<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998
REGISTRATION NO. 333-56903
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SILVER CINEMAS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7832 72-2656147
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN L. HOLMES
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRYANT B. EDWARDS
LATHAM & WATKINS
633 WEST FIFTH STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
SILVER CINEMAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7832 75-2672675
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN L. HOLMES
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRYANT B. EDWARDS
LATHAM & WATKINS
633 WEST FIFTH STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
<PAGE> 2
SCI ACQUISITION CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7832 75-2749958
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN L. HOLMES
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRYANT B. EDWARDS
LATHAM & WATKINS
633 WEST FIFTH STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
LANDMARK THEATRE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7832 75-2749959
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN L. HOLMES
4004 BELTLINE ROAD, SUITE 205
DALLAS, TEXAS 75244
(972) 503-9851
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRYANT B. EDWARDS
LATHAM & WATKINS
633 WEST FIFTH STREET
SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of 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. [ ]
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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<PAGE> 3
PROSPECTUS
$100,000,000
OFFER TO EXCHANGE
10 1/2% SENIOR SUBORDINATED NOTES DUE 2005
FOR ALL OUTSTANDING 10 1/2% SENIOR SUBORDINATED NOTES DUE 2005
OF
SILVER CINEMAS INTERNATIONAL, INC.
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
, 1998 UNLESS EXTENDED.
Silver Cinemas International, Inc., a Delaware corporation ("Silver
Cinemas" or the "Company"), hereby offers (the "Exchange Offer"), upon the terms
and subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (the "Letter of Transmittal"), to exchange $1,000
principal amount of its 10 1/2% Senior Subordinated Notes due 2005 (the
"Exchange Notes"), which exchange has 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 (the "Registration Statement"), for each
$1,000 principal amount of its outstanding 10 1/2% Senior Subordinated Notes due
2005 (the "Private Notes"), of which $100,000,000 in aggregate principal amount
was issued on April 16, 1998 (the "Private Offering") all of which are
outstanding as of the date hereof. The form and terms of the Exchange Notes are
the same as the form and terms of the Private Notes except that (i) the exchange
will have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) Holders of
the Exchange Notes will not be entitled to certain rights of Holders of the
Private Notes under the Registration Rights Agreement (as defined), which rights
will terminate upon the consummation of the Exchange Offer. The Exchange Notes
will evidence the same debt as the Private Notes (which they replace) and will
be entitled to the benefits of an indenture dated as of April 15, 1998 governing
the Private Notes and the Exchange Notes (the "Indenture"). The Private Notes
and the Exchange Notes are sometimes referred to herein collectively as the
"Notes." See "The Exchange Offer" and "Description of Exchange Notes."
The Exchange Notes will bear interest at the same rate and on the same
terms as the Private Notes. Consequently, interest on the Exchange Notes will
accrue from the date of issuance of the Private Notes (April 16, 1998) and will
be payable semi-annually in arrears on April 15 and October 15 of each year,
commencing on October 15, 1998, at the rate of 10 1/2% per annum. The Exchange
Notes will be redeemable, in whole or in part, at the option of the Company on
or after April 15, 2001, at the redemption prices set forth herein, plus accrued
and unpaid interest to the date of redemption. In addition, at any time prior to
April 15, 2001, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Exchange Notes originally issued with the net
cash proceeds of one or more Equity Offerings (as defined), at a redemption
price equal to 110 1/2% of the aggregate principal amount of the Exchange Notes
to be redeemed plus accrued and unpaid interest to the date of redemption;
provided, however, that after giving effect to any such redemption, at least 65%
of the aggregate principal amount of the Exchange Notes originally issued under
the Indenture remains outstanding. Holders whose Private Notes are accepted for
exchange will be deemed to have waived the right to receive any interest accrued
on the Private Notes.
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to existing and future Senior Debt (as
defined) of the Company. The Exchange Notes will be fully and unconditionally
guaranteed (the "Guarantees") on a joint and several basis by all of the
Company's current and certain future subsidiaries (the "Guarantors"). The
Guarantees will be general unsecured obligations of the Guarantors and will be
subordinated in right of payment to all existing and future Guarantor Senior
Debt (as defined). The Exchange Notes and the Guarantees will also be
effectively subordinated to all secured indebtedness of either the Company or
any of its subsidiaries to the extent of the assets secured by such
indebtedness. As of March 31, 1998, on pro forma basis, the Company and its
subsidiaries would have had approximately $5.2 million of indebtedness
outstanding which ranks senior to the Exchange Notes.
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offering is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn at
any time prior to the Expiration Date. Private Notes may be tendered only in
integral multiples of $1,000. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer -- Conditions."
SEE "RISK FACTORS," BEGINNING ON PAGE 16, FOR A DISCUSSION OF CERTAIN
FACTORS THAT INVESTORS SHOULD CONSIDER 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 SECURITIES
AND EXCHANGE 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
<PAGE> 4
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a Holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person 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 the Holder is acquiring
the Exchange Notes in the ordinary course of its business and is not
participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such 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 Company believes that none of the registered Holders of the Private
Notes is an affiliate (as such term is defined in Rule 405 under the Securities
Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Exchange Notes will not be listed on any securities exchange, but the
Private Notes are eligible for trading in the National Association of Securities
Dealers, Inc.'s Private Offerings, Resales and Trading through Automatic
Linkages (PORTAL) market. There can be no assurance that an active market for
the Exchange Notes will develop. To the extent that a market for the Exchange
Notes does develop, the market value of the Exchange Notes will depend on market
conditions (such as yields on alternative investments), general economic
conditions, the Company's financial condition and certain other factors. Such
conditions might cause the Exchange Notes, to the extent that they are traded,
to trade at a significant discount from face value. See "Risk Factors -- Absence
of Public Market."
Each 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
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 broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has indicated its intention
to make this Prospectus (as it may be amended or supplemented) available to any
broker-dealer for use in connection with any such resale for a period of 180
days after the Expiration Date. See "The Exchange Offer -- Resale of the
Exchange Notes" and "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer. See "The Exchange Offer -- Resale of the Exchange Notes."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL [ ], 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A
2
<PAGE> 5
PROSPECTUS IN CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM. THE
COMPANY EXPECTS THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER
WILL BE ISSUED IN THE FORM OF ONE OR MORE FULLY REGISTERED GLOBAL NOTES THAT
WILL BE DEPOSITED WITH, OR ON BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC" OR
THE "DEPOSITARY") AND REGISTERED IN ITS NAME OR IN THE NAME OF CEDE & CO., AS
ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL NOTE REPRESENTING THE EXCHANGE
NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH,
RECORDS MAINTAINED BY THE DEPOSITARY AND ITS PARTICIPANTS. AFTER THE INITIAL
ISSUANCE OF SUCH GLOBAL NOTE, EXCHANGE NOTES IN CERTIFICATED FORM WILL BE ISSUED
IN EXCHANGE FOR THE GLOBAL NOTE ONLY IN ACCORDANCE WITH THE TERMS AND CONDITIONS
SET FORTH IN THE INDENTURE. SEE "THE EXCHANGE OFFER -- BOOK-ENTRY TRANSFER" AND
"DESCRIPTION OF EXCHANGE NOTES -- BOOK ENTRY; DELIVERY AND FORM."
------------------------
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references to the
"Company" shall mean, collectively, Silver Cinemas International, Inc. and its
subsidiaries on a consolidated, pro forma basis after giving effect to the
Transactions (as defined). Unless otherwise specified, the pro forma income
statement data and summary pro forma balance sheet data presented herein reflect
adjustments to the historical consolidated financial statements of Silver
Cinemas to give effect to (i) the consummation of the Private Offering, (ii) the
acquisition of all of the assets of StarTime Cinema, Inc. subject to the
StarTime Asset Purchase Agreement (the "StarTime Acquisition"), (iii) the
acquisition of all of the assets of The Landmark Theatre Group subject to the
Landmark Asset Purchase Agreement (the "Landmark Acquisition,"), (iv) the
acquisition of three theaters from AMC Entertainment, Inc. (the "AMC
Acquisition," and, together with the StarTime Acquisition and the Landmark
Acquisition, the "Acquisitions"), (v) the Equity Contribution (as defined), and
(vi) the repayment of the Old Credit Facility (as defined) and execution of the
Revolving Credit Facility(as defined), (collectively, the "Transactions") in
each case as if such events had occurred on January 1, 1997 or as of March 31,
1998, respectively.
THE COMPANY
The Company is the largest exhibitor of specialty motion pictures and one
of the largest operators of second-run theaters in the United States. The
Company operates 106 theaters with 524 screens located in eighteen states. The
106 theaters are comprised of 49 specialty motion picture theaters, 49
second-run theaters and eight first-run theaters. The Company's strategy is to
acquire theaters in under-served markets, to upgrade and expand theaters to
provide a high-quality movie-going experience and to improve the profitability
of theaters by combining certain administrative functions, obtaining volume
discounts and implementing tighter operating controls. On a pro forma basis for
the year ended December 31, 1997 and the three months ended March 31, 1998, the
Company generated revenue of approximately, $106.3 million and $27.3 million,
respectively, and pro forma EBITDA (as defined) of $12.1 million and $3.3
million, respectively. On a pro forma basis for the year ended December 31, 1997
and the three months ended March 31, 1998, the Company had net losses of $9.2
million and $2.2 million, respectively, and had a total debt to equity ratio of
4.0:1.0 at March 31, 1998.
The Company's specialty-film theaters exhibit alternatives to commercial
first-run movies. The specialty-film niche is composed of art films, foreign
pictures and independent releases such as Good Will Hunting, The Full Monty, The
Apostle, Shine, Sling Blade and The English Patient which are generally released
in limited numbers to selected markets. Studios such as Disney, Universal, Sony,
Paramount, Twentieth Century Fox and New Line have begun to distribute
specialty-films through dedicated distribution subsidiaries (Miramax, October
Films, Sony Pictures Classics, Paramount's specialty-film division, Fox
Searchlight Pictures and Fine Line, respectively). Management believes that the
recent success of independent films in garnering Academy Award nominations and
Academy Awards will further drive independent film production, particularly from
these "independent" subsidiaries which seek the recognition of these
prestigious, high profile awards. According to Exhibitor Relations Company,
Inc., the number of new films released by independent producers and distributors
has increased from 158 in 1992 to 295 in 1997. In addition to the prestige of
the Academy Awards, the generally lower budgets and higher potential returns on
capital invested in specialty films makes the production of these films
financially appealing to the studios. Specialty films are also attractive to
exhibitors since the specialty-film niche tends to benefit from higher average
admission prices and lower film rental expense than first-run operators,
resulting in higher operating margins. Finally, the specialty-film niche, which
generally appeals to more mature and upscale audiences, is expected to continue
to benefit from favorable demographic trends as a result of the aging of the
"baby boom" generation.
The Company's second-run theaters offer major studio productions, generally
six to ten weeks after their initial release dates, at significantly lower
admission prices than commercial first-run theaters, making their revenues less
susceptible to economic recession. The Company enjoys more favorable film
booking arrangements and film buying terms at its second-run theaters than its
commercial first-run counterparts. With far
4
<PAGE> 7
fewer second-run screens than first-run screens nationwide, there is typically
little competition for prints of commercial films, enabling the Company to
screen its choice of successful commercial films. First-run theaters, on the
other hand, must aggressively compete for films from distributors and generally
screen only a subset of new releases. In addition to its film booking advantage,
the Company's second-run theaters also benefit from lower film rental expense
and a larger proportion of high-margin concession sales as a percentage of
overall revenue. Finally, the Company's lower admission prices for its
second-run theaters appeal especially to teen audiences and older patrons,
segments of the population which are expected to experience steady growth over
the next decade.
Founded in May 1996, the Company completed seven acquisitions, representing
26 theaters with an aggregate total of 154 screens as of December 31, 1997. In
addition, the Company completed two construction projects, increasing its total
number of theaters and screens to 27 and 165, respectively. Management has
successfully integrated these theaters into its operations by implementing new
operating standards, management controls and information systems. In addition,
the Company has added new seating, improved sound and projection equipment, and
broadened concession offerings in many locations. The impact of these
improvements, which have helped increase profitability, are reflected in the
operating performance of the Company's first two acquisitions in November 1996,
Movie One and MI Theaters, consisting of 102 screens at 18 theaters. Based on
actual results for the nine months ended September 30, 1997, theater level cash
flow at these theaters increased 31.7% compared to the nine months ended
September 30, 1996, prior to the Company's ownership of the theaters.
BUSINESS STRATEGY
The Company's strategy is to increase revenue and cash flow by (i)
acquiring specialty motion picture and second-run theaters and first-run
theaters in non-competitive markets, (ii) improving operations at acquired
theaters, (iii) building new state-of-the-art multiplexes in selected markets,
and (iv) adding additional screens, seating capacity, state-of-the-art sound and
projection systems, and other exhibition or concession equipment at its existing
theaters.
Pursue Strategic Acquisitions. The Company has successfully pursued a
disciplined acquisition strategy and intends to continue to acquire and
integrate theaters in both the specialty-film and second-run niches. Management
believes that there are many attractive acquisition candidates in the
highly-fragmented exhibition industry. Management believes that the recent
consolidation trend in the exhibition industry is driving many major exhibitors
to dispose of non-core properties, many of which are specialty-film or second-
run theaters that do not fit those companies' commercial first-run strategies.
In addition, the growth of megaplexes (theaters with 16 or more screens) has
created another avenue of potential growth for the Company through the
conversion of existing commercial first-run theaters to theaters with a
specialty-film or second-run format at an attractive cost.
Leverage Existing Infrastructure and Control Operating Costs. The Company
has successfully integrated and improved the operations of its acquisitions.
Management believes significant opportunities exist to leverage its existing
infrastructure over future acquisitions and realize significant operating
improvements through the implementation of superior operating procedures,
management oversight and its state-of-the-art management information system.
Specific areas of improvement include (i) labor scheduling, (ii) film selection
and lineup, (iii) cash control, (iv) pricing policies, and (v) purchasing
discounts on concession contracts. Additionally, many of the smaller theater
chains lack the sophisticated information systems employed by the Company, which
the Company believes are necessary to effectively manage a geographically
diverse group of theaters. Examples of management's ability to acquire and
improve operations of theaters include the acquisitions of Movie One and MI
Theaters, both completed in November 1996. Based on actual results for the nine
months ended September 30, 1997, these two groups of theaters have shown theater
level cash flow increases of 31.7% compared to the same period in the previous
year, prior to the Company's ownership of the theaters.
Capitalize on Leading Position in Specialty-Film Segment. The Company,
through The Landmark Theatre Group ("Landmark"), is the largest exhibitor of
specialty motion pictures and the only specialty-film
5
<PAGE> 8
exhibitor with a national presence. The Company has a leading presence in, among
others, the following major markets: Los Angeles, San Francisco, Boston, Dallas,
Houston, Seattle, Cleveland, Minneapolis, Denver, Milwaukee and New Orleans. The
Company plans to use its experience in the specialty-film niche to establish a
presence in the following strategic new markets: Chicago, Detroit, St. Louis and
Washington D.C. Landmark achieved its leading presence by developing strong
relationships with specialty-film distributors, many of whom rely on the
Company's expertise in distributing and marketing specialty films. These
relationships enable the Company to secure film prints in limited release and
secure a period of exclusivity in exhibiting selected new films in many of its
markets. For example, for films such as The English Patient, Good Will Hunting
and Shine the Company had exclusive rights to the films for up to three weeks in
selected markets.
Expand Established Second-Run Operations. The Company believes it is the
leading operator of second-run theaters in most of its markets, operating 49
second-run theaters with 336 screens in 15 states. By offering patrons a
high-quality alternative to commercial first-run exhibitors at a low price, the
Company avoids direct competition with commercial first-run theaters. In
addition, the second-run niche offers other attractive characteristics which
include (i) lower film costs as a percentage of admission revenue, (ii) greater
percentage of total revenue from high margin concessions, (iii) greater
recession resistance due to lower admission prices, and (iv) lower seasonal
variability than commercial first-run exhibitors due to a staggered film release
schedule.
Provide a Superior Movie-Going Experience. The Company seeks to provide
audiences with a high quality viewing experience, comparable to that available
at new commercial first-run theaters. To enhance the movie-going experience, the
Company invests in high quality projection and stereo sound equipment,
comfortable chairs with wide seats and cupholder armrests, and appealing lobby
and concession areas. Since many competitors in the specialty-film and
second-run exhibition niches do not focus on these aspects of operations,
management believes that this strategy provides it with a distinct competitive
advantage.
Pursue Attractive Construction Opportunities. The Company continually
evaluates existing and new markets for new theater locations for specialty,
second-run, and, in selected situations, commercial first-run theaters. The
Company generally seeks to develop theaters in markets that are under-served as
a result of changing demographic trends or the aging or obsolescence of existing
theaters. Some of the factors management considers in determining whether to
develop a theater in a particular location are the market's population, average
household income, education levels, proximity to retail corridors, convenient
roadway access, proximity to competing theaters, and the effect on the Company's
existing theaters in the market, if any.
Leverage Experienced Management Team and Strong Sponsorship. The Company's
senior management team averages over 21 years of experience in the exhibition
industry, and members of senior management have been heavily involved in the
rapid growth of exhibition companies such as Cinemark USA, Inc. and The Landmark
Theatre Group. In addition, the Company enjoys the strong equity sponsorship of
Brentwood Associates Buyout Fund II, L.P. ("Brentwood") and certain members of
management. See "Principal Stockholders." On March 3, 1998, Brentwood made an
additional equity investment of $10.0 million in the Company, bringing its
aggregate equity investment to approximately $25.0 million. Brentwood
beneficially owns 82.3% of the Company's voting securities and accordingly has
the ability to elect a majority of the Company's Board of Directors and direct
the Company's activities.
RECENT AND PENDING ACQUISITIONS AND CONSTRUCTION
From its inception through December 31, 1997, the Company completed seven
acquisitions, representing 26 theaters with an aggregate of 154 screens.
In April 1998, the Company acquired the assets of Landmark for cash
consideration of approximately $62.2 million pursuant to an asset purchase
agreement (the "Landmark Asset Purchase Agreement") with Metromedia
International Group, Inc. ("Metromedia"). Landmark, with 140 screens at 49
locations, was the largest exhibitor of specialty motion pictures in the United
States, with theaters located in California, Colorado, Louisiana, Massachusetts,
Michigan, Minnesota, Ohio, Texas, Washington and Wisconsin.
6
<PAGE> 9
In April 1998, the Company completed the acquisition of 202 screens at 27
locations operating predominately under the name Super Saver Cinemas pursuant to
an asset purchase agreement (the "StarTime Asset Purchase Agreement") with
StarTime Cinema, Inc. ("StarTime") for approximately $21.6 million. The theaters
acquired from StarTime are second-run theaters located in Arizona, California,
Colorado, Florida, Nebraska, New York, Ohio, Oklahoma, Texas and Wisconsin.
In April 1998, the Company completed the acquisition of 17 screens at three
theaters for approximately $1.7 million from AMC Entertainment, Inc. ("AMC").
These theaters include one specialty-film theater in Michigan and two second-run
theaters in Texas.
In addition to acquisitions, the Company completed the construction of its
first second-run multiplex theater with ten screens in Des Moines, Iowa in June
1997. The Company also completed the expansion of its existing facility in
LaPlace, Louisiana in September 1997, which increased the number of screens from
six to seven and the number of seats from 734 to 970. In addition, the Company
recently executed leases for the construction of four theaters in Illinois,
Massachusetts, Missouri and Michigan, representing 24 screens.
------------------------
The Company is a Delaware corporation with its principal executive offices
located at 4004 Beltline Road, Suite 205, Dallas, Texas 75244, and its telephone
number is (972) 503-9851.
7
<PAGE> 10
THE EXCHANGE OFFER
THE EXCHANGE OFFER.................. The Company is offering to exchange
$1,000 principal amount of Exchange
Notes for each $1,000 principal amount
of Private Notes that are properly
tendered and accepted. The Company will
issue Exchange Notes on or promptly
after the Expiration Date. There is
$100.0 million aggregate principal
amount of Private Notes outstanding.
See "The Exchange Offer -- Purpose of
the Exchange Offer."
Based on an interpretation by the staff
of the Commission set forth in
no-action letters issued to third
parties, the Company believes that the
Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private
Notes may be offered for resale, resold
and otherwise transferred by a Holder
thereof (other than (i) a broker-dealer
who purchases such Exchange Notes
directly from the Company to resell
pursuant to Rule 144A or any other
available exemption under the
Securities Act or (ii) a person 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 the Holder is
acquiring Exchange Notes in the
ordinary course of its business and is
not participating, and had no
arrangement or understanding with any
person to participate, in the
distribution of the Exchange Notes.
Each broker-dealer that receives
Exchange Notes for its own account in
exchange for Private Notes, where such
Private Notes were acquired by such
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 "The Exchange
Offer -- Resale of the Exchange Notes."
REGISTRATION RIGHTS AGREEMENT....... The Private Notes were sold by the
Company on April 16, 1998 to Donaldson,
Lufkin & Jenrette Securities
Corporation, BT Alex. Brown
Incorporated and Bear, Stearns & Co.,
Inc. (collectively, the "Initial
Purchasers") pursuant to a Purchase
Agreement, dated April 9, 1998, by and
among the Company and the Initial
Purchasers (the "Purchase Agreement").
Pursuant to the Purchase Agreement, the
Company and the Initial Purchasers
entered into a Registration Rights
Agreement, dated as of April 16, 1998
(the "Registration Rights Agreement"),
which grants the Holders of the Private
Notes certain exchange and registration
rights. The Exchange Offer is intended
to satisfy such rights, which will
terminate upon the consummation of the
Exchange Offer. See "The Exchange
Offer -- Termination of Certain
Rights."
8
<PAGE> 11
EXPIRATION DATE..................... The Exchange Offer will expire at 5:00
p.m., New York City time, on
, 1998, unless the Exchange
Offer is extended by the Company in its
sole discretion, in which case the term
"Expiration Date" shall mean the latest
date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
ACCRUED INTEREST ON THE EXCHANGE
NOTES AND THE PRIVATE NOTES......... The Exchange Notes will bear interest
from and including the date of issuance
of the Private Notes (April 16, 1998).
Holders whose Private Notes are
accepted for exchange will be deemed to
have waived the right to receive any
interest accrued on the Private Notes.
See "The Exchange Offer -- Interest on
the Exchange Notes."
CONDITIONS TO THE EXCHANGE OFFER.... The Exchange Offer is subject to
certain customary conditions that may
be waived by the Company. The Exchange
Offer is not conditioned upon any
minimum aggregate principal amount of
Private Notes being tendered for
exchange. See "The Exchange Offer --
Conditions."
PROCEDURES FOR TENDERING PRIVATE
NOTES............................... Each Holder of Private Notes wishing to
accept the Exchange Offer must
complete, sign and date the 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 such Private Notes and
any other required documentation to the
Exchange Agent, at the address set
forth herein. By executing the Letter
of Transmittal, the Holder will
represent to and agree with the Company
that, among other things, (i) the
Exchange Notes to be acquired by such
Holder of Private Notes in connection
with the Exchange Offer are being
acquired by such Holder in the ordinary
course of its business, (ii) if such
Holder is not a broker-dealer, such
Holder is not currently participating
in, does not intend to participate in,
and has no arrangement or understanding
with any person to participate in a
distribution of the Exchange Notes,
(iii) if such Holder is a broker-dealer
registered under the Exchange Act or is
participating in the Exchange Offer for
the purposes of distributing the
Exchange Notes, such Holder will comply
with the registration and prospectus
delivery requirements of the Securities
Act in connection with a secondary
resale transaction of the Exchange
Notes acquired by such person and
cannot rely on the position of the
staff of the Commission set forth in
no-action letters (see "The Exchange
Offer -- Resale of Exchange Notes"),
(iv) such Holder under-
9
<PAGE> 12
stands that a secondary resale
transaction described in clause (iii)
above and any resales of Exchange Notes
obtained by such Holder in exchange for
Private Notes acquired by such Holder
directly from the Company should be
covered by an effective registration
statement containing the selling
securityholder information required by
Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and
(v) such Holder is not an "affiliate,"
as defined in Rule 405 under the
Securities Act, of the Company. If the
Holder is a broker-dealer that will
receive Exchange Notes for its own
account in exchange for Private Notes
that were acquired as a result of
market-making activities or other
trading activities, such Holder will be
required to acknowledge in the Letter
of Transmittal that such Holder will
deliver a prospectus in connection with
any resale of such Exchange Notes;
however, by so acknowledging and by
delivering a prospectus, such Holder
will not be deemed to admit that it is
an "underwriter" within the meaning of
the Securities Act. See "The Exchange
Offer -- Procedures for Tendering."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.............................. Any beneficial owner whose Private
Notes are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and who wishes
to tender such Private Notes in the
Exchange Offer 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 such owner's Private Notes,
either make appropriate arrangements to
register ownership of the Private 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 and may not be able
to be completed prior to the Expiration
Date. See "The Exchange
Offer -- Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES...... Holders of Private Notes who wish to
tender their Private Notes and whose
Private Notes are not immediately
available or who cannot deliver their
Private Notes, the Letter of
Transmittal or any other documentation
required by the Letter of Transmittal
to the Exchange Agent prior to the
Expiration Date must tender their
Private Notes according to the
guaranteed delivery procedures set
forth under "The Exchange
Offer -- Guaranteed Delivery
Procedures."
10
<PAGE> 13
ACCEPTANCE OF THE PRIVATE NOTES AND
DELIVERY OF THE EXCHANGE NOTES...... Subject to the satisfaction or waiver
of the conditions to the Exchange
Offer, the Company will accept for
exchange any and all Private Notes that
are properly tendered in the Exchange
Offer prior to the Expiration Date. The
Exchange Notes issued pursuant to the
Exchange Offer will be delivered on the
earliest practicable date following the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
WITHDRAWAL RIGHTS................... Tenders of Private Notes may be
withdrawn at any time prior to the
Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
EXCHANGE AGENT...................... Norwest Bank Minnesota, National
Association, is serving as the Exchange
Agent in connection with the Exchange
Offer.
THE EXCHANGE NOTES
The Exchange Offer applies to $100.0 million aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) Holders of the Exchange
Notes will not be entitled to certain rights of Holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Private Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the Indenture. For further information and for
definitions of certain capitalized terms used below, see "Description of
Exchange Notes."
SECURITIES OFFERED.................. $100.0 million aggregate principal
amount of the Company's 10 1/2% Senior
Subordinated Notes due 2005.
COMPANY............................. Silver Cinemas International, Inc.
MATURITY DATE....................... April 15, 2005.
INTEREST PAYMENT DATES.............. Interest on the Notes will accrue from
the date of original issuance (the
"Issue Date") and will be payable
semi-annually in arrears on each April
15 and October 15, commencing October
15, 1998.
OPTIONAL REDEMPTION................. The Notes will be redeemable, in whole
or in part, at the option of the
Company on or after April 15, 2001, at
the redemption prices set forth herein,
plus accrued and unpaid interest to the
date of redemption. In addition, at any
time on or prior to April 15, 2001, the
Company may, at its option, redeem up
to 35% of the aggregate principal
amount of the Notes originally issued
with the net cash proceeds of one or
more Equity Offerings (as defined), at
a redemption price equal to 110 1/2% of
the aggregate principal amount of the
Notes to be redeemed plus accrued and
unpaid interest to the date of
redemption; provided, however, that,
after giving effect to any such
redemption, at least 65% of the
11
<PAGE> 14
aggregate principal amount of the Notes
originally issued under the Indenture
remains outstanding. See "Description
of Exchange Notes -- Redemption."
CHANGE OF CONTROL................... Upon the occurrence of a Change of
Control (as defined), each holder will
have the right, subject to certain
conditions, to require the Company to
repurchase all or any part of such
holder's Notes at a price equal to 101%
of the aggregate principal amount
thereof, plus accrued and unpaid
interest and Liquidated Damages, if
any, thereon to the date of repurchase.
See "Description of Exchange
Notes -- Change of Control." There can
be no assurance that, in the event of a
Change of Control, the Company would
have sufficient funds to repurchase all
Notes tendered. See "Risk
Factors -- Change of Control."
RANKING............................. The Notes will be general unsecured
senior subordinated obligations of the
Company and will be subordinated in
right of payment to existing and future
Senior Debt (as defined) of the
Company, including indebtedness as a
guarantor under the Revolving Credit
Facility (as defined). The Notes will
also be effectively subordinated to all
secured indebtedness of either the
Company or any of its subsidiaries to
the extent of the assets secured by
such indebtedness. The Notes will rank
pari passu in right of payment with any
future senior subordinated indebtedness
of the Company and senior in right of
payment to all existing and future
subordinated indebtedness of the
Company. As of March 31, 1998, on a pro
forma consolidated basis, the Company
would have had approximately $5.2
million of indebtedness outstanding
which is senior to the Notes. See "Risk
Factors -- Ranking."
GUARANTEES.......................... The Notes will be fully and
unconditionally guaranteed on a senior
subordinated basis by each of the
Guarantors on a joint and several
basis. The Guarantees will be general
unsecured obligations of the Guarantors
and will be subordinated in right of
payment to all existing and future
Guarantor Senior Debt (as defined). As
of March 31, 1998, on a pro forma
basis, the Guarantors collectively
would have had approximately $5.1
million of Guarantor Senior Debt
outstanding. See "Description of
Exchange Notes -- Guarantees."
CERTAIN COVENANTS................... The Indenture governing the Notes (the
"Indenture") will contain certain
covenants that limit the ability of the
Company and its subsidiaries to, among
other things, incur additional
indebtedness, pay dividends or make
investments and certain other
restricted payments, consummate certain
asset sales, enter into certain
transactions with affiliates, incur
liens, permit payment or dividend
restrictions to apply to subsidiaries
of the Company, merge or consolidate
with any other
12
<PAGE> 15
person or sell, assign, transfer,
lease, convey or otherwise dispose of
all or substantially all of the assets
of the Company. In addition, under
certain circumstances, the Company will
be required to offer to purchase the
Notes, in whole or in part, at a
purchase price equal to 100% of the
principal amount thereof plus accrued
and unpaid interest, if any, to the
date of repurchase, with the proceeds
of certain Asset Sales (as defined).
All of such covenants are subject to
significant qualifications and
exceptions. See "Description of
Exchange Notes -- Certain Covenants."
RISK FACTORS
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus in connection with the Exchange Offer before making an investment in
the Exchange Notes.
13
<PAGE> 16
SUMMARY PRO FORMA FINANCIAL DATA AND OPERATING DATA
The following summary pro forma financial data was derived in part from,
and should be read in conjunction with the Consolidated Financial Statements,
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Financial Data," including in
each case the notes thereto, included elsewhere in this Prospectus. The "Pro
Forma Financial Data" for the year ended December 31, 1997 and the three months
ended March 31, 1998 gives effect to: (i) the Acquisitions; (ii) the Private
Offering; (iii) the purchase on March 3, 1998, by Brentwood of an aggregate of
$10.0 million of additional equity of Silver Cinemas consisting of Series A
Preferred Stock and Common Stock and the purchase on April 16, 1998 by DLJ Fund
Investment Partners II, L.P. of $3.0 million of equity of Silver Cinemas
consisting of Series A Preferred Stock and Common Stock (together with the
Brentwood purchase, the "Equity Contribution"); and (iv) the repayment of the
Old Credit Facility and execution of the Revolving Credit Facility, as if each
transaction had occurred on January 1, 1997 for both statements of operations or
as of the balance sheet date.
The Pro Forma Financial Data does not purport to be indicative of the
Company's financial position or results of operations that would actually have
been obtained had the Transactions been completed at the date or as of the
beginning of the period presented, or to project the Company's financial
position or results of operations at any future date or for any future period.
(IN THOUSANDS, EXCEPT RATIOS AND THEATER DATA)
<TABLE>
<CAPTION>
PRO FORMA(5)
----------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Admissions................................................ $72,872 $18,916
Concessions............................................... 30,965 7,839
Other..................................................... 2,451 556
------- -------
Total............................................. 106,288 27,311
Costs and Expenses:
Film rentals.............................................. 31,017 8,207
Concession supplies....................................... 4,993 1,175
Salaries and wages........................................ 18,282 4,645
Facilities................................................ 16,586 4,280
Advertising............................................... 4,482 700
Utilities and other....................................... 13,156 3,414
General and administrative expenses....................... 5,712 1,605
Depreciation and amortization............................. 9,226 2,421
------- -------
Total............................................. 103,454 26,447
------- -------
Operating income............................................ 2,834 864
Interest expense(1)......................................... 11,996 3,000
Interest (income) and other expense, net.................... (67) (22)
------- -------
Income (loss) before income taxes........................... (9,095) (2,114)
Income tax expense.......................................... 100 75
------- -------
Net income (loss)........................................... $(9,195) $(2,189)
======= =======
OTHER FINANCIAL DATA:
Deficiency of earnings to fixed charges(2).................. $(9,095) $(2,114)
EBITDA(3)................................................... 12,060 3,285
Cash interest expense(4).................................... 11,196 2,800
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
PRO FORMA AS
OF
MARCH 31, 1998
--------------
<S> <C>
THEATER DATA:
Theaters.................................................... 106
Screens..................................................... 524
BALANCE SHEET DATA:
Cash and cash equivalents................................... $14,867
Total assets................................................ 139,932
Total debt.................................................. 105,238
Stockholders' equity........................................ 26,139
</TABLE>
- ---------------
(1) Interest expense includes amortization of debt issuance costs of $800 and
$200 for the year ended December 31, 1997 and the three months ended March
31, 1998, respectively.
(2) Earnings consist of net loss before taxes, 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.
(3) The term EBITDA, as used herein, represents operating income plus
depreciation and amortization. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles, the Company has included information concerning EBITDA in this
Prospectus because it is used by certain investors and analysts as a measure
of a company's ability to service its debt obligations. EBITDA should not be
used as an alternative to, or be considered more meaningful than, operating
income, net income, or cash flow as an indicator of the Company's operating
performance.
(4) Cash interest expense excludes amortization of debt issuance costs of $800
and $200 for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively.
(5) The Pro Forma Financial Data reflect costs savings and revenue enhancements
resulting from the Acquisitions related to: (i) increased other revenues
from new screen advertising agreements; (ii) reduced concession supplies
costs associated with a new fountain drink contract negotiated by the
Company as a result of the higher combined drink sales; (iii) reduced
expenses associated with new insurance agreements negotiated by the Company
as a result of the higher combined attendance and a more diversified real
estate portfolio; and (iv) reduced general and administrative expenses as a
result of the absorption of such costs by the Company's post-Transactions
overhead structure.
15
<PAGE> 18
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider all of the information contained
in this Prospectus and, in particular, should evaluate the following risk
factors. Certain statements in this Prospectus that are not historical fact
constitute "forward-looking statements." Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results of the Company to be materially different from results expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other factors include, but are not limited to, the following:
ABSENCE OF A PUBLIC MARKET
The Exchange Notes have no established trading market and will not be
listed on any securities exchange. The Initial Purchasers have advised the
Company that they intend to make a market in the Notes as permitted by
applicable laws and regulations; however, the Initial Purchasers are not
obligated to do so, and may discontinue any such market making activities at any
time without notice. In addition, such market making activity may be limited
during the Exchange Offer. Therefore, there can be no assurance that an active
market for the Notes will develop. If a trading market develops for the Exchange
Notes future trading prices of such securities will depend on many factors,
including, among other things, prevailing interest rates, the market for similar
securities, the performance of the Company and other factors. In addition, based
on such factors, the Notes may trade at a discount from their initial offering
price. See "The Exchange Offer" and "Plan of Distribution."
SUBSTANTIAL LEVERAGE; DEBT SERVICE OBLIGATIONS
As a result of the Transactions, the Company is highly leveraged and has
substantial indebtedness and debt service obligations. At March 31, 1998, on a
pro forma basis after giving effect to the Transactions, the Company's total
indebtedness, on a consolidated basis, would have been approximately $105.2
million. On a pro forma basis for the year ended December 31, 1997 and the three
months ended March 31, 1998, 92.8% and 85.2% of EBITDA would be dedicated to
service cash interest expense, respectively. In addition, subject to the
restrictions of the Indenture and expected to be imposed by the Revolving Credit
Facility, the Company and its Restricted Subsidiaries may incur additional
indebtedness, including Senior Debt and Guarantor Senior Debt, from time to
time. See "Description of Exchange Notes -- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness."
The level of the Company's leverage may have important consequences for the
Company, including: (i) the ability of the Company to obtain additional
financing for acquisitions, working capital, capital expenditures or other
purposes may be impaired or such financing may not be on terms favorable to the
Company; (ii) a substantial portion of the Company's cash flow will be used to
pay the Company's interest expense and under certain conditions to repay
indebtedness, which will reduce the funds that would otherwise be available to
the Company for its operations and future business opportunities; (iii) a
decrease in net operating cash flows or an increase in expenses of the Company
could make it difficult for the Company to meet its debt service requirements
and force it to modify its operations; (iv) the Company may be more highly
leveraged than its competitors, which may place it at a competitive
disadvantage; and (v) the Company's leverage may limit its flexibility to react
to changes in its operating environment or economic conditions, making it more
vulnerable to a downturn in its business or the economy generally. Any inability
of the Company to service its indebtedness or obtain additional financing, as
needed, would have a material adverse effect on the Company.
16
<PAGE> 19
POTENTIAL INABILITY TO REPAY DEBT
The Company's ability to pay principal of and interest and Liquidated
Damages, if any, on the Notes and to satisfy its other debt obligations will
depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control. The Company's ability to service its
debt as it becomes due will require significant growth in its operating cash
flow. If the Company is unable to service its indebtedness, it will be forced to
take actions such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing its indebtedness, or seeking additional equity
capital. There can be no assurance that any of these remedies can be effected on
satisfactory terms, if at all, or that the Company will be successful in
improving its cash flow by a sufficient magnitude or in a timely manner.
HOLDING COMPANY STRUCTURE; UNSECURED STATUS OF NOTES
Silver Cinemas is a holding company with no direct operations and no
significant assets other than the stock of the Guarantors. The Notes will be
general unsecured obligations of the Company and will rank pari passu in right
of payment with all existing and future senior subordinated indebtedness of the
Company, if any, and junior in right of payment to all existing and future
senior indebtedness of Silver Cinemas, if any. Silver Cinemas does not currently
have any other existing debt other than its guarantee of the obligations of its
subsidiaries under the Revolving Credit Facility and the debt of its
subsidiaries. In addition, Silver Cinemas has granted liens on its assets,
including a pledge of the stock of the Guarantors to secure its guarantee of the
borrowings under the Revolving Credit Facility and the Guarantors have granted
liens on substantially all of their assets as security for the obligations under
the Revolving Credit Facility or the guarantees thereof. Because the Notes are
not secured by any assets, in the event of a dissolution, bankruptcy,
liquidation or reorganization of Silver Cinemas or the Guarantors, holders of
the Notes may receive less ratably than the secured creditors under the
Revolving Credit Facility.
Silver Cinemas is dependent on the cash flow of the Guarantors to meet its
obligations, including the payment of interest and principal obligations on the
Notes when due. Accordingly, Silver Cinemas' ability to make principal, interest
and other payments to holders of the Notes when due is dependent on the receipt
of sufficient funds from the Guarantors. Receipt of such funds will be
restricted by the terms of existing and future indebtedness of the Guarantors,
including the Revolving Credit Facility. See "Description of Revolving Credit
Facility."
HISTORY OF OPERATING LOSSES
Silver Cinemas International has had net losses of $0.5 million and $1.2
million for the three months ended March 31, 1998 and the year ended December
31, 1997, respectively. The net losses primarily resulted from implementation of
the Company's acquisition strategy since its inception in May 1996. StarTime had
net losses of $1.1 million and $1.0 million, for the three months ended March
31, 1998 and the year ended December 31, 1997 respectively. The Company expects
to continue to incur net losses for the next several years in connection with
integrating the operations of StarTime and Landmark with the Company's
operations and in connection with potential future acquisitions. The ability of
the Company to generate net income and increase its operating cash flow will
depend upon, among other factors, the success of the Acquisitions and the
Company's operating performance. There can be no assurance that the Company will
achieve net income or increased operating cash flow and the failure to achieve
such goals could result in the Company failing to make payments of interest or
repay principal of the Notes when due.
17
<PAGE> 20
RANKING
The Notes and Guarantees will be subordinated in right of payment to all
Senior Debt and Guarantor Senior Debt of the Company and its subsidiaries,
including the Revolving Credit Facility. As of March 31, 1998, on a pro forma
basis giving effect to the Transactions, the Company and its Guarantors would
have had approximately $5.2 million of Senior Debt and Guarantor Senior Debt,
all of which would effectively rank senior to the Notes and the Guarantees. In
the event of a bankruptcy, liquidation, dissolution, reorganization or other
winding up of the Company or any of the Guarantors, the assets of the Company or
the Guarantors, as the case may be, will be available to pay the Notes and the
Guarantees only after all Senior Debt and Guarantor Senior Debt has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on the
Notes or Guarantees. Additional Senior Debt and Guarantor Senior Debt may be
incurred by the Company and the Guarantors from time to time, subject to certain
restrictions. See "Description of Revolving Credit Facility" and "Description of
Exchange Notes -- Subordination."
BUSINESS RISKS ASSOCIATED WITH THE ACQUISITIONS
There can be no assurances that the Acquisitions will perform as expected
or that the returns from such properties will be sufficient to support the
indebtedness incurred to acquire, or the capital expenditures needed to develop,
such properties. In particular, there can be no assurance that certain theater
level payroll reductions reflected in the "Management's Discussion and Analysis
of Financial Conditions and Results of Operations -- Acquisition Synergies" will
be achieved. The Company developed such reductions based on a general analysis
of its operations and those of StarTime and Landmark. Those operations are not
directly comparable due to differences in, among other things, screens per
theater and markets served. In addition, such payroll reductions will need to be
implemented at each individual theater by the theater manager taking into
account the individual characteristics of the theater, including its employees,
number of screens, physical layout and customer base. The implementation of such
reduction at individual StarTime and Landmark theaters may not be achievable as
expected in the Company's overall plan.
LIMITED OPERATING HISTORY; ACQUISITION STRATEGY
The Company was formed in May 1996 and has limited experience in
implementing its operating policies and strategies on a broad, national basis.
In addition to the Acquisitions, the Company intends to acquire other theaters
or groups of theaters. The operation of the Company and any such acquisitions
may require additional personnel, assets and cash expenditures and there can be
no assurance that the Company will be able to successfully expand and operate
such acquisitions profitably. There can be no assurance that the Company will
anticipate and respond effectively to all of the changing demands that its
expanding operations will have on the Company's management, information and
operating systems and cash reserves and the failure of the Company to meet
challenges of any such expansion could have a material adverse effect on the
Company's results of operations and financial condition.
The growth of the Company has been dependent mainly on the Company's
ability to acquire theaters. There can be no assurance that the Company will be
able to identify additional theaters for acquisition in the future, or that such
theaters will be available for acquisition at prices the Company considers
reasonable. Failure to acquire additional theaters or the increased prices the
Company might be required to pay for additional acquisitions could have a
material adverse effect on the Company's growth prospects, as well as its
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend, in large part, on the efforts, abilities
and experience of its executive officers 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."
18
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DEPENDENCE ON MOTION PICTURE PRODUCTION AND PERFORMANCE; RELATIONSHIP WITH FILM
DISTRIBUTORS
The Company's business is dependent upon a number of factors, including 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 studios or
independent producers could have a material adverse effect on the Company's
business and results of operations. In addition, the Company's business depends
to a significant degree on maintaining good relations with the film distributors
who are responsible for allocating films to the Company's theaters. If the
Company's relationship with one or more of such film distributors were to
deteriorate for any reason, the Company might experience difficulties in
scheduling the most commercially successful films in its theaters, thereby
adversely affecting the Company's results of operations. See "Business -- Film
Licensing."
COMPETITION
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 its
markets, the Company competes with first-run, second-run and specialty-film
exhibitors. Many of the Company's current and potential competitors have
financial, personnel and other resources substantially greater than those of the
Company. See "Business -- Competition" for more detailed information on the
competitive environment faced by the Company.
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of Control
(as defined), the Company will make an offer to purchase all or any part of the
Notes at a price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase. The Revolving
Credit Facility will prohibit the Company from repurchasing any Notes and will
require the Company to first repay outstanding borrowings and permanently reduce
the commitments thereunder. The Revolving Credit Facility will provide that
certain change of control events with respect to the Company would constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Debt or Guarantor Senior Debt (as defined) to which the Company or its
subsidiaries becomes a party are likely to contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Company
is prohibited from purchasing the Notes, or if the Company is required to make
an Asset Sale Offer pursuant to the terms of the Notes, the Company could seek
the consent of its lenders to purchase the Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or refinance such borrowings, the Company would remain prohibited
from purchasing the Notes. In such case, the Company's failure to purchase
tendered Notes would constitute an Event of Default (as defined) under the
Indenture. If, as a result thereof, a default occurs with respect to any Senior
Debt or Guarantor Senior Debt, the subordination provisions of the Indenture
would likely restrict payments to the holders of Notes. See "Description of
Exchange Notes -- Change of Control."
RESTRICTIVE COVENANTS OF REVOLVING CREDIT FACILITY; INABILITY TO BORROW
ADDITIONAL AMOUNTS
The Revolving Credit Facility contains a number of covenants that
significantly restrict the operations of the Company. In addition, the Company
is required to comply with specified financial ratios and tests under the
Revolving Credit Facility, including the interest coverage ratio, the fixed
charge coverage ratio and the leverage ratio. If the Company does not meet such
ratios, one consequence will be that the Company will not be able to borrow
under the Revolving Credit Facility and may therefore lack the funds necessary
to pursue its acquisition strategy and fund its capital expenditure needs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." As of December 31, 1997, the
Company did not comply with the leverage and EBITDA provisions of the Old Credit
Facility. These provisions were amended as of January 16, 1998 and March 25,
1998, and the Company obtained a waiver for past noncompliance. Currently, the
Company is unable to borrow under either the Revolving Credit Facility or any
other credit facility. In order to borrow under the Revolving Credit Facility,
the Company and Lenders must amend and restate the credit agreement under the
terms set forth in the April 10, 1998
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<PAGE> 22
commitment letter. Any future credit agreements or other agreements relating to
Senior Debt or Guarantor Senior Debt are likely to contain similar covenants.
There can be no assurance that the Company will be able to comply with such
restrictions or covenants in the future. The Company's ability to comply with
such covenants and other restrictions may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions would result in a default under the
Revolving Credit Facility that would permit the lenders thereunder to declare
all amounts outstanding thereunder to be immediately due and payable, together
with accrued and unpaid interest, and terminate their commitments to make
further extensions of credit thereunder. See "Description of Revolving Credit
Facility."
SEASONALITY
The Company's revenues have historically been seasonal, coinciding with the
timing of releases of films by distributors. The Company's quarterly results may
also be affected by the timing of the development or acquisition of theaters.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the issuance of the Guarantees. To the extent that a court were to
find that (x) a Guarantee was incurred by a Guarantor with intent to hinder,
delay or defraud any present or future creditor or such Guarantor contemplated
insolvency with a design to prefer one or more creditors to the exclusion in
whole or in part of others or (y) such Guarantor did not receive fair
consideration or reasonably equivalent value for issuing its Guarantee and such
Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the
issuance of its Guarantee, (iii) was engaged or about to engage in a business or
transaction for which the remaining assets of such Guarantor constituted
unreasonably small capital to carry on its business or (iv) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured, the court could avoid or subordinate such Guarantee in favor of
the creditors of such Guarantor. Among other things, a legal challenge of any
Guarantee may focus on the benefits, if any, realized by such Guarantor as a
result of the Company's issuance of the Notes. The Indenture will contain a
savings clause, which generally will limit the obligations of any Guarantor
under its Guarantee to the maximum amount as will, after giving effect to all of
the liabilities of such Guarantor, result in such obligation not constituting a
fraudulent conveyance. To the extent a Guarantee was avoided or limited as a
fraudulent conveyance or held unenforceable for any other reason, holders of the
Notes would cease to have any claim against such Guarantor and would be
creditors solely of the Company. In such event, the claims of holders of the
Notes against such Guarantor would be subject to the prior payment of all
liabilities (including trade payables) of such Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any avoided
portion of any Guarantee.
The measure of insolvency for the purposes of the foregoing considerations
will vary depending upon the law applied in any such proceeding. Generally,
however, a guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, is greater than the fair marketable value of
all of its assets at a fair valuation or if the present fair marketable value of
its assets is less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature. Based upon financial and other information, the
Company believes that the Guarantees are being incurred for proper purposes and
in good faith and that the Guarantors are solvent and will continue to be
solvent after issuing the Guarantees, will have sufficient capital for carrying
on their business after such issuance and will be able to pay their debts as
they mature. There can be no assurance, however, that a court passing on such
standards would agree with such beliefs. See "Description of Exchange Notes --
Guarantees."
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<PAGE> 23
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, Holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
Holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own accounts in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. To
the extent that Private Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Private Notes
could be adversely affected due to the limited amount, or "float," of the
Private Notes that are expected to remain outstanding following the Exchange
Offer. Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Private
Notes are not tendered or are tendered and not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See "Plan
of Distribution" and "The Exchange Offer."
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<PAGE> 24
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on April 16, 1998 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Private Notes to "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule
144A"), in reliance on Rule 144A. As a condition to the sale of the Private
Notes, the Company and the Initial Purchasers entered into the Registration
Rights Agreement on April 16, 1998. Pursuant to the Registration Rights
Agreement, the Company agreed that, unless the Exchange Offer is not permitted
by applicable law or Commission policy, it would (i) file with the Commission a
Registration Statement under the Securities Act with respect to the Exchange
Notes within 60 days after the Closing Date, (ii) use its best efforts to cause
such Registration Statement to become effective under the Securities Act within
150 days after the Closing Date and (iii) commence the Exchange Offer and use
its best efforts to issue, on or prior to 30 days after the date on which the
Registration Statement was declared effective by the Commission, Exchange Notes
in exchange for all Private Notes tendered prior thereto in the Exchange Offer.
A copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement. The Registration Statement is intended to satisfy
certain of the Company's obligations under the Registration Rights Agreement and
the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a Holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such Holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell 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 the distribution of the Exchange Notes or is a broker-dealer,
such Holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties 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 broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such 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. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus, as it may be amended or supplemented from
time to time, available to broker-dealers for use in connection with any resale
for a period of 180 days after the Expiration Date. See "Plan of Distribution."
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 Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000
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<PAGE> 25
principal amount of outstanding Private Notes surrendered pursuant to the
Exchange Offer. Private 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 Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) Holders of the Exchange Notes will not
be entitled to any of the rights of Holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, the Indenture, which also authorized the issuance of the
Private Notes, such that both series of Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $100.0 million in aggregate principal
amount of the Private Notes are outstanding. Only a registered Holder of the
Private Notes (or such Holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered Holders of the Private Notes entitled to participate in the Exchange
Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private 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
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private 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 Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, 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 City 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.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, and (ii) mail to the
registered Holders an announcement thereof which shall include disclosure of the
approximate number of Private Notes deposited to date, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "-- Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination 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. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
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<PAGE> 26
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10 1/2% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on each
April 15 and October 15, commencing October 15, 1998. Holders of Exchange Notes
will receive interest on October 15, 1998 from the date of initial issuance of
the Private Notes. Holders of Private Notes that are accepted for exchange will
be deemed to have waived the right to receive any interest accrued on the
Private Notes.
PROCEDURES FOR TENDERING
Only a registered Holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a Holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the Holder must comply with
the guaranteed delivery procedures described below.
The tender by a Holder that is not withdrawn prior to the Expiration Date
will constitute an 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 PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE 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(s) of the Private Notes whose Private 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. 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 such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private 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.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered Holder who has not completed
the box titled "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 made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
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<PAGE> 27
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Private Notes listed therein, such Letter of
Transmittal 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 Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private 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 Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private 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 Private 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 Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "-- Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such Holder of
Private Notes in connection with the Exchange Offer are being acquired by such
Holder in the ordinary course of the respective business of such Holder, (ii)
such Holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) if such Holder is a resident of
the State of California, it falls under the self-executing institutional
investor exemption set forth under Section 25102(i) of the Corporate Securities
Law of 1968 and Rules 260.102.10 and 260.105.14 of the California Blue Sky
Regulations, (iv) if such Holder is a resident of the Commonwealth of
Pennsylvania, it falls under the self-executing institutional investor exemption
set forth under Sections 203(c), 102(d) and (k) of the Pennsylvania Securities
Act of 1972, Section 102.111 of the Pennsylvania Blue Sky Regulations and an
interpretive opinion dated November 16, 1985, (v) such Holder acknowledges and
agrees that any person who is a broker-dealer registered under the Exchange Act
or is participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(vi) such Holder understands that a secondary resale transaction described in
clause (v) above and any resales of Exchange Notes obtained by such Holder in
exchange for Private Notes acquired by such Holder directly from the Company
should be covered by an effective registration statement containing the selling
securityholder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (vii) such Holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the Holder is a
broker-dealer that will
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<PAGE> 28
receive Exchange Notes for such Holder's own account in exchange for Private
Notes that were acquired as a result of market-making activities or other
trading activities, such Holder will be required to acknowledge in the Letter of
Transmittal that such Holder will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, such Holder will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the Holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering Holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make
book-entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"-- Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
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 substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Private Notes and
the principal amount of Private 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 a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, 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 executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Private
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within 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 Private Notes according to the
guaranteed delivery procedures set forth above.
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<PAGE> 29
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private 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 Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer -- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of Holders to
withdraw such Private Notes (see "-- Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders of the Private Notes, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of Holders of the Private Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such Holders (including
any broker-dealers) and certain parties related to such Holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any Holder of a transfer-restricted Private Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Private Notes pursuant to Rule 144A, (iii) to use its
best efforts to keep the Registration Statement effective to the extent
necessary to ensure that it is available for resales of transfer-restricted
Private Notes by broker-dealers for a period of up to one year from the
Expiration Date and (iv) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request during such one year period.
LIQUIDATED DAMAGES
In the event of a Registration Default (as defined in the Registration
Rights Agreement), the Company will pay Liquidated Damages to each Holder of
Transfer Restricted Securities (as defined below), with respect to the first
90-day period immediately following the occurrence of such Registration Default
in an
27
<PAGE> 30
amount equal to $0.05 per week per $1,000 principal amount of Private Notes
constituting Transfer Restricted Securities held by such Holder. Transfer
Restricted Securities shall mean each Private Note until (i) the date on which
such Private Note has been exchanged for an Exchange Note in the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of such
Private Note for one or more Exchange Notes, the date on which such Exchange
Notes are sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of this Prospectus, (iii) the date on which such
Private Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement (as defined in
the Registration Rights Agreement) or (iv) the date on which such Private Note
is distributed to the public pursuant to Rule 144(k) under the Securities Act.
The amount of Liquidated Damages will increase by an additional $0.05 per week
per $1,000 principal amount of Private Notes constituting Transfer Restricted
Securities with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.50
per week per $1,000 principal amount of Private Notes constituting Transfer
Restricted Securities. Following the cure of all Registration Defaults, the
accrual of all Liquidated Damages will cease. The filing and effectiveness of
the Registration Statement of which this Prospectus is a part and the
consummation of the Exchange Offer will eliminate all rights of the Holders of
Private Notes eligible to participate in the Exchange Offer to receive damages
that would have been payable if such actions had not occurred.
Holders of Transfer Restricted Securities will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Transfer Restricted Securities included in the Shelf Registration
Agreement and benefit from the provisions regarding Liquidated Damages set forth
above.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association, has been appointed as
Exchange Agent of 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>
<S> <C>
By Registered or Certified Mail: By Hand Delivery:
Norwest Bank Minnesota, Northstar East Bldg.
National Association 608 2nd Ave. S.
Corporate Trust Operations 12th Floor
P.O. Box 1517 Corporate Trust Ser.
Minneapolis, MN 55480-1517 Minneapolis, MN
By Overnight Delivery: By Facsimile:
Norwest Bank Minnesota, (612) 667-4927
National Association
Corporate Trust Operations
Norwest Center Confirm by Telephone
Sixth and Marquette (612) 667-9764
Minneapolis, MN 55480-0113
</TABLE>
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, 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.
28
<PAGE> 31
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$300,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to a person whom the seller reasonably believes is
a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in accordance with
another exemption from the registration requirements of the Securities Act (and
based upon an opinion of counsel if the Company so requests), (v) to the Company
or (vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United States
or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
29
<PAGE> 32
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds from the Private Offering, which were approximately $96.0 million after
deducting discounts, commissions and estimated fees and expenses incurred in
connection therewith, were applied to repay approximately $2.6 million
outstanding under the Old Revolving Credit Facility and to finance the
Acquisitions. The remainder will be used to finance the construction of
identified new theaters and general corporate purposes. For a description of the
indebtedness repaid with the proceeds of the Private Offering, see "Description
of Certain Indebtedness."
The following table sets forth the estimated sources and uses of funds in
connection with the Acquisitions, the Private Offering, the Equity Contribution,
the repayment of the Old Credit Facility and execution of the Revolving Credit
Facility (collectively, the "Transactions"), pro forma as of March 31, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
TOTAL SOURCES:
Senior Subordinated Notes.................... $100,000
Equity Contribution.......................... 3,000
--------
Total Sources...................... $103,000
========
TOTAL USES:
Landmark Acquisition......................... $ 62,204
StarTime Acquisition......................... 17,135
AMC Acquisition.............................. 1,285
Repay Old Credit Facility.................... 2,625
Transaction fees and expenses(1)............. 5,000
Excess cash proceeds......................... 14,751
--------
Total Uses......................... $103,000
========
</TABLE>
- ---------------
(1) Includes fees of approximately $1.0 million related to the Revolving Credit
Facility.
(2) During the three months ended March 31, 1998, the Company received a $10.0
million equity investment. These proceeds were used to repay approximately
$3.9 million outstanding under the Old Revolving Credit Facility, acquire
certain theater assets from StarTime and AMC for approximately $4.5 and $.4
million, respectively, and general corporate purposes.
30
<PAGE> 33
CASH AND CASH EQUIVALENTS AND CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of Silver Cinemas as of March 31, 1998 on an actual basis and on
a pro forma basis to reflect the Transactions. See "Use of Proceeds." This table
should be read in conjunction with the consolidated financial statements of
Silver Cinemas, Landmark and StarTime, including the related notes thereto,
"Unaudited Pro Forma Financial Data" and "Selected Consolidated Financial and
Operating Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 116 $ 14,867
======= ========
Debt (including current maturities):
Old Credit Facility(1).................................... $ 2,625 $ --
Revolving Credit Facility(2).............................. -- --
10 1/2% Senior Subordinated Notes due 2005................ -- 100,000
Capital leases............................................ -- 4,923
Other..................................................... 95 315
------- --------
Total debt........................................ 2,720 105,238
------- --------
Stockholders' equity(3)..................................... 23,139 26,139
------- --------
Total capitalization........................................ $25,859 $131,377
======= ========
</TABLE>
- ---------------
(1) Concurrently with the Private Offering, the Company paid all of the existing
indebtedness under the Old Credit Facility (approximately $20.1 million as
of April 9, 1998).
(2) DLJ Capital Funding, Inc. has committed to provide the Company with a five
year revolving credit facility with aggregate availability of $40.0 million.
See "Description of Revolving Credit Facility."
(3) On March 3, 1998, the Company issued an aggregate of $10.0 million of
additional equity consisting of Series A Preferred Stock and Common Stock to
Brentwood. Concurrently with the Private Offering, DLJ Fund Investment
Partners II, L.P. purchased $3.0 million of Silver Cinemas' equity
consisting of Series A Preferred Stock and Common Stock.
31
<PAGE> 34
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data (the "Pro Forma Financial
Data") has been derived by the application of pro forma adjustments to the
historical consolidated financial statements of Silver Cinemas which give effect
to the Transactions as if each such transaction had been completed at the date
or as of the beginning of the period presented.
The Pro Forma Financial Data assume that the Company acquired all of the
theaters subject to the StarTime Asset Purchase Agreement and the Landmark Asset
Purchase Agreement at the date or as of the beginning of the period presented.
The purchase prices of the Acquisitions were determined based upon arm's
length negotiations between Silver Cinemas and the respective sellers and have
been allocated primarily to theater properties and equipment and goodwill.
Management believes no material change to these preliminary purchase price
allocations will result from the final determination of the fair market values
of the net assets acquired.
The Pro Forma Financial Data does not give effect to any events occurring
after consummation of the Acquisitions, other than increased other revenues from
new screen advertising agreements, reduced concession supplies costs associated
with a new fountain drink contract and reduced expenses associated with new
insurance agreements, which were negotiated by the Company as a result of the
higher combined attendance and drink sales and a more diversified real estate
portfolio anticipated from the Acquisitions; and reduced general and
administrative expenses as a result of the absorption of such costs by the
Company's post-Transactions overhead structure.
Although management believes that additional revenue enhancements, cost
reductions, and operating expense synergies will be realized after the Company
has integrated the acquired businesses and has consolidated administrative
functions (which may take up to a year to achieve), including (i) increased
other revenues associated with an increase in vending machine sales and other
advertising revenue, (ii) reduced theater-level payroll at StarTime and Landmark
associated with a reduction in theater level employees, the reorganization of
employees' work schedules and the diversification of employees' functions at
Landmark theaters; (iii) reduced advertising expenses at StarTime as a result of
consolidated advertisements and utilizing free directory advertisements in a
local newspaper for the Company's three theaters located in Denver, Colorado;
and (iv) elimination of one-time items associated with outside consultants, such
adjustments are not provided for in the definition of "pro forma" pursuant to
Regulation S-X under the Securities Act and these items have not been reflected
in the Pro Forma Financial Data. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisition Synergies," "Risk
Factors -- Business Risks Associated with the Acquisitions" and "Risk
Factors -- Risk of Failure to Obtain Landlord Consents."
The Pro Forma Financial Data is subject to numerous assumptions and
estimates that are subject to change and, in many cases, are beyond the control
of the Company. The Pro Forma Financial Data should be read in conjunction with
the historical financial statements of Silver Cinemas, Landmark and StarTime and
the notes thereto.
32
<PAGE> 35
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SILVER HISTORICAL PRO FORMA
CINEMAS STARTIME LANDMARK AMC(2) COMBINED ADJUSTMENTS PRO FORMA
------- -------- -------- ------ ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions.................. $10,368 $16,554 $45,903 $1,547 $74,372 $(1,500)(3) $72,872
Concessions................. 8,098 12,522 10,061 1,164 31,845 (880)(3) 30,965
Other....................... 296 756 990 61 2,103 348 (3,4) 2,451
------- ------- ------- ------ ------- ------- -------
Total................ 18,762 29,832 56,954 2,772 108,320 (2,032) 106,288
Costs and expenses:
Costs of operations:
Film rentals.............. 4,484 5,710 20,734 627 31,555 (538)(3) 31,017
Concession supplies....... 1,462 2,027 2,096 193 5,778 (785)(3,4) 4,993
Salaries and wages........ 3,065 5,643 9,448 668 18,824 (542)(3) 18,282
Facility leases........... 3,312 7,529 6,067 381 17,289 (703)(3) 16,586
Advertising............... 755 1,280 2,478 161 4,674 (192)(3) 4,482
Utilities and other....... 3,024 5,249 4,999 542 13,814 (658)(3,4) 13,156
General and
administrative.......... 1,901 1,393 5,191 8,485 (2,773)(5) 5,712
Depreciation and
amortization............ 1,479 1,786 4,929 8,194 1,032 (6,7) 9,226
------- ------- ------- ------ ------- ------- -------
Total................ 19,482 30,617 55,942 2,572 108,613 (5,159) 103,454
------- ------- ------- ------ ------- ------- -------
Operating income (loss)....... (720) (785) 1,012 200 (293) 3,127 2,834
Interest expense.............. (353) (941) (748) (2,042) (9,154)(8) (11,196)
Amortization of debt issue
costs....................... (55) (55) (745)(8) (800)
Interest income and other
(expense), net.............. (28) 95 67 67
------- ------- ------- ------ ------- ------- -------
Income (loss) before income
taxes....................... (1,156) (1,631) 264 200 (2,323) (6,772) (9,095)
Income tax expense
(benefit)................... 17 (618) 496 (105) 205(10) 100
------- ------- ------- ------ ------- ------- -------
Net income (loss)............. $(1,173) $(1,013) $ (232) $ 200 $(2,218) $(6,977) $(9,195)
======= ======= ======= ====== ======= ======= =======
EBITDA(1)..................... $ 759 $ 1,001 $ 5,941 $ 200 $ 7,901 $ 4,159 $12,060
======= ======= ======= ====== ======= ======= =======
</TABLE>
33
<PAGE> 36
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SILVER HISTORICAL PRO FORMA
CINEMAS STARTIME LANDMARK AMC(2) COMBINED ADJUSTMENTS PRO FORMA
------- -------- -------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Admissions........... $2,560 $ 3,582 $12,643 $325 $19,110 $ (194)(3) $18,916
Concessions.......... 2,129 2,799 2,813 244 7,985 (146)(3) 7,839
Other................ 113 128 204 15 460 96(3,4) 556
------ ------- ------- ---- ------- ------- -------
Total......... 4,802 6,509 15,660 584 27,555 (244) 27,311
COSTS AND EXPENSES:
Cost of Operations:
Film Rentals....... 986 1,203 5,924 145 8,258 (51)(3) 8,207
Concession
supplies......... 309 416 581 49 1,355 (180)(3,4) 1,175
Salaries and
wages............ 855 1,253 2,470 140 4,718 (73)(3) 4,645
Facility leases.... 780 1,939 1,646 81 4,446 (166)(3) 4,280
Advertising........ 144 280 278 31 733 (33)(3) 700
Utilities and
other............ 954 1,105 1,295 130 3,484 (70)(3,4) 3,414
General and
administrative..... 590 315 1,357 2,262 (657)(5) 1,605
Depreciation and
amortization....... 476 387 1,290 2,153 268(6,7) 2,421
------ ------- ------- ---- ------- ------- -------
Total......... 5,094 6,898 14,841 576 27,409 (962) 26,447
------ ------- ------- ---- ------- ------- -------
Operating income
(loss)............... (292) (389) 819 8 146 718 864
Interest expense....... (157) (163) (162) (482) (2,318)(8) (2,800)
Amortization of debt
issue costs.......... (34) (34) (166)(8) (200)
Interest income and
other (expense),
net.................. 10 (1,241) (1,231) 1,253(9) 22
------ ------- ------- ---- ------- ------- -------
Income (loss) before
income taxes......... (473) (1,793) 657 8 (1,601) (513) (2,114)
Income tax expense
(benefit)............ 23 (686) 392 (271) 346(10) 75
------ ------- ------- ---- ------- ------- -------
Net income (loss)...... $ (496) $(1,107) $ 265 $ 8 $(1,330) $ (859) $(2,189)
====== ======= ======= ==== ======= ======= =======
EBITDA(1).............. $ 184 $ (2) $ 2,109 $ 8 $ 2,229 $ 986 $ 3,285
====== ======= ======= ==== ======= ======= =======
</TABLE>
34
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER ATTENDEE DATA)
(1) The term EBITDA, as used herein, represents operating income plus
depreciation and amortization. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles, the Company has included information concerning EBITDA in this
Prospectus because it is used by certain investors and analysts as a
measure of a company's ability to service its debt obligations. EBITDA
should not be used as an alternative to, or be considered more meaningful
than, operating income, net income, or cash flow as an indicator of the
Company's operating performance.
(2) Derived from the unaudited combined theater-level historical 1997 operating
results of three theaters acquired through the AMC Acquisition.
(3) Reflects the elimination of revenues and costs of theaters not purchased in
the StarTime Acquisition and the Landmark Acquisition and reflects the
Acquisition of Landmark's Main Art Theater, which occurred in June 1997, as
if it had occurred on January 1, 1997.
(4) Reflects an increase in other revenues as a result of new on-screen
advertising agreements not previously in effect for Silver Cinemas and
Landmark. Concession supplies costs have been reduced to reflect cost
savings for Silver Cinemas, StarTime and Landmark associated with the
negotiation of a new fountain drink contract. Utilities and other costs
have been reduced to reflect cost savings associated with the negotiation
of new insurance agreements for Silver Cinemas' theaters. The Company was
able to negotiate these new agreements as a result of the Acquisitions and
the higher combined attendance and drink sales and the more diversified
real estate portfolio of the combined operations. These new agreements are
reflected in the following pro forma adjustments:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
-------------------- -----------------
<S> <C> <C>
Increase in other revenue...................... $ 94 $375
Decrease in concession supplies cost........... 163 650
Decrease in utilities and other costs.......... 7 125
</TABLE>
(5) Reflects the elimination of general and administrative costs of $1,143 and
$252 for the year ended December 31, 1997 and the three months ended March
31, 1998, respectively, for StarTime because such costs will be absorbed by
the Company's existing overhead structure after the consummation of the
Acquisitions. In addition, general and administrative expenses of $1,630
and $405 for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, have been eliminated for Landmark officers
and administrative employees not hired or replaced by the Company and for
employment contract adjustments upon the consummation of the Landmark
Acquisition.
(6) Reflects an increase in depreciation expense to reflect differences between
pro forma depreciation expense based on the fair values of acquired theater
properties and equipment over useful lives of ten to 20 years and
historical depreciation expense over useful lives primarily ranging from
three to 40 years.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
-------------------- -----------------
<S> <C> <C>
Pro forma depreciation expense................. $ 1,630 $ 6,081
Historical depreciation expense................ (1,570) (5,984)
------- -------
Pro forma adjustment........................... $ 60 $ 97
======= =======
</TABLE>
(7) Reflects an increase in amortization expense to reflect the difference
between historical amortization expense and amortization of the purchase
price amounts allocated to the fair values of (i) goodwill (over 20 years),
and (ii) other identifiable intangible assets, such as organization costs
and non-competition agreements, over the life of the related intangible
asset (generally four to five years).
35
<PAGE> 38
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
-------------------- -----------------
<S> <C> <C>
Pro forma amortization expense:
Goodwill..................................... $ 659 $ 2,610
Other intangible assets...................... 134 535
----- -------
793 3,145
Historical amortization expense:
Goodwill..................................... (447) (1,840)
Other intangible assets...................... (138) (370)
----- -------
Pro forma adjustment................. $ 208 $ 935
===== =======
</TABLE>
Pro forma other intangible assets as of March 31, 1998 include net
organizational costs of $116.
In April 1998, the AICPA issued Statement of Policy 98-5 -- "Reporting on
the Costs of Start Up Activities", which provides guidance on the financial
reporting of organizational costs and is effective for fiscal years
beginning after December 15, 1998. Initial application should be reported
as the cumulative effect of a change in accounting principles resulting in
the write off of unamortized organizational costs as of January 1, 1999 and
expensing of such costs as incurred, thereafter.
(8) Reflects interest expense on the Notes, amortization of debt issue costs
and the elimination of historical interest expense associated with
indebtedness repaid in connection with the Private Offering.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
-------------------- -----------------
<S> <C> <C>
Historical combined interest expense........... $ 482 $ 2,097
Less: Amounts in historical combined for
refinanced and extinguished debt............. (307) (1,401)
Add: Interest expense on Senior Subordinated
Notes........................................ 2,625 10,500
Amortization of debt issue costs............. 200 800
------ -------
Pro forma interest expense........... $3,000 $11,996
====== =======
</TABLE>
(9) Reflects the elimination of loss on sale of theater assets to the Company
of $1,253 for StarTime during the three months ended March 31, 1998.
(10) Reflects income tax provision for state income taxes. No federal income tax
provision has been provided due to the net loss in the Unaudited Pro Forma
Consolidated Statements of Operations.
36
<PAGE> 39
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
SILVER ACQUISITION OFFERING
CINEMAS STARTIME LANDMARK ADJUSTMENTS TOTAL ADJUSTMENTS PRO FORMA
------- -------- -------- ----------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 116 $ 319 $ 577 $ (896)(1) $ 116 $14,751(3) $ 14,867
Accounts receivable.................. 221 152 (221)(1) 152 152
Inventories.......................... 148 186 178 (14)(1) 498 498
Prepaid expenses and other........... 211 1,588 943 (2,088)(1) 654 654
------- -------- ------- -------- -------- ------- --------
Total current assets........ 475 2,314 1,850 (3,219) 1,420 14,751 16,171
Theater properties and equipment:
Land................................. 610 1,407 140(2) 2,157 2,157
Buildings............................ 3,880 6,054 320(2) 10,254 10,254
Leasehold interests and
improvements....................... 2,165 27,243 (1,595)(2) 27,813 27,813
Theater furniture and equipment...... 7,041 21,833 4,910 (13,451)(2) 20,333 20,333
Theaters under construction.......... 293 2,149 2,040 (2,150)(2) 2,332 2,332
Less accumulated depreciation and
amortization....................... (937) (11,193) (5,859) 17,052(2) (937) (937)
------- -------- ------- -------- -------- ------- --------
Net......................... 13,052 12,789 35,795 316 61,952 61,952
Goodwill, net........................ 10,711 2,204 21,714 18,074(2) 52,703 52,703
Other assets, net.................... 2,935 83 476 612(2) 4,106 5,000(3) 9,106
------- -------- ------- -------- -------- ------- --------
Total Assets................ $27,173 $ 17,390 $59,835 $ 15,783 $120,181 $19,751 $139,932
======= ======== ======= ======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 600 $ 1,100 $ 4,602 $ (1,932)(1) $ 4,370 $ $ 4,370
Accrued film rentals................. 260 (1) 260 260
Accrued payroll...................... 305 957 (1) 1,262 1,262
Accrued property taxes and other
liabilities........................ 149 501 239 (501)(1) 388 388
Payable to parent company............ 132 (132)(1)
Current portion of capital lease
obligation......................... 284 284 284
Current portion of long term debt.... 6 1,536 171 (1,707)(1) 6 6
------- -------- ------- -------- -------- ------- --------
Total current liabilities... 1,320 3,137 6,385 (4,272) 6,570 6,570
Long term debt:
Existing Credit Facility............. 2,625 2,625 (2,625)(3)
Note payable......................... 89 3,995 1,085 (4,860)(1) 309 309
Capital leases....................... 4,639 4,639 4,639
Senior Subordinated Notes............ 80,624(2) 80,624 19,376(2) 100,000
------- -------- ------- -------- -------- ------- --------
Total long term debt........ 2,714 3,995 5,724 75,764 88,197 16,751 104,948
Other long-term obligations.......... 3,043 6,152 (6,920)(1,2) 2,275 2,275
Redeemable preferred stock........... 3,000 (3,000)(1)
Stockholders' equity:
Preferred stock...................... 25,301 3,802 (3,802)(1) 25,301 2,988(3) 28,289
Common stock......................... 1 1 (1)(1) 1 1
Additional paid-in capital........... 101 1,814 41,046 (42,860)(1) 101 12(3) 113
Stockholder notes receivable......... (214) (214) (214)
Retained earnings (deficit).......... (2,050) (1,402) 528 874(1) (2,050) (2,050)
------- -------- ------- -------- -------- ------- --------
Total stockholders'
equity.................... 23,139 4,215 41,574 (45,789) 23,139 3,000 26,139
------- -------- ------- -------- -------- ------- --------
Total Liabilities and Stockholders'
Equity............................. $27,173 $ 17,390 $59,835 $ 15,783 $120,181 $19,751 $139,932
======= ======== ======= ======== ======== ======= ========
</TABLE>
37
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
(1) Represents the elimination of assets, liabilities, and stockholders' equity
of StarTime and Landmark that were not purchased or assumed in the
Acquisitions.
(2) Represents the allocation of the excess of the cash consideration for
StarTime, Landmark and AMC over the historical carrying value of the net
assets acquired after March 31, 1998 to the fair values of net assets
acquired, as follows:
<TABLE>
<CAPTION>
STARTIME LANDMARK AMC TOTAL
-------- -------- ------ --------
<S> <C> <C> <C> <C>
Cash consideration........................ $ 17,135 $ 62,204 $1,285 $ 80,624
Landmark commitments assumed:
Employment contracts.................... 875 875
Lease commitment........................ 1,400 1,400
Less historical carrying value of net
tangible assets acquired................ (10,827) (26,935) (100) (37,862)
-------- -------- ------ --------
Excess purchase prices.................... $ 6,308 $ 37,544 $1,185 $ 45,037
======== ======== ====== ========
Allocation of excess purchase prices:
Excess fair value of theater properties
and equipment........................ $ 250 $ 2,100 $ -- $ 2,350
Noncompete agreements................... 194 500 694
Goodwill................................ 5,864 34,944 1,185 41,993
-------- -------- ------ --------
Total........................... $ 6,308 $ 37,544 $1,185 $ 45,037
======== ======== ====== ========
</TABLE>
(3) Represents the sources of funds from the Private Offering and the Equity
Contribution, and the related use of the proceeds therefrom, as follows:
<TABLE>
<S> <C>
Sources of Funds:
Senior Subordinated Notes................................. $100,000
Equity Contribution....................................... 3,000
--------
Total sources..................................... $103,000
========
Uses of Funds:
Landmark Acquisition...................................... $ 62,204
StarTime Acquisition...................................... 17,135
AMC Acquisition........................................... 1,285
Repayment of Old Credit Facility.......................... 2,625
Transaction fees and expenses............................. 5,000
Excess cash proceeds...................................... 14,751
--------
Total uses........................................ $103,000
========
</TABLE>
38
<PAGE> 41
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
SILVER CINEMAS
The following table sets forth selected consolidated financial and
operating data for Silver Cinemas derived from the audited financial statements
for the periods ended and as of December 31, 1996 and 1997 and from unaudited
financial statements for the three months ended and as of March 31, 1997 and
1998. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Silver Cinemas' consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996 THREE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, ------------------
1996 1997 1997 1998
------------------- ------------ ------- -------
(IN THOUSANDS, EXCEPT
THEATER AND SCREEN DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 1,420 $18,762 $ 3,968 $ 4,802
Theater operating costs................... 1,219 16,102 3,407 4,028
General and administrative expenses....... 577 1,901 389 590
Depreciation and amortization............. 103 1,479 304 476
Operating loss............................ (479) (720) (132) (292)
Interest expense.......................... -- 353 28 157
Amortization of debt issue costs.......... -- 55 34
Net loss.................................. (382) (1,173) (163) (496)
CONSOLIDATED OTHER FINANCIAL DATA:
Deficiency of earnings to fixed
charges(1)............................. $ (382) $(1,156) $ (160) $ (472)
Theater level cash flow(2)................ 201 2,660 561 774
Theater level cash flow margin(3)......... 14.2% 14.2% 14.1% 16.1%
EBITDA(4)................................. $ (376) $ 759 $ 172 $ 184
Net cash provided (used) by operating
activities............................. 733 757 (219) (314)
Net cash provided (used) by investing
activities............................. (13,180) (9,047) (3,985) (5,970)
Net cash provided (used) by financing
activities............................. 17,156 3,857 31 6,123
Capital expenditures(5)................... 182 4,556 776 386
THEATER DATA:
Theaters.................................. 18 27 19 31
Screens................................... 102 165 109 191
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents................. $ 4,709 $ 276 $ 535 $ 116
Theater properties and equipment -- net... 3,361 8,688 5,294 13,052
Total assets.............................. 17,827 21,927 17,399 27,173
Total long-term debt, including current
portion................................ 2,000 6,597 2,000 2,720
Stockholders' equity...................... 14,774 13,633 14,642 23,138
</TABLE>
- ---------------
(1) Earnings consist of net loss before taxes, 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.
(2) Theater level cash flow represents operating income plus depreciation and
amortization plus general and administrative expenses. The Company believes
theater level cash flow provides useful information regarding the Company's
ability to generate cash flow at the theater level; however, theater level
cash
39
<PAGE> 42
flow does not represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute
for cash flow from operations as an indicator of operating performance or as
a measure of liquidity.
(3) Theater level cash flow margin represents theater level cash flow divided by
revenues.
(4) EBITDA represents operating income plus depreciation and amortization. The
Company believes that EBITDA provides useful information regarding the
Company's ability to service its debt; however, EBITDA does not represent
cash flow from operations as defined by generally accepted accounting
principles and should not be considered as a substitute for net income as an
indicator of the Company's operating performance, cash flow or as a measure
of liquidity.
(5) Capital expenditures includes only the amounts expended for purchase of
property and equipment.
LANDMARK
The following table sets forth selected consolidated financial and
operating data for Landmark derived from the audited financial statements for
the periods ended and as of December 31, 1997, December 31, 1996, June 30, 1996
and March 31, 1996 and for the period ended March 31, 1995, and from unaudited
financial statements for the three months ended and as of March 31, 1997 and
1998 and for the period ended March 31, 1994. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Landmark's consolidated financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED MARCH 31,
MARCH 31, MARCH 31, MARCH 31, JUNE 30, DECEMBER 31, DECEMBER 31, -----------------
1994 1995 1996 1996 1996 1997 1997 1998
---------- ---------- ---------- ------------ ------------ ------------ ------- -------
(IN THOUSANDS, EXCEPT THEATER, SCREEN AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Predecessor) (Successor)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................ $41,588 $46,401 $51,143 $11,576 $29,581 $56,954 $17,023 $15,660
Theater operating
costs................. 32,949 37,654 42,105 10,244 23,305 45,822 13,070 12,194
General and
administrative
expenses.............. 3,293 3,634 4,225 1,189 2,426 5,191 1,210 1,357
Depreciation and
amortization.......... 2,983 3,241 3,569 906 2,237 4,929 1,177 1,290
Operating income........ 2,363 1,872 1,244 (763) 1,613 1,012 1,566 819
Interest expense........ 531 516 716 237 458 748 215 162
Net income (loss)....... 1,100 700 207 (647) 495 (232) 651 265
CONSOLIDATED OTHER
FINANCIAL DATA:
Ratio of earnings to
fixed charges(1)...... 1.84x 1.54x 1.18x 1.69x 1.09x 2.82x 1.93x
Deficiency of earnings
available to cover
fixed charges(1)...... $(1,000)
Theater level cash
flow(2)............... $ 8,639 $ 8,747 $ 9,038 1,332 $ 6,276 $11,132 $ 3,953 $ 3,466
Theater level cash flow
margin(3)............. 20.8% 18.9% 17.7% 11.5% 21.2% 19.5% 23.2% 22.1%
EBITDA(4)............... $ 5,346 $ 5,113 $ 4,813 $ 143 $ 3,850 $ 5,941 $ 2,742 $ 2,109
THEATER DATA:
Theaters................ 45 50 52 52 50 49 50 49
Screens................. 103 125 140 140 138 140 138 140
CONSOLIDATED BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash
equivalents........... $ 1,192 $ 2,004 $ -- $ 577
Theater properties and
equipment -- net...... 35,632 35,023 34,879 35,795
Total assets............ 61,476 60,749 58,746 59,835
Total long-term debt and
capital leases,
including current
portion............... 8,583 6,371 8,197 6,179
Shareholder's equity.... 36,660 41,309 45,160 41,574
</TABLE>
- ---------------
(1) Earnings consist of net income before taxes, plus fixed charges. Fixed
charges consist of interest expense, and one third of rent expense on
operating leases treated as representative of the interest factor
attributable to rent expense.
(2) Theater level cash flow represents operating income plus depreciation and
amortization plus general and administrative expenses. The Company believes
theater level cash flow provides useful information regarding the Company's
ability to generate cash flow at the theater level; however, theater level
cash flow does not represent cash flow from operations as defined by
generally accepted accounting principles
40
<PAGE> 43
and should not be considered as a substitute for cash flow from operations
as an indicator of operating performance or as a measure of liquidity.
(3) Theater level cash flow margin represents theater level cash flow divided by
revenues.
(4) EBITDA represents operating income plus depreciation and amortization. The
Company believes that EBITDA provides useful information regarding the
Company's ability to service its debt; however, EBITDA does not represent
cash flow from operations as defined by generally accepted accounting
principles and should not be considered as a substitute for net income as an
indicator of the Company's operating performance, cash flow or as a measure
of liquidity.
41
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Unaudited
Pro Forma Financial Data" and the consolidated financial statements, including
notes thereto, of Silver Cinemas and Landmark appearing elsewhere in this
Prospectus. Certain information in this section includes forward-looking
statements. Such forward-looking statements relate to the Company's financial
condition, results of operations, expansion plans and business. Actual results
could differ materially from the forward-looking statements due to, among other
things, the risks and uncertainties noted under the heading "Risk Factors" in
this Prospectus.
OVERVIEW
Silver Cinemas was formed by Steve Holmes, Tom Owens and Brentwood in May
1996 to effect a consolidation and build-up of specialty-film and second-run
theaters in the fragmented motion picture exhibition industry. Silver Cinemas'
strategy is to acquire theaters in underserved markets, to upgrade and expand
theaters to provide a high-quality movie-going experience and to improve
profitability by combining certain administrative functions, obtaining volume
purchasing discounts and executing tighter operating controls.
Since its inception, Silver Cinemas has experienced rapid revenue growth
through theater acquisition and the development of new theaters. During fiscal
year 1996, Silver Cinemas acquired 18 theaters with 102 screens. During fiscal
year 1997, Silver Cinemas acquired eight additional theaters with a total of 52
screens, constructed one theater with ten screens and added one screen to an
existing theater. By December 31, 1997, Silver Cinemas operated 27 theaters with
an aggregate of 165 screens in ten states. See "Business -- Recent and Pending
Acquisitions" and "Business -- Recent and Pending Theater Construction." Silver
Cinemas has been able to effect superior improvements in the operating
performance of the acquired theaters. For example, Silver Cinemas' first two
acquisitions, Movie One and MI Theaters, have shown theater level cash flow
increases of 31.7% for the nine months ended September 30, 1997 compared to the
same period during 1996, prior to Silver Cinemas' ownership of the theaters.
Silver Cinemas expects that its future revenue growth will be derived primarily
from the operation of its existing theaters, the acquisition and construction of
new theaters and the addition of screens and seating to existing theaters.
RESULTS OF OPERATIONS OF SILVER CINEMAS
The following table sets forth, for the periods indicated, Silver Cinemas'
operating results in thousands of dollars and as a percentage of total revenues:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
(DATE OF INCEPTION) THREE MONTHS ENDED MARCH 31,
TO DECEMBER 31, YEAR ENDED --------------------------------------
1996 DECEMBER 31, 1997 1997 1998
-------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions............................. $ 787 55.4% $10,368 55.3% $2,220 56.0% $ 2,560 53.3%
Concessions............................ 610 43.0 8,098 43.2 1,704 42.9 2,129 44.3
Other.................................. 23 1.6 296 1.5 44 1.1 113 2.4
------ ----- ------- ----- ------ ----- ------- -----
Total............................ 1,420 100.0 18,762 100.0 3,968 100.0 4,802 100.0
Costs and expenses:
Cost of operations:
Film rentals......................... 378 26.6 4,484 23.9 951 24.0 986 20.5
Concession supplies.................. 111 7.8 1,462 7.8 311 7.8 309 6.5
Salaries and wages................... 276 19.4 3,065 16.3 621 15.7 855 17.8
Facility leases...................... 207 14.6 3,312 17.7 622 15.7 780 16.2
Advertising.......................... 46 3.2 755 4.0 135 3.4 144 3.0
Utilities and other.................. 201 14.2 3,024 16.1 767 19.3 953 19.9
------ ----- ------- ----- ------ ----- ------- -----
Total............................ 1,219 85.8 16,102 85.8 3,407 85.9 4,027 83.9
------ ----- ------- ----- ------ ----- ------- -----
General and administrative expenses...... 577 40.6 1,901 10.1 389 9.8 590 12.3
Depreciation and amortization............ 103 7.3 1,479 7.9 304 7.7 476 9.9
------ ----- ------- ----- ------ ----- ------- -----
Operating income (loss).................. $ (479) (33.7)% $ (720) (3.8)% $ (132) (3.3)% $ (291) (6.1)%
====== ===== ======= ===== ====== ===== ======= =====
</TABLE>
42
<PAGE> 45
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM MAY 10, 1996 (DATE OF
INCEPTION) TO DECEMBER 31, 1996
Meaningful comparisons of the year ended December 31, 1997 and the period
from May 10, 1996 to December 31, 1996 are not possible given the short
operating history of those theaters purchased late in 1996. The significant
increases from 1996 to 1997 in revenue, expenses and depreciation and
amortization are the result of operating 18 theaters acquired in 1996 for a full
year, plus the additional nine theaters acquired throughout 1997. The following
presents the primary revenue and expense categories for Silver Cinemas.
Revenues. Silver Cinemas' revenues are generated primarily from box office
admission receipts and concession sales. For the year ended December 31, 1997
and the period from May 10, 1996 (date of inception) to December 31, 1996,
admissions revenues comprised approximately 55% of total revenues for both
periods and concessions revenues comprised approximately 43% of total revenue
for both periods. The remaining approximately 2% of revenue for those periods
was derived primarily from electronic video games located in theater lobbies.
Admissions Revenues. Box office admission receipts are based on the level
of theater attendance and the average ticket price. Attendance levels are
primarily affected by the commercial appeal of released films, and to a lesser
extent, by the comfort and quality of the theater, competition from other local
theaters and population growth in the geographic markets Silver Cinemas serves.
Silver Cinemas' ticket prices vary throughout the circuit depending upon such
things as type of theater (second-run or first-run), local competition and local
economies, as well as special discounts and pricing promotions. Admissions
revenue is recorded net of applicable sales taxes.
Concessions Revenues. Concessions revenues represent a significant portion
of a theater's overall profitability. Silver Cinemas' primary concession
products are soft drinks, popcorn, candy and certain other products on a
regional basis. The majority of concession products are generally offered in
three or four sizes. Retail prices are determined according to size as well as
local competition. Concessions revenues are recorded net of applicable sales
taxes.
In an effort to increase concession sales, Silver Cinemas is constantly
reviewing new products, adjusting pricing, creating convenience and
value-oriented combinations, and continually training concession personnel in
the techniques of up-selling and cross selling. In addition Silver Cinemas has
remodeled concession stands at certain theaters to make them more efficient and
attractive. Theater managers and assistant managers are motivated through
concession commission programs.
Film Rental Expenses. Film rental fees are paid directly to the film
distribution companies and are directly related to the popularity of a film and
the length of time since that film's release. Film rental costs are calculated
on a percentage of admission revenues and generally decline the longer the film
has been showing. Most terms of film licenses are finalized subsequent to
exhibition of the film in a process known as "settlement." The final terms of
the film licenses consider, among other things, the actual success of a film
relative to original expectations and the exhibitor's relationship with the film
distributor.
Concession Supplies Expenses. Concession supplies are regularly purchased
in bulk through Silver Cinemas' distributors and vendors. Concession product is
generally ordered weekly from the distributors in order to prevent the build-up
of inventory at the theaters. Concession costs also include the cost of spoiled
and wasted concession inventory.
Salaries and Wage Expenses. Salaries and wages include payroll taxes,
employee benefits, commissions on concession sales and bonuses for the theater
managers and all theater staff. Typically only the theater manager and the
assistant manager are paid a base salary. The wages paid to the remaining staff
are based on an hourly wage rate.
Silver Cinemas continually adjusts staffing levels based upon attendance
levels. In order to monitor payroll levels, management measures salary and wage
expense in relation to attendance through payroll per attendee. For the year
ended December 31, 1997, Silver Cinemas experienced payroll per attendee of
$0.49.
43
<PAGE> 46
Facility Lease Expenses. Facility lease expenses consist primarily of a
fixed monthly minimum rent payment. In addition, several theater leases contain
contingency rent that is based on a percentage of revenue after such revenue
reaches a certain dollar amount.
Advertising Expenses. The largest component of advertising costs consists
of daily movie directories placed in local newspapers to advertise Silver
Cinemas' theaters and showtimes. In select markets Silver Cinemas participates
in "co-op" arrangements whereby the exhibitors in those markets share the cost
of film advertisement in newspapers with the film distributors. The cost of
newspaper ads is generally based on the size of the directory. Silver Cinemas
anticipates lowering advertising costs in those cities which have multiple
theaters as a result of the Acquisitions. The savings will be realized through
consolidating directory ads and receiving greater purchasing discounts.
Utilities and Other Expenses. Utilities and other expenses consist
primarily of utilities, insurance, property taxes, repair and maintenance and
cleaning.
General and Administrative Expenses. General and administrative expenses
are comprised of various expenses related to the management and operation of its
theaters and consist primarily of management and office salaries, payroll taxes,
related employee benefit costs, professional fees, insurance costs and general
office expenses.
Depreciation and Amortization. Depreciation and amortization expense
includes the depreciation of theater equipment and buildings, the amortization
of theater lease costs, goodwill, and certain non-compete agreements.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Silver Cinemas' revenues are generated primarily from box office
admission receipts and concession sales. For the three months ended March 31,
1997 and three months ended March 31, 1998, admissions revenues comprised 56.0%
and 53.3% of total revenues respectively and concession revenues comprised
approximately 42.9% and 44.3% of total revenues respectively. The remaining 1.1%
and 2.4% of total revenues was derived primarily from electronic video games
located in the theater lobbies.
Admissions Revenues. Admissions revenue increased $0.3 million or 15.3% to
$2.6 million during the three months ended March 31, 1998. The increased
admissions revenue was primarily the result of the addition of 12 newly acquired
theaters representing 82 screens. The average ticket price for the circuit
decreased slightly from $1.68 to $1.67.
Concessions Revenues. Concession revenue increased $0.4 million or 25.0% to
$2.1 million during the three months ended March 31, 1998. The increased
concession revenue was primarily the result of the newly acquired theaters and a
7.0% increase in the average concession sale per attendee from $1.29 to $1.38
due to upselling sales techniques and retail price adjustments.
Film Rental Expenses. Film rental expenses as a percentage of admissions
revenue decreased from 42.8% to 38.5% as a result of acquiring additional
discount theaters which have lower film rental expenses compared to first run
theaters.
Concession Supplies Expenses. Concession costs as a percentage of
concession revenue decreased in 1998 from 18.3% of concession sales to 14.5%
primarily as the result of negotiating lower wholesale prices, standardizing
menus, and the adjustment of retail prices to reflect local market conditions.
Salaries and Wage Expenses. Payroll expense increased from $0.6 million for
the three months ended March 31, 1997 to $0.9 million for the three months ended
March 31, 1998 due primarily to the addition of the newly acquired theatres.
Facility Lease Expenses. Facility Leases increased $0.2 million to $0.8
million for the three months ended March 31, 1998 from $0.6 million for the
three months ended March 31, 1997. The increase in facility lease expense is
primarily attributable to the additional theatres operated at March 31, 1998.
44
<PAGE> 47
Advertising Expenses. Advertising expenses were essentially flat from the
three months ended March 31, 1997. Advertising expenses comprised 3.4% and 3.0%
of total revenues for the three months ended March 31, 1997 and the three months
ended March 31, 1998 respectively.
Utilities and Other Expenses. Utilities and other expenses increased from
$0.8 million to $1.0 million for the three months ended March 31, 1998 compared
to the three months ended March 31, 1997. The increase was primarily the result
of the additional theaters operated at March 31, 1998.
General & Administrative Expenses. General & Administrative expenses
increased from $0.4 million to $0.6 million for the three months ended March 31,
1998 compared to the three months ended March 31, 1997. The increase was
primarily the result of increased payroll costs associated with the Company's
expansion.
Depreciation and Amortization. Depreciation and amortization increased $0.2
million to $0.5 million for the three months ended March 31, 1998 from $0.3
million for the three months ended March 31, 1997. The increase was primarily
the result of the additional theaters operated at March 31, 1998.
45
<PAGE> 48
RESULTS OF OPERATIONS OF LANDMARK
The following table sets forth the predecessor basis three month periods
ended March 31 and June 30, 1996 and the successor basis six month period ended
December 31, 1996 to arrive at a total for the 12 months ended December 31,
1996, which is compared to the year ended December 31, 1997 of Landmark.
Management of Silver Cinemas has arrived at the total for the 12 months ended
December 31, 1996 by combining, without adjustments, the three and six month
periods with the three month period. The three month period ended March 31, 1996
has not been derived from audited financial statements. This three month period
has been provided to Silver Cinemas by Landmark. This information is provided
herein for the purpose of constructing a period for comparison with the year
ended December 31, 1997; however, Silver Cinemas makes no representations as to
its usefulness for such purpose. The information for the three month periods
ended March 31, 1997 and 1998 was derived from unaudited interim financial
statements. The following discussion should be read in conjunction with
Landmark's consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
The following table sets forth, for the periods indicated, Landmark's
operating results in thousands of dollars and as a percentage of total revenues:
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR SUCCESSOR COMBINED SUCCESSOR
THREE MONTHS THREE MONTHS SIX MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1997
------------ ------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Predecessor) (Successor)
Revenues:
Admissions............. $12,374 $ 9,314 $23,960 $45,648 80.8% $45,903 80.6%
Concessions............ 2,660 2,060 5,044 9,764 17.3 10,061 17.7
Other.................. 309 202 577 1,088 1.9 990 1.7
------- ------- ------- ------- ----- ------- -----
Total........... 15,343 11,576 29,581 56,500 100.0 56,954 100.0
Cost of revenues:
Film rentals and
advertising........... $ 6,405 $ 5,078 $11,995 $23,478 41.6% $23,212 40.8%
Cost of concessions.... 509 456 1,039 2,004 3.6 2,096 3.7
Payroll and related
expenses.............. 2,260 2,128 4,610 8,998 15.9 9,448 16.6
Occupancy costs........ 1,730 1,708 3,689 7,127 12.6 7,071 12.4
Other theater operating
expenses.............. 959 874 1,972 3,805 6.7 3,995 7.0
------- ------- ------- ------- ----- ------- -----
Total........... 11,863 10,244 23,305 45,412 80.4 45,822 80.5
------- ------- ------- ------- ----- ------- -----
-- -- -- -- -- -- --
General and
administrative......... 1,357 1,189 2,426 4,972 8.8 5,191 9.1
Depreciation and
amortization........... 977 906 2,237 4,120 7.3 4,929 8.7
-- -- -- -- -- -- --
------- ------- ------- ------- ----- ------- -----
Operating income
(loss)................. $ 1,146 $ (763) $ 1,613 $ 1,996 3.5% $ 1,012 1.8%
======= ======= ======= ======= ===== ======= =====
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Admissions............. $13,648 80.2% $12,643 80.7%
Concessions............ 3,085 18.1 2,813 18.0
Other.................. 290 1.7 204 1.3
------- ----- ------- -----
Total........... 17,023 100.0 15,660 100.0
Cost of revenues:
Film rentals and
advertising........... 7,204 42.3 6,202 39.6
Cost of concessions.... 623 3.7 581 3.7
Payroll and related
expenses.............. 2,351 13.8 2,470 15.8
Occupancy costs........ 1,600 9.4 1,646 10.5
Other theater operating
expenses.............. 1,292 7.6 1,295 8.3
------- ----- ------- -----
Total........... 13,070 76.8 12,194 77.9
------- ----- ------- -----
-- -- -- --
General and
administrative......... 1,210 7.1 1,357 8.7
Depreciation and
amortization........... 1,177 6.9 1,290 8.2
-- -- -- --
------- ----- ------- -----
Operating income
(loss)................. $ 1,566 9.2% $ 819 5.2%
======= ===== ======= =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Admissions revenues. Admissions revenues increased $0.2 million or 0.5% to
$45.9 million during the year ended December 31, 1997. The increased admissions
revenue was primarily the result of a 4.0% increase in the average ticket price
from $5.72 to $5.95, partially offset by a 3.3% reduction in attendance from
7,974,962 to 7,712,422. Landmark benefits from having an average ticket price
that is substantially higher than the national average ticket price ($5.95 vs.
$4.59 for 1997 respectively) and strong customer loyalty due to their dedication
to the specialty-film market.
Concessions revenues. Concessions revenues increased $0.3 million or 3.0%
to $10.1 million during the year ended December 31, 1997. The increased
concession revenue was primarily the result of a 6.6% increase in the average
concession sale per attendee from $1.22 to $1.30, partially offset by a 3.3%
reduction in attendance from 7,974,962 to 7,712,422. In addition to offering the
traditional movie theater concessions of
46
<PAGE> 49
popcorn, soft drinks and candy, Landmark theaters work with local vendors to
provide specialty items that cater to their customers, such as fresh pastry,
specialty coffees, and desserts.
Film and advertising expenses. Film rental and advertising expenses as a
percentage of admissions revenue decreased from 51.4% to 50.6% as a result of
more aggressive film settlement as well as the ability to extend the run of
several successful releases during 1997. Landmark's film rental rates are
typically below film rental rates of first-run theaters, which average in the
low to mid 50% range. The low film rental expense combined with the above
average ticket price contributes to Landmark's overall profitability.
Cost of concessions. Concession costs as a percentage of concession revenue
increased slightly in 1997 from 20.5% to 20.8%. Concession costs for Landmark
are at the higher end of the range for theater circuits. Landmark's higher rate
is partially attributable to the lower-margined specialty concession items
offered (cookies, coffee, desserts), increased spoilage and fewer volume
discounts.
Payroll and related expense. Payroll expense increased from $9.0 million
for the twelve months ended December 31, 1996 to $9.4 million for the year ended
December 31, 1997. Payroll per attendee, a key measure for staff efficiency,
increased from $1.13 per attendee to $1.22 per attendee. The increase is
partially attributable to the addition of a dedicated ticket taker at the
majority of theaters, and the opening of two new theaters, which typically
require more staff prior to and shortly after opening.
Occupancy costs. Occupancy costs were flat from the prior year at $7.1
million.
General and administrative expenses. General and administrative expenses
increased from $5.0 million for the year ended December 31, 1996 to $5.2 million
for the year ended December 31, 1997. The increase was primarily the result of
management bonuses, travel associated with new site development and increased
corporate occupancy expenses. These increases were partially offset by a
reduction in legal expenses associated with the successful defense of litigation
relating to a theater lease in 1996.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Landmark Theatres' revenues are generated primarily from box
office admission receipts and concession sales. For the three months ended March
31, 1997 and three months ended March 31, 1998, admissions revenues comprised
80.2% and 80.7% of total revenues respectively and concession revenues comprised
approximately 18.0% of total revenues for both periods. The remaining 1.7% and
1.3% of total revenues for the three months ended March 31, 1997 and the three
months ended March 31, 1998 respectively was derived primarily from film
screenings.
Admissions revenues. Admissions revenue decreased $1.0 million or 7.4% to
$12.6 million during the three months ended March 31, 1998. The decreased
admissions revenue was primarily the result of a decline in attendance of
approximately 9.3%. The decrease in attendance was partially offset by an
increase in the circuits' average ticket price from $5.88 for the three months
ended March 31, 1997 to $6.01 for the three months ended March 31, 1998.
Concessions revenues. Concession revenue decreased $0.3 million or 8.8% to
$2.8 million during the three months ended March 31, 1998. The decreased
concession revenue was primarily the result of the 9.3% drop in attendance. The
decrease in attendance was partially offset by a 1.0% increase in the average
concession sale per attendee.
Film and advertising expenses. Film rental expenses as a percentage of
admissions revenue decreased from 42.3% to 39.6% as a result of more aggressive
film settlement and newsprint advertising rebates.
Cost of Concessions. Concession costs declined slightly due to the decrease
in concession sales. As a percentage of total revenues, concession supplies
expenses remained flat at 3.7%.
Payroll and related. Payroll expense increased from $2.4 million for the
three months ended March 31, 1997 to $2.5 million for the three months ended
March 31, 1998. The increase is partially attributable to work schedules that
were not reduced as attendance levels declined.
47
<PAGE> 50
Occupancy costs. Occupancy costs were relatively flat at $1.6 million for
the three months ended March 31, 1998 compared to the three months ended March
31, 1997.
General and administrative expenses. General and Administrative expenses
increased from $1.2 million to $1.4 million for the three months ended March 31,
1998 compared to the three months ended March 31, 1997. The increase was
primarily the result of increased payroll and related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Revenues are collected in cash, primarily through box office receipts and
the sale of concession items. Because revenues are received in cash prior to the
payment of related expenses, there are, in effect, no accounts receivable. This,
in combination with minimal inventory requirements, creates a negative working
capital position, which provides certain operating capital.
During 1996 and 1997 Silver Cinemas' capital requirements were the result
of theater acquisitions, renovation of existing theaters, and construction of a
new theater. Such capital expenditures were financed with equity financing, bank
borrowings, and internally generated cash. On April 7, 1997, Silver Cinemas
entered into the Old Credit Facility, which, subject to the restrictions
therein, provides Silver Cinemas through the Issue Date the ability to borrow up
to $25.0 million. In December 1997, Silver Cinemas did not comply with certain
coverage ratio provisions of the Old Credit Facility. Silver Cinemas' lender
amended these provisions and issued a waiver of default.
The Company repaid all of the indebtedness under the Old Credit Facility
with proceeds from the Private Offering. The Company intends to enter into the
Revolving Credit Facility. Until such time that the Company enters into the
Revolving Credit Facility, the Company will not be able to borrow under any
credit facility. The Company has obtained a commitment from DLJ Capital Funding,
Inc. for the Revolving Credit Facility. The Revolving Credit Facility is
expected to allow the Company to borrow up to $40.0 million subject to certain
restrictive covenants. See "Description of Revolving Credit Facility." Under the
Revolving Credit Facility, the Company will be required to maintain specified
financial ratios and tests, including a ratio of Funded Debt to Adjusted EBIDTA
below a specified maximum, and above minimum fixed charge coverage levels and
minimum interest coverage levels. The inability of the Company to meet such
ratios and tests will result in the Company being unable to borrow under the
Revolving Credit Facility, in addition to constituting a default under the
Revolving Credit Facility. In such circumstances, the Company could be unable to
effect its acquisition strategy or fund capital expenditures. See "Risk
Factors -- Restrictive Covenants of Revolving Credit Facility; Inability to
Borrow Additional Amounts." The Company expects to use the amounts available
under the Revolving Credit Facility to finance future capital expenditures and
acquisitions. See "Risk Factors -- Restrictive Covenants of Revolving Credit
Facility; Inability to Borrow Additional Amounts."
During 1998, the Company expects to spend approximately $6.5 million to
construct two six-screen specialty-film theaters in St. Louis, Missouri and
Waltham, Massachusetts, one six-screen second-run theater in Joliet, Illinois
and one six-screen first-run theater in Flint, Michigan. Also during 1998 the
Company plans to spend approximately $1.2 million to add three screens to an
existing second-run theater in Laredo, Texas and to convert a second-run theater
in Yukon, Oklahoma to stadium seating. The Company expects that the portion of
the proceeds of the Private Offering not used for the Acquisitions or to repay
bank borrowings, together with amounts available under the Revolving Credit
Facility and cash flow, should be sufficient to fund the Company's operations
and growth strategy for approximately 18 to 24 months.
INFLATION
Inflation has not had a significant impact on Silver Cinemas' operations to
date.
48
<PAGE> 51
SEASONALITY
Silver Cinemas' quarterly results of operations tend to be affected by film
release patterns by producers and distributors, and the commercial success of
films. In the past, the year-end holiday season and the summer resulted in
higher-than-average quarterly revenues for Silver Cinemas.
Landmark's quarterly results of operations tend to be affected by film
release patterns by producers and distributors of independent films. In the
past, Landmark has experienced higher-than-average quarterly revenues during the
first three months of the year. During 1997 and 1996 approximately 35% and 31%,
respectively of Landmark's revenue was earned during the first quarter.
Combined, the seasonal fluctuations of Silver Cinemas and StarTime tend to
offset each other.
ACQUISITION SYNERGIES
As a result of the Acquisitions, the Company expects to achieve cost
savings and incremental revenues within the first year following the Issue Date,
including (i) increased other revenues associated with an increase in vending
machine sales and other advertising revenue, (ii) reduced theater level payroll,
(iii) reduced advertising expenses and (iv) elimination of one-time consulting
fees. These acquisition synergies are not considered in the Pro Forma
Consolidated Statement of Operations contained elsewhere in this Prospectus, as
such adjustments are not provided for in the definition of "pro forma" pursuant
to Regulation S-X under the Securities Act. There can be no assurance that the
acquisition synergies will occur or continue in the future. Actual results may
differ materially due to economic and competitive uncertainties and other
contingencies, including, without limitation, the possibility that theater
managers may not have sufficient managerial skills to properly implement
reorganization of employees work schedules and employees may not be able to
handle efficiently diversified functions. See "Risk Factors -- Business Risks
Associated with the Acquisitions," "Risk Factors -- Risks of Failure to Obtain
Landlord Consents" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Revenue Synergies:
The Company expects to achieve revenue synergies due to the placement of
vending machines throughout its second-run theaters and the implementation
of innovative advertising mediums. Projected first year revenues are
estimated below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
(i) New bulk candy vending machines at 27 theaters............. $ 70
(ii) New audio advertising at all of the Company's theaters..... 332
----
Total...................................................... $402
====
</TABLE>
Cost Synergies:
By implementing the Company's operational philosophy, the Company believes
it can substantially reduce the cost of operating its newly acquired
theaters. The majority of the Company's cost savings will be achieved as a
result of reducing the number of theater-level employees at StarTime and
Landmark, the reorganization of employees' work schedules and the
diversification of employee functions at Landmark. The cost savings are
based on management's belief that it can reduce theater-level payroll
expenses at StarTime theaters to approximately $0.49 per attendee and at
Landmark theaters to approximately $1.01 per attendee. Management
anticipates that these reductions will be fully implemented within one year
of closing the StarTime Acquisition and the Landmark Acquisition. As a
reference, Silver Cinemas achieved a $0.49 payroll per attendee for the year
ended December 31, 1997. Assuming the Company achieves its payroll per
attendee goals, the Company could potentially
49
<PAGE> 52
save approximately $2.7 million in the first year. Assuming 1997 attendance
levels and the Company's projected payroll per attendee goal, the following
payroll savings are anticipated:
<TABLE>
<CAPTION>
ADJUSTED
THEATER- THEATER- ADJUSTED
LEVEL THEATER- LEVEL THEATER- COST
PAYROLL/ LEVEL PAYROLL/ LEVEL SAVINGS PER COST
ATTENDEE(A) PAYROLL(B) ATTENDEE(A) PAYROLL(B) ATTENDEE(A) SAVINGS
----------- -------------- ----------- -------------- ----------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
StarTime............. $0.61 $5,645 $0.49 $4,576 $0.12 $1,069
Landmark............. 1.22 9,317 1.01 7,730 0.21 1,586
------
Total...... $2,655
======
</TABLE>
- ---------------
(a) Based on attendance for the year ended December 31, 1997 of 9,281,347 at
StarTime and 7,632,964 at Landmark.
(b) Excludes theater level payroll from those StarTime and Landmark theaters not
acquired.
Advertising expense savings will be achieved as a result of consolidating
advertisements and utilizing free directory advertisements in a local
newspapers. Estimated savings are projected to be approximately $36,000 in the
first year.
Other expense savings are projected as the Company foresees a reduced need for
outside consultants. Based on what the previous entities paid for such services,
the Company anticipates saving approximately $91,000 in the first full year of
operations.
50
<PAGE> 53
BUSINESS
GENERAL
The Company is the largest exhibitor of specialty motion pictures and one
of the largest operators of second-run theaters in the United States. The
Company operates 106 theaters with 524 screens located in eighteen states. The
106 theaters are comprised of 49 specialty motion picture theaters, 49
second-run theaters and eight first-run theaters. The Company's strategy is to
acquire theaters in under-served markets, to upgrade and expand theaters to
provide a high-quality movie-going experience and to improve the profitability
of theaters by combining certain administrative functions, obtaining volume
discounts and implementing tighter operating controls. On a pro forma basis for
the year ended December 31, 1997 and the three months ended March 31, 1998, the
Company generated revenue of approximately, $106.3 million and $27.3 million,
respectively, and pro forma EBITDA (as defined) of $12.1 million and $3.3
million, respectively.
The Company's specialty-film theaters exhibit alternatives to commercial
first-run movies. The specialty-film niche is composed of art films, foreign
pictures and independent releases such as Good Will Hunting, The Full Monty, The
Apostle, Shine, Sling Blade and The English Patient which are generally released
in limited numbers to selected markets. Studios such as Disney, Universal, Sony,
Paramount, Twentieth Century Fox and New Line have begun to distribute
specialty-films through dedicated distribution subsidiaries (Miramax, October
Films, Sony Pictures Classics, Paramount's specialty-film division, Fox
Searchlight Pictures and Fine Line, respectively). Management believes that the
recent success of independent films in garnering Academy Award nominations and
Academy Awards will further drive independent film production, particularly from
these "independent" subsidiaries which seek the recognition of these
prestigious, high profile awards. According to Exhibitor Relation Company, Inc.,
the number of new films released by independent producers and distributors was
increased from 158 in 1992 to 295 in 1997. In addition to the prestige of the
Academy Awards, the generally lower budgets and higher potential returns on
capital invested in specialty films makes the production of these films
financially appealing to the studios. Specialty films are also attractive to
exhibitors since the specialty-film niche tends to benefit from higher average
admission prices and lower film rental expense than first-run operators,
resulting in higher operating margins. Finally, the specialty-film niche, which
generally appeals to more mature and upscale audiences, is expected to continue
to benefit from favorable demographic trends as a result of the aging of the
"baby boom" generation
The Company's second-run theaters offer major studio productions, generally
six to ten weeks after their initial release dates, at significantly lower
admission prices than commercial first-run theaters, ranging from $1.00 to
$2.00. The Company believes that these lower prices make the level of revenues
from second-run theaters less susceptible to economic recession. The Company
enjoys more favorable film booking arrangements and film buying terms at its
second-run theaters than its commercial first-run counterparts. With far fewer
second-run screens than first-run screens nationwide, there is typically little
competition for prints of commercial films, enabling the Company to screen its
choice of successful commercial films. First-run theaters, on the other hand,
must aggressively compete for films from distributors and generally screen only
a subset of new releases. In addition to its film booking advantage, the
Company's second-run theaters also benefit from lower film rental expense and a
larger proportion of high-margin concession sales as a percentage of overall
revenue. Finally, the Company's lower admission prices for its second-run
theaters appeal especially to teen audiences and older patrons, segments of the
population which are expected to experience steady growth over the next decade.
Founded in May 1996, the Company completed seven acquisitions, representing
26 theaters with an aggregate total of 154 screens as of December 31, 1997. In
addition, the Company completed two construction projects, increasing its total
number of theaters and screens to 27 and 165, respectively. Management has
successfully integrated these theaters into its operations by implementing new
operating standards, management controls and information systems. In addition,
the Company has added new seating, improved sound and projection equipment, and
broadened concession offerings in many locations. The impact of these
improvements, which have helped increase profitability, are reflected in the
operating performance of the Company's first two acquisitions in November 1996,
Movie One and MI Theaters, consisting of 102 screens at 18 theaters. Based on
actual results for the nine months ended September 30, 1997, theater level cash
flow at these
51
<PAGE> 54
theaters increased 31.7% compared to the nine months ended September 30, 1996,
prior to the Company's ownership of the theaters.
BUSINESS STRATEGY
The Company's strategy is to increase revenue and cash flow by (i)
acquiring specialty motion picture and second-run theaters and first-run
theaters in non-competitive markets, (ii) improving operations at acquired
theaters, (iii) building new state-of-the-art multiplexes in selected markets,
and (iv) adding additional screens, seating capacity, state-of-the-art sound and
projection systems, and other exhibition or concession equipment at its existing
theaters.
Pursue Strategic Acquisitions. The Company has successfully pursued a
disciplined acquisition strategy and intends to continue to acquire and
integrate theaters in both the specialty-film and second-run niches. Management
believes that there are many attractive acquisition candidates in the
highly-fragmented exhibition industry. Management believes that the recent
consolidation trend in the exhibition industry is driving many major exhibitors
to dispose of non-core properties, many of which are second-run or specialty-
film theaters that do not fit those companies' commercial first-run strategies.
In addition, the growth of megaplexes (theaters with 16 or more screens) has
created another avenue of potential growth for the Company through the
conversion of existing commercial first-run theaters to theaters with a
specialty-film or second-run format at an attractive cost.
Leverage Existing Infrastructure and Control Operating Cost. The Company
has successfully integrated and improved the operations of its acquisitions.
Management believes significant opportunities exist to leverage its existing
infrastructure over future acquisitions and realize significant operating
improvements through the implementation of superior operating procedures,
management oversight and its state-of-the-art management information system.
Specific areas of improvement include (i) labor scheduling, (ii) film selection
and lineup, (iii) cash control, (iv) pricing policies, and (v) purchasing
discounts on concession contracts. Additionally, many of the smaller chains lack
the sophisticated information systems employed by the Company, which the Company
believes are necessary to effectively manage a geographically diverse group of
theaters. Examples of management's ability to acquire and improve operations of
theaters include the acquisitions of Movie One and MI Theaters, both completed
in November 1996. Based on actual results for the nine months ended September
30, 1997, these two groups of theaters have shown theater level cash flow
increases of 31.7% compared to the same period in the previous year, prior to
the Company's ownership of the theaters.
Capitalize on Leading Position in Specialty-Film Segment. The Company,
through Landmark, is the largest exhibitor of specialty motion pictures and the
only specialty-film exhibitor with a national presence. The Company has a
leading presence in, among others, the following major markets: Los Angeles, San
Francisco, Boston, Dallas, Houston, Seattle, Cleveland, Minneapolis, Denver,
Milwaukee and New Orleans. The Company plans to use its experience in the
specialty-film niche to establish a presence in the following strategic new
markets: Chicago, Detroit, St. Louis and Washington D.C. Landmark achieved its
leading presence by developing strong relationships with specialty-film
distributors, many of whom rely on the Company's expertise in distributing and
marketing specialty films. These relationships enable the Company to secure film
prints in limited release and secure a period of exclusivity in exhibiting
selected new films in many of its markets. For example, for films such as The
English Patient, Good Will Hunting and Shine, the Company had exclusive rights
to the films for up to three weeks in selected markets.
Expand Established Second-Run Operations. The Company believes it is the
leading operator of second-run theaters in most of its markets, operating 49
second-run theaters with 336 screens in 15 states. By offering patrons a
high-quality alternative to commercial first-run exhibitors at a low price, the
Company avoids direct competition with commercial first-run theaters. In
addition, the second-run niche offers other attractive characteristics which
include (i) lower film costs as a percentage of admission revenue, (ii) greater
percentage of total revenue from high margin concessions, (iii) greater
recession resistance due to lower admission prices, and (iv) lower seasonal
variability than commercial first-run exhibitors due to a staggered film release
schedule.
52
<PAGE> 55
Provide a Superior Movie-Going Experience. The Company seeks to provide
audiences with a high quality viewing experience, comparable to that available
at new commercial first-run theaters. To enhance the movie-going experience, the
Company invests in high quality projection and stereo sound equipment,
comfortable chairs with wide seats and cup-holder armrests, and appealing lobby
and concession areas. Since many competitors in the specialty-film and
second-run exhibition niches do not focus on these aspects of operations,
management believes that this strategy provides it with a distinct competitive
advantage.
Pursue Attractive Construction Opportunities. The Company continually
evaluates existing and new markets for new theater locations for specialty,
second run, and, in selected situations, commercial first-run theaters. The
Company generally seeks to develop theaters in markets that are under-served as
a result of changing demographic trends or the aging or obsolescence of existing
theaters. Some of the factors management considers in determining whether to
develop a theater in a particular location are the market's population, average
household income, education levels, proximity to retail corridors, convenient
roadway access, proximity to competing theaters, and the effect on the Company's
existing theaters in the market, if any.
Leverage Experienced Management Team and Strong Sponsorship. The Company's
senior management team averages over 21 years of experience in the exhibition
industry, and members of senior management have been heavily involved in the
rapid growth of exhibition companies such as Cinemark USA, Inc. and The Landmark
Theatre Group, Inc. In addition, the Company enjoys the strong equity
sponsorship of Brentwood and certain members of management. See "Principal
Stockholders." On March 3, 1998, Brentwood made an additional equity
contribution of $10.0 million, bringing its aggregate equity investment to $25.0
million.
RECENT AND PENDING ACQUISITIONS
From its inception through December 31, 1997, the Company completed seven
acquisitions, representing 26 theaters with an aggregate of 154 screens.
In April 1998, the Company acquired the assets of Landmark for cash
consideration of approximately $62.2 million pursuant to an asset purchase
agreement (the "Landmark Asset Purchase Agreement") with Metromedia
International Group, Inc. ("Metromedia"). Landmark, with 140 screens at 49
locations, was the largest exhibitor of specialty motion pictures in the United
States, with theaters located in California, Colorado, Louisiana, Massachusetts,
Michigan, Minnesota, Ohio, Texas, Washington and Wisconsin.
In April 1998, the Company completed the acquisition of 202 screens at 27
locations operating predominately under the name Super Saver Cinemas pursuant to
an asset purchase agreement (the "StarTime Asset Purchase Agreement") with
StarTime Cinema, Inc. ("StarTime") for approximately $21.6 million. (In the
first quarter of 1998, the Company acquired two of the 27 locations for
approximately $4.6 million.) The theaters acquired from StarTime are second-run
theaters located in Arizona, California, Colorado, Florida, Nebraska, New York,
Ohio, Oklahoma, Texas and Wisconsin.
In April 1998, the Company completed the acquisition of 17 screens at three
theaters for approximately $1.7 million from AMC Entertainment, Inc. ("AMC").
(In the first quarter of 1998, the Company acquired two of the three AMC
theaters for approximately $0.5 million.) These theaters include one
specialty-film theater in Michigan and two second-run theaters in Texas.
The following table sets forth the Company's completed and pending
acquisitions since its inception in June 1996.
COMPLETED AND PENDING ACQUISITIONS
<TABLE>
<CAPTION>
DATE SELLER THEATERS SCREENS STATE
---- ------ -------- ------- -----
<S> <C> <C> <C> <C>
November 1996 Movie One 4 22 NM, TX
November 1996 MI Theaters 14 80 LA, FL, OK, TX
January 1997 Cinamerica 1 6 CA
January 1997 Wometco 2 19 FL
April 1997 Hoyts 2 12 NY, VT
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
DATE SELLER THEATERS SCREENS STATE
---- ------ -------- ------- -----
<S> <C> <C> <C> <C>
May 1997 United Artists 1 4 TX
September 1997 Westminster(1) 2 11 CO
April 1998 AMC 3 17 MI, TX
April 1998 StarTime 27 202 AZ, CA, CO, FL, NE, NY, OH, OK, TX, WI
April 1998 Landmark 49 140 CA, CO, LA, MA, MI, MN, OH, TX, WA, WI
--- ---
105 513
Total
=== ===
</TABLE>
- ---------------
(1) Theaters operated pursuant to management agreement.
RECENT AND PENDING THEATER CONSTRUCTION
The Company continually evaluates existing and new markets for the
construction and expansion of specialty, second-run and, in selected situations,
commercial first-run theaters. The Company generally seeks to develop theaters
in markets that are under-served as a result of changing demographic trends or
the aging or obsolescence of existing theaters. Some of the factors management
considers in determining whether to develop a theater in a particular location
are the market's population, average household income, education levels,
proximity to retail corridors, convenient roadway access, proximity to competing
theaters, and the effect on the Company's existing theaters in the market, if
any.
The Company completed the construction of its first second-run multiplex
theater with ten screens in Des Moines, Iowa in June 1997. The Company also
completed the expansion of its existing facility in LaPlace, Louisiana in
September 1997, which increased the number of screens from six to seven and the
number of seats from 734 to 970. In addition, the Company recently executed
leases contingent upon the construction of four theaters with 24 screens in
Illinois, Massachusetts, Missouri and Michigan.
The following table summarizes the Company's completed and projected
expansions of existing theaters and constructions of new theaters since its
inception in June 1996.
COMPLETED AND PROJECTED THEATER CONSTRUCTION AND EXPANSION
<TABLE>
<CAPTION>
ADDITIONAL
DATE LOCATION FORMAT TYPE OF PROJECT SCREENS
---- -------- ------ --------------- ----------
<S> <C> <C> <C> <C>
June 1997 Des Moines, IA Second-run New theater 10
September 1997 LaPlace, LA Second-run Addition to existing theater 1
Second quarter 1998 St. Specialty New theater 6
Louis,MO(1)
Third quarter 1998 Waltham, MA(1) Specialty New theater 6
Fourth quarter 1998 Flint, MI(1) First-run New theater 6
Fourth quarter 1998 Yukon, OK Second-run Conversion to stadium seating --
First quarter 1999 Roseville, MI Second-run New theater 8
First quarter 1999 Joliet, IL(2) Second-run New theater 6
First quarter 1999 Laredo, TX Second-run Addition to existing theater 3
</TABLE>
- ---------------
(1) Lease executed, construction started.
(2) Lease executed.
In addition, the Company expects to commence construction of four
additional specialty-film theaters, representing approximately 34 screens, by
the fourth quarter of 1998.
OVERVIEW OF THE EXHIBITION INDUSTRY
The domestic motion picture exhibition industry is comprised of
approximately 490 exhibitors, approximately 255 of which operate four or more
screens at one or more locations, according to the National Association of
Theater Owners ("NATO"). As of May 1997, the ten largest exhibitors (in terms of
number of screens) controlled approximately 51% of the total screens in the
United States, with no single exhibitor controlling more than 9% of the total
screens.
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<PAGE> 57
According to data released by the Motion Picture Association of America
(the "MPAA"), the total U.S. box office sales of approximately $6.4 billion in
1997 was a record for the exhibition industry. Attendance and domestic box
office revenue have grown since 1992 at compounded annual growth rates of
approximately 3.4% and 5.5%, respectively. The following table summarizes the
recent historical trends in U.S. theater attendance, average ticket price, and
box office sales since 1992.
U.S. EXHIBITION STATISTICS
<TABLE>
<CAPTION>
ATTENDANCE AVG. TICKET PRICE BOX OFFICE SALES
YEAR (MILLIONS) (DOLLARS) (MILLIONS)
- ---- ---------- ----------------- ----------------
<S> <C> <C> <C>
1992 1,173 $4.15 $4,871
1993 1,244 4.14 5,154
1994 1,292 4.18 5,396
1995 1,263 4.35 5,493
1996 1,339 4.41 5,911
1997 1,386 4.59 6,360
</TABLE>
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. Revenues from
all distribution channels grew by more than 250% over the past ten years to $20
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 motion picture exhibition industry and the home
video industry, and the significantly increased channel capacity created by
enhanced cable and satellite-based transmission systems.
Management believes that the recent critical and commercial success of
smaller budget, independent films will further drive independent film
production, particularly from the "independent" subsidiaries of major studios
which desire the recognition of these prestigious, high profile awards.
Independent producers and distributors such as (i) Gramercy Pictures
("Gramercy"), (ii) Turner Pictures, which includes New Line Distribution, Inc.
("New Line"), Fine Line Features ("Fine Line"), and Castle Rock Entertainment,
and (iii) Dreamworks SKG, the highly publicized partnership among Jeffrey
Katzenberg, Steven Spielberg and David Geffen, should help maintain film
production at a high level. These independent film producers, along with the
"independent" subsidiaries of the major distributors such as Miramax Films, Inc.
("Miramax") which is owned by Buena Vista Pictures Distribution, Inc. ("Buena
Vista"), October Films ("October") which is owned by Universal Pictures
("Universal"), the new specialty film division of Paramount Pictures, Sony
Pictures Classics ("Sony Classics") which is owned by Sony Pictures Releasing
("Sony"), and Fox Searchlight Pictures ("Fox Searchlight") which is owned by
Twentieth Century Fox ("Fox"), have found increasing success with Academy of
Motion Picture Arts and Sciences Awards ("the Academy Awards"). In addition, the
generally lower budgets and higher potential returns on capital invested in
specialty films make them financially appealing to the studios.
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The table summarizes recent nominations and awards for independent films at
the Academy Awards.
RECENT ACADEMY AWARDS AND NOMINATIONS FOR INDEPENDENT FILMS
<TABLE>
<CAPTION>
YEAR FILM DISTRIBUTOR NOMINATIONS AWARDS
- ---- ---- ----------- ----------- ------
<S> <C> <C> <C> <C>
1996 The English Patient Miramax 11 Best Picture Best Director
Best Supporting Actress Best
Art Direction Best
Cinematography Best Costume
Design Best Film Editing
Best Original Dramatic Score
Best Sound
1996 Fargo Gramercy 7 Best Actress Best Original
Screenplay
1996 Shine Fine Line 5 Best Actor
1996 Sling Blade Miramax 2 Best Adapted Screenplay
1996 Emma Miramax 2 Best Original Music or
Comedy Score
1996 Secrets & Lies October 5 --
1996 Trainspotting Miramax 1 --
1996 Marvin's Room Miramax 1 --
1996 Angels & Insects Samuel Goldwyn Co. 1 --
1995 Dead Man Walking Gramercy 4 Best Actress
1995 The Usual Suspects Gramercy 2 Best Supporting Actor Best
Original Screenplay
1995 The Postman (Il Miramax 5 Best Original Dramatic Score
Postino)
1995 Mighty Aphrodite Miramax 2 Best Supporting Actress
1995 Restoration Miramax 2 Best Art Direction Best
Costume Design
1995 Shanghai Triad Sony Classics 2 --
1995 Georgia Miramax 1 --
</TABLE>
Continuing this trend of independent film successes, independent films such
as The Full Monty, Good Will Hunting, Wings of the Dove, The Sweet Hereafter and
The Apostle received 31 Academy Award nominations for 1997. Management believes
that continued high levels of independent film production should complement the
Company's efforts to expand its presence in the specialty-film niche of the
exhibition industry.
In addition, management believes that certain demographic trends favor the
theater exhibition industry, and particularly the specialty-film and second-run
niches. Information obtained from the U.S. Bureau of Census indicates that the
number of 12 to 20 year-olds in the United States, the largest movie-going
segment of the population, is projected to grow an aggregate of 7.5% through the
year 2000. This segment of the movie-going population tends to favor second-run
films in particular due to their attractive price point. In addition, according
to the MPAA, the number of movie patrons over 40 years old as a percentage of
the total movie audience has more than doubled from approximately 14% in 1986 to
32% in 1996. This trend in theater attendance seems to be following the highly
publicized aging of the "baby boom" generation. Management believes that major
studios have recognized this trend and are producing an increasing number of
wide-release commercial films targeted to a more mature audience, including such
notable recent films as Mr. Holland's Opus (Buena Vista), Courage Under Fire
(Fox), Sense and Sensibility (Sony), Evita (Buena Vista), The Mirror Has Two
Faces (Sony), and Braveheart (Paramount). The wider appeal of more mature films
should also complement the Company's strategy of expanding its presence in the
specialty-film niche of the industry since this niche has traditionally appealed
to a slightly more mature audience demographic.
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<PAGE> 59
OPERATIONS
SPECIALTY-FILM EXHIBITION
Through the acquisition of Landmark, the Company is the largest exhibitor
in the United States of specialty films both in terms of number of screens and
number of theaters dedicated to these films. The Company operates 49 theaters
and 139 screens dedicated to specialty-films in California, Colorado, Louisiana,
Massachusetts, Michigan, Minnesota, Ohio, Texas, Washington, and Wisconsin. The
Company holds the largest or second largest market share of the specialty-film
exhibition business in the following major markets: Los Angeles, San Francisco,
Seattle, Dallas, Houston, Denver, Minneapolis, Boston, Cleveland, Detroit, Palo
Alto, Berkeley, San Diego, Milwaukee, Sacramento and New Orleans.
The specialty-film exhibition business is the largest niche of the
exhibition industry outside of traditional commercial first-run exhibition in
terms of box office revenue generated. In 1996, according to Entertainment Data,
Inc., films released by independent distributors and "independent" subsidiaries
of major distributors such as Miramax, October Films, and Fine Line generated an
estimated $500 million of box office revenue. Based on the Company's 1996 box
office revenue from specialty-films, the Company maintains a market share of
approximately 9% of the total box office revenue generated by specialty-films.
The Company is responsible for a substantially higher percentage of certain
films' total domestic box office revenue due to the strategic location of
Landmark's theaters.
The following table presents a summary of selected recent films for which
Landmark has been responsible for a significant portion of the total domestic
gross box office, as of September 1997.
SELECTED INDEPENDENT FILM REVENUE GENERATED AT LANDMARK THEATERS
<TABLE>
<CAPTION>
LANDMARK
PERCENTAGE
GROSS BOX OFFICE OF
------------------------ NATIONAL
YEAR FILM DISTRIBUTOR NATIONAL LANDMARK GROSS
---- ---- ----------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997 Shall We Dance Miramax $6,479 $1,290 19.9%
1997 Kolya Miramax 5,731 1,060 18.5
1997 Waiting for Guffman Sony Classics 2,893 1,162 40.2
1996 Lone Star Sony Classics 12,409 2,331 18.8
1996 Secrets & Lies October 12,116 1,917 15.8
1995 The Postman Miramax 21,846 2,795 12.8
1994 The Last Seduction October 5,843 981 16.8
</TABLE>
SECOND-RUN EXHIBITION
The Company is one of the largest exhibitors of second-run films in the
United States in terms of number of screens and operated 49 theaters and 336
screens dedicated to the second-run format in Arizona, California, Colorado,
Florida, Nebraska, New York, Ohio, Oklahoma, Texas, Vermont, Washington and
Wisconsin.
Management estimates that the second-run niche of the theater exhibition
industry represents approximately 5% of theater and film revenues but as much as
10% of the nation's screens. Management further believes that most of the
estimated 125 companies which operate second-run theaters also operate first-run
theaters.
The Company's second-run theaters typically charge admission prices of
$1.00 to $2.00 but provide the same amenities to customers as first-run
theaters. The Company's second-run theaters typically offer wall-to-wall
screens, comfortable seating with cupholder armrests, stereo sound, attractive
concession stands, clean and inviting lobby areas, and video games or game
rooms. Management believes that offering this type of "first-run quality"
theatrical experience for a second-run price is the key to generating large
audiences at second-run theaters and subsequently increasing the profitability
of the theaters. The Company's second-run
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theaters benefit from lower film costs and a greater proportion of total revenue
from concession sales than at comparable first-run theaters.
Management believes that its second-run theaters appeal to many customer
groups, but in particular allow it to serve (i) families with children, (ii)
patrons who miss a film during its first-run exhibition, and (iii) customers who
may not be able to afford to attend first-run theaters on a frequent basis.
Management further believes that its second-run format allows the Company to
expand the number of potential customers beyond traditional first-run
moviegoers.
In addition to being able to draw customers from a wider group of potential
moviegoers, second-run theaters tend to enjoy better film booking arrangements
and film buying terms than their commercial first-run counterparts. Film rental
costs are generally significantly lower in the second-run format than in the
first-run format. Due to the smaller number of second-run screens in comparison
with the number of first-run screens in the country, there is typically very
little competition among second-run theaters for prints of commercially
successful films. In addition, each second-run theater typically comprises its
own film zone. As a result, the Company's second-run theaters generally benefit
from the ability to screen all successful commercial films, as opposed to the
average commercial first-run theater which receives only a subset of these
movies.
OTHER EXHIBITION
Occasionally, as has been the case with the MI Theaters and Movie One
acquisitions, the Company may acquire and continue to operate certain commercial
first-run theaters in conjunction with acquisitions of specialty-film and
second-run film theaters. In addition, the commercial first-run theaters that
have been acquired to date and those anticipated to be acquired in the future
have largely been and will continue to be in film zones with no other
competitors or in smaller cities with few first-run competitors.
The Company operates eight commercial first-run theaters comprised of 49
screens. As the Company continues to grow, management does not expect its
commercial first-run business to expand beyond the current proportion of
approximately 10% to 15% of the Company's total screens.
CONCESSIONS
Concession sales are the second largest source of revenue for the Company
after box office admissions, representing approximately 29.1% and 28.7% of total
combined pro forma revenues for the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively. The Company has devoted considerable
management effort to increasing concession sales and improving the income
margins from concession sales. These efforts include implementation of the
following strategies:
- Optimization of product mix. The Company's primary concession products
include popcorn, soft drinks and candy sold at each of the Company's
theaters. In addition, different varieties and brands of candy and other
concession items are offered at theaters based on preferences in a
particular geographic region. The Company has also implemented "combo
meals" and "movie meals" for children and senior citizens, both of which
offer a pre-selected assortment of concession products for a slightly
discounted price. Management believes that these concession packages tend
to increase overall concession revenue.
- Introduction of new products. The Company continues to evaluate and
introduce new concession products designed to attract additional
concession purchases. Management considers adding new products in many
locations, including bottled water, bulk candy, frozen yogurt and ice
cream.
- Staff training. Employees are continually trained in "cross-selling" and
"upselling" techniques. This training occurs through on-the-job training.
- Theater design. New theaters are designed to include multiple
point-of-sale terminals at the concession stand, making it easier to
serve large numbers of customers rapidly. Strategic placement of large
concession stands with fast-flow drink dispenser heads within theaters
heightens their visibility, aids in reducing the length of concession
lines and improves traffic flow around the concession stands.
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- Cost control. The Company negotiates prices for its concession supplies
with concession distributors on a bulk rate. The concession distributors
provide inventory and distribution services to the theaters, which place
volume orders directly with the concession distributors. The concession
distributors are paid a fee for such service equal to a percentage of the
Company's concession supply purchases. The Company believes that
utilization of concession distributors is more cost effective than
establishing a concession warehousing network owned by the Company.
FILM LICENSING
The Company licenses films from distributors on a film-by-film,
theater-by-theater basis. Film buyers negotiate directly with major distributors
and independent distributors on behalf of the Company. Successful licensing
depends in part upon the exhibitor's knowledge of trends and historical film
preferences of the residents in the market served by each theater, as well as on
the availability of commercially successful motion pictures. The Company's film
buyers have significant experience in the theater industry and have developed
long-standing relationships with distributors.
The Company's specialty-film theaters license films primarily from
independent film distributors, foreign film distributors, and "independent"
subsidiaries of major film distributors (collectively "independent
distributors"). Similar to the major film distributors, independent distributors
typically establish geographic film licensing zones and allocate each available
film to a single theater 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 approximately five
miles in metropolitan and suburban markets to up to 15 miles in smaller towns.
In general, the major distributors try to place a print of each wide-release
film in as many film zones as possible (often exceeding 3,000 prints), whereas
independent distributors typically exhibit their films in 300 or fewer zones.
The limited number of prints available of specialty films makes the runs of
these films generally more exclusive in any given market. Management believes,
however, that due to its significant presence in the specialty-film niche, the
Company has been able to and will continue to be able to secure an adequate
number of prints of films that it feels will be successful. Management also
believes that its large percentage of total national box office of specialty
films gives the Company the ability to negotiate more favorable film rental
agreements than most other specialty-film exhibitors. For example, for films
such as The English Patient, Good Will Hunting and Shine, the Company had
exclusive rights to the films for up to three weeks in selected markets.
The Company's second-run theaters generally enjoy better film booking
arrangements and film buying terms than comparable commercial first-run
theaters. Film rental costs are generally significantly lower in the second-run
format than in the first-run format, and the Company has had no difficulty to
date in securing the films that it believed would be most successful in its
respective markets. Due to the smaller number of second-run screens in
comparison with the number of first-run screens nationwide, there is typically
very little competition among second-run theaters for prints of commercially
successful films. In addition, each second-run theater typically comprises its
own film zone. As a result, the Company's second-run theaters generally benefit
from the ability to screen all successful commercial films, as opposed to the
average commercial first-run theater which receives only a subset of these
movies. Based on the different film release schedule in the second-run format,
management also has the benefit of knowing how successful each film was in its
first run prior to committing to that film for a second run.
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<PAGE> 62
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 corporate office receives daily reports
generated by the management information system 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 films with higher
gross revenues and substituting films when gross revenues cease to meet goals.
Real-time seating and box office information is available in certain locations
to box office personnel, making it possible for theater management to avoid
overselling a particular film, to provide faster and more accurate responses to
customer inquiries regarding showings and available seating, as well as the
ability to make advanced ticket sales by telephone. The information system also
tracks concession sales and total deposits, leading to better inventory
management and control.
MARKETING
In order to attract customers, the Company relies principally on newspaper
display advertisements (substantially paid for by film distributors) and
newspaper directory film schedules (generally paid for by the Company) to inform
customers 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
of coming attractions and films presently playing on other screens 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.
EMPLOYEES
The Company has approximately 2,300 employees, of which approximately 85%
are part-time employees who are paid on an hourly basis. Film projectionists at
certain of the Company's theaters in California, Colorado, Ohio, Massachusetts,
Minnesota, Texas, and Washington are represented by the International Alliance
of Theatrical Stage Employees pursuant to collective bargaining agreements. In
addition, janitors at the Company's theater in Berkeley, California are
represented by the Theatrical Janitors Union. These collective bargaining
agreements, which cover an aggregate of 84 of the Company's employees, expire at
various periods through 2001. The Company believes its relations with its
employees are good. The Company's expansion into new markets may increase the
number of employees represented by unions.
PROPERTIES
Of the 106 theaters operated by the Company, 90 are leased, 11 are owned,
three buildings are owned by the Company on properties covered by ground leases,
and two are operated pursuant to a management agreement. The Company's leases
typically have remaining terms from one to 25 years, with options to extend the
leases 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 50 theater
leases (representing 200 screens) will expire, representing approximately 49% of
all the Company's theaters (38% of all screens). Of those coming due within the
next five years, leases at 42 theaters (representing 182 screens) will be
subject to renewal options. The Company leases office space in Dallas, Texas for
its corporate headquarters.
COMPETITION
The domestic motion picture exhibition industry is highly competitive,
particularly in licensing films, attracting patrons and finding new theater
sites. According to NATO, there are approximately 490 exhibitors, of which
approximately 255 operate four or more screens at one or more locations. As of
May 1997, the ten largest exhibitors (in terms of number of screens) controlled
approximately 51% of the total screens in the
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<PAGE> 63
United States, with no single exhibitor controlling more than 9% of the total
screens. Industry participants vary substantially in size, from small
independent operators of single screen theaters to large national chains of
multi-screen theaters affiliated with large entertainment conglomerates.
The Company is the largest exhibitor of specialty motion pictures in the
United States based on the number of screens dedicated to these films and in
terms of box office revenue generated from these films. In addition, the Company
is one of the largest second-run exhibitors in the United States based on the
number of screens. 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. Management believes that the Company is the only exhibitor
aggressively pursuing a growth strategy in both specialty-film and second-run
exhibition.
The Company competes for film based on the location of its theaters and
number of competitors within its film zones. In film zones where the Company has
little or no direct competition, management selects those pictures that it
believes will be most successful in its markets from those offered to it by
distributors. The Company faces little or no competition for films in any of its
second-run film zones. In addition, the Company is granted a period of
exclusivity in its area for selected specialty films at many of its
specialty-film theaters. In film zones in which the Company faces competition
for films, it generally licenses films based on an allocation process.
Management 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.
The Company competes for customers based on the availability of popular
films, the location of theaters, the comfort and quality of theaters, and ticket
prices. Management believes that its admission prices are competitive with
admission prices of respective competing theaters. On a pro forma basis for the
year ended December 31, 1997 and the three months ended March 31, 1998, the
Company achieved an approximate average ticket price of $3.15 and $3.34,
respectively. The U.S. average ticket price for the year ended December 31, 1997
was $4.59. The Company's average ticket price is lower than the national average
due to the Company's large concentration of second-run theaters.
Management believes that the emergence of new motion picture distribution
channels has not adversely affected attendance at theaters and that these new
channels do not provide an experience comparable to the out-of-home experience
of viewing a motion picture in a theater. Management believes that the public
will continue to recognize the advantages of viewing a film on a large screen
with superior audio and visual quality, while enjoying a variety of concessions
and sharing the experience with a large audience. Theatrical exhibition is the
primary distribution channel for new motion picture releases. Successful
theatrical release of a film in international markets and in "downstream"
distribution channels, such as home video, pay-per-view, pay cable, network
television, and syndicated television, generally depends on successful
theatrical release in the United States.
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 is not a
party, have a material impact on the industry and the Company. These consent
decrees bind certain 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.
The Company is subject to various general regulations applicable to its
operations including the Americans with Disabilities Act (the "ADA"). Management
is not currently aware of any pending or threatened action in regard to the
Company's compliance with the ADA.
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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.
YEAR 2000
The Company believes that the computer equipment and software used in its
operations will function properly with respect to dates in the Year 2000 and
thereafter. The Company is in the process of communicating with its significant
suppliers to determine the extent to which interfaces with such entities are
vulnerable to Year 2000 issues and the extent to which any products or services
purchased by or from such entities are vulnerable to Year 2000 issues. The
Company presently believes that the Year 2000 issues will not require the
Company to incur any material costs or pose significant operational problems for
the Company directly or as a result of any Year 2000 issues of suppliers.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information, regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven L. Holmes.......... 39 Chief Executive Officer, Chief Financial Officer
and Director
John M. Sullivan.......... 62 Chairman of the Board of Directors
Thomas J. Owens........... 41 President and Director
Bert Manzari.............. 52 President of Landmark and Director
Ron Reid.................. 56 Executive Vice President, Operations
Paul Richardson........... 49 Executive Vice President
Stephen Kauzlaric......... 32 Vice President, Treasurer
David H. Wong............. 34 Director
Christopher A. Laurence... 30 Director
James Rosenthal........... 34 Director
Thomas E. Davin........... 40 Director
</TABLE>
Steven L. Holmes, Chief Executive Officer, Chief Financial Officer and
Director. Mr. Holmes is a co-founder of the Company, and has served as Chief
Executive Officer, Chief Financial Officer and Director since the Company's
inception. Prior to joining the Company, from 1993 to 1996, Mr. Holmes served as
Chief Financial Officer of Cobblestone Golf Group ("Cobblestone"). Prior to his
employment with Cobblestone, Mr. Holmes served as a Director and Chief Financial
Officer of Cinemark USA, Inc. ("Cinemark"). Prior to joining Cinemark, Mr.
Holmes was a manager at Deloitte & Touche LLP.
John M. Sullivan, Chairman of the Board of Directors. Mr. Sullivan has
served as a Chairman of the Board of Directors of the Company since its
inception in June 1996. He is presently a director of The Scotts Company,
Clinical Communications Group Inc., Cobblestone Golf Group, Inc. and Rental
Service Corporation. From October 1987 to January 1993, Mr. Sullivan was
Chairman of the Board and Chief Executive Officer of Prince Holdings, Inc.
Thomas J. Owens, President and Director. Mr. Owens is a co-founder of the
Company and has served as President and a Director since the Company's
inception. Prior to joining the Company, from 1987 to 1996 Mr. Owens served as
the Vice President of Real Estate Development of Cinemark. Prior to joining
Cinemark in 1987, Mr. Owens spent six years in commercial real estate in the
Austin, Texas area. In 1985, he formed a real estate company specializing in
anchor tenant representation, where he worked to acquire locations for Cinemark.
Bert Manzari, President of Landmark and Director. Mr. Manzari is President
of Landmark Theatre Corp., a subsidiary of the Company, and is a director of the
Company. Prior to joining the Company, Mr. Manzari was Senior Vice President,
Head Film Buyer of Landmark since 1982. Prior to that time, Mr. Manzari was
President and Head Film Buyer for Seven Gables Theaters, a northwestern theater
circuit located in Seattle, Washington. Prior to that time, Mr. Manzari opened
the Guild Theatre in Albuquerque in 1974, where Mr. Manzari and Paul Richardson
expanded this holding into Movie, Inc., a circuit of 13 repertory screens in the
south and southwestern parts of the United States.
Ron Reid, Executive Vice President, Operations. Mr. Reid has served as
Executive Vice President of Operations since December 1996. Prior to joining the
Company, Mr. Reid served as Vice President of Construction and Purchasing,
Worldwide for Cinemark from 1988 to 1996. Prior to that time, Mr. Reid served as
Cinemark's Western Region Operations Manager from 1987 to 1988. Prior to joining
Cinemark, Mr. Reid held the position of Director of Operations, overseeing
concessions, construction and personnel for Theatre Operators, Inc. for eight
years.
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Paul Richardson, Executive Vice President. Mr. Richardson will serve as
Executive Vice President of the Company upon the closing of Landmark
Acquisition. Mr. Richardson has served as Senior Vice President of Operations of
Landmark since 1982. Prior to joining Landmark, Mr. Richardson owned and
operated Movie, Inc., a circuit of 13 repertory screens in the south and
southwestern parts of the United States. Mr. Richardson is responsible for the
operation, renovation, acquisition and design of Landmark's theaters.
Stephen Kauzlaric, Vice President, Treasurer. Mr. Kauzlaric has served as
the Company's Vice President, Treasurer, since September 1997. Prior to joining
the Company, Mr. Kauzlaric held several positions with Cobblestone, including
Director of Strategic Planning and Director of Acquisitions. Prior to joining
Cobblestone, Mr. Kauzlaric was an Assistant Vice President at First Interstate
Bank in the real estate developer lending department.
David H. Wong, Director. Mr. Wong has served as a director of the Company
since its inception in June 1996. Mr. Wong joined Brentwood in July 1989 and is
presently a general partner of Brentwood Golf Partners, L.P., Brentwood,
Brentwood Buyout Management Partners, L.P. and Brentwood Buyout Partners, L.P.
and is a managing member of Brentwood Private Equity, L.L.C. and Brentwood
Private Equity Management, L.L.C. Mr. Wong is also a director of Clinical
Communications Group Inc., Aspen Marketing Group, Inc., Cobblestone Golf Group,
Inc. and Horizon Cellular Telephone Company, Inc.
Christopher A. Laurence, Director. Mr. Laurence has served as a director of
the Company since its inception in June 1996. Mr. Laurence joined Brentwood in
1991 and is presently a managing member of Brentwood Private Equity, L.L.C. and
Brentwood Private Equity Management, L.L.C. Mr. Laurence is also a director of
Rental Service Corporation and Aspen Marketing Group, Inc.
James Rosenthal, Director. Mr. Rosenthal has served as a Director of the
Company since its inception in June 1996. Mr. Rosenthal also serves as Executive
Vice President of Business Development for New Line Cinema Corporation, a
position he has held since 1992. In his capacity at New Line, Mr. Rosenthal
focuses on new business opportunities, mergers and acquisitions, finance, and
joint ventures. Prior to this time, Mr. Rosenthal was a Senior Associate with
the management consulting firm Booz, Allen & Hamilton.
Thomas E. Davin, Director. Thomas E. Davin has served as a director of the
Company since March 1998. In June 1997 he was appointed Chief Operating Officer
for Taco Bell Corp. Mr. Davin joined Taco Bell Corp. in November 1993 as Vice
President and General Manager for the South Central Region. In September 1996,
he was named Vice President of Operations. Prior to joining Taco Bell Corp. and
since October 1991, Mr. Davin served as Director, Mergers and Acquisitions for
PepsiCo. Inc. Mr. Davin is also a director of Cobblestone Golf Group, Inc.
EXECUTIVE COMPENSATION
The following table sets forth, with respect to the services rendered
during the 1997 fiscal year, the total compensation paid by the Company to its
five most highly-compensated officers.
EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
TOTAL
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER
--------------------------- -------- ------- ------
<S> <C> <C> <C>
Steven L. Holmes.............................. $146,222 $42,635 $9,797
Chief Executive Officer, Chief Financial
Officer
Thomas J. Owens............................... $144,865 $39,792 $8,434
President
Ron Reid...................................... $142,770 $26,125 $7,368
Executive Vice President, Operations
John Ralston.................................. $ 72,849 $ 6,000 $1,368
Controller
Stephen Kauzlaric............................. $ 27,788 $ 0 $1,962
Vice President, Treasurer
</TABLE>
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EMPLOYMENT ARRANGEMENTS
In connection with the Landmark Acquisition, the Company assumed the
employment agreements of two senior executive officers of Landmark. Pursuant to
such agreements and the amendments thereto, these executives are entitled to
receive certain compensation and benefits through the term of their respective
agreement as well as upon the termination of their respective agreement prior to
the expiration of such term.
Bert Manzari, President of Landmark, receives a salary of $330,000 per year
and is eligible to receive a bonus based upon Landmark reaching certain
performance targets. In addition, he will be eligible to receive certain
payments under a long-term incentive plan based on the future value of the
Company. His employment agreement provides that his salary is subject to fixed
annual increases. The term of his agreement expires on March 31, 2001.
Paul Richardson, Executive Vice President, currently receives a salary of
$285,000 per year and is eligible to receive a bonus based upon Landmark
reaching certain performance targets. His employment agreement provides that his
salary is subject to increase based on the Consumer Price Index after March 31,
1999. In addition, he was given the opportunity to purchase 1000 shares of the
Company's common stock. The term of his agreement expires on March 31, 2001.
COMPENSATION OF DIRECTORS
Members of the Board of Directors of the Company do not receive any
compensation for their services as directors. They do receive reimbursement for
travel and other expenses incurred in their capacity as directors.
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PRINCIPAL STOCKHOLDERS
The Company has two classes of voting securities, Common Stock and
preferred stock designated as voting Series A Preferred Stock ("Series A
Preferred Stock"). The Common Stock and Series A Preferred Stock vote together
as a single class. The following table sets forth, as of the date of the closing
of the Private Offering, the ownership of Common Stock and Series A Preferred
Stock of the Company by each stockholder who is known by the Company to own
beneficially more than five percent of the outstanding Common Stock or Series A
Preferred Stock, respectively, by each director, by each executive officer
listed in the table below, and by all directors and officers as a group.
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK PREFERRED STOCK PERCENT OF
AMOUNT AND NATURE OF PERCENT AMOUNT AND NATURE OF PERCENT ALL VOTING
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS BENEFICIAL OWNERSHIP OF CLASS SECURITIES
---------------- -------------------- -------- -------------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Brentwood Associates
Buyout Fund II, L.P.(1)....... 82,010 70.0% 249,180 87.7% 82.3%
DLJ Fund Investment Partners II,
L.P.(2)....................... 12,151 10.4 29,878 10.5 10.4
Steven L. Holmes(3)............. 6,400 5.5 936 0.3 1.8
Thomas J. Owens(3).............. 6,400 5.5 936 0.3 1.8
Ron Reid(3)..................... 3,164 2.7 468 0.2 0.9
John M. Sullivan(1)............. 1,328 1.1 987 0.3 0.6
Stephen Kauzlaric(3)............ 1,000 0.9 0 0 0.2
Paul Richardson(4).............. 1,000 0.9 0 0 0.2
James Rosenthal(1).............. 628 0.5 994 0.3 0.4
Tom Davin(1).................... 546 0.5 745 0.3 0.3
David H. Wong(1)(5)............. 82,010 70.0% 249,180 87.7% 82.3%
Christopher A. Laurence(1)(5)... 82,010 70.0% 249,180 87.7% 82.3%
All Directors and Officers as a
group (eight
individuals)(5)............... 20,466 17.5% 5,066 1.8% 6.3%
</TABLE>
- ---------------
(1) The address for Brentwood Associates Buyout Fund II, L.P. and Messrs. Davin,
Sullivan, Rosenthal, Wong and Laurence is c/o Brentwood Associates, 11150
Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(2) The address for DLJ Fund Investment Partners II, L.P. is 277 Park Avenue,
New York, New York 10172.
(3) The address for Messrs. Holmes, Kauzlaric, Owens and Reid is c/o Silver
Cinemas International, Inc., 4004 Beltline Road, Suite 205, Dallas, Texas
75244.
(4) The address for Mr. Richardson is c/o Landmark Theatre Corp., 2222 S.
Barrington Avenue, Los Angeles, California 90064.
(5) Includes 82,010 shares of Common Stock and 249,180 shares of Series A
Preferred Stock held by Brentwood Associates Buyout Fund II, L.P. Each of
Messrs. Wong and Laurence are managing members of the general partner of
Brentwood Associates Buyout Fund II, L.P. and may be deemed to share
investment and voting control over the shares of Common Stock and Series A
Preferred Stock owned by Brentwood Associates Buyout Fund II, L.P. Each of
Messrs. Wong and Laurence disclaims beneficial ownership of such shares.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH BRENTWOOD
Pursuant to a Corporate Development and Administrative Services Agreement,
dated as of July 2, 1996, between Brentwood Private Equity LLC ("BPE"), an
affiliate of Brentwood, and the Company, as amended (the "Services Agreement"),
BPE has agreed to assist in the corporate development activities of the Company
by providing services to the Company, including (i) assistance in analyzing,
structuring and negotiating the terms of investments and acquisitions, (ii)
researching, identifying, contacting, meeting and negotiating with prospective
sources of debt and equity financing, (iii) preparing, coordinating and
conducting presentations to prospective sources of debt and equity financing,
(iv) assistance in structuring and establishing the terms of debt and equity
financing and (v) assistance and advice in connection with the preparation of
the Company's financial and operating plans. Pursuant to the Services Agreement,
BPE is entitled to receive: (i) financial advisory fees equal to 1.5% of the
acquisition cost of the Company's completed acquisitions; (ii) upon the
occurrence of certain events, monitoring fees equal to 1% of the aggregate
amount of investment in Company by Brentwood; and (iii) reimbursement of its
reasonable fees and expenses incurred from time to time (a) in performing the
services rendered thereunder and (b) in connection with any investment in,
financing of, or sale, distribution or transfer of any interest in the Company
by BPE or any person or entity associated with BPE. For the year ended December
31, 1997, BPE was paid $81,505 (including reimbursement of fees and expenses)
pursuant to the Services Agreement. No amounts were paid to BPE during the three
months ended March 31, 1998.
STOCKHOLDERS AGREEMENT
The Company and its stockholders (the "Stockholders") have entered into a
stockholders agreement (the "Stockholders Agreement") which provides certain
restrictions and rights related to the transfer, sale or purchase of Common
Stock and Series A Preferred Stock (collectively, the "Company Stock"). Such
restrictions and rights include the following: (i) except as set forth below, a
Stockholder may not sell or transfer any shares of the Company Stock without
first giving the Company the right of first refusal to purchase such shares;
(ii) in the event that Brentwood agrees to sell or transfer any of its shares of
Common Stock, the other Stockholders shall have the right to sell or transfer a
proportionate number of shares of Company Stock as part of such sale or
transfer; and (iii) in the event that Brentwood agrees to sell or transfer all
of its shares of Company Stock, the other Stockholders shall be obligated to
sell or transfer all of their shares of Company Stock as part of such sale or
transfer. In connection with the Stockholders Agreement, the Company and the
Stockholders have entered into a registration rights agreement which provides
that the Stockholders would have certain piggyback rights upon the registration
for a public offering of the Company Stock by the Company.
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<PAGE> 70
DESCRIPTION OF REVOLVING CREDIT FACILITY
The Company repaid all of the indebtedness under the Old Credit Facility
with proceeds from the Private Offering. Silver Cinemas, Inc. (the "Borrower"),
a subsidiary of the Company, intends to amend and restate such facility (as
amended and restated, the "Revolving Credit Facility"). Until the Borrower
amends and restates the facility, the Company will not be able to borrow under
any credit facility. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ
Securities") will act as arranger under the Revolving Credit Facility for a
syndicate of financial institutions (collectively, the "Lenders"). The following
is a summary description of the principal terms and conditions expected to be
contained in the Revolving Credit Facility. The description set forth below does
not purport to be complete and is qualified in its entirety by reference to
certain agreements setting forth the principal terms and conditions of the
Revolving Credit Facility. The Company's obligations under the Revolving Credit
Facility will constitute Senior Debt and Guarantor Senior Debt with respect to
the Notes.
DLJ Capital Funding, Inc. has committed, subject to compliance with
customary conditions and satisfactory documents, to provide the Borrower with a
five year reducing revolving credit facility with aggregate availability of
$40.0 million. The Borrower, subject to execution of a credit agreement (the
"Credit Agreement"), may utilize borrowings to fund working capital
requirements, including issuance of stand-by and trade letters of credit, and
for other general corporate purposes, including the acquisition and construction
of theaters. Borrowings under the Revolving Credit Facility will be guaranteed
by Silver Cinemas International, Inc., the Company of the Notes, and each of the
Company's direct and indirect domestic subsidiaries. The Revolving Credit
Facility and the guarantees thereof will be secured by a perfected first
priority security interest in substantially all material assets of the Company
and its direct and indirect domestic subsidiaries including: (i) fee interests
and certain leasehold interests in real property; (ii) accounts receivable,
equipment, inventory and intangibles; and (iii) the capital stock of the Company
and its direct and indirect domestic subsidiaries.
Amounts borrowed under the Revolving Credit Facility will bear interest at
a rate per annum equal (at the Borrower's option) to: (i) the Administrative
Agent's reserve-adjusted LIBO rate ("LIBOR") plus an applicable margin or (ii)
an alternate base rate based on the Administrative Agent's prime rate, plus an
applicable margin. Initially, the applicable margin is expected to be 2.75% per
annum for LIBOR loans and 1.75% per annum for alternate base rate loans and will
be tied to a grid based on the Company's ratio of Funded Debt to Adjusted EBITDA
(as each will be defined in the Revolving Credit Facility). The Borrower will be
required to pay, on a quarterly basis, a commitment fee on the undrawn portion
of the Revolving Credit Facility at an initial rate equal to 0.50% and
thereafter at a rate equal to 0.50% or 0.375% per annum depending on the
Company's ratio of Funded Debt to Adjusted EBITDA.
The Lenders' obligations under the Revolving Credit Facility to advance
funds at any time during the five-year term will be subject to certain
conditions customary in secured credit facilities, including the absence of a
default under the Credit Agreement. Borrowings under the Revolving Credit
Facility will reduce quarterly, with an annual reduction of approximately $5.0
million, commencing fifteen months from the execution of the Credit Agreement.
In addition, the Revolving Credit Facility will provide for mandatory
prepayments of (i) certain net proceeds from the sale of assets, subject to
certain exceptions, (ii) all net proceeds from the issuance of debt securities,
and (iii) all of the net proceeds from certain equity issuances.
The Credit Agreement will contain a number of covenants that, among other
things, restrict the ability of the Borrower, the Company and its subsidiaries
to dispose of assets, incur additional indebtedness or guarantees, prepay other
indebtedness or amend certain debt instruments (including the Notes), pay
dividends, create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, make capital expenditures, change the business conducted by the
Company or its subsidiaries or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. Consent of the Lenders to
acquisitions will be required under certain circumstances. In addition, under
the Credit Agreement, the Company will be required to maintain specified
financial ratios and tests, including a ratio of Funded Debt to Adjusted EBITDA
below a specified maximum, and above minimum fixed charge coverage levels and
minimum interest coverage levels. The
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<PAGE> 71
inability of the Borrower to meet such ratios and tests will result in the
Borrower being unable to borrow under the Revolving Credit Facility, in addition
to constituting a default under the Credit Agreement. In such circumstances, the
Company could be unable to effect its acquisition strategy or fund capital
expenditures. See "Risk Factors -- Restrictive Covenants of Revolving Credit
Facility; Inability to Borrow Additional Amounts."
The Credit Agreement will contain customary events of default, including
without limitation events of default relating to (i) failure to pay principal,
interest or fees, (ii) breach of covenants, representations or warranties, (iii)
cross default to other indebtedness (including the Notes) or material contracts,
(iv) bankruptcy, (v) change of control, (vi) the occurrence of a material
adverse effect and (vii) material judgments. The occurrence of any of such
events of default could result in acceleration of the Company's obligations
under the Credit Agreement and foreclosure on the collateral securing such
obligations, which would have a material adverse effect on the holders of the
Notes.
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<PAGE> 72
DESCRIPTION OF EXCHANGE NOTES
The Notes were issued under an indenture (the "Indenture") dated April 15,
1998 by and among the Company, the Guarantors and Norwest Bank, Minnesota,
National Association, as Trustee (the "Trustee") in a private transaction not
subject to the Securities Act. The following summary of certain provisions of
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Trust Indenture Act of 1939, as
amended (the "TIA"), and to all of the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the Indenture and the Registration Rights Agreement may be obtained from
the Company or the Initial Purchasers as set forth below under "-- Additional
Information." The definitions of certain capitalized terms used in the following
summary are set forth below under "-- Certain Definitions." For purposes of this
section, references to the "Company" include only the Company and not its
Subsidiaries.
The Notes are general unsecured obligations of the Company, limited to
$115,000,000 aggregate principal amount of which $100.0 million aggregate
principal amount was issued in the Private Offering. Additional amounts may be
issued in one or more series from time to time subject to the limitations set
forth under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness." The Notes are subordinated in right of payment to, all existing
and future Senior Debt of the Company. The Notes are fully and unconditionally
guaranteed on a senior subordinated basis by all of the Company's current
Subsidiaries on a joint and several basis. See "-- Guarantees." The Guarantees
are general unsecured obligations of the Guarantors and are subordinated in
right of payment to all existing and future Guarantor Senior Debt. As of March
31, 1998, on a consolidated pro forma basis after giving effect to the
Transactions, the Company and its Subsidiaries would have had $5.2 million of
Senior Debt and Guarantor Senior Debt outstanding. All Indebtedness incurred
under the Revolving Credit Facility will be Senior Debt of the Company and
Guarantor Senior Debt of the Subsidiaries and will be secured by substantially
all of the assets of the Company and its Subsidiaries.
Except as described in "Change of Control," the Indenture does not contain
any provision that would provide protection to the holders of the Notes against
a sudden and dramatic decline in credit quality resulting from a takeover,
recapitalization or similar restructuring of the Company. If a Change of Control
were to occur, it could be the case that the Company would not have adequate
funds to repurchase the Notes as required by the Indenture and/or that the
Revolving Credit Facility will not permit such repurchase. See "-- Change of
Control."
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest and Liquidated Damages, if any, may be paid at the Trustee's corporate
trust office or by check mailed to the registered address of Holders. Any Notes
that remain outstanding after the completion of the Exchange Offer, together
with the Exchange Notes issued in connection with the Exchange Offer, will be
treated as a single class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $115.0 million, of
which an aggregate principal amount of $100.0 million issued in the Private
Offering, and will mature on April 15, 2005. Interest on the Notes will accrue
at the rate of 10 1/2% per annum and will be payable semiannually in cash on
each April 15 and October 15 commencing on October 15, 1998, to the persons who
are registered Holders at the close of business on the April 1 and October 1
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from and including the date of issuance.
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<PAGE> 73
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The Notes are redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after April 15, 2001,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on April 15 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon, if any, to the
date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.............................................. 107.875%
2002.............................................. 105.250%
2003.............................................. 102.625%
2004 and thereafter............................... 100.000%
</TABLE>
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to April 15, 2001, the Company may, at its option, use the net
cash proceeds of one or more Equity Offerings (as defined below) to redeem the
Notes at a redemption price equal to 110 1/2% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, to the date of redemption;
provided that at least 65% of the principal amount of Notes originally issued
under the Indenture remains outstanding immediately after any such redemption.
In order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 90 days after the
consummation of any such Equity Offering.
Mandatory Redemption. The Company is not required to make redemption or
sinking fund payments with respect to the Notes.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of a Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations (including interest
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<PAGE> 74
accruing after the commencement date of any such proceeding whether or not
allowable as a claim in any such proceeding) due or to become due upon all
Senior Debt shall first be paid in full in cash or Cash Equivalents before any
payment or distribution of any kind or character is made on account of any
Obligations on the Notes, or for the acquisition of any of the Notes for cash or
property or otherwise (except that Holders of Notes may receive and retain
Permitted Junior Securities and payments made from the trust described under "--
Legal Defeasance and Covenant Defeasance"). If any default occurs and is
continuing in the payment when due, whether at maturity, upon any redemption, by
declaration or otherwise, of any principal of, interest on, unpaid drawings for
letters of credit issued in respect of, or regularly accruing fees with respect
to, any Senior Debt, no payment of any kind or character shall be made by or on
behalf of the Company or any other Person on its or their behalf with respect to
any Obligations on the Notes or to acquire any of the Notes for cash or property
or otherwise (except that Holders of Notes may receive and retain Permitted
Junior Securities and payments made from the trust described under "-- Legal
Defeasance and Covenant Defeasance").
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default have
been cured or waived or have ceased to exist or the Trustee receives notice from
the Representative for the respective issue of Designated Senior Debt
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither the Company
nor any other Person on its behalf shall (x) make any payment of any kind or
character with respect to any Obligations on the Notes (except in Permitted
Junior Securities or from the trust described under "-- Legal Defeasance and
Covenant Defeasance") or (y) acquire any of the Notes for cash or property or
otherwise (except in Permitted Junior Securities or from the trust described
under "-- Legal Defeasance and Covenant Defeasance"). Notwithstanding anything
herein to the contrary, in no event will a Blockage Period extend beyond 180
days from the date the payment on the Notes was due and only one such Blockage
Period may be commenced within any 360 consecutive days. No event of default
which existed or was continuing on the date of the commencement of any Blockage
Period with respect to the Designated Senior Debt shall be, or be made, the
basis for commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days.
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
After giving effect to the Transactions, on a consolidated pro forma basis,
at March 31, 1998, the aggregate amount of Senior Debt and Guarantor Senior Debt
would have been approximately $5.2 million.
GUARANTEES
Each Guarantor fully and unconditionally guarantees, on a senior
subordinated basis, jointly and severally, to each Holder and the Trustee, the
full and prompt payment of the Company's obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes. The
Guarantees are subordinated to Guarantor Senior Debt on the same basis as the
Notes are subordinated to Senior Debt. The obligations of each Guarantor are
limited to the maximum amount which, after giving effect to all other contingent
and fixed liabilities of such Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under a Guarantee shall be entitled to a
contribution from each other Guarantor in an amount pro rata, based on the net
assets of each Guarantor, determined in accordance with GAAP.
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<PAGE> 75
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with other Persons upon the terms and conditions
set forth in the Indenture. See "Certain Covenants -- Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by
the Company and the sale complies with the provisions set forth in "Certain
Covenants -- Limitation on Asset Sales," the Guarantor's Guarantee will be
released.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Company's obligations pursuant to the Notes, and the aggregate net assets,
earnings and equity of the Guarantors and the Company are substantially
equivalent to the net assets, earnings and equity of the Company on a
consolidated basis.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, the
Company will be required to offer to purchase all of the Notes pursuant to the
offer described below (the "Change of Control Offer"), at a purchase price equal
to 101% of the principal amount thereof plus accrued interest to the date of
purchase.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Revolving Credit Facility and all other Senior Debt or
Guarantor Senior Debt the terms of which require repayment upon a Change of
Control or offer to repay in full and terminate all commitments under all
Indebtedness under the Revolving Credit Facility and all other such Senior Debt
or Guarantor Senior Debt and to repay the Indebtedness owed to each lender which
has accepted such offer or (ii) obtain the requisite consents under the
Revolving Credit Facility and all other Senior Debt to permit the repurchase of
the Notes as provided below. The Company shall first comply with the covenant in
the immediately preceding sentence before it shall be required to repurchase
Notes pursuant to the provisions described below.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on its property, to make Restricted Payments and to make Asset Sales
may make more difficult or discourage a takeover of the Company, whether favored
or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances
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from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Notwithstanding the foregoing, the Company will not be required to make a
Change of Control Offer upon a Change of Control if a third party makes the
Change of Control Offer in the manner, at the times and otherwise in compliance
with the requirements set forth in the Indenture applicable to a Change of
Control Offer made by the Company, including any requirements to repay in full
the Revolving Credit Facility, any such Senior Debt or Guarantor Senior Debt or
obtain the consents of such lenders to such Change of Control Offer as set forth
in the second paragraph of this Section, and purchases all Notes validly
tendered and not withdrawn under such Change of Control Offer.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries may incur Indebtedness (including, without limitation, Acquired
Indebtedness) if on the date of the incurrence of such Indebtedness, after
giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage
Ratio of the Company is greater than 2.0 to 1.0.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Notes or any Preferred Stock of a Restricted
Subsidiary or (d) make any Investment (other than Permitted Investments) (each
of the foregoing actions set forth in clauses (a), (b) (c) and (d) being
referred to as a "Restricted Payment"), if at the time of such Restricted
Payment or immediately after giving effect thereto, (i) a Default or an Event of
Default shall have occurred and be continuing or (ii) the Company is not able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of: (w) 50% of the
cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company earned during the
period beginning on the first day of the fiscal quarter after the Issue Date and
ending on the last day of the fiscal quarter ending at least 30 days prior to
the date the Restricted Payment occurs (the "Reference Date") (treating such
period as a single accounting period); plus (x) 100% of the aggregate net cash
proceeds received by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and
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sale subsequent to the Issue Date and on or prior to the Reference Date of
Qualified Capital Stock of the Company (excluding any such proceeds that have
been used to make Investments in Unrestricted Subsidiaries pursuant to clause
(vii) of the definition of Permitted Investments); plus (y) without duplication
of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any
net cash proceeds from a Equity Offering to the extent used to redeem the
Notes); plus (z) to the extent that any Investment (other than a Permitted
Investment) that was made after the Issue Date is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Investment (less the cost of disposition, if any) and (B) the
initial amount of such Investment.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) the acquisition of any shares of
Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior in
right of payment to the Notes or any Preferred Stock of a Restricted Subsidiary
either (i) solely in exchange for shares of Qualified Capital Stock of the
Company, or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of (A)
shares of Qualified Capital Stock of the Company or (B) Refinancing
Indebtedness; (4) so long as no Default or Event of Default shall have occurred
and be continuing, repurchases by the Company of Common Stock of the Company
from employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
employees, in an aggregate amount not to exceed $500,000 in any calendar year or
$2.5 million in the aggregate; (5) so long as no Default or Event of Default has
occurred and is continuing, amounts paid by the Company or its Subsidiaries to
Brentwood in accordance with the Administrative Services Agreement. In
determining the aggregate amount of Restricted Payments made subsequent to the
Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(ii) and (4) shall be
included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof
either (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case
of any Senior Debt or Guarantor Senior Debt under any revolving credit facility,
effect a permanent reduction in the availability under such revolving credit
facility, (B) to make any investment in assets which constitute or are part of
businesses which are materially related to the business of the Company and its
Subsidiaries as of the Issue Date or in 100% of the issued and outstanding
Capital Stock of a Person the assets of which are principally comprised of such
assets ("Replacement Assets"), or (C) a combination of prepayment and investment
permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after
an Asset Sale or such earlier date, if any, as the Board of Directors of the
Company or of such Restricted Subsidiary determines not to apply the Net Cash
Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B)
and (iii)(C) of the preceding sentence (each, a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash
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Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the
Company or such Restricted Subsidiary to make an offer to purchase (the "Net
Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than
30 nor more than 45 days following the applicable Net Proceeds Offer Trigger
Date, from all Holders on a pro rata basis, that amount of Notes equal to the
Net Proceeds Offer Amount at a price equal to 100% of the principal amount of
the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to
the date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary of the
Company, as the case may be, in connection with any Asset Sale is converted into
or sold or otherwise disposed of for cash (other than interest received with
respect to any such non-cash consideration), then such conversion or disposition
shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds
thereof shall be applied in accordance with this covenant. The Company may defer
the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $5,000,000 resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not
just the amount in excess of $5,000,000, shall be applied as required pursuant
to this paragraph).
Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided, that if the total consideration
with respect to such Asset Sale is greater than $10.0 million (as determined in
good faith by the Company's Board of Directors), the Company shall obtain a
fairness opinion from an Independent Financial Advisor; provided further, that
any consideration not constituting Replacement Assets received by the Company or
any of its Restricted Subsidiaries in connection with any Asset Sale permitted
to be consummated under this paragraph shall constitute Net Cash Proceeds
subject to the provisions of the immediately preceding paragraph.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) the Revolving Credit
Facility; (4) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary of the Company; (5)
any instrument governing Acquired Indebtedness, which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person or the properties or assets of the Person so acquired; (6)
agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (7) restrictions arising by
customary non-assignment provisions in leases and licenses entered into in the
ordinary course of business and consistent with
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past practices; (8) restrictions contained in purchase money or capital lease
obligations for property acquired in the ordinary course of business; (9) any
customary restriction or encumbrance contained in contracts for sale of assets
or sales of Capital Stock of Restricted Subsidiaries permitted by the Indenture;
or (10) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (5) or (6) above; provided, however, that the provisions relating to
such encumbrance or restriction contained in any such Indebtedness, taken as a
whole, are no less favorable to the Company in any material respect than the
provisions relating to such encumbrance or restriction contained in agreements
whose Indebtedness is being refinanced.
Limitation on Liens. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of its Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes are equally and ratably secured,
except for (A) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date; (B) Liens securing Senior
Debt and Liens securing Guarantor Senior Debt; (C) Liens securing the Notes and
the Guarantees; (D) Liens in favor of the Company or a Restricted Subsidiary of
the Company; (E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens (A) are no less favorable to the
Holders and are not more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being Refinanced and (B) do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F)
Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will not
incur or suffer to exist Indebtedness that is senior in right of payment to the
Notes and subordinate in right of payment to any other Indebtedness of the
Company.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (i) either (1) the Company shall be the surviving
or continuing corporation or (2) the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall expressly assume,
by supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall
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have occurred and be continuing; and (iv) the Company or the Surviving Entity
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have been
satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "-- Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Guarantor) or to which such sale,
lease, conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) such entity assumes by supplemental indenture
all of the obligations of the Guarantor on the Guarantee; (iii) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (iv) immediately after giving effect to
such transaction and the use of any net proceeds therefrom on a pro forma basis,
the Company could satisfy the provisions of clause (ii) of the first paragraph
of this covenant. Any merger or consolidation of a Guarantor with and into the
Company (with the Company being the surviving entity) or another Guarantor that
is a Wholly Owned Restricted Subsidiary of the Company need only comply with
clause (iv) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1.0 million shall be
approved by the disinterested members of the Board of Directors of the Company
or such Restricted Subsidiary, as the case may be, such approval to be evidenced
by a Board Resolution filed with the Trustee stating that such Board of
Directors has determined that such transaction complies with the foregoing
provisions. If the Company or any Restricted Subsidiary of the Company enters
into an Affiliate Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market value of more
than $5.0 million, the Company or such Restricted Subsidiary, as the case may
be, shall, prior to the consummation thereof, obtain a favorable opinion as to
the fairness of such transaction or series of related transactions to the
Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
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(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management; (ii) transactions exclusively between or among
the Company and any of its Restricted Subsidiaries or exclusively between or
among such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture; (iii) any agreement as in effect as of the Issue
Date or any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) in any replacement agreement thereto so long
as any such amendment or replacement agreement is not more disadvantageous to
the Holders in any material respect than the original agreement as in effect on
the Issue Date; (iv) so long as no Default or Event of Default has occurred and
is continuing, amounts paid by the Company or its Subsidiaries to Brentwood in
accordance with the Administrative Services Agreement; and (v) Restricted
Payments permitted by the Indenture.
Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary that
is not a Guarantor, or if the Company or any of its Restricted Subsidiaries
shall organize, acquire or otherwise invest in another Restricted Subsidiary
having total assets with a book value in excess of $500,000, then such
transferee or acquired or other Restricted Subsidiary shall (i) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and constitutes
a legal, valid, binding and enforceable obligation of such Restricted
Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all
purposes of the Indenture.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or related to the
businesses in which the Company and its Restricted Subsidiaries are engaged on
the Issue Date.
Reports to Holders. The Indenture will provide that the Company will
deliver to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA sec. 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect
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to the "Merger, Consolidation and Sale of Assets" covenant, which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5.0 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees ceases to be in full force and effect or
any of the Guarantees is declared to be null and void and unenforceable or
any of the Guarantees is found to be invalid or any of the Guarantors
denies its liability under its Guarantee (other than by reason of release
of a Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Revolving Credit
Facility, shall become immediately due and payable upon the first to occur of an
acceleration under the Revolving Credit Facility or five Business Days after
receipt by the Company and the Representative under the Revolving Credit
Facility of such Acceleration Notice. If an Event of Default specified in clause
(vi) above occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding Notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
In the event of a declaration of acceleration of the Notes because an Event
of Default has occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (iv) of the first paragraph of this section,
the declaration of acceleration of the Notes shall be automatically annulled if
the holders of any Indebtedness described in clause (iv) have rescinded the
declaration of acceleration in respect of such Indebtedness within 30 days of
the date of such declaration and if (i) the annulment of the acceleration of the
Notes would not conflict with any judgment or decree of a court of competent
jurisdiction, and (ii) all existing Events of Default, except nonpayment of
principal or interest on the Notes that became due solely because of the
acceleration of the Notes, have been cured or waived. The Indenture will provide
that, at any time after a declaration of acceleration with respect to the Notes
as described in the preceding paragraph, the Holders of a majority in principal
amount of the Notes may rescind and cancel such declaration and its consequences
(i) if the rescission would not conflict with any judgment or decree, (ii) if
all existing Events of Default have been cured or waived except nonpayment of
principal or interest that has become due solely because of the acceleration,
(iii) to the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue principal, which has become due otherwise
than by such declaration of acceleration, has been paid, (iv) if the Company has
paid the Trustee its reasonable compensation and reimbursed the Trustee for its
expenses, disbursements and advances and (v) in the event of the cure or waiver
of an Event of Default of the type described in clause (vi) of the description
above of Events of Default, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
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The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes 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.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture, the Revolving Credit Facility or
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any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with; (viii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that (A) the trust
funds will not be subject to any rights of holders of Senior Debt, including,
without limitation, those arising under the Indenture and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain other customary conditions
precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; or (vi) amend, change or modify in
any material respect the obligation of the Company to make and consummate a
Change of Control Offer after the occurrence of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated, in either such case, or modify any of the provisions or definitions
with respect thereto. Any modification or change of the provisions of the
Indenture or the related definitions affecting subordination in any manner which
adversely affects the holders of Designated Senior Debt or
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Designated Guarantor Senior Debt will also require the consent of the holders of
such Designated Senior Debt or Designated Guarantor Senior Debt.
GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
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 by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
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.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"Administrative Services Agreement" means that certain Corporate
Development and Administrative Services Agreement between the Company and
Brentwood dated as of July 2, 1996, as such agreement has been amended by that
certain First Amendment thereto dated on or about the Issue Date, as such
agreement is in effect on the Issue Date.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company
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or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary
of the Company; or (b) any other property or assets of the Company or any
Restricted Subsidiary of the Company other than in the ordinary course of
business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $500,000,
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company or any Restricted Subsidiary as
permitted under "Merger, Consolidation and Sale of Assets," and (iii) any
permitted Restricted Payment.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Brentwood" means Brentwood Private Equity LLP.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250.0 million; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) (A)
prior to the initial public offering of the Common Stock of the Company, both
(x) the Permitted Holders shall own less than 50% of the aggregate ordinary
voting power ("Voting Power") represented by the issued and outstanding Capital
Stock of the Company and (y) any Person or Group (other than the Permitted
Holders(s)) shall become the owner, directly or indirectly, beneficially or of
record, of shares representing Voting Power greater than that owned by the
Permitted Holders or (B) subsequent to the initial public offering of the Common
Stock of the Company, both (x) the Permitted Holders shall own less than 35% of
the aggregate Voting Power represented by the issued and
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outstanding Capital Stock of the Company and (y) any other Person or Group
(other than Permitted Holders) shall become the owner, directly or indirectly,
beneficially or of record, of shares representing greater than 35% of the
aggregate Voting Power of the Company; or (iii) the replacement of a majority of
the Board of Directors of the Company over a two-year period from the directors
who constituted the Board of Directors of the Company at the beginning of such
period, and such replacement shall not have been approved by a vote of at least
a majority of the Board of Directors of the Company then still in office who
either were members of such Board of Directors at the beginning of such period
or whose election as a member of such Board of Directors was previously so
approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business), (B) Consolidated Interest
Expense and (C) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a consolidated
basis for such Person and its Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect (i) on a
pro forma basis for the period of such calculation to the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) on a pro
forma basis (calculated in accordance with Article 11 of Regulation S-X under
the Securities Act) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (provided that such
Consolidated EBITDA shall be included only to the extent includable pursuant to
the definition of "Consolidated Net Income") attributable to the assets which
are the subject of the Asset Acquisition or Asset Sale during the Four Quarter
Period) occurring during the Four Quarter Period or at any time subsequent to
the last day of the Four Quarter Period and on or prior to the Transaction Date,
as if such Asset Sale or Asset Acquisition (including the incurrence, assumption
or liability for any such Acquired Indebtedness) occurred on the first day of
the Four Quarter Period. If such Person or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if such Person or any Restricted Subsidiary of such Person had directly incurred
or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the
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rate of interest on such Indebtedness in effect on the Transaction Date; (2) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period; and (3) notwithstanding clause (1) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Interest Swap Obligations, shall
be deemed to accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person or of any Restricted Subsidiary of such Person
(other than dividends paid in Qualified Capital Stock) paid, accrued or
scheduled to be paid or accrued during such period times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current effective consolidated federal, state and local tax rate of such Person,
expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
of deferred financing costs, (b) the net costs under Interest Swap Obligations,
(c) all capitalized interest and (d) the interest portion of any deferred
payment obligation; and (ii) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP; but, (iii) excluding the
amortization of debt discount and amortization or write-off of deferred
financing costs.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except to the extent
of cash dividends or distributions paid to the referent Person or to a Wholly
Owned Restricted Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
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"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Revolving Credit Facility and (ii) any other Indebtedness constituting Senior
Debt or Guarantor Senior Debt which, at the time of determination, has an
aggregate principal amount or commitment of at least $25.0 million and is
specifically designated in the instrument evidencing such Senior Debt or
Guarantor Senior Debt as "Designated Senior Debt" or "Designated Guarantor
Senior Debt" by the Company or such Guarantor.
"Disqualified Capital Stock" means (i) that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof on or prior to the final maturity date of the Notes and (ii) Preferred
Stock of Subsidiaries of the Company.
"Equity Offering" means (i) an underwritten public offering of Qualified
Capital Stock of the Company pursuant to a registration statement filed with the
Commission in accordance with the Securities Act, (ii) a purchase of Qualified
Capital Stock or an additional common equity contribution by any of the
Permitted Holders, or (iii) a purchase of Qualified Capital Stock by any person
engaged in the movie theatre business which has a total equity market value (as
determined in good faith by the Company's Board of Directors) or total private
market value in excess of $100.0 million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantor" means (i) each Subsidiary of the Company on the Issue Date and
(ii) each Restricted Subsidiary that in the future executes a supplemental
indenture in which such Restricted Subsidiary agrees to be bound by the terms of
the Indenture as a Guarantor; provided that any Person constituting a Guarantor
as described above shall cease to constitute a Guarantor when its respective
Guarantee is released in accordance with the terms of the Indenture.
"Guarantor Senior Debt" means with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) and all other Obligations with respect to
any Indebtedness of such Guarantor, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Guarantee of such Guarantor. Without
limiting the generality of the foregoing, "Guarantor Senior Debt" shall also
include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is
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an allowed claim under applicable law) on, and all other amounts and Obligations
owing in respect of, (x) all Obligations of every nature of such Guarantor under
the Revolving Credit Facility, including, without limitation, obligations to pay
principal and interest, reimbursement obligations under letters of credit, fees,
expenses and indemnities, (y) all Interest Swap Obligations and (z) all
obligations under Currency Agreements, in each case whether outstanding on the
Issue Date or thereafter incurred. Notwithstanding the foregoing, "Guarantor
Senior Debt" shall not include (i) any Indebtedness of such Guarantor to a
Restricted Subsidiary of such Guarantor or any Affiliate of such Guarantor or
any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or guaranteed on
behalf of, any shareholder, director, officer or employee of such Guarantor or
any Restricted Subsidiary of such Guarantor (including, without limitation,
amounts owed for compensation), (iii) Indebtedness to trade creditors and other
amounts incurred in connection with obtaining goods, materials or services, (iv)
Indebtedness represented by Disqualified Capital Stock, (v) any liability for
federal, state, local or other taxes owed or owing by such Guarantor, (vi)
Indebtedness incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to such Guarantor and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of such Guarantor.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the Company of such
Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any
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purchase or acquisition by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by, any
Person. "Investment" shall exclude extensions of trade credit by the Company and
its Restricted Subsidiaries on commercially reasonable terms in accordance with
normal trade practices of the Company or such Restricted Subsidiary, as the case
may be. For the purposes of the "Limitation on Restricted Payments" covenant,
(i) "Investment" shall include and be valued at the fair market value of the net
assets of any Restricted Subsidiary at the time that such Restricted Subsidiary
is designated an Unrestricted Subsidiary and shall exclude the fair market value
of the net assets of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the
amount of any Investment shall be the original cost of such Investment plus the
cost of all additional Investments by the Company or any of its Restricted
Subsidiaries, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment, reduced by
the payment of dividends or distributions in connection with such Investment or
any other amounts received in respect of such Investment; provided that no such
payment of dividends or distributions or receipt of any such other amounts shall
reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, 100% of the
outstanding Common Stock of such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holder(s)" means Brentwood, Steven L. Holmes and Thomas J.
Owens.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes issued in the Private Offering, and
the Guarantees thereof;
(ii) Indebtedness of Company and its Restricted Subsidiaries incurred
pursuant to the Revolving Credit Facility, not to exceed $75.0 million
reduced by any required permanent repayments as a result of Asset Sales
(which are accompanied by a corresponding permanent commitment reduction)
thereunder;
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(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no Lien
(other than a lien in favor of lenders under the Revolving Credit Facility)
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company; provided that if as of any date any Person other
than the Company or a Wholly Owned Restricted Subsidiary of the Company
owns or holds any such Indebtedness or holds a Lien (other than a lien in
favor of lenders under the Revolving Credit Facility) in respect of such
Indebtedness, such date shall be deemed the date of the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company of such
Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary of the Company, in each case subject to
no Lien (other than a lien in favor of lenders under the Revolving Credit
Facility); provided that (a) any Indebtedness of the Company to any Wholly
Owned Restricted Subsidiary of the Company is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any Person other than a
Wholly Owned Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person holds a Lien (other than a lien in favor of
lenders under the Revolving Credit Facility) in respect of such
Indebtedness, such date shall be deemed the date of the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $15.0 million
at any one time outstanding;
(xii) 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 loan and advances made in settlement of such accounts
receivable, all in the ordinary course of business and;
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(xiii) purchase money Indebtedness to finance property or assets of
the Company or any Restricted Subsidiary of the Company acquired in the
ordinary course of business in an aggregate amount not to exceed $10.0
million at any one time outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company, (ii) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Restricted Subsidiary of the Company or that
will merge or consolidate into the Company or a Restricted Subsidiary of the
Company in an amount not to exceed $5.0 million at any one time outstanding;
(iii) Investments in the Company by any Restricted Subsidiary of the Company;
provided that any Indebtedness evidencing such Investment is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iv) investments in cash and Cash
Equivalents; (v) loans and advances to employees and officers of the Company and
its Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $500,000 at any one time outstanding;
(vi) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's or its Restricted Subsidiaries' businesses and
otherwise in compliance with the Indenture; (vii) Investments in Unrestricted
Subsidiaries not to exceed $5.0 million at any one time outstanding plus the
proceeds from the sale Qualified Capital Stock after the Issue Date that are not
otherwise used to make a Restricted Payment; (viii) Investments in securities of
trade creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; and (ix) Investments made by the Company or its Restricted
Subsidiaries as a result of consideration received in connection with an Asset
Sale made in compliance with the "Limitation on Asset Sales" covenant.
"Permitted Junior Securities" means equity interests in the Company or debt
securities of the Company, in each case as provided for in a plan of
reorganization, that are subordinated to all Senior Debt (and any debt
securities issued in exchange for Senior Debt) and to all Guarantor Senior Debt
(and any debt securities issued in exchange for Guarantor Senior Debt) to the
same extent as, or to a greater extent than, the Notes are subordinated to
Senior Debt pursuant to the Indenture that have a final maturity and a weighted
average life to maturity which is the same as or greater than that of the Notes
and that are not secured by any collateral.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
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(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens to finance property or assets of the
Company or any Restricted Subsidiary of the Company acquired in the
ordinary course of business; provided, however, that (A) the related
purchase money Indebtedness shall not exceed the cost of such property or
assets and shall not be secured by any property or assets of the Company or
any Restricted Subsidiary of the Company other than the property and assets
so acquired and (B) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;
(xiv) Liens in favor of sellers of theaters in respect of escrows or
other deposits made in the ordinary course of business, but in any event
not exceeding 15% of the total consideration; and
(xv) 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 business.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
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"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (xi), (xii) or
(xiii) of the definition of Permitted Indebtedness), in each case that does not
(1) result in an increase in the aggregate principal amount of Indebtedness of
such Person as of the date of such proposed Refinancing (plus the amount of any
premium required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; provided that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"Replacement Assets" has the meaning set forth under "-- Limitation on
Asset Sales" above.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Revolving Credit Facility" means the Credit Agreement among the Company,
Silver Cinemas, Inc., as borrower, the lenders party thereto in their capacities
thereunder and DLJ Capital Funding, Inc., together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder or adding Restricted Subsidiaries of the Company
as additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on, and
all other Obligations with respect to, any Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Notes. Without limiting the generality of the foregoing, "Senior Debt" shall
also include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto,
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whether or not such interest is an allowed claim under applicable law) on, and
all other amounts and Obligations owing in respect of, (x) all Obligations of
every nature of the Company under the Revolving Credit Facility, including,
without limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities, (y) all
Interest Swap Obligations and (z) all obligations under Currency Agreements, in
each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company or any Affiliate of
the Company or any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or
guaranteed on behalf of, any shareholder, director, officer or employee of the
Company or of any Subsidiary of the Company (including, without limitation,
amounts owed for compensation), (iii) Indebtedness to trade creditors and other
amounts incurred in connection with obtaining goods, materials or services, (iv)
Indebtedness represented by Disqualified Capital Stock, (v) any liability for
federal, state, local or other taxes owed or owing by the Company, (vi)
Indebtedness incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness 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 and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of the Company.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w)
of Regulation S-X under the Securities Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors'
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qualifying shares or an immaterial amount of shares required to be owned by
other Persons pursuant to applicable law) are owned by such Person or any Wholly
Owned Restricted Subsidiary of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes initially will be
represented by one or more permanent global certificates in definitive, fully
registered form (the "Global Notes"). The Global Notes will be deposited on the
Issue Date with, or on behalf of DTC and registered in the name of a nominee of
DTC.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Holders may hold their interests in the
Global Notes directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any), interest (including
Additional Interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent 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 Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Additional Interest) on the
Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global 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
the Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
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) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants and
which will be legended as set forth under the heading "Notice to Investors."
95
<PAGE> 98
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 Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its 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 movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others 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").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Notes, which certificates will bear the legends
referred to under the heading "Notice to Investors."
PLAN OF DISTRIBUTION
Each 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. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with the resale of Exchange Notes received in
exchange for Private Notes where such Private Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of up to one year after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to 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 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 broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to 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 broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the Holders of Private Notes (including any broker-dealers), and
certain parties related to such Holders, against certain liabilities, including
liabilities under the Securities Act.
96
<PAGE> 99
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes offered hereby
will be passed upon for the Company by Latham & Watkins, Los Angeles,
California.
EXPERTS
The consolidated financial statements of Silver Cinemas as of December 31,
1997 and 1996, and for the year ended December 31, 1997 and the period May 10,
1996 (inception) to December 31, 1996; and the financial statements of Landmark
as of December 31, 1997 and for the year then ended appearing in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Landmark as of December 31, 1996
and for the six months ended December 31, 1996, the three months ended June 30,
1996 and the year ended March 31, 1996 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of StarTime as of December 31, 1997
and 1996 and for the years ended December 31, 1997, 1996 and 1995 have been
included herein and in the registration statement in reliance upon the report of
Coopers & Lybrand L.L.P., independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. As a result of the Exchange Offer, the
Company will become subject to the informational requirements of the Exchange
Act. The Registration Statement (and the exhibits and schedules thereto), as
well as the periodic reports and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1400,
75 Park Place, New York, New York 10007 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 6061-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
its public reference facilities in New York, New York and Chicago, Illinois at
the prescribed rates. Additionally, the Commission maintains a Web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the Commission and the address of this site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered Holders of the Notes, without cost to the Trustee or such
registered Holders, copies of all reports and other information that would be
required to be filed by the Company with the Commission under the Exchange Act,
whether or not the Company is then required to file reports with the Commission.
As a result of this Exchange Offer, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act. In
the event that the Company ceases to be subject to the informational
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes remain outstanding, it will file with the Commission
97
<PAGE> 100
(but only if the Commission at such time is accepting such voluntary filings)
and distribute to Holders of the Private Notes or the Exchange Notes, as
applicable, copies of the financial information that would have been contained
in such annual reports and quarterly reports, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations," that
would have been required to be filed with the Commission pursuant to the
Exchange Act. The Company will also furnish such other reports as it may
determine or as may be required by law.
The principal address of the Company is 4004 Beltline Road, Suite 205,
Dallas, Texas 75244, and the Company's telephone number is (972) 503-9851.
98
<PAGE> 101
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SILVER CINEMAS INTERNATIONAL, INC.
Independent Auditors' Report -- Deloitte & Touche LLP..... F-3
Consolidated Balance Sheets at December 31, 1997 and
1996................................................... F-4
Consolidated Statements of Operations for Year ended
December 31, 1997, and the period from May 10, 1996
(inception) to December 31, 1996....................... F-5
Consolidated Statements of Stockholders' Equity for Year
ended December 31, 1997, and the period from May 10,
1996 (inception) to December 31, 1996.................. F-6
Consolidated Statements of Cash Flows for Year ended
December 31, 1997 and the period from May 10, 1996
(inception) to December 31, 1996....................... F-7
Notes to Consolidated Financial Statements................ F-8
Unaudited Condensed Consolidated Balance Sheet as of March
31, 1998............................................... F-13
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997..... F-14
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997..... F-15
Notes to Unaudited Interim Condensed Consolidated
Financial Statements................................... F-16
THE LANDMARK THEATRE GROUP
Independent Auditors' Report -- Deloitte & Touche LLP..... F-17
Consolidated Balance Sheet at December 31, 1997........... F-18
Consolidated Statement of Operations for Year ended
December 31, 1997...................................... F-19
Consolidated Statement of Changes in Shareholder's Equity
for Year ended December 31, 1997....................... F-20
Consolidated Statement of Cash Flows for Year ended
December 31, 1997...................................... F-21
Notes to Consolidated Financial Statements................ F-22
THE LANDMARK THEATRE GROUP
Independent Auditors' Report -- KPMG Peat Marwick LLP..... F-27
Consolidated Balance Sheets at December 31, 1996 and March
31, 1996............................................... F-28
Consolidated Statements of Operations for the six months
ended December 31, 1996, three months ended June 30,
1996 and Year ended March 31, 1996..................... F-29
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended December 31, 1996, three
months ended June 30, 1996 and Year ended March 31,
1996................................................... F-30
Consolidated Statements of Cash Flows for the six months
ended December 31, 1996, three months ended June 30,
1996 and Year ended March 31, 1996..................... F-31
Notes to Consolidated Financial Statements................ F-32
Unaudited Condensed Consolidated Balance Sheet as of March
31, 1998............................................... F-39
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997..... F-40
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997..... F-41
Notes to Unaudited Interim Condensed Consolidated
Financial Statements................................... F-42
</TABLE>
F-1
<PAGE> 102
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STARTIME CINEMA, INC.
Independent Auditors' Report -- Coopers & Lybrand
L.L.P.................................................. F-43
Consolidated Balance Sheets at December 31, 1997 and
1996................................................... F-44
Consolidated Statements of Operations for Years ended
December 31, 1997, 1996 and 1995....................... F-45
Consolidated Statements of Stockholders' Equity for Years
ended December 31, 1997, 1996 and 1995................. F-46
Consolidated Statements of Cash Flows for Years ended
December 31, 1997, 1996 and 1995....................... F-47
Notes to Consolidated Financial Statements................ F-48
Unaudited Condensed Consolidated Balance Sheet as of March
31, 1998............................................... F-57
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997..... F-58
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997..... F-59
Notes to Unaudited Interim Condensed Consolidated
Financial Statements................................... F-60
</TABLE>
F-2
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Silver Cinemas International, Inc.
We have audited the accompanying consolidated balance sheets of Silver
Cinemas International, Inc. and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997 and for the period from May 10, 1996
(date of inception) to December 31, 1996. These financial statements are the
responsibility of the Company'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, such consolidated financial statements present fairly, in
all material respects, the financial position of Silver Cinemas International,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997 and for the
period from May 10, 1996 (date of inception) to December 31, 1996, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 26, 1998
F-3
<PAGE> 104
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 276,497 $ 4,709,457
Inventories............................................... 147,792 100,512
Prepaid expenses and other................................ 264,601 40,588
----------- -----------
Total current assets.............................. 688,890 4,850,557
THEATER PROPERTIES AND EQUIPMENT:
Land...................................................... 50,000 50,000
Buildings................................................. 1,000,000 1,000,000
Leasehold interests and improvements...................... 2,103,055 1,350
Theater furniture and equipment........................... 6,138,930 2,280,630
Theaters under construction............................... 77,575 67,745
----------- -----------
Total............................................. 9,369,560 3,399,725
Less accumulated depreciation and amortization............ (681,136) (39,179)
----------- -----------
Theater properties and equipment -- net........... 8,688,424 3,360,546
GOODWILL -- NET (Note 2).................................... 10,023,423 8,029,875
OTHER ASSETS -- NET (Note 3)................................ 2,526,562 1,585,738
----------- -----------
TOTAL............................................. $21,927,299 $17,826,716
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4)................ $ 6,448 $ 2,000,000
Accounts payable.......................................... 42,599 203,222
Accrued film rentals...................................... 240,170 193,322
Accrued payrolls.......................................... 282,348 203,845
Accrued property taxes and other liabilities.............. 1,132,126 452,792
----------- -----------
Total current liabilities......................... 1,703,691 3,053,181
LONG-TERM DEBT, less current portion (Note 4)............... 6,590,561
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
STOCKHOLDERS' EQUITY (Note 5):
Series preferred stock, 100,000 shares authorized, no
shares issued
Series A preferred stock, $.01 par value, 400,000 shares
authorized, 152,038 and 151,739 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 15,203,800 15,173,900
Common stock, $.01 par value; 200,000 shares authorized,
100,784 and 98,320 shares issued and outstanding at
December 31, 1997 and 1996, respectively............... 1,008 983
Additional paid-in capital................................ 99,712 97,295
Stockholder notes receivable.............................. (116,079) (116,436)
Accumulated deficit....................................... (1,555,394) (382,207)
----------- -----------
Total stockholders' equity........................ 13,633,047 14,773,535
----------- -----------
TOTAL............................................. $21,927,299 $17,826,716
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 105
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31,
1997 1996
------------ -------------------
<S> <C> <C>
REVENUES:
Admissions................................................ $10,367,555 $ 787,291
Concessions............................................... 8,097,921 609,634
Other..................................................... 296,102 23,005
----------- ----------
Total............................................. 18,761,578 1,419,930
COSTS AND EXPENSES:
Cost of operations:
Film rentals........................................... 4,483,842 378,199
Concession supplies.................................... 1,462,163 110,875
Salaries and wages..................................... 3,064,974 275,754
Facility leases........................................ 3,311,740 207,339
Advertising............................................ 755,337 46,155
Utilities and other.................................... 3,024,285 200,786
General and administrative expenses....................... 1,900,892 576,574
Depreciation and amortization............................. 1,479,090 102,896
----------- ----------
Total............................................. 19,482,323 1,898,578
----------- ----------
OPERATING LOSS.............................................. (720,745) (478,648)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (352,509)
Amortization of debt issue costs.......................... (54,907)
Interest income and other expense, net (Note 4)........... (28,069) 96,441
----------- ----------
LOSS BEFORE INCOME TAX EXPENSE.............................. (1,156,230) (382,207)
INCOME TAX EXPENSE.......................................... 16,957
----------- ----------
NET LOSS.................................................... (1,173,187) (382,207)
PREFERRED STOCK DIVIDENDS................................... (911,328) (301,803)
----------- ----------
NET LOSS APPLICABLE TO COMMON STOCK......................... $(2,084,515) $ (684,010)
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 106
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM
MAY 10, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK
--------------------- ---------------- ADDITIONAL SHAREHOLDER
SHARES SHARES PAID-IN NOTES ACCUMULATED
ISSUED AMOUNT ISSUED AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
------- ----------- ------- ------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital stock issuance... 151,739 $15,173,900 98,320 $ 983 $97,295 $(151,210) $ -- $15,120,968
Net loss................. (382,207) (382,207)
Payment of stockholder
notes receivable....... 34,774 34,774
------- ----------- ------- ------ ------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1996...... 151,739 15,173,900 98,320 983 97,295 (116,436) (382,207) 14,773,535
Capital stock issuance... 299 29,900 2,464 25 2,417 32,342
Net loss................. (1,173,187) (1,173,187)
Payment of stockholder
notes receivable....... 357 357
------- ----------- ------- ------ ------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1997...... 152,038 $15,203,800 100,784 $1,008 $99,712 $(116,079) $(1,555,394) $13,633,047
======= =========== ======= ====== ======= ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 107
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31,
1997 1996
------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(1,173,187) $ (382,207)
Noncash items in net loss:
Depreciation........................................... 642,259 39,179
Amortization........................................... 891,738 63,717
Cash from (used for) working capital:
Inventories............................................ (23,705)
Prepaid expenses and other............................. (224,013) (40,588)
Accounts payable....................................... (160,623) 203,845
Accrued liabilities.................................... 804,685 849,336
----------- ------------
Net cash from operating activities................ 757,154 733,282
----------- ------------
INVESTING ACTIVITIES:
Acquisitions of theater properties and equipment.......... (4,212,426) (12,386,187)
Additions to theater properties and equipment............. (4,555,736) (181,707)
Increase in other assets.................................. (278,710) (611,673)
----------- ------------
Net cash used for investing activities............ (9,046,872) (13,179,567)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from the issuance of debt........................ 6,600,000 2,000,000
Payments of debt.......................................... (2,002,991)
Increase in debt issue costs.............................. (772,950)
Proceeds from the issuance of stock....................... 32,342 15,120,968
Payments on stockholder notes receivable.................. 357 34,774
----------- ------------
Net cash from financing activities................ 3,856,758 17,155,742
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (4,432,960) 4,709,457
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 4,709,457
----------- ------------
End of period............................................. $ 276,497 $ 4,709,457
=========== ============
SUPPLEMENTAL INFORMATION:
Stock issued for notes receivable......................... $ $ 151,210
=========== ============
Cash paid for interest.................................... $ 261,607 $
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 108
SILVER CINEMAS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Silver Cinemas International, Inc. and its wholly-owned
subsidiary, Silver Cinemas, Inc. (collectively referred to as the "Company").
All intercompany accounts and transactions have been eliminated.
Business -- The Company owns or leases and operates 25 motion picture
theaters (154 screens) in 9 states and manages 2 theaters (11 screens) for
another party at December 31, 1997.
Management Estimates -- In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and
revenues and expenses for the period. Actual results could differ significantly
from those estimates.
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.
Cash and Cash Equivalents consist of operating funds held in financial
institutions, petty cash held by the theaters and highly liquid investments with
original maturities of three months or less when purchased.
Inventories of concession products are stated at the lower of cost
(first-in, first-out method) or market.
Theater Properties and Equipment are stated at cost assigned as part of the
acquisitions (see Note 2) less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows: buildings -- 20 years and theater
furniture and equipment -- 10 years. Leasehold interests and improvements are
amortized using the straight-line method over the lesser of the lease period or
the estimated useful lives of the leasehold improvements.
Goodwill is amortized on a straight-line basis over a 20-year period. In
the event that facts and circumstances indicated that goodwill may be impaired,
an evaluation of continuing value would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with this
asset would be compared to its carrying amount to determine if a write down to
market value or discounted cash flows value is required. No adjustments were
required at December 31, 1997 or 1996.
Other Assets, as applicable, are amortized using the straight-line method
over five years, and over the four to six year terms of the noncompete and debt
agreements.
Advertising costs are expensed when incurred.
Deferred Income Taxes are provided under the liability method for temporary
differences between revenue and expenses recognized for tax return and financial
reporting purposes.
Financial Instrument disclosure requirements include the estimated fair
value of these assets and liabilities. Cash and cash equivalents, accounts
receivable, 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 the Company's debt
obligations were determined to approximate their carrying values since (i) a
substantial amount of the December 31, 1997, debt obligations were issued at
fair market value during 1997 and (ii) long-term debt amounts are interest rate
variable in nature.
F-8
<PAGE> 109
SILVER CINEMAS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
In separate transactions, the Company acquired certain assets and
businesses as follows:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER NUMBER
PURCHASE OF OF EFFECTIVE
SELLER PRICE THEATERS SCREENS DATE
------ ----------- -------- ------- -------------
<S> <C> <C> <C> <C>
1996
A.................... $ 580,693 4 22 November 1996
B.................... 11,805,494 14 80 November 1996
----------- -- ---
$12,386,187 18 102
=========== == ===
1997
C.................... $ 370,231 1 6 January 1997
D.................... 2,710,889 2 19 January 1997
E.................... 1,097,200 2 12 April 1997
F.................... 34,106 1 4 May 1997
----------- -- ---
$4,212,426 6 41
=========== == ===
</TABLE>
The Company's acquisitions have been accounted for under the purchase
method of accounting. Under the purchase method of accounting, the results of
operations of the acquired businesses are included in the accompanying
consolidated financial statements as of their respective acquisition dates. The
assets and liabilities of acquired businesses are included based on an
allocation of the purchase price as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Inventories................................ $ 23,577 $ 100,512
Theater properties and equipment........... 1,414,099 3,218,017
Noncompete agreements...................... 250,000 1,000,000
Goodwill................................... 2,524,750 8,067,658
---------- -----------
$4,212,426 $12,386,187
========== ===========
</TABLE>
Goodwill has been recorded as an intangible asset and is presented net of
accumulated amortization of $568,985 and $37,783 at December 31, 1997 and 1996,
respectively. Pro forma financial information for 1997 has been omitted as the
effect is immaterial. The Company paid $81,505 and $184,500 to a principal
stockholder (the "Stockholder") for advisory services for the year ended
December 31, 1997 and the period from May 10, 1996 (date of inception) to
December 31, 1996, respectively.
F-9
<PAGE> 110
SILVER CINEMAS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER ASSETS
Other assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Noncompete agreements....................... $1,250,000 $1,000,000
Debt issue costs............................ 772,949
Organization costs.......................... 52,431 49,153
---------- ----------
Total............................. 2,075,380 1,049,153
Less accumulated amortization............... (383,982) (25,935)
---------- ----------
Net......................................... 1,691,398 1,023,218
Employee notes receivable................... 186,911 261,435
Equipment, lease and other deposits......... 648,253 301,085
---------- ----------
Total............................. $2,526,562 $1,585,738
========== ==========
</TABLE>
4. DEBT
The following is a summary of debt at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Revolving loan facility.................... $6,500,000
Other...................................... 97,009
Note payable to stockholder (interest at
prime plus 2%, paid in April 1997)....... $ 2,000,000
---------- -----------
Total long-term debt............. 6,597,009 2,000,000
Less current portion....................... (6,448) (2,000,000)
---------- -----------
Long-term debt, less current portion....... $6,590,561 $ --
========== ===========
</TABLE>
Credit Agreement -- In April 1997, the Company entered into a Credit
Agreement with a group of lenders, which included a reducing, revolving loan
facility and a letter of credit facility. Under the reducing, revolving loan
facility, the initial commitment is $25 million, subject to certain
restrictions, with quarterly reductions of $1,250,000 scheduled June 30, 1999
through March 31, 2001 and $1,875,000 through March 31, 2003. As of December 31,
1997, the Company did not comply with the leverage and EBITDA provisions. These
provisions of the Credit agreement were amended as of January 16, 1998 and March
25, 1998, and the Company obtained a waiver for past noncompliance. As such,
there was no unused available credit at December 31, 1997.
Amounts outstanding under the revolving loan facility bear quarterly
interest based on one of the following rates at the Company's option: (i) a
variable rate based on the higher of the administrative agent's established
commercial lending rate or the federal funds rate plus 0.5% or (ii) a variable
rate based on the Eurodollar rate, adjusted in accordance with certain financial
ratios. The weighted average interest rate and current interest rate at December
31, 1997, was 7.57% and 7.69%, respectively. The Company pays a commitment fee
to the lenders at the rate of 0.375 to 0.5% per annum on the average daily
unused portion of the commitment amounts for both the revolving loan and letter
of credit facilities.
The Credit Agreement contains financial and operating covenants requiring,
among other items, the maintenance of certain financial standards, as defined,
including interest coverage, leverage and EBITDA. In addition, the Credit
Agreement contains various covenants which, among other things, limit the
Company's ability to incur additional indebtedness, restrict the Company's
ability to invest in and divest of assets, and restrict the Company's ability to
pay dividends or redeem or purchase its stock.
F-10
<PAGE> 111
SILVER CINEMAS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, the scheduled maturities of debt were as follows:
<TABLE>
<S> <C>
1998............................................. $ 6,448
1999............................................. 7,122
2000............................................. 7,868
2001............................................. 8,692
2002............................................. 4,634,601
Thereafter....................................... 1,932,278
----------
$6,597,009
==========
</TABLE>
5. CAPITAL STOCK
Cumulative Preferred Stock -- The Company has 500,000 authorized shares of
$.01 par value preferred stock at December 31, 1997, with 400,000 shares
designated as voting Series A Preferred Stock ("Series A"). Each outstanding
Series A share bears a $6.00 cumulative annual dividend which is payable if
earned and declared, if the Series A preferred stock is redeemed or if the
Company is liquidated. The Company may redeem all Series A shares at any time
for $100 per share plus dividends in arrears. As of December 31, 1997 and 1996,
aggregate Series A preferred stock dividends of $1,213,131 and $301,803,
respectively, are in arrears.
At December 31, 1997, the Company has reserved 98,752 and 491 shares of
Series A Preferred Stock for potential issuances at $100 per share to the
Stockholder and certain officers, respectively.
Stockholders' Agreement -- The Company and its stockholders have entered
into a stockholders' agreement which provides certain restrictions and rights
related to the transfer, sale or purchase of capital shares.
6. LEASES AND OTHER COMMITMENTS
Leases -- The Company conducts a significant part of its theater operations
in leased premises under noncancelable operating leases with terms of 1 to 15
years. In addition to the minimum annual lease payment, most of these leases
provide for contingent rentals based on operating results and require the
payment of taxes, insurance and other costs applicable to the property.
Generally, these leases include renewal options for various periods at
stipulated rates. Rent expense for the year ended December 31, 1997 and for the
period from May 10, 1996 (date of inception) to December 31, 1996 (primarily
incurred in November and December 1996) totaled $3,177,013 and $234,293,
respectively.
Future minimum payments under noncancelable operating leases with initial
or remaining terms in excess of one year at December 31, 1997, are due as
follows:
<TABLE>
<S> <C>
1998............................................ $ 3,596,042
1999............................................ 3,351,775
2000............................................ 2,705,573
2001............................................ 2,366,104
2002............................................ 1,699,912
Thereafter...................................... 9,472,899
-----------
Total................................. $23,192,305
===========
</TABLE>
After December 31, 1997, the Company entered into a lease agreement that is
contingent on the lessor's completing construction of a theater facility. Upon
satisfaction of the contingency, the lease agreement will require future minimum
lease payments estimated to be $5.5 million over 20 years.
F-11
<PAGE> 112
SILVER CINEMAS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Letters of Credit and Collateral -- At December 31, 1997 and 1996, the
Company has an outstanding letter of credit of $15,000 in connection with
requirements of a film distributor.
7. CONTINGENCIES
The Company, in the normal course of business, is party to various legal
actions. Management believes that the potential exposure, if any, from such
matters would not have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
8. INCOME TAXES
The 1997 tax provision results from state income taxes. Deferred tax
liabilities (assets) at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Gross deferred tax assets:
Net operating loss carryforwards......... $(1,700,000) $(385,000)
Book accruals and reserves in excess of
cumulative tax deductions............. (50,000) (15,000)
----------- ---------
Total............................ (1,750,000) (400,000)
Gross deferred tax liabilities --
Tax depreciation and amortization in
excess of book........................ 400,000 50,000
Valuation allowance........................ 1,350,000 350,000
----------- ---------
$ -- $ --
=========== =========
</TABLE>
The Company has provided a full valuation allowance for net deferred tax
assets due to the lack of an earnings history. Gross deferred tax assets at
December 31, 1997, include net operating loss carryforwards of approximately
$1,700,000 for income tax purposes. These net operating loss carryforwards begin
to expire in 2011 and may be limited in use in the event of significant changes
in the Company's ownership.
9. SUBSEQUENT AND PENDING TRANSACTIONS
In March 1998, the Company issued $10 million of Series A preferred stock
and common stock to the Stockholder.
The Company has entered into definitive agreements to acquire substantially
all of the assets of The Landmark Theatre Group and StarTime Cinema, Inc. and
three theaters of AMC Entertainment, Inc. for a total purchase price of
approximately $85.7 million.
F-12
<PAGE> 113
SILVER CINEMAS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
-----------
<S> <C>
CURRENT ASSETS:
Cash and equivalents...................................... $ 115,905
Inventories............................................... 147,792
Prepaid expenses and other................................ 211,082
-----------
Total current assets.............................. 474,779
THEATER PROPERTIES AND EQUIPMENT:
Land...................................................... 610,000
Buildings................................................. 3,880,000
Leasehold interests and improvements...................... 2,165,228
Theater furniture and equipment........................... 7,041,080
Theater under construction................................ 292,333
-----------
Total............................................. 13,988,641
Less accumulated depreciation and amortization............ (936,753)
-----------
Theater properties and equipment, net..................... 13,051,888
GOODWILL -- NET............................................. 10,711,405
OTHER ASSETS -- NET......................................... 2,934,696
-----------
TOTAL............................................. $27,172,768
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt......................... $ 6,000
Accounts payable.......................................... 599,927
Accrued film rentals...................................... 259,671
Accrued payrolls.......................................... 304,887
Accrued property taxes and other liabilities.............. 149,667
-----------
Total current liabilities......................... 1,320,152
LONG-TERM DEBT, less current portion........................ 2,714,162
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series preferred stock, 10,000 shares authorized, no
shares issued.......................................... --
Series A preferred stock, $.01 par value, 400,000 shares
authorized, 253,013 shares issued and outstanding...... 25,301,322
Common stock, $.01 par value, 200,000 shares authorized,
101,862 shares issued and outstanding.................. 1,019
Additional paid-in capital................................ 100,843
Stockholder notes receivable.............................. (214,443)
Accumulated deficit....................................... (2,050,287)
-----------
Total stockholders' equity........................ 23,138,454
-----------
TOTAL............................................. $27,172,768
===========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-13
<PAGE> 114
SILVER CINEMAS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
UNAUDITED
------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Admissions................................................ $2,560,296 $2,220,040
Concessions............................................... 2,129,201 1,703,857
Other..................................................... 113,230 44,098
---------- ----------
Total............................................. 4,802,727 3,967,995
COST OF REVENUES:
Film Rentals.............................................. 985,759 950,868
Concession supplies....................................... 309,394 310,742
Salaries and wages........................................ 855,060 621,000
Facility leases........................................... 779,830 621,850
Advertising............................................... 144,303 135,621
Utilities and other....................................... 953,242 767,000
General and administrative.................................. 590,160 388,400
Depreciation and amortization............................... 475,850 304,150
---------- ----------
Total............................................. 5,093,598 4,099,631
---------- ----------
OPERATING LOSS.............................................. (290,871) (131,636)
OTHER INCOME (EXPENSE):
Interest expense............................................ (156,542) (28,404)
Amortization of debt issuance costs......................... (34,119)
Interest income and other expense, net...................... 9,802
---------- ----------
LOSS BEFORE INCOME TAX EXPENSE.............................. (471,730) (160,040)
INCOME TAX EXPENSE.......................................... 23,162 2,299
---------- ----------
NET INCOME (LOSS)........................................... (494,892) (162,339)
PREFERRED STOCK DIVIDENDS................................... (253,055) (227,982)
---------- ----------
NET LOSS APPLICABLE TO COMMON STOCK......................... $ (747,947) $ (390,321)
========== ==========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-14
<PAGE> 115
SILVER CINEMAS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
UNAUDITED
--------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $ (494,892) $ (162,339)
----------- -----------
Noncash items in net income (loss):
Depreciation...................................... 255,617 103,346
Amortization...................................... 254,352 200,804
Cash from (used for) working capital:
Inventories....................................... (23,767)
Prepaid expenses and other........................ 53,519 (41,333)
Accounts payable.................................. 557,328 (15,096)
Accrued liabilities............................... (940,419) (281,073)
----------- -----------
Net cash used for operating activities....... (314,495) (219,458)
INVESTING ACTIVITIES:
Acquisitions of theater properties and equipment....... (5,134,613) (3,027,393)
Additions to theater properties and equipment.......... (386,472) (775,867)
Increase in other assets............................... (448,465) (181,802)
----------- -----------
Net cash used for investing activities....... (5,969,550) (3,985,062)
FINANCING ACTIVITIES:
Payments of debt....................................... (3,876,847)
Proceeds from the issuance of stock.................... 10,000,300 30,542
----------- -----------
Net cash from financing activities........... 6,123,453 30,542
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (160,592) (4,173,978)
CASH AND CASH EQUIVALENTS:
Beginning of period.................................... 276,497 4,709,457
----------- -----------
End of period.......................................... $ 115,905 $ 535,479
=========== ===========
SUPPLEMENTAL INFORMATION:
Stock issued for notes receivable...................... $ 98,364 $ --
=========== ===========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-15
<PAGE> 116
SILVER CINEMAS INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited Interim Condensed Consolidated
Financial Statements of Silver Cinemas International, Inc. and subsidiaries (the
"Company") include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the Company's financial position as of
March 31, 1998, and the results of its operations for the three months ended
March 31, 1998 and 1997. Due to seasonality of the Company's operations, the
results of its operations for the interim periods ended March 31, 1998 and 1997,
may not be indicative of the 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 Silver Cinemas International, Inc. and subsidiaries and
accompanying notes for the years ended December 31, 1997 and for the period from
May 10, 1996 (date of inception) to December 31, 1996.
2. EQUITY ISSUANCE
In March 1998, the Company issued 99,595 shares of its Series A preferred
stock and 40,500 shares of its common stock to Brentwood Associates Buyout Fund
II, L.P. for $10 million.
3. SUBSEQUENT EVENTS
In April 1998, the Company issued 29,878 shares of its Series A preferred
stock and 12,151 shares of its common stock to DLJ Fund Investment Partners II,
L.P. for $3 million. Also in April 1998, the Company completed an offering of
$100.0 million of Senior Subordinated Notes due 2005 in a private placement
under Section 144A of the Securities Act of 1933. The Company used the net
proceeds to fund the acquisition of substantially all of the assets of The
Landmark Theatre Group and StarTime Cinema, Inc. and three theaters of AMC
Entertainment, Inc., repay borrowings under the credit agreement, and general
corporate purposes as follows:
<TABLE>
<S> <C>
Landmark Acquisition...................................... $ 62,204
StarTime Acquisition...................................... 17,135
AMC Acquisition........................................... 1,285
Repay Old Credit Facility................................. 2,625
Transaction fees and expenses(1).......................... 5,000
Excess cash proceeds...................................... 14,751
--------
Total Uses...................................... $103,000
========
</TABLE>
F-16
<PAGE> 117
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
The Landmark Theatre Group
We have audited the accompanying consolidated balance sheet of The Landmark
Theatre Group as of December 31, 1997, and the related consolidated statements
of operations, shareholder's equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Landmark Theatre Group as
of December 31, 1997, and the results of operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 27, 1998
F-17
<PAGE> 118
THE LANDMARK THEATRE GROUP
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Cash and cash equivalents................................... $ 2,004,000
Accounts receivable......................................... 355,000
Inventories................................................. 145,000
Prepaid expenses............................................ 293,000
Deferred tax assets......................................... 500,000
-----------
Total current assets.............................. 3,297,000
Property and equipment, net................................. 35,023,000
Goodwill, net of accumulated amortization of $1,401,000..... 21,948,000
Other assets................................................ 481,000
-----------
TOTAL............................................. $60,749,000
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses....................... $ 5,475,000
Current portion of notes payable............................ 170,000
Current portion of capital lease obligations................ 288,000
Payable to parent company................................... 1,800,000
-----------
Total current liabilities......................... 7,733,000
Notes payable, less current portion......................... 1,211,000
Deferred tax liabilities.................................... 5,760,000
Capital lease obligations, less current portion............. 4,702,000
Other long-term liabilities................................. 34,000
-----------
Total liabilities................................. 19,440,000
-----------
SHAREHOLDER'S EQUITY:
Common stock, no par value; authorized, issued and
outstanding 100 shares
Paid-in capital........................................... 41,046,000
Retained earnings......................................... 263,000
-----------
Total shareholder's equity........................ 41,309,000
-----------
TOTAL............................................. $60,749,000
===========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 119
THE LANDMARK THEATRE GROUP
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
REVENUES:
Admissions................................................ $45,903,000
Concessions............................................... 10,061,000
Other..................................................... 990,000
-----------
Total revenues.................................... 56,954,000
-----------
COST OF REVENUES:
Film rentals and advertising.............................. 23,212,000
Cost of concessions....................................... 2,096,000
Payroll and related expenses.............................. 9,448,000
Occupancy costs........................................... 7,071,000
Other theatre operating expenses.......................... 3,995,000
-----------
Total cost of revenues............................ 45,822,000
General and administrative.................................. 5,191,000
Depreciation and amortization............................... 4,929,000
-----------
Total expenses.................................... 55,942,000
-----------
INCOME FROM OPERATIONS...................................... 1,012,000
INTEREST EXPENSE............................................ 748,000
-----------
INCOME BEFORE INCOME TAXES.................................. 264,000
INCOME TAX PROVISION........................................ 496,000
-----------
NET LOSS.................................................... $ (232,000)
===========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 120
THE LANDMARK THEATRE GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- --------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996................. $ -- $36,165,000 $ 495,000 $36,660,000
Forgiveness of payable to parent company... -- 4,881,000 4,881,000
Net loss for the year ended December 31,
1997..................................... (232,000) (232,000)
---- ----------- --------- -----------
BALANCE, DECEMBER 31, 1997................. $ -- $41,046,000 $ 263,000 $41,309,000
==== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE> 121
THE LANDMARK THEATRE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (232,000)
Noncash items in net loss
Depreciation and amortization............................. 4,929,000
Deferred income taxes..................................... (150,000)
Cash from (used for) working capital
Receivables............................................... (140,000)
Inventories............................................... (16,000)
Prepaid expenses.......................................... 132,000
Other assets.............................................. 15,000
Accounts payable and accrued expenses..................... (17,000)
Other liabilities......................................... (10,000)
-----------
Net cash provided by operating activities......... 4,511,000
-----------
INVESTING ACTIVITIES:
Additions to theatre property and equipment............... (1,005,000)
Acquisitions of theatre property and equipment............ (2,375,000)
-----------
Net cash (used in) investing activities........... (3,380,000)
-----------
FINANCING ACTIVITIES:
Increase in payable to parent company..................... 1,894,000
Repayment of notes payable and capital leases............. (2,543,000)
Proceeds from note payable................................ 330,000
-----------
Net cash (used in) financing activities........... (319,000)
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 812,000
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 1,192,000
-----------
End of period............................................. $ 2,004,000
===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest.................................................. $ 715,000
===========
Income taxes................................................ $ 62,000
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ITEM:
Forgiveness of payable to parent company.................. $ 4,881,000
===========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE> 122
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Landmark Theatre Group (the "Company") is a wholly owned subsidiary of
Metromedia International Group ("Metromedia"). The principal subsidiaries of the
Company are Landmark Theatre Corporation and Seven Gables Corporation, which
operate first-run art and specialty motion picture theatres in ten states, with
a significant portion of revenues derived from California. At December 31, 1997,
the Company operated 140 screens in 49 theatres.
Film Exhibition Revenues -- Theatre admission revenues and related film
rental expense are recognized as films are exhibited. Film rental expense
represents the distributors' shares of gross box office receipts.
Cash Equivalents -- Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Inventory -- Inventory consists of concession products on hand at the
theatres. Inventory is valued at the lower of cost (using the first-in,
first-out method) or market.
Property and Equipment -- Property and equipment are carried at cost. The
depreciable lives of buildings and equipment are 25 years and 3 to 7 years,
respectively. Leasehold improvements are amortized over the lesser of the terms
of the respective leases or the estimated useful lives of the improvements. The
Company uses the straight-line method to depreciate all depreciable assets.
Maintenance and repairs are expensed as incurred.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows without interest costs expected to be generated by the asset. If the
carrying value of the assets exceeds the expected future cash flows, an
impairment exists and is measured by the amount by which the carrying amount of
the assets exceeds the estimated fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell.
Goodwill -- Goodwill has been recognized for the excess of the purchase
price over the value of the identifiable net assets acquired. Goodwill is being
amortized over 25 years using the straight-line method.
Management continuously monitors and evaluates the realizability of
recorded intangibles to determine whether their carrying values have been
impaired. In evaluating the value and future benefits of the goodwill, their
carrying value would be reduced by the excess, if any, of their carrying value
over management's best estimate of undiscounted future cash flows over the
remaining amortization period. The Company believes that the carrying value of
goodwill is not impaired.
Income Taxes -- The Company accounts for its income taxes in accordance
with the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109
requires the asset and liability method of accounting for deferred income taxes.
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.
Financial Instruments -- The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," include cash and
cash equivalents, accounts receivable, accounts payable and long-term debt. The
Company believes that the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are a reasonable
estimate of their fair value.
F-22
<PAGE> 123
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Land............................................ $ 1,407,000
Building and improvements....................... 6,054,000
Leasehold interest.............................. 18,806,000
Leasehold improvements.......................... 8,355,000
Theatre and office equipment.................... 4,729,000
Construction in progress........................ 476,000
-----------
39,827,000
Less accumulated depreciation and
amortization.................................. (4,804,000)
-----------
$35,023,000
===========
</TABLE>
Depreciation expense for the year ended December 31, 1997, was $3,990,000.
The assets acquired through capitalized theatre leases at December 31,
1997, amount to $4,633,000, and the assets acquired through capitalized
equipment leases amount to $1,150,000 for this same period. Accumulated
amortization of assets under capitalized leases was $1,295,000 at December 31,
1997. The related depreciation expense for the year ended December 31, 1997 was
$414,000.
3. NOTES PAYABLE
Notes payable represent obligations incurred in connection with the
acquisition of theatres. These notes are collateralized by certain property and
equipment.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Cormorant Associates (monthly payments of $12,700
through October 2003 with the final payment of
$611,000; interest rate of 9%)...................... $1,051,000
C. T. Ting (annual payments of $110,000 through
January 2000, interest rate of 10%)................. 330,000
----------
1,381,000
Less current portion of long-term notes payable....... (170,000)
----------
$1,211,000
==========
</TABLE>
A summary of the future annual maturities is as follows:
<TABLE>
<S> <C>
1998............................................. $ 170,000
1999............................................. 176,000
2000............................................. 182,000
2001............................................. 79,000
2002............................................. 86,000
Thereafter....................................... 688,000
----------
$1,381,000
==========
</TABLE>
F-23
<PAGE> 124
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The Company's taxable income for the year ended December 31, 1997, was
included in a federal income tax return filed by a consolidated group of which
Metromedia International Group, Inc. was the parent.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current................................................. $ 646,000
Deferred................................................ (150,000)
---------
Total income tax expense...................... $ 496,000
=========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Statutory federal income tax rate....................... 34%
State income tax, net of federal tax benefit............ 6
Nondeductible amortization -- goodwill.................. 142
Other nondeductible expenses............................ 6
---
188%
===
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred tax assets:
Accrued expenses...................................... $ 110,000
State taxes........................................... 350,000
Miscellaneous......................................... 40,000
----------
Total gross deferred tax assets............... 500,000
Valuation allowance
----------
Net deferred tax assets....................... $ 500,000
==========
Deferred tax liabilities -- depreciation................ $5,760,000
==========
</TABLE>
5. LEASES
The Company has long-term operating and capital leases, primarily involving
theatre facilities and equipment. The leases have varying terms and a portion
contains renewal options. Future minimum lease payments under noncancelable
operating leases consisted of the following:
<TABLE>
<S> <C>
1998.................................................... $ 4,860,000
1999.................................................... 4,471,000
2000.................................................... 3,777,000
2001.................................................... 3,609,000
2002.................................................... 3,545,000
Thereafter.............................................. 28,857,000
-----------
$49,119,000
===========
</TABLE>
F-24
<PAGE> 125
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The terms of an operating lease obligate the Company to incur costs to
bring one of its theatres into compliance with seismic requirements. The Company
estimates that related costs will approximate $1,250,000.
Certain theatres are leased under operating lease agreements which are
subject to rent adjustments based on the consumer price index and expire at
various dates through February 2015. Total rent expense (including contingent
rentals of $536,000) was $5,786,000 for the year ended December 31, 1997.
Future minimum lease payments under capital leases together with the
present value of minimum lease payments consisted of the following:
<TABLE>
<S> <C>
1998.................................................... $ 799,000
1999.................................................... 798,000
2000.................................................... 834,000
2001.................................................... 538,000
2002.................................................... 538,000
Thereafter.............................................. 8,223,000
-----------
11,730,000
Less amount representing interest....................... 6,740,000
-----------
Present value of future minimum lease payments.......... 4,990,000
Less current portion.................................... 288,000
-----------
$ 4,702,000
===========
</TABLE>
The Company has entered into lease agreements that are contingent on the
lessors' completing construction of two theatre facilities. Upon satisfaction of
this contingency, the lease agreements will require future minimum lease
payments estimated to be approximately $13,000,000 over 15 to 25 years.
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Company has employment agreements with certain
principal officers providing for total minimum future annual payments as
follows:
<TABLE>
<S> <C>
1998..................................................... $1,061,000
1999..................................................... 1,088,000
2000..................................................... 1,013,000
2001..................................................... 246,000
----------
$3,408,000
==========
</TABLE>
The employment contracts also provide for additional payments of
approximately $2.2 million upon the occurrence of defined events including a
sale of the Company's assets (see Note 10).
The Company is involved in various lawsuits, claims and inquiries incurred
in the normal course of business. Management, based in part upon the advice of
its legal counsel, believes that resolution of these matters will not have a
material adverse effect on the financial position of the Company or on the
results of its operations.
7. RELATED PARTIES
On July 10, 1997, Metromedia and Metro-Goldwyn ("MGM"), through its holding
company, P&K Acquisition Corp., sold certain entertainment assets of Metromedia
(excluding the Landmark Theatre Group) to MGM. The sale was for an aggregate
cash consideration of $573 million. Under the terms of the agreement,
F-25
<PAGE> 126
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Metromedia sold its film and television library and the production and
distribution activities which include Orion Pictures Corporation ("Orion").
The Company licenses films from Orion for exhibition in its theatres. Terms
for film licensing agreements between the parties are comparable to those the
Company enters into with independent third-party distributors. Orion was paid
$426,000 for film rental expense for the six months ended June 30, 1997.
8. 401(k) PLAN
The Company has a 401(k) plan covering substantially all employees meeting
certain eligibility requirements. Participants may make contributions to the
plan from 1% to 15% of their gross salary and are fully vested. Employer
contributions to the plan, which are made at the discretion of the Company, are
made up to 50% of participant contributions to a maximum of 6% of compensation.
The 401(k) contributions expense charged to operations for the year ended
December 31, 1997, was $120,000.
9. ACQUISITIONS
Effective January 6, 1997, the Company exercised its option to purchase a
theatre which was previously classified as a capital lease. The acquisition
price was $530,000 payable in three equal annual installments of $110,000 plus a
$200,000 down payment.
The Company acquired two theatres in June and August 1997 for total cash
consideration of $2,375,000. These acquisitions have been accounted for under
the purchase method of accounting. Under the purchase method of accounting, the
results of operations of the acquired businesses are included in the
accompanying consolidated financial statements as of their respective
acquisition dates. The assets of the acquired theaters are included based on an
allocation of the purchase price as follows:
<TABLE>
<S> <C>
Theater equipment........................................ $ 260,000
Leasehold interests and improvements..................... 2,115,000
----------
$2,375,000
==========
</TABLE>
Pro forma financial information for 1997 has been omitted as the effect is
immaterial.
10. SALE AGREEMENT
On December 18, 1997, Metromedia entered into an agreement to sell the
assets including the assumption of certain liabilities of the Company to Silver
Cinemas, Inc. for approximately $62.0 million.
F-26
<PAGE> 127
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder of
The Landmark Theatre Group:
We have audited the accompanying consolidated balance sheets of The
Landmark Theatre Group (the Company) as of December 31 and March 31, 1996, and
the related consolidated statements of operations, changes in shareholder's
equity and cash flows for the six months ended December 31, 1996, three months
ended June 30, 1996 and the year ended March 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Landmark
Theatre Group as of December 31 and March 31, 1996, and the results of its
operations and its cash flows for the six months ended December 31, 1996, three
months ended June 30, 1996 and the year ended March 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, effective
July 2, 1996, Metromedia International Group, Inc. acquired all of the
outstanding stock of The Samuel Goldwyn Company including the Company in a
business combination accounted for as a purchase. As a result of the
acquisition, the consolidated financial information for the periods after the
acquisition is presented on a different cost basis than for the periods before
the acquisition and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
Los Angeles, California
December 19, 1997
F-27
<PAGE> 128
THE LANDMARK THEATRE GROUP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,192,000 $ 1,115,000
Accounts receivable......................................... 215,000 203,000
Inventories................................................. 129,000 161,000
Prepaid expenses............................................ 425,000 136,000
Deferred tax assets......................................... 500,000 518,000
----------- -----------
Total current assets.............................. 2,461,000 2,133,000
Property and equipment, net................................. 35,632,000 31,995,000
Goodwill, net of accumulated amortization of $462,000 and
$974,000 as of December 31, 1996 and March 31, 1996,
respectively.............................................. 22,887,000 3,619,000
Other assets................................................ 496,000 488,000
----------- -----------
Total assets...................................... $61,476,000 $38,235,000
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses....................... $ 5,492,000 $ 4,178,000
Current portion of notes payable............................ 1,760,000 494,000
Current portion of capital lease obligations................ 256,000 240,000
Payable to parent company................................... 4,787,000 5,534,000
----------- -----------
Total current liabilities......................... 12,295,000 10,446,000
Notes payable, less current portion......................... 1,050,000 2,685,000
Deferred tax liabilities.................................... 5,910,000 5,904,000
Capital lease obligations, less current portion............. 5,517,000 5,711,000
Other long-term liabilities................................. 44,000 --
----------- -----------
Total liabilities................................. 24,816,000 24,746,000
----------- -----------
Shareholder's equity:
Common stock, no par value. Authorized, issued and
outstanding 100 shares................................. -- --
Paid-in capital........................................... 36,165,000 11,567,000
Retained earnings......................................... 495,000 1,922,000
----------- -----------
36,660,000 13,489,000
----------- -----------
Total liabilities and shareholder's equity........ $61,476,000 $38,235,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 129
THE LANDMARK THEATRE GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, MARCH 31,
1996 1996 1996
------------ ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Revenues:
Admissions........................................ $23,960,000 $ 9,314,000 $41,452,000
Concessions....................................... 5,044,000 2,060,000 8,771,000
Other............................................. 577,000 202,000 920,000
----------- ----------- -----------
Total revenues............................ 29,581,000 11,576,000 51,143,000
----------- ----------- -----------
Cost of revenues:
Film rentals and advertising...................... 11,995,000 5,078,000 21,543,000
Cost of concessions............................... 1,039,000 456,000 1,877,000
Payroll and related expenses...................... 4,610,000 2,128,000 8,349,000
Occupancy costs................................... 3,689,000 1,708,000 6,783,000
Other theatre operating expenses.................. 1,972,000 874,000 3,553,000
----------- ----------- -----------
Total cost of revenues.................... 23,305,000 10,244,000 42,105,000
General and administrative.......................... 2,426,000 1,189,000 4,225,000
Depreciation and amortization....................... 2,237,000 906,000 3,569,000
----------- ----------- -----------
Total expenses............................ 27,968,000 12,339,000 49,899,000
----------- ----------- -----------
Income (loss) from operations....................... 1,613,000 (763,000) 1,244,000
Interest expense.................................... 458,000 237,000 716,000
----------- ----------- -----------
Income (loss) before income taxes................... 1,155,000 (1,000,000) 528,000
Provision (benefit) for income taxes................ 660,000 (353,000) 321,000
----------- ----------- -----------
Net income (loss)......................... $ 495,000 $ (647,000) $ 207,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 130
THE LANDMARK THEATRE GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
PAID-IN- RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
------------ --------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at March 31, 1995........... $ -- $11,567,000 $ 1,715,000 $13,282,000
Net income.......................... -- -- 207,000 207,000
---- ----------- ----------- -----------
Balance at March 31, 1996........... -- 11,567,000 1,922,000 13,489,000
Net loss for the three months ended
June 30, 1996..................... -- -- (647,000) (647,000)
---- ----------- ----------- -----------
Balance at June 30, 1996............ -- 11,567,000 1,275,000 12,842,000
===================================================================================================
Push-down accounting from the
acquisition by Orion Pictures
Corporation....................... -- 24,598,000 (1,275,000) 23,323,000
---- ----------- ----------- -----------
Balance at July 1, 1996............. -- 36,165,000 -- 36,165,000
Net income for the six months ended
December 31, 1996................. -- -- 495,000 495,000
---- ----------- ----------- -----------
Balance at December 31, 1996........ $ -- $36,165,000 $ 495,000 $36,660,000
==== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 131
THE LANDMARK THEATRE GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE
SIX MONTHS MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, MARCH 31,
1996 1996 1996
------------ ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 495,000 $ (647,000) $ 207,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 2,237,000 906,000 3,569,000
(Increase) decrease in receivables................... (109,000) 97,000 79,000
(Increase) decrease in inventories................... 56,000 (24,000) 36,000
(Increase) decrease in prepaid expenses.............. (136,000) (153,000) 169,000
(Increase) decrease in other assets.................. (8,000) -- 14,000
Increase (decrease) in accounts payable and accrued
expenses.......................................... 1,107,000 207,000 (995,000)
Increase (decrease) in deferred income taxes......... 658,000 (352,000) 318,000
Increase in other liabilities........................ 44,000 -- --
----------- ---------- -----------
Net cash provided by operating activities.... 4,344,000 34,000 3,397,000
----------- ---------- -----------
Cash flows from investing activities -- additions to
property and equipment............................... (2,572,000) (153,000) (2,838,000)
----------- ---------- -----------
Cash flows from financing activities:
(Repayments) borrowings from parent company.......... (1,029,000) -- 900,000
Repayment of notes payable and capital leases........ (370,000) (177,000) (849,000)
Proceeds from note payable........................... -- -- --
----------- ---------- -----------
Net cash (used in) provided by financing
activities................................. (1,399,000) (177,000) 51,000
----------- ---------- -----------
Net (decrease) increase in cash and cash
equivalents................................ 373,000 (296,000) 610,000
Cash and cash equivalents, beginning of period......... 819,000 1,115,000 505,000
----------- ---------- -----------
Cash and cash equivalents, end of period............... $ 1,192,000 $ 819,000 $ 1,115,000
=========== ========== ===========
Supplemental disclosure of cash paid for:
Interest............................................. $ 458,000 237,000 716,000
Income taxes......................................... 2,000 -- --
=========== ========== ===========
Supplemental disclosure of noncash item -- acquisitions
under capital lease.................................. $ -- $ -- $ 4,769,000
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-31
<PAGE> 132
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31 AND MARCH 31, 1996
(1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Landmark Theatre Group (the Company) was a subsidiary of Heritage
Entertainment until December 1991, when both Companies were acquired by the
Samuel Goldwyn Company (Goldwyn). The Company was then acquired by Orion
Pictures Corporation (Orion), a wholly owned subsidiary of Metromedia
International Group (Metromedia), in July 1996. The principal subsidiaries of
the Company are Landmark Theatre Corporation and Seven Gables Corporation, which
operate first-run art and specialty motion picture theaters in nine states, with
a significant portion of revenues derived from California. At March 31, 1996 and
December 31, 1996, the Company operated 140 screens in 52 theaters and 138
screens in 50 theaters, respectively.
Basis of Presentation
Effective July 2, 1996, Metromedia, a publicly traded company and parent
corporation of Orion, acquired Goldwyn and the Company in an exchange of stock.
The acquisition was accounted for using the purchase method of accounting. The
Company has applied push-down accounting reflecting the acquisition and
resulting equity in the accompanying consolidated financial statements
subsequent to the acquisition date. As a result of the acquisition, the
consolidated financial information for periods after the acquisition (Successor)
is presented on a different cost basis than for the periods before the
acquisition (Predecessor) and, therefore, is not comparable. The purchase price
for the Company (excluding Goldwyn) of $36,165,000 has been allocated to the net
assets of the Company based on their estimated fair market value at the
acquisition date. The balance of the purchase price after allocation to
identifiable net assets, $23,349,000, was allocated to goodwill.
The consolidated financial statements are presented as if the acquisition
occurred on July 1, 1996, rather than the actual purchase date of July 2, 1996.
There are no material adjustments or modifications required as a result of this
change in presentation.
The following pro forma financial information presents the results of
operations of the Company as if it had been acquired as of April 1, 1995, after
giving effect to amortization of goodwill. The pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had Metromedia and the Company constituted a single entity during such periods.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
<S> <C> <C>
Revenues................................... $41,157,000 51,143,000
Net loss................................... (314,000) (441,000)
</TABLE>
Film Exhibition Revenues
Theatre admission revenues and related film rental expense are recognized
as films are exhibited. Film rental expense represents the distributors' shares
of gross box office receipts.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Inventory
Inventory consists of concession products on hand at the theatres.
Inventory is valued at the lower of cost (using the first-in, first-out method)
or market.
F-32
<PAGE> 133
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment are carried at cost. The depreciable lives of
buildings and equipment are 25 years and 3 to 7 years, respectively. Leasehold
improvements are amortized over the lesser of the terms of the respective leases
or the estimated useful lives of the improvements. The Company uses the
straight-line method to depreciate all depreciable assets. Maintenance and
repairs are expensed as incurred.
Long-Lived Assets
Effective March 31, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to the future undiscounted cash flows without interest costs expected
to be generated by the asset. If the carrying value of the assets exceeds the
expected future cash flows, an impairment exists and is measured by the amount
by which the carrying amount of the assets exceeds the estimated fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this statement did not have
a material impact on the Company's financial position, results of operations or
liquidity.
Goodwill
Goodwill has been recognized for the excess of the purchase price over the
value of the identifiable net assets acquired. The goodwill as of March 31, 1996
resulted from the acquisition of the Company by Goldwyn in 1991. This balance
was being amortized over 20 years using the straight-line method. The goodwill
at December 31, 1996 resulting from the Orion acquisition is being amortized
over 25 years using the straight-line method.
Management continuously monitors and evaluates the realizability of
recorded intangibles to determine whether their carrying values have been
impaired. In evaluating the value and future benefits of the goodwill, their
carrying value would be reduced by the excess, if any, of their carrying value
over management's best estimate of undiscounted future cash flows over the
remaining amortization period. The Company believes that the carrying value of
goodwill is not impaired.
Payable to Parent Company
Intercompany activity relates to the financing of theatre acquisitions,
advances and repayments occurring among the Company, Orion, Goldwyn and
Metromedia in the normal course of business. Activity also relates to the tax
sharing agreement between the Company and Goldwyn.
Income Taxes
The Company accounts for its income taxes in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Statement 109 requires the asset and
liability method of accounting for deferred income taxes.
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
F-33
<PAGE> 134
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Land............................................. $ 1,407,000 $ 1,407,000
Building and improvements........................ 6,054,000 6,576,000
Leasehold interest............................... 18,633,000 21,420,000
Leasehold improvements........................... 7,402,000 8,052,000
Theatre and office equipment..................... 3,513,000 5,523,000
Construction in progress......................... 125,000 84,000
----------- ------------
37,134,000 43,062,000
Less accumulated depreciation and amortization... (1,502,000) (11,067,000)
----------- ------------
$35,632,000 $ 31,995,000
=========== ============
</TABLE>
Depreciation expense for the six months ended December 31, 1996, the three
months ended June 30, 1996 and the year ended March 31, 1996 was $1,775,000,
$849,000, and $3,339,000, respectively.
The assets acquired through capitalized theatre leases at December 31 and
March 31, 1996 amount to $5,182,000, and the assets acquired through capitalized
equipment leases amount to $1,150,000 for these same periods. Accumulated
amortization of assets under capitalized leases was $1,119,000 and $756,000 at
December 31 and March 31, 1996, respectively. The related depreciation expense
for the six months ended December 31, 1996, the three months ended June 30, 1996
and for the year ended March 31, 1996 was $242,000, $121,000, and $276,000,
respectively.
(3) NOTES PAYABLE
Notes payable represents obligations incurred in connection with the
acquisition of theatres. These notes are collateralized by certain property and
equipment.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Cinerama Theatres, Inc. (monthly payments of $50,000
through April 1997 with the final payment of $1,561,000
on April 15, 1997; interest rate of prime plus 2%;
interest rate at March 31, 1996 and December 31, 1996 of
10.75% and 10.25%, respectively)......................... $ 1,698,000 $1,998,000
Cormorant Associates (monthly payments of $12,700 through
October 2003 with the final payment of $611,000; interest
rate of 9%).............................................. 1,105,000 1,143,000
Other...................................................... 7,000 38,000
----------- ----------
2,810,000 3,179,000
Less current portion of long-term notes payable............ (1,760,000) (494,000)
----------- ----------
$ 1,050,000 $2,685,000
=========== ==========
</TABLE>
F-34
<PAGE> 135
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the future annual maturities is as follows:
<TABLE>
<S> <C>
1997............................................. $1,760,000
1998............................................. 60,000
1999............................................. 66,000
2000............................................. 72,000
2001............................................. 78,000
Thereafter....................................... 774,000
----------
$2,810,000
==========
</TABLE>
(4) INCOME TAXES
The Company's taxable income for the six months ended December 31, 1996 was
included in a Federal income tax return filed by a consolidated group of which
Metromedia International Group, Inc. was the parent.
Prior to that period, the Company and Goldwyn filed consolidated Federal
and certain state income tax returns and had a formal tax sharing agreement. The
provisions for income tax in these statements have been provided on a
separate-company basis. The current amount provided has been recorded as a
payable to Goldwyn, although no repayment terms are specified.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, MARCH 31,
1996 1996 1996
------------ ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Current:
Federal.................................... $ 713,000 $(211,000) $ 624,000
State...................................... 234,000 4,000 196,000
Deferred:
Federal.................................... (206,000) (80,000) (377,000)
State...................................... (81,000) (66,000) (122,000)
--------- --------- ---------
Total income tax expense
(benefit)........................ $ 660,000 $(353,000) $ 321,000
========= ========= =========
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective rate is presented below:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, MARCH 31,
1996 1996 1996
------------ ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Statutory Federal income tax rate............ 34% 34% 34%
State income tax, net of Federal tax
benefit.................................... 9 3 9
Nondeductible amortization -- goodwill....... 14 (2) 14
Other nondeductible expenses................. -- -- 4
-- -- --
57% 35% 61%
== == ==
</TABLE>
F-35
<PAGE> 136
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996 and March 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -------------
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Deferred tax assets:
Accrued expenses................................. $ 97,000 $ 99,000
State taxes...................................... 378,000 415,000
Miscellaneous.................................... 25,000 4,000
---------- ----------
Total gross deferred tax assets.......... 500,000 518,000
Valuation allowance................................ -- --
---------- ----------
Net deferred tax assets.................. $ 500,000 518,000
========== ==========
Deferred tax liabilities -- depreciation........... $5,910,000 $5,904,000
========== ==========
</TABLE>
(5) LEASES
The Company has long-term operating and capital leases, primarily involving
theatre facilities and equipment. The leases have varying terms and a portion
contains renewal options. Future minimum lease payments under noncancelable
operating leases consisted of the following:
<TABLE>
<S> <C>
1997............................................ $ 4,860,000
1998............................................ 3,991,000
1999............................................ 3,385,000
2000............................................ 2,881,000
2001............................................ 2,772,000
Thereafter...................................... 20,011,000
-----------
$37,900,000
===========
</TABLE>
The Company is contractually obligated to incur costs of approximately
$750,000 to bring one of its theaters into compliance with seismic requirements.
Certain theatres are leased under operating lease agreements which are
subject to rent adjustments based on the consumer price index and expire at
various dates through February 2015.
Future minimum lease payments under capital leases together with the
present value of minimum lease payments consisted of the following:
<TABLE>
<S> <C>
1997............................................ $ 868,000
1998............................................ 867,000
1999............................................ 1,382,000
2000............................................ 833,000
2001............................................ 538,000
Thereafter...................................... 8,761,000
-----------
13,249,000
Less amount representing interest............... (7,476,000)
-----------
Present value of future minimum lease
payments...................................... 5,773,000
Less current portion............................ (256,000)
-----------
$ 5,517,000
===========
</TABLE>
F-36
<PAGE> 137
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents rent expense for the periods:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, MARCH 31,
1996 1996 1996
------------ ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C>
Total rent expense (including contingent
rentals)..................................... $2,663,000 $1,304,000 $5,512,000
Contingent rental expense.................... 265,000 74,000 441,000
</TABLE>
(6) COMMITMENT AND CONTINGENCIES
The Company is involved in various lawsuits, claims and inquiries incurred
in the normal course of business. Management, based in part upon the advice of
its legal counsel, believes that resolution of these matters will not have a
material adverse effect on the financial position of the Company or on the
results of its operations.
(7) RELATED PARTIES
From December 1991 to June 1996, the Company was a wholly owned subsidiary
of Goldwyn, a publicly held motion picture and television production and
distribution company. The Company became a wholly owned subsidiary of Metromedia
as of July 1996.
The Company licenses films from Orion and Goldwyn for exhibition in its
theatres. Terms for film licensing agreements between the parties are comparable
to those the Company enters into with independent third-party distributors. For
the nine months ended December 31, 1996 and year ended March 31, 1996, the
Company paid Goldwyn $576,000, and $986,000, respectively, for film rental
expenses. Orion was paid $2,013,000 for film rental expense for the six months
ended December 31, 1996.
(8) 401(k) PLAN
Effective January 1, 1995, Goldwyn established a 401(k) plan covering
substantially all employees meeting certain eligibility requirements.
Participants may make contributions to the plan from 1% to 15% of their gross
salary and are fully vested. Employer contributions to the plan, which are made
at the discretion of the Company, are made up to 3% of a participant's salary
and are fully vested at the time of contribution. The 401(k) contributions
expense charged to operations for the nine months ended December 31, 1996 and
year ended March 31, 1996 was $64,000 and $63,000, respectively.
Effective January 1, 1997, the Goldwyn 401(k) plan was merged into the
Orion 401(k) plan. The Orion plan has similar provisions and eligibility
requirements; however, effective March 1, 1997, discretionary employer
contributions will be made up to 50% of participant contributions to a maximum
of 6% of compensation.
(9) SUBSEQUENT EVENT
Effective January 6, 1997, the Company exercised its option to purchase a
theatre which was previously classified as a capital lease. The acquisition
price was $530,000 payable in three equal annual installments of $110,000 plus a
$200,000 down payment. Interest is to be paid annually on the unpaid balance at
an interest rate of 10%.
On July 10, 1997, Metromedia and Metro-Goldwyn-Mayer (MGM), through its
holding company, P&F Acquisition Corp., sold certain entertainment assets of
Metromedia (excluding the Landmark Theatre Group) to MGM. The sale was for an
aggregate cash consideration of $573 million. Under the terms of the agreement,
F-37
<PAGE> 138
THE LANDMARK THEATRE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Metromedia sold its film and television library and the production and
distribution activities which include Orion, Goldwyn and Motion Picture
Corporation of America (MPCA).
The Company acquired two theaters in June and August 1997 for total cash
consideration of $2.4 million.
On December 18, 1997, Metromedia entered into an agreement to sell the
assets and certain liabilities of the Company to Silver Cinemas Inc. for
approximately $62 million.
F-38
<PAGE> 139
THE LANDMARK THEATRE GROUP
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
-----------
<S> <C>
CURRENT ASSETS:
Cash and equivalents...................................... $ 577,000
Accounts receivable....................................... 152,000
Inventories............................................... 178,000
Prepaid expenses and other................................ 943,000
-----------
Total current assets................................. 1,850,000
THEATER PROPERTIES AND EQUIPMENT:
Land...................................................... 1,407,000
Buildings................................................. 6,054,000
Leasehold interests and improvements...................... 27,243,000
Theater furniture and equipment........................... 4,910,000
Theaters under construction............................... 2,040,000
-----------
Total................................................ 41,654,000
Less accumulated depreciation and amortization............ (5,859,000)
-----------
Theater properties and equipment net................... 35,795,000
GOODWILL -- NET............................................. 21,714,000
OTHER ASSETS -- NET......................................... 476,000
-----------
TOTAL................................................ $59,835,000
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long term debt......................... $ 171,000
Accounts payable.......................................... 4,602,000
Accrued payrolls.......................................... 957,000
Accrued property taxes and other liabilities.............. 239,000
Payable to parent......................................... 132,000
Current portion of capital lease obligation............... 284,000
-----------
Total current liabilities............................ 6,385,000
LONG-TERM DEBT, less current portion........................ 1,085,000
CAPITAL LEASES, less current portion........................ 4,639,000
DEFERRED TAX LIABILITIES.................................... 6,152,000
-----------
Total Liabilities.................................... 18,261,000
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 100 shares authorized, issued
and outstanding
Paid-in capital........................................... 41,046,000
Retained earnings......................................... 528,000
-----------
Total shareholder's equity........................... 41,574,000
-----------
TOTAL................................................ $59,835,000
===========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-39
<PAGE> 140
THE LANDMARK THEATRE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Admissions................................................ $12,643,000 $13,648,000
Concessions............................................... 2,813,000 3,085,000
Other..................................................... 204,000 290,000
----------- -----------
Total............................................. 15,660,000 17,023,000
COST OF REVENUES:
Film rentals.............................................. 5,924,000 6,462,000
Concession supplies....................................... 581,000 623,000
Salaries and wages........................................ 2,470,000 2,351,000
Facility leases........................................... 1,646,000 1,600,000
Advertising............................................... 278,000 742,000
Utilities and other....................................... 1,295,000 1,292,000
General and administrative.................................. 1,357,000 1,210,000
Depreciation and amortization............................... 1,290,000 1,177,000
----------- -----------
Total............................................. 14,841,000 15,457,000
----------- -----------
OPERATING INCOME (LOSS)..................................... 819,000 1,566,000
OTHER INCOME (EXPENSE):
Interest expense............................................ (162,000) (215,000)
----------- -----------
LOSS BEFORE INCOME TAX EXPENSE.............................. 657,000 1,351,000
INCOME TAX EXPENSE.......................................... 392,000 700,000
----------- -----------
NET INCOME (LOSS)........................................... $ 265,000 $ 651,000
=========== ===========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-40
<PAGE> 141
THE LANDMARK THEATRE GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
UNAUDITED
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 265,000 $ 651,000
Noncash items in net income:
Depreciation and amortization.......................... 1,290,000 1,177,000
Deferred income taxes.................................. 392,000 160,000
Cash from (used for) working capital:
Inventories............................................ (33,000) 2,000
Accounts receivable.................................... 203,000 (31,000)
Prepaid expenses and other............................. (150,000) 315,000
Accounts payable and accrued liabilities............... 323,000 (134,000)
------------ ------------
Net cash from operating activities................ 2,290,000 2,140,000
INVESTING ACTIVITIES:
Additions to theater properties and equipment............. (1,828,000) (193,000)
Increase in other assets.................................. 5,000
------------ ------------
Net cash used for investing activities............ (1,823,000) (193,000)
FINANCING ACTIVITIES:.......................................
Decrease in payable to parent............................. (1,668,000) (2,753,000)
Payments of debt.......................................... (226,000) (386,000)
------------ ------------
Net cash (used for) financing activities.......... (1,894,000) (3,139,000)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,427,000) (1,192,000)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 2,004,000 1,192,000
------------ ------------
End of period............................................. $ 577,000 $ --
============ ============
</TABLE>
See notes to interim condensed consolidated financial statements.
F-41
<PAGE> 142
THE LANDMARK THEATRE GROUP
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited Interim Condensed Consolidated
Financial Statements of The Landmark Theatre Group and subsidiaries (the
"Company") include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the Company's financial position as of
March 31, 1998, and the result of its operations for the three months ended
March 31, 1998 and 1997. Due to seasonality of the Company's operations, the
results of its operations for the interim periods ended March 31, 1998 and 1997,
may not be indicative of the 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 unaudited
Consolidated Financial Statements of The Landmark Theatre Group and subsidiaries
and accompanying notes for the year ended December 31, 1997, the six months
ended December 31, 1996, three months ended June 30, 1996 and the year ended
March 31, 1996.
2. SUBSEQUENT EVENT
On April 16, 1998, the Company completed the sale of the operating assets
used in 47 of its theaters.
F-42
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
StarTime Cinema, Inc.
We have audited the accompanying consolidated balance sheets of StarTime
Cinema, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
StarTime Cinema, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
As more fully discussed in Note 13 to the consolidated financial
statements, the Company has entered into agreements to sell the majority of its
operating assets during 1998.
COOPERS & LYBRAND L.L.P.
El Paso, Texas
March 15, 1998
F-43
<PAGE> 144
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 670,923 $ 3,530,625
Short-term investments.................................... 26,801 119,749
Inventories............................................... 223,940 217,607
Prepaid expenses.......................................... 241,157 236,520
Deferred income taxes..................................... 533,000 106,000
Receivable from vendor and other.......................... 166,885 224,297
Assets held for sale...................................... 4,416,211 --
----------- -----------
Total current assets.............................. 6,278,917 4,434,798
Property, theater equipment and improvements at cost, net of
accumulated depreciation and amortization of $10,899,418
and $9,911,038 for 1997 and 1996.......................... 12,093,959 16,044,116
Deferred income taxes....................................... 261,000 70,000
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $1,371,230 and $1,030,990
for 1997 and 1996......................................... 3,473,465 3,803,705
Other assets, net of accumulated amortization of $197,080
and $134,411 for 1997 and 1996............................ 243,587 316,256
----------- -----------
Total assets...................................... $22,350,928 $24,668,875
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 4,786,600 $ 1,276,400
Subordinated notes payable................................ 1,312,100 --
Accounts payable.......................................... 392,249 346,584
Accrued film rentals...................................... 456,412 443,611
Other accrued liabilities................................. 966,076 1,094,226
Income taxes payable...................................... -- 19,684
----------- -----------
Total current liabilities......................... 7,913,437 3,180,505
----------- -----------
Long-term debt, less current maturities..................... 3,076,712 7,863,312
----------- -----------
Subordinated notes payable.................................. -- 1,312,100
----------- -----------
Deferred lease payments..................................... 3,038,211 2,917,695
----------- -----------
Mandatorily redeemable preferred stock, Series B, $10 par,
2% cumulative convertible, 88,235 shares authorized,
88,235 shares issued and outstanding...................... 3,000,000 3,290,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A, $10 par, 6% cumulative
convertible, 417,553 shares authorized, 380,263 shares
issued and outstanding................................. 3,802,630 3,802,630
Common stock, $.01 par, 1,000,000 shares authorized,
87,500 shares issued and outstanding................... 875 875
Additional paid-in capital................................ 1,814,045 1,814,045
(Accumulated deficit) retained earnings................... (294,982) 487,713
----------- -----------
Total stockholders' equity........................ 5,322,568 6,105,263
----------- -----------
Total liabilities and stockholders' equity........ $22,350,928 $24,668,875
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE> 145
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Box office receipts................................... $16,553,625 $18,306,082 $17,630,259
Concessions........................................... 12,522,307 13,666,783 13,037,620
Other................................................. 755,891 619,534 588,688
----------- ----------- -----------
Total revenues................................ 29,831,823 32,592,399 31,256,567
----------- ----------- -----------
Costs and expenses:
Film rentals.......................................... 5,709,965 6,354,443 6,063,669
Concession supplies................................... 2,027,354 2,166,037 2,117,659
----------- ----------- -----------
7,737,319 8,520,480 8,181,328
Facility leases....................................... 7,529,262 7,367,246 7,019,107
Salaries and wages.................................... 5,642,893 5,538,700 5,055,653
Advertising........................................... 1,280,336 1,420,507 1,170,618
Utilities............................................. 1,431,606 1,431,170 1,372,154
Other theater......................................... 3,817,035 4,109,741 3,915,349
Depreciation and amortization......................... 1,785,510 1,740,108 1,484,743
General and administrative............................ 1,392,773 1,654,262 1,668,501
----------- ----------- -----------
Total costs and expenses...................... 30,616,734 31,782,214 29,867,453
----------- ----------- -----------
Operating (loss) income....................... (784,911) 810,185 1,389,114
----------- ----------- -----------
Other income (expense):
Interest.............................................. (940,952) (810,093) (783,912)
Other................................................. 95,168 90,201 140,467
----------- ----------- -----------
Total other income (expense).................. (845,784) (719,892) (643,445)
----------- ----------- -----------
(Loss) income before income taxes............. (1,630,695) 90,293 745,669
Income tax benefit (expense)............................ 618,000 (42,000) (297,612)
----------- ----------- -----------
Net (loss) income............................. (1,012,695) 48,293 448,057
Dividends and accretion of preferred stock............ 2,202 (386,980) (453,103)
----------- ----------- -----------
Net loss applicable to common stock................... $(1,010,493) $ (338,687) $ (5,046)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE> 146
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
RETAINED
PREFERRED ADDITIONAL EARNINGS
STOCK COMMON PAID-IN (ACCUMULATED
SERIES A STOCK CAPITAL DEFICIT) TOTAL
---------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994........... $3,716,330 $875 $1,684,595 $ 831,446 $ 6,233,246
Adjustment of mandatorily redeemable
preferred stock, Series B........... -- -- -- (170,000) (170,000)
Payment of cash dividends:
Preferred stock, Series A; $0.60 per
share............................ -- -- -- (222,980) (222,980)
Preferred stock, Series B; $0.68 per
share............................ -- -- -- (60,123) (60,123)
Net income............................ -- -- -- 448,057 448,057
---------- ---- ---------- ----------- -----------
Balances, December 31, 1995........... 3,716,330 875 1,684,595 826,400 6,228,200
Adjustment of mandatorily redeemable
preferred stock, Series B........... -- -- -- (89,000) (89,000)
Issuance of preferred stock, Series
A................................... 86,300 -- 129,450 -- 215,750
Payment of cash dividends:
Preferred stock, Series A; $0.60 per
share............................ -- -- -- (222,980) (222,980)
Preferred stock, Series B; $0.68 per
share............................ -- -- -- (75,000) (75,000)
Net income............................ -- -- -- 48,293 48,293
---------- ---- ---------- ----------- -----------
Balances, December 31, 1996........... 3,802,630 875 1,814,045 487,713 6,105,263
Adjustment of mandatorily redeemable
preferred stock, Series B........... -- -- -- 290,000 290,000
Payment of cash dividends, preferred
stock, Series B; $0.68 per share.... -- -- -- (60,000) (60,000)
Net loss.............................. -- -- -- (1,012,695) (1,012,695)
---------- ---- ---------- ----------- -----------
Balances, December 31, 1997........... $3,802,630 $875 $1,814,045 $ (294,982) $ 5,322,568
========== ==== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE> 147
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................................... $(1,012,695) $ 48,293 $ 448,057
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization...................... 1,785,510 1,740,108 1,484,743
Deferred income taxes.............................. (618,000) (118,684) (149,588)
Deferred lease expense............................. 120,516 156,998 296,310
Increase (decrease) from changes in:
Inventories........................................ (6,333) 27,984 (34,942)
Prepaid expenses................................... (4,637) (220,876) 8,324
Income tax refund receivable....................... -- -- 86,940
Receivable from vendor and other................... 57,412 (4,724) (202,525)
Accounts payable................................... 45,665 (181,584) 105,210
Accrued liabilities and film rentals............... (115,349) 44,529 589,551
Income taxes payable............................... (19,684) 4,945 14,739
----------- ----------- -----------
Net cash provided by operating activities..... 232,405 1,496,989 2,646,819
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, theater equipment and
improvements....................................... (1,848,655) (1,044,520) (453,376)
Purchase of short-term investments.................... -- -- (3,326,977)
Proceeds on sale of short-term investments............ 92,948 32,672 6,195,204
Purchase of theaters.................................. -- -- (7,400,000)
----------- ----------- -----------
Net cash used in investing activities......... (1,755,707) (1,011,848) (4,985,149)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt.......................... -- 2,275,712 6,010,000
Payments on long-term debt............................ (1,276,400) (929,470) (2,521,428)
Proceeds from issuance of preferred stock, Series A... -- 134,850 --
Debt and stock issuance costs......................... -- -- (4,417)
Payment of dividends.................................. (60,000) (297,980) (283,103)
----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................. (1,336,400) 1,183,112 3,201,052
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents.... (2,859,702) 1,668,253 862,722
Cash and cash equivalents:
Beginning of year..................................... 3,530,625 1,862,372 999,650
----------- ----------- -----------
End of year........................................... $ 670,923 $ 3,530,625 $ 1,862,372
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................... $ 945,628 $ 837,814 $ 738,912
=========== =========== ===========
Income taxes....................................... $ 18,672 $ 361,146 $ 355,901
=========== =========== ===========
Noncash investing and financing activities:
Adjustment of mandatorily redeemable preferred stock,
Series B to estimated redemption value............. $ (290,000) $ 89,000 $ 170,000
=========== =========== ===========
Exchange of subordinated notes payable for preferred
stock, Series A.................................... $ -- $ 80,900 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE> 148
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
StarTime Cinema, Inc. ("StarTime") and its wholly-owned subsidiaries
(F.S.A. Super Saver Cinema No. 1 Ltd. and StarTime Properties, Inc.),
collectively the "Company", owns and operates 29 discount movie theaters located
throughout the United States. The Company does not have a significant market
concentration in a specific geographic region as no single market represents
more than 8% of revenues.
Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company.
All significant intercompany accounts and transactions are eliminated in
consolidation.
Certain amounts have been reclassified in 1996 and 1995 to conform to the
current presentation.
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.
Property, Theater Equipment and Improvements
Property, theater equipment and improvements are stated at cost less
accumulated depreciation and amortization. Costs assigned to property, theater
equipment and improvements of acquired businesses are based on estimated fair
value at the date of acquisition. Depreciation for property and theater
equipment is provided using the straight-line method over the estimated useful
lives of the assets. Theater 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. When assets are sold or retired, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is included in income. Interest incurred during construction is
capitalized as theater equipment and leasehold improvements.
Theater Leases
The Company accounts for its theater leases in accordance with Financial
Accounting Standards Board Technical Bulletin No. 85-3, "Accounting for
Operating Leases with Scheduled Rent Increases". Accordingly, scheduled rent
increases, which are included in minimum lease payments, are recognized on a
straight-line basis over the lease term and amounts recognized as lease expense
prior to the date that such amounts are actually payable are recorded as
deferred lease payments.
Inventories
Inventories consist of concession products and certain supplies and are
stated at the lower of cost (determined by the first-in, first-out method) or
market.
Excess of Cost Over Fair Value of Net Assets Acquired
Excess of cost over fair value of net assets acquired consists of goodwill
related to the 1991 purchase of partnership interests of one of StarTime's
subsidiaries and the 1995 acquisition of certain theaters. The 1995 acquisition
was accounted for using the purchase method. The purchase included, at fair
value, property and theater equipment of $4,659,000. The remaining purchase
price of $2,541,000 was allocated to goodwill.
F-48
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STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Excess of cost over fair value of net assets acquired is being amortized on a
straight-line basis over the estimated future periods to be benefited, generally
seven to twenty years.
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable. An
impairment of goodwill is recognized when estimated undiscounted future cash
flows generated by acquired businesses are determined to not be sufficient to
recover goodwill. The amount of goodwill impairment, if any, is measured based
on projected discounted cash flows using a discount rate commensurate with the
risks involved.
Other Assets
Other assets include organization costs, issuance costs for debt and a
non-compete agreement which are amortized using the straight-line method over
five to ten years. The Company paid $200,000 for the non-compete agreement in
connection with the 1995 acquisition of certain theaters discussed above.
Cash and Cash Equivalents
The Company considers cash on hand, cash in banks, certificates of deposit,
time deposits and U.S. government and other short-term securities with
maturities of three months or less when purchased as cash and cash equivalents.
Investments in Debt and Equity Securities
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Short-term investments at December 31,
1997 and 1996 consisted primarily of mortgage-backed securities which are
classified as available for sale. Market values are determined based on quoted
market prices. The cost of short-term investments held at December 31, 1997 and
1996 approximates their respective market values. Accordingly, no valuation or
offsetting adjustment to stockholders' equity for unrealized holding gains and
losses has been made at December 31, 1997 and 1996. Contractual maturities range
from seven to twenty-one years.
Financial Instruments and Risk Concentration
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and
short-term investments. Cash equivalents consist primarily of highly liquid
temporary investments and other interest bearing and demand accounts maintained
at banks and other financial institutions located in El Paso, Texas as well as
the cities where the Company's theaters are located.
Financial instruments of the Company for which fair value approximates
carrying value include cash and cash equivalents, short-term investments,
accounts receivable and accounts payable. The carrying value of the Company's
notes payable approximate fair value as they are subject to interest rates which
increase and decrease with changes in market rates. It is not practicable to
estimate the fair value of the subordinated debt because it is not traded. The
fair value of the mandatorily redeemable preferred stock, Series B approximates
its carrying value. Fair value is based on the estimated redemption value at
each balance sheet date (see Note 7).
Income Taxes
The Company is a "C" Corporation and files a consolidated Federal income
tax return which includes 100% of the income of its subsidiaries. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the
F-49
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STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. The Company's income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
Advertising
The Company expenses the cost of advertising as it is incurred or the first
time the advertising takes place. Advertising expense was approximately
$1,280,000, $1,421,000 and $1,171,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
2. PROPERTY, THEATER EQUIPMENT AND IMPROVEMENTS
Property, theater equipment and improvements at December 31, 1997 and 1996,
consisted of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES
(YEARS) 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Theater leasehold improvements, furniture and
equipment....................................... 5 -- 20 $21,884,370 $20,981,024
Buildings......................................... 40 -- 3,600,000
Office equipment.................................. 5 161,635 156,928
------ ----------- -----------
22,046,005 24,737,952
Less accumulated depreciation..................... (10,899,418) (9,911,038)
------ ----------- -----------
11,146,587 14,826,914
Land.............................................. -- -- 700,000
Construction in progress.......................... -- 947,372 517,202
------ ----------- -----------
$12,093,959 $16,044,116
====== =========== ===========
</TABLE>
Fully depreciated assets with an original cost basis of approximately
$2,464,000 are still in use and are included in property, theater equipment and
improvements at December 31, 1997.
Construction in progress at December 31, 1997 included costs related to
construction costs of an entertainment plaza, which consists of multiple
screens, restaurants and other entertainment related facilities. The Company has
planned capital expenditures related to this project of approximately $3.0
million. It is anticipated that the project will be completed during 1998.
3. ASSETS HELD FOR SALE
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards Board No. 121 ("FAS 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement
requires the recognition of an impairment loss for an asset held for use when
the estimate of undiscounted future cash flows expected to be generated by the
asset is less than its carrying amount. The Company assesses impairment of its
theaters primarily on a geographic and advertising market approach. The
statement also requires recognition of an impairment loss for assets to be
disposed of, whether by sale or abandonment, when the carrying amount exceeds
the asset's fair value less selling costs. Measurement of the impairment loss is
based on fair value of the asset which is generally determined based on the
present value of expected future cash flows. No charges to current year
operations resulted from adoption of FAS 121.
Assets held for sale represents buildings, land and theater equipment of
two theaters owned by the Company. The assets are reported at historical cost
net of accumulated depreciation recognized through
F-50
<PAGE> 151
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997. Combined theater level operating income for these two
facilities amounted to approximately $200,000 in 1997. These assets were sold
subsequent to December 31, 1997 (see Note 13).
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Accrued taxes and commissions.......................... $256,459 $ 304,606
Accrued interest....................................... 40,520 45,196
Group health........................................... 26,449 52,914
Salary taxes payable................................... 65,275 55,519
Accrued wages.......................................... 309,601 264,848
Accrued sales taxes.................................... 77,224 108,070
Deferred gift book income.............................. 60,129 202,778
Other.................................................. 130,419 60,295
-------- ----------
$966,076 $1,094,226
======== ==========
</TABLE>
5. SUBORDINATED NOTES PAYABLE
Subordinated notes payable of $1,312,000 were outstanding as of December
31, 1997 and 1996. The notes are subordinated in payment to the bank debt and
bear interest at 10% payable semiannually, with principal due in November 1998.
Prior to expiration of associated warrants on November 1, 1996, each $1,000
of subordinated notes payable entitled the holder to purchase eight shares of
the Company's Series A Preferred Stock at a price of $25.00 per share. During
1996, certain holders of subordinated notes payable exercised their warrants and
purchased 8,630 shares of the Company's Series A Preferred Stock.
6. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Note payable to bank due in monthly installments of $56,000
plus interest at THE WALL STREET JOURNAL interest rate
(8.25% at December 31, 1997) plus 1% through January 1,
2001.
Collateralized by substantially all assets of the Company
and limited personal guarantee of the sole common
stockholder............................................... $2,467,712 $3,139,712
Note payable to bank due in monthly installments of $72,050
plus interest at THE WALL STREET JOURNAL interest rate
plus 1% through April 2004. Collateralized by
substantially all assets of the Company and limited
personal guarantee of the sole common stockholder......... 5,395,600 6,000,000
---------- ----------
7,863,312 9,139,712
Less current maturities of long-term debt................... 4,786,600 1,276,400
---------- ----------
$3,076,712 $7,863,312
========== ==========
</TABLE>
The loan agreement with the bank contains, among other provisions,
requirements for maintaining defined levels of debt service coverage and net
worth. Under the terms of the loan agreement with the bank, the Company must
obtain authorization before issuing dividends. At December 31, 1997, $3,250,000
of long-
F-51
<PAGE> 152
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
term debt has been classified as current due to repayment from the proceeds from
sale of assets classified as assets held for sale at December 31, 1997 (see Note
13).
The scheduled maturities of long-term debt at December 31, 1997 after
adjustment for repayments made in January 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................. $4,786,600
1999............................................. 1,536,600
2000............................................. 1,540,112
----------
$7,863,312
==========
</TABLE>
7. REDEEMABLE PREFERRED STOCK
On August 15, 1994, StarTime issued 88,235 shares of Mandatorily Redeemable
Series B Preferred Stock, 2% cumulative convertible, $10 par value ("Series B
Preferred Stock") for $3 million. In preference to shares of Series A Preferred
Stock, 6% cumulative convertible, $10 par value ("Series A Preferred Stock") and
common stock, each share is entitled to 2% cumulative cash dividends per year.
Each share of Series B Preferred Stock is convertible into one share of
StarTime's common stock at the option of the shareholder and shall automatically
be converted into shares of common stock upon the effectiveness of a Qualified
Public Offering, as defined in the stock purchase agreement. The Series B
Preferred Stock has a liquidation preference of $34 per share over StarTime's
Series A Preferred Stock and Common Stock. The holder of the Series B Preferred
Stock is entitled to one vote per share held.
The Series B Preferred Stock is redeemable at the option of the stockholder
in whole or in part at the earlier of 1) the fifth anniversary of the date of
issuance; 2) the effective date of any public offering of Common Stock which is
not a Qualified Public Offering; 3) the date preceding the closing date of the
consolidation or merger of the Company into any other business entity; or 4) the
date upon which any shareholder gives the Company written notice that it is in
violation of the related stock purchase agreement. However, in connection with
the transactions discussed in Note 13, the holder of all outstanding shares of
Series B Preferred Stock has agreed to a settlement price of $3 million plus
accrued but unpaid dividends.
The Series B Preferred Stock was initially recorded at its fair value at
the issuance date ($34 per share). The carrying amount is periodically increased
or decreased for amounts which are estimated to be payable upon redemption as
defined in the stock purchase agreement. The adjustment to the carrying amount
is based upon the estimated redemption value at each balance sheet date. These
adjustments resulted in a direct increase to retained earnings of $290,000 in
1997 and decreases of $89,000 and $170,000 in 1996 and 1995, respectively.
The stock purchase agreement entered into by the Company in conjunction
with the issuance of the Series B Preferred Stock contains various covenants,
one of which limits the Company's ability to issue dividends to that which is
regularly scheduled on the Series A and B Preferred Stock. If in non-compliance,
the stockholders have the right to sell the stock back to the Company as
discussed above.
8. CAPITAL STOCK
The authorized capital stock of StarTime consists of common stock and two
classes of preferred stock. The holder of all classes of stock is entitled to
one vote per share.
StarTime has 380,263 outstanding shares of Series A Preferred Stock. The
Series A Preferred Stock has a liquidation preference of $10 per share over
StarTime's common stock. Each share of Series A Preferred Stock is convertible
into one share of StarTime's common stock upon the effectiveness of a Qualified
Public
F-52
<PAGE> 153
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Offering. As of December 31, 1997, cumulative unpaid dividends totaled
approximately $228,000 and have not been accrued by the Company.
9. STOCK OPTIONS
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which if fully adopted by the Company, would change
the methods the Company applies in recognizing the cost of its stock option
plans. All outstanding stock options were issued prior to January 1, 1995,
therefore the cost recognition provisions of SFAS 123 are not applicable.
At December 31, 1997 and 1996, there were non-qualified stock option plans
that provide for the purchase of up to 8,500 and 3,500 shares of StarTime's
common and Series A Preferred Stock, respectively. The exercise prices for the
common stock options range from $25.00 to $37.00 per share. The exercise price
for the Series A Preferred Stock is $22.86 per share. All options were
immediately exercisable from the date of grant during 1994 and expire five years
after the date of grant.
At December 31, 1997 and 1996, there were also 3,062 common stock options
outstanding at $1.00 which expire in 2002.
No options had been exercised as of December 31, 1997. Subsequent to
December 31, 1997, common stock options for 3,062 shares were exercised for
$1.00.
10. COMMITMENTS AND CONTINGENCIES
Commitments
The Company conducts its theater operations primarily in leased premises
under noncancelable operating leases with initial terms of 15 to 20 years with
renewal options. A majority of the Company's operating leases contain purchase
options at the termination of the lease term. Most of these leases provide for
additional rental payments based on a percentage of box office and concession
revenues and require the payment of real estate taxes, insurance, and other
costs applicable to the property. No contingent rental payments were made in
1997, 1996 or 1995.
Deferred lease payments of approximately $3,038,000 and $2,918,000 have
been accrued as of December 31, 1997 and 1996, respectively, to recognize lease
expense on a straight-line basis for those leases with deferred or escalating
payments.
Future minimum lease payments and the effect of recognizing lease expense
on leases with escalating or deferred payments on a straight-line basis are as
follows:
<TABLE>
<CAPTION>
FUTURE CHANGE IN FUTURE
MINIMUM DEFERRED MINIMUM
LEASE LEASE LEASE
YEAR ENDING DECEMBER 31, EXPENSE PAYMENTS PAYMENTS
------------------------ ----------- ---------- -----------
<S> <C> <C> <C>
1998.................................... $ 6,100,433 $ (19,106) $ 6,081,327
1999.................................... 6,215,433 50,282 6,265,715
2000.................................... 6,215,433 113,838 6,329,271
2001.................................... 6,215,433 194,989 6,410,422
2002.................................... 5,862,152 170,232 6,032,384
Thereafter.............................. 39,654,891 2,527,976 42,182,867
----------- ---------- -----------
$70,263,775 $3,038,211 $73,301,986
=========== ========== ===========
</TABLE>
F-53
<PAGE> 154
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense on the theater leases for the three years ended December 31,
1997 was approximately $5,868,000, $5,877,000 and $5,980,000, respectively.
Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the resolution of
the matters will not materially affect the consolidated financial position,
results of operations or cash flows of the Company.
11. RELATED PARTY TRANSACTIONS
The Company engages in various transactions with related parties, including
the common stockholder, preferred stockholders, officers and affiliates. Costs
and expenses in 1997, 1996 and 1995 include the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Legal fees.................................. $17,490 $ 69,135 $ 71,375
Consulting fees............................. $24,378 $143,137 $147,933
</TABLE>
12. INCOME TAXES
The components of deferred tax assets and liabilities at December 31, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred lease payments........................... $1,172,000 $1,126,000
Income tax operating loss carryforward............ 493,000 --
Deferred income................................... 23,000 78,000
Group medical expense............................. 17,000 20,000
Other............................................. 1,000 8,000
---------- ----------
Total deferred tax assets................. 1,706,000 1,232,000
---------- ----------
Deferred tax liabilities:
Theater equipment and improvements................ (627,000) (743,000)
Intangible assets................................. (285,000) (313,000)
---------- ----------
Total deferred tax liabilities............ (912,000) (1,056,000)
---------- ----------
Net deferred tax assets................... $ 794,000 $ 176,000
========== ==========
</TABLE>
The components of income tax benefit (expense) in the consolidated
statements of operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................ $ -- $(141,000) $(366,562)
Deferred............................... 545,000 105,000 132,136
State:
Current................................ -- (20,000) (80,638)
Deferred............................... 73,000 14,000 17,452
-------- --------- ---------
$618,000 $ (42,000) $(297,612)
======== ========= =========
</TABLE>
F-54
<PAGE> 155
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated effective tax rate differs from the statutory U.S. federal
tax rate for the following reasons and by the following percentages:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- -------
<S> <C> <C> <C>
Statutory U.S. federal (tax) benefit rate...... 34.0% (34.0)% (34.0)%
Increases:
State and local income taxes................. 2.9% (4.4)% (2.4)%
Permanent differences........................ 1.0% (8.3)% (1.1)%
Other........................................ -- -- (2.4)%
----- ------- -------
37.9% (46.7)% (39.9)%
===== ======= =======
</TABLE>
At December 31, 1997, the Company had an income tax net operating loss
carryforward generated by current year income tax losses of approximately
$1,279,000. This carryforward will expire in 2012.
13. SUBSEQUENT EVENTS
During January 1998, the Company entered into a Property Purchase Agreement
(the "Property Agreement") whereby it sold two theaters to include all real and
personal property and assignment of all continuing contracts related to ongoing
operation of the theaters. The cash selling price was $4,500,000, subject to
sales price adjustments as specified by the Property Agreement. Proceeds of
$3,250,000 from the sale were used to repay existing debt to the bank.
During March 1998, by a majority vote of the stockholders, the Company
entered into an Asset Purchase Agreement (the "Asset Agreement") whereby it has
agreed to sell the operating assets used in 26 of its theaters and assignment of
related leasing agreements and other continuing contracts related to the
continuing operation of these theaters. The cash selling price is $16,306,000,
subject to adjustment as specified by the Asset Agreement. It is management's
intention to use a portion of the proceeds from the sale of these assets to
repay approximately $3,600,000 of the remaining balance of debt to the bank.
For a period of one year after the closing of the transactions contemplated
by the Asset Agreement, the Company may exercise its rights under a put option
(the "Put Option") to sell and assign property and leases related to one theater
and a management contract for a third party theater that the Company manages.
The selling price is $170,000 plus the product of 6.5 times the Theater Level
Cash Flow of the Company owned theater for the twelve month period ending as of
the last day of the month immediately preceding the date the Put Option is
exercised, subject to adjustment as specified in the Put Option.
If the sales of operating assets included in the Property and Asset
Agreements, other than assets subject to the Put Option, had been consummated as
of December 31, 1997 at a combined sales price of $20,806,000, net property,
theater equipment and improvements, assets held for sale and net intangible
assets included in the accompanying 1997 consolidated balance sheet would have
been reduced by approximately $18,500,000, deferred lease payments would have
been reduced by approximately $3,000,000, and a pre-tax gain of approximately
$5,300,000 would have been recorded for financial reporting purposes. It is
anticipated that certain of the proceeds from the Asset Agreement will be used
to repay bank debt and subordinated notes payable.
In connection with the Asset Agreement, the holder of the 88,235 shares of
Series B Preferred Stock has agreed to accept $3 million in exchange for all
outstanding shares. This represents the original face value of $3 million.
F-55
<PAGE> 156
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). Adoption is required for interim and annual periods beginning after
December 15, 1997. SFAS No. 130 requires that comprehensive income and its
components, as defined in the Statement, be reported in a company's financial
statements. Management does not believe that the adoption of this statement will
have a significant impact on the Company.
F-56
<PAGE> 157
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
-----------
<S> <C>
CURRENT ASSETS:
Cash and equivalents...................................... $ 318,907
Accounts receivable....................................... 220,755
Inventories............................................... 186,698
Prepaid expenses and other................................ 107,786
Deferred income taxes..................................... 1,480,230
-----------
Total current assets.............................. 2,314,376
THEATER PROPERTIES AND EQUIPMENT:
Theater furniture and equipment........................... 21,832,791
Theaters under construction............................... 2,149,479
-----------
Total............................................. 23,982,270
Less accumulated depreciation and amortization............ (11,192,910)
-----------
Theater properties and equipment, net.................. 12,789,360
GOODWILL-NET................................................ 2,203,418
OTHER ASSETS-NET............................................ 82,920
-----------
TOTAL............................................. $17,390,074
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt......................... $ 1,536,000
Subordinated notes payable................................ 1,312,100
Accounts payable.......................................... 1,100,440
Accrued property taxes and other liabilities.............. 500,466
-----------
Total current liabilities......................... 4,449,006
LONG-TERM DEBT, less current portion........................ 2,682,662
DEFERRED LEASE PAYMENTS..................................... 3,042,990
MANDATORILY REDEEMABLE PREFERRED STOCK, Series B, $10 par,
2% cumulative convertible, 88,235 shares authorized,
issued and outstanding.................................... 3,000,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $10 par, 6% cumulative
convertible, 417,553 shares authorized, 380,263 issued
and outstanding........................................ 3,802,630
Common stock, $.01 par value, 1,000,000 shares authorized,
87,500 shares issued and outstanding................... 875
Additional paid-in capital................................ 1,814,045
Accumulated deficit....................................... (1,402,134)
-----------
Total stockholders' equity........................ 4,215,416
-----------
TOTAL............................................. $17,390,074
===========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-57
<PAGE> 158
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
UNAUDITED
<S> <C> <C>
REVENUES:
Admission................................................. $ 3,581,782 $4,041,344
Concessions............................................... 2,798,812 3,012,011
Other..................................................... 128,044 165,257
----------- ----------
Total............................................. 6,508,638 7,218,612
COST OF REVENUES:
Film rentals.............................................. 1,202,809 1,353,801
Concession supplies....................................... 416,148 473,442
Salaries and wages........................................ 1,253,344 1,311,588
Facility leases........................................... 1,938,531 1,837,009
Advertising............................................... 279,750 364,772
Utilities and other....................................... 1,105,051 1,376,867
General and administrative.................................. 314,900 365,223
Depreciation and amortization............................... 387,354 440,526
----------- ----------
Total............................................. 6,897,887 7,523,228
----------- ----------
OPERATING INCOME (LOSS)..................................... (389,249) (304,616)
OTHER INCOME (EXPENSE):
Interest expense............................................ (162,889) (244,353)
Interest income and other (expense), net (Note 2)........... (1,241,244) 33,714
----------- ----------
LOSS BEFORE INCOME TAX EXPENSE.............................. (1,793,382) (515,255)
INCOME TAX EXPENSE (BENEFIT)................................ (686,230) (195,797)
----------- ----------
NET INCOME (LOSS)........................................... (1,107,152) (319,458)
----------- ----------
Dividends and accretion of preferred stock................ (72,000) (73,000)
----------- ----------
Net loss applicable to common stock....................... $(1,179,152) $ (392,458)
=========== ==========
</TABLE>
See notes to interim condensed consolidated financial statements.
F-58
<PAGE> 159
STARTIME CINEMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
UNAUDITED
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (1,107,152) $ (319,458)
Noncash items in net income (loss):
Depreciation and amortization.......................... 387,354 440,526
Deferred income taxes.................................. (686,230) (195,797)
Loss on sale of theater assets......................... 1,253,000
Deferred lease expense................................. 4,779 30,129
Cash from (used for) working capital:
Accounts receivable.................................... (53,870) 110,590
Inventories............................................ 37,242 (22,536)
Prepaid expenses and other............................. 133,371 157,934
Accounts payable and accrued liabilities............... (213,831) (168,493)
------------ ------------
Net cash from (used for) operating activities..... (245,337) 32,895
INVESTING ACTIVITIES:
Proceeds from disposal of theater assets.................. 4,500,000
Additions to theater properties and equipment............. (988,893) (990,833)
Increase (decrease) in other assets....................... 26,864 490,494
------------ ------------
Net cash from (used for) investing activities..... 3,537,971 (500,339)
FINANCING ACTIVITIES:.......................................
Payments of debt.......................................... (3,644,650) (168,000)
------------ ------------
Net cash (used for) financing activities.......... (3,644,650) (168,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (352,016) (635,444)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 670,923 3,530,625
------------ ------------
End of period............................................. $ 318,907 $ 2,895,181
============ ============
</TABLE>
See notes to interim condensed consolidated financial statements.
F-59
<PAGE> 160
STARTIME CINEMA, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited Interim Condensed Consolidated
Financial Statements of StarTime Cinema, Inc. and subsidiaries (the "Company")
include all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the Company's financial position as of March 31,
1998, and the results of its operations for the three months ended March 31,
1998 and 1997. Due to seasonality of the Company's operations, the results of
its operations for the interim period ended March 31, 1998 and 1997, may not be
indicative of the total results for the full year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principals 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 StarTime Cinema, Inc. and subsidiaries and accompanying notes for
the years ended December 31, 1997, 1996 and 1995.
2. SUBSEQUENT EVENT
On April 2, 1998, the Company completed the sale of the operating assets
used in 25 of its theaters.
F-60
<PAGE> 161
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS EXCHANGE
OFFER NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE INITIAL PURCHASERS. THIS CONFIDENTIAL PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY
ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 4
Risk Factors.......................... 16
Use of Proceeds....................... 30
Capitalization........................ 31
Unaudited Pro Forma Financial Data.... 32
Selected Consolidated Financial and
Operating Data...................... 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 42
Business.............................. 51
Management............................ 63
Principal Stockholders................ 66
Certain Relationships and Related
Transactions........................ 67
Description of Revolving Credit
Facility............................ 68
Description of Exchange Notes......... 70
Plan of Distribution.................. 96
Legal Matters......................... 97
Experts............................... 97
Available Information................. 97
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$100,000,000
[LOGO]
SILVER CINEMAS
INTERNATIONAL, INC.
10 1/2% SENIOR SUBORDINATED
NOTES DUE 2005
------------------------
PROSPECTUS
------------------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a Delaware corporation and its Bylaws and Certificate of
Incorporation provide for indemnification of its directors, officers, employees
and agents to the fullest extent permitted by the Delaware General Corporation
Law (the "DGCL"), as the same exists or may hereafter be amended. Section 145 of
the DGCL provides in relevant part 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 such person 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 such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person 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 such person's conduct was
unlawful.
In addition, Section 145 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 such
person 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 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 such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person 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. Delaware law further provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 102(b)(7) of the DGCL eliminates the liability of a corporation's
directors to a corporation or its stockholders, except for liabilities related
to a breach of duty of loyalty, actions not in good faith, and certain other
liabilities.
II-1
<PAGE> 163
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Unless otherwise indicated, all exhibits have been previously filed.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Purchase Agreement, dated April 9, 1998, between Silver
Cinemas International, Inc., the Guarantors (as defined
therein), Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated and Bear, Stearns &
Co. Inc. relating to the 10 1/2% Senior Subordinated Notes
of Silver Cinemas International, Inc. due 2005.
2.1 Asset Purchase Agreement, dated as of December 17, 1997,
between Silver Cinemas, Inc. Landmark Theatre Corporation,
Seven Gables Corporation, Parallax Theatre Systems, Inc.,
San Francisco Landmark Theatre Corporation, and Wisconsin
Repertory Cinemas, Inc., The Landmark Theater Group, and
Metromedia International Group, Inc.
2.2 Asset Purchase Agreement, dated as of January 22, 1998,
between Silver Cinemas, Inc., SCI Acquisition Corp.,
StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1,
Ltd., StarTime Properties, Inc., the Trust formed by that
certain Irrevocable Declaration of Trust under deed dated
May 14, 1994 for the benefit of StarTime Cinema, Inc., Lloyd
Curley, and NationsBanc Capital Corporation.
2.3 Property Purchase Agreement, dated as of January 22, 1998,
between Silver Cinemas, Inc., StarTime Properties, Inc.,
StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1,
Ltd., the trust formed by that certain Irrevocable
Declaration of Trust under deed dated May 14, 1994 for the
benefit of StarTime Cinema, Inc., and Lloyd Curley.
3.1 Certificate of Incorporation, as amended, of Silver Cinemas
International, Inc.
3.2 By-Laws of Silver Cinemas International, Inc.
3.3 Certificate of Incorporation of Silver Cinemas, Inc.
3.4 By-Laws of Silver Cinemas, Inc.
3.5 Certificate of Incorporation of SCI Acquisition Corp.
3.6 By-Laws of SCI Acquisition Corp.
3.7 Certificate of Incorporation of Landmark Theatre Corp.
3.8 By-Laws of Landmark Theatre Corp.
4.1 Indenture, dated as of April 15, 1998, between Silver
Cinemas International, Inc., the Guarantors (as defined
therein) and Norwest Bank Minnesota, National Association,
as trustee, relating to $100,000,000 aggregate principal
amount of 10 1/2% Senior Subordinated Notes due 2005.
4.2 A/B Exchange Registration Rights Agreement, dated as of
April 16, 1998, between Silver Cinemas International, Inc.,
the Guarantors (as defined therein), Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated
and Bear, Stearns & Co. Inc.
4.3 Specimen Certificate of 10 1/2% Senior Subordinated Notes
due 2005 (the "Private Notes") (included in Exhibit 4.1
hereto).
4.4 Specimen Certificate of 10 1/2% Senior Subordinated Notes
due 2005 (the "Exchange Notes") (included in Exhibit 4.1
hereto).
*5.1 Opinion of Latham & Watkins regarding the validity of the
Exchange Notes.
10.1 Stockholders' Agreement, dated as of August 1, 1996, between
Silver Cinemas International, Inc. and the stockholders set
forth therein.
</TABLE>
II-2
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.2 Employment Agreement dated April 16, 1998 between Landmark
Theatre Corp. and Bert Manzari.
10.3 Employment Agreement dated April 16, 1998 between Landmark
Theatre Corp. and Paul Richardson.
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges.
21.1 Subsidiaries of Silver Cinemas International, Inc.
*23.1 Consent of Latham & Watkins (included in their opinion filed
as Exhibit 5.1).
*23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of KPMG Peat Marwick LLP.
*23.4 Consent of Coopers & Lybrand, L.L.P.
24.1 Power of Attorney of Silver Cinemas International, Inc.
(included on signature page to this Registration Statement
on Form S-4).
25.1 Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of 1939 of Norwest Bank Minnesota,
National Association (bound separately).
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal and related documents to be
used in conjunction with the Exchange Offer.
99.2 Forms of Notices of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith
(b) Financial Statement Schedules:
None
SCHEDULES OMITTED
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or the registrant in the successful defense of any action, suit 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 Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into this 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.
II-3
<PAGE> 165
(c) The undersigned registrant hereby undertakes 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.
(d)(1) 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; (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;
(2) That, for purposes 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.
(3) 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-4
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas on July 24, 1998.
SILVER CINEMAS INTERNATIONAL, INC.
SILVER CINEMAS, INC.,
SCI ACQUISITIONS CORP., AND
LANDMARK THEATRE CORP.
By /s/ STEVEN L. HOLMES
------------------------------------
Steven L. Holmes
Chief Executive Officer and Chief
Financial Officer of Silver Cinemas
International, Inc., Silver
Cinemas, Inc., SCI Acquisitions
Corp., and Landmark Theatre Corp.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacity
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ STEVEN L. HOLMES Chief Executive Officer, Chief July 24, 1998
- ----------------------------------------------------- Financial Officer and Director
Steven L. Holmes
* Chairman of the Board of July 24, 1998
- ----------------------------------------------------- Directors
John M. Sullivan
* President of Silver Cinemas July 24, 1998
- ----------------------------------------------------- International, Inc., Silver
Thomas J. Owens Cinemas, Inc., and SCI
Acquisition Corp., and Director
* President of Landmark Theatre July 24, 1998
- ----------------------------------------------------- Corp. and Director
E.L. Manzari
* Director July 24, 1998
- -----------------------------------------------------
David H. Wong
* Director July 24, 1998
- -----------------------------------------------------
Christopher A. Laurence
* Director July 24, 1998
- -----------------------------------------------------
James Rosenthal
* Director July 24, 1998
- -----------------------------------------------------
Thomas E. Davin
</TABLE>
* Signed under Power of Attorney Dated June 15, 1998.
II-5
<PAGE> 167
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
1.1 Purchase Agreement, dated April 9, 1998, between Silver
Cinemas International, Inc., the Guarantors (as defined
therein), Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated and Bear, Stearns &
Co. Inc. relating to the 10 1/2% Senior Subordinated Notes
of Silver Cinemas International, Inc. due 2005.
2.1 Asset Purchase Agreement, dated as of December 17, 1997,
between Silver Cinemas, Inc. Landmark Theatre Corporation,
Seven Gables Corporation, Parallax Theatre Systems, Inc.,
San Francisco Landmark Theatre Corporation, and Wisconsin
Repertory Cinemas, Inc., The Landmark Theater Group, and
Metromedia International Group, Inc.
2.2 Asset Purchase Agreement, dated as of January 22, 1998,
between Silver Cinemas, Inc., SCI Acquisition Corp.,
StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1,
Ltd., StarTime Properties, Inc., the Trust formed by that
certain Irrevocable Declaration of Trust under deed dated
May 14, 1994 for the benefit of StarTime Cinema, Inc., Lloyd
Curley, and NationsBanc Capital Corporation.
2.3 Property Purchase Agreement, dated as of January 22, 1998,
between Silver Cinemas, Inc., StarTime Properties, Inc.,
StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1,
Ltd., the trust formed by that certain Irrevocable
Declaration of Trust under deed dated May 14, 1994 for the
benefit of StarTime Cinema, Inc., and Lloyd Curley.
3.1 Certificate of Incorporation, as amended, of Silver Cinemas
International, Inc.
3.2 By-Laws of Silver Cinemas International, Inc.
3.3 Certificate of Incorporation of Silver Cinemas, Inc.
3.4 By-Laws of Silver Cinemas, Inc.
3.5 Certificate of Incorporation of SCI Acquisition Corp.
3.6 By-Laws of SCI Acquisition Corp.
3.7 Certificate of Incorporation of Landmark Theatre Corp.
3.8 By-Laws of Landmark Theatre Corp.
4.1 Indenture, dated as of April 15, 1998, between Silver
Cinemas International, Inc., the Guarantors (as defined
therein) and Norwest Bank Minnesota, National Association,
as trustee, relating to $100,000,000 aggregate principal
amount of 10 1/2% Senior Subordinated Notes due 2005.
4.2 A/B Exchange Registration Rights Agreement, dated as of
April 16, 1998, between Silver Cinemas International, Inc.,
the Guarantors (as defined therein), Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated
and Bear, Stearns & Co. Inc.
4.3 Specimen Certificate of 10 1/2% Senior Subordinated Notes
due 2005 (the "Private Notes") (included in Exhibit 4.1
hereto).
4.4 Specimen Certificate of 10 1/2% Senior Subordinated Notes
due 2005 (the "Exchange Notes") (included in Exhibit 4.1
hereto).
*5.1 Opinion of Latham & Watkins regarding the validity of the
Exchange Notes.
</TABLE>
<PAGE> 168
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
10.1 Stockholders' Agreement, dated as of August 1, 1996, between
Silver Cinemas International, Inc. and the stockholders set
forth therein.
10.2 Employment Agreement dated April 16, 1998 between Landmark
Theatre Corp. and Bert Manzari.
10.3 Employment Agreement dated April 16, 1998 between Landmark
Theatre Corp. and Paul Richardson.
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges.
21.1 Subsidiaries of Silver Cinemas International, Inc.
*23.1 Consent of Latham & Watkins (included in their opinion filed
as Exhibit 5.1).
*23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of KPMG Peat Marwick LLP.
*23.4 Consent of Coopers & Lybrand, L.L.P.
24.1 Power of Attorney of Silver Cinemas International, Inc.
(included on signature page to the Registration Statement on
Form S-4).
25.1 Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of 1939 of Norwest Bank Minnesota,
National Association (bound separately).
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal and related documents to be
used in conjunction with the Exchange Offer.
99.2 Forms of Notices of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 169
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
FILED WITH
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SILVER CINEMAS INTERNATIONAL, INC.
VOLUME I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 5.1
[LATHAM & WATKINS LETTERHEAD]
July 24, 1998
(File No.)
Silver Cinemas International, Inc.
4004 Beltline Road, Suite 205
Dallas, Texas 75244
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
In connection with the registration of $100,000,000
aggregate principal amount of 10 1/2% Senior Subordinated Notes due 2005 (the
"Exchange Notes") by Silver Cinemas International, Inc., a Delaware corporation
(the "Company"), together with the guarantees of the Exchange Notes (the
"Guarantees") by Silver Cinemas, Inc., Landmark Theatre Corp. and SCI
Acquisition Corp. (collectively, the "Guarantors"), on Form S-4 filed with the
Securities and Exchange Commission (the "Commission") on June 15, 1998 (the
"Registration Statement"), you have requested our opinion with respect to the
matters set forth below. The Exchange Notes will be issued pursuant to an
indenture (the "Indenture"), dated as of April 15, 1998, among the Company, the
Guarantors and Norwest Bank Minnesota, N.A., as trustee (the "Trustee"). The
Exchange Notes will be issued in exchange for the Company's outstanding 10 1/2%
Senior Subordinated Notes due 2005 (the "Private Notes") on the terms set forth
in the prospectus contained in the Registration Statement and the Letter of
Transmittal filed as an exhibit thereto (the "Exchange Offer").
In our capacity as your special counsel, we have made such
legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
<PAGE> 2
[LATHAM & WATKINS]
Silver Cinemas International, Inc.
July 24, 1998
Page 2
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to authentic original documents of all documents submitted to us
as copies.
We are opining herein as to the effect on the subject
transactions only of the internal laws of the State of New York and the General
Corporation Law of the State of Delaware and we express no opinion with respect
to the applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any local agencies within any state.
Subject to the foregoing and the other matters set forth
herein, it is our opinion that, as of the date hereof:
1. The Exchange Notes, when duly executed, issued,
authenticated and delivered in accordance with the terms of the Exchange Offer
and the Indenture, will be legally valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms.
2. The Guarantees, when duly executed and delivered and
when the Exchange Notes are duly executed, issued, authenticated and delivered
in accordance with the terms of the Exchange Offer and the Indenture, will be
legally valid and binding obligations of the Guarantors, enforceable against the
Guarantors in accordance with their terms.
The opinions rendered in paragraphs 1 and 2 above are
subject to the following exceptions, limitations and qualifications: (i) the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights and remedies
of creditors; (ii) the effect of general principles of equity, whether
enforcement is considered in a proceeding in equity or at law, and the
discretion of the court before which any proceeding therefor may be brought and
(iii) we express no opinion concerning the enforceability of the waiver of
rights or defenses contained in Section 4.06 of the Indenture.
To the extent that the obligations of the Company and the
Guarantors under the Indenture may be dependent upon such matters, we have
assumed for purposes of this opinion that (i) the Trustee is validly existing
and in good standing under the laws of its jurisdiction of organization; (ii)
the Trustee has been duly qualified to engage in the activities contemplated by
the Indenture; (iii) the Trustee is in compliance generally, and with respect to
acting as Trustee under the Indenture, with all applicable laws and regulations;
and (iv) the Trustee has the requisite organizational and other power and
authority to perform its obligations under the Indenture.
We have not been requested to express and, with your
knowledge and consent, do not render any opinion with respect to the
applicability to the obligations of the Company or the Guarantors under the
Exchange Notes, the Guarantees or the Indenture of Sections 547 and 548 of Title
11 of the Bankruptcy Reform Act of 1978, as amended, or applicable state law
(including,
<PAGE> 3
[LATHAM & WATKINS]
Silver Cinemas International, Inc.
July 24, 1998
Page 3
without limitation, Article 10 of the New York Debtor & Creditor Law) relating
to fraudulent transfers and obligations.
We consent to your filing this opinion as an exhibit to
the Registration Statement and to the reference to our firm contained under the
heading "Legal Matters".
Very truly yours,
/s/ Latham & Watkins
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use of this Amendment No. 1 to Registration Statement No.
333-56903 of Silver Cinemas International, Inc. of our report dated March 26,
1998 with respect to the consolidated financial statements of Silver Cinemas
International, Inc. as of December 31, 1997 and 1996 and for the year ended
December 31, 1997 and for the period from May 10, 1996 (date of inception) to
December 31, 1996; and our report dated March 27, 1998 with respect to the
consolidated financial statements of The Landmark Theatre Group as of and for
the year ended December 31, 1997; all appearing in the prospectus, which is part
of such Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
- -----------------------------
Deloitte & Touche LLP
Dallas, Texas
July 24, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Silver Cinemas International, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 22, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this registration statement on Form S-4 (File No.
333-56903) of our report dated March 15, 1998 on our audits of the consolidated
financial statements of StarTime Cinema, Inc. and Subsidiaries. We also consent
to the reference to our firm under the caption "Experts".
PRICEWATERHOUSECOOPERS LLP
Austin, Texas
July 24, 1998
