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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NOS.
SILVER CINEMAS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-2656147
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4004 BELTLINE ROAD
SUITE 205
ADDISON, TEXAS 75001-4363
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's Telephone Number, including area code: (972) 503-9851
Securities Registered pursuant to Section 12(b) of the Act:
NONE
(TITLE OF CLASS)
Securities Registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 7, 2000, 141,746 shares of Common Stock were outstanding.
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INDEX
<TABLE>
<S> <C>
PART I......................................................................................................... 3
Item 1: Business
(a) General Development of Business
(b) Financial Information About Industry Segments
(c) Narrative Description of Business
Item 2: Properties
Item 3: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
PART II........................................................................................................ 12
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 7a: Quantitative and Qualitative Disclosures About Market Risk
Item 8: Financial Statements and Supplementary Data
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III....................................................................................................... 23
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Certain Relationships and Related Transactions
PART IV........................................................................................................ 26
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
(b) Reports on Form 8-K
(c) Exhibits
(c) Financial Statement Schedules
</TABLE>
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Silver Cinemas International, Inc., a Delaware corporation (the "Company"),
was formed in May 1996 and operates in two segments as the largest exhibitor of
specialty motion pictures and one of the largest operators of second-run
theaters in the United States. The Company has three wholly owned subsidiaries,
Landmark Theatre Corp, Landmark Theatre Corp. USA (collectively referred to as
"Landmark") and Silver Cinemas, Inc. ("Silver Cinemas"), (Landmark and Silver
Cinemas are collectively referred to as the "Company"). Landmark operates 53
specialty motion picture theaters (164 screens) and Silver Cinemas operates 37
second-run theaters (269 screens) and 11 first-run theaters (73 screens). At
April 7, 2000, the Company operated 101 theaters with 506 screens located in
nineteen states.
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.
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-K includes certain statements that are forward-looking
statements. Statements included or incorporated by reference in this Form 10-K
which address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as future
capital expenditures (including the amount and nature thereof), expansion and
other development trends of industry segments in which the Company is active,
business strategy, expansion and growth of the Company's business and operations
and other such matters are forward-looking statements. Although the Company
believes it has made reasonable assumptions within the bounds of its knowledge
of its business, a number of factors could cause actual results to differ
materially from those expressed in any forward-looking statements. Many of these
factors have previously been identified in filings or statements made by or on
behalf of the Company.
All phases of the Company's operations are subject to influence outside its
control. Any one, or a combination, of these factors could materially affect the
results of the Company's operations. These factors include: competitive
pressures, inflation, consumer spending trends and habits, laws and regulations
affecting labor and employee benefit costs, interest rate fluctuations and other
capital market conditions. Forward-looking statements made by or on behalf of
the Company are based on a knowledge of its business and the environment in
which it operates, but because of the factors listed above, actual results may
differ from those in the forward-looking statements. Consequently, all of the
forward-looking statements made are qualified by these and other cautionary
statements and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on the Company or
its business or operations.
ACQUISITIONS
During 1998, the Company expanded its business with the acquisition of 81
theaters (372 screens) and the construction of three theaters (18 screens). The
Company anticipates that its future growth will come primarily through the
development of new specialty motion picture theaters and selected strategic
acquisitions.
In December 1997, the Company entered into a definitive agreement (the
"Landmark Asset Purchase Agreement") with Metromedia International Group, Inc.
("Metromedia") to acquire the assets of Landmark. On April 17, 1998, the Company
acquired the assets of The Landmark Theatre Group for cash consideration of
approximately $62.5 million. Landmark, with 140 screens at 49 locations, is the
largest exhibitor of specialty motion pictures in the United States, with
theaters located in California, Colorado, Louisiana, Massachusetts, Missouri,
Michigan, Minnesota, Ohio, Texas, Washington and Wisconsin.
In January 1998, the Company entered into a definitive agreement (the
"StarTime Asset Purchase Agreement") with StarTime Cinema, Inc. ("StarTime") to
acquire 202 screens at 27 locations operating predominately under the name Super
Saver Cinemas. On April 2, 1998, the Company completed the acquisition for
approximately $22.3 million. The theaters acquired from StarTime Cinema, Inc.
are second-run theaters located in Arizona, California, Colorado, Florida,
Nebraska, New York, Ohio, Oklahoma, Texas and Wisconsin.
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In March 1998, the Company entered into agreements with AMC Entertainment,
Inc. ("AMC") to acquire 17 screens at three theaters for approximately $1.6
million. These theaters include one specialty-film theater in Michigan and two
second-run theaters in Texas. Pursuant to the AMC Acquisition, the Company
purchased one of these theaters in Texas in February 1998 and another in March
1998 and the theater in Michigan in April 1998.
In May 1998, the Company purchased one theater with twelve screens out of
bankruptcy for approximately $3.5 million. The second-run theater, located in El
Paso, Texas was previously owned by Movies One, Inc.
In June 1998, the Company entered into a management agreement whereby it
manages the operations of the single-screen theater located in California for a
fixed monthly fee.
In November 1998 the Company entered into a Stock Purchase Agreement with
Dinger Brothers, Inc. to acquire a 4-screen specialty-film theater in Texas. In
January 1999, the Company completed the acquisition for approximately $0.8
million.
In May 1999, the Company entered into a management agreement whereby it
manages the operations of a six screen theater located in Colorado for a fixed
monthly fee.
In July 1999, the Company entered into a management agreement whereby it
manages the operations of a three screen theater located in Missouri for a fixed
monthly fee.
CLOSINGS / IMPAIRMENT / DISPOSITIONS
The Company periodically reviews the profitability of each of its theaters
in conjunction with the lease provisions to determine whether to continue their
operations. During the year ended December 31, 1998, the Company closed or did
not renew leases for four second-run theaters (17 screens) and two specialty
theaters (4 screens) generally as a result of unfavorable or unavailable lease
renewals or individual theater performance. These closures resulted in a $0.7
million charge for the year ended December 31, 1998. During 1998, Silver Cinemas
also impaired assets at 16 second-run theaters (124 screens) and 4 first-run
theaters (26 screens) based on its continuing valuation of recoverability of
long-lived theater assets resulting in a charge of $3.9 million. All of these
impaired theaters were acquired as part of larger acquisitions.
In March 1999, the Company sold its specialty theater in Sacramento,
California to a non-theater entity for approximately $1.5 million. In April
1999, the Company sold its theater in Burton, Michigan for approximately $2.2
million. These transactions resulted in total gains of $0.3 million. The net
proceeds from both sales are being used to continue the Company's new-build
expansion program. During the year ended December 31, 1999, the Company closed
or did not renew the leases for four second run theaters (26 screens) as a
result of unfavorable lease renewals or individual theater performance. These
closures resulted in a $0.5 million charge for the year ended December 31, 1999.
During 1999, Silver Cinemas impaired assets at 17 second-run theaters (128
screens) resulting in a $3.1 million charge.
In March 2000, the Company closed an additional three second-run theaters
(20 screens) and one specialty theater (3 screens) also as a result of
unfavorable lease renewals or individual theater performance. These closures
will not result in additional charges.
The Company will continue to evaluate underperforming, and non-strategic
theaters for the possibility of divestiture or restructuring.
CHANGES IN SECURITIES AND USE OF PROCEEDS
The following sets forth information with respect to securities sold by the
Company for the last twelve months that were not registered under the Securities
Act of 1933, as amended (the "Securities Act"). All securities sold and not
registered were sold in transactions not involving a public offering under (S)
4(2) of the Securities Act. On August 25, 1999, the Board of Directors of the
Company amended its Restated Certificate of Incorporation to allow for the
issuance of a new series of Convertible Preferred Stock consisting initially of
5,000 shares with a liquidation preference of $100 per share. The dividend and
conversion terms of the Convertible Preferred Stock are described in the
Certificate of Amendment of Restated Certificate of Incorporation filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K dated as of September
16, 1999. The Convertible Preferred Stock ranks senior to the Series A Preferred
Stock with respect to the payment of dividends and upon liquidation,
dissolution, winding-up or otherwise and the Series A Preferred Stock ranks
senior to all the Company's common stock and to all other series or classes of
preferred stock.
On September 7, 1999, the Company issued 3,000 shares of Convertible
Preferred Stock and sold 10,000 shares of common stock at $1.00 per share to
Larry Hohl in connection with the execution of his employment agreement. The
shares were granted in a private placement.
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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is principally engaged in the operation of movie theaters which
serve our customers primarily through the operations of two segments.
The Company identifies its segments based on type of film exhibited and
management responsibility. The Landmark segment operates specialty motion
picture theaters and the Silver Cinemas segment operates primarily second-run
theaters. For the financial results of the Company's operating segments, see
Note 9 of Notes to Consolidated Financial Statements incorporated by reference
in Item 8 of Part II of this annual report.
(c) NARRATIVE DESCRIPTION OF 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. At April
7, 2000, the Company operated 101 theaters with 506 screens located in nineteen
states. The 101 theaters are comprised of the Landmark segment's 53 specialty
motion picture theaters, and the Silver Cinemas segment's 37 second-run theaters
and 11 first-run theaters. The Company's strategy is 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.
Landmark'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 Life Is Beautiful, Red Violin, The
Blair Witch Project, and Buena Vista Social Club 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, USA Films,
Sony Pictures Classics, Paramount's classics 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. 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.
Silver Cinemas' 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. Silver Cinemas 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 Silver Cinemas 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, Silver Cinemas' 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, Silver
Cinemas' 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. "Same theater attendance" at
these theaters has declined by approximately 8% and 16% during 1999 and 1998,
respectively. Management believes this trend is the result of several factors
including the development of megaplexes in certain markets, changes in film and
video release patterns, and the overall strength of the U. S. economy.
BUSINESS STRATEGY
The Company's strategy is to increase revenue and cash flow by (i)
improving operations at its theaters and (ii) building new state-of-the-art
specialty film multiplexes in selected markets.
Capitalize on Leading Position in Specialty-Film Segment. Landmark is the
largest exhibitor of specialty motion pictures and the only specialty-film
exhibitor with a national presence. Landmark has a leading presence in, among
others, the following major markets: Los Angeles, San Francisco, Boston, Dallas,
Houston, Seattle, San Diego, Minneapolis, St, Louis, Denver, Detroit, Milwaukee
and New Orleans. Landmark plans to use its experience in the specialty-film
niche to establish a presence in the following strategic new markets: Chicago,
New York, and Washington D.C. Landmark achieved its leading presence by
developing strong
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relationships with specialty-film distributors, many of whom rely on the
Company's expertise in distributing and marketing specialty films. These
relationships enable Landmark 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 Life is Beautiful and The Blair Witch
Project the Company had exclusive rights to the films for up to three weeks in
selected markets.
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.
Maintain Established Second-Run Operations. Silver Cinemas believes it is
the leading operator of second-run theaters in its markets, operating 37
second-run theaters with 269 screens in 13 states. By offering patrons a
high-quality alternative to commercial first-run exhibitors at a low price,
Silver Cinemas 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-film
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.
RECENT ACQUISITIONS
From its inception through December 31, 1997, the Company completed seven
acquisitions, representing 26 theaters with an aggregate of 154 screens. In
1998, the Company continued the expansion of its business with the acquisition
of 81 theaters (372 screens) and the construction of three theaters (18
screens). During 1999, the Company acquired 3 theaters (13 screens) and
constructed one theater (6 screens). The Company anticipates that its future
growth will come primarily through the development of new specialty motion
picture theaters and selected strategic acquisitions.
The following table sets forth the Company's completed acquisitions since
its inception in June 1996.
<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
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
May 1998 US District 1 12 TX
Court
June 1998 Checci Gori (2) 1 1 CA
January 1999 Dinger Bros. 1 4 TX
May 1999 Kipling Place,
LLC (2) 1 6 CO
July 1999 Tivoli
Building, LLC (2) 1 3 MO
--- ---
110 539
=== ===
</TABLE>
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- ----------
(1) Operated pursuant to a management agreement from September 1997 to August
1998.
(2) Theater currently operated pursuant to a management agreement.
PENDING THEATER CONSTRUCTION
The Company continually evaluates existing and new markets for the
construction and expansion of specialty-film 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 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 June 1998, the Company opened two, six-screen theatres in
Waltham, Massachusetts and St. Louis, Missouri. In November 1998, the Company
opened a six-screen theater in Burton, Michigan, and in May 1999, the Company
opened a six-screen theater in Joliet, Illinois. Additionally, in March 2000,
the Company opened a 7 screen theater in Chicago, Illinois.
In addition, the Company has executed leases for the construction of five
specialty theaters with 31 screens in Washington, D. C., New York, New York,
Highland Park, Illinois, and Dallas Texas, and one second-run theater with 8
screens in Roseville, Michigan.
The following table summarizes the Company's completed expansions of
existing theaters and construction of new theaters since its inception in June
1996.
COMPLETED 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 1
May 1998 St. Louis, MO Specialty New Theater 6
May 1998 Waltham, MA Specialty New Theater 6
June 1998 Yukon, OK Second-run Conversion to Stadium --
November 1998 Burton, MI First-run New Theater 6
May 1999 Joliet, IL Second-run New Theater 6
March 2000 Chicago, IL Specialty New Theater 7
</TABLE>
OVERVIEW OF THE EXHIBITION INDUSTRY
The domestic motion picture exhibition industry is comprised of
approximately 548 exhibitors, approximately 191 of which operate four or more
screens on average at one or more locations, according to the National
Association of Theater Owners ("NATO"). As of June 1999, the ten largest
exhibitors (in terms of number of screens) controlled approximately 61% of the
total screens in the United States, with no single exhibitor controlling more
than 13% of the total screens.
According to data released by the Motion Picture Association of America
(the "MPAA"), the total U.S. box office sales of approximately $7.45 billion in
1999 was a record for the exhibition industry. Attendance and domestic box
office revenue have grown since 1992 at compounded annual growth rates of
approximately 4.0% and 6.1%, respectively. The following table summarizes the
recent historical trends in U.S. theater attendance, average ticket price, and
box office sales since 1992.
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U.S. EXHIBITION STATISTICS
<TABLE>
<CAPTION>
AVG. TICKET BOX OFFICE
ATTENDANCE PRICE 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 1,388 4.59 6,366
1998 1,480 4.70 6,950
1999 1,465 5.08 7,448
</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. 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 continue to support independent film
production, particularly from the "independent" subsidiaries of major studios
which desire the recognition of 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"), USA
Films ("USA") 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").
OPERATIONS
LANDMARK
Landmark 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. As of April 7, 2000, Landmark operates 53 theaters with 164 screens
dedicated to specialty-films in California, Colorado, Louisiana, Massachusetts,
Michigan, Illinois, Minnesota, Ohio, Missouri, Texas, Washington, and Wisconsin.
Landmark 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, Austin, Detroit, Palo
Alto, Berkeley, San Diego, St. Louis, Milwaukee 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 1999, according to Entertainment Data,
Inc., films released by independent distributors and "independent" subsidiaries
of major distributors such as Miramax, Artisan, USA, Lions Gate, Sony Classics,
Trimark, Fox Searchlight, and Fine Line generated an estimated $676 million of
box office revenue. Based on Landmark's 1999 box office revenue from
specialty-films, Landmark maintains a market share of approximately 8% of the
total box office revenue generated by specialty-films.
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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 December 1999.
SELECTED INDEPENDENT FILM REVENUE GENERATED AT LANDMARK THEATERS
<TABLE>
<CAPTION>
GROSS BOX OFFICE LANDMARK
------------------------ PERCENTAGE OF
YEAR FILM DISTRIBUTOR NATIONAL LANDMARK NATIONAL GROSS
- ----------- ---------------------- --------------------- --------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999 The Blair Witch Project Artisan Pictures, Inc. $140,530 $ 5,025 3.6%
1999 Life Is Beautiful Miramax Films 57,598 3,252 5.6
1999 Shakespeare in Love Miramax Films 100,241 2,764 2.8
1999 Run Lola Run Sony Pictures Classics 7,267 1,999 27.5
1999 Waking Ned Devine Twentieth Century 24,788 1,553 6.3
Fox Film Corp
1999 Being John Malkovich USA Films 22,136 1,429 6.5
1999 The Buena Vista Social Artisan Pictures, Inc. 6,997 1,203 17.2
Club
1999 Central Station Sony Pictures Classics 5,595 1,178 21.1
1998 Spanish Prisoner Sony Classics 10,272 1,691 16.5
1998 Smoke Signals Miramax Films 6,888 1,587 23.0
</TABLE>
SILVER CINEMAS
Silver Cinemas is one of the largest exhibitors of second-run films in the
United States in terms of number of screens, operating 37 theaters and 269
screens dedicated to the second-run format in Arizona, California, Colorado,
Florida, Louisiana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Texas,
Vermont, Illinois, and Wisconsin.
Silver Cinemas' second-run theaters typically charge admission prices of
$1.00 to $2.00 but provide many of the same amenities to customers as first-run
theaters. Silver Cinemas' 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. Silver Cinemas' second-run 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.
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, Silver Cinemas' 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.
CONCESSIONS
Concession sales are the second largest source of revenue for the Company
after box office admissions, representing approximately 28.0% of total combined
revenues for the year ended December 31, 1999. 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.
9
<PAGE> 10
- - 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.
- - Price Points. The Company continually reviews product size and price points
of its concession offerings. In several locations, the product sizes
offered and prices charged have been reduced to stimulate demand.
- - 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.
Landmark'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,
Landmark 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 Landmark the ability to negotiate more favorable film rental
agreements than most other specialty-film exhibitors. For example, for films
such as Life is Beautiful and The Blair Witch Project, Landmark had exclusive
rights to the films for up to three weeks in selected markets.
Silver Cinemas' 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 Silver Cinemas 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, Silver Cinemas' 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.
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.
10
<PAGE> 11
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 548 exhibitors, of which
approximately 191 operate an average of four or more screens at each location.
As of May 1999, the ten largest exhibitors (in terms of number of screens)
controlled approximately 61% of the total screens in the United States, with no
single exhibitor controlling more than 13% 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.
Landmark 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, Silver
Cinemas 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.
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. In addition, Landmark is granted a period of exclusivity in its
area for selected specialty films at many of its specialty-film theaters. Silver
Cinemas faces little or no competition for films in any of its second-run film
zones. 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.
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"). The
Company is not currently aware of any pending or threatened action which will
have a material adverse effect on the Company's financial condition, results of
operations and cash flows.
EMPLOYEES
The Company has approximately 2,101 employees, of which approximately 88%
are part-time employees who are paid on an hourly basis. The International
Alliance of Theatrical Stage Employees pursuant to collective bargaining
agreements represents film projectionists at certain of the Company's theaters
in California, Colorado, Ohio, Massachusetts, Minnesota, Texas, and Washington.
In addition, the Theatrical Janitors Union represents janitors at the Company's
theater in Berkeley, California. These collective bargaining agreements, which
cover an aggregate of 50 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.
11
<PAGE> 12
ITEM 2. PROPERTIES
PROPERTIES
Of the 101 theaters operated by the Company, 91 are leased, five are owned,
four buildings are owned by the Company on properties covered by ground leases,
and one is 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 and additional rent payments based on a percentage
of the leased theater's revenue above a base amount and require the Company to
pay for property taxes, maintenance, insurance and certain other
property-related expense during the term of the lease. The terms are negotiated
at the signing of the lease.
During the next five years approximately 49 theater leases (representing
197 screens) will expire, representing approximately 49% of all the Company's
theaters (39% of all screens). Of those coming due within the next five years,
leases at 37 theaters (representing 162 screens) will be subject to renewal
options, four theaters (representing 14 screens) are currently operated on a
month to month basis, 7 theaters (representing 17 screens) currently have no
renewal options and one theater (representing 4 screens) is subject to a
purchase option.
The majority of the concessions, projection, seating, and other related
equipment required for each of the Company's theaters is owned.
The Company leases office space in Addison, Texas and Los Angeles,
California for its corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
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, results of operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's Common or
Preferred Stock. As of April 7, 2000, there were 25 holders of record of the
Company's Common Stock, 17 holders of the Company's Series A Preferred Stock,
and one holder of the Company's Convertible Preferred Stock. The Company has not
paid dividends on its Common Stock and does not expect to pay dividends on its
Common Stock in the foreseeable future. The Senior Subordinated Notes Indenture
contains restrictions on the Company's ability to pay dividends on its Common
and Preferred Stock. The Company's Series A Preferred Stock accrues a $6.00
cumulative annual dividend on each outstanding share and is payable if earned
and declared, if the preferred stock is redeemed or if the Company is
liquidated. The Company's Convertible Preferred Stock, which ranks senior to the
Series A Preferred Stock as to the payment of dividends, accrues a $80.00
cumulative annual dividend on each outstanding share through June 30, 2002.
Thereafter, the dividend will accrue at a rate of $6.00 per share during the
term of employment of the holder. The dividend is payable if earned and
declared, if the Convertible Preferred Stock is redeemed or if the Company is
liquidated. As of December 31, 1999 and 1998, aggregate Series A Preferred Stock
dividends of $5,148,497 and $2,776,235, respectively, and Convertible Preferred
Stock dividends of $79,200 and $0, respectively, are in arrears.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
THE COMPANY
The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated for the years ended December
31, 1999, 1998, 1997 and for the period from May 10, 1996 (date of inception) to
December 31, 1996. This information should be read in conjunction with
"Management Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, appearing elsewhere in this report.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
DATE OF INCEPTION) YEAR ENDED YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999
-------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT THEATER AND SCREEN DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $ 1,420 $ 18,762 $ 77,216 $ 106,081
Theater operating costs .......................... 1,219 16,102 67,778 96,425
General and administrative expenses .............. 577 1,901 6,272 8,493
Depreciation and amortization .................... 103 1,479 6,507 8,343
Asset impairment charge .......................... 4,580 3,571
Operating loss ................................... (479) (720) (7,921) (10,751)
Interest expense ................................. 353 7,940 11,677
Amortization of debt issue costs ................. (55) 1,469 1,039
Net loss ......................................... (382) (1,173) (16,786) (22,627)
CONSOLIDATED OTHER FINANCIAL DATA:
Deficiency of earnings to fixed charges (1) ...... $ 382 $ 1,156 $ 16,786 $ 22,627
Theater level cash flow (2) ...................... 201 2,660 9,438 9,656
Theater level cash flow margin (3) ............... 14.2% 14.2% 12.2% 9.1%
EBITDA (4) ....................................... $ (376) $ 759 $ 3,166 $ 1,162
Cash flow from (used for):
Operating ..................................... 733 757 (3,935) (6,339)
Investing ..................................... (13,180) (9,047) (102,546) (8,945)
Financing ..................................... 17,156 3,857 109,086 12,403
Capital Expenditures (5) ......................... 182 4,556 7,934 12,039
THEATER DATA:
Theaters ......................................... 18 27 105 104
Screens .......................................... 102 165 534 522
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents ........................ $ 4,709 $ 276 $ 2,881 $ -
Theater properties and equipment -- net .......... 3,361 8,688 66,913 67,089
Total assets ..................................... 17,827 21,927 132,392 134,262
Total long-term debt and capital leases,
including current portion ........................ 2,000 6,597 107,139 125,349
Stockholders' equity (deficiency) ................ 14,774 13,633 17,585 (4,992)
</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 asset impairment charge 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
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 plus
asset impairment charge. 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 purchases of
property and equipment.
13
<PAGE> 14
LANDMARK
The following table sets forth selected consolidated financial and
operating data for Landmark derived from audited financial statements for the
periods ended December 31, 1997, December 31, 1996, June 30, 1996, March 31,
1996 and March 31, 1995, and from unaudited financial statements for the year
ended December 31, 1999, the nine months ended December 31, 1998 and the three
months ended March 31, 1998. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." A major portion of the Company's business and assets was acquired
from Landmark, and for accounting purposes only, Landmark should be considered a
predecessor of Company pursuant to Rule 405 of Regulation C of the Securities
Act.
<TABLE>
<CAPTION>
Three Three Nine
Year Months Six Months Year Months Months
Ended Ended Ended Ended Ended Ended
March 31, June 30, December 31, December 31, March 31, December 31,
1996 1996 1996 1997 1998 1998
------------ ------------ ------------ ----------- ----------- ------------
(In thousands, except theater, screens and ratio data)
(Predecessor) (Second Predecessor) (Successor)
-------------------------- ---------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues ............................... $ 51,143 $ 11,576 $ 29,581 $ 56,954 $ 15,660 $ 39,804
Theater operating costs ................ 42,105 10,244 23,305 45,822 12,194 32,654
General and administrative expenses .... 4,225 1,189 2,426 5,191 1,357 2,631
Depreciation and amortization .......... 3,569 906 2,237 4,929 1,290 3,272
Operating income (loss) ................ 1,244 (763) 1,613 1,012 819 1,178
Interest expense ....................... 716 237 458 748 162 (360)
Net income (loss) ...................... 207 (647) 495 (232) 265 924
Consolidated Other Financial Data:
Ratio of earnings to fixed charges (1).. 1.18x 1.69x 1.09x 1.93x N/A
Deficiency of earnings available to
Cover fixed charges (1) ............. $ (1,000)
Theater level cash flow (2) ............ $ 9,038 1,332 $ 6,276 $ 11,132 $ 3,466 $ 7,187
Theater level cash flow margin (3) ..... 17.7% 11.5% 21.2% 19.5% 22.1% 18.0%
EBITDA (4) ............................. $ 4,813 $ 143 $ 3,850 $ 5,941 2,109 4,585
Theater Data:
Theaters ............................... 52 52 50 49 49 51
Screens ................................ 140 140 138 140 140 152
Consolidated Balance Sheet Data
(at Period End):
Theater properties and equipment -
Net .................................. $ 35,632 $ 35,023 $ 35,795 $ 42,587
Total assets........................... 61,476 60,749 59,835 79,865
</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 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.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
The following analysis of the financial condition and results of operations
of the Company and Landmark and Silver Cinemas should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
Since inception in May 1996, the Company has experienced rapid revenue
growth through theater acquisition and the development of new theaters. During
fiscal year 1996, the Company acquired 18 theaters with 102 screens. During
fiscal year 1997, the Company acquired eight additional theaters with a total of
52 screens, constructed one theater with ten screens and added one screen to an
existing theater. During fiscal year 1998, the Company acquired 81 theaters with
372 screens, opened three newly constructed theaters with 18 screens, closed 4
theaters with 10 screens, and terminated the management agreement on 2 theaters
with 11 screens. In the current fiscal year through December 31, 1999, the
Company acquired 3 theaters with 13 screens, opened one newly constructed
theater with 6 screens, and closed 6 theaters with 35 screens, bringing the
Company's total theater and screen count to 104 and 522, respectively. The
Company expects that its future revenue growth will be derived primarily from
the operation of its existing theaters, the acquisition and construction of
specialty theaters and the addition of screens and seating to existing theaters.
In 1999, the Company incurred a net loss of $22.6 million compared with net
losses of $16.8 million and $1.2 million in 1998 and 1997, respectively. The
losses in 1999 and 1998 included noncash charges totaling $3.6 million and $4.6
million, respectively, for the impairment of value of certain theaters.
SEGMENT DATA
A summary of the results of operations for each of the Company's principal
business segments is displayed in Note 9 to the consolidated financial
statements.
The Company's business operations are aligned into the following two
segments: Landmark (Specialty Film) and Silver Cinemas (primarily second-run).
15
<PAGE> 16
RESULTS OF OPERATIONS OF LANDMARK
The following table sets forth information for certain predecessor and
successor fiscal periods used to present, without adjustment, information for
the years ended December 31, 1999, 1998 and 1997. This information is provided
herein for the purpose of presenting comparisons for such periods; however, the
Company makes no representations as to its usefulness for such purpose.
<TABLE>
<CAPTION>
COMBINED
YEAR THREE MONTHS NINE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1998 1999
----------------------------------------- ------------------ ----------------- ------------------
(FIRST PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions $45,903 80.6% $12,643 80.7% $31,794 79.9% $44,437 80.1% $52,560 81.2%
Concessions 10,061 17.7 2,813 18.0 7,240 18.2 10,053 18.1 11,228 17.4
Other 990 1.7 204 1.3 770 1.9 974 1.8 902 1.4
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 56,954 100.0 15,660 100.0 39,804 100.0 55,464 100.0 64,690 100.0
Costs and expenses
Cost of operations:
Film rentals
and advertising 23,212 40.8 6,201 39.6 15,298 38.4 21,499 38.8 27,964 43.2
Cost of
concessions 2,096 3.7 581 3.7 1,430 3.6 2,011 3.6 1,965 3.0
Payroll and related
expenses 9,448 16.6 2,470 15.8 6,529 16.4 8,999 16.2 9,125 14.1
Occupancy costs 5,596 9.8 1,478 9.4 4,282 10.7 5,760 10.4 6,522 10.1
Other theater
operating costs 5,470 9.6 1,463 9.3 5,115 12.9 6,578 11.9 7,983 12.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 45,822 80.5 12,193 77.8 32,654 82.0 44,847 80.9 53,560 82.8
General and
administrative 5,191 9.1 1,357 8.7 2,631 6.6 3,988 7.2 3,504 5.4
Depreciation and
and amortization 4,929 8.7 1,290 8.2 3,271 8.2 4,561 8.2 4,662 7.2
Asset impairment 70 0.2 70 0.1 80 .1
Operating income
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(loss) $ 1,012 1.8% $ 820 5.2% $ 1,178 3.0% $ 1,998 3.6% 2,884 4.5%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Information for 1998 includes approximately 3 months under prior ownership,
which have been added to the Company's period of ownership to derive a year of
operating results. Since Landmark was operated for a partial year under current
management, many of the Company's cost saving programs are not fully reflected
in the 1998 results.
Admissions revenues. Admissions revenues increased $8.1 million or 18.3% to
$52.6 million during the year ended December 31, 1999. The increased admissions
revenue was primarily the result of a 4.4% increase in the average ticket price
from $5.88 to $6.14 and a 13.1% increase in attendance from 7,562,000 to
8,553,000. Landmark benefits from having an average ticket price that is
substantially higher than the national average ticket price ($6.14 vs. $5.08 for
1999 respectively) and strong customer loyalty due to their dedication to the
specialty-film market.
Concessions revenues. Concessions revenues increased $1.2 million or 11.7%
during the year ended December 31, 1999. The increase in attendance was offset
by a slight decrease in the average concession sale per attendee from $1.33 to
$1.31.
Film and advertising expenses. Film rental and advertising expenses as a
percentage of admissions revenue increased from 48.4% to 53.2% as a result of
higher than expected settlements on several releases including The Blair Witch
Project. Landmark's film rental rates are typically below film rental rates of
first-run theaters, which average in the mid 50% range.
Cost of concessions. Concession costs as a percentage of concession revenue
decreased from 20.0% in 1998 to 17.5% in 1999. 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), and increased spoilage. These added costs are
partially offset by the Company's negotiated volume discounts on the traditional
theater concession items including fountain drinks. Most of the volume discounts
were put in place by the Company during the second and third quarters of 1998.
Payroll and related expense. Payroll expense increased $0.1 million or 1.4%
for the year ended December 31, 1999. Payroll per attendee, a key measure for
staff efficiency, decreased from $1.19 per attendee to $1.07 per attendee. The
decrease is primarily attributable to the Company's efforts to train theater
managers to adjust their staffing levels to the level of business.
16
<PAGE> 17
Occupancy costs. Occupancy costs increased from $5.8 million for the year
ending December 31, 1998 to $6.5 million for the year ending December 31, 1999
primarily due to percentage rents paid with respect to theaters which exceeded
certain specified sales levels.
General and administrative expenses. General and administrative expenses
decreased from $4.0 million for the year ended December 31, 1998 to $3.5 million
for the year ended December 31, 1999. The decrease was primarily the result of
the elimination of duplicate staff positions following the acquisitions.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Information for 1998 includes approximately 3 months under prior ownership,
which have been added to the Company's period of ownership to derive a year of
operating results. Since Landmark was operated for a partial year under current
management, many of the Company's cost saving programs are not fully reflected
in the 1998 results.
Admissions revenues. Admissions revenues decreased $1.5 million or 3.2% to
$44.4 million during the year ended December 31, 1998. The decreased admissions
revenue was primarily the result of a 1.2% decrease in the average ticket price
from $5.95 to $5.88 and an 2.0% reduction in attendance from 7,712,000 to
7,562,000. Landmark benefits from having an average ticket price that is
substantially higher than the national average ticket price ($5.88 vs. $4.59 for
1997 respectively) and strong customer loyalty due to their dedication to the
specialty-film market.
Concessions revenues. Concessions revenues were flat from year to year at
$10.1 million. The slight decrease in attendance was offset by a slight increase
in the average concession sale per attendee from $1.30 to $1.33.
Film and advertising expenses. Film rental and advertising expenses as a
percentage of admissions revenue decreased from 50.6% to 48.4% as a result of
more aggressive film settlement, the ability to extend the run of several
successful releases during 1998, and more efficient recovery of advertising
co-op expenses. Landmark's film rental rates are typically below film rental
rates of first-run theaters, which average in the low to mid 50% range.
Cost of concessions. Concession costs as a percentage of concession revenue
decreased slightly in 1998 from 20.8% to 20.0%. 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), and increased spoilage. These added costs
are partially offset by the Company's negotiated volume discounts on the
traditional theater concession items including fountain drinks. Most of the
volume discounts were put in place by the Company during the second and third
quarters of 1998.
Payroll and related expense. Payroll expense decreased from $9.4 million
for the year ended December 31, 1997 to $9.0 million for the year ended December
31, 1998. Payroll per attendee, a key measure for staff efficiency, decreased
from $1.23 per attendee to $1.19 per attendee. The decrease is primarily
attributable to the Company's efforts to train theater managers to adjust their
staffing levels to the level of business. The benefits attributable to more
efficient staffing schedules were partially offset by higher staff levels for
the Company's two theater openings in 1998, which typically require more staff
prior to and shortly after opening.
Occupancy costs. Occupancy costs increased from $5.6 million for the year
ending December 31, 1997 to $5.8 million for the year ending December 31, 1998
primarily due to a higher theater count and contractual escalations in
Landmark's operating leases.
General and administrative expenses. General and administrative expenses
decreased from $5.2 million for the year ended December 31, 1997 to $4.0 million
for the year ended December 31, 1998. The decrease was primarily the result of
the elimination of duplicate staff positions following the acquisition.
17
<PAGE> 18
RESULTS OF OPERATIONS OF SILVER CINEMAS
The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 10,368 55.3% $ 20,333 54.4% $ 21,879 52.9%
Concessions 8,098 43.2 16,383 43.8 18,393 44.4
Other 296 1.5 696 1.8 1,119 2.7
--------- --------- --------- --------- --------- ---------
Total 18,762 100.0 37,412 100.0 41,391 100.0
Costs and expenses
Cost of operations:
Film rentals 4,484 23.9 7,737 20.7 8,215 19.8
Cost of concessions 1,462 7.8 2,415 6.5 3,852 9.3
Payroll and related expenses 3,065 16.3 6,927 18.5 8,630 20.9
Occupancy costs 2,813 15.0 7,872 21.0 9,685 23.5
Advertising 755 4.0 1,767 4.7 1,913 4.6
Other theater operating cost 3,523 18.8 8,406 22.5 10,569 25.5
--------- --------- --------- --------- --------- ---------
Total 16,102 85.8 35,124 93.9 42,864 103.6
General and administrative 1,901 10.1 3,641 9.7 4,990 12.1
Depreciation and amortization 1,479 7.9 3,236 8.6 3,681 8.9
Asset impairment charges 0 0.0 4,510 12.1 3,491 8.4
--------- --------- --------- --------- --------- ---------
Operating income (loss) $ (720) (3.8)% $ (9,099) (24.3)% $ (13,635) (33.0)%
========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Admissions Revenues. Admissions revenue increased $1.5 million or 7.6% to
$21.9 million during the year ended December 31, 1999. The increased admission
revenue was primarily the result of an increase in attendance from 12,133,000 in
1998 to 13,187,000 in 1999. Thirty-one newly acquired or constructed theaters
were added during 1998. The average ticket price for the circuit decreased from
$1.68 to $1.65 primarily as the result of promotional discounts.
Concession Revenues. Concession revenue increased $2.0 million or 12.3% to
$18.4 million during the year ended December 31, 1999. The increased concession
revenue was primarily the result of an increase in attendance. The average
concession sale per attendee increased slightly from $1.35 to $1.39 due
primarily to attendance shifts from theaters serving full priced menus versus
theaters serving reduced price menus.
Film Rental Expenses. Film rental expenses as a percentage of admissions
revenues declined slightly from 38.1% for the year ended December 31, 1998
compared to 37.6% for the year ended December 31, 1999. The decrease was
primarily attributable to the increased percentage of admission revenue that was
contributed by discount theaters when compared to December 31, 1998.
Concession Supplies Expenses. Concession costs as a percentage of
concession revenue for the period to period comparison increased from 14.7% of
concession sales to 20.9% primarily due to the implementation of the Company's
reduced price concession menu at several locations.
Salaries and Wage Expenses. Payroll expense increased $1.7 million or 25.0%
to $8.6 million for the year ended December 31, 1999 from the year ended
December 31, 1998. Payroll per attendee, a key measure for staff efficiency,
increased from $0.57 per attendee to $0.66 per attendee. The increase is
primarily attributable to the increased staffing levels at those theaters
offering the reduced-rate concession menu, coupled with lost leverage
attributable to the 1999 same theater attendance decline of 8% at the Company's
second run theaters.
Facility Lease Expenses. Facility leases increased $1.8 million to $9.7
million or 23.0% for the year ended December 31, 1999 from $7.9 million for the
year ended December 31, 1998. The increase in facility lease expense is
primarily attributable to the additional theaters acquired and constructed
during 1998.
Advertising Expenses. Advertising expenses increased $0.1 million or 8.3%
for the year ended December 31, 1999 compared to the year ended December 31,
1998. Advertising expenses comprised 4.6% of total revenues for each of the
years ended December 31, 1999 and 1998.
Utilities and Other Expenses. Utilities and other expenses increased from
$8.4 million to $10.6 million or 25.7% for the year ended December 31, 1999
compared to the year ended December 31, 1998. The increase was primarily the
result of the additional theaters acquired and constructed during 1998.
18
<PAGE> 19
General and Administrative Expenses. General and administrative expenses
increased $1.3 million to $5.0 million or 37.1% for the year ended December 31,
1999 compared to the year ended December 31, 1998. The increase was primarily
the result of increased payroll costs associated with the Company's expansion
and approximately $0.5 million of one-time charges for the appointment of the
Company's President and CEO.
Depreciation and Amortization. Depreciation and amortization increased $0.4
million to $3.7 million or 13.8% for the year ended December 31, 1999 from $3.3
million for the year ended December 31, 1998. The increase was primarily the
result of theater property additions associated with the Company's expansion
efforts.
Asset Impairment Charges. Based on recent trends in declining attendance in
several of Silver Cinemas' markets, the Company reviewed its assets for
impairment. During 1999 and 1998, the carrying value of the assets for 17
theaters (128 screens) and 20 theaters (150 screens), respectively, exceeded the
expected future cash flows from the theater indicating impairment. The
impairments were measured by the amount by which the carrying amount of the
assets of the theater exceeded the estimated fair value of the assets. This
resulted in a $3.1 million and $3.9 million charge to earnings during 1999 and
1998, respectively. Additionally, the Company also recognized $0.5 million and
$0.7 million in write downs related to the closings of four and two theaters in
1999 and 1998, respectively.
Operating Loss. The operating loss for the year ended December 31, 1999
increased by $4.5 million to $13.6 million or 33.0% of total revenues, compared
to an operating loss of $(9.1) million, or (24.3%) of total revenues, for the
year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Admissions Revenues. Admissions revenue increased $10.0 million or 96.1% to
$20.3 million during the year ended December 31, 1998. The increased admission
revenue was primarily the result of the addition of 31 newly acquired or
constructed theaters representing 228 screens. The average ticket price for the
circuit increased from $1.66 to $1.68 primarily as the result of the addition of
one newly constructed first-run theater and a change in format from second-run
to first run.
Concession Revenues. Concession revenue increased $8.3 million or 102.3% to
$16.4 million during the year ended December 31, 1998. The increased concession
revenue was primarily the result of the newly acquired and constructed theaters
and a 4.7% increase in the average concession sale per attendee from $1.29 to
$1.35 due primarily to retail price adjustments.
Film Rental Expenses. Film rental expenses as a percentage of admissions
revenues declined slightly from 43.2% for the year ended December 31, 1997
compared to 38.1% for the year ended December 31, 1998. The decrease was
primarily attributable to the acquisition of 31 second-run theaters during the
year, which increased the percentage of admission revenue that was contributed
by second-run theaters when compared to December 31, 1997.
Concession Supplies Expenses. Concession costs as a percentage of
concession revenue for the period to period comparison decreased from 18.1% of
concession sales to 14.7% primarily due the negotiation of lower wholesale
prices, standardizing menus, and the adjustment of retail prices to reflect
local market conditions for those theaters operated more than year.
Salaries and Wage Expenses. Payroll expense increased from $3.1 million or
126.0% for the year ended December 31, 1997 to $6.9 million for the year ended
December 31, 1998 due primarily to the addition of the newly acquired and
constructed theaters.
Facility Lease Expenses. Facility leases increased $5.1 million to $7.9
million or 179.8% for the year ended December 31, 1998 from $2.8 million for the
year ended December 31, 1997. The increase in facility lease expense is
primarily attributable to the additional theaters acquired and constructed
during 1998. Reflected in facility lease expense are non-cash charges of $0.2
million which relate to the straight-lining of rent expense over the term of the
leases.
Advertising Expenses. Advertising expenses increased $1.0 million or 134.0%
from the year ended December 31, 1998 compared to the year ended December 31,
1997. Advertising expenses comprised 4.7% and 4.0% of total revenues for the
years ended December 31, 1998 and 1997 respectively. The higher percentage for
the year ended December 31, 1998 was due primarily to the additional cost of
promoting a theater's change from second-run to first-run and the marketing of a
newly constructed theater that opened in November 1998.
Utilities and Other Expenses. Utilities and other expenses increased from
$3.5 million to $8.4 million or 138.6% for the year ended December 31, 1998
compared to the year ended December 31, 1997. The increase was primarily the
result of the additional theaters operated at December 31, 1998 compared to
December 31, 1997.
19
<PAGE> 20
General and Administrative Expenses. General and administrative expenses
increased from $1.9 million to $3.6 million or 91.6% for the year ended December
31, 1998 compared to the year ended December 31, 1997. The increase was
primarily the result of increased payroll costs associated with the Company's
expansion and one-time severance expenses of $0.1 million.
Depreciation and Amortization. Depreciation and amortization increased $1.8
million to $3.2 million or 118.7% for the year ended December 31, 1998 from $1.5
million for the year ended December 31, 1997. The increase was primarily the
result of theater property additions associated with the Company's expansion
efforts.
Asset Impairment Charges. Based on recent trends in declining attendance in
several of Silver Cinemas' markets, the Company reviewed its assets for
impairment. For 20 theaters (150 screens) the carrying value of the assets
exceeded the expected future cash flows from the theater indicating impairment.
The impairment was measured by the amount by which the carrying amount of the
assets of the theater exceeded the estimated fair value of the assets. This
resulted in a $3.9 million charge to earnings during 1998. Additionally, the
Company also recognized $0.6 million in write downs related to the closings of
two theaters.
Operating Loss. The operating loss for the year ended December 31, 1998
increased by $8.4 million to ($9.1) million or (24.3%) of total revenues,
compared to an operating loss of $0.7 million, or (3.8%) of total revenues, for
the year ended December 31, 1997.
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 is, in effect, no accounts receivable. This,
in combination with minimal inventory requirements, creates a negative working
capital position, which provides certain operating capital.
During fiscal 1999, the Company's capital requirements were the result of
theater acquisitions, renovation of existing theaters, and the construction of
one theater. Such capital expenditures were financed with equity sales, bank
borrowings, proceeds from the issuance of senior subordinated notes and the sale
of two theaters.
The Company's operating activities used net cash of approximately $6.3
million during 1999. Net cash used in operations resulted primarily from net
losses of $22.6 million, adjusted for depreciation and amortization expense of
$9.4 million, asset impairment charges of $3.6 million, and an increase in
accrued liabilities of $3.2 million.
Cash used by investing activities was approximately $8.9 million, which
consisted primarily of amounts used for acquisitions of existing theaters and
construction of new theaters. Cash used for these acquisitions and construction
was offset by the sale of two theaters during the year.
Cash provided by financing activities was approximately $12.4 million
during 1999. During June 1999, the Company secured additional debt financing of
approximately $19.7 million, which was offset by an increase in debt issue costs
of approximately $7.2 million.
As of December 31, 1999, the Company had a net overdraft of cash accounts
of approximately $1.2 million.
Cash used in operating activities of $3.9 million during 1998 primarily was
attributable to net losses of approximately $16.8 million, partially offset by
$8.0 million in depreciation and amortization expenses and asset impairment
charges of $4.6 million. Cash used in investing activities during 1998 was $103
million, principally as the result of acquisitions of existing theaters and
newly constructed theaters. Cash provided from financing activities during 1998
was $109 million, which consisted of the issuance of $100 million in debt and
$20.7 million in proceeds of stock issuances.
"Same Theater" attendance at the Company's second-run theaters has declined
by approximately 8% and 16% during 1999 and 1998, respectively. Management
believes this trend is the result of several factors including the development
of megaplexes in certain markets, changes in film and video release patterns,
and the overall strength of the US economy. If this trend continues, the
Company's ability to generate liquidity could be negatively impacted.
The preceding statements concerning the attendance declines may constitute
forward-looking statements within the meaning of the federal securities laws.
The Company warns that many factors could, individually or in aggregate, lead to
further declines in theater attendance, including, without limitation, the
following: consumer spending trends and habits; increased competition in the
theater industry; adverse developments in economic factors influencing the
exhibition industry; and lack of demand for films by the general public. The
Company does not expect to update such forward-looking statements continually as
conditions change, and readers should consider that such statements pertain only
to the date hereof.
20
<PAGE> 21
CREDIT AGREEMENT - On October 6, 1999, Farallon Capital Funding, LLC
("Farallon"), as agent, an affiliate thereof, as initial lender and the Company
and its subsidiaries entered into a four year, senior secured credit facility
with aggregate availability of $50 million, subject to a defined real estate
collateral borrowing base (the "Credit Facility"). The $50.0 million facility is
comprised of a revolving credit facility of up to $15.0 million (the
"Revolver"), term loans of up to $17.0 million ("Term A Loan") and term loans of
up to $18.0 million ("Term B Loans"). The Term A Loan was funded in its entirety
on October 8, 1999. Under the Term A Loan and the Revolver, the Company will
utilize borrowings to fund working capital requirements, and for other general
corporate purposes, including, subject to certain conditions, the acquisition
and construction of theaters. The Term B Loans may be used only for repurchasing
the Company's senior subordinated notes, and the amount of Term B Loans will be
limited to the lesser of (i) $18.0 and (ii) the amount by which the real estate
collateral-based borrowing base exceeds the sum of the outstanding principal
balance (including accrued interest) of the Term A Loan and the $15.0 million
revolving loan commitment). At April 7, 2000, the Company's borrowings under the
Revolver totaled $11.0 million and an additional calculated $4.0 million was
available to the Company. Borrowings under the Credit Facility rank senior in
right of payment to the Notes and is secured by a perfected first priority
security interest in substantially all existing and future assets of the Company
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 subsidiaries.
Farallon's obligations under the Credit Facility to advance funds at any
time during the four-year term are subject to certain conditions customary in
secured credit facilities, including the absence of a default under the Credit
Facility. The Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness or guarantees, prepay other indebtedness,
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 corporate
activities. The Company is not currently in compliance with certain
requirements, including its present intention to fail to make a scheduled
interest payment for the Company's senior subordinated notes when due on April
15, 2000 and its receipt of a report from its independent auditors for the year
ended December 31, 1999 containing an explanatory paragraph that explains an
uncertainty as to the Company's ability to continue as a going concern, and has
not obtained a waiver from Farallon.
The Company will be required to restructure its current financing
arrangements and/or seek additional financing sufficient to meet its working
capital needs for fiscal 2000. The Company will utilize the thirty day grace
period allowed under the senior subordinated note indenture to evaluate
restructuring alternatives and has hired professionals in that regard. Failure
to make the scheduled interest payment does not constitute a default under the
senior subordinated note indenture for thirty days. Given that no assurance can
be made that the Company could restructure its current financing arrangements
and/or obtain additional financing, substantial doubt exists about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classifications of assets or liabilities that may result from the outcome of
these uncertainties.
As of December 31, 1999, the Company had $5,148,497 and $79,200 of Series A
Preferred Stock and Convertible Preferred Stock dividends in arrears.
INFLATION
Inflation has not had a significant impact on the Company's operations to
date.
SEASONALITY
The Company's 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 the Company.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems and believes those systems successfully responded to the
Year 2000 date change. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
ITEM 7 (a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any derivative financial instruments in place as
of December 31, 1999.
21
<PAGE> 22
The following table presents the carrying and fair value at December 31,
1999 of the Company's debt along with its interest rates. Fair value is
determined as the quoted price of the financial instrument.
<TABLE>
<CAPTION>
EXPECTED
MATURITY FAIR
DATE 2005 TOTAL VALUE
<S> <C> <C> <C> <C>
Fixed Rate
Debt $ 99,580,000 $ 99,580,000 $41,077,000
Interest
Rate 10.5%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS
The financial statements are listed on the Index at F-1. Such financial
statements are included herein beginning on page F-3
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
22
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth certain information, regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- ----- -----------------------------
<S> <C> <C>
Larry D. Hohl 45 President, Chief Executive Officer, and Director
John M. Sullivan 64 Chairman of the Board of Directors
Paul Ledbetter 43 Vice President, General Counsel
David H. Wong 36 Director
Christopher A. Laurence 32 Director
James Rosenthal 36 Director
Thomas E. Davin 42 Director
</TABLE>
Larry D. Hohl, President, Chief Executive Officer, President and Director.
Mr. Hohl has served as Chief Executive Officer, President and Director since
September 13, 1999. Prior to joining the Company, Mr. Hohl served as Executive
Vice President and Senior Operating Officer of Storage, USA, Inc. Mr. Hohl
previously served 11 years in various senior management positions at Pepsico,
Inc., including the position of Vice President and General Manager of Pizza Hut,
North Atlantic Division.
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 and serves on the
organization and compensation and audit committees of The Scotts Company and is
a director and member of the audit committee of Bell Sports, Inc. From October
1987 to January 1993, Mr. Sullivan was Chairman of the Board and Chief Executive
Officer of Prince Holdings, Inc.
Paul A. Ledbetter, Vice President, General Counsel. Mr. Ledbetter has
served as the Company's Vice President, General Counsel, since July 1998. Prior
to joining the Company, Mr. Ledbetter was Vice President, General Counsel for
MEPC American Properties. Prior to joining MEPC American Properties, Mr.
Ledbetter was with the law firm Akin, Gump, Strauss, Hauer & Feld, LLP in the
Dallas office engaged primarily in the real estate and real estate financing
section of the firm.
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, 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 Aspen Marketing Group, Inc., Spectrum Clubs, Inc.,
Oriental Trading Co. and Bay Travelgear, 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
Aspen Marketing Group, Inc., Bay Travelgear, Inc., FleetPride Corporation and
Worldpoint Logistics, Inc.
James Rosenthal, Director. Mr. Rosenthal has served as a Director of the
Company since its inception in June 1996. In 1999, Mr. Rosenthal was named
President of New Line New Media for the New Line Cinema Corporation. Mr.
Rosenthal continues to serve 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 supervises on-line ventures including the
internet store and the internet auction site, as well as 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 February 2000 he was appointed President and CEO of
Entrepreneur.Com, Inc. From June 1997 to February 2000 he was 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.
23
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by the Company
to its seven most highly compensated officers.
<TABLE>
<CAPTION>
TOTAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER
- ------------------------------------------------------- ---- -------- -------- --------
<S> <C> <C> <C> <C>
Larry D. Hohl
Chief Executive Officer, President 1999 $107,792 $120,000 $239,000(a)
Steven L. Holmes(1)
Chief Executive Officer, Chief Financial Officer 1999 $153,974 $ 12,000 $ 7,800(b)
1998 153,974 54,000 9,978(c)
1997 146,222 42,635 7,800(b)
Thomas J. Owens(2)
President 1999 $113,808 $ 23,213(d)
1998 251,582 $ 54,000 9,941(e)
1997 144,865 39,792 7,800(f)
Bert Manzari(3)
President of Landmark 1999
1998 $229,615 $152,175 $ 2,219(g)
Ron Reid(4)
Executive Vice President, Operations 1999
1998 $150,237 $ 47,000 $ 8,524(h)
1997 142,770 26,125 6,000(i)
Paul Richardson
Executive Vice President 1999 $260,121 $ 16,000 $136,338(j)
1998 198,404 18,000 3,119(k)
Paul Ledbetter 1999 $122,052 $ 10,000
Vice President, General Counsel 1998
</TABLE>
- ----------
(a) Includes $200,000 for relocation, $37,500 amortization of convertible stock
grant and $1,500 car allowance.
(b) Includes a $7,800 annual car allowance.
(c) Includes $2,178 annual contribution to the Company's 401(k) savings plan
and a $7,800 annual car allowance.
(d) Includes a $1,800 annual car allowance and a $21,413 vacation payout.
(e) Includes $2,141 annual contribution to the Company's 401(k) savings plan
and a $7,800 annual car allowance.
(f) Includes a $7,800 annual car allowance.
(g) Includes a $2,219 allowance for family health insurance.
(h) Includes $2,524 annual contribution to the Company's 401(k) savings plan
and a $6,000 annual car allowance.
(i) Includes a $6,000 annual car allowance.
(j) Includes a $28,188 vacation payout and a $108,150 severance.
(k) Includes a $3,119 allowance for family health insurance.
(1) Mr. Holmes resigned as Chief Executive Officer and President effective
September 7, 1999 and Chief Financial Officer and Director of the Company
effective February 2, 2000.
(2) Mr. Owens resigned as President and Director of the Company effective
January 12, 1999.
(3) Mr. Manzari resigned as President of Landmark effective February 15, 1999
and Director of the Company effective February 15, 1999.
(4) Mr. Reid resigned as Executive Vice President, Operations of the Company
effective May 7, 1999.
EMPLOYMENT ARRANGEMENTS
Mr. Hohl, Chief Executive Officer and President, currently receives a
salary of $350,000 per year and is eligible to receive bonuses based upon
performance goals established by Mr. Hohl and the Board of Directors prior to
the beginning of each calendar year and upon formula determined enterprise value
events. In addition, he was given the opportunity to purchase 10,000 shares of
the Company's common stock and granted 3,000 shares of the Company's convertible
preferred stock. Mr. Hohl is entitled to receive certain compensation and
benefits through the term of his agreement as well as upon the termination of
his respective agreement prior to the expiration of such term.
24
<PAGE> 25
COMPENSATION OF DIRECTORS
The Chairman and Non-Employee Directors of the Company's Board of Directors
receive $4,000 and $2,000 respectively each calendar quarter as compensation for
their services as directors. They also receive reimbursement for travel and
other expenses incurred in their capacity as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 April 7, 2000, 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>
NAME AND ADDRESS COMMON STOCK AMOUNT PERCENT SERIES A PREFERRED STOCK PERCENT PERCENT OF ALL
AND NATURE OF OF CLASS AMOUNT AND NATURE OF OF CLASS VOTING
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP SECURITIES
-------------------- ------------------------ --------------
<S> <C> <C> <C> <C> <C>
Brentwood Associates 106,613 75.1% 323,400 90.2% 85.9%
Buyout Fund II, L.P.(1)
DLJ Fund Investment Partners 12,151 8.6 29,878 8.3 8.4
II, L.P.(2)
Larry D. Hohl(3) 10,000 7.0 2.0
John M. Sullivan(1) 1,328 0.9 987 0.3 0.5
James Rosenthal(1) 628 0.4 994 0.3 0.3
Tom Davin(1) 548 0.4 745 0.2 0.3
Paul Ledbetter(3) 500 0.4 0.1
David H. Wong(1)(4) 106,613 75.1 323,400 90.2 85.9
Christopher A. Laurence(1)(4) 106,613 75.1 323,400 90.2 85.9
All Directors and Officers 13,004 9.2 2,726 0.8 3.1
as a group (five individuals)
</TABLE>
- ----------
(1) The address for Brentwood Associates Buyout Fund II, L.P. and Messrs.
Davin, Sullivan and Rosenthal 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. Hohl and Ledbetter is c/o Silver Cinemas
International, Inc., 4004 Beltline Road, Suite 205, Addison, Texas 75001.
(4) Includes 106,613 shares of Common Stock and 323,400 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 years ended December
31, 1999, 1998 and 1997, BPE was paid $252,078, $1,466,840 and $81,505,
respectively, (including reimbursement of fees and expenses) pursuant to the
Services Agreement.
25
<PAGE> 26
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, Series A Preferred Stock and Convertible 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.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Documents filed as part of this Report.
1. The financial statements listed in the accompanying Index beginning on F-1
are filed as a part of this report.
(b) Reports on Form 8-K
On Form 8-Ks dated January 12, 1999 and September 16, 1999, under Item 5.
Other Events, the Company announced the resignation of Thomas. J. Owens from the
positions of President and Director of Silver Cinemas International, Inc. and
the appointment of Larry D. Hohl to the position of president and CEO of Silver
Cinemas International, Inc.
(c) Exhibits
27 - Financial Data Schedule
(d) Financial Statement Schedules.
None. Schedules 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.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 2000
SILVER CINEMAS INTERNATIONAL, INC.
BY: /s/ Larry D. Hohl
------------------------------------
Larry D. Hohl
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ Larry D. Hohl Chief Executive Officer, President April 14, 2000
-------------------------------- and Director
Larry D. Hohl
/s/ John M. Sullivan Chairman of the Board of Directors April 14, 2000
--------------------------------
John M. Sullivan
/s/ David H. Wong Director April 14, 2000
--------------------------------
David H. Wong
/s/ Christopher A. Laurence Director April 14, 2000
--------------------------------
Christopher A. Laurence
/s/ James Rosenthal Director April 14, 2000
--------------------------------
James Rosenthal
/s/ Thomas E. Davin Director April 14, 2000
--------------------------------
Thomas E. Davin
</TABLE>
27
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
(ITEMS 8 AND 14 OF FORM 10-K)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT....................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets, December 31, 1999 and 1998............................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997........ F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended December 31,
1999, 1998 and 1997............................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997......... F-6
Notes to Consolidated Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Silver Cinemas International, Inc.
We have audited the accompanying consolidated balance sheets of Silver Cinemas
International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended December 31,
1999. 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 subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Silver Cinemas International, Inc. and subsidiaries will continue as a
going concern. As more fully described in Note 1, the Company has incurred
significant operating losses since inception, has a working capital deficiency,
expects that it will continue to incur net losses, and is not in compliance with
certain requirements of its financing arrangements. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 31, 2000
F-2
<PAGE> 30
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 2,880,955
Inventories 543,656 560,886
Receivables 1,025,754 1,129,062
Prepaid rent and other 2,080,460 81,266
------------- -------------
Total current assets 3,649,870 4,652,169
THEATER PROPERTIES AND EQUIPMENT - Net 67,088,707 66,913,041
GOODWILL - NET 46,930,594 49,981,350
OTHER ASSETS - NET 16,592,799 10,845,858
------------- -------------
TOTAL $ 134,261,970 $ 132,392,418
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 119,465,800 $ 110,000
Current portion of capital lease obligations 384,398 306,284
Net overdraft of cash accounts 1,243,160
Accounts payable 2,393,909 522,733
Accrued film rentals 2,602,415 2,098,791
Accrued payrolls 1,443,154 1,190,914
Accrued property taxes and other liabilities 4,023,284 1,646,509
Accrued interest 2,198,500 2,209,500
------------- -------------
Total current liabilities 133,754,620 8,084,731
LONG-TERM DEBT, less current portion 100,110,000
CAPITAL LEASE OBLIGATIONS, less current obligations 4,029,900 4,414,299
OTHER LONG-TERM OBLIGATIONS 1,469,019 2,198,380
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series preferred stock, 95,000 shares authorized, no shares issued
Series A preferred stock, $.01 par value, 400,000 shares authorized, 358,470 and 359,874
shares issued and outstanding at December 31, 1999 and 1998, respectively 35,847,036 35,987,442
Convertible preferred stock, $.01 par value, 5,000 shares authorized, 3,000 shares
issued and outstanding at December 31, 1999 300,000
Common stock, $.01 par value; 500,000 shares authorized, 145,144 and 140,458 shares
issued and outstanding at December 31, 1999 and 1998, respectively 1,451 1,405
Additional paid-in capital 142,162 139,053
Stockholder notes receivable (51,780) (201,780)
Deferred compensation (262,470)
Accumulated deficit (40,967,968) (18,341,112)
------------- -------------
Total stockholders' equity (deficiency) (4,991,569) 17,585,008
------------- -------------
TOTAL $ 134,261,970 $ 132,392,418
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 31
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Admissions $ 74,439,210 $ 52,126,518 $ 10,367,555
Concessions 29,620,264 23,622,616 8,097,921
Other 2,021,474 1,466,747 296,102
------------- ------------- -------------
Total 106,080,948 77,215,881 18,761,578
COSTS AND EXPENSES:
Cost of operations:
Film rentals 34,007,871 21,399,319 4,483,842
Concession supplies 5,817,095 3,845,095 1,462,163
Salaries and wages 17,757,851 13,456,371 3,064,974
Facility leases 18,244,152 13,679,253 3,311,740
Advertising 4,273,191 3,402,350 755,337
Utilities and other 16,325,159 11,995,773 3,024,285
General and administrative expenses 8,493,575 6,271,867 1,900,892
Depreciation and amortization 8,342,755 6,507,118 1,479,090
Asset impairment charges 3,570,681 4,580,000
------------- ------------- -------------
Total 116,832,330 85,137,146 19,482,323
------------- ------------- -------------
OPERATING LOSS (10,751,382) (7,921,265) (720,745)
OTHER INCOME (EXPENSE):
Interest expense (11,676,875) (7,940,021) (352,509)
Amortization of debt issue costs (1,038,650) (1,469,115) (54,907)
Interest income and other income (expense), net 840,051 544,683 (45,026)
------------- ------------- -------------
Total (11,875,474) (8,864,453) (452,442)
------------- ------------- -------------
NET LOSS (22,626,856) (16,785,718) (1,173,187)
PREFERRED STOCK DIVIDENDS (2,391,462) (1,563,104) (911,328)
------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK $ (25,018,318) $ (18,348,822) $ (2,084,515)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 32
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------------- --------------------------- ----------------------------
SHARES SHARES SHARES
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 151,739 $ 15,173,900 98,320 $ 983
Capital stock 299 29,900 2,464 25
issuance
Net loss
Payment of
stockholder
notes receivable
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 152,038 15,203,800 100,784 1,008
Capital stock 207,836 20,783,642 39,674 397
issuance
Net loss
Payment of
stockholder
notes receivable
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 359,874 35,987,442 140,458 1,405
Capital stock 3,000 $ 300,000 10,000 100
issuance
Capital stock (1,404) (140,406) (5,314) (54)
repurchase
Amortized
compensation
Net loss
Payment of
stockholder
notes receivable
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1999 358,470 $ 35,847,036 3,000 $ 300,000 145,144 $ 1,451
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDER
PAID-IN NOTES DEFERRED ACCUMULATED
CAPITAL RECEIVABLE COMPENSATION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 $ 97,295 $ (116,436) $ (382,207) $ 14,773,535
Capital stock 2,417 32,342
issuance
Net loss (1,173,187) (1,173,187)
Payment of
stockholder
notes receivable 357 357
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 99,712 (116,079) (1,555,394) 13,633,047
Capital stock 39,341 (98,790) 20,724,590
issuance
Net loss (16,785,718) (16,785,718)
Payment of
stockholder
notes receivable 13,089 13,089
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 139,053 (201,780) (18,341,112) 17,585,008
Capital stock 9,900 $ (299,970) 10,030
issuance
Capital stock (6,791) (147,251)
repurchase
Amortized
compensation 37,500 37,500
Net loss (22,626,856) (22,626,856)
Payment of
stockholder
notes receivable 150,000 150,000
------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1999 $ 142,162 $ (51,780) $ (262,470) $(40,967,968) $ (4,991,569)
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 33
SILVER CINEMAS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (22,626,856) $ (16,785,718) $ (1,173,187)
Gain on sale of assets 332,617
Noncash items in net loss:
Depreciation and amortization 9,381,405 7,976,233 642,259
Amortized compensation 37,500
Asset impairment charges 3,570,681 4,580,000 891,738
Gain on debt retirement (252,000)
Cash from (used for) working capital:
Inventories 13,204 (79,498) (23,705)
Receivables and other (1,895,886) 170,423 (224,013)
Accounts payable 1,871,176 151,470 (160,623)
Accrued liabilities 3,229,439 52,003 804,685
------------- ------------- -------------
Net cash from (used for) operating activities (6,338,720) (3,935,087) 757,154
------------- ------------- -------------
INVESTING ACTIVITIES:
Acquisitions of theater properties and equipment (781,566) (89,962,008) (4,212,426)
Additions to theater properties and equipment (12,039,439) (7,933,542) (4,555,736)
Increase in other assets 93,445 (4,650,466) (278,710)
Dispositions of theater property and equipment 3,782,209
------------- ------------- -------------
Net cash (used for) investing activities (8,945,351) (102,546,016) (9,046,872)
------------- ------------- -------------
FINANCING ACTIVITIES:
Increase in bank overdraft 1,243,160
Proceeds from the issuance of debt 19,668,000 100,000,000 6,600,000
Payments of debt and capital leases (584,285) (6,884,786) (2,002,991)
Decrease in other long-term obligations (729,361) (221,029)
Increase in debt issue costs (7,197,147) (4,546,303) (772,950)
Proceeds (payments) on capital stock transactions (147,251) 20,724,590 32,342
Payments on stockholder notes receivable 150,000 13,089 357
------------- ------------- -------------
Net cash from financing activities 12,403,116 109,085,561 3,856,758
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,880,955) 2,604,458 (4,432,960)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,880,955 276,497 4,709,457
------------- ------------- -------------
End of period $ -- $ 2,880,955 $ 276,497
============= ============= =============
SUPPLEMENTAL INFORMATION:
Stock issued for notes receivable $ $ 98,790 $
============= ============= =============
Cash paid for interest $ 11,580,076 $ 5,794,424 $ 261,607
============= ============= =============
Deferred compensation $ 300,000 $ $
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 34
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 subsidiaries
(collectively referred to as the "Company"). All intercompany accounts and
transactions have been eliminated.
BUSINESS - The Company owns or leases and operates 104 motion picture
theaters (522 screens) in 19 states at December 31, 1999.
GOING CONCERN - The Company has experienced significant operating losses
since inception, has a working capital deficiency, expects that it will
continue to incur net losses, and is not in compliance with certain
requirements of its financing arrangements (see Note 5). The Company's
operations are subject to certain risks and uncertainties including, among
others: (i) limited operating history; (ii) dependence on motion picture
production and performance; (iii) relationships with film distributors; and
(iv) competition by entities with greater financial and other resources.
There can be no assurance that the Company will be successful in achieving
or sustaining profitability and positive cash flow in the future.
The Company will be required to restructure its current financing
arrangements and/or seek additional financing sufficient to meet its
working capital needs for fiscal 2000. Given that no assurance can be made
that the Company could restructure its current financing arrangements
and/or obtain additional financing, substantial doubt exists about the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on
the recoverability and classifications of assets or liabilities that may
result from the outcome of these uncertainties.
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 estimates of the final settlement pursuant to 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 primarily 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.
LONG-LIVED ASSETS and certain identifiable intangibles are reviewed by the
Company 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. Considerable management judgment is necessary to estimate cash flows
and expected fair values. Accordingly, it is reasonably possible that
actual results could vary significantly from such estimates.
OTHER ASSETS, as applicable, are amortized using the straight-line method
over five years, and over the three to seven year terms of the noncompete
and debt agreements.
ADVERTISING COSTS are expensed when incurred.
F-7
<PAGE> 35
DEFERRED INCOME TAXES are provided under the liability method for temporary
differences between revenue and expenses recognized for tax return and
financial reporting purposes. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
COMPREHENSIVE LOSS is the same as net loss.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for the quarter ending March 31, 2001. The Company does not
expect the adoption of SFAS No. 133 to have a material impact on its
financial statements. The Company will continue to review this statement
over time to determine if any additional disclosures are necessary based on
evolving circumstances.
RECLASSIFICATIONS have been made to prior period amounts to conform with
the 1999 presentation.
2. ACQUISITIONS AND DISPOSITIONS
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>
1997
A $ 370,231 1 6 January 1997
B 2,710,889 2 19 January 1997
C 1,097,200 2 12 April 1997
D 34,106 1 4 May 1997
----------- ---- ----
$ 4,212,426 6 41
=========== ==== ====
1998
E $ 1,608,398 3 17 March 1998
F 22,335,810 27 202 April 1998
G 62,523,136 49 140 April 1998
H 3,494,664 1 12 May 1998
----------- ---- ----
$89,962,008 80 371
=========== ==== ====
1999
I $ 862,869 1 4 January 1999
=========== ==== ====
</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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash $ 81,303
Inventories 4,026 $ 333,596 $ 23,577
Theater properties and equipment 200,000 56,029,299 1,414,099
Noncompete agreements 776,440 250,000
Goodwill 577,540 44,906,145 2,524,750
Other 1,262,261
Accounts payable and accrued liabilities (13,345,733)
------------ ------------ ------------
$ 862,869 $ 89,962,008 $ 4,212,426
============ ============ ============
</TABLE>
Goodwill has been recorded as an intangible asset and is presented net of
accumulated amortization of $5,140,776 and $2,573,438 at December 31, 1999
and 1998, respectively. During 1999 and 1998, goodwill was reduced by an
asset impairment charges of $988,786 and $2,821,440 (see Note 10),
respectively. The Company paid $252,078, $1,466,840 and $81,505 to a
principal stockholder (the "Stockholder") for advisory services for the
years ended December 31, 1999, 1998 and 1997, respectively.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS DATA - Pro forma statements of
operations data for the years ended December 31, 1998 and 1997 reflect
adjustments to the historical statements of operations data to give effect
to (i) the April 1998 issuance of $100 million of senior subordinated debt,
(ii) the April 1998 purchase of the assets of StarTime Cinema, Inc. for
approximately $22.3 million, (iii) the April 1998 purchase of the assets of
The Landmark Theatre Group for approximately $62.5
F-8
<PAGE> 36
million, (iv) the March 1998 purchase of three theaters from AMC
Entertainment, Inc. for approximately $1.6 million, (v) the March 1998
issuance of 99,595 shares of Series A Buyout Fund II, L.P. for $10.0
million and the April 1998 issuance of 29,878 shares of Series A Preferred
Stock and 12,151 shares of common stock to DLJ Fund Investment Partners II,
L.P. for $3.0 million, and (vi) the repayment of certain borrowings of
approximately $2.6 million, in each case as if such events had occurred at
the beginning of each respective period. Unaudited pro forma data follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues $ 101,690 $ 106,288
Net loss $ (18,054) $ (9,195)
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what the actual results of operations of the Company would
have been had the acquisition occurred at the beginning of the periods
presented, nor do they purport to be indicative of the future results of
operations of the Company.
DISPOSITIONS - In March 1999, the Company sold its specialty theater in
Sacramento, California for approximately $1.5 million in cash. In April
1999, the Company sold its theater in Burton, Michigan for approximately
$2.2 million in cash. These transactions resulted in total gains of $0.3
million. During the year ended December 31, 1999, the Company closed or did
not renew the leases for four second run theaters (26 screens) resulting in
a $0.5 million charge (see Note 10).
3. THEATER PROPERTIES AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 1,513,200 $ 1,810,062
Buildings 9,744,723 10,689,846
Leasehold interests and improvements 32,356,325 31,770,730
Theater furniture and equipment 26,415,686 26,295,904
Theaters under construction 6,311,538 897,181
------------ ------------
Total 76,341,472 71,463,723
Less accumulated depreciation and amortization (9,252,765) (4,550,682)
------------ ------------
Theater properties and equipment - net $ 67,088,707 $ 66,913,041
============ ============
</TABLE>
Depreciation and amortization expense related to theater properties and
equipment for the years ended December 31, 1999, 1998 and 1997 was
$5,214,682, $3,871,060 and $642,259. During 1999 and 1998, theater
properties and equipment was reduced by asset impairment charges of
$2,020,911 and $1,618,246, respectively (see Note 10).
The assets acquired through capitalized theater leases and capitalized
equipment leases amount to $4,912,976, and accumulated depreciation
amounted to $638,934 and $212,978 at December 31, 1999 and 1998,
respectively. Related depreciation expense for the years ended December 31,
1999 and 1998 was $425,956 and $212,978, respectively.
4. OTHER ASSETS
Other assets at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Noncompete agreements $ 2,026,400 $ 2,026,400
Debt issue costs 11,752,807 4,555,659
Organization costs 52,431
------------ ------------
Total 13,779,207 6,634,490
Less accumulated amortization (2,765,483) (1,274,262)
------------ ------------
Net 11,013,724 5,360,228
Employee notes receivable 128,189 136,681
Equipment, lease and other deposits 5,450,886 5,348,949
------------ ------------
Total $ 16,592,799 $ 10,845,858
============ ============
</TABLE>
In 1999, the Company capitalized $7,093,000 in debt issue costs related to
its new credit agreement (see Note 5.)
F-9
<PAGE> 37
5. DEBT
The following is a summary of debt at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
10 1/2% Senior subordinated notes $ 99,580,000 $ 100,000,000
Term A 17,104,335
Term B 168,184
Revolver 2,503,281
Other 110,000 220,000
------------- -------------
Total long-term debt 119,465,800 100,220,000
Less current portion 119,465,800 110,000
------------- -------------
Long-term debt, less current portion $ 0 $ 100,110,000
============= =============
</TABLE>
The senior subordinated notes (the "Notes") bear interest at 10 1/2% and
are due in 2005. The Notes are redeemable, in whole or in part, at the
option of the Company at a redemption price of 107.875% in 2001, 105.250%
in 2002, 102.625% in 2003 and 100% in 2004 and thereafter plus any accrued
but unpaid interest. In addition, on or before April 15, 2001, the Company
may, at its option and subject to certain requirements, use an amount equal
to the net cash proceeds from one or more public equity offerings, as
defined, to redeem up to an aggregate of 35% of the principal amount of the
Notes originally issued at a redemption price of 110.5% plus any accrued
but unpaid interest. Upon a change in control of the Company, as defined in
the indenture, the Company will be required to make an offer to repurchase
all or any part of each holder's Notes at a price equal to 101% of the
principal amount thereof plus interest. The Notes also include restrictive
covenants relative to the incurrence of additional indebtedness, the
payment of dividends and other matters.
The Company does not intend to make a scheduled interest payment for the
Notes when due on April 15, 2000 and is not currently in compliance with
certain requirements of its senior secured credit agreement. Accordingly,
the Notes have been included in the current portion of long-term debt on
the Company's consolidated balance sheet at December 31, 1999.
During November 1999, the Company offered to purchase for cash up to
$45,000,000 aggregate principal amount of its outstanding Notes due 2005.
The tender offer expired on December 10, 1999, and $420,000 of principal
was tendered for total payments by the Company of $168,000. This gain on
debt retirement is included in other income (expense) in the 1999 statement
of operations.
CREDIT AGREEMENTS - On October 6, 1999, Farallon Capital Funding, LLC
("Farallon"), as agent, an affiliate thereof, as initial lender and the
Company and its subsidiaries entered into a four year, senior secured
credit facility with aggregate availability of $50 million, subject to a
defined real estate collateralbased borrowing base (the "Credit Facility").
The $50.0 million facility is comprised of a revolving credit facility of
up to $15.0 million (the "Revolver"), term loans of up to $17.0 million
("Term A Loan") and term loans of up to $18.0 million ("Term B Loans"). The
Term A Loan was funded in its entirety on October 8, 1999. Under the Term A
Loan and the Revolver, the Company will utilize borrowings to fund working
capital requirements, and for other general corporate purposes, including,
subject to certain conditions, the acquisition and construction of
theaters. The Term B Loans may be used only for repurchasing the Notes, and
the amount of Term B Loans will be limited to the lesser of (i) $18.0 and
(ii) the amount by which the real estate collateral-based borrowing base
exceeds the sum of the outstanding principal balance (including accrued
interest) of the Term A Loan and the $15.0 million revolving loan
commitment). At December 31, 1999, an additional calculated $12.5 million
was available to the Company under the Revolver. Borrowings under the
Credit Facility rank senior in right of payment to the Notes and is secured
by a perfected first priority security interest in substantially all
existing and future assets of the Company 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 subsidiaries. Borrowings bear total annual interest at
15.5% with annual interest at 12.875% due monthly and the remaining
interest due with the borrowings. The Company pays an annual unused
commitment fee of 0.50%.
Farallon's obligations under the Credit Facility to advance funds at any
time during the four-year term are subject to certain conditions customary
in secured credit facilities, including the absence of a default under the
Credit Facility. The Credit Facility contains a number of covenants that,
among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness or
guarantees, prepay other indebtedness, 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 corporate activities. The Company is
not currently in compliance with certain requirements, including its
present intention to fail to make a scheduled interest payment for the
Company's Notes when due on April 15, 2000, and has not obtained a waiver
from Farallon. Accordingly, the borrowings under the Credit Facility have
been included in the current portion of long-term debt on the Company's
consolidated balance sheet at December 31, 1999.
F-10
<PAGE> 38
At December 31, 1999, the original scheduled maturities of debt were as
follows:
<TABLE>
<S> <C>
2000 $ 110,000
2001
2002
2003 19,775,800
2004
Thereafter 99,580,000
------------
$119,465,800
============
</TABLE>
6. CAPITAL STOCK
CUMULATIVE PREFERRED STOCK - The Company has 400,000 authorized shares of
$.01 par value 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, 1999 and 1998, aggregate Series A preferred stock dividends of
$5,148,497 and $2,776,235, respectively, are in arrears.
During 1998, the Company issued Series A preferred stock and common stock
for approximately $17.5 million and $3.0 million to the Stockholder and DLJ
Fund Investment Partners II, L.P., respectively.
CONVERTIBLE PREFERRED STOCK - The Company has 5,000 authorized nonvoting
shares of $.01 par value convertible preferred stock ("Convertible Stock")
with a liquidation preference of $100 per share at December 31, 1999. Each
outstanding share of Convertible Stock bears an $80.00 cumulative annual
dividend through June 30, 2002. Thereafter, the dividend is at a rate of
$6.00 per share during the term of employment of the holder. Dividends are
payable if earned and declared, if the Convertible Stock is redeemed or if
the Company is liquidated. The Company may redeem all Convertible Stock
shares if the employment of the holder is terminated for $1 plus dividends
in arrears.
The Convertible Stock ranks senior to the Series A stock with respect to
the payment of dividends and upon liquidation, dissolution, winding-up or
otherwise, and the Series A stock ranks senior to the Company's common
stock and to all other series or classes of preferred stock.
The Convertible Stock is convertible into the number of common shares
representing a formula determined percentage of fully diluted outstanding
common stock shares upon defined events including the sale, merger or
liquidation of the Company.
STOCKHOLDERS' AGREEMENT - The Company and its stockholders have entered
into stockholders' agreements which provides certain restrictions and
rights related to the transfer, sale or purchase of capital shares.
F-11
<PAGE> 39
7. LEASES AND OTHER COMMITMENTS
LEASES - The Company has noncancelable operating and capital leases
primarily involving theater facilities and equipment with varying terms. In
addition to the minimum annual lease payments, 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 under operating leases for the years ended December 31, 1999,
1998 and 1997 totaled $18,195,928, $13,603,689 and $3,177,013,
respectively. 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
$1.4 million.
Future minimum payments under noncancelable operating leases with initial
or remaining terms in excess of one year at December 31, 1999, are due as
follows:
<TABLE>
<S> <C>
2000 $ 17,917,527
2001 17,608,113
2002 15,839,876
2003 14,690,471
2004 13,886,287
Thereafter 95,899,047
------------
Total $175,841,321
============
</TABLE>
Future minimum lease payments under capital leases together with the
present value of minimum lease payments consist of the following:
<TABLE>
<S> <C>
2000 $ 842,837
2001 537,946
2002 537,946
2003 537,946
2004 537,946
Thereafter 7,148,475
------------
10,143,096
Less amount representing interest (5,728,798)
------------
Present value of future minimum lease payments 4,414,298
Less current portion (384,398)
------------
Total $ 4,029,900
============
</TABLE>
The Company is completing theater improvements related to lease agreements
requiring additional future minimum lease payments estimated to be $29.4
million over 20 years.
LETTERS OF CREDIT AND COLLATERAL - At December 31, 1999 and 1998, the
Company has outstanding letters of credit of $3,848,000 and $3,450,000,
respectively, in connection with future theater construction and
improvement.
EMPLOYMENT AGREEMENTS - As of December 31, 1999, the Company has employment
agreements with a principal officer providing for annual minimum future
payments of $350,000 and performance bonuses.
8. 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.
F-12
<PAGE> 40
9. SEGMENTS
The Company identifies its segments based on type of films exhibited and
management responsibility. Segment profit (loss) is measured as operating
profit (loss), which is defined as profit (loss) before other income
(expense). During the year ended December 31, 1997 the Company had no
operations in the Specialty Film segment. Information on segments and a
reconciliation to net loss for the years ended December 31, 1999 and 1998
are as follows (in 000's):
<TABLE>
<CAPTION>
SILVER
CINEMAS
LANDMARK (SECOND AND
1999 (SPECIALTY FILM) FIRST-RUN) CORPORATE CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues $ 64,690 $ 41,391 $ 106,081
Depreciation and amortization 4,661 3,682 8,343
Asset impairment charges 80 3,491 3,571
Operating income (loss) 2,884 (13,635) $ (10,751)
Interest expense and debt issue costs $ (12,716) (12,716)
Interest income and other expense 840 840
----------
Net loss $ (22,627)
===========
Total assets $ 84,934 $ 45,783 $ 3,545 $ 134,262
==========
1998
Revenues $ 39,804 $ 37,412 $ 77,216
Depreciation and amortization 3,271 3,236 6,507
Asset impairment charges 70 4,510 4,580
Operating income (loss) 1,178 (9,099) $ (7,921)
Interest expense and debt issue costs $ (9,409) (9,409)
Interest income and other expense 544 544
----------
Net loss $ (16,786)
===========
Total assets $ 79,865 $ 48,308 $ 4,219 $ 132,392
==========
</TABLE>
10. ASSET IMPAIRMENT CHARGES
During 1999 and 1998, the Company impaired assets at 17 and 24 locations,
respectively, based on its continuing evaluation of recoverability of
long-lived theater assets. Impairment costs of $3,570,000 and $4,580,000
reduced goodwill and theater properties and equipment in 1999 and 1998,
respectively.
11. INCOME TAXES
Deferred tax liabilities (assets) at December 31, 1999 and 1998 consist of
the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ (12,000,000) $ (6,000,000)
Book accruals and reserves in excess of
cumulative tax deductions (250,000) (100,000)
------------- -------------
Total (12,250,000) (6,100,000)
Deferred tax liabilities -
Tax depreciation and amortization in excess of book 4,000,000 2,500,000
Valuation allowance 8,250,000 3,600,000
------------- -------------
$ -- $ --
============= =============
</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, 1999 and 1998, include net operating loss carryforwards of
approximately $30,000,000 and $15,000,000, respectively, for income tax
purposes. These net operating loss carryforwards begin to expire in 2016
and may be limited in use in the event of significant changes in the
Company's ownership.
F-13
<PAGE> 41
12. EMPLOYEE BENEFIT PLAN
During 1998, the Company implemented a 401(k) plan covering substantially
all employees meeting certain eligibility requirements. Participants may
make contributions to the plan of up 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 years ended December 31, 1999 and 1998, was
$92,448 and $90,202, respectively.
13. FINANCIAL INSTRUMENTS
The following estimated fair value information for financial instruments
has been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and certain notes payable and
long-term obligations approximates fair value. The fair values of
$41,077,000 and $83,000,000 at December 31, 1999 and 1998, respectively,
for the 10 1/2% Senior Subordinated Notes are based on quoted market
prices. The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1999 and 1998.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
the date presented, and therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
F-14
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONDENSED CONSOLIDATED BALANCE SHEET OF SILVER CINEMAS INTERNATIONAL, INC. AS OF
DECEMBER 31, 1999, AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,025,754
<ALLOWANCES> 0
<INVENTORY> 543,656
<CURRENT-ASSETS> 3,649,870
<PP&E> 76,341,472
<DEPRECIATION> 9,252,765
<TOTAL-ASSETS> 134,261,970
<CURRENT-LIABILITIES> 133,754,620
<BONDS> 0
0
36,147,036
<COMMON> 1,451
<OTHER-SE> (41,282,218)
<TOTAL-LIABILITY-AND-EQUITY> 134,261,970
<SALES> 0
<TOTAL-REVENUES> 106,080,948
<CGS> 0
<TOTAL-COSTS> 116,832,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,676,875
<INCOME-PRETAX> (11,875,474)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,875,474)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,875,474)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
