<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 333-36763
HOLLYWOOD THEATERS, INC.
HOLLYWOOD THEATER HOLDINGS, INC.
CROWN THEATER CORPORATION
(Exact names of registrants as specified in their respective charters)
Delaware 75-2598844
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2911 Turtle Creek Blvd., Dallas, Texas 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number and area code: (214) 528-9500
Indicate by check mark whether the registrant (1) has filed all reports required
to filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date.
Not Applicable
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HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
Table of Contents
-----------------
PART I
Item 1 - Financial Information
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 14
PART II
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities and Use of Proceeds 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 18
2
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ITEM 1 - FINANCIAL INFORMATION
HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(in thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
Current assets: (UNAUDITED) (AUDITED)
<S> <C> <C>
Cash and cash equivalents......................................................................... $ 2,853 $ 7,379
Accounts receivable............................................................................... 1,205 1,562
Inventories....................................................................................... 2,055 1,012
Prepaid and other current assets, net............................................................. 4,119 850
Deposits.......................................................................................... 1,747 1,593
-------- --------
Total current assets....................................................................... 11,979 12,396
-------- --------
Property and equipment, net......................................................................... 138,984 104,376
-------- --------
Goodwill, net....................................................................................... 47,095 49,215
Intangible assets, net.............................................................................. 12,424 14,289
Other............................................................................................... 3,670 3,744
-------- --------
Total other assets......................................................................... 63,189 67,248
-------- --------
Total assets............................................................................... $214,152 $184,020
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
<S> <C> <C>
Accounts payable and accrued expenses............................................................. $ 6,079 $ 10,605
Deferred revenue.................................................................................. 158 158
Revolving credit facility......................................................................... 47,000 -
-------- --------
Total current liabilities.................................................................. 53,237 10,763
Other liabilities:
Long-term debt.................................................................................... 110,000 110,000
Deferred lease expenses........................................................................... 1,568 1,158
Deferred revenue.................................................................................. 120 302
-------- --------
Total liabilities.......................................................................... 164,925 122,223
Commitments and contingencies
Convertible Redeemable Preferred Stock,
Series B Preferred Stock, $.01 par value, 400,000 shares authorized in 1998 and 1997, 177,995
and 178,028 shares issued and outstanding at September 30, 1998 and December 31, 1997,
respectively, (redemption preference of $31,149)................................................. 2 2
Series C Preferred Stock, $.01 par value, 400,000 shares authorized in 1998 and 1997, 84,137
shares issued and outstanding at September 30, 1998 and December 31, 1997, (redemption
preference of $16,407).......................................................................... 1 1
Series D Preferred Stock, $.01 par value, 400,000 shares authorized in 1998 and 1997, 61,826
shares issued and outstanding at September 30, 1998 and December 31, 1997, (redemption
preference of $12,054)........................................................................... 1 1
Additional paid-in capital........................................................................ 63,812 59,610
Redeemable Common Stock:
Common Stock, $.01 par value, 16,413 shares issued and outstanding at September 30, 1998 and
December 31, 1997................................................................................ - -
Additional paid-in capital........................................................................ 2,872 2,872
Stockholders' deficit:
Common stock, $.01 par value, 1,500,000 shares authorized in 1998 and 1997, 103,659 and 103,464
shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively.......... 1 1
Additional paid-in capital........................................................................ 15,552 15,508
Accumulated deficit............................................................................... (33,014) (16,198)
-------- --------
Total stockholders' deficit................................................................ (17,461) (689)
-------- --------
Total liabilities and stockholders' deficit................................................ $214,152 $184,020
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Admissions and other operating revenues......... $18,768 $14,772 $ 49,701 $35,957
Concessions..................................... 10,136 7,779 26,660 18,895
------- ------- -------- -------
Total revenues.......................... 28,904 22,551 76,361 54,852
------- ------- -------- -------
Operating expenses:
Film rental and advertising costs............... 10,422 7,869 27,218 19,304
Cost of concessions............................. 1,804 1,266 4,554 3,021
Theater operating expenses...................... 11,097 8,558 30,243 22,241
General and administrative expenses............. 1,720 1,631 4,516 3,992
Depreciation and amortization................... 4,660 2,984 12,202 7,930
------- ------- -------- -------
Total operating expenses................ 29,703 22,308 78,733 56,488
------- ------- -------- -------
Operating income (loss)........................... (799) 243 (2,372) (1,636)
Interest expense, net............................. 3,887 2,234 10,229 4,482
------- ------- -------- -------
Net loss.......................................... $(4,686) $(1,991) $(12,601) $(6,118)
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(UNAUDITED)
Cash flows from operating activities:
<S> <C> <C>
Net loss...................................................................................... $(12,601) $ (6,118)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities :
Depreciation and amortization................................................................ 12,202 7,930
Deferred lease expenses...................................................................... 503 421
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................................................... 357 (466)
Increase in prepaids and other current assets................................................ (3,859) (1,650)
Increase in inventories...................................................................... (1,043) (622)
Increase in deposits......................................................................... (154) (181)
Decrease in deferred revenues................................................................ (182) -
(Decrease) increase in accounts payable and accrued expenses................................. (4,526) 3,420
-------- --------
Net cash (used in) provided by operating activities..................................... (9,303) 2,734
-------- --------
Cash flows from investing activities:
Purchases of property and equipment and construction of theaters............................. (41,462) (48,707)
Payments for business acquisitions net of cash acquired...................................... - (28,242)
-------- --------
Net cash used in investing activities.................................................... (41,462) (76,949)
-------- --------
Cash flows from financing activities:
Borrowings on Senior Subordinated Notes...................................................... - 110,000
Borrowings under revolving credit facility.................................................. 47,000 14,000
Borrowings on notes payable.................................................................. - 3,800
Repayment on revolving credit facility....................................................... - (14,500)
Repayment on term loan....................................................................... - (50,000)
Proceeds from issuance of stock.............................................................. - 22,000
Payment of financing fees.................................................................... (695) (5,505)
Repurchase of stock.......................................................................... (66) -
Repayment of capital lease obligations....................................................... - (32)
-------- --------
Net cash provided by financing activities................................................ 46,239 79,763
-------- --------
Net (decrease) increase in cash and cash equivalents................................................ (4,526) 5,548
Cash and cash equivalents, beginning of period...................................................... 7,379 3,560
-------- --------
Cash and cash equivalents, at end of period......................................................... $ 2,853 $ 9,108
======== ========
Noncash transactions:
Stock dividend............................................................................... $ 4,208 $ 2,853
======== ========
Issuance of stock............................................................................ $ 97 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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HOLLYWOOD THEATER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the unaudited Interim Condensed
Consolidated Financial Statements of Hollywood Theater Holdings, Inc.
("Holdings") and its subsidiaries include all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly Holdings' financial
position as of September 30, 1998, and the results of its operations for the
three month and nine month periods ended September 30, 1998 and 1997. Due to
the seasonality of Holdings' operations, the results of its operations for the
interim periods ended September 30, 1998 and 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 Condensed Consolidated Financial Statements should be read
in conjunction with the audited Consolidated Financial Statements of Holdings
and the accompanying notes for the years ended December 31, 1997 and 1996. These
Consolidated Financial Statements were filed with the Securities and Exchange
Commission in a Special Financial Report in accordance with regulation 15(d) -
Reports of Registrants Under the Securities Act of 1933.
NOTE 2. ORGANIZATION
Holdings 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. and affiliates. Crown
Theatre Corporation ("CTC") became a wholly owned subsidiary of HTI after it was
acquired by HTI on November 1, 1996, the effective date of the purchase.
Holdings, HTI, and CTC (collectively "The Company") owned and operated 75 motion
picture theaters with 471 screens at September 30, 1998. The Company currently
operates theaters in Idaho, Kansas, Missouri, Ohio, Oklahoma, and Texas.
NOTE 3. FINANCING ARRANGEMENTS
10 5/8% Senior Subordinated Notes
In August 1997, the Company completed an offering of $110.0 million of
senior subordinated notes (the "Offering"). The notes bear interest at 10 5/8%
and are due in 2007. The notes are redeemable, in whole or in part, at the
option of the Company at any time on or after August 1, 2002, at a redemption
price of 105.312% in 2002, 103.542% in 2003, 101.771% in 2004, and 100% in 2005
and thereafter plus any accrued but unpaid interest. 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 notes originally issued at a redemption price of
110.625% plus any accrued but unpaid interest. Upon a change in control of the
Company, as defined in the indenture, the Company will be required to make an
offer to repurchase all or any part of each holder's notes at a price equal to
101% of the principal amount thereof plus interest. The notes also include
restrictive covenants relative to the incurrence of additional indebtedness. The
Company used the net proceeds from the Offering to repay all of the existing
indebtedness under its former bank 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.
6
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Revolving Credit Facility
In conjunction with the Offering, the Company entered into a revolving
credit facility (the "Senior Bank Facility") to fund working capital
requirements and capital expenditures. The Senior Bank Facility consists of a
revolving credit facility of up to $50 million. At September 30, 1998, the
Company had $47.0 million of indebtedness outstanding under the Senior Bank
Facility. Amounts outstanding 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), plus the Applicable Margin
(as defined therein). At September 30, 1998, the applicable interest rate was
8.60%. Borrowings under the Senior Bank Facility are subject to various
conditions precedent, including the maintenance of certain financial covenants.
Such financial covenants require the Company to comply with specified financial
ratios and minimum tests, including minimum interest coverage ratios and maximum
leverage ratios. Since November 1997, the Company has amended the Senior Bank
Facility on five occasions and received waivers in respect of certain financial
covenants, on three occasions. In August 1998, the Company received a waiver of
certain financial covenants until October 30, 1998. The Company received an
extension of such waiver until December 15, 1998. The terms of the current
waiver require that the Company or Holdings obtain additional equity on or
before December 15, 1998.
The Company has entered into an exclusive letter of intent providing for an
equity investment in Holdings (the "Proposed Equity Issuance"). Consummation of
the Proposed Equity Issuance would satisfy the terms of the current bank waiver.
The letter of intent sets forth certain conditions to the investment, including,
but not limited to, completion by the Company of the issuance of a $100 million
of a series of senior notes in a 144A offering (the "Proposed Debt Financing").
In order to complete the Proposed Debt Financing, the Company will solicit the
consent of the majority of the holders of its 10 5/8% Senior Subordinated Notes
to certain amendments to the indenture under which such notes are issued. These
amendments, among other things, will permit the Company to issue a new series of
senior notes and will revise certain other financial covenants. In connection
with such amendments, the Company will also amend the indenture to provide for
the elimination of all applicable provisions which subordinate the 10 5/8%
Senior Subordinated Notes. The Company intends to use the proceeds of the
Proposed Debt Financing and the contributed proceeds from the Proposed Equity
Issuance to retire the Senior Bank Facility and the Interim Facility (as
defined) and to finance future theater development. If the Company does not
obtain the required consent, the Company will have no ability to complete the
Proposed Debt Financing.
Bank of America National Trust and Savings Association ("Bank of America")
has provided the Company with $5.0 million of short-term capital under a new
bank credit facility (the "Interim Facility"). All amounts borrowed under the
Interim Facility will be backed by a letter of credit or guarantee supplied by
Holding's principal stockholder, Beacon Group III-Focus Value Fund, L.P. or an
affiliate thereof ("Beacon"). The purpose of the Interim Facility is to provide
short-term capital to the Company prior to the completion of the Proposed Equity
Issuance and the Proposed Debt Financing. If the letter of credit or guarantee
is called upon, the Company will reimburse Beacon by issuing a combination of
subordinated debt and equity securities.
If the Company is not able to consummate the Proposed Equity Issuance and
the Proposed Debt Financing for any reason, or otherwise satisfy the terms of
the current waiver or obtain another waiver or amendment of the Senior Bank
Facility, the Company will not be in compliance with several financial covenants
set forth in the Senior Bank Facility immediately upon expiration of the current
waiver on December 15, 1998. A failure to comply with such financial covenants
could lead to an event of default under the terms of the Senior Bank Facility,
which could result in an acceleration of the amounts borrowed thereunder and
under the 10 5/8% Senior Subordinated Notes. Such acceleration would have a
material adverse effect on the Company and impact its ability to operate in its
current form. In such case, the Company will not have sufficient resources or
may not have access to sufficient resources to satisfy its obligations under the
Senior Bank Facility or the 10 5/8% Senior Subordinated Notes.
7
<PAGE>
Unless the context otherwise requires, references in this 10-Q to the
"Company" includes Hollywood Theaters, Inc.("HTI") and its subsidiary, Crown
Theatre Corporation ("CTC"). The following discussion of the Company's
financial condition and results of operations should be read in conjunction with
the financial information included herein, and the Company's Special Financial
Report filed with the Securities and Exchange Commission (the "SEC") for fiscal
years ended December 31, 1997 and 1996. Except for the historical information
contained herein, the following discussion contains forward-looking statements
that involve a number of risks and uncertainties. Factors which could cause the
Company's actual results in future periods to differ materially include, but are
not limited to, the availability of suitable motion pictures for exhibition in
the Company's markets, the availability of opportunities for expansion and
competition with other forms of entertainment, as well as those discussed or
identified from time to time in the Company's filings with the SEC, including,
but not limited to, the Company's 1997 Special Financial Report.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's revenues are generated primarily from box office receipts and
concession sales, which constituted approximately 65% and 35% of revenues,
respectively, for the quarter ended September 30, 1998. 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,
competition, general economic conditions 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 construction of new theaters. Since January 1997, the
Company has acquired 13 theaters with 98 screens, constructed six theaters with
78 screens, added nine screens to two existing theaters, closed 15 theaters with
47 screens and swapped six theaters with 31 screens for five theaters with 22
screens and $1.1 million in cash. The results of operations of the acquired and
newly-built theaters are included in the Company's consolidated financial
statements from their respective dates of acquisition or opening dates.
The Company currently operates eight stadium-style theaters with an
aggregate of 104 screens, 46 first run theaters with an aggregate of 260
screens, and 21 discount theaters (theaters that exhibit second run movies and
charge lower admission prices) with an aggregate of 107 screens. In comparison,
at the end of 1997 the Company operated 81 theaters with 469 screens. These were
composed of seven stadium-style theaters with 80 screens, 53 first run theaters
with an aggregate of 288 screens, and 21 discount theaters with an aggregate of
101 screens.
The Company's 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 in
the summer season from Memorial Day to Labor Day and the holiday season
extending from Thanksgiving through year-end. There are other factors, however,
which may affect the Company's revenues during any particular quarter, including
the popularity of films released during the quarter and the availability of such
popular films at the Company's theaters.
8
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RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the percentage
of total revenues represented by certain items reflected in the Company's
consolidated statement of operations (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Admissions and other operating revenues........ 64.9% 65.5% 65.1% 65.6%
Concessions 35.1% 34.5% 34.9% 34.4%
----- ----- ----- -----
Total revenues......................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Film rental and advertising costs.............. 36.1% 34.9% 35.6% 35.2%
Cost of concessions............................ 6.2% 5.6% 6.0% 5.5%
Theater operating expenses..................... 38.4% 37.9% 39.6% 40.5%
General and administrative expenses............ 6.0% 7.2% 5.9% 7.3%
Depreciation and amortization.................. 16.1% 13.3% 16.0% 14.5%
----- ----- ----- -----
Total operating expenses............... 102.8% 98.9% 103.1% 103.0%
----- ----- ----- -----
Operating income (loss).......................... (2.8% ) 1.1% (3.1%) (3.0%)
Interest expense, net............................ 13.4% 10.0% 13.4% 8.2%
----- ----- ----- -----
Net loss......................................... (16.2% ) (8.9%) (16.5%) (11.2%)
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
TOTAL REVENUES. Total revenues for the quarter ended September 30, 1998
increased by 28.2% to $28.9 million from $22.6 million in the comparable 1997
period. This increase in revenues was principally due to a 18.4% increase in
attendance primarily attributable to the Company's acquisition of nine theaters
with 72 screens, the construction of three stadium theaters with 38 screens and
the addition of nine stadium screens to existing theaters during the period from
July 1, 1997 to September 30, 1998 and a 5.8% increase in average ticket price.
The average price of a ticket for the Company's first run and discount
theaters was $4.46 and $1.29, respectively, during the quarter ended September
30, 1998 and $4.32 and $1.24, respectively, during the comparable 1997 period.
This increase was principally due to a change in the mix of theaters (increased
number of all stadium-style-seating theaters that generate higher average ticket
prices per patron) operated by the Company, raising ticket prices and acquiring
theaters with higher average ticket prices than those previously owned. The
average concession sales for the Company's first run and discount theaters were
$2.21 and $1.60, respectively, during the quarter ended September 30, 1998 and
$2.04 and $1.44, respectively, during the comparable 1997 period. Average
concession sales per customer circuit wide in the Company's theaters increased
approximately 10.0% in the quarter ended September 30, 1998 over the same
period in the prior year, reflecting both an increase in consumption and, to a
lesser extent, an increase in prices.
The Company's first run theaters had box office revenue, concession revenue
and attendance per weighted average screen of $45,242, $22,448, and 10,155
patrons, respectively, for the three months ended September 30, 1998 and
$39,971, $18,816, and 9,242 patrons, respectively, for the comparable 1997
period. This represents an increase per weighted average screen for box office
revenue, concession revenue and attendance of 13.2%, 19.3% and 9.9%,
respectively.
DIRECT THEATER COSTS. Direct theater costs (which includes film rental and
advertising costs, cost of concessions, and theater operating expenses) for the
quarter ended September 30, 1998 increased by 31.8% to $23.3 million from $17.7
million in the comparable 1997 period. As a percentage of total revenues,
direct theater costs increased to 80.7% for the quarter ended September 30, 1998
from 78.4% in the comparable 1997 period. Film rental and advertising costs for
the quarter ended September 30, 1998 increased by 32.4% to $10.4 million from
$7.9 million in the comparable 1997 period. As a percentage of total revenues,
film rental and advertising costs increased to 36.1%
9
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for the quarter ended September 30, 1998 from 34.9% in the comparable 1997
period. Cost of concessions for the quarter ended September 30, 1998 increased
by 42.5% to $1.8 million from $1.3 million in the comparable 1997 period. As a
percentage of total revenues, cost of concessions increased to 6.2% for the
quarter ended September 30, 1998 from 5.6% in the comparable 1997 period.
Theater operating expenses for the quarter ended September 30, 1998 increased by
29.7% to $11.1 million from $8.6 million in the comparable 1997 period. As a
percentage of total revenues, theater operating expenses increased to 38.4% for
the quarter ended September 30, 1998 from 37.9% in the comparable 1997 period.
This dollar increase in direct theater costs is due to the increased number of
screens in operation from the Company's acquisition and construction of theaters
in 1997 and 1998, a higher level of film rental and advertising costs, an
increase in concession costs from the introduction of product combination sales
and the use of more expensive containers, and an increase in utility costs
resulting from the heat wave across the regions in which the Company operates.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended September 30, 1998 increased by 5.5% to $1.7 million from
$1.6 million in the comparable 1997 period. As a percentage of total revenues,
general and administrative expenses decreased to 6.0% for the quarter ended
September 30, 1998 from 7.2% in the comparable 1997 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the quarter ended September 30, 1998 increased by 56.2% to $4.7 million from
$3.0 million in the comparable 1997 period. The increase was principally due
to the Company's acquisition and construction of theaters during 1997 and 1998.
As a percentage of total revenues, depreciation and amortization expense
increased to 16.1% for the quarter ended September 30, 1998 from 13.3% in the
comparable 1997 period.
OPERATING INCOME (LOSS). Operating loss was ($799,000) for the quarter
ended September 30, 1998 as compared to operating income of $243,000 in the
comparable 1997 period.
INTEREST EXPENSE, NET. Interest expense, net for the quarter ended
September 30, 1998 increased by 74.0% to $3.9 million from $2.2 million in the
comparable 1997 period. The increase was due to increased borrowing by the
Company to finance the Company's theater construction program and an increase in
the effective interest rate on the Company's borrowings as a result of the
Company's issuance of 10 5/8% Senior Subordinated Notes in August 1997.
NET LOSS. The Company's net loss was $4.7 million for the quarter ended
September 30, 1998 as compared to $2.0 million in the comparable 1997 period.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
TOTAL REVENUES. Total revenues for the nine months ended September 30,
1998 increased by 39.2% to $76.4 million from $54.9 million in the comparable
1997 period. This increase in revenues was principally due to a 26.0% increase
in attendance primarily attributable to the Company's acquisition of 13 theaters
with 98 screens, the construction of six stadium theaters with 78 screens and
the addition of nine stadium screens to two existing theaters during 1997 and
the first nine months of 1998 and a 9.1% increase in average ticket price.
The average price of a ticket for the Company's first run and discount
theaters was $4.46 and $1.31, respectively, during the nine months ended
September 30, 1998 and $4.26 and $1.26, respectively, during the comparable 1997
period. This increase was principally due to a change in the mix of theaters
(increased number of all stadium-style-seating theaters that generate higher
average ticket prices per patron) operated by the Company, raising ticket prices
and acquiring theaters with higher average ticket prices than those previously
owned. The average concession sales for the Company's first run and discount
theaters were $2.20 and $1.60, respectively, during the nine months ended
September 30, 1998 and $1.98 and $1.49, respectively, during the comparable 1997
period. Average concession sales per customer circuit wide in the Company's
theaters increased approximately 12.0% in the nine months
10
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ended September 30,1998 over the same period in the prior year, reflecting both
an increase in consumption and, to a lesser extent, an increase in prices.
The Company's first run theaters had box office revenue, concession revenue
and attendance per weighted average screen of $122,090, $60,161, and 27,386
patrons, respectively, for the nine months ended September 30, 1998 and
$112,726, $52,298, and 26,448 patrons, respectively, for the comparable 1997
period. This represents an increase per weighted average screen for box office
revenue, concession revenue and attendance of 8.3%, 15.0% and 3.5%,
respectively.
DIRECT THEATER COSTS. Direct theater costs (which includes film rental and
advertising costs, costs of concessions, and theater operating expenses) for the
nine months ended September 30, 1998 increased by 39.2% to $62.0 million from
$44.6 million in the comparable 1997 period. As a percentage of total revenues,
direct theater costs remained constant at 81.2% for the nine months ended
September 30, 1998 and the comparable 1997 period. Film rental and advertising
costs for the nine months ended September 30, 1998 increased by 41.0% to $27.2
million from $19.3 million in the comparable 1997 period. As a percentage of
total revenues, film rental and advertising costs increased to 35.6% for the
nine months ended September 30, 1998 from 35.2% in the comparable 1997 period.
Cost of concessions for the nine months ended September 30, 1998 increased by
50.7% to $4.6 million from $3.0 million in the comparable 1997 period. As a
percentage of total revenues, cost of concessions increased to 6.0% for the nine
months ended September 30, 1998 from 5.5% in the comparable 1997 period. Theater
operating expenses for the nine months ended September 30, 1998 increased by
36.0% to $30.2 million from $22.2 million in the comparable 1997 period. As a
percentage of total revenues, theater operating expenses decreased to 39.6% for
the nine months ended September 30, 1998 from 40.5% in the comparable 1997
period. This dollar increase in direct theater costs is due to the increased
number of screens in operation from the Company's acquisition and construction
of theaters in 1997 and 1998, a higher level of film rental and advertising
costs, and an increase in concession costs from the introduction of product
combination sales and the use of more expensive containers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 1998 increased by 13.1% to $4.5 million
from $4.0 million in the comparable 1997 period. As a percentage of total
revenues, general and administrative expenses decreased to 5.9% for the nine
months ended September 30, 1998 from 7.3% in the comparable 1997 period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the nine months ended September 30, 1998 increased by 53.9% to $12.2 million
from $7.9 million in the comparable 1997 period. The increase was principally
due to the Company's acquisition and construction of theaters during 1997 and
1998. As a percentage of total revenues, depreciation and amortization expense
increased to 16.0% for the nine months ended September 30, 1998 from 14.5% in
the comparable 1997 period.
OPERATING LOSS. Operating loss was $2.4 million for the nine months ended
September 30, 1998 as compared to $1.6 million in the comparable 1997 period.
INTEREST EXPENSE, NET. Interest expense, net for the nine months ended
September 30, 1998 increased by 128.2% to $10.2 million from $4.5 million in the
comparable 1997 period. The increase was due to increased borrowing by the
Company to finance the Company's theater construction program and an increase in
the effective interest rate on the Company's borrowings as a result of the
Company's issuance of 10 5/8 % Senior Subordinated Notes in August 1997.
NET LOSS. The Company's net loss was $12.6 million for the nine months
ended September 30, 1998 as compared to $6.1 million in the comparable 1997
period.
11
<PAGE>
LIQUIDITY
The Company's revenues are collected in cash, primarily through box office
receipts and concession sales. The Company generally pays for film rentals,
inventories and other theater services 15 to 45 days following receipt of
revenues. As a result of this timing difference, the Company has generally
operated with a minimum working capital position for its ongoing theater
operations.
Since January 1997, the Company has acquired 13 theaters with 98 screens,
constructed six theaters with 78 screens, added nine screens to two existing
theaters, closed 15 theaters with 47 screens and swapped six theaters with 31
screens for five theaters with 22 screens and $1.1 million in cash. The
Company's capital expenditures in connection with such acquisitions and theater
development in 1997 and the first nine months of 1998 were approximately $130.5
million. The Company funded these capital expenditures through cash flows from
operations, borrowings under the Senior Bank Facility, the proceeds of the
securities offerings and the proceeds from the issuance of shares of Common
Stock and Convertible Preferred Stock by Holdings.
The Company currently has three all-stadium-style theaters with 43 screens
under construction in Alabama, Missouri and Texas. Including these current
construction projects, the Company's remaining 1998-99 theater development
program provides for the construction of eight new stadium-style theaters with
116 screens, the addition of 56 stadium-style auditoriums to 10 theaters and the
conversion of 82 existing screens into stadium-style auditoriums at 13 theaters.
Since January 1998, the Company has closed seven theaters with 27 screens. As a
result, by the end of fiscal year 1999, the Company expects to operate
approximately 373 stadium screens out of a total of 643 screens. The Company has
budgeted $148.1 million for its 1998-1999 theater development program, of which,
at September 30, 1998, $23.4 million has been spent on completed projects,
$12.6 million has been spent on projects currently under construction and $112.1
million remains to be spent to complete projects currently under construction
and remaining projects in the 1998-1999 theater development program. The
Company has historically funded its capital expansion needs through the
contributed proceeds from issuances by Holdings of its' capital stock, the sale
of securities, the Company's revolving credit facilities and funds generated
from its operations.
Currently the Company's direct financing sources are limited to borrowings
under its existing Senior Bank Facility. The Senior Bank Facility consists of a
revolving credit facility of up to $50 million. At September 30, 1998, the
Company had $157.0 million of indebtedness outstanding, $47.0 million of which
was indebtedness outstanding under the Senior Bank Facility. Amounts
outstanding 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), plus the Applicable Margin (as defined therein). At
September 30, 1998, the applicable interest rate was 8.60%. Borrowings under
the Senior Bank Facility are subject to various conditions precedent, including
the maintenance of certain financial covenants. Such financial covenants
require the Company to comply with specified financial ratios and minimum tests,
including minimum interest coverage ratios and maximum leverage ratios. Since
November 1997, the Company has amended the Senior Bank Facility on five
occasions and received waivers in respect of certain of its financial covenants,
on three occasions. In August 1998, the Company received a waiver of certain
financial covenants until October 30, 1998. The Company received an extension
of such waiver until December 15, 1998. The terms of the current waiver require
that the Company or Holdings obtain additional equity on or before December 15,
1998.
The Company has entered into an exclusive letter of intent providing for
the Proposed Equity Issuance. Consummation of the Proposed Equity Issuance
would satisfy the terms of the current bank waiver. The letter of intent sets
forth certain conditions to the investment, including, but not limited to,
completion by the Company of the Proposed Debt Financing. In order to complete
the Proposed Debt Financing, the Company will solicit the consent of the
majority of the holders of its 10 5/8% Senior Subordinated Notes to certain
amendments to the indenture under which such notes are issued. These
amendments, among other things, will permit the Company to issue a new series of
senior notes and will revise certain other financial covenants. In connection
with such amendments, the Company will also
12
<PAGE>
amend the indenture to provide for the elimination of all applicable provisions
which subordinate the 10 5/8% Senior Subordinated Notes. The Company intends to
use the proceeds of the Proposed Debt Financing and the contributed proceeds
from the Proposed Equity Issuance to retire the Senior Bank Facility and the
Interim Facility and to finance future theater development. If the Company does
not obtain the required consent, the Company will have no ability to complete
the Proposed Debt Financing.
Bank of America has provided the Company with $5.0 million of short-term
capital under the Interim Facility. All amounts borrowed under the Interim
Facility will be backed by a letter of credit or guarantee supplied by Holding's
principal stockholder, Beacon. The purpose of the Interim Facility is to
provide short-term capital to the Company prior to the completion of the
Proposed Equity Issuance and the Proposed Debt Financing. If the letter of
credit or guarantee is called upon, the Company will reimburse Beacon by issuing
a combination of subordinated debt and equity securities.
If the Company is not able to consummate the Proposed Equity Issuance and
the Proposed Debt Financing for any reason, or otherwise satisfy the terms of
the current waiver or obtain another waiver or amendment of the Senior Bank
Facility, the Company will not be in compliance with several financial covenants
set forth in the Senior Bank Facility immediately upon expiration of the current
waiver on December 15, 1998. A failure to comply with such financial covenants
could lead to an event of default under the terms of the Senior Bank Facility,
which could result in an acceleration of the amounts borrowed thereunder and
under the 10 5/8% Senior Subordinated Notes. Such acceleration would have a
material adverse effect on the Company and impact its ability to operate in its
current form. In such case, the Company will not have sufficient resources or
may not have access to sufficient resources to satisfy its obligations under the
Senior Bank Facility or the 10 5/8% Senior Subordinated Notes.
USES OF CASH
Cash (used in) provided by operating activities was ($9.3) million and $2.7
million for the nine months ended September 30, 1998 and 1997, respectively. The
payment of accrued interest on the 10 5/8 % Senior Subordinated Notes, increased
net loss and decrease in accounts payable in the first nine months of 1998
contributed to the increase in cash used in operating activities as compared to
the third quarter of 1997.
Cash used in investing activities was $41.5 million and $76.9 million for
the nine months ended September 30, 1998 and 1997, respectively. Investing
activities consist of theater development and acquisition and remodeling and
expansion of existing theaters. Cash provided by financing activities was $46.2
million and $79.8 million for the nine month periods ended September 30, 1998
and 1997, respectively.
YEAR 2000 IMPACT
The Company has initiated a review of its internal information systems for
Year 2000 transition problems and has purchased and installed new accounting
software that it believes to be Year 2000 compliant. Other internal computer
systems of the Company have not been fully evaluated, but the Company has
initiated a task force to evaluate these systems. The Company has not
extensively investigated the Year 2000 compliance of its customers, suppliers
and other third parties with whom it does business, but has initiated
discussions with its significant suppliers to determine the extent to which
their failure to correct their own Year 2000 issues could affect the Company.
Compliance by such third parties is voluntary and the Company cannot guarantee
that any Year 2000 problems in other companies' systems, on which the Company
relies, will be resolved in a timely manner. The Company cannot guarantee that
other companies' failure to resolve such problems, or resolutions incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
13
<PAGE>
The Company is dependent on computer systems and applications to conduct
business. Based on a current assessment of its computer systems and
applications, the Company believes that it will not experience any material Year
2000 problems with its computer systems. The Company estimates that it has
spent approximately $800,000 on Year 2000 issues year to date and estimates that
it will spend $1.9 million to remediate any Year 2000 issues over the next year.
Costs associated with Year 2000 issues will be funded through operating cash
flows.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures
About Segments of an Enterprise and Related Information. SFAS 131 requires new
disclosures of segment information in a company's financial statements and is
effective for fiscal years beginning after December 15, 1997. This statement
will become effective for the Company in fiscal 1998. Adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
During fiscal 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use and Statement of
Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP
98-1 requires companies to capitalize certain internal-use software costs once
certain criteria are met. SOP 98-5 requires costs of start-up activities to be
expensed when incurred. SOP 98-1 and SOP 98-5 are effective for fiscal years
beginning after December 15, 1998. Adoption of these statements is not expected
to have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
14
<PAGE>
PART II
ITEM 1 - 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.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
None
15
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
*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 Theater Corporation and
U.S. Trust Company of Texas, N.A.
*4.2 Exchange and Registration Rights Agreement, dated a of August 7, 1997
among Hollywood Theaters, Inc., Hollywood Theaters Holdings, Inc.,
Goldman, Sachs, & Co., and BancAmerica Securities Inc.
*4.3 Second Amendment to Registration Rights Agreement, date 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 Registration Rights Agreement, dated as of
December 17, 1997, by and among Hollywood Theater Holdings, Inc.,
Stratford Capital 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, date 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.
*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.
*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, and 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., 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.
16
<PAGE>
*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 Award Plan,
dated 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
January 7, 1998, among Hollywood Theater Holdings, Inc., Hollywood
Theaters, Inc., and Bank of America National Trust and Savings
Association.
*24.1 Power of Attorney
Financial Data Schedule
* - Incorporated by reference to Hollywood Theaters, Inc.'s Registration
Statement on Form S-4 (File No. 333-36763), dated February 4, 1998.
REPORTS ON FORM 8-K
None.
17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOLLYWOOD THEATERS, INC. AND SUBSIDIARIES
Date: November 12, 1998 /s/ Thomas W. Stephenson, Jr.
----------------- -----------------------------
Thomas W. Stephenson, Jr.
Chief Executive Officer
Date: November 12, 1998 /s/ James R. Featherstone
----------------- -----------------------------
James R. Featherstone
Chief Financial Officer
18
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