any remaining Net Available Proceeds, to any other use as determined by the
Company which is not otherwise prohibited by the Indenture. (ss. 1014)
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, enter into any transaction (or series of related transactions) with
an Affiliate or Related Person of the Company (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company), including any Investment,
either directly or indirectly, unless such transaction is on terms no less
favorable to the Company or such Restricted Subsidiary than those that could be
obtained in a comparable arm's-length transaction with an entity that is not an
Affiliate or Related Person. For any transaction that involves in excess of
$100,000 but less than or equal to $1,000,000, the Chief Executive Officer of
the Company shall determine that the transaction satisfies the above criteria
and shall evidence such a determination by a certificate filed with the Trustee.
For any transaction that involves in excess of $1,000,000, a majority of the
disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria and shall evidence such a determination
by a Board Resolution filed with the Trustee. For any transaction that involves
in excess of $5,000,000, the Company shall also obtain an opinion from a
nationally recognized expert with experience in appraising the terms and
conditions of the type of transaction (or series of related transactions) for
which the opinion is required stating that such transaction (or series of
related transactions) is on terms no less favorable to the Company or such
Restricted Subsidiary than those that could be obtained in a comparable
arm's-length transaction with an entity that is not an Affiliate or Related
Person of the Company, which opinion shall be filed with the Trustee. (ss. 1015)
Notwithstanding anything to the contrary contained in the Indenture, the
foregoing provisions shall not apply to (i) transactions with any employee,
officer or director of the Company or any of its Restricted Subsidiaries
pursuant to employee benefit plans or compensation arrangements or agreements
entered into in the ordinary course of business, (ii) transactions with any
Affiliate or Related Person in which such Affiliate or Related Person acquires
or purchases the capital stock of the Company or any Restricted Subsidiary at
fair market value or (iii) transactions with any Affiliate or Related Person in
which such Affiliate or Related Person receives a customary finder's fee or
other advisory fee for services rendered to the Company or any Restricted
Subsidiary.
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, the Company will
be required to make an Offer to Purchase all Outstanding Notes at a purchase
price equal to 101% of their principal amount plus accrued interest to the date
of purchase. A "Change of Control" will be deemed to have occurred at such time
as either (a) any Person (other than a Permitted Holder) or any Persons acting
together that would constitute a "group" (a "Group") for purposes of Section
13(d) of the Securities Exchange Act of 1934, or any successor provision thereto
(other than Permitted Holders), together with any Affiliates or Related Persons
thereof, shall beneficially own (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, or any successor provision thereto), directly
or indirectly, at least 50% of the aggregate voting power of all classes of
Voting Stock of the Company (for the purposes of this clause (a) a person shall
be deemed to beneficially own the Voting Stock of a corporation that is
beneficially owned (as defined above) by another corporation (a "parent
corporation"), if such person beneficially owns (as defined above) at least 50%
of the
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aggregate voting power of all classes of Voting Stock of such parent
corporation); or (b) any Person or Group (other than Permitted Holders),
together with any Affiliates or Related Persons thereof, shall succeed in having
a sufficient number of its nominees elected to the Board of Directors of the
Company such that such nominees, when added to any existing director remaining
on the Board of Directors of the Company after such election who was a nominee
of or is an Affiliate or Related Person of such Person or Group, will constitute
a majority of the Board of Directors of the Company. (ss. 1016)
Certain events involving a Change of Control will result in an event of
default under the Senior Bank Facility and may result in an event of default
under other indebtedness of the Company that may be incurred in the future. An
event of default under the Senior Bank Facility or other future senior
indebtedness could result in an acceleration of such indebtedness, in which case
the subordination provisions of the Notes would require payment in full of such
senior indebtedness before repurchase of the Notes. It is unlikely that the
Company would have sufficient resources to repurchase the Notes or pay its
obligations if the indebtedness under the Senior Bank Facility or other future
senior indebtedness were accelerated upon the occurrence of a Change of Control.
The inability of the Company to repurchase all of the tendered Exchange Notes
would constitute an Event of Default under the Indenture.
The foregoing provisions will not prevent the Company from entering into
transactions of the types described above with management or their affiliates.
In addition, such provisions may not necessarily afford the holders of the
Exchange Notes protection in the event of a highly leveraged transaction,
including a reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect the holders because such
transactions may not involve a shift in voting power or beneficial ownership, or
even if they do, may not involve a shift of the magnitude required under the
definition of Change of Control to trigger the provisions. Nonetheless, such
provisions may have the effect of deterring certain mergers, tender offers,
takeover attempts or similar transactions by increasing the cost of such a
transaction and may limit the Company's ability to obtain additional equity
financing in the future.
In the event that the Company makes an Offer to Purchase the Notes, the
Company intends to comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Securities Exchange Act of 1934.
PROVISION OF FINANCIAL INFORMATION
Prior to the time the Company becomes subject to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, the Company shall provide to all Holders
and file with the Trustee copies of the annual reports, quarterly reports and
other documents which the Company would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) or any successor provision
thereto if the Company were so required, such documents to be mailed to Holders
and filed with the Trustee on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so to file such
documents if the Company were so required. After the Company commences filing
such reports, and so long as any of the Notes are outstanding, the Company, or
if the Company is not required to file, Holdings shall file with the Commission
the annual reports, quarterly reports and other documents which the Company is
required to file with the Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 or any successor provisions thereto. (ss. 1017)
UNRESTRICTED SUBSIDIARIES
The Company may designate any Subsidiary of the Company to be an
"Unrestricted Subsidiary" as provided below in which event such Subsidiary and
each other Person that is then or thereafter becomes a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary. "Unrestricted
Subsidiary" means (1) any Subsidiary designated as such by the Board of
Directors as set forth below where (a) neither the Company nor any of its other
Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit
support for, or any Guarantee of, any Debt of such Subsidiary or any Subsidiary
of such Subsidiary (including any undertaking, agreement or instrument
evidencing such Debt) or (ii) is directly or indirectly liable for any Debt of
such Subsidiary or any Subsidiary of such Subsidiary,
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and (b) no default with respect to any Debt of such Subsidiary or any Subsidiary
of such Subsidiary (including any right which the holders thereof may have to
take enforcement action against such Subsidiary) would permit (upon notice,
lapse of time or both) any holder of any other Debt of the Company and its
Subsidiaries (other than another Unrestricted Subsidiary) to declare a default
on such other Debt or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity and (2) any Subsidiary of an Unrestricted
Subsidiary. The Board of Directors may designate any Subsidiary to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, any other Subsidiary of the Company
which is not a Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary, provided that either (x) the Subsidiary to be so
designated has total assets of $1,000 or less or (y) immediately after giving
effect to such designation, the Company could incur at least $1.00 of additional
Debt pursuant to the first paragraph under " -- Limitation on Consolidated Debt"
and provided, further, that the Company could make a Restricted Payment in an
amount equal to the greater of the fair market value and book value of such
Subsidiary pursuant to "Limitation on Restricted Payments" and such amount is
thereafter treated as a Restricted Payment for the purpose of calculating the
aggregate amount available for Restricted Payments thereunder. (ss. 1018)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into the Company and (ii) directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets unless: (1) in a transaction in which the Company does not
survive or in which the Company sells, leases or otherwise disposes of all or
substantially all of its assets, the successor entity to the Company is
organized under the laws of the United States of America or any State thereof or
the District of Columbia and shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
of the Company's obligations under the Indenture; (2) immediately before and
after giving effect to such transaction and treating any Debt which becomes an
obligation of the Company or a Restricted Subsidiary as a result of such
transaction as having been Incurred by the Company or such Restricted Subsidiary
at the time of the transaction, no Event of Default or event that with the
passing of time or the giving of notice, or both, would constitute an Event of
Default shall have occurred and be continuing; (3) immediately after giving
effect to such transaction, the Consolidated Net Worth of the Company (or other
successor entity to the Company) is equal to or greater than that of the Company
immediately prior to the transaction; (4) immediately after giving effect to
such transaction and treating any Debt which becomes an obligation of the
Company or a Restricted Subsidiary as a result of such transaction as having
been Incurred by the Company or such Restricted Subsidiary at the time of the
transaction, the Company (including any successor entity to the Company) could
Incur at least $1.00 of additional Debt pursuant to the provisions of the
Indenture described in the first paragraph under "Limitation on Consolidated
Debt" above; and (5) certain other conditions are met. (ss. 801)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (ss. 101)
"Acquired Debt" of any particular Person means Debt of any other Person
existing at the time such other Person merged with or into or became a
Subsidiary of such Particular Person or assumed by such particular Person in
connection with the acquisition of assets from any other Person, and not
Incurred by such other Person in connection with, or in contemplation of, such
other Person merging with or into such particular Person or becoming a
Subsidiary of such particular Person or such acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether
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through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted Subsidiaries
(including any issuance or sale by a Restricted Subsidiary of Capital Stock of
such Restricted Subsidiary, and including a consolidation or merger or other
sale of any such Restricted Subsidiary with, into or to another Person in a
transaction in which such Restricted Subsidiary ceases to be a Restricted
Subsidiary, but excluding a disposition by a Restricted Subsidiary of such
Person to such Person or a Wholly Owned Restricted Subsidiary of such Person or
by such Person to a Wholly Owned Restricted Subsidiary of such Person) of (i)
shares of Capital Stock (other than directors' qualifying shares) or other
ownership interests of a Restricted Subsidiary of such Person, (ii)
substantially all of the assets of such Person or any of its Restricted
Subsidiaries representing a division or line of business or (iii) other assets
or rights of such Person or any of its Restricted Subsidiaries outside of the
ordinary course of business, provided in each case that the aggregate
consideration for such transfer, conveyance, sale, lease or other disposition is
equal to $1.0 million or more. The term "Asset Disposition" shall not include
(i) any sale and leaseback of Qualifying Theater Assets effected at fair market
value, and (ii) any swap or exchange of Qualifying Theater Assets of the Company
or its Subsidiaries for Qualifying Theater Assets of another Person, provided
that if the fair market value of the assets exchanged by the Company or its
Subsidiary exceeds the fair market value of the assets to be received, in each
case as determined in good faith by the Board of Directors of the Company, such
excess shall be subject to the "Limitation on Asset Dispositions" covenant.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Cash Equivalents" means (i) direct obligations of the United States of
America or any agency thereof having maturities of not more than one year from
the date of acquisition, (ii) time deposits and certificates of deposit of any
domestic commercial bank or recognized standing having capital and surplus in
excess of $500 million, with maturities of not more than one year from the date
of acquisition, (iii) repurchase obligations issued by any bank described in
clause (ii) above with a term not to exceed 30 days; (iv) commercial paper rated
at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's, in each case maturing within one year after the date of
acquisition and (v) shares of any money market mutual fund, or similar fund, in
each case having excess of $500 million, which invests predominantly in
investments of the types describes in clauses (i) through (iv) above.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted Subsidiaries
for such period, plus (iv) all
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other non-cash items reducing Consolidated Net Income of the Company and its
Restricted Subsidiaries, less all non-cash items increasing Consolidated Net
Income of the Company and its Restricted Subsidiaries; provided, however, that
there shall be excluded therefrom the Consolidated Cash Flow Available for Fixed
Charges (if positive) of any Restricted Subsidiary of the Company (calculated
separately for such Restricted Subsidiary in the same manner as provided above
for the Company) that is subject to a restriction which prevents the payment of
dividends or the making of distributions to the Company or another Restricted
Subsidiary of the Company to the extent of such restriction.
"Consolidated Cash Flow Coverage Ratio" as of any date of determination
means the ratio of (i) Consolidated Cash Flow Available for Fixed Charges of the
Company and its Restricted Subsidiaries for the period of the most recently
completed four consecutive fiscal quarters for which quarterly or annual
financial statements are available to (ii) Consolidated Fixed Charges of the
Company and its Restricted Subsidiaries for such period; provided, however, that
Consolidated Fixed Charges shall be adjusted to give effect on a pro forma basis
to any Debt that has been Incurred by the Company or any Restricted Subsidiary
since the beginning of such period that remains outstanding and to any Debt that
is proposed to be Incurred by the Company or any Restricted Subsidiary as if in
each case such Debt had been Incurred on the first day of such period and as if
any Debt that (i) is or will no longer be outstanding as the result of the
Incurrence of any such Debt or (ii) had been repaid or retired during such
period had not been outstanding as of the first day of such period; provided,
however, that in making such computation, the Consolidated Interest Expense of
the Company and its Restricted Subsidiaries attributable to interest on any
proposed Debt bearing a floating interest rate shall be computed on a pro forma
basis as if the rate in effect on the date of computation had been the
applicable rate for the entire period; and provided further that, in the event
the Company or any of its Restricted Subsidiaries has made Asset Dispositions or
acquisitions of assets not in the ordinary course of business (including
acquisitions of other Persons by merger, consolidation or purchase of Capital
Stock) during or after such period, such computation shall be made on a pro
forma basis as if the Asset Dispositions or acquisitions had taken place on the
first day of such period.
"Consolidated Fixed Charges" for any period means the sum of (i)
Consolidated Interest Expense and (ii) the consolidated amount of interest
capitalized by the Company and its Restricted Subsidiaries during such period
calculated in accordance with generally accepted accounting principles.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of the Company and its Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (without deduction
of interest income) of the Company and its Restricted Subsidiaries for such
period calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees with respect to interest rate swap
or similar agreements or foreign currency hedge, exchange or similar agreements;
(iv) Preferred Stock dividends of Restricted Subsidiaries of the Company (other
than with respect to Redeemable Stock) declared and paid or payable to persons
other than the Company or any Restricted Subsidiary; (v) accrued Redeemable
Stock dividends of the Company and its Restricted Subsidiaries payable to
persons other than the Company or any Restricted Subsidiary, whether or not
declared or paid; (vi) interest on Debt guaranteed by the Company and its
Restricted Subsidiaries; and (vii) the portion of any rental obligation
allocable to interest expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by of the Company or a Restricted
Subsidiary of the Company in a pooling-of-interests transaction for any period
prior to the date of such transaction, (b) the net income (or loss) of any
Person that is not a Subsidiary of the Company except to the extent of the
amount of dividends or other distributions actually paid to the Company or a
Subsidiary of the Company by such Person during such period, (c) gains or losses
on Asset Dispositions by the
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Company or its Restricted Subsidiaries, (d) all extraordinary gains and
extraordinary losses, (e) the cumulative effect of changes in accounting
principles and (f) the tax effect of any of the items described in clauses (a)
through (e) above; provided, further, that for purposes of any determination
pursuant to the provisions described under "Limitation on Restricted Payments,"
there shall further be excluded therefrom the net income (but not net loss) of
any Restricted Subsidiary of the Company that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the Company
or another Restricted Subsidiary of the Company to the extent of such
restriction.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person; provided that, with respect to the Company,
adjustments following the date of the Indenture to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of the Company by another Person shall not be given
effect to.
"Consolidated Tangible Assets" of any Person means, as of any date, the
amount which, in accordance with GAAP, would be set forth under the caption
"Total Assets" (or any like caption) on a consolidated balance sheet of such
Person and its Restricted Subsidiaries, less all intangible assets, including,
without limitation, goodwill, organization costs, patents, trademarks,
copyrights, franchises, and research and development costs.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements but excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) all Receivables Sales of such Person, together
with any obligation of such Person to pay any discount, interest, fees,
indemnities, penalties, recourse, expenses or other amounts in connection
therewith, (vii) all Redeemable Stock issued by such Person, (viii) Preferred
Stock of Restricted Subsidiaries of such Person held by Persons other than such
Person or one of its Wholly Owned Restricted Subsidiaries, (ix) every obligation
under Interest Rate, Currency or Commodity Price Agreements of such Person and
(x) every obligation of the type referred to in clauses (i) through (ix) of
another Person and all dividends of another Person the payment of which, in
either case, such Person has Guaranteed or is responsible or liable, directly or
indirectly, as obligor, Guarantor or otherwise. The "amount" or "principal
amount" of Debt at any time of determination as used herein represented by (a)
any Receivables Sale, shall be the amount of the unrecovered capital or
principal investment of the purchaser (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) thereof, excluding amounts representative
of yield or interest earned on such investment and (b) any Redeemable Stock,
shall be the maximum fixed redemption or repurchase price in respect thereof.
"Designated Senior Debt" shall mean (i) the obligations of the Company
under the Senior Bank Facility and (ii) any other Senior Debt of the Company
permitted under the Indenture the principal amount of which at original issuance
is $25.0 million or more and that has been designated by the Company as
Designated Senior Debt.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to
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pay such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have
meanings correlative to the foregoing); provided, however, that the Guaranty by
any Person shall not include endorsements by such Person for collection or
deposit, in either case, in the ordinary course of business.
"Holdings" means Hollywood Theater Holdings, Inc. or any successor thereto.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred," "Incurrable" and "Incurring"
shall have meanings correlative to the foregoing); provided, however, that a
change in generally accepted accounting principles that results in an obligation
of such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
"Interest Rate, Currency or Commodity Price Agreement" of any Person means
any forward contract, futures contract, swap, option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates, currency exchange rates or commodity prices or indices
(excluding contracts for the purchase or sale of goods in the ordinary course of
business).
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets)
therefrom by such Person, net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses Incurred and all federal,
state, provincial, foreign and local taxes required to be accrued as a liability
as a consequence of such Asset Disposition, (ii) all payments made by such
Person or its Restricted Subsidiaries on any Debt which is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or which must by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person or joint ventures as a result of such Asset Disposition and (iv)
appropriate amounts to be provided by such Person or any Restricted Subsidiary
thereof, as the case may be, as a reserve in accordance with generally accepted
accounting principles against any liabilities associated with such assets and
retained by such Person or any Restricted Subsidiary thereof, as the case may
be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, in each case as
determined by the Board of Directors, in its reasonable good faith judgment
evidenced by a resolution of the Board of Directors filed with the Trustee;
provided, however, that any reduction in such reserve following the consummation
of such Asset Disposition will be treated for all purposes of the Indenture and
the Notes as a new Asset Disposition at the time of such reduction with Net
Available Proceeds equal to the amount of such reduction.
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"Senior Bank Facility" means the Reducing Revolving Credit Agreement to be
entered into between the Company and certain of its affiliates and Bank of
America NT&SA, as Agent, and the banks named therein, as it may be amended or
restated from time to time, and any renewal, extension, refinancing, refunding
or replacement thereof.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each Holder at his address appearing in
the Note Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of the
Company's obligation to make an Offer to Purchase, and the Offer shall be mailed
by the Company or, at the Company's request, by the Trustee in the name and at
the expense of the Company. The Offer shall contain information concerning the
business of the Company and its Restricted Subsidiaries which the Company in
good faith believes will enable such Holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein. The Offer shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase is
being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such has been determined pursuant to
the Section hereof requiring the Offer to Purchase) (the "Purchase
Amount");
(4) the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant to
the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes registered
in the name of such Holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not purchased by
the Company pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
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Date (such Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of Notes
tendered if the Company (or their Paying Agent) receives, not later than
the close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Note the Holder tendered, the certificate number of the Note
the Holder tendered and a statement that such Holder is withdrawing all or
a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or equal
to the Purchase Amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, the Company shall purchase all such Notes and (b) if
Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in part,
the Company shall execute, and the Trustee shall authenticate and deliver
to the Holder of such Note without service charge, a new Note or Notes, of
any authorized denomination as requested by such Holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Permitted Holder" means each of The Beacon Group III -- Focus Value Fund,
L.P., Stratford Capital Partners, L.P., Hoak Communications Fund and members of
senior management of Holdings which have been such members for at least one year
and beneficially own (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, or any successor provision thereto) shares of Capital
Stock of Holdings.
"Permitted Interest Rate, Currency or Commodity Price Agreement" of any
Person means any Interest Rate, Currency or Commodity Price Agreement entered
into with one or more financial institutions in the ordinary course of business
that is designed to protect such Person against fluctuations in interest rates
or currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby, or in the case of currency or commodity protection agreements,
against currency exchange rate or commodity price fluctuations in the ordinary
course of business relating to then existing financial obligations or then
existing or sold production and not for purposes of speculation.
"Permitted Investments" means (i) an Investment in the Company or a
Restricted Subsidiary of the Company; (ii) an Investment in a Person, if such
Person or a Subsidiary of such Person will, as a result of the making of such
Investment and all other contemporaneous related transactions, become a
Restricted Subsidiary of the Company or be merged or consolidated with or into
transfer or convey all or substantially all its assets to the Company or a
Restricted Subsidiary of the Company; (iii) a Temporary Cash Investment; (iv)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses in accordance with
generally accepted accounting principles; (v) stock, obligations or securities
received in settlement of debts owing to the Company or a Restricted Subsidiary
of the Company as a result of bankruptcy or insolvency proceedings or upon the
foreclosure, perfection, enforcement or agreement in lieu of foreclosure of any
Lien in favor of the Company or a Restricted Subsidiary of the Company; (vi)
refundable construction advances made with respect to the construction of
properties of a nature or type that are used in a business or similar or related
to the business of the Company or its Restricted Subsidiaries in the ordinary
course of business; (vii) advances or extensions of credit on terms customary in
the industry in the form of accounts or other receivables incurred, or pre-paid
film rentals, and loans and advances made in settlement of such accounts
receivable, all in the ordinary course of business; (viii) Investments in the
Notes; (ix) any consolidation
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or merger of a Wholly-Owned Restricted Subsidiary of the Company to the extent
otherwise permitted under the Indenture; (x) Investments in Permitted Interest
Rate, Currency or Commodity Price Agreements and (xi) other Investments not to
exceed $3.0 million.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company or (if Holdings owns all the outstanding Common
Stock of the Company) of Holdings pursuant to an effective registration
statement under the Securities Act of 1933, as amended.
"Qualifying Theater Assets" means all motion picture theaters (whether
owned in fee or leased), all other motion picture theater assets, including,
without limitation, theater furniture and fixtures, all real property acquired
for the purpose of motion picture theater development or construction, and joint
venture interests or partnership interests in Persons owning, leasing,
developing or constructing motion picture theaters or principally engaged in the
business of exhibiting motion pictures.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Redeemable Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) matures or is required to be redeemed (pursuant to any sinking fund
obligation or otherwise) or is convertible into or exchangeable for Debt or is
redeemable at the option of the holder thereof, in whole or in part, at any time
prior to the final Stated Maturity of the Notes; provided that "Redeemable
Stock" shall not include any Capital Stock that is payable at maturity, or upon
required redemption or redemption at the option of the holder thereof, or that
is automatically convertible or exchangeable, solely in or into Common Stock of
such Person.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the Outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary, whether existing on or after
the date of the Indenture, unless such Subsidiary is an Unrestricted Subsidiary.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Notes to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Notes exists; (ii) in the event that any other default
that with the passing of time or the giving of notice, or both, would constitute
an event of default exists with respect to the Notes, upon notice by 25% or more
in principal amount of the Notes to the Trustee, the Trustee shall have the
right to give notice to the Company and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of such Debt
may be made for a period of 179 days from the date of such notice; and (iii)
such Debt may not (x) provide for payments of principal of such Debt
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at the stated maturity thereof or by way of a sinking fund applicable thereto or
by way of any mandatory redemption, defeasance, retirement or repurchase thereof
by the Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Debt upon an event of default thereunder), in
each case prior to the final Stated Maturity of the Notes or (y) permit
redemption or other retirement (including pursuant to an offer to purchase made
by the Company) of such other Debt at the option of the holder thereof prior to
the final Stated Maturity of the Notes, other than a redemption or other
retirement at the option of the holder of such Debt (including pursuant to an
offer to purchase made by the Company) which is conditioned upon a change of
control of the Company pursuant to provisions substantially similar to those
described under "Change of Control" (and which shall provide that such Debt will
not be repurchased pursuant to such provisions prior to the Company's repurchase
of the Notes required to be repurchased by the Company pursuant to the
provisions described under "Change of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Temporary Cash Investments" means any Investment in the following kinds of
instruments: (A) readily marketable obligations issued or unconditionally
guaranteed as to principal and interest by the United States of America or by
any agency or authority controlled or supervised by and acting as an
instrumentality of the United States of America if, on the date of purchase or
other acquisition of any such instrument by the Company or any Restricted
Subsidiary of the Company, the remaining term to maturity or interest rate
adjustment is not more than two years; (B) obligations (including, but not
limited to, demand or time deposits, bankers' acceptances and certificates of
deposit) issued or guaranteed by a depository institution or trust company
incorporated under the laws of the United States of America, any state thereof
or the District of Columbia, provided that (1) such instrument has a final
maturity nor more than one year from the date of purchase thereof by the Company
or any Restricted Subsidiary of the Company and (2) such depository institution
or trust company has at the time of the Company's or such Restricted
Subsidiary's Investment therein or contractual commitment providing for such
Investment, (x) capital, surplus and undivided profits (as of the date such
institution's most recently published financial statements) in excess of $100
million and (y) the long-term unsecured debt obligations (other than such
obligations rated on the basis of the credit of a Person other than such
institution) of such institution, at the time of the Company's or such
Restricted Subsidiary's Investment therein or contractual commitment providing
for such Investment, are rated in the highest rating category of both Standard &
Poor's Ratings Group, a division of McGraw-Hill, Inc. ("S&P"), and Moody's
Investors Service, Inc. ("Moody's"); (C) commercial paper issued by any
corporation, if such commercial paper has, at the time of the Company's or any
Restricted Subsidiary's Investment therein or contractual commitment providing
for such Investment credit ratings of at least A-1 by S&P and P-1 by Moody's;
(D) money market mutual or similar funds having assets in excess of $100
million; (E) readily marketable debt obligations issued by any corporation, if
at the time of the Company's or and Restricted Subsidiary's Investment therein
or contractual commitment providing for such Investment (1) the remaining term
to maturity is not more than two years and (2) such debt obligations are rated
in one of the two highest rating categories of both S&P and Moody's; (F) demand
or time deposit accounts used in the ordinary course of business with commercial
banks the balances in which are at all times fully insured as to principal and
interest by the Federal Deposit Insurance Corporation or any successor thereto;
and (G) to the extent not otherwise included herein, Cash Equivalents. In the
event that either S&P or Moody's ceases to publish ratings of the type provided
herein, a replacement rating agency shall be selected by the Company with the
consent of the Trustee, and in each case the rating of such replacement rating
agency most nearly equivalent to the corresponding S&P or Moody's rating, as the
case may be, shall be used for purposes hereof.
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"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due; (b) failure to pay
any interest on any Note when due, continued for 30 days; (c) default in the
payment of principal and interest on Notes required to be purchased pursuant to
an Offer to Purchase as described under "Change of Control" and "Limitation on
Certain Asset Dispositions" when due and payable; (d) failure to perform or
comply with the provisions described under "Merger, Consolidation and Certain
Sales of Assets"; (e) failure to perform any other covenant or agreement of the
Company under the Indenture or the Notes continued for 60 days after written
notice to the Company by the Trustee or Holders of at least 25% in aggregate
principal amount of Outstanding Notes; (f) default under the terms of any
instrument evidencing or securing Debt for money borrowed by the Company or any
Restricted Subsidiary having an outstanding principal amount of $2.0 million
individually or in the aggregate which default results in the acceleration of
the payment of such indebtedness or constitutes the failure to pay such
indebtedness when due; (g) the rendering of a final judgment or judgments (not
subject to appeal) against the Company or any Restricted Subsidiary in an amount
in excess of $2.0 million which remains undischarged or unstayed for a period of
60 days after the date on which the right to appeal has expired; and (h) certain
events of bankruptcy, insolvency or reorganization affecting the Company or any
Restricted Subsidiary. (ss. 501) Subject to the provisions of the Indenture
relating to the duties of the Trustee in case an Event of Default (as defined)
shall occur and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. (ss. 603) Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in aggregate principal
amount of the Outstanding Notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee. (ss. 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(h) above occurs, the Outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder. (ss. 502) For information as to waiver of defaults, see
"Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a majority
in aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (ss. 507) However, such limitations do not apply to a suit instituted by a
Holder of a Note for enforcement of payment of the principal of and premium, if
any, or interest on such Note on or after the respective due dates expressed in
such Note. (ss. 508)
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The Company will be required to furnish to the Trustee quarterly a
statement as to the performance by the Company of certain of its obligations
under the Indenture and as to any default in such performance. (ss. 1019)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to
receive payment of principal and interest on the Notes, (iv) rights, obligations
and immunities of the Trustee under the Indenture and (v) rights of the Holders
of the Notes as beneficiaries of the Indenture with respect to any property
deposited with the Trustee payable to all or any of them), if (x) the Company
will have paid or caused to be paid the principal of and interest on the Notes
as and when the same will have become due and payable or (y) all outstanding
Notes (except lost, stolen or destroyed Notes which have been replaced or paid)
have been delivered to the Trustee for cancellation.
DEFEASANCE
The Indenture will provide that, at the option of the Company, (a) if
applicable, the Company will be discharged from any and all obligations in
respect of the Outstanding Notes or (b) if applicable, the Company may omit to
comply with certain restrictive covenants, that such omission shall not be
deemed to be an Event of Default under the Indenture and the Notes, in either
case (A) or (B) upon irrevocable deposit with the Trustee, in trust, of money
and/or U.S. government obligations which will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of and premium, if any, and
each installment of interest, if any, on the Outstanding Notes. With respect to
clause (B), the obligations under the Indenture other than with respect to such
covenants and the Events of Default other than the Events of Default relating to
such covenants above shall remain in full force and effect. Such trust may only
be established if, among other things (i) with respect to clause (A), the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling or there has been a change in law, which in the Opinion of
Counsel provides that Holders of the Notes will not recognize gain or loss for
Federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to Federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to clause (B), the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the Holders of the Notes will not recognize gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit and defeasance had not occurred;
(ii) no Event of Default or event that with the passing of time or the giving of
notice, or both, shall constitute an Event of Default shall have occurred or be
continuing; (iii) the Company has delivered to the Trustee an Opinion of Counsel
to the effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940; and (iv) certain
other customary conditions precedent are satisfied. (ss.ss. 1301, 1302, 1303 and
1304)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, (or the premium) or interest on, any Note, (c) change the
place or currency of payment of principal of (or premium), or interest on, any
Note, (d) impair the right to institute suit for the enforcement of any payment
on or with respect to any Note, (e) reduce the above-stated percentage of
Outstanding Notes necessary to modify or amend the Indenture, (f) reduce the
percentage of aggregate principal amount of Outstanding Notes necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, or (h) following the mailing of any
Offer to Purchase, modify any Offer to Purchase for
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the Notes required under the "Limitation on Asset Dispositions" and the "Change
of Control" covenants contained in the Indenture in a manner materially adverse
to the Holders thereof. (ss. 902)
The Holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. (ss. 1020) Subject to
certain rights of the Trustee, as provided in the Indenture, the Holders of a
majority in aggregate principal amount of the Outstanding Notes, on behalf of
all Holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Note tendered pursuant to an Offer to Purchase.
(ss. 513)
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs. (ss. 601)
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign. (ss.ss. 608, 613)
CERTAIN U.S. FEDERAL TAX CONSEQUENCES TO U.S. HOLDERS
The following summary describes all material United States federal income
tax consequences for holders of the Exchange Notes who are subject to U.S. net
income tax with respect to the Exchange Notes ("U.S. persons") and who will hold
the Exchange Notes as capital assets. There can be no assurance that the U.S.
Internal Revenue Service (the "IRS") will take a similar view of the purchase,
ownership or disposition of the Exchange Notes. This summary is based upon the
Internal Revenue Code of 1986, as amended, and regulations, rulings and judicial
decisions now in effect, all of which are subject to change. It does not include
any discussion of the tax laws of any state, local or foreign governments or any
estate or gift tax considerations that may be applicable to the Exchange Notes
or holders thereof; nor does it discuss all aspects of U.S. federal income
taxation that may be relevant to a particular investor under his particular
circumstances or to investors subject to special treatment under the U.S.
federal income tax laws (for example, dealers in securities or currencies, S
corporations, life insurance companies, tax-exempt organizations, taxpayers
subject to the alternative minimum tax and non-U.S. persons) and also does not
discuss Exchange Notes held as a hedge against currency risks or as part of a
straddle with other investments or as part of a "synthetic security" or other
integrated investment (including a "conversion transaction") comprising an
Exchange Note and one or more other investments, or situations in which the
functional currency of the holders is not the U.S. dollar.
Holders of Old Notes contemplating acceptance of the Exchange Offer should
consult their tax advisors with respect to their particular circumstances and
with respect to the effects of state, local or foreign tax laws to which they
may be subject.
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EXCHANGE OF NOTES
The exchange of Old Notes for Exchange Notes should not be a taxable event
to holders for federal income tax purposes. The exchange of Old Notes for the
Exchange Notes pursuant to the Exchange Offer should not be treated as an
"exchange" for federal income tax purposes, because the Exchange Notes should
not be considered to differ materially in kind or extent from the Old Notes.
Accordingly, the Exchange Notes should have the same issue price as the Old
Notes, and a holder should have the same adjusted basis and holding period in
the Exchange Notes as it had in the Old Notes immediately before the exchange.
INTEREST ON EXCHANGE NOTES
A holder of an Exchange Note will be required to report as ordinary
interest income for U.S. federal income tax purposes interest earned on the
Exchange Note in accordance with the holder's method of tax accounting.
DISPOSITION OF EXCHANGE NOTES
A holder's tax basis for an Exchange Note generally will be the holder's
purchase price for the Old Note. Upon the sale, exchange, redemption, retirement
or other disposition of an Exchange Note, a holder will recognize gain or loss
equal to the difference (if any) between the amount realized and the holders'
tax basis in the Exchange Note. Such gain or loss will be long-term capital gain
or loss if the Exchange Note has been held for more than one year and otherwise
will be short-term capital gain or loss (with certain exceptions to the
characterization as capital gain if the Exchange Note was acquired at a market
discount).
BACKUP WITHHOLDING
A holder of an Exchange Note may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Exchange Note and proceeds from
the sale, exchange, redemption or retirement of the Exchange Note, unless such
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates that fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of an Exchange Note who does not provide the Company
with his correct taxpayer identification number may be subject to penalties
imposed by the IRS.
A holder of an Exchange Note who is not a U.S. person will generally be
exempt from backup withholding and information reporting requirements, but may
be required to comply with certification and identification procedures in order
to obtain an exemption from backup withholding and information reporting.
Any amount paid as backup withholding will be creditable against the
holder's U.S. federal income tax liability.
CERTAIN U.S. FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following is a general discussion of certain U.S. federal tax
consequences of the ownership and disposition of Exchange Notes by a non-U.S.
holder who acquires and owns such Exchange Notes as a capital asset within the
meaning of Section 1221 of the Code. A "non-U.S. holder" is any person other
than (i) a resident (within the meaning of Section 7701(b) of the Code) or
current or former citizen of the United States, (ii) a corporation, limited
liability company, or partnership created or organized in the United States or
under the laws of the United States or of any state, or (iii) an estate or trust
whose income is includable in gross income for U.S. federal income tax purposes
regardless of its source. The discussion is based on laws and regulations
presently in force and does not take account of any possible changes in such
laws or regulations. Moreover, the discussion does not discuss every aspect of
U.S. federal taxation that may be relevant to a particular taxpayer under
special circumstances or to persons who are otherwise
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subject to a special tax treatment (including, without limitation, banks,
insurance companies, pension and other employee benefit plans, and tax exempt
organizations and entities) and it does not discuss the effect of any applicable
U.S. state and local or non-U.S. tax laws. EACH PROSPECTIVE NON-U.S. HOLDER IS
URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL TAX
CONSEQUENCES OF HOLDING AND DISPOSING OF EXCHANGE NOTES, AS WELL AS ANY TAX
CONSEQUENCES APPLICABLE UNDER THE LAWS OF ANY U.S. STATE, LOCAL, OR NON-U.S.
TAXING JURISDICTION.
INTEREST
In general, interest paid to a non-U.S. holder of Exchange Notes will be
subject to U.S. federal income tax or regular withholding tax so long as (a) the
interest is not effectively connected with the conduct of a trade or business
within the United States, (b) the non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the company entitled to vote, (c) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the Company actually or
constructively through stock ownership and (d) either (i) the beneficial owner
of the Exchange Note certifies to the Company or its agent, under penalties of
perjury, that it is not a U.S. Holder and provides its name and address on U.S.
Treasury Form W-8 (or a suitable substitute form) or (ii) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and holds the Exchange Note certifies under penalties of perjury
that such a Form W-8 (or suitable substitute form) has been received from the
beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payor with a copy thereof.
Recently proposed Internal Revenue Service Treasury regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (d) above. The Proposed
Regulations also would require, in the case of Exchange Notes held by a foreign
partnership, that (x) the certification described in clause (d) above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. The Proposed Regulations are proposed to be effective for payments
made after December 31, 1997. There can be no assurance that the Proposed
Regulations will be adopted or as to the provisions that they will include if
and when adopted in temporary or final form.
DISPOSITION OF EXCHANGE NOTES
Non-U.S. holders generally will not be subject to U.S. federal income
taxation on gain recognized on a disposition of Exchange Notes so long as (i)
the gain is not effectively connected with the conduct by the non-U.S. holder of
a trade or business within the United States and (ii) in the case of a non-U.S.
holder who is an individual, either such holder is not present in the United
States for 183 days or more in the taxable year of disposition or such holder
does not (a) have a "tax home" (within the meaning of section 911(d)(3) of the
Code) in the United States or (b) maintain an office or fixed place of business
in the United States to which the gain is attributable.
FEDERAL ESTATE TAXES
An Exchange Note held by an individual who, at the time of death, is not a
citizen or resident of the United States will not be includible in the
individual's gross estate for purposes of the U.S. federal estate tax as a
result of such individual's death if the individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote and if, at the time of the individual's
death, payments with respect to such Exchange Note would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Generally, payments of interest, premium or principal on the Exchange Notes
to Non-U.S. Holders will not be subject to information reporting or backup
withholding (assuming the income is otherwise exempt from United States
90
<PAGE> 96
federal income tax) if the non-U.S. holder complies with the certification
requirements set forth in clause (d) under "Certain U.S. Federal Tax
Consequences To Non-U.S. Holders -- Interest" above.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
Exchange Notes effected by, to or through the foreign office of a broker;
provided, however, that if the broker is a U.S. person or a U.S.-related person,
information reporting (but not backup withholding) would apply unless the broker
has documentary evidence in its records as to the non-U.S. holder's foreign
status (and has no actual knowledge to the contrary), or the non-U.S. holder
certifies as to its non-U.S. status under penalty of perjury or otherwise
establishes an exemption. Non-U.S. holders will be subject to information
reporting and backup withholding at a rate of 31% with respect to the payment of
proceeds from the disposition of Exchange Notes effected by, to or through the
United States office of a broker, unless the non-U.S. holder certifies as to its
non-U.S. status under penalty of perjury or otherwise establishes an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, amounts withheld under the backup
withholding rules from a payment to a non-U.S. holder will be allowed as a
credit against such non-U.S. holder's U.S. federal income tax liability and any
amounts withheld in excess of such non- U.S. holder's U.S. federal income tax
liability would be refunded, provided that the required information is furnished
to the IRS.
91
<PAGE> 97
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account in connection with the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by Participating Broker- Dealers during the period referred to below in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired by such Participating Broker-Dealers for
their own accounts as a result of market-making activities or other trading
activities (other than a resale of an unsold allotment from the original sale of
Old Notes). The Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such Exchange Notes for a period ending 180 days from
the Expiration Date. However, a Participating Broker-Dealer who intends to use
this Prospectus in connection with the resale of Exchange Notes received in
exchange for Old Notes pursuant to the Exchange Offer must notify the Company,
or cause the Company to be notified, on or prior to the Expiration Date, that it
is a Participating Broker-Dealer. Such notice may be given in the space provided
for that purpose in the Letter of Transmittal or may be delivered to the
Exchange Agent at one of the addresses set forth in the Letter of Transmittal.
See "The Exchange Offer -- Resales of Exchange Notes."
The Company will not receive any proceeds from the issuance of the Exchange
Notes offered hereby. Exchange Notes received by Participating Broker-Dealers
for their own accounts in connection with the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any Participating Broker-Dealer that resells Exchange Notes that
were received by it for its own account in connection with the Exchange Offer
and any broker or dealer that participates in a distribution of such Exchange
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period ending 180 days from the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Baker & Botts, L.L.P., Dallas, Texas, counsel for the Company.
EXPERTS
The audited consolidated financial statements included in this Prospectus,
to the extent and for the periods indicated in their reports, have been audited
by Arthur Andersen LLP, independent public accountants, and are included herein
in reliance upon the authority of said firm as experts in accounting and
auditing in giving such reports.
92
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995............................... F-4
Consolidated Statements of Operations for the Year Ended
December 31, 1996 and for the period from inception
(July 11, 1995), through December 31, 1995.............................................. F-5
Consolidated Statements of Stockholders' Equity for the
Year Ended December 31, 1996 and for the period from
inception (July 11, 1995), through December 31, 1995.................................... F-6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1996 and for the period from inception
(July 11, 1995), through December 31, 1995.............................................. F-7
Notes to Consolidated Financial Statements................................................. F-8
Unaudited Condensed Consolidated Balance Sheet as of
September 30, 1997....................................................................... F-19
Unaudited Condensed Consolidated Statements of Operations
for the Nine Months Ended September 30, 1997 and 1996................................... F-20
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996................................... F-21
Notes to Unaudited Interim Condensed Consolidated
Financial Statements.................................................................... F-22
THEATERS ACQUIRED FROM DICKINSON, INC.
Report of Independent Public Accountants................................................... F-24
Statement of Assets Acquired as of May 29, 1997............................................ F-25
Statement of Revenues and Direct Operating Expenses for
the Year Ended May 29, 1997.............................................................. F-26
Notes to Financial Statements.............................................................. F-27
Unaudited Statement of Assets Acquired as of August 31, 1997............................... F-29
Unaudited Interim Statements of Revenues and Direct Operating
Expenses for the Three Months Ended August 31, 1997 and 1996............................. F-30
Notes to Unaudited Interim Financial Statements............................................ F-31
THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
Report of Independent Public Accountants................................................... F-32
Statement of Assets Acquired as of October 31, 1996........................................ F-33
Statements of Revenues and Direct Operating Expenses for
the Years Ended October 31, 1996 and 1995............................................... F-34
Notes to Financial Statements.............................................................. F-35
Unaudited Statement of Assets Acquired as of July 31, 1997................................. F-37
Unaudited Interim Statements of Revenues and Direct
Operating Expenses for the Three and Nine Months Ended
July 31, 1997 and 1996.................................................................. F-38
Notes to Unaudited Interim Financial Statements............................................ F-39
ESCAPE THEATRES, INC.
Report of Independent Public Accountants................................................... F-40
Balance Sheet as of September 30, 1996..................................................... F-41
Statement of Operations for the Year Ended September 30, 1996.............................. F-42
Statement of Cash Flows for the Year Ended September 30, 1996.............................. F-43
Notes to Financial Statements.............................................................. F-44
Unaudited Condensed Balance Sheet as of March 31, 1997..................................... F-47
Unaudited Condensed Statements of Operations for the Three
and Six Months Ended March 31, 1997 and 1996............................................ F-48
Unaudited Condensed Statements of Cash Flows for the Three
and Six Months Ended March 31, 1997 and 1996............................................ F-49
Notes to Unaudited Interim Condensed Financial Statements.................................. F-50
THEATERS ACQUIRED FROM UNITED ARTISTS THEATRE CIRCUIT, INC.
Report of Independent Public Accountants................................................... F-51
</TABLE>
F-1
<PAGE> 99
<TABLE>
<S> <C>
Statements of Revenues and Direct Operating Expenses for the
Nine Months Ended September 30, 1996 and the Year
Ended December 31, 1995................................................................. F-52
Notes to Statements of Revenues and Direct Operating
Expenses................................................................................ F-53
THEATERS ACQUIRED FROM CROWN CINEMA CORPORATION AND CROWN
THEATRE CORPORATION
Report of Independent Public Accountants................................................... F-55
Statements of Revenues and Direct Operating Expenses for
the Nine Months Ended September 30, 1996 and the Years
Ended December 31, 1995 and 1994........................................................ F-56
Notes to Statements of Revenues and Direct Operating Expenses.............................. F-57
TRANS TEXAS AMUSEMENTS, INC.
Unaudited Statement of Operations for
the Period from January 1, 1995, through July 10, 1995, and
for the Year Ended December 31, 1994..................................................... F-66
Unaudited Statement of Cash Flows for the Period from
January 1, 1995, through July 10, 1995, and for the Year
Ended December 31, 1994.................................................................. F-59
Notes to Unaudited Financial Statements..................................................... F-60
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Financial
Statements Headnote..................................................................... P-1
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1996......................................... P-2
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended September 30, 1997................................. P-3
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1997................................................................ P-4
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.................................................................... P-5
FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants
on Financial Statement Schedule.......................................................... S-1
Schedule II - Valuation and Qualifying Accounts -
for the Year Ended December 31, 1996 and for the Period
from Inception (July 11, 1995), through December 31, 1995................................ II-7
</TABLE>
F-2
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollywood Theater Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Hollywood Theater Holdings, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1996, and for the period from inception (July 11, 1995), through December 31,
1995. These financial statements are the responsibility of Hollywood Theater
Holdings, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 Hollywood Theater
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the year ended December 31,
1996, and for the period from inception (July 11, 1995), through December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 29, 1997
F-3
<PAGE> 101
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................... $ 3,559,454 $ 447,343
Accounts receivable ................................................................. 366,142 49,762
Accounts receivable-- related parties ............................................... 634,300 --
Inventories ......................................................................... 446,180 --
Prepaid and other current assets .................................................... 1,267,255 119,288
Deposits ............................................................................ 1,564,046 20,679
------------ ------------
Total current assets ......................................................... 7,837,377 637,072
Property and equipment:
Buildings ........................................................................... 15,645,107 --
Furniture and equipment ............................................................. 14,045,128 2,609,741
Leasehold improvements .............................................................. 8,448,726 1,351,295
Land ................................................................................ 4,889,288 --
Land improvements ................................................................... 428,965 --
Construction in progress ............................................................ 1,100,970 --
------------ ------------
44,558,184 3,961,036
Less-- Accumulated depreciation and amortization .................................... (1,442,624) (319,249)
------------ ------------
Property and equipment, net .................................................. 43,115,560 3,641,787
Other assets:
Goodwill, net ....................................................................... 30,782,899 7,044,691
Intangible assets, net .............................................................. 10,619,457 1,606,517
------------ ------------
Total other assets ........................................................... 41,402,356 8,651,208
------------ ------------
Total assets ................................................................. $ 92,355,293 $ 12,930,067
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................................... $ 5,887,458 $ 1,602,853
Federal income taxes payable ........................................................ 17,550 400,802
Note payable ........................................................................ -- 100,000
Current maturities of long-term debt ................................................ 136,680 375,000
Current maturities of capital lease obligation ...................................... 32,432 44,329
------------ ------------
Total current liabilities .................................................... 6,074,120 2,522,984
Other liabilities:
Long-term debt, net of current maturities ........................................... 50,500,000 8,425,000
Capital lease obligation, net of current maturities ................................. -- 32,432
Deferred lease expenses ............................................................. 657,888 112,143
------------ ------------
Total liabilities ............................................................ 57,232,008 11,092,559
Commitments and contingencies (Note 11)
Convertible preferred stock, $.01 par value, 500,000 shares
authorized:
Series B Preferred Stock, $.01 par value, 163,319 shares
issued and outstanding in 1996, none in 1995 (redemption preference of $28,580,825) 1,633 --
Additional paid-in capital .......................................................... 28,577,697 --
Stockholders' equity
Series A Preferred Stock, 5,090 shares issued and
outstanding in 1995, none in 1996 ................................................. -- 51
Common stock, $.01 par value, 500,000 and 100,000 shares
authorized in 1996 and 1995, respectively; 82,489 and
22,622 shares issued and outstanding in 1996 and 1995, respectively .............. 825 226
Additional paid-in capital .......................................................... 11,160,881 2,744,723
Accumulated deficit ................................................................. (4,617,751) (907,492)
------------ ------------
Total stockholders' equity ................................................... 6,543,955 1,837,508
------------ ------------
Total liabilities and stockholders' equity ................................... $ 92,355,293 $ 12,930,067
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE> 102
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996, AND
FOR THE PERIOD FROM INCEPTION (JULY 11, 1995), THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Revenues:
Admissions......................................................................... $ 15,334,877 $ 3,912,596
Concessions........................................................................ 8,709,985 2,304,860
Other operating revenues........................................................... 834,378 116,205
------------ -----------
Total revenues............................................................. 24,879,240 6,333,661
------------ -----------
Operating expenses:
Film rental and advertising costs.................................................. 8,387,938 2,336,535
Cost of concessions and other...................................................... 1,411,869 339,476
Theater operating expenses......................................................... 10,998,455 2,620,045
General and administrative expenses................................................ 1,601,185 742,605
Depreciation and amortization...................................................... 3,151,582 739,028
------------ -----------
Total operating expenses................................................... 25,551,029 6,777,689
------------ -----------
Operating loss....................................................................... (671,789) (444,028)
Interest expense, net................................................................ 2,120,722 463,464
------------ -----------
Net loss............................................................................. $ (2,792,511) $ (907,492)
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 103
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996, AND
FOR THE PERIOD FROM INCEPTION (JULY 11, 1995), THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK
------------------- -------------------
ADDITIONAL
SHARES SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT TOTAL
----------- ------ ----------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 11, 1995 ....... -- $ -- -- $ -- $ -- $ -- $ --
Initial
capitalization ........... 5,090 51 22,622 226 2,544,723 -- 2,545,000
Issuance of detachable
warrants ................. -- -- -- -- 200,000 -- 200,000
Net loss ................... -- -- -- -- -- (907,492) (907,492)
------- -------- ------- ------- ----------- ------------ -----------
Balance, December 31, 1995 .. 5,090 51 22,622 226 2,744,723 (907,492) 1,837,508
Issuance of stock .......... 85,000 850 77,168 772 20,500,894 -- 20,502,516
Issuance of stock in
connection with
acquisitions ............... -- -- 12,872 129 2,252,471 -- 2,252,600
Retirement of stock ........ (90,090) (901) (30,173) (302) (14,137,207) -- (14,138,410)
Retirement of warrant ...... -- -- -- -- (200,000) (140,850) (340,850)
Stock dividend ............. -- -- -- -- -- (422,355) (422,355)
Cash dividend .............. -- -- -- -- -- (354,543) (354,543)
Net loss ................... -- -- -- -- -- (2,792,511) (2,792,511)
------- -------- ------- ------- ----------- ------------ -----------
Balance, December 31, 1996 ... -- $ -- 82,489 $ 825 $ 11,160,881 $ (4,617,751) $ 6,543,955
======= ======== ======= ======= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 104
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, AND
FOR THE PERIOD FROM INCEPTION (JULY 11, 1995), THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (2,792,511) $ (907,492)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization ........................ 3,151,582 739,028
Deferred lease expenses .............................. 545,745 148,940
Changes in assets and liabilities
Increase in accounts receivable .................... (950,680) (49,762)
Increase in prepaids and other current assets ...... (963,192) (22,190)
Increase in inventories ............................ (316,369) --
Decrease in other assets ........................... -- 15,897
Increase in deposits ............................... (1,543,367) --
Increase in accounts payable and accrued expenses .. 4,284,605 258,051
Decrease in federal income taxes payable ........... (383,252) --
------------ ------------
Net cash provided by operating activities ....... 1,032,561 182,472
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ..................... (10,734,244) (805,177)
Payments for business acquisitions, net of cash
acquired ............................................. (58,986,124) (9,863,792)
------------ ------------
Net cash used in investing activities ........... (69,720,368) (10,668,969)
------------ ------------
Cash flows from financing activities:
Borrowings under note payable ........................... -- 100,000
Borrowings under long-term debt ......................... 58,427,734 9,000,000
Payment of financing fees ............................... (3,718,121) --
Repayments of capital lease obligation .................. (44,329) (20,563)
Repayments of note payable and long-term debt ........... (16,691,054) (690,597)
Proceeds from issuance of stock ......................... 48,659,491 2,545,000
Repurchase of stock ..................................... (14,138,410) --
Retirement of warrants .................................. (340,850) --
Dividends paid .......................................... (354,543) --
------------ ------------
Net cash provided by financing activities ....... 71,799,918 10,933,840
------------ ------------
Net increase in cash ...................................... 3,112,111 447,343
Cash and cash equivalents, beginning of period ............ 447,343 --
------------ ------------
Cash and cash equivalents, at year-end .................... $ 3,559,454 $ 447,343
============ ============
Supplemental information:
Cash paid for interest .................................. $ 2,088,838 $ 386,631
============ ============
Noncash transactions:
Issuance of detachable warrants for common stock ........ $ -- $ 200,000
============ ============
Stock dividend .......................................... $ 422,355 $ --
============ ============
Issuance of stock in connection with business
acquisitions ......................................... $ 2,252,600 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 105
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION
Hollywood Theater Holdings, Inc. and its wholly owned subsidiary,
Hollywood Theaters, Inc., ("HTI") both Delaware corporations, were formed in
June 1995 to purchase all of the outstanding shares of Trans Texas Amusements,
Inc. ("TransTexas") and affiliates. Crown Theatre Corporation became a wholly
owned subsidiary of Hollywood Theaters, Inc. after it was acquired by Hollywood
Theater Holdings, Inc. on November 1, 1996, the effective date of the purchase.
Hollywood Theater Holdings, Inc., Hollywood Theaters, Inc., and Crown Theatre
Corporation (collectively "Holdings") owned and operated 72 motion picture
theaters at December 31, 1996. Holdings currently operates theaters in Idaho,
Kansas, Missouri, Ohio, Oklahoma, and Texas.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of Hollywood
Theater Holdings, Inc., and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of operating funds held in financial
institutions and petty cash held by the theaters. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
Deposits
Deposits consist of funds held in escrow in accordance with certain
purchase agreements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist primarily of concession products and theater supplies.
Accounts Receivable
Accounts receivable are due primarily from vendors and film companies
for reimbursable vendor promotion costs and film advertising costs. Film
advertising reimbursements are generally credited against the film rental
expense.
Vendor promotion reimbursements are included in other income.
Prepaid and Other Current Assets
Prepaid and other current assets consist of prepaid insurance and
theater start-up costs. Theater start-up costs are amortized over a one-year
period.
F-8
<PAGE> 106
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture
and equipment, and buildings is provided using the straight-line method over an
eight-year period and thirty-year period, respectively. Leasehold improvements
are amortized using the straight-line method over the lesser of the lease period
or the estimated useful lives of the leasehold improvements.
Intangible Assets
Intangible assets include deferred finance costs and covenants
not-to-compete which are amortized using the straight-line method over a five
year period.
Goodwill
Goodwill is recorded as the excess of cost over fair value of assets
acquired and is amortized over 15 years. Accumulated amortization of goodwill
was approximately $1,213,000 and $246,000 at December 31, 1996 and 1995,
respectively.
Holdings reviews the carrying value of goodwill at least annually on a
market-by-market basis to determine if facts and circumstances exist which would
suggest the goodwill may be impaired or that the amortization period needs to be
modified. Among the factors Holdings considers in making the evaluation are
changes in Holdings' market position, reputation, profitability and geographic
penetration. If indicators are present which may indicate impairment is
probable, Holdings will prepare a projection of the undiscounted cash flows of
the specific market and determine if goodwill is recoverable based on these
undiscounted cash flows. If impairment is indicated, then an adjustment will be
made to reduce the carrying amount of the goodwill to its fair value. Similar
reviews are made of other long-lived assets. No such adjustments were required
at December 31, 1996 or 1995.
Deferred Lease Expenses
Rent expense is recognized on a straight-line basis after considering
the effect of rent escalation provisions.
Revenues
Revenues are recognized when admissions and concessions sales are
received at the theaters. Film rental costs are accrued based on the applicable
box office receipts and the terms of the film licenses.
Advertising
Advertising costs are expensed when incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year statements
to conform them to the current year presentation.
F-9
<PAGE> 107
3. INTANGIBLE ASSETS
A summary of intangible assets at December 31, 1996 and 1995, is as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Covenants not-to-compete ............ $ 7,098,827 $ 1,000,000
Deferred finance and other costs ..... 4,674,016 774,176
------------ ------------
11,772,843 1,774,176
Less- Accumulated amortization ...... (1,153,386) (167,659)
------------ ------------
$ 10,619,457 $ 1,606,517
============ ============
</TABLE>
4. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Senior term note payable to a bank; interest of prime plus 1.5% (10.25% at
December 31, 1995), payable monthly; principal payable in quarterly
installments, with a final maturity on December 31, 2000; paid in
1996 ........................................................................ $ -- $ 6,500,000
Subordinated term note payable to an individual;
interest ranging from 9%-11.5% payable quarterly;
principal due June 30, 2002; paid in 1996 ................................... -- 2,500,000
Term note payable to a bank; interest of LIBOR plus
2.75% or base rate plus 1.75% (10% at December 31, 1996), payable monthly;
principal payments beginning
March, 1998; final maturity on December 31, 2001 ............................ 50,000,000 --
Revolving credit agreement, interest at LIBOR plus 2.75%
or the base rate plus 1.75% (weighted average of 10%
at December 31, 1996); due 2001 ............................................. 500,000 --
Promissory note payable to a bank; interest of prime
plus 1% (9.25% at December 31, 1996); principal and
accrued interest due on November 1, 1997 .................................... 136,680 --
------------ ------------
Total long-term debt .......................................................... 50,636,680 9,000,000
Less --
Current maturities .......................................................... (136,680) (375,000)
Discount on long-term debt .................................................. -- (200,000)
------------ ------------
Long-term debt ................................................................ $ 50,500,000 $ 8,425,000
============ ============
</TABLE>
At December 31, 1995, Holdings had a working capital line of credit
agreement with a lender that allowed borrowings of up to $100,000 with interest
at prime plus 1.5%. On November 1, 1996, Holdings entered into a $25.0 million
revolving credit agreement and a $50.0 million term note borrowing agreement
with a financial institution which replaced Holdings' prior line of credit
agreement. The proceeds from the term note and revolving credit agreement were
primarily used to retire existing debt and to fund the acquisition of certain
assets from Crown Cinema Corporation and United Artists Theatre Circuit, Inc.
The agreement stipulates that total borrowings are not to exceed 4.75 times
Holdings' "trailing" twelve-month cash flow and certain other restrictions. As
of December 31, 1996, management believes Holdings was in compliance with these
covenants. All borrowings under this agreement are secured by the assets and all
shares of the capital stock of Holdings.
Long-term debt at December 31, 1996, matures as follows:
<TABLE>
<S> <C>
1997................................................. $ 136,680
1998................................................. 6,000,000
1999................................................. 11,250,000
2000................................................. 12,750,000
2001................................................. 20,500,000
------------
$ 50,636,680
============
</TABLE>
F-10
<PAGE> 108
5. LEASES
Holdings leases certain of its theater premises with lease terms of 4
to 20 years. Additionally, certain leases provide for contingent rentals based
on operating results and require the payment of taxes, insurance, and other
costs applicable to the property. Holdings, at its option, may renew a
substantial portion of the leases at defined or then fair rental rates for
various periods. Some leases also provide for escalating rent payments
throughout the lease term. A deferred lease expenses accrual of $657,888 and
$112,143 in 1996 and 1995, respectively has been provided to account for these
leases on a straight-line basis. Rent expense for the periods ended December 31,
1996 and 1995, totaled $2,964,755, and $965,033, respectively.
Future minimum payments under noncancelable leases with initial or
remaining terms in excess of one year at December 31, 1996, are due as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------ ------
<S> <C> <C>
1997.............................................................................. $ 6,700,000 $ 32,802
1998.............................................................................. 6,600,000 --
1999.............................................................................. 6,400,000 --
2000.............................................................................. 5,800,000 --
2001.............................................................................. 5,000,000 --
Thereafter........................................................................ 35,600,000 --
------------ --------
Total................................................................... 66,100,000 32,802
Less-- Amount representing interest............................................... -- (337)
------------ --------
$ 66,100,000 $ 32,465
============ ========
</TABLE>
6. INCOME TAXES
As of December 31, 1996, Holdings has a net operating loss (NOL)
carryforward of approximately $2,525,363 for tax reporting purposes which begins
to expire in calendar year 2010. In October 1996, Holdings underwent an
ownership change pursuant to Internal Revenue Code Section 382. Therefore, the
NOL carryforward to future years will be limited. Due to the lack of an earnings
history, the tax benefits normally associated with this NOL carryforward and
other tax assets have been fully valued and have not been recorded in the
accompanying financial statements.
Holdings' deferred income taxes at December 31, 1996 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Assets --
Amortization......................................................... $ 112,697 $ 42,256
Deferred lease expenses.............................................. 223,682 50,640
Net operating loss carryforward...................................... 858,623 180,941
Depreciation......................................................... 48,102 29,443
----------- ----------
Total assets................................................. 1,243,104 303,280
Less-- Valuation allowance........................................... (1,243,104) (303,280)
----------- ----------
Total deferred income taxes.................................. $ -- $ --
=========== ==========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities. Cash
and cash equivalents, accounts receivable, and accounts payable and accrued
liabilities are reflected in the consolidated financial statements at fair value
because of the short-term maturity of these instruments. In addition, the fair
value of Holdings' long-term debt and capital lease obligations were determined
to approximate its carrying value since (i) a substantial amount of the December
31, 1996, long-term debt and capital lease obligations were issued at fair
market value during 1996 and (ii) long-term debt amounts are interest rate
variable in nature.
F-11
<PAGE> 109
Changes in the assumptions or estimation methodologies may have a
material effect on these estimated fair values.
8. STOCKHOLDERS' EQUITY
In April 1996, Holdings issued 50,000 shares of Series A Preferred
Stock ($.01 par value) to Precept Investors, Inc. and Stratford Capital Partners
L.P. (collectively "Precept/Stratford") for proceeds of $5.0 million.
In October 1996, The Beacon Group III Focus Value Fund, L.P. ("Beacon")
purchased 35,000 shares of Series A Preferred Stock for $3.5 million.
In November 1996, Beacon purchased approximately $21.5 million of
common stock and shares of a new class of Series B Convertible Redeemable
Preferred Stock ("Series B Preferred Stock"). The Series B Preferred Stock is
redeemable after the seventh anniversary of the issue date by the holders, as
long as a qualifying initial public offering of the common stock has not
occurred. The preferred shares are automatically converted into common stock,
upon completion of a qualifying initial public offering. The Series B Preferred
Stock is convertible, initially on a one-for-one basis, subject to adjustment to
reflect specified antidilution events, including without limitation, stock
splits, stock combinations, certain issuances of equity and certain business
combination transactions. In connection with the transaction, Holdings offered
to purchase the outstanding common stock from existing stockholders for $170 per
share. Shareholders sold 30,173 shares to Holdings for a total cost of
approximately $5.0 million. In addition, Holdings exchanged Beacon's and
Precept/Stratford's Series A Preferred Stock for the newly authorized Series B
Preferred Stock at a ratio of 1.75/1.00 shares.
The Board of Directors authorized a 9% preferred stock dividend of
Series B Preferred Stock on December 15, 1996 to the stockholders of record of
Series B Preferred Stock on December 15, 1996. The stock dividend was paid on
December 31, 1996.
In anticipation of the adoption of a stock option plan, 37,000 shares
of common stock have been reserved for issuance.
At December 31, 1995, shares of common stock were reserved for warrants
for the purchase of up to 750 shares of common stock of 10,000 shares issued and
outstanding of Hollywood Theaters, Inc. The exercise price is $0.01 per share
and the warrants expire July 11, 2002. The warrants were carried at their
estimated fair value at their issue date. The unexercised warrants were retired
for $340,850 in 1996.
9. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following are condensed consolidating financial statements of
Hollywood Theater Holdings, Inc. and Hollywood Theaters, Inc. (in thousands).
These statements are presented to provide financial information with respect to
Hollywood Theaters, Inc.
F-12
<PAGE> 110
<TABLE>
<CAPTION>
HOLLYWOOD HOLLYWOOD CONSOLIDATING HOLDINGS
DECEMBER 31, 1995 THEATER HOLDINGS INC. THEATERS, INC. ENTRIES CONSOL'D
----------------- --------------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and cash investments ............. $ -- $ 447 $ -- $ 447
Other current assets .................. -- 190 -- 190
-------- -------- -------- --------
Total current assets .................. -- 637 -- 637
Property, plant and equipment, net .... -- 3,642 -- 3,642
Investment in subsidiaries ............ 1,838 -- (1,838) --
Other noncurrent assets ............... -- 8,651 -- 8,651
-------- -------- -------- --------
$ 1,838 $ 12,930 $ (1,838) $ 12,930
======== ======== ======== ========
Liabilities and equity:
Current liabilities ................... $ -- $ 2,523 $ -- $ 2,523
Long-term debt ........................ -- 8,425 -- 8,425
Other noncurrent liabilities .......... -- 144 -- 144
Stockholders' equity .................. 1,838 1,838 (1,838) 1,838
-------- -------- -------- --------
$ 1,838 $ 12,930 $ (1,838) $ 12,930
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HOLLYWOOD HOLLYWOOD CONSOLIDATING HOLDINGS
DECEMBER 31, 1996 THEATER HOLDINGS INC. THEATERS, INC. ENTRIES CONSOL'D
----------------- --------------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and cash investments ............. $ -- $ 3,559 $ -- $ 3,559
Other current assets .................. -- 4,278 -- 4,278
-------- -------- -------- --------
Total current assets .................. -- 7,837 -- 7,837
Property, plant and equipment, net .... -- 43,116 -- 43,116
Investment in subsidiaries ............ 35,260 -- (35,260) --
Other noncurrent assets ............... -- 41,402 -- 41,402
-------- -------- -------- --------
$ 35,260 92,355 (35,260) $ 92,355
======== ======== ======== ========
Liabilities and equity:
Current liabilities ................... 137 $ 5,937 -- $ 6,074
Long-term debt ........................ -- 50,500 -- 50,500
Other noncurrent liabilities .......... -- 658 -- 658
Convertible Preferred Stock ........... 28,579 -- -- 28,579
Stockholders' equity .................. 6,544 35,260 (35,260) 6,544
-------- -------- -------- --------
$ 35,260 $ 92,355 $(35,260) $ 92,355
======== ======== ======== ========
</TABLE>
F-13
<PAGE> 111
<TABLE>
<CAPTION>
HOLLYWOOD HOLLYWOOD CONSOLIDATING HOLDINGS
DECEMBER 31, 1995 THEATER HOLDINGS INC. THEATERS, INC. ENTRIES CONSOL'D
----------------- --------------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Revenues ................................... $ -- $ 6,334 $ -- $ 6,334
------- ------- ------- -------
Costs and expenses:
Direct theater costs .................... -- 5,296 -- 5,296
General and administrative .............. -- 743 -- 743
Depreciation and amortization ........... -- 739 -- 739
------- ------- ------- -------
-- 6,778 -- 6,778
------- ------- ------- -------
Operating loss ............................. -- (444) -- (444)
------- ------- ------- -------
Interest expense, net of interest income ... -- 463 -- 463
------- ------- ------- -------
Equity in loss of subsidiaries ............. (907) -- 907 --
------- ------- ------- -------
Net loss ................................... $ (907) $ (907) $ 907 $ (907)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
HOLLYWOOD HOLLYWOOD CONSOLIDATING HOLDINGS
DECEMBER 31, 1996 THEATER HOLDINGS INC. THEATERS, INC. ENTRIES CONSOL'D
----------------- --------------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Revenues ................................... $ -- $ 24,879 $ -- $ 24,879
-------- -------- -------- --------
Costs and expenses:
Direct theater costs .................... -- 20,798 -- 20,798
General and administrative .............. -- 1,601 -- 1,601
Depreciation and amortization ........... -- 3,152 -- 3,152
-------- -------- -------- --------
-- 25,551 -- 25,551
-------- -------- -------- --------
Operating loss ............................. -- (672) -- (672)
-------- -------- -------- --------
Interest expense, net of interest income ... -- 2,121 -- 2,121
-------- -------- -------- --------
Equity in loss of subsidiaries ............. (2,793) -- 2,793 --
-------- -------- -------- --------
Net loss ................................... $ (2,793) $ (2,793) $ 2,793 $ (2,793)
======== ======== ======== ========
</TABLE>
F-14
<PAGE> 112
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
YEARS ENDED:
<TABLE>
<CAPTION>
HOLLYWOOD HOLLYWOOD CONSOLIDATING HOLDINGS
DECEMBER 31, 1995 THEATER HOLDINGS INC. THEATERS, INC. ENTRIES CONSOL'D
----------------- --------------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities ............................. $ -- $ 182 $ -- $ 182
Cash flows from investing activities:
Purchases of property and equipment ........................... -- (805) -- (805)
Payments for business acquisitions, net of cash acquired -- ... (9,864) -- (9,864)
Contributions to subsidiaries ................................. (2,545) -- 2,545 (9,864)
-------- -------- -------- -------
(2,545) (10,669) 2,545 (10,669)
Cash flows from financing activities:
Borrowings under note payable and long-term debt .............. 9,100 -- 9,100
Repayments of note payable and long-term debt ................. -- (691) -- (691)
Proceeds from issuance of stock ............................... 2,545 2,545 (2,545) 2,545
Other ......................................................... -- (20) -- (20)
--------
2,545 10,934 (2,545) 10,934
-------- -------- -------- --------
Net increase in cash ............................................. $ -- $ 447 $ -- $ 447
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HOLLYWOOD HOLLYWOOD CONSOLIDATING HOLDINGS
DECEMBER 31, 1996 THEATER HOLDINGS INC. THEATERS, INC. ENTRIES CONSOL'D
----------------- --------------------- -------------- ------------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities ............................. $ -- $ 1,032 $ -- $ 1,032
--------
Cash flows from Investing activities:
Purchases of property and equipment ........................... -- (10,734) -- (10,734)
Payments for business acquisitions, net of cash acquired.-- ... (58,986) -- (58,986)
Contributions to subsidiaries ................................. (48,659) -- 48,659 --
-------- -------- -------- --------
(48,659) (69,720) 48,659 (69,720)
Cash flows from financing activities:
Borrowings under note payable and long-term debt .............. -- 58,428 -- 58,428
Repayments of note payable and long-term debt ................. -- (16,691) -- (16,691)
Proceeds from issuance of stock ............................... 48,659 48,659 (48,659) 48,659
Other ......................................................... -- (18,596) -- (18,596)
-------- -------- -------- --------
48,659 71,800 (48,659) 71,800
-------- -------- -------- --------
Net increase in cash ............................................. $ -- $ 3,112 $ -- $ 3,112
======== ======== ======== ========
</TABLE>
F-15
<PAGE> 113
Notes to Condensed Consolidated Financial Statements
(a) These condensed consolidating financial statements should be read in
conjunction with the consolidated financial statements of Holdings and
notes thereto of which this note is an integral part.
(b) As of December 31, 1995, Holdings owns 100% interest in Hollywood
Theaters, Inc. These condensed consolidating financial statements
present Holdings' investment in its subsidiaries using the equity
method. Under this method, investments are recorded at cost and
adjusted for the parent company's ownership share of the subsidiary's
cumulative results of operations. In addition, investments increase in
the amount of contributions to subsidiaries and decrease in the amount
of distributions from subsidiaries.
10. RETIREMENT SAVINGS PLAN
Holdings has a 401(k) profit sharing plan for the benefit of all
eligible employees and makes contributions as determined annually by the Board
of Directors. No contributions were made in 1996 or 1995.
11. ACQUISITIONS
Effective July 11, 1995, Holdings acquired for approximately $6,600,000
in cash and $2,500,000 in debt, all of the outstanding capital stock of
TransTexas, which includes 11 theaters in Texas and Oklahoma.
Effective April 11, 1996, Holdings acquired, for $3,264,000 in cash,
six theaters in Texas from Cinemore, Inc. and related entities.
Effective August 12, 1996, Holdings acquired, for $1,798,000 in cash,
two theaters in Texas from Beaumont Cinema Ventures, L.P.
Effective November 1, 1996, Holdings acquired 33 theaters primarily in
Kansas, Missouri, and Ohio from Crown Cinema Corporation and Crown Theatre
Corporation. Holdings issued 12,872 shares of its common stock to the seller, at
a fair market value of $2,252,600, and paid cash of $41,123,000 to the seller
for these acquisitions. As specified in the Crown Cinema Corporation purchase
agreement, an adjustment will be made to the purchase price based upon the
performance of the acquired theaters between September 8, 1996, and October 31,
1996. As of December 31, 1996, the amount of this adjustment had not been
finalized. Therefore, the purchase price allocation used to ascertain the
associated value of goodwill, and other acquired assets is preliminary.
Potentially, 3,218 shares of additional common stock may be issued to the former
stakeholder of Crown Cinema Corporation upon final agreement of the purchase
price. The former stakeholder of Crown Cinema Corporation is now a stockholder
and consultant with Holdings.
Effective November 14, 1996, Holdings acquired, for $700,000 in cash,
two theaters in Texas from General Cinema Corp. of Texas.
Effective in November and December 1996, Holdings acquired, for
$11,285,000 in cash, 19 theaters in Idaho, Oklahoma, and Texas from United
Artists Theatre Circuit Inc. and related entities.
The 1996 and 1995 acquisitions have been accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the assets acquired (including all identifiable intangible assets, if material)
based upon their estimated fair values at the dates of acquisition in accordance
with APB No. 16. The results of operations of the acquired theaters are included
in the consolidated financial statements from the respective dates of
acquisition. None of the acquisition agreements contain any significant earn-out
provisions with the sellers.
F-16
<PAGE> 114
The following is a summary of the net assets acquired and liabilities
assumed in connection with the foregoing acquisitions in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Assets acquired:
Cash and cash equivalents ............... $ 55,661 $ --
Inventories ............................. 129,844 71,370
Prepaid current assets and other ........ 442,026 106,649
----------- -----------
Total current assets ............ 627,531 178,019
Furniture and equipment ................. 9,011,295 2,122,221
Leasehold improvements .................. 6,123,077 594,313
Building ................................ 10,963,717 --
Land .................................... 2,989,902 --
Land improvements ....................... 436,254 --
Construction-in-progress ................ 117,297 --
Covenants not-to-compete ................ 6,098,827 1,000,000
----------- -----------
Total other assets .............. 35,740,369 3,716,534
----------- -----------
Total assets acquired ........... 36,367,900 3,894,553
----------- -----------
Liabilities assumed:
Accounts payable ........................ -- 1,808,315
Note payable ............................ -- 690,597
----------- -----------
Total liabilities assumed ....... -- 2,498,912
----------- -----------
Net assets acquired ............. 36,367,900 1,395,641
Purchase price, including acquisition costs 61,073,027 9,089,620
----------- -----------
Goodwill .................................. $24,705,127 $ 7,693,979
=========== ===========
</TABLE>
Pro Forma Information
The following unaudited pro forma information reflects the effect on
the consolidated statements of operations assuming that significant acquisitions
were consummated as of January 1, 1996 and 1995. This information may not be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on such dates. Therefore, pro forma information cannot
be considered indicative of future operations. The unaudited pro forma
information for the year ended December 31, 1996 and the period from inception
(July 11, 1995), through December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Total revenues............................................................. $ 78,710,000 $ 37,830,000
Net income................................................................. 4,323,000 3,102,000
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
Holdings, in the normal course of business, is party to various matters
of litigation. Management is of the opinion that the eventual outcome of these
matters will not have a material adverse effect on Holdings' financial position
or results of operations.
13. RELATED-PARTY TRANSACTIONS
Precept Investors, Inc. ("Precept"), one of Holdings' shareholders, has
been engaged by Holdings to construct various theaters. During 1996, Precept was
involved in the construction of one theater and the improvements to one existing
theater, and was paid approximately $4,600,000 for these services. At December
31, 1996, approximately $1,200,000 was owed to Precept and is included in
accounts payable and accrued expenses on the accompanying balance sheet.
At December 31, 1996, Holdings was owed approximately $615,000 by a
current shareholder and consultant with Holdings, who is a former stakeholder of
Crown Cinema Corporation and Crown Theatre Corporation. The
F-17
<PAGE> 115
receivable primarily represents costs paid by Holdings for services performed
prior to the acquisition of the theaters by Holdings.
14. SUBSEQUENT EVENTS
In March 1997, Holdings received a commitment for a long-term, first
mortgage loan of $3.8 million from a financial institution. The proceeds will be
used to construct a theater in Lawrence, Kansas. Holdings began construction in
January 1997, with completion in May 1997.
In March 1997, Holdings entered into a purchase contract for $8.7
million to acquire a 16-screen theater under construction in Waco, Texas (the
"Waco Acquisition"). Additionally, Holdings has committed $2.1 million for the
purchase of furniture, fixtures, and equipment for this theater. The purchase
will be accounted for using the purchase method of accounting. Construction
should be completed in August 1997. Holdings also signed a contract to buy land
in Norman, Oklahoma, for $2.9 million.
In April 1997, Holdings signed a letter of intent to buy two theaters
for $8.5 million. The purchase will be accounted for using the purchase method
of accounting. Additionally, the Board of Directors approved 200,000 shares of
$.01 par value Series C Convertible Redeemable Preferred Stock. Additionally,
Holdings sold 43,076 shares of this preferred stock and 18,462 of common stock.
Net proceeds from the sale of the 61,500 shares were approximately $12.0 million
and were used to finance the above transactions and current construction
activity.
On August 1, 1997, HTI completed a $110.0 million offering of Senior
Subordinated Notes. The Notes bear interest at 10 5/8% and are due 2007. The
Notes are redeemable at HTI's option and upon the occurrence of certain events
in the future. The Notes also include certain restrictive covenants relative to
the maintenance of financial ratios and the incurrence of additional
indebtedness.
During the nine months ended September 30, 1997, HTI paid approximately
$27.7 million consideration in connection with acquisitions. The acquisitions
will be accounted for under the purchase method of accounting.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the year ended December
31, 1996, and the period from inception (July 11, 1995) through December 31,
1995, are as follows:
Year Ended December 31, 1996
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenues........................................ $ 2,716,463 $ 3,779,273 $ 4,908,796 $ 13,474,708
Operating expenses........................................ 3,161,029 4,180,596 5,006,021 13,203,383
----------- ----------- ----------- ------------
Operating income (loss)................................... (444,566) (401,323) (97,225) 271,325
Interest expense, net..................................... 219,113 218,298 275,959 1,407,352
----------- ----------- ----------- ------------
Net loss........................................ $ (663,679) $ (619,621) $ (373,184) $ (1,136,027)
=========== =========== =========== ============
</TABLE>
Period from Inception (July 11, 1995), Through December 31, 1995
<TABLE>
<CAPTION>
THIRD FOURTH
QUARTER QUARTER
----------- -----------
<S> <C> <C>
Operating revenues.............................................................. $ 3,219,016 $ 3,114,645
Operating expenses.............................................................. 3,220,023 3,557,666
----------- -----------
Operating loss.................................................................. (1,007) (443,021)
Interest expense, net........................................................... 226,910 236,554
----------- -----------
Net loss........................................................................ $ (227,917) $ (679,575)
=========== ===========
</TABLE>
F-18
<PAGE> 116
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
1997
-----------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents..................................................................... $ 9,108
Accounts receivable........................................................................... 1,206
Inventories................................................................................... 1,151
Prepaid and other current assets.............................................................. 2,852
Deposits...................................................................................... 2,442
------------
Total current assets.................................................................. 16,759
Property and equipment:
Buildings..................................................................................... 39,781
Furniture and equipment....................................................................... 27,182
Leasehold improvements........................................................................ 14,459
Land and land improvements.................................................................... 12,386
Construction in progress...................................................................... 9,607
------------
103,415
Less-- Accumulated depreciation and amortization.............................................. (5,457)
------------
Property and equipment, net........................................................... 97,958
Other assets:
Goodwill, net................................................................................. 45,296
Intangible assets, net........................................................................ 15,365
------------
Total other assets.................................................................... 60,661
------------
Total assets.......................................................................... $ 175,378
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................................................... $ 9,357
Current maturities of long-term debt.......................................................... 3,937
------------
Total current liabilities............................................................. 13,294
Other liabilities:
Long-term debt................................................................................ 110,000
Deferred lease expenses....................................................................... 1,078
------------
Total other liabilities............................................................... 111,078
------------
Total liabilities..................................................................... 124,372
Commitments and contingencies
Convertible preferred stock
Series B preferred stock, $.01 par value, 400,000 shares authorized, 163,319 shares
issued and outstanding in 1997............................................................. 2
Series C preferred stock, $.01 par value, 400,000 shares authorized, 78,973 shares
issued and outstanding in 1997............................................................. 1
Additional paid-in capital.................................................................... 46,830
Stockholders' equity
Common stock, $.01 par value, 1,000,000 shares authorized in
1997; 116,336 shares issued and outstanding................................................ 1
Additional paid-in capital.................................................................... 17,761
Accumulated deficit........................................................................... (13,589)
------------
Total stockholders' equity............................................................ 4,173
------------
Total liabilities and stockholders' equity............................................ $ 175,378
============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-19
<PAGE> 117
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
-------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------------- -----------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Admissions and other operating revenue................ $14,772 $2,966 $35,957 $7,035
Concessions........................................... 7,779 1,943 18,895 4,370
------ ----- ------ -----
Total revenues................................ 22,551 4,909 54,852 11,405
------ ----- ------ ------
Operating expenses:
Film rental and advertising costs..................... 7,869 1,578 19,304 3,952
Cost of concessions and other......................... 1,266 320 3,021 684
Theater operating expenses............................ 8,558 2,183 22,241 5,316
General and administrative expenses................... 1,631 512 3,992 1,158
Depreciation and amortization......................... 2,984 413 7,930 1,238
------ ------ ------ ------
Total operating expenses...................... 22,308 5,006 56,488 12,348
------ ----- ------ ------
Operating income (loss)................................. 243 (97) (1,636) (943)
Interest expense, net................................... 2,234 276 4,482 713
------ ------ ------ ------
Net loss................................................ $(1,991) $(373) $(6,118) $(1,656)
======= ====== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 118
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities ........................ $ 2,734 $ (367)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment .................................. (28,242) (5,641)
Payments for business acquisitions, net of cash acquired ............. (48,707) (5,264)
--------- ---------
Net cash used in investing activities ........................ (76,949) (10,905)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Senior Subordinated Notes .................. 110,000 --
Borrowings under line of credit ...................................... 14,000
Net borrowings on notes payable ...................................... 3,800 5,046
Repayment on line of credit .......................................... (14,500) --
Repayment of term loan ............................................... (50,000) --
Repayments of capital lease obligations .............................. (32) (32)
Payments of financing fees ........................................... (5,505) (643)
Proceeds from issuance of stock ....................................... 22,000 6,803
--------- ---------
Net cash provided by financing activities .................... 79,763 11,174
--------- ---------
Net increase in cash ................................................... 5,548 (98)
Cash and cash equivalents, beginning of period ......................... 3,560 447
--------- ---------
Cash and cash equivalents, end of period ............................... $ 9,108 $ 349
========= =========
Non cash transactions:
Stock dividend ....................................................... 2,853 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 119
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited Interim Condensed
Consolidated Financial Statements of Hollywood Theater Holdings, Inc. and
subsidiaries ("Holdings") include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly Holdings' financial position
as of September 30, 1997, and the results of its operations for the three and
nine months ended September 30, 1997 and 1996. Due to the seasonality of
Holdings' operations, the results of its operations for the interim periods
ended September 30, 1997 and 1996, may not be indicative of total results for
the full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
promulgated by the Securities and Exchange Commission. The unaudited Interim
Condensed Consolidated Financial Statements should be read in conjunction with
the audited Consolidated Financial Statements of Hollywood Theater Holdings,
Inc. and subsidiaries and accompanying notes for the years ended December 31,
1996 and 1995.
2. FINANCING ARRANGEMENTS
The Company completed an offering of $110.0 million of Senior
Subordinated Notes (the "Offering") in August 1997. The notes bear interest at
10 5/8% and are due 2007. The notes are redeemable at the Company's option and
upon the occurrence of certain events in the future. The notes also include
restrictive covenants relative to the maintenance of financial ratios and the
incurrence of additional indebtedness. The Company used the net proceeds from
the Offering to repay all of the existing indebtedness under its existing
facility, to finance certain acquisitions, to fund a portion of construction and
other expenses related to the 1997 theater building program, and for general
corporate purposes.
In conjunction with the Offering, the Company repaid all of its
existing indebtedness under its former bank facility at that time and entered
into the Senior Bank Facility. The Senior Bank Facility provides for a revolving
credit facility of $50.0 million with a five year term; however, the total
available borrowings under the Senior Bank Facility may be less based on
leverage levels of the Company.
At September 30, 1997 the Company was not in compliance with two of the
thirteen Senior Bank Facility debt covenants; however, during January 1998 the
Senior Bank Facility was amended and the Company is currently in compliance with
the Senior Bank Facility. At September 30, 1997 and December 31, 1997, no
amounts were borrowed under the Senior Bank Facility.
3. ACQUISITIONS
In May 1997, Holdings completed the Beaumont/Port Arthur Acquisition,
pursuant to which it acquired two theaters with an aggregate of 12 screens in
Beaumont and Port Arthur, Texas from United Artists Theatre Circuit Inc. for a
purchase price of $3.4 million. Holdings expects these newly acquired theaters
to complement the Company's existing theaters in Beaumont.
In June 1997, Holdings completed the acquisition of two theaters with
an aggregate of 14 screens in Killeen, Texas from Escape Theatres, Inc. for a
purchase price of $8.5 million.
F-22
<PAGE> 120
In August 1997, Holdings completed the acquisition of seven theaters
with an aggregate of 50 screens located in Tulsa and Oklahoma City, Oklahoma
from General Cinema Corp. of Oklahoma, Inc. for a purchase price of $15.8
million.
In September 1997, Holdings completed the purchase of a
newly-constructed 16-screen theater in Waco, Texas for a purchase price of $8.7
million (The "Waco Acquisition"). Additionally, Holdings purchased furniture,
fixtures, and equipment for this theater for an additional $2.1 million. The
purchase was accounted for using the purchase method of accounting.
Pro Forma Information
The following unaudited pro forma information gives effect to (i) the
significant acquisitions described above and the exchange of theaters described
below and (ii) the Offering, assuming such transactions had occurred on January
1, 1996. This information may not be indicative of the results that would have
actually been obtained if the acquisitions and the Offering had occurred on
such date. Therefore, pro forma information cannot be considered indicative of
future operations. The unaudited pro forma information for the nine months
ended September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Total revenues............................. $65,704,000 $59,000,000
Net loss................................... 9,368,000 7,350,000
</TABLE>
4. EQUITY ISSUANCES
In April 1997, Holdings issued 43,076 shares of Series C Preferred
Stock ($.01 par value) ("Series C") and 18,462 shares of common stock ($.01 par
value) to the Beacon Group III-Focus Value Fund, L.P. ("Beacon") and Stratford
Capital Partners, L.P. ("Stratford) for approximately $12.0 million.
In May 1997, Holdings issued 35,897 shares of Series C and 15,385
shares of common stock for approximately $10.0 million to Hoak Communications
Partners, L.P. ("Hoak").
In November 1997, Holdings issued 51,283 shares of Series C for
approximately $10.0 million to Beacon and Stratford.
In December 1997, the Board of Directors approved 400,000 shares of
$.01 par value Series D Convertible Redeemable Preferred Stock. Additionally,
Holdings sold 10,256 shares of this preferred stock for approximately $2.0
million to Hoak.
5. COMMITMENTS AND CONTINGENCIES
Holdings, in the normal course of business, is party to various matters
of litigation. Management is of the opinion that the eventual outcome of these
matters will not have a material adverse effect on Holdings' financial position
or results of operations.
6. SUBSEQUENT EVENTS
In October 1997, Holdings completed the exchange of six theaters with
an aggregate of 31 screens operated by Holdings in Kansas and Missouri for five
theaters with an aggregate of 22 screens owned by Dickinson, Inc. in the same
states and cash of approximately $1.1 million.
In October 1997, Holdings completed the acquisition of one theater with
six screens in Tomball, Texas from Cineco Cinema Corporation. for a purchase
price of approximately $1.8 million.
F-23
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollywood Theater Holdings, Inc.:
We have audited the accompanying statement of assets acquired of the theaters
acquired (the "Acquired Theaters") from Dickinson, Inc. as of May 29, 1997, and
the related statements of revenues and direct operating expenses for the year
then ended. These financial statements are the responsibility of Dickinson
Theatres, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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.
The statements of assets acquired and revenues and direct operating expenses for
the Acquired Theaters were prepared for the purpose of complying with the rules
and regulations of the Securities and Exchange Commission as described in Note
1, and are not intended to be a complete presentation of assets, revenues, and
expenses.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets acquired of the Acquired Theaters as of May
29, 1997, and the revenues and direct operating expenses for the year then
ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 16, 1997
F-24
<PAGE> 122
FOR THE THEATERS ACQUIRED FROM DICKINSON, INC.
STATEMENT OF ASSETS ACQUIRED
AS OF MAY 29, 1997
<TABLE>
<CAPTION>
MAY 29,
1997
--------
<S> <C>
Inventories ....................... $ 17,973
Property and equipment, net ....... 815,263
--------
Total assets acquired ..... $833,236
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-25
<PAGE> 123
FOR THE THEATERS ACQUIRED FROM DICKINSON, INC.
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEAR ENDED MAY 29, 1997
<TABLE>
<CAPTION>
YEAR ENDED
MAY 29, 1997
------------
<S> <C>
Revenues:
Admissions ......................................... $3,505,649
Concessions ........................................ 1,466,537
Other operating revenues ........................... 20,222
----------
Total revenues ............................. 4,992,408
Operating expenses:
Film rental and advertising costs .................. 1,856,373
Cost of concessions and other ...................... 264,537
Theater operating expenses ......................... 1,751,886
----------
Total operating expenses ................... 3,872,796
----------
Excess of revenues over direct operating expenses .... $1,119,612
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-26
<PAGE> 124
FOR THE THEATERS ACQUIRED FROM DICKINSON, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 29, 1997
1. BASIS OF PRESENTATION:
In August 1997, Hollywood Theaters, Inc. ("Hollywood") entered into a definitive
agreement with Dickinson, Inc. ("Dickinson") pursuant to which Hollywood will
exchange six theaters it operates in Kansas and Missouri for five theaters owned
by Dickinson ("Acquired Theaters") in the same states and cash of approximately
$1.1 million.
The accompanying statements of revenues and direct operating expenses do not
include general and administrative expense, interest income or expense, a
provision for depreciation, and amortization or any provision for income taxes
because the property interests acquired represent only a portion of a business
and the costs incurred by the sellers of the properties are not necessarily
indicative of the costs to be incurred by Hollywood.
Historical financial information reflecting financial position, results of
operations and cash flows of the Acquired Theaters is not presented because
primarily all of the acquisition cost was assigned to property and equipment.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. SIGNIFICANT ACCOUNTING POLICIES:
Revenues
Revenues are recognized when admissions and concessions sales are received at
the theaters. Film rental costs are accrued based on the applicable box office
receipts and the terms of the film licenses. Other revenues consist primarily of
on-screen and slide advertising and electronic video game receipts.
Operating Costs and Expenses
Film rental and advertising costs include film rental and co-op and directory
advertising costs. Film advertising costs are expensed as incurred. Cost of
concessions consist solely of direct concession product costs. Other operating
expenses include joint facility costs such as employee costs, theater rental and
utilities, all of which are common to both ticket sales and concession
operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist primarily of concession products and theater supplies.
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture and
equipment, and buildings is provided using the straight-line method over a
7-year period and 39-year period, respectively. Leasehold improvements are
amortized using the straight-line method over the lesser of the lease period or
the estimated useful lives of the leasehold improvements.
F-27
<PAGE> 125
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Actual results could differ from those estimates.
3. LEASES:
The Acquired Theaters lease certain of its theater premises with lease terms of
15 to 26 years. Additionally, certain leases provide for contingent rentals
based on operating results and require the payment of taxes, insurance, and
other costs applicable to the property. The Acquired Theaters, at its option,
may renew a substantial portion of the leases at defined or then fair rental
rates for various periods. Some leases also provide for escalating rent payments
throughout the lease term. Rent expense for the period ended May 29, 1997,
totaled approximately $538,000.
Future minimum payments under noncancelable leases with initial or remaining
terms in excess of one year at May 29, 1997, are due as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 527,600
1999 536,500
2000 536,500
2001 519,600
2002 360,200
Thereafter 255,200
----------
Total $2,735,600
==========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
The Acquired Theaters, in the normal course of business, is party to various
matters of litigation. Management is of the opinion that the eventual outcome of
these matters will not have a material adverse effect on the Acquired Theaters'
financial position or results of operations.
5. SUBSEQUENT EVENT (UNAUDITED)
In October 1997, the Acquired Theaters were exchanged with theaters from
Hollywood, as described in Note 1.
F-28
<PAGE> 126
FOR THE THEATERS ACQUIRED FROM DICKINSON, INC.
STATEMENT OF ASSETS ACQUIRED
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
AUGUST 31,
1997
-----------
(UNAUDITED)
<S> <C>
Inventories ....................... $ 17,900
Property and equipment, net ....... 763,713
--------
Total assets acquired ... $781,613
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-29
<PAGE> 127
FOR THE THEATERS ACQUIRED FROM DICKINSON, INC.
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
------------------------
1997 1996
---------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues:
Admissions and other operating revenue ........ $1,082,728 $1,151,562
Concessions ................................... 481,588 481,335
---------- ----------
Total revenues ........................ 1,564,316 1,632,897
Operating expenses:
Film rental and advertising costs ............. 649,628 668,692
Cost of concessions and other ................. 102,888 111,194
Theater operating expenses .................... 426,541 454,127
---------- ----------
Total operating expenses .............. 1,179,057 1,234,013
---------- ----------
Excess of revenues over direct operating
expenses ...................................... $ 385,259 $ 398,884
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 128
FOR THE THEATERS ACQUIRED FROM DICKINSON, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
AUGUST 31, 1997
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the unaudited interim statements of assets and
revenues and direct operating expenses of the theaters acquired from Dickinson,
Inc. ("Acquired Theaters") by Hollywood Theaters, Inc. ("Hollywood") include all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the Acquired Theaters' financial position as of August 31, 1997,
and the results of its operations for the three months ended August 31, 1997.
Due to the seasonality of the Acquired Theaters operations, the results of its
operations for the interim period ended August 31, 1997, may not be indicative
of total results for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission. The
unaudited interim statements of assets and revenues and direct operating
expenses should be read in conjunction with the consolidated financial
statements of the Acquired Theaters and accompanying notes for the year ended
May 29, 1997.
The accompanying statements of revenues and direct operating expenses do not
include general and administrative expense, interest income or expense, a
provision for depreciation, and amortization or any provision for income taxes
because the property interests acquired represent only a portion of a business
and the costs incurred by the sellers of the properties are not necessarily
indicative of the costs to be incurred by Hollywood.
Historical financial information reflecting financial position, results of
operations and cash flows of the Acquired Theaters is not presented because
primarily all of the acquisition cost was assigned to property and equipment.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. COMMITMENTS AND CONTINGENCIES:
The Acquired Theaters, in the normal course of business, is party to various
matters of litigation. Management is of the opinion that the eventual outcome of
these matters will not have a material adverse effect on the Sold Theaters'
financial position or results of operations.
3. SUBSEQUENT EVENT:
In October 1997, the Acquired Theaters were exchanged for six theaters owned by
Hollywood. Additionally, the Acquired Theaters paid $1.1 million in cash to
Hollywood.
F-31
<PAGE> 129
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollywood Theater Holdings, Inc.:
We have audited the accompanying statement of assets acquired of the theaters
acquired (the "Acquired Theaters") from General Cinema Corp. of Oklahoma, Inc.
as of October 31, 1996, and the related statements of revenues and direct
operating expenses for the years ended October 31, 1996 and 1995. These
financial statements are the responsibility of GC Companies, Inc.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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.
The statements of assets acquired and revenues and direct operating expenses
for the Acquired Theaters were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission as described in
Note 1, and are not intended to be a complete presentation of assets, revenues,
and expenses.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets acquired of the Acquired Theaters as of
October 31, 1996, and the revenues and direct operating expenses for the years
ended October 31, 1996 and October 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 30, 1997
F-32
<PAGE> 130
FOR THE THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
STATEMENT OF ASSETS ACQUIRED
AS OF OCTOBER 31, 1996
<TABLE>
<CAPTION>
OCTOBER 31,
1996
----------
<S> <C>
Cash and cash equivalents ......... $ 129,091
Inventories ....................... 61,322
Property and equipment, net ....... 4,782,667
----------
Total assets acquired ... $4,973,080
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE> 131
FOR THE THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Admissions .................................... $10,973,332 $10,096,860
Concessions ................................... 4,987,201 4,464,015
Other operating revenues ...................... 214,137 167,072
----------- -----------
Total revenues ........................ 16,174,670 14,727,947
Operating expenses:
Film rental and advertising costs ............. 6,366,263 5,835,820
Cost of concessions and other ................. 743,146 741,061
Theater operating expenses .................... 5,719,805 5,702,602
----------- -----------
Total operating expenses .............. 12,829,214 12,279,483
----------- -----------
Excess of revenues over direct operating expenses $ 3,345,456 $ 2,448,464
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 132
FOR THE THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
1. BASIS OF PRESENTATION
Seven theaters (the "Acquired Theaters") owned by General Cinema Corp.
of Oklahoma, Inc. were acquired by Hollywood Theaters, Inc. ("Hollywood") in
August 1997.
The accompanying statements of revenues and direct operating expenses
do not include general and administrative expense, interest income or expense, a
provision for depreciation, and amortization or any provision for income taxes
because the property interests acquired represent only a portion of a business
and the costs incurred by the sellers of the properties are not necessarily
indicative of the costs to be incurred by Hollywood.
Historical financial information reflecting financial position, results
of operations and cash flows of the Acquired Theaters is not presented because
primarily all of the acquisition cost was assigned to property and equipment.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenues
Revenues are recognized when admissions and concessions sales are
received at the theaters. Film rental costs are accrued based on the applicable
box office receipts and the terms of the film licenses. Other revenues consist
primarily of on-screen and slide advertising and electronic video games located
in theater lobbies.
Operating Costs and Expenses
Film rental and advertising costs include film rental and co-op and
directory advertising costs. Film advertising costs are expensed as incurred.
Cost of concession consist solely of direct concession product costs. Other
operating expenses include joint facility costs such as employee costs, theater
rental and utilities which are common to both ticket sales and concession
operations. Rental expense for operating leases which provide for escalating
minimum annual rentals during the term of the lease are accounted for on a
straight-line basis over the terms of the underlying leases and reported as a
component of theater operating expenses.
Cash and Cash Equivalents
Cash and cash equivalents consist of operating funds held in financial
institutions and petty cash held by the theaters. The Acquired Theaters consider
all highly liquid investments with an original maturity of three months or less
to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist primarily of concession products and theater supplies.
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture
and equipment, and buildings is provided using the straight-line method over a 3
to 20-year period and 20 to 30-year period, respectively. Leasehold improvements
are amortized using the straight-line method over the lesser of the lease period
or the estimated useful lives of the leasehold improvements.
F-35
<PAGE> 133
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
3. LEASES
The Acquired Theaters lease certain of its theater premises with lease
terms of 20 to 30 years. Additionally, certain leases provide for contingent
rentals based on operating results and require the payment of taxes, insurance,
and other costs applicable to the property. The Acquired Theaters, at its
option, may renew a substantial portion of the leases at defined or then fair
rental rates for various periods. Some leases also provide for escalating rent
payments throughout the lease term. Rent expense for the period ending October
31, 1996 and 1995, totaled $2,056,070, and $2,453,539, respectively.
Future minimum payments under noncancelable leases with initial or
remaining terms in excess of one year at October 31, 1996, are due as follows:
<TABLE>
<CAPTION>
Operating
Leases
------------
<S> <C>
1997..................................................................... $ 2,416,556
1998..................................................................... 2,416,556
1999..................................................................... 2,488,322
2000..................................................................... 2,521,478
2001..................................................................... 2,521,478
Thereafter............................................................... 19,677,775
------------
Total.......................................................... $ 32,042,165
============
</TABLE>
F-36
<PAGE> 134
FOR THE THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
STATEMENT OF ASSETS ACQUIRED
AS OF JULY 31, 1997
<TABLE>
<CAPTION>
JULY 31,
1997
----------
(UNAUDITED)
<S> <C>
Cash and cash equivalents .......... $ 118,602
Inventories ........................ 56,922
Property and equipment ............. 9,569,075
----------
Total assets acquired .... $9,744,599
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-37
<PAGE> 135
FOR THE THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
INTERIM STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Admissions ...................... $ 3,520,986 $ 4,383,784 $ 9,644,267 $ 8,895,960
Concessions ..................... 1,683,345 2,011,747 4,509,435 4,026,622
Other operating revenues ........ 129,532 83,225 227,394 160,750
----------- ----------- ----------- -----------
Total revenues .......... 5,333,863 6,478,756 14,381,096 13,083,332
----------- ----------- ----------- -----------
Operating expenses:
Film rental and advertising
costs .......................... 2,192,746 2,699,199 5,699,600 5,272,949
Cost of concessions and other ... 384,031 217,365 782,224 523,130
Theater operating expenses ...... 1,914,126 1,998,124 5,229,508 4,774,986
----------- ----------- ----------- -----------
Total operating
expenses............... 4,490,903 4,914,688 11,711,332 10,571,065
----------- ----------- ----------- -----------
Operating income .................. $ 842,960 $ 1,564,068 $ 2,669,764 $ 2,512,267
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 136
FOR THE THEATERS ACQUIRED FROM GENERAL CINEMA CORP. OF OKLAHOMA, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1997
1. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim statements of
assets acquired and revenues and direct operating expenses of the theaters
acquired from General Cinema Corp. of Oklahoma, Inc. (the "Acquired Theaters")
include all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the Acquired Theaters' assets to be acquired as of
July 31, 1997, and the revenues and direct operating expenses for the three
months ended July 31, 1997 and 1996. Due to the seasonality of the Acquired
Theaters' operations, the revenues and direct operating expenses for the interim
period ended July 31, 1997 and 1996, may not be indicative of total results for
the full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
promulgated by the Securities and Exchange Commission. The unaudited interim
statements of assets acquired and revenues and direct operating expenses should
be read in conjunction with the financial statements of the theaters acquired
from GC Companies, Inc. and accompanying notes for the years ended October 31,
1996 and 1995.
The accompanying statements of revenues and direct operating expenses
do not include general and administrative expense, interest income or expense, a
provision for depreciation, and amortization or any provision for income taxes
because the property interests acquired represent only a portion of a business
and the costs incurred by the sellers of the properties are not necessarily
indicative of the costs to be incurred by Hollywood.
Historical financial information reflecting financial position, results
of operations and cash flows of the Acquired Theaters is not presented because
primarily all of the acquisition cost was assigned to property and equipment.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. SUBSEQUENT EVENT
In August 1997, the Acquired Theaters were acquired by Hollywood
Theaters, Inc. for approximately $15.8 million.
F-39
<PAGE> 137
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollywood Theaters, Inc.:
We have audited the accompanying balance sheet of Escape Theatres, Inc.
(a Texas corporation) as of September 30, 1996, and the related statements of
operations and cash flows for the year ended September 30, 1996. These financial
statements are the responsibility of Escape Theatres, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 Escape Theatres,
Inc. as of September 30, 1996, and the results of their operations and cash
flows for the year ended September 30, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 1, 1997
F-40
<PAGE> 138
ESCAPE THEATRES, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
1996
-----------
<S> <C>
Current assets:
Cash and cash equivalents ............................................................ $ 402,140
Inventories and other current assets ................................................. 20,828
-----------
Total current assets ......................................................... 422,968
Property and equipment:
Building ............................................................................. 2,058,876
Furniture and equipment .............................................................. 1,219,534
Land ................................................................................. 220,000
-----------
3,498,410
Less--Accumulated depreciation ....................................................... (702,256)
-----------
Property and equipment, net .................................................. 2,796,154
Other assets:
Goodwill, net ........................................................................ 905,440
-----------
Total other assets ........................................................... 905,440
-----------
Total assets ................................................................. $ 4,124,562
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................................ $ 155,120
Federal income taxes payable ......................................................... 16,554
Notes payable ........................................................................ 775,089
Current maturities of long-term debt ................................................. 43,332
-----------
Total current liabilities .................................................... 990,095
Other liabilities:
Long-term debt, net of current maturities ............................................ 1,073,429
-----------
Total liabilities ............................................................ 2,063,524
Stockholder's Equity
Common stock, no par value, 2,000,000 shares authorized;
105,001 shares issued and outstanding ............................................. 1,050,010
Retained earnings .................................................................... 1,011,028
-----------
Total stockholders' equity ................................................... 2,061,038
-----------
Total liabilities and stockholders' equity ................................... $ 4,124,562
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-41
<PAGE> 139
ESCAPE THEATRES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Revenues:
Admissions.................................................................................. $ 2,806,347
Concessions................................................................................. 1,245,367
Other operating revenues.................................................................... 64,974
-----------
Total revenues...................................................................... 4,116,688
Operating expenses:
Film rental and advertising costs........................................................... 1,535,815
Cost of concessions and other............................................................... 318,372
Theater operating expenses.................................................................. 1,134,509
General and administrative expenses......................................................... 83,302
Depreciation and amortization............................................................... 202,738
-----------
Total operating expenses............................................................. 3,274,736
-----------
Operating income............................................................................... 841,952
Interest expense, net.......................................................................... 145,745
Federal income tax provision................................................................... 211,554
-----------
Net income..................................................................................... $ 484,653
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-42
<PAGE> 140
ESCAPE THEATRES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Cash flows from operating activities:
Net income ........................................................... $ 484,653
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization ..................................... 202,738
Changes in assets and liabilities--
Decrease in inventories and other current assets .................. 3,395
Decrease in accounts payable and accrued expenses ................. (33,091)
Decrease in federal income taxes payable .......................... (100,680)
---------
Net cash used in operating activities ........................ 557,015
---------
Cash flows from investing activities:
Purchases of property and equipment .................................. (171,671)
---------
Net cash used in investing activities ........................ (171,671)
---------
Cash flows from financing activities:
Proceeds from note payable ........................................... 270,000
Repayments of long-term debt ......................................... (538,332)
---------
Net cash provided by financing activities .................... (268,332)
---------
Net increase in cash ................................................... 117,012
Cash and cash equivalents, beginning of year ........................... 285,128
---------
Cash and cash equivalents, end of year ................................. $ 402,140
=========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-43
<PAGE> 141
ESCAPE THEATRES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
Escape Theatres, Inc., ("Escape") is a Texas corporation formed to own
and operate motion picture theaters in Texas. Escape was incorporated on June 5,
1990, and began operations on November 30, 1990, by acquiring the operating
assets and land of United Artists Theatre Circuit Inc. in Killeen, Texas. At
September 30, 1996, Escape operated three theaters in Killeen, Texas.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consists of operating funds held in financial
institutions and petty cash held by the theaters. Escape considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
Inventories and Other Current Assets
Inventories are stated at cost and consist primarily of concession
products and theater supplies. Other current assets consist primarily of
advanced film rental payments which are required by various film distributors
prior to the release of a highly anticipated film.
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture,
equipment, and buildings is provided using the straight-line method over a
five-year period, ten-year period, and thirty five-year period, respectively.
Goodwill
Goodwill is recorded as the excess of cost over fair value of assets
acquired and is amortized over 40 years. Accumulated amortization of goodwill
was approximately $26,250 at September 30, 1996.
Revenues
Revenues are recognized when admissions and concessions sales are
received at the theaters.
Rent Expense
Rent expense is recognized on a straight-line basis after considering
the effect of rent escalation provisions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
3. LONG-TERM DEBT
Long-term debt at September 30, 1996, consisted of the following:
F-44
<PAGE> 142
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Term note payable to a bank; interest of eight and one-quarter percent (8.25%
per annum, interest and principal payable monthly, with a maturity on
September 30, 1998)...................................................................... $ 1,116,761
Less --
Current maturities....................................................................... 43,332
-----------
Long-term debt............................................................................. $ 1,073,429
===========
</TABLE>
4. LEASES
Escape leases certain of its theater premises with lease terms of 5 to
20 years. Additionally, certain leases provide for contingent rentals based on
operating results and require the payment of taxes, insurance, and other costs
applicable to the property. Escape, at its option, may renew a substantial
portion of the leases at defined or then fair rental rates for various periods.
Some leases also provide for escalating rent payments throughout the lease term.
Rent expense for the period ending September 30, 1996, totaled $115,933.
Future minimum payments under noncancelable leases with initial or
remaining terms in excess of one year at September 30, 1996, are due as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1997.......................................................................................... $101,508
1998.......................................................................................... 89,433
1999.......................................................................................... 89,433
2000.......................................................................................... 89,433
2001.......................................................................................... 52,169
Thereafter.................................................................................... --
========
Total............................................................................... $421,976
========
</TABLE>
5. INCOME TAXES
Escape's deferred income taxes at September 30, 1996, consisted of the
following:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Assets --
Capital loss carryforward................................................................... $ 27,000
Other....................................................................................... 3,000
---------
Total assets........................................................................ 30,000
Less-- Valuation allowance.................................................................. (30,000)
---------
Total deferred income taxes......................................................... $ --
=========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities. Cash
and cash equivalents, accounts receivable, and accounts payable and accrued
liabilities are reflected in the consolidated financial statements at fair value
because of the short-term maturity of those instruments. In addition, the fair
value of Escape's long-term debt and capital lease obligations were determined
to approximate its carrying value since (i) a substantial amount of the
September 30, 1996, long-term debt and capital lease obligations were issued at
fair market value during 1996 and (ii) long-term debt amounts are interest rate
variable in nature.
Changes in the assumptions or estimation methodologies may have a
material effect on these estimated fair values.
7. STOCKHOLDERS' EQUITY
Escape has authorized 2,000,000 shares of no par value common stock. As
of September 30, 1996, 105,001 shares are outstanding. The principal stockholder
is John A. Treadwell, President of Escape, who holds 62,501 shares.
F-45
<PAGE> 143
8. RELATED-PARTY TRANSACTIONS
At September 30, 1996, Escape owed approximately $575,000 to the
President of Escape. The liability primarily represents cash provided by the
President to fund operations of Escape. These liabilities consist of a $100,000
note payable, a $200,000 note payable, and a $275,000 note payable due November
1996, May 1997, and upon demand, respectively.
At September 30, 1996, Escape also owed approximately $100,000 to an
Escape Stockholder. This liability primarily represents cash provided by the
Stockholder to fund operations of Escape. The note payable is due November 1996.
9. SUBSEQUENT EVENT
Effective March 31, 1997, Escape entered into a sale contract for
$10,000 for the sale of its Showplace Theater to an individual.
F-46
<PAGE> 144
ESCAPE THEATRES, INC.
CONDENSED BALANCE SHEET
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS
MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents ....................................... $ 710,265
Inventories and other current assets ............................ 67,372
-----------
Total current assets .................................... 777,637
Property and equipment:
Building ........................................................ 2,058,876
Furniture and equipment ......................................... 1,219,534
Land ............................................................ 220,000
-----------
3,498,410
Less-- Accumulated depreciation ................................. (762,448)
-----------
Property and equipment, net ............................. 2,735,962
Other assets:
Goodwill, net ................................................... 892,192
-----------
Total other assets ...................................... 892,192
-----------
Total assets ............................................ $ 4,405,791
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................... $ 276,604
Note payable .................................................... 675,089
Current maturities of long-term debt ............................ 43,332
-----------
Total current liabilities ............................... 995,025
Other liabilities:
Long-term debt, net of current maturities ....................... 1,051,763
-----------
Total liabilities ....................................... 2,046,788
Stockholder's equity
Common stock, $10 par value, 2,000,000 shares authorized;
105,001 shares issued and outstanding ........................ 1,050,010
Retained earnings ............................................... 1,308,993
-----------
Total stockholders' equity .............................. 2,359,003
-----------
Total liabilities and stockholders' equity .............. $ 4,405,791
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-47
<PAGE> 145
ESCAPE THEATRES, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Admissions and other operating
revenue.......................................... $682,213 $583,193 $1,325,236 $1,235,906
Concessions......................................... 300,720 257,402 574,214 538,839
-------- -------- --------- ---------
Total revenues.............................. 982,933 840,595 1,899,450 1,774,745
Operating Expenses:
Film rental and advertising costs................... 361,957 335,615 668,700 620,030
Cost of concessions................................. 64,907 58,222 111,620 107,676
Theater operating expenses.......................... 267,703 270,864 539,621 503,203
General and administrative expenses................. 23,949 19,025 43,898 37,758
Depreciation and amortization....................... 36,720 45,293 73,440 90,587
-------- -------- --------- ---------
Total operating expenses.................... 755,236 729,019 1,437,279 1,359,254
-------- -------- --------- ---------
Operating income...................................... 227,697 111,576 462,171 415,491
Interest expense, net................................. 69,465 36,069 102,352 111,848
-------- -------- --------- ---------
Income before income taxes............................ 158,232 75,507 359,819 303,643
Federal income tax provision.......................... -- -- 40,000 119,000
-------- -------- --------- ---------
Net income............................................ $158,232 $ 75,507 $ 319,819 $ 184,643
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 146
ESCAPE THEATRES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net cash provided by operating
activities ...................... $ 250,762 $ 105,698 $ 429,791 $ 228,566
Cash flows from investing activities:
Purchase of property and equipment ........ -- -- -- (171,671)
--------- --------- --------- ---------
Net cash used in investing
activities ...................... -- -- -- (171,671)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under note payable ............. -- -- -- 220,000
Repayments of note payable ................ -- (26,591) (100,000) --
Repayments of long-term debt .............. (10,833) (14,444) (21,666) (344,166)
--------- --------- --------- ---------
Net cash used in financing
activities ...................... (10,833) (41,035) (121,666) (124,166)
--------- --------- --------- ---------
Net increase (decrease) in cash ............. 239,929 64,663 308,125 (67,271)
Cash and cash equivalents, beginning of
period .................................... 470,336 153,194 402,140 285,128
--------- --------- --------- ---------
Cash and cash equivalents, end of
period .................................... $ 710,265 $ 217,857 $ 710,265 $ 217,857
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 147
ESCAPE THEATRES, INC.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited Interim Condensed Financial
Statements of Escape Theatres, Inc. ("Escape") include all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly
Escape's financial position as of March 31, 1997, and the results of its
operations for the three and six months ended March 31, 1997 and 1996. Due to
the seasonality of Escape's operations, the results of its operations for the
interim periods ended March 31, 1997 and 1996, may not be indicative of total
results for the full year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission. The unaudited
Interim Condensed Financial Statements should be read in conjunction with the
audited Financial Statements of Escape Theatres, Inc. and accompanying notes for
the year ended September 30, 1996.
2. COMMITMENTS AND CONTINGENCIES
Escape, in the normal course of business, is party to various matters
of litigation. Management is of the opinion that the eventual outcome of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
3. DISPOSITIONS
Effective March 31, 1997, Escape entered into a sale contract for
$10,000 for the sale of its Showplace theater to an individual.
4. SUBSEQUENT EVENT
In June 1997, Escape was acquired by Hollywood Theaters, Inc. for
approximately $8.5 million.
F-50
<PAGE> 148
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollywood Theaters, Inc.:
We have audited the accompanying statements of revenues and direct
operating expenses of the theaters acquired (the "Acquired Theaters") from
United Artists Theatre Circuit, Inc. ("UATCI") for the nine months ended
September 30, 1996, and the year ended December 31, 1995. These financial
statements are the responsibility of UATCI's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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.
The statements of revenues and direct operating expenses for the
Acquired Theaters were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1,
and are not intended to be a complete presentation of revenues and expenses.
In our opinion, the statements of revenues and direct operating
expenses referred to above present fairly, in all material respects, the
revenues and direct operating expenses of the Acquired Theaters for the nine
months ended September 30, 1996, and the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 18, 1997
F-51
<PAGE> 149
FOR THE THEATERS ACQUIRED FROM UNITED ARTISTS THEATRE CIRCUIT, INC.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Revenues:
Admissions ....................................... $ 7,763,118 $10,221,538
Concessions ...................................... 3,733,338 4,770,019
Other operating revenues ......................... 212,800 99,880
----------- -----------
Total revenues ........................... 11,709,256 15,091,437
----------- -----------
Direct operating expenses:
Film rental and advertising costs ................ 4,396,998 5,714,361
Cost of concessions .............................. 610,181 789,874
Other operating expenses ......................... 4,919,465 6,466,978
----------- -----------
Total direct operating expenses .......... 9,926,644 12,971,213
----------- -----------
Revenues in Excess of Direct Operating Expenses .... $ 1,782,612 $ 2,120,224
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 150
FOR THE THEATERS ACQUIRED FROM UNITED ARTISTS THEATRE CIRCUIT, INC.
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
1. BASIS OF PRESENTATION
Effective in November and December 1996, Hollywood Theaters, Inc.
("Hollywood") closed acquisitions of 19 theaters (the "Acquired Theaters") from
United Artists Theatre Circuit, Inc. ("UATCI").
The accompanying statements of revenues and direct operating expenses
do not include general and administrative expense, interest income or expense, a
provision for depreciation, and amortization or any provision for income taxes
because the property interests acquired represent only a portion of a business
and the costs incurred by the sellers of the properties are not necessarily
indicative of the costs to be incurred by Hollywood.
Historical financial information reflecting financial position, results
of operations and cash flows of the Acquired Theaters is not presented because
primarily all of the acquisition cost was assigned to property and equipment.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenues
Admissions and concessions revenues are recognized when such sales are
received at the theaters. Other revenues consist primarily of on-screen and
slide advertising and electronic video games located in theater lobbies.
Operating Costs and Expenses
Film rental and advertising costs include film rental and co-op and
directory advertising costs. Film advertising costs are expensed as incurred.
Cost of concessions consists solely of direct concession product costs. Other
operating expenses include joint facility costs such as employee costs, theater
rental and utilities which are common to both ticket sales and concession
operations. Rental expense for operating leases which provide for escalating
minimum annual rentals during the term of the lease are accounted for on a
straight-line basis over the terms of the underlying leases and reported as a
component of theater operating expenses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
3. COMMITMENTS AND CONTINGENCIES
Certain of the Acquired Theaters premises are leased with noncancelable
lease terms expiring at various dates after September 30, 1996. Additionally,
certain leases provide for contingent rentals based on operating results and
require the payment of taxes, insurance, and other costs applicable to the
property. A substantial portion of the leases may be renewed at defined or then
fair rental rates for various periods. Some leases also provide for escalating
rent payments throughout the lease term. Rent expense for the period ending
September 30, 1996 and December 31, 1995, totaled $1,612,929 and $1,803,561,
respectively.
F-53
<PAGE> 151
Future minimum payments under noncancelable leases with initial or
remaining terms in excess of one year at September 30, 1996, are due as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 1,705,000
1998.......................................................... 1,592,000
1999.......................................................... 1,403,000
2000.......................................................... 1,150,000
2001.......................................................... 271,000
-----------
$ 6,121,000
===========
</TABLE>
F-54
<PAGE> 152
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hollywood Theaters, Inc.:
We have audited the accompanying statements of revenues and direct
operating expenses of the theaters acquired (the "Acquired Theaters") from Crown
Cinema Corporation and Crown Theatre Corporation (both Missouri corporations)
for the nine months ended September 30, 1996, and the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the Acquired
Theaters' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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.
The statements of revenues and direct operating expenses for the
Acquired Theaters were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission as described in Note 1,
and are not intended to be a complete presentation of revenues and expenses.
In our opinion, the statements of revenues and direct operating
expenses referred to above present fairly, in all material respects, the
revenues and direct operating expenses of the Acquired Theaters for the nine
months ended September 30, 1996, and the years ended December 31, 1995 and 1994,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
June 3, 1997
F-55
<PAGE> 153
FOR THE THEATERS ACQUIRED FROM CROWN
CINEMA CORPORATION AND CROWN THEATRE CORPORATION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Admissions.......................................................... $13,008,317 $16,941,418 $16,197,090
Concessions......................................................... 6,371,109 7,928,452 7,279,178
Other operating revenues............................................ 161,454 342,454 362,934
----------- ----------- -----------
Total revenues.............................................. 19,540,880 25,212,324 23,839,202
Direct operating expenses:
Film rental and advertising costs................................... 7,080,995 9,478,043 9,117,416
Cost of concessions and other....................................... 1,206,008 1,546,354 1,408,553
Theater operating expenses.......................................... 7,099,107 9,147,913 8,577,873
----------- ----------- -----------
Total direct operating expenses............................. 15,386,110 20,172,310 19,103,842
----------- ----------- -----------
Operating income...................................................... $ 4,154,770 $ 5,040,014 $ 4,735,360
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 154
FOR THE THEATERS ACQUIRED FROM CROWN
CINEMA CORPORATION AND CROWN THEATRE CORPORATION
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 AND 1994
1. ORGANIZATION
Crown Cinema Corporation (CCC) is a Missouri corporation, and was
incorporated in August 1976. CCC owned and operated 33 motion picture theaters
in Kansas and Missouri at September 30, 1996. Crown Theatre Corporation (CTC) is
a Missouri corporation and was incorporated in December 1989. CTC owned and
operated three motion picture theaters in Missouri and Ohio at September 30,
1996. CCC and CTC ("Crown Combined") jointly rent a corporate office located in
Kansas City, Missouri.
On November 1, 1996, Hollywood Theaters, Inc. ("Hollywood") closed an
acquisition of 33 theaters (the "Acquired Theaters") from Crown Combined.
The accompanying statements of revenues and direct operating expenses
do not include general and administrative expense, interest income or expense, a
provision for depreciation, and amortization or any provision for income taxes
because the property interests acquired represent only a portion of a business
and the costs incurred by the sellers of the properties are not necessarily
indicative of the costs to be incurred by Hollywood.
Historical financial information reflecting financial position, results
of operations and cash flows of the Acquired Theaters is not presented because
primarily all of the acquisition cost was assigned to property and equipment.
Accordingly, the historical statements of revenues and direct operating expenses
have been presented in lieu of the financial statements required under Rule 3-05
of Securities and Exchange Commission Regulation S-X.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenues
Revenues are recognized when admissions and concessions sales are
received at the theaters. Film rental costs are accrued based on the applicable
box office receipts and the terms of the film licenses. Other revenues consist
primarily of on-screen and slide advertising and electronic video games located
in theater lobbies.
Operating Costs and Expenses
Film rental and advertising costs include film rental and co-op and
directory advertising costs. Film advertising costs are expensed as incurred.
Cost of concession consist solely of direct concession product costs. Other
operating expenses include joint facility costs such as employee costs, theater
rental and utilities which are common to both ticket sales and concession
operations. Rental expense for operating leases which provide for escalating
minimum annual rentals during the term of the lease are accounted for on a
straight-line basis over the terms of the underlying leases and reported as a
component of theater operating expenses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
F-57
<PAGE> 155
TRANS TEXAS AMUSEMENTS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1995, THROUGH JULY 10, 1995, AND
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
(UNAUDITED)
<S> <C> <C>
Revenues:
Admissions ............................. $ 4,330 $ 7,827
Concessions ............................ 2,578 4,538
Other operating revenues ............... 82 177
------- -------
Total revenues ................. 6990 12,542
------- -------
Operating expenses:
Film rental and advertising costs ...... 2452 4,301
Cost of concessions and other .......... 358 756
Theater operating expenses ............. 3,265 4,879
General and administrative expenses .... 281 1,197
Depreciation and amortization .......... 202 366
------- -------
Total operating expenses ....... 6,558 11,499
------- -------
Operating loss ........................... 432 1,043
Interest expense, net .................... 69 103
------- -------
Net income ............................... $ 363 $ 940
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 156
TRANS TEXAS AMUSEMENTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995, THROUGH JULY 10, 1995,
AND FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net Income ........................................................... $ 363 $ 940
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization ..................................... 202 366
Changes in assets and liabilities
Increase (decrease) in other current assets ..................... 209 (41)
Increase (decrease) in accounts payable and accrued expenses .... (168) 112
------- -------
Net cash provided by operating activities .................... 606 1,377
------- -------
Cash flows from investing activities:
Purchases of property and equipment .................................. -- (645)
Sales of Property and Equipment ...................................... 1,319 --
------- -------
Net cash used in investing activities ........................ 1,319 (645)
------- -------
Cash flows from financing activities:
Repayments of note payable and long-term debt ........................ (2,605) (277)
Dividends paid ....................................................... -- (415)
------- -------
Net cash provided by financing activities .................... (2,605) (692)
------- -------
Change in Cash and Cash Equivalents .................................... (680) 40
Cash and cash equivalents, beginning of period ......................... 680 640
------- -------
Cash and cash equivalents, at end of period ............................ $ -- $ 680
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 157
TRANS TEXAS AMUSEMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 10, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
1. ORGANIZATION
Trans Texas Amusements, Inc. ("Trans Texas") is an S corporation formed
in the state of Texas. Trans Texas owned and operated 11 theaters in Texas as
of July 10, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of operating funds held in financial
institutions and petty cash held by the theaters. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
Deferred Lease Expenses
Rent expense is recognized on a straight-line basis after considering
the effect of rent escalation provisions.
Revenues
Revenues are recognized when admissions and concessions sales are
received at the theaters. Film rental costs are accrued based on the applicable
box office receipts and the terms of the film licenses.
Advertising
Advertising costs are expensed when incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
3. LEASES
Trans Texas leases certain of its theater premises with lease terms of
5 to 20 years. Additionally, certain leases provide for contingent rentals based
on operating results and require the payment of taxes, insurance, and other
costs applicable to the property. Trans Texas, at its option, may renew a
substantial portion of the leases at defined or then fair rental rates for
various periods. Some leases also provide for escalating rent payments
throughout the lease term. Rent expense for the periods ended July 10, 1995 and
December 31, 1994, totaled $640,000, and $1,400,000, respectively.
4. SUBSEQUENT EVENT
In July 1995, these theaters were sold to Hollywood Theaters, Inc. for
approximately $6.6 million in cash and $2.5 million in debt.
F-60
<PAGE> 158
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-61
<PAGE> 159
PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1996 gives effect to (i) the 1996 acquisitions
of theaters from United Artists Theatre Circuit, Inc., Crown Cinema Corporation
and Crown Theatre Corporation, the Killeen Acquisition, the Oklahoma Acquisition
and the Dickinson Exchange, collectively the "Significant Acquisitions," and
(ii) the receipt and application of the net proceeds from the Offering of the
Old Notes as if such transactions had occurred on January 1, 1996. The Unaudited
Pro Forma Condensed Consolidated Statement of Operations for the nine months
ended September 30, 1997 gives effect to (i) the Killeen Acquisition, the
Oklahoma Acquisition and the Dickinson Exchange, and (ii) the receipt and
application of the net proceeds from the Offering of the Old Notes as if such
transactions had occurred on January 1, 1996. The Unaudited Pro Forma Condensed
Consolidated Balance Sheet as of September 30, 1997 reflects the Dickinson
Exchange, as if such transaction had occurred on that date. The following Pro
Forma Financial Information should be read in conjunction with the historical
financial statements of Holdings, which are included elsewhere in this
Prospectus.
The Company usually implements significant changes to the operations of
the entities that it acquires to enhance profitability. The expected benefits
and cost reductions anticipated by the Company have not been reflected in the
following unaudited pro forma condensed consolidated financial statements.
Accordingly, these pro forma financial statements are not necessarily indicative
of the operating results that would have been achieved had the Significant
Acquisitions occurred on January 1, 1996.
The pro forma adjustments are based upon available information. The Pro
Forma Financial Information is based on the historical financial statements of
Holdings and the historical financial statements of the Significant
Acquisitions. These adjustments are directly attributable to the transactions
referenced above, and are expected to have a continuing impact on the Company's
business, results of operations, and financial position. The Dickinson Exchange
will be accounted for using the purchase method of accounting, pursuant to which
the total purchase costs of the acquisition will be allocated to the tangible
and intangible assets and liabilities acquired based upon their estimated fair
values. The final allocation of the purchase price will be determined upon the
receipt of final appraisals of the acquired assets; however, such allocation is
not expected to differ materially from the preliminary allocation.
P-1
<PAGE> 160
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996
HOLDINGS SIGNIFICANT ACQUISITION PRO FORMA
HISTORICAL ACQUISITIONS(A) ADJUSTMENTS OFFERING AS ADJUSTED
---------- -------------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions and other operating revenue ........... $ 16,169 $ 36,644 $ -- $ -- $ 52,813
Concessions ...................................... 8,710 16,392 -- -- 25,102
-------- -------- --------
Total revenues ........................... 24,879 53,036 -- -- 77,915
Operating expenses:
Film rental and advertising
costs ......................................... 8,388 20,332 -- -- 28,720
Cost of concessions and other .................... 1,412 2,865 -- -- 4,277
Theater operating expenses ....................... 10,998 19,648 -- -- 30,646
General and administrative
expenses ...................................... 1,601 83 470(B) -- 2,154
Depreciation and amortization .................... 3,152 189 4,263 -- 7,604
-------- -------- -------- -------- --------
Total operating expenses ................. 25,551 43,117 4,733 -- 73,401
-------- -------- -------- -------- --------
Operating income (loss) .................. (672) 9,919 (4,733) -- 4,514
Interest, net ...................................... 2,121 146 4,830(D) 5,021(E) 12,118
-------- -------- -------- -------- --------
Net income (loss) .................................. $ (2,793) $ 9,773 $ (9,563) $ (5,021) $ (7,604)
======== ======== ======== ======== ========
</TABLE>
P-2
<PAGE> 161
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997
HOLDINGS SIGNIFICANT ACQUISITION PRO FORMA
HISTORICAL ACQUISITIONS(A) ADJUSTMENTS OFFERING AS ADJUSTED
---------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions and other operating
revenue .................................. $ 35,957 $ 7,668 $ -- $ -- $ 43,625
Concessions ................................. 18,895 3,184 -- -- 22,079
-------- -------- -------- -------- --------
Total revenues .......................... 54,852 10,852 -- -- 65,704
Operating expenses:
Film rental and advertising
costs .................................... 19,304 4,276 -- -- 23,580
Cost of concessions and other ............... 3,021 514 -- -- 3,535
Theater operating expenses .................. 22,241 3,514 -- -- 25,755
General and administrative .................. 3,992 24 353(B) -- 4,369
Depreciation and amortization ............... 7,930 37 778(C) -- 8,745
-------- -------- -------- -------- --------
Total operating expenses ................ 56,488 8,365 1,131 -- 65,984
-------- -------- -------- -------- --------
Operating income (loss) ................. (1,636) 2,487 (1,131) -- (280)
Interest, net ................................. 4,482 39 1,136(D) 3,431(E) 9,088
-------- -------- -------- -------- --------
Net income (loss) ............................. $ (6,118) $ 2,448 $ (2,267) $ (3,431) $ (9,368)
======== ======== ======== ======== ========
</TABLE>
P-3
<PAGE> 162
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1997
HISTORICAL SIGNIFICANT PRO FORMA
HOLDINGS ACQUISITIONS(F) AS ADJUSTED
---------- --------------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 9,108 $ 1,092 $ 10,200
Accounts receivable............................ 1,206 -- 1,206
Inventories.................................... 1,151 (28) 1,123
Prepaid and other current assets............... 2,852 -- 2,852
Deposits....................................... 2,442 -- 2,442
-------- --------- --------
Total current assets.................... 16,759 1,064 17,823
Property and equipment, net...................... 97,958 (1,064) 96,894
Goodwill, net.................................... 45,296 -- 45,296
Intangibles, net................................. 15,365 -- 15,365
-------- --------- --------
Total assets............................ $175,378 $ -- $175,378
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses..................................... $ 9,357 $ -- $ 9,357
Other current liabilities...................... 3,937 -- 3,937
-------- --------- --------
Total current liabilities............... 13,294 -- 13,294
Old senior notes................................. 110,000 -- 110,000
Deferred lease expenses.......................... 1,078 -- 1,078
-------- --------- --------
Total liabilities....................... 124,372 -- 124,372
Convertible Preferred Stock...................... 46,833 -- 46,833
Stockholders' equity:
Common stock................................... 1 -- 1
Additional paid-in capital..................... 17,761 -- 17,761
Accumulated deficit............................ (13,589) -- (13,589)
-------- --------- --------
Total stockholders'
equity................................ 4,173 -- 4,173
-------- --------- --------
Total liabilities and
stockholders' equity.................. $175,378 $ -- $175,378
======== ========= ========
</TABLE>
See accompanying notes to pro forma financial information.
P-4
<PAGE> 163
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the historical revenues and operating expenses recorded up to the
time of acquisition for the Significant Acquisitions on a combined basis.
(B) Represents the incremental general and administrative costs related to the
Significant Acquisitions.
(C) Represents (i) incremental amortization of goodwill of $2.3 million and
$510,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively, based upon the Company's allocation of
purchase prices as if the Significant Acquisitions were all completed on
January 1, 1996 and (ii) depreciation of $2.2 million and $268,000 for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, on the Significant Acquisitions for which no depreciation was
recorded in the historical revenues and operating expenses recorded up to
the time of acquisitions. Goodwill is being amortized over a 15-year
period, furniture and equipment is being amortized over a 8-year period,
and buildings are being amortized over a 30-year period.
(D) Reflects the additional interest expense that would have been incurred had
the debt incurred to finance the Significant Acquisitions been outstanding
from the beginning of the period to the dates of acquisition.
(E) Reflects the (i) elimination of the interest expense of $7.1 million and
$4.6 million for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively, on the Company's Existing Senior Credit
Facility, (ii) the interest expense of $11.7 million and $7.8 million for
the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively, on the New Notes, and (iii) the amortization of
deferred debt issuance costs of $430,000 and $287,000 for the year ended
December 31, 1996 and the nine months ended September 30, 1997,
respectively, related to the Notes.
(F) Represents the exchange of theaters from Dickinson in 1997. The estimated
fair values reflected are based on preliminary estimates and assumptions
and are subject to revision. In management's opinion, the preliminary
allocation is not expected to be materially different from the final
allocation.
P-5
<PAGE> 164
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Hollywood Theater Holdings, Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Hollywood Theater Holdings,
Inc. and subsidiaries included in this registration statement and have issued
our report thereon dated April 29,1997. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the index at S-1 (Schedule II) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 29, 1997
S-1
<PAGE> 165
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SUCH SECURITIES BY ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------------------
TABLE OF CONTENTS
PAGE
----
Notice to Investors........................................... (i)
Available Information......................................... (iv)
Prospectus Summary............................................ 1
Risk Factors.................................................. 14
Use of Proceeds............................................... 18
Capitalization................................................ 20
Selected Consolidated Financial Information................... 21
Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 23
Business...................................................... 29
Management.................................................... 41
Principal Stockholders........................................ 49
Description of Capital Stock.................................. 53
Certain Transactions.......................................... 54
Description of Senior Bank Facility........................... 54
The Exchange Offer............................................ 56
Description of Exchange Notes................................. 65
Certain U.S. Federal Tax Consequences
to U.S. Holders........................................... 88
Certain U.S. Federal Tax Consequences
to Non-U.S. Holders....................................... 89
Plan of Distribution.......................................... 92
Validity of the Exchange Notes................................ 92
Experts....................................................... 92
Index to Financial Statements................................. F-1
================================================================================
================================================================================
HOLLYWOOD THEATERS, INC.
HOLLYWOOD THEATER HOLDINGS, INC.
CROWN THEATRE CORPORATION
OFFER TO EXCHANGE
HOLLYWOOD THEATERS, INC.
10 5/8% SENIOR SUBORDINATED
NOTES DUE AUGUST 1, 2007
FOR ANY AND ALL OF ITS OUTSTANDING
10 5/8% SENIOR SUBORDINATED
NOTES DUE AUGUST 1, 2007
---------------
PROSPECTUS
---------------
_________, 1998
================================================================================
<PAGE> 166
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
145(a) and (b), or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under
Section 145(a) and (b) (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 145(a) and (b). Such determination shall be made (1) by a majority vote
of the directors who were not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
II-1
<PAGE> 167
Section 145(f) of the DGCL provides that the indemnification and
advancement of expenses provided by, or granted pursuant to, Section 145 shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 145(g) of the DGCL provides that a corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his capacity as such, whether or not the corporation
would have the power to indemnify him against such liability under Section 145.
RESTATED CERTIFICATE OF INCORPORATION
Article Sixth of the Amended and Restated Certificate of Incorporation
of the Company, a copy of which is filed as Exhibit 3.1 to this Registration
Statement, provides that no director of the Company shall be personally liable
to the Company or any of its stockholders for monetary damages for breach of
fiduciary duty as a director involving any act or omission of any such director;
provided, however, that such Article Sixth does not eliminate or limit the
liability of a director (1) for any breach of such director's duty of loyalty to
the Company or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) under
Section 174 of the DGCL (which relates to certain unlawful dividend payments or
stock purchases or redemptions), as the same exists or may hereafter be amended,
supplemented or replaced, or (4) for a transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the DGCL, as so amended. Furthermore, any repeal or modification of
Article Sixth of the Amended and Restated Certificate of Incorporation by the
stockholders of the Company shall be prospective only, and shall not adversely
affect any limitation on the personal liability of a director of the Company
existing at the time of such repeal or modification.
BYLAWS
Article V, Section 1(a) of the Bylaws (the "Bylaws") of the Company
provides that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company) by reason of the fact
that he is or was a director, officer, employee or agent of the Company, or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
Article V, Section 1(b) of the Bylaws provides that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees)
II-2
<PAGE> 168
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Company unless and only to the extent that the Delaware Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
Article V, Section 1(c) of the Bylaws provides that to the extent that
a director, officer, employee or agent of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
Section 1(a) or (b) of Article V of the Bylaws, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
Article V, Section 1(d) of the Bylaws provides that any indemnification
under Section 1(a) or (b) of Article V of the Bylaws (unless ordered by a court)
shall be made by the Company only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Section 1(a) or (b) of Article V of the Bylaws. Such
determination shall be made (1) by a majority vote of a quorum consisting of the
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable and a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
Article V, Section 1(e) of the Bylaws provides that expenses (including
attorneys' fees) incurred by an officer or director in defending any civil,
criminal, administrative or investigative action, suit or proceeding may be paid
by the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Company as authorized in Section V of the
Bylaws. Such expenses (including attorneys' fees) incurred by other employees
and agents may be so paid upon such terms and conditions, if any, as the board
of directors deems appropriate.
Article V, Section 2 of the Bylaws provides that the indemnification
and advancement of expenses provided by, or granted pursuant to, Article V of
the Bylaws shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
Bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article V, Section 3 of the Bylaws provides that the Company shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his capacity as such, whether or not the Company
would have the power to indemnify him against such liability under Article V of
the Bylaws.
INDEMNIFICATION AGREEMENT
Thomas W. Stephenson has entered into an indemnification agreement with
the Company and Holdings in connection with certain personal guarantees made by
Mr. Stephenson for obligations of the Company under certain agreements,
including, but not limited to theater leases and film rental agreements and
other similar agreements that Mr. Stephenson may be required to guarantee in the
future (the "Stephenson Guarantees"). Pursuant to such indemnification
agreement, the Company and Holdings have agreed to indemnify Mr. Stephenson
against any and all payments, liabilities, obligations, claims, losses, damages,
commitments, costs, deficiencies, expenses paid or incurred by Mr. Stephenson
under any Stephenson Guarantee and against any and all expenses (including
attorneys' fees), costs,
II-3
<PAGE> 169
liabilities and obligations paid or incurred in connection with or as a result
of such payments under the Stephenson Guarantees.
INSURANCE
The Company has obtained and intends to maintain in effect directors'
and officers' liability insurance policies providing customary coverage for its
directors and officers against losses resulting from wrongful acts committed by
them in their capacities as directors and officers of the Company.
The above discussion of Section 145 of the DGCL, the Company's Restated
Certificate of Incorporation and the Company's Bylaws is not intended to be
exhaustive and is respectively qualified in its entirety by such statute, the
Restated Certificate of Incorporation and the Bylaws.
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<PAGE> 170
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
(A) EXHIBITS.
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Hollywood
Theaters, Inc.
3.2 Restated Certificate of Incorporation of Hollywood Theater
Holdings, Inc.
3.3 Articles of Incorporation of Crown Theatre Corporation
3.4 By-laws of Hollywood Theaters, Inc.
3.5 By-laws of Hollywood Theater Holdings, Inc.
3.6 By-laws of Crown Theatre Corporation
4.1 Indenture dated as of August 7, 1997 between Hollywood
Theaters, Inc., Hollywood Theater Holdings, Inc. and Crown
Theatre Corporation and U.S. Trust Company of Texas, N.A.
4.2 Exchange and Registration Rights Agreement, dated as of August
7, 1997 among Hollywood Theaters, Inc., Hollywood Theater
Holdings, Inc., Goldman, Sachs & Co., and BancAmerica
Securities Inc.
4.3 Second Amendment to Registration Rights Agreement, dated as of
December 17, 1997 by and between Hollywood Theater Holdings, Inc.
and The Beacon Group III - Focus Value Fund, L.P., as amended.
4.4 Second Amendment to Restated Registration Rights Agreement, dated
as of December 17, 1997, by and among Hollywood Theater Holdings,
Inc., Stratford Capital Partners, L.P., Stratford Equity Partners,
L.P. and Precept Investors, Inc.
4.5 Registration Rights Agreement, dated as of November 1, 1996, by
and between Hollywood Theater
Holdings, Inc. and Richard M. Durwood Revocable Trust.
4.6 First Amendment to Registration Rights Agreement, dated as
of December 17, 1997, by and among Hollywood Theater Holdings,
Inc., Hoak Communications Partners, L.P., HCP Capital Fund,
L.P. and HCP 1997 Authorized Employee Fund, L.P.
4.7 Amended and Restated Agreement with respect to Registration
Rights, dated as of May 13, 1997, by and among Hollywood
Theater Holdings, Inc., Stratford Capital Partners, L.P.,
Precept Investors, Inc., The Beacon Group III - Focus Value
Fund, L.P., Hoak Communications Partners, L.P., HCP Capital
Fund, L.P. and HCP 1997 Authorized Employee Fund, L.P.
5.1 Opinion and consent of Baker & Botts, L.L.P.
10.1 Purchase Agreement, dated as of July 31, 1997, by and among
Hollywood Theaters, Inc., Hollywood Theater Holdings, Inc.,
Crown Theater Corporation and Goldman, Sachs & Co.
10.2 Amended and Restated Credit Agreement, dated as of August 7, 1997,
among Hollywood Theater Holdings, Inc., Hollywood Theaters, Inc.
and Bank of America National Trust and Savings Associations.
10.3 Amended and Restated Shareholders' and Voting Agreement,
dated as of December 17, 1997, by and among Hollywood Theater
Holdings, Inc., The Beacon Group III - Focus Value Fund, L.P.,
Stratford Capital Partners, L.P., Stratford Equity Partners,
L.P., Hoak Communications Partners, L.P., HCP Capital Fund,
L.P. and HCP 1997 Authorized Employee Fund, L.P.
10.4 Purchase and Assignment Agreement, dated as of July 25, 1997,
between General Cinema Corp. of Oklahoma, Inc. and Hollywood
Theaters, Inc., as amended by Amendment No. 1 to Purchase and
Assignment Agreement, dated as of July 30, 1997, between General
Cinema Corp. of Oklahoma, Inc. and Hollywood Theaters, Inc.
10.5 Agreement of Purchase and Sale, dated as of July 22, 1996, by and
among United Artists Theatre Circuit, Inc., United Artists
Properties I Corp., Resort Amusement Corporation and Hollywood
Theaters, Inc., as amended.
10.6 Asset and Stock Purchase Agreement, dated as of August 26, 1996,
between Crown Cinema Corporation, Crown Theatre Corporation,
Hollywood Theaters, Inc. and Hollywood Theater Holdings, Inc., as
amended.
</TABLE>
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<PAGE> 171
<TABLE>
<S> <C>
10.7 Asset Purchase Agreement, dated as of August 19, 1997, between
Dickinson, Inc. and Hollywood Theaters, Inc.
10.8 Employment Agreement, dated as of October 1, 1996, between
Hollywood Theaters, Inc. and Thomas W. Stephenson, Jr.
10.9 Employment Agreement, dated as of October 1, 1996, between
Hollywood Theaters, Inc. and James R. Featherstone.
10.10 Employment Agreement, dated as of October 1, 1996, between
Hollywood Theaters, Inc. and Robert E. Painter.
10.11 Hollywood Theaters, Inc. Savings and Profit Sharing Plan, as
amended and restated.
10.12 Hollywood Theater Holdings, Inc. 1996 Stock Option and Stock
Award Plan, dated as of December 15, 1996, as amended.
10.13 Hollywood Theaters, Inc. 401(k) Savings Plan, as amended.
10.14 Indemnification Agreement, dated as of May 15, 1996, by and
between Hollywood Theaters, Inc., Hollywood Theater Holdings,
Inc. and Thomas W. Stephenson, Jr.
10.15 Third Amendment to Amended and Restated Credit Agreement, dated
as of January 7, 1998, among Hollywood Theater Holdings, Inc.,
Hollywood Theaters, Inc. and Bank of America National Trust and
Savings Associations.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Hollywood Theaters, Inc.
*23.1 Consent of Arthur Andersen LLP, independent public accountants.
23.2 Consent of Baker & Botts, L.L.P.
24.1 Powers of Attorney (previously filed).
25.1 Statement of Eligibility of Trustee on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- --------------------------------------
* Filed herewith.
II-6
<PAGE> 172
(B) FINANCIAL STATEMENT SCHEDULES.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (JULY 11, 1995), THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
CLASSIFICATION PERIOD EXPENSES END OF PERIOD
- -------------- ------------- ---------- --------------
<S> <C> <C> <C>
December 31, 1996:
Accumulated Amortization of Goodwill $ 246 $ 967 $1,213
Accumulated Amortization of Intangibles 168 986 1,154
Accumulated Amortization of Theater Start-Up Costs 6 76 82
------ ------ ------
Total $ 420 $2,029 $2,449
December 31, 1995:
Accumulated Amortization of Goodwill $ 0 $ 246 $ 246
Accumulated Amortization of Intangibles 0 168 168
Accumulated Amortization of Theater Start-Up Costs 0 6 6
------ ------ ------
Total $ 0 $ 420 $ 420
</TABLE>
All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are inapplicable and
therefore have been omitted.
II-7
<PAGE> 173
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when it
became effective.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the registrant pursuant to the provision
described under Item 20 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 Securities 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 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 Securities Act and will be governed
by the final adjudication of such issue.
(4) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(ss.230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(5) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(6) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
II-8
<PAGE> 174
(7) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by ss.210.3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements.
II-9
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on January 30, 1998.
HOLLYWOOD THEATERS, INC.
By: /s/ JAMES R. FEATHERSTONE
-------------------------------
James R. Featherstone
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registration Statement has been signed by the following persons on January 30,
1998 in the capacities indicated:
<TABLE>
<CAPTION>
NAME CAPACITY
---- --------
<S> <C>
* President and Chief Executive Officer, Chairman of the Board
- ------------------------------------ (principal executive officer)
Thomas W. Stephenson, Jr.
/s/ JAMES R. FEATHERSTONE Chief Financial Officer
- ------------------------------------ (principal financial officer and accounting officer)
James R. Featherstone
* Chief Operating Officer and Assistant Secretary
- ------------------------------------ (principal administrative officer)
Robert E. Painter
* Director
- ------------------------------------
John G. Farmer
* Director
- ------------------------------------
Thomas L. Harrison
* Director
- ------------------------------------
Thomas G. Mendell
* Director
- ------------------------------------
Harold W. Pote
* Director
- ------------------------------------
Eric R. Wilkinson
*By: /s/ JAMES R. FEATHERSTONE
--------------------------------
James R. Featherstone
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Hollywood
Theaters, Inc.
3.2 Restated Certificate of Incorporation of Hollywood Theater
Holdings, Inc.
3.3 Articles of Incorporation of Crown Theatre Corporation
3.4 By-laws of Hollywood Theaters, Inc.
3.5 By-laws of Hollywood Theater Holdings, Inc.
3.6 By-laws of Crown Theatre Corporation
4.1 Indenture dated as of August 7, 1997 between Hollywood
Theaters, Inc., Hollywood Theater Holdings, Inc. and Crown
Theatre Corporation and U.S. Trust Company of Texas, N.A.
4.2 Exchange and Registration Rights Agreement, dated as of August
7, 1997 among Hollywood Theaters, Inc., Hollywood Theater
Holdings, Inc., Goldman, Sachs & Co., and BancAmerica
Securities Inc.
4.3 Second Amendment to Registration Rights Agreement, dated as of
December 17, 1997 by and between Hollywood Theater Holdings, Inc.
and The Beacon Group III - Focus Value Fund, L.P., as amended.
4.4 Second Amendment to Restated Registration Rights Agreement, dated
as of December 17, 1997, by and among Hollywood Theater Holdings,
Inc., Stratford Capital Partners, L.P., Stratford Equity Partners,
L.P. and Precept Investors, Inc.
4.5 Registration Rights Agreement, dated as of November 1, 1996, by
and between Hollywood Theater Holdings, Inc. and Richard M.
Durwood Revocable Trust.
4.6 First Amendment to Registration Rights Agreement, dated as of
December 17, 1997, by and among Hollywood Theater Holdings, Inc.,
Hoak Communications Partners, L.P., HCP Capital Fund, L.P. and HCP
1997 Authorized Employee Fund, L.P.
4.7 Amended and Restated Agreement with respect to Registration
Rights, dated as of May 13, 1997, by and among Hollywood
Theater Holdings, Inc., Stratford Capital Partners, L.P.,
Precept Investors, Inc., The Beacon Group III - Focus Value
Fund, L.P., Hoak Communications Partners, L.P., HCP Capital
Fund, L.P. and HCP 1997 Authorized Employee Fund, L.P.
5.1 Opinion and consent of Baker & Botts, L.L.P.
10.1 Purchase Agreement, dated as of July 31, 1997, by and among
Hollywood Theaters, Inc., Hollywood Theater Holdings, Inc.,
Crown Theater Corporation and Goldman, Sachs & Co.
10.2 Amended and Restated Credit Agreement, dated as of August 7, 1997,
among Hollywood Theater Holdings, Inc., Hollywood Theaters, Inc.
and Bank of America National Trust and Savings Associations.
10.3 Amended and Restated Shareholders' and Voting Agreement,
dated as of December 17, 1997, by and among Hollywood Theater
Holdings, Inc., The Beacon Group III - Focus Value Fund, L.P.,
Stratford Capital Partners, L.P., Stratford Equity Partners,
L.P., Hoak Communications Partners, L.P., HCP Capital Fund,
L.P. and HCP 1997 Authorized Employee Fund, L.P.
10.4 Purchase and Assignment Agreement, dated as of July 25, 1997,
between General Cinema Corp. of Oklahoma, Inc. and Hollywood
Theaters, Inc., as amended by Amendment No. 1 to Purchase and
Assignment Agreement, dated as of July 30, 1997, between General
Cinema Corp. of Oklahoma, Inc. and Hollywood Theaters, Inc.
10.5 Agreement of Purchase and Sale, dated as of July 22, 1996, by and
among United Artists Theatre Circuit, Inc., United Artists
Properties I Corp., Resort Amusement Corporation and Hollywood
Theaters, Inc., as amended.
</TABLE>
<PAGE> 177
<TABLE>
<S> <C>
10.6 Asset and Stock Purchase Agreement, dated as of August 26, 1996,
between Crown Cinema Corporation, Crown Theatre Corporation,
Hollywood Theaters, Inc. and Hollywood Theater Holdings, Inc., as
amended.
10.7 Asset Purchase Agreement, dated as of August 19, 1997, between
Dickinson, Inc. and Hollywood Theaters, Inc.
10.8 Employment Agreement, dated as of October 1, 1996, between
Hollywood Theaters, Inc. and Thomas W. Stephenson, Jr.
10.9 Employment Agreement, dated as of October 1, 1996, between
Hollywood Theaters, Inc. and James R. Featherstone.
10.10 Employment Agreement, dated as of October 1, 1996, between
Hollywood Theaters, Inc. and Robert E. Painter.
10.11 Hollywood Theaters, Inc. Savings and Profit Sharing Plan, as
amended and restated.
10.12 Hollywood Theater Holdings, Inc. 1996 Stock Option and Stock
Award Plan, dated as of December 15, 1996, as amended.
10.13 Hollywood Theaters, Inc. 401(k) Savings Plan, as amended.
10.14 Indemnification Agreement, dated as of May 15, 1996, by and
between Hollywood Theaters, Inc., Hollywood Theater Holdings,
Inc. and Thomas W. Stephenson, Jr.
10.15 Third Amendment to Amended and Restated Credit Agreement, dated
as of January 7, 1998, among Hollywood Theater Holdings, Inc.,
Hollywood Theaters, Inc. and Bank of America National Trust and
Savings Associations.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Hollywood Theaters, Inc.
*23.1 Consent of Arthur Andersen LLP, independent public accountants.
23.2 Consent of Baker & Botts, L.L.P.
24.1 Powers of Attorney (previously filed).
25.1 Statement of Eligibility of Trustee on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- --------------------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports, and to all references to our Firm, included in or made a part of this
Form S-4.
Arthur Andersen LLP
Dallas, Texas
January 28, 1998
