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Silver Cinemas International Inc, et al. – ‘S-4/A’ on 7/24/98

As of:  Friday, 7/24/98   ·   Accession #:  950150-98-1260   ·   File #s:  333-56903, -01, -02, -03

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/24/98  Silver Cinemas International Inc  S-4/A                  5:548K                                   Bowne of Los Ang..Inc/FA
          Silver Cinemas Inc
          SCL Acquisition Corp
          Landmark Theatre Corp

Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Amendment No. 1 to Form S-4                          169    816K 
 2: EX-5.1      Opinion of Latham & Watkins                            3     13K 
 3: EX-23.2     Consent of Deloitte & Touche LLP                       1      7K 
 4: EX-23.3     Consent of Kpmg Peat Marwick LLP                       1      6K 
 5: EX-23.4     Consent of Coopers & Lybrand, LLP                      1      6K 


S-4/A   —   Amendment No. 1 to Form S-4
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
10The Exchange Offer
15Risk Factors
20Ranking
"Business Risks Associated with the Acquisitions
21Competition
"Change of Control
"Restrictive Covenants of Revolving Credit Facility; Inability to Borrow Additional Amounts
22Seasonality
24Purpose of the Exchange Offer
"Resale of the Exchange Notes
"Terms of the Exchange Offer
25Expiration Date; Extensions; Amendments
26Interest on the Exchange Notes
"Procedures for Tendering
28Book-Entry Transfer
"Guaranteed Delivery Procedures
29Withdrawal of Tenders
"Conditions
"Termination of Certain Rights
30Exchange Agent
"Fees and Expenses
32Use of Proceeds
34Unaudited Pro Forma Financial Data
41Selected Consolidated Financial and Operating Data
"Silver Cinemas
42Landmark
44Management's Discussion and Analysis of Financial Condition and Results of Operations
45Revenues
46General and administrative expenses
"Depreciation and amortization
50Liquidity and Capital Resources
51Acquisition Synergies
53Business
55Recent and Pending Acquisitions
56Recent and Pending Theater Construction
60Concessions
61Film Licensing
65Management
66Total
68Principal Stockholders
"Series A
69Certain Relationships and Related Transactions
"Stockholders Agreement
70Description of Revolving Credit Facility
72Description of Exchange Notes
73Redemption
"Subordination
74Guarantees
76Certain Covenants
"Limitation on Incurrence of Additional Indebtedness
"Limitation on Restricted Payments
77Limitation on Asset Sales
79Merger, Consolidation and Sale of Assets
81Events of Default
83Legal Defeasance and Covenant Defeasance
85Certain Definitions
98Plan of Distribution
99Legal Matters
"Experts
"Available Information
101Index to Financial Statements
103Deloitte & Touche LLP
108Notes to Consolidated Financial Statements
127KPMG Peat Marwick LLP
132Cash Equivalents
133Goodwill
143Coopers & Lybrand L.L.P
148Inventories
149Other Assets
"Cash and cash equivalents
150Advertising
162Item 20. Indemnification of Directors and Officers
163Item 21. Exhibits and Financial Statement Schedules
164Item 22. Undertakings
169Registration Statement
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998 REGISTRATION NO. 333-56903 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SILVER CINEMAS INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Download Table] DELAWARE 7832 72-2656147 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) ORGANIZATION) 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEVEN L. HOLMES 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BRYANT B. EDWARDS LATHAM & WATKINS 633 WEST FIFTH STREET SUITE 4000 LOS ANGELES, CALIFORNIA 90071 (213) 485-1234 SILVER CINEMAS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Download Table] DELAWARE 7832 75-2672675 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) ORGANIZATION) 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEVEN L. HOLMES 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BRYANT B. EDWARDS LATHAM & WATKINS 633 WEST FIFTH STREET SUITE 4000 LOS ANGELES, CALIFORNIA 90071 (213) 485-1234
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SCI ACQUISITION CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Download Table] DELAWARE 7832 75-2749958 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) ORGANIZATION) 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEVEN L. HOLMES 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BRYANT B. EDWARDS LATHAM & WATKINS 633 WEST FIFTH STREET SUITE 4000 LOS ANGELES, CALIFORNIA 90071 (213) 485-1234 LANDMARK THEATRE CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [Download Table] DELAWARE 7832 75-2749959 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) ORGANIZATION) 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEVEN L. HOLMES 4004 BELTLINE ROAD, SUITE 205 DALLAS, TEXAS 75244 (972) 503-9851 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: BRYANT B. EDWARDS LATHAM & WATKINS 633 WEST FIFTH STREET SUITE 4000 LOS ANGELES, CALIFORNIA 90071 (213) 485-1234 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
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PROSPECTUS $100,000,000 OFFER TO EXCHANGE 10 1/2% SENIOR SUBORDINATED NOTES DUE 2005 FOR ALL OUTSTANDING 10 1/2% SENIOR SUBORDINATED NOTES DUE 2005 OF SILVER CINEMAS INTERNATIONAL, INC. ------------------------ THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , 1998 UNLESS EXTENDED. Silver Cinemas International, Inc., a Delaware corporation ("Silver Cinemas" or the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount of its 10 1/2% Senior Subordinated Notes due 2005 (the "Exchange Notes"), which exchange has been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement of which this Prospectus is a part (the "Registration Statement"), for each $1,000 principal amount of its outstanding 10 1/2% Senior Subordinated Notes due 2005 (the "Private Notes"), of which $100,000,000 in aggregate principal amount was issued on April 16, 1998 (the "Private Offering") all of which are outstanding as of the date hereof. The form and terms of the Exchange Notes are the same as the form and terms of the Private Notes except that (i) the exchange will have been registered under the Securities Act, and, therefore, the Exchange Notes will not bear legends restricting the transfer thereof and (ii) Holders of the Exchange Notes will not be entitled to certain rights of Holders of the Private Notes under the Registration Rights Agreement (as defined), which rights will terminate upon the consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Private Notes (which they replace) and will be entitled to the benefits of an indenture dated as of April 15, 1998 governing the Private Notes and the Exchange Notes (the "Indenture"). The Private Notes and the Exchange Notes are sometimes referred to herein collectively as the "Notes." See "The Exchange Offer" and "Description of Exchange Notes." The Exchange Notes will bear interest at the same rate and on the same terms as the Private Notes. Consequently, interest on the Exchange Notes will accrue from the date of issuance of the Private Notes (April 16, 1998) and will be payable semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 1998, at the rate of 10 1/2% per annum. The Exchange Notes will be redeemable, in whole or in part, at the option of the Company on or after April 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time prior to April 15, 2001, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Exchange Notes originally issued with the net cash proceeds of one or more Equity Offerings (as defined), at a redemption price equal to 110 1/2% of the aggregate principal amount of the Exchange Notes to be redeemed plus accrued and unpaid interest to the date of redemption; provided, however, that after giving effect to any such redemption, at least 65% of the aggregate principal amount of the Exchange Notes originally issued under the Indenture remains outstanding. Holders whose Private Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Private Notes. The Exchange Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to existing and future Senior Debt (as defined) of the Company. The Exchange Notes will be fully and unconditionally guaranteed (the "Guarantees") on a joint and several basis by all of the Company's current and certain future subsidiaries (the "Guarantors"). The Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all existing and future Guarantor Senior Debt (as defined). The Exchange Notes and the Guarantees will also be effectively subordinated to all secured indebtedness of either the Company or any of its subsidiaries to the extent of the assets secured by such indebtedness. As of March 31, 1998, on pro forma basis, the Company and its subsidiaries would have had approximately $5.2 million of indebtedness outstanding which ranks senior to the Exchange Notes. The Company will accept for exchange any and all validly tendered Private Notes not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless the Exchange Offering is extended by the Company in its sole discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn at any time prior to the Expiration Date. Private Notes may be tendered only in integral multiples of $1,000. The Exchange Offer is subject to certain customary conditions. See "The Exchange Offer -- Conditions." SEE "RISK FACTORS," BEGINNING ON PAGE 16, FOR A DISCUSSION OF CERTAIN FACTORS THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE EXCHANGE NOTES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998
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Based on an interpretation by the staff of the Securities and Exchange Commission (the "Commission") set forth in no-action letters issued to third parties, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for Private Notes may be offered for resale, resold and otherwise transferred by a Holder thereof (other than (i) a broker-dealer who purchases such Exchange Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act; provided that the Holder is acquiring the Exchange Notes in the ordinary course of its business and is not participating, and had no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer must represent to the Company, as required by the Registration Rights Agreement, that such conditions have been met. Each broker-dealer that receives Exchange Notes for its own account in exchange for Private Notes, where such Private Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Company believes that none of the registered Holders of the Private Notes is an affiliate (as such term is defined in Rule 405 under the Securities Act) of the Company. Prior to the Exchange Offer, there has been no public market for the Notes. The Exchange Notes will not be listed on any securities exchange, but the Private Notes are eligible for trading in the National Association of Securities Dealers, Inc.'s Private Offerings, Resales and Trading through Automatic Linkages (PORTAL) market. There can be no assurance that an active market for the Exchange Notes will develop. To the extent that a market for the Exchange Notes does develop, the market value of the Exchange Notes will depend on market conditions (such as yields on alternative investments), general economic conditions, the Company's financial condition and certain other factors. Such conditions might cause the Exchange Notes, to the extent that they are traded, to trade at a significant discount from face value. See "Risk Factors -- Absence of Public Market." Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Private Notes where such Private Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has indicated its intention to make this Prospectus (as it may be amended or supplemented) available to any broker-dealer for use in connection with any such resale for a period of 180 days after the Expiration Date. See "The Exchange Offer -- Resale of the Exchange Notes" and "Plan of Distribution." The Company will not receive any proceeds from, and has agreed to bear the expenses of, the Exchange Offer. No underwriter is being used in connection with this Exchange Offer. See "The Exchange Offer -- Resale of the Exchange Notes." THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. UNTIL [ ], 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A 2
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PROSPECTUS IN CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM. THE COMPANY EXPECTS THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE ISSUED IN THE FORM OF ONE OR MORE FULLY REGISTERED GLOBAL NOTES THAT WILL BE DEPOSITED WITH, OR ON BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC" OR THE "DEPOSITARY") AND REGISTERED IN ITS NAME OR IN THE NAME OF CEDE & CO., AS ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL NOTE REPRESENTING THE EXCHANGE NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED ONLY THROUGH, RECORDS MAINTAINED BY THE DEPOSITARY AND ITS PARTICIPANTS. AFTER THE INITIAL ISSUANCE OF SUCH GLOBAL NOTE, EXCHANGE NOTES IN CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE FOR THE GLOBAL NOTE ONLY IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE INDENTURE. SEE "THE EXCHANGE OFFER -- BOOK-ENTRY TRANSFER" AND "DESCRIPTION OF EXCHANGE NOTES -- BOOK ENTRY; DELIVERY AND FORM." ------------------------ 3
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PROSPECTUS SUMMARY The following summary information is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references to the "Company" shall mean, collectively, Silver Cinemas International, Inc. and its subsidiaries on a consolidated, pro forma basis after giving effect to the Transactions (as defined). Unless otherwise specified, the pro forma income statement data and summary pro forma balance sheet data presented herein reflect adjustments to the historical consolidated financial statements of Silver Cinemas to give effect to (i) the consummation of the Private Offering, (ii) the acquisition of all of the assets of StarTime Cinema, Inc. subject to the StarTime Asset Purchase Agreement (the "StarTime Acquisition"), (iii) the acquisition of all of the assets of The Landmark Theatre Group subject to the Landmark Asset Purchase Agreement (the "Landmark Acquisition,"), (iv) the acquisition of three theaters from AMC Entertainment, Inc. (the "AMC Acquisition," and, together with the StarTime Acquisition and the Landmark Acquisition, the "Acquisitions"), (v) the Equity Contribution (as defined), and (vi) the repayment of the Old Credit Facility (as defined) and execution of the Revolving Credit Facility(as defined), (collectively, the "Transactions") in each case as if such events had occurred on January 1, 1997 or as of March 31, 1998, respectively. THE COMPANY The Company is the largest exhibitor of specialty motion pictures and one of the largest operators of second-run theaters in the United States. The Company operates 106 theaters with 524 screens located in eighteen states. The 106 theaters are comprised of 49 specialty motion picture theaters, 49 second-run theaters and eight first-run theaters. The Company's strategy is to acquire theaters in under-served markets, to upgrade and expand theaters to provide a high-quality movie-going experience and to improve the profitability of theaters by combining certain administrative functions, obtaining volume discounts and implementing tighter operating controls. On a pro forma basis for the year ended December 31, 1997 and the three months ended March 31, 1998, the Company generated revenue of approximately, $106.3 million and $27.3 million, respectively, and pro forma EBITDA (as defined) of $12.1 million and $3.3 million, respectively. On a pro forma basis for the year ended December 31, 1997 and the three months ended March 31, 1998, the Company had net losses of $9.2 million and $2.2 million, respectively, and had a total debt to equity ratio of 4.0:1.0 at March 31, 1998. The Company's specialty-film theaters exhibit alternatives to commercial first-run movies. The specialty-film niche is composed of art films, foreign pictures and independent releases such as Good Will Hunting, The Full Monty, The Apostle, Shine, Sling Blade and The English Patient which are generally released in limited numbers to selected markets. Studios such as Disney, Universal, Sony, Paramount, Twentieth Century Fox and New Line have begun to distribute specialty-films through dedicated distribution subsidiaries (Miramax, October Films, Sony Pictures Classics, Paramount's specialty-film division, Fox Searchlight Pictures and Fine Line, respectively). Management believes that the recent success of independent films in garnering Academy Award nominations and Academy Awards will further drive independent film production, particularly from these "independent" subsidiaries which seek the recognition of these prestigious, high profile awards. According to Exhibitor Relations Company, Inc., the number of new films released by independent producers and distributors has increased from 158 in 1992 to 295 in 1997. In addition to the prestige of the Academy Awards, the generally lower budgets and higher potential returns on capital invested in specialty films makes the production of these films financially appealing to the studios. Specialty films are also attractive to exhibitors since the specialty-film niche tends to benefit from higher average admission prices and lower film rental expense than first-run operators, resulting in higher operating margins. Finally, the specialty-film niche, which generally appeals to more mature and upscale audiences, is expected to continue to benefit from favorable demographic trends as a result of the aging of the "baby boom" generation. The Company's second-run theaters offer major studio productions, generally six to ten weeks after their initial release dates, at significantly lower admission prices than commercial first-run theaters, making their revenues less susceptible to economic recession. The Company enjoys more favorable film booking arrangements and film buying terms at its second-run theaters than its commercial first-run counterparts. With far 4
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fewer second-run screens than first-run screens nationwide, there is typically little competition for prints of commercial films, enabling the Company to screen its choice of successful commercial films. First-run theaters, on the other hand, must aggressively compete for films from distributors and generally screen only a subset of new releases. In addition to its film booking advantage, the Company's second-run theaters also benefit from lower film rental expense and a larger proportion of high-margin concession sales as a percentage of overall revenue. Finally, the Company's lower admission prices for its second-run theaters appeal especially to teen audiences and older patrons, segments of the population which are expected to experience steady growth over the next decade. Founded in May 1996, the Company completed seven acquisitions, representing 26 theaters with an aggregate total of 154 screens as of December 31, 1997. In addition, the Company completed two construction projects, increasing its total number of theaters and screens to 27 and 165, respectively. Management has successfully integrated these theaters into its operations by implementing new operating standards, management controls and information systems. In addition, the Company has added new seating, improved sound and projection equipment, and broadened concession offerings in many locations. The impact of these improvements, which have helped increase profitability, are reflected in the operating performance of the Company's first two acquisitions in November 1996, Movie One and MI Theaters, consisting of 102 screens at 18 theaters. Based on actual results for the nine months ended September 30, 1997, theater level cash flow at these theaters increased 31.7% compared to the nine months ended September 30, 1996, prior to the Company's ownership of the theaters. BUSINESS STRATEGY The Company's strategy is to increase revenue and cash flow by (i) acquiring specialty motion picture and second-run theaters and first-run theaters in non-competitive markets, (ii) improving operations at acquired theaters, (iii) building new state-of-the-art multiplexes in selected markets, and (iv) adding additional screens, seating capacity, state-of-the-art sound and projection systems, and other exhibition or concession equipment at its existing theaters. Pursue Strategic Acquisitions. The Company has successfully pursued a disciplined acquisition strategy and intends to continue to acquire and integrate theaters in both the specialty-film and second-run niches. Management believes that there are many attractive acquisition candidates in the highly-fragmented exhibition industry. Management believes that the recent consolidation trend in the exhibition industry is driving many major exhibitors to dispose of non-core properties, many of which are specialty-film or second- run theaters that do not fit those companies' commercial first-run strategies. In addition, the growth of megaplexes (theaters with 16 or more screens) has created another avenue of potential growth for the Company through the conversion of existing commercial first-run theaters to theaters with a specialty-film or second-run format at an attractive cost. Leverage Existing Infrastructure and Control Operating Costs. The Company has successfully integrated and improved the operations of its acquisitions. Management believes significant opportunities exist to leverage its existing infrastructure over future acquisitions and realize significant operating improvements through the implementation of superior operating procedures, management oversight and its state-of-the-art management information system. Specific areas of improvement include (i) labor scheduling, (ii) film selection and lineup, (iii) cash control, (iv) pricing policies, and (v) purchasing discounts on concession contracts. Additionally, many of the smaller theater chains lack the sophisticated information systems employed by the Company, which the Company believes are necessary to effectively manage a geographically diverse group of theaters. Examples of management's ability to acquire and improve operations of theaters include the acquisitions of Movie One and MI Theaters, both completed in November 1996. Based on actual results for the nine months ended September 30, 1997, these two groups of theaters have shown theater level cash flow increases of 31.7% compared to the same period in the previous year, prior to the Company's ownership of the theaters. Capitalize on Leading Position in Specialty-Film Segment. The Company, through The Landmark Theatre Group ("Landmark"), is the largest exhibitor of specialty motion pictures and the only specialty-film 5
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exhibitor with a national presence. The Company has a leading presence in, among others, the following major markets: Los Angeles, San Francisco, Boston, Dallas, Houston, Seattle, Cleveland, Minneapolis, Denver, Milwaukee and New Orleans. The Company plans to use its experience in the specialty-film niche to establish a presence in the following strategic new markets: Chicago, Detroit, St. Louis and Washington D.C. Landmark achieved its leading presence by developing strong relationships with specialty-film distributors, many of whom rely on the Company's expertise in distributing and marketing specialty films. These relationships enable the Company to secure film prints in limited release and secure a period of exclusivity in exhibiting selected new films in many of its markets. For example, for films such as The English Patient, Good Will Hunting and Shine the Company had exclusive rights to the films for up to three weeks in selected markets. Expand Established Second-Run Operations. The Company believes it is the leading operator of second-run theaters in most of its markets, operating 49 second-run theaters with 336 screens in 15 states. By offering patrons a high-quality alternative to commercial first-run exhibitors at a low price, the Company avoids direct competition with commercial first-run theaters. In addition, the second-run niche offers other attractive characteristics which include (i) lower film costs as a percentage of admission revenue, (ii) greater percentage of total revenue from high margin concessions, (iii) greater recession resistance due to lower admission prices, and (iv) lower seasonal variability than commercial first-run exhibitors due to a staggered film release schedule. Provide a Superior Movie-Going Experience. The Company seeks to provide audiences with a high quality viewing experience, comparable to that available at new commercial first-run theaters. To enhance the movie-going experience, the Company invests in high quality projection and stereo sound equipment, comfortable chairs with wide seats and cupholder armrests, and appealing lobby and concession areas. Since many competitors in the specialty-film and second-run exhibition niches do not focus on these aspects of operations, management believes that this strategy provides it with a distinct competitive advantage. Pursue Attractive Construction Opportunities. The Company continually evaluates existing and new markets for new theater locations for specialty, second-run, and, in selected situations, commercial first-run theaters. The Company generally seeks to develop theaters in markets that are under-served as a result of changing demographic trends or the aging or obsolescence of existing theaters. Some of the factors management considers in determining whether to develop a theater in a particular location are the market's population, average household income, education levels, proximity to retail corridors, convenient roadway access, proximity to competing theaters, and the effect on the Company's existing theaters in the market, if any. Leverage Experienced Management Team and Strong Sponsorship. The Company's senior management team averages over 21 years of experience in the exhibition industry, and members of senior management have been heavily involved in the rapid growth of exhibition companies such as Cinemark USA, Inc. and The Landmark Theatre Group. In addition, the Company enjoys the strong equity sponsorship of Brentwood Associates Buyout Fund II, L.P. ("Brentwood") and certain members of management. See "Principal Stockholders." On March 3, 1998, Brentwood made an additional equity investment of $10.0 million in the Company, bringing its aggregate equity investment to approximately $25.0 million. Brentwood beneficially owns 82.3% of the Company's voting securities and accordingly has the ability to elect a majority of the Company's Board of Directors and direct the Company's activities. RECENT AND PENDING ACQUISITIONS AND CONSTRUCTION From its inception through December 31, 1997, the Company completed seven acquisitions, representing 26 theaters with an aggregate of 154 screens. In April 1998, the Company acquired the assets of Landmark for cash consideration of approximately $62.2 million pursuant to an asset purchase agreement (the "Landmark Asset Purchase Agreement") with Metromedia International Group, Inc. ("Metromedia"). Landmark, with 140 screens at 49 locations, was the largest exhibitor of specialty motion pictures in the United States, with theaters located in California, Colorado, Louisiana, Massachusetts, Michigan, Minnesota, Ohio, Texas, Washington and Wisconsin. 6
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In April 1998, the Company completed the acquisition of 202 screens at 27 locations operating predominately under the name Super Saver Cinemas pursuant to an asset purchase agreement (the "StarTime Asset Purchase Agreement") with StarTime Cinema, Inc. ("StarTime") for approximately $21.6 million. The theaters acquired from StarTime are second-run theaters located in Arizona, California, Colorado, Florida, Nebraska, New York, Ohio, Oklahoma, Texas and Wisconsin. In April 1998, the Company completed the acquisition of 17 screens at three theaters for approximately $1.7 million from AMC Entertainment, Inc. ("AMC"). These theaters include one specialty-film theater in Michigan and two second-run theaters in Texas. In addition to acquisitions, the Company completed the construction of its first second-run multiplex theater with ten screens in Des Moines, Iowa in June 1997. The Company also completed the expansion of its existing facility in LaPlace, Louisiana in September 1997, which increased the number of screens from six to seven and the number of seats from 734 to 970. In addition, the Company recently executed leases for the construction of four theaters in Illinois, Massachusetts, Missouri and Michigan, representing 24 screens. ------------------------ The Company is a Delaware corporation with its principal executive offices located at 4004 Beltline Road, Suite 205, Dallas, Texas 75244, and its telephone number is (972) 503-9851. 7
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THE EXCHANGE OFFER THE EXCHANGE OFFER.................. The Company is offering to exchange $1,000 principal amount of Exchange Notes for each $1,000 principal amount of Private Notes that are properly tendered and accepted. The Company will issue Exchange Notes on or promptly after the Expiration Date. There is $100.0 million aggregate principal amount of Private Notes outstanding. See "The Exchange Offer -- Purpose of the Exchange Offer." Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for Private Notes may be offered for resale, resold and otherwise transferred by a Holder thereof (other than (i) a broker-dealer who purchases such Exchange Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act; provided that the Holder is acquiring Exchange Notes in the ordinary course of its business and is not participating, and had no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account in exchange for Private Notes, where such Private Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "The Exchange Offer -- Resale of the Exchange Notes." REGISTRATION RIGHTS AGREEMENT....... The Private Notes were sold by the Company on April 16, 1998 to Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and Bear, Stearns & Co., Inc. (collectively, the "Initial Purchasers") pursuant to a Purchase Agreement, dated April 9, 1998, by and among the Company and the Initial Purchasers (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial Purchasers entered into a Registration Rights Agreement, dated as of April 16, 1998 (the "Registration Rights Agreement"), which grants the Holders of the Private Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such rights, which will terminate upon the consummation of the Exchange Offer. See "The Exchange Offer -- Termination of Certain Rights." 8
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EXPIRATION DATE..................... The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, unless the Exchange Offer is extended by the Company in its sole discretion, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendments." ACCRUED INTEREST ON THE EXCHANGE NOTES AND THE PRIVATE NOTES......... The Exchange Notes will bear interest from and including the date of issuance of the Private Notes (April 16, 1998). Holders whose Private Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Private Notes. See "The Exchange Offer -- Interest on the Exchange Notes." CONDITIONS TO THE EXCHANGE OFFER.... The Exchange Offer is subject to certain customary conditions that may be waived by the Company. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Private Notes being tendered for exchange. See "The Exchange Offer -- Conditions." PROCEDURES FOR TENDERING PRIVATE NOTES............................... Each Holder of Private Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with such Private Notes and any other required documentation to the Exchange Agent, at the address set forth herein. By executing the Letter of Transmittal, the Holder will represent to and agree with the Company that, among other things, (i) the Exchange Notes to be acquired by such Holder of Private Notes in connection with the Exchange Offer are being acquired by such Holder in the ordinary course of its business, (ii) if such Holder is not a broker-dealer, such Holder is not currently participating in, does not intend to participate in, and has no arrangement or understanding with any person to participate in a distribution of the Exchange Notes, (iii) if such Holder is a broker-dealer registered under the Exchange Act or is participating in the Exchange Offer for the purposes of distributing the Exchange Notes, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the Exchange Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in no-action letters (see "The Exchange Offer -- Resale of Exchange Notes"), (iv) such Holder under- 9
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stands that a secondary resale transaction described in clause (iii) above and any resales of Exchange Notes obtained by such Holder in exchange for Private Notes acquired by such Holder directly from the Company should be covered by an effective registration statement containing the selling securityholder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the Commission and (v) such Holder is not an "affiliate," as defined in Rule 405 under the Securities Act, of the Company. If the Holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Private Notes that were acquired as a result of market-making activities or other trading activities, such Holder will be required to acknowledge in the Letter of Transmittal that such Holder will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, such Holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange Offer -- Procedures for Tendering." SPECIAL PROCEDURES FOR BENEFICIAL OWNERS.............................. Any beneficial owner whose Private Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender such Private Notes in the Exchange Offer should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Private Notes, either make appropriate arrangements to register ownership of the Private Notes in such owner's name or obtain a properly completed bond power from the registered Holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. See "The Exchange Offer -- Procedures for Tendering." GUARANTEED DELIVERY PROCEDURES...... Holders of Private Notes who wish to tender their Private Notes and whose Private Notes are not immediately available or who cannot deliver their Private Notes, the Letter of Transmittal or any other documentation required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Private Notes according to the guaranteed delivery procedures set forth under "The Exchange Offer -- Guaranteed Delivery Procedures." 10
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ACCEPTANCE OF THE PRIVATE NOTES AND DELIVERY OF THE EXCHANGE NOTES...... Subject to the satisfaction or waiver of the conditions to the Exchange Offer, the Company will accept for exchange any and all Private Notes that are properly tendered in the Exchange Offer prior to the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered on the earliest practicable date following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." WITHDRAWAL RIGHTS................... Tenders of Private Notes may be withdrawn at any time prior to the Expiration Date. See "The Exchange Offer -- Withdrawal of Tenders." EXCHANGE AGENT...................... Norwest Bank Minnesota, National Association, is serving as the Exchange Agent in connection with the Exchange Offer. THE EXCHANGE NOTES The Exchange Offer applies to $100.0 million aggregate principal amount of the Private Notes. The form and terms of the Exchange Notes are the same as the form and terms of the Private Notes except that (i) the exchange will have been registered under the Securities Act and, therefore, the Exchange Notes will not bear legends restricting the transfer thereof and (ii) Holders of the Exchange Notes will not be entitled to certain rights of Holders of the Private Notes under the Registration Rights Agreement, which rights will terminate upon consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Private Notes (which they replace) and will be issued under, and be entitled to the benefits of, the Indenture. For further information and for definitions of certain capitalized terms used below, see "Description of Exchange Notes." SECURITIES OFFERED.................. $100.0 million aggregate principal amount of the Company's 10 1/2% Senior Subordinated Notes due 2005. COMPANY............................. Silver Cinemas International, Inc. MATURITY DATE....................... April 15, 2005. INTEREST PAYMENT DATES.............. Interest on the Notes will accrue from the date of original issuance (the "Issue Date") and will be payable semi-annually in arrears on each April 15 and October 15, commencing October 15, 1998. OPTIONAL REDEMPTION................. The Notes will be redeemable, in whole or in part, at the option of the Company on or after April 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to April 15, 2001, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Equity Offerings (as defined), at a redemption price equal to 110 1/2% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest to the date of redemption; provided, however, that, after giving effect to any such redemption, at least 65% of the 11
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aggregate principal amount of the Notes originally issued under the Indenture remains outstanding. See "Description of Exchange Notes -- Redemption." CHANGE OF CONTROL................... Upon the occurrence of a Change of Control (as defined), each holder will have the right, subject to certain conditions, to require the Company to repurchase all or any part of such holder's Notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. See "Description of Exchange Notes -- Change of Control." There can be no assurance that, in the event of a Change of Control, the Company would have sufficient funds to repurchase all Notes tendered. See "Risk Factors -- Change of Control." RANKING............................. The Notes will be general unsecured senior subordinated obligations of the Company and will be subordinated in right of payment to existing and future Senior Debt (as defined) of the Company, including indebtedness as a guarantor under the Revolving Credit Facility (as defined). The Notes will also be effectively subordinated to all secured indebtedness of either the Company or any of its subsidiaries to the extent of the assets secured by such indebtedness. The Notes will rank pari passu in right of payment with any future senior subordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. As of March 31, 1998, on a pro forma consolidated basis, the Company would have had approximately $5.2 million of indebtedness outstanding which is senior to the Notes. See "Risk Factors -- Ranking." GUARANTEES.......................... The Notes will be fully and unconditionally guaranteed on a senior subordinated basis by each of the Guarantors on a joint and several basis. The Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all existing and future Guarantor Senior Debt (as defined). As of March 31, 1998, on a pro forma basis, the Guarantors collectively would have had approximately $5.1 million of Guarantor Senior Debt outstanding. See "Description of Exchange Notes -- Guarantees." CERTAIN COVENANTS................... The Indenture governing the Notes (the "Indenture") will contain certain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make investments and certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, permit payment or dividend restrictions to apply to subsidiaries of the Company, merge or consolidate with any other 12
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person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes, in whole or in part, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase, with the proceeds of certain Asset Sales (as defined). All of such covenants are subject to significant qualifications and exceptions. See "Description of Exchange Notes -- Certain Covenants." RISK FACTORS Prospective investors should carefully consider the information set forth under the caption "Risk Factors" and all other information set forth in this Prospectus in connection with the Exchange Offer before making an investment in the Exchange Notes. 13
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SUMMARY PRO FORMA FINANCIAL DATA AND OPERATING DATA The following summary pro forma financial data was derived in part from, and should be read in conjunction with the Consolidated Financial Statements, "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Financial Data," including in each case the notes thereto, included elsewhere in this Prospectus. The "Pro Forma Financial Data" for the year ended December 31, 1997 and the three months ended March 31, 1998 gives effect to: (i) the Acquisitions; (ii) the Private Offering; (iii) the purchase on March 3, 1998, by Brentwood of an aggregate of $10.0 million of additional equity of Silver Cinemas consisting of Series A Preferred Stock and Common Stock and the purchase on April 16, 1998 by DLJ Fund Investment Partners II, L.P. of $3.0 million of equity of Silver Cinemas consisting of Series A Preferred Stock and Common Stock (together with the Brentwood purchase, the "Equity Contribution"); and (iv) the repayment of the Old Credit Facility and execution of the Revolving Credit Facility, as if each transaction had occurred on January 1, 1997 for both statements of operations or as of the balance sheet date. The Pro Forma Financial Data does not purport to be indicative of the Company's financial position or results of operations that would actually have been obtained had the Transactions been completed at the date or as of the beginning of the period presented, or to project the Company's financial position or results of operations at any future date or for any future period. (IN THOUSANDS, EXCEPT RATIOS AND THEATER DATA) [Enlarge/Download Table] PRO FORMA(5) ---------------------------------- THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1997 MARCH 31, 1998 ----------------- -------------- STATEMENT OF OPERATIONS DATA: Revenues: Admissions................................................ $72,872 $18,916 Concessions............................................... 30,965 7,839 Other..................................................... 2,451 556 ------- ------- Total............................................. 106,288 27,311 Costs and Expenses: Film rentals.............................................. 31,017 8,207 Concession supplies....................................... 4,993 1,175 Salaries and wages........................................ 18,282 4,645 Facilities................................................ 16,586 4,280 Advertising............................................... 4,482 700 Utilities and other....................................... 13,156 3,414 General and administrative expenses....................... 5,712 1,605 Depreciation and amortization............................. 9,226 2,421 ------- ------- Total............................................. 103,454 26,447 ------- ------- Operating income............................................ 2,834 864 Interest expense(1)......................................... 11,996 3,000 Interest (income) and other expense, net.................... (67) (22) ------- ------- Income (loss) before income taxes........................... (9,095) (2,114) Income tax expense.......................................... 100 75 ------- ------- Net income (loss)........................................... $(9,195) $(2,189) ======= ======= OTHER FINANCIAL DATA: Deficiency of earnings to fixed charges(2).................. $(9,095) $(2,114) EBITDA(3)................................................... 12,060 3,285 Cash interest expense(4).................................... 11,196 2,800 14
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[Download Table] PRO FORMA AS OF MARCH 31, 1998 -------------- THEATER DATA: Theaters.................................................... 106 Screens..................................................... 524 BALANCE SHEET DATA: Cash and cash equivalents................................... $14,867 Total assets................................................ 139,932 Total debt.................................................. 105,238 Stockholders' equity........................................ 26,139 --------------- (1) Interest expense includes amortization of debt issuance costs of $800 and $200 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. (2) Earnings consist of net loss before taxes, plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs and one third of rent expense on operating leases treated as representative of the interest factor attributable to rent expense. (3) The term EBITDA, as used herein, represents operating income plus depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, the Company has included information concerning EBITDA in this Prospectus because it is used by certain investors and analysts as a measure of a company's ability to service its debt obligations. EBITDA should not be used as an alternative to, or be considered more meaningful than, operating income, net income, or cash flow as an indicator of the Company's operating performance. (4) Cash interest expense excludes amortization of debt issuance costs of $800 and $200 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. (5) The Pro Forma Financial Data reflect costs savings and revenue enhancements resulting from the Acquisitions related to: (i) increased other revenues from new screen advertising agreements; (ii) reduced concession supplies costs associated with a new fountain drink contract negotiated by the Company as a result of the higher combined drink sales; (iii) reduced expenses associated with new insurance agreements negotiated by the Company as a result of the higher combined attendance and a more diversified real estate portfolio; and (iv) reduced general and administrative expenses as a result of the absorption of such costs by the Company's post-Transactions overhead structure. 15
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RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should carefully consider all of the information contained in this Prospectus and, in particular, should evaluate the following risk factors. Certain statements in this Prospectus that are not historical fact constitute "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results of the Company to be materially different from results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the following: ABSENCE OF A PUBLIC MARKET The Exchange Notes have no established trading market and will not be listed on any securities exchange. The Initial Purchasers have advised the Company that they intend to make a market in the Notes as permitted by applicable laws and regulations; however, the Initial Purchasers are not obligated to do so, and may discontinue any such market making activities at any time without notice. In addition, such market making activity may be limited during the Exchange Offer. Therefore, there can be no assurance that an active market for the Notes will develop. If a trading market develops for the Exchange Notes future trading prices of such securities will depend on many factors, including, among other things, prevailing interest rates, the market for similar securities, the performance of the Company and other factors. In addition, based on such factors, the Notes may trade at a discount from their initial offering price. See "The Exchange Offer" and "Plan of Distribution." SUBSTANTIAL LEVERAGE; DEBT SERVICE OBLIGATIONS As a result of the Transactions, the Company is highly leveraged and has substantial indebtedness and debt service obligations. At March 31, 1998, on a pro forma basis after giving effect to the Transactions, the Company's total indebtedness, on a consolidated basis, would have been approximately $105.2 million. On a pro forma basis for the year ended December 31, 1997 and the three months ended March 31, 1998, 92.8% and 85.2% of EBITDA would be dedicated to service cash interest expense, respectively. In addition, subject to the restrictions of the Indenture and expected to be imposed by the Revolving Credit Facility, the Company and its Restricted Subsidiaries may incur additional indebtedness, including Senior Debt and Guarantor Senior Debt, from time to time. See "Description of Exchange Notes -- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness." The level of the Company's leverage may have important consequences for the Company, including: (i) the ability of the Company to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes may be impaired or such financing may not be on terms favorable to the Company; (ii) a substantial portion of the Company's cash flow will be used to pay the Company's interest expense and under certain conditions to repay indebtedness, which will reduce the funds that would otherwise be available to the Company for its operations and future business opportunities; (iii) a decrease in net operating cash flows or an increase in expenses of the Company could make it difficult for the Company to meet its debt service requirements and force it to modify its operations; (iv) the Company may be more highly leveraged than its competitors, which may place it at a competitive disadvantage; and (v) the Company's leverage may limit its flexibility to react to changes in its operating environment or economic conditions, making it more vulnerable to a downturn in its business or the economy generally. Any inability of the Company to service its indebtedness or obtain additional financing, as needed, would have a material adverse effect on the Company. 16
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POTENTIAL INABILITY TO REPAY DEBT The Company's ability to pay principal of and interest and Liquidated Damages, if any, on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. The Company's ability to service its debt as it becomes due will require significant growth in its operating cash flow. If the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness, or seeking additional equity capital. There can be no assurance that any of these remedies can be effected on satisfactory terms, if at all, or that the Company will be successful in improving its cash flow by a sufficient magnitude or in a timely manner. HOLDING COMPANY STRUCTURE; UNSECURED STATUS OF NOTES Silver Cinemas is a holding company with no direct operations and no significant assets other than the stock of the Guarantors. The Notes will be general unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future senior subordinated indebtedness of the Company, if any, and junior in right of payment to all existing and future senior indebtedness of Silver Cinemas, if any. Silver Cinemas does not currently have any other existing debt other than its guarantee of the obligations of its subsidiaries under the Revolving Credit Facility and the debt of its subsidiaries. In addition, Silver Cinemas has granted liens on its assets, including a pledge of the stock of the Guarantors to secure its guarantee of the borrowings under the Revolving Credit Facility and the Guarantors have granted liens on substantially all of their assets as security for the obligations under the Revolving Credit Facility or the guarantees thereof. Because the Notes are not secured by any assets, in the event of a dissolution, bankruptcy, liquidation or reorganization of Silver Cinemas or the Guarantors, holders of the Notes may receive less ratably than the secured creditors under the Revolving Credit Facility. Silver Cinemas is dependent on the cash flow of the Guarantors to meet its obligations, including the payment of interest and principal obligations on the Notes when due. Accordingly, Silver Cinemas' ability to make principal, interest and other payments to holders of the Notes when due is dependent on the receipt of sufficient funds from the Guarantors. Receipt of such funds will be restricted by the terms of existing and future indebtedness of the Guarantors, including the Revolving Credit Facility. See "Description of Revolving Credit Facility." HISTORY OF OPERATING LOSSES Silver Cinemas International has had net losses of $0.5 million and $1.2 million for the three months ended March 31, 1998 and the year ended December 31, 1997, respectively. The net losses primarily resulted from implementation of the Company's acquisition strategy since its inception in May 1996. StarTime had net losses of $1.1 million and $1.0 million, for the three months ended March 31, 1998 and the year ended December 31, 1997 respectively. The Company expects to continue to incur net losses for the next several years in connection with integrating the operations of StarTime and Landmark with the Company's operations and in connection with potential future acquisitions. The ability of the Company to generate net income and increase its operating cash flow will depend upon, among other factors, the success of the Acquisitions and the Company's operating performance. There can be no assurance that the Company will achieve net income or increased operating cash flow and the failure to achieve such goals could result in the Company failing to make payments of interest or repay principal of the Notes when due. 17
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RANKING The Notes and Guarantees will be subordinated in right of payment to all Senior Debt and Guarantor Senior Debt of the Company and its subsidiaries, including the Revolving Credit Facility. As of March 31, 1998, on a pro forma basis giving effect to the Transactions, the Company and its Guarantors would have had approximately $5.2 million of Senior Debt and Guarantor Senior Debt, all of which would effectively rank senior to the Notes and the Guarantees. In the event of a bankruptcy, liquidation, dissolution, reorganization or other winding up of the Company or any of the Guarantors, the assets of the Company or the Guarantors, as the case may be, will be available to pay the Notes and the Guarantees only after all Senior Debt and Guarantor Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay amounts due on the Notes or Guarantees. Additional Senior Debt and Guarantor Senior Debt may be incurred by the Company and the Guarantors from time to time, subject to certain restrictions. See "Description of Revolving Credit Facility" and "Description of Exchange Notes -- Subordination." BUSINESS RISKS ASSOCIATED WITH THE ACQUISITIONS There can be no assurances that the Acquisitions will perform as expected or that the returns from such properties will be sufficient to support the indebtedness incurred to acquire, or the capital expenditures needed to develop, such properties. In particular, there can be no assurance that certain theater level payroll reductions reflected in the "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Acquisition Synergies" will be achieved. The Company developed such reductions based on a general analysis of its operations and those of StarTime and Landmark. Those operations are not directly comparable due to differences in, among other things, screens per theater and markets served. In addition, such payroll reductions will need to be implemented at each individual theater by the theater manager taking into account the individual characteristics of the theater, including its employees, number of screens, physical layout and customer base. The implementation of such reduction at individual StarTime and Landmark theaters may not be achievable as expected in the Company's overall plan. LIMITED OPERATING HISTORY; ACQUISITION STRATEGY The Company was formed in May 1996 and has limited experience in implementing its operating policies and strategies on a broad, national basis. In addition to the Acquisitions, the Company intends to acquire other theaters or groups of theaters. The operation of the Company and any such acquisitions may require additional personnel, assets and cash expenditures and there can be no assurance that the Company will be able to successfully expand and operate such acquisitions profitably. There can be no assurance that the Company will anticipate and respond effectively to all of the changing demands that its expanding operations will have on the Company's management, information and operating systems and cash reserves and the failure of the Company to meet challenges of any such expansion could have a material adverse effect on the Company's results of operations and financial condition. The growth of the Company has been dependent mainly on the Company's ability to acquire theaters. There can be no assurance that the Company will be able to identify additional theaters for acquisition in the future, or that such theaters will be available for acquisition at prices the Company considers reasonable. Failure to acquire additional theaters or the increased prices the Company might be required to pay for additional acquisitions could have a material adverse effect on the Company's growth prospects, as well as its financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's success will depend, in large part, on the efforts, abilities and experience of its executive officers and other key employees of the Company. The loss of the services of one or more of such individuals could have a material adverse effect on the Company's business. See "Management." 18
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DEPENDENCE ON MOTION PICTURE PRODUCTION AND PERFORMANCE; RELATIONSHIP WITH FILM DISTRIBUTORS The Company's business is dependent upon a number of factors, including the availability of suitable motion pictures for exhibition in its theaters and the performance of such films in the Company's markets. Poor performance of films or a disruption or reduction in the production of motion pictures by studios or independent producers could have a material adverse effect on the Company's business and results of operations. In addition, the Company's business depends to a significant degree on maintaining good relations with the film distributors who are responsible for allocating films to the Company's theaters. If the Company's relationship with one or more of such film distributors were to deteriorate for any reason, the Company might experience difficulties in scheduling the most commercially successful films in its theaters, thereby adversely affecting the Company's results of operations. See "Business -- Film Licensing." COMPETITION The Company competes against local, regional, and national exhibitors, most of which have been in existence significantly longer than the Company and many of which have substantially greater financial resources than the Company. In its markets, the Company competes with first-run, second-run and specialty-film exhibitors. Many of the Company's current and potential competitors have financial, personnel and other resources substantially greater than those of the Company. See "Business -- Competition" for more detailed information on the competitive environment faced by the Company. CHANGE OF CONTROL The Indenture will provide that, upon the occurrence of a Change of Control (as defined), the Company will make an offer to purchase all or any part of the Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The Revolving Credit Facility will prohibit the Company from repurchasing any Notes and will require the Company to first repay outstanding borrowings and permanently reduce the commitments thereunder. The Revolving Credit Facility will provide that certain change of control events with respect to the Company would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt or Guarantor Senior Debt (as defined) to which the Company or its subsidiaries becomes a party are likely to contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing the Notes, or if the Company is required to make an Asset Sale Offer pursuant to the terms of the Notes, the Company could seek the consent of its lenders to purchase the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or refinance such borrowings, the Company would remain prohibited from purchasing the Notes. In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default (as defined) under the Indenture. If, as a result thereof, a default occurs with respect to any Senior Debt or Guarantor Senior Debt, the subordination provisions of the Indenture would likely restrict payments to the holders of Notes. See "Description of Exchange Notes -- Change of Control." RESTRICTIVE COVENANTS OF REVOLVING CREDIT FACILITY; INABILITY TO BORROW ADDITIONAL AMOUNTS The Revolving Credit Facility contains a number of covenants that significantly restrict the operations of the Company. In addition, the Company is required to comply with specified financial ratios and tests under the Revolving Credit Facility, including the interest coverage ratio, the fixed charge coverage ratio and the leverage ratio. If the Company does not meet such ratios, one consequence will be that the Company will not be able to borrow under the Revolving Credit Facility and may therefore lack the funds necessary to pursue its acquisition strategy and fund its capital expenditure needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." As of December 31, 1997, the Company did not comply with the leverage and EBITDA provisions of the Old Credit Facility. These provisions were amended as of January 16, 1998 and March 25, 1998, and the Company obtained a waiver for past noncompliance. Currently, the Company is unable to borrow under either the Revolving Credit Facility or any other credit facility. In order to borrow under the Revolving Credit Facility, the Company and Lenders must amend and restate the credit agreement under the terms set forth in the April 10, 1998 19
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commitment letter. Any future credit agreements or other agreements relating to Senior Debt or Guarantor Senior Debt are likely to contain similar covenants. There can be no assurance that the Company will be able to comply with such restrictions or covenants in the future. The Company's ability to comply with such covenants and other restrictions may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any such covenants or restrictions would result in a default under the Revolving Credit Facility that would permit the lenders thereunder to declare all amounts outstanding thereunder to be immediately due and payable, together with accrued and unpaid interest, and terminate their commitments to make further extensions of credit thereunder. See "Description of Revolving Credit Facility." SEASONALITY The Company's revenues have historically been seasonal, coinciding with the timing of releases of films by distributors. The Company's quarterly results may also be affected by the timing of the development or acquisition of theaters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality." FRAUDULENT CONVEYANCE Various fraudulent conveyance laws enacted for the protection of creditors may apply to the issuance of the Guarantees. To the extent that a court were to find that (x) a Guarantee was incurred by a Guarantor with intent to hinder, delay or defraud any present or future creditor or such Guarantor contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others or (y) such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Guarantee and such Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the issuance of its Guarantee, (iii) was engaged or about to engage in a business or transaction for which the remaining assets of such Guarantor constituted unreasonably small capital to carry on its business or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the court could avoid or subordinate such Guarantee in favor of the creditors of such Guarantor. Among other things, a legal challenge of any Guarantee may focus on the benefits, if any, realized by such Guarantor as a result of the Company's issuance of the Notes. The Indenture will contain a savings clause, which generally will limit the obligations of any Guarantor under its Guarantee to the maximum amount as will, after giving effect to all of the liabilities of such Guarantor, result in such obligation not constituting a fraudulent conveyance. To the extent a Guarantee was avoided or limited as a fraudulent conveyance or held unenforceable for any other reason, holders of the Notes would cease to have any claim against such Guarantor and would be creditors solely of the Company. In such event, the claims of holders of the Notes against such Guarantor would be subject to the prior payment of all liabilities (including trade payables) of such Guarantor. There can be no assurance that, after providing for all prior claims, there would be sufficient assets to satisfy the claims of the holders of the Notes relating to any avoided portion of any Guarantee. The measure of insolvency for the purposes of the foregoing considerations will vary depending upon the law applied in any such proceeding. Generally, however, a guarantor may be considered insolvent if the sum of its debts, including contingent liabilities, is greater than the fair marketable value of all of its assets at a fair valuation or if the present fair marketable value of its assets is less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature. Based upon financial and other information, the Company believes that the Guarantees are being incurred for proper purposes and in good faith and that the Guarantors are solvent and will continue to be solvent after issuing the Guarantees, will have sufficient capital for carrying on their business after such issuance and will be able to pay their debts as they mature. There can be no assurance, however, that a court passing on such standards would agree with such beliefs. See "Description of Exchange Notes -- Guarantees." 20
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FAILURE TO EXCHANGE PRIVATE NOTES The Exchange Notes will be issued in exchange for Private Notes only after timely receipt by the Exchange Agent of such Private Notes, a properly completed and duly executed Letter of Transmittal and all other required documentation. Therefore, Holders of Private Notes desiring to tender such Private Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor the Company is under any duty to give notification of defects or irregularities with respect to tenders of Private Notes for exchange. Private Notes that are not tendered or are tendered but not accepted will, following consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. In addition, any Holder of Private Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives Exchange Notes for its own accounts in exchange for Private Notes, where such Private Notes were acquired by such broker-dealer as a result of market-making activities or any other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. To the extent that Private Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Private Notes could be adversely affected due to the limited amount, or "float," of the Private Notes that are expected to remain outstanding following the Exchange Offer. Generally, a lower "float" of a security could result in less demand to purchase such security and could, therefore, result in lower prices for such security. For the same reason, to the extent that a large amount of Private Notes are not tendered or are tendered and not accepted in the Exchange Offer, the trading market for the Exchange Notes could be adversely affected. See "Plan of Distribution" and "The Exchange Offer." 21
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THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The Private Notes were sold by the Company on April 16, 1998 (the "Closing Date") to the Initial Purchasers pursuant to the Purchase Agreement. The Initial Purchasers subsequently sold the Private Notes to "qualified institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule 144A"), in reliance on Rule 144A. As a condition to the sale of the Private Notes, the Company and the Initial Purchasers entered into the Registration Rights Agreement on April 16, 1998. Pursuant to the Registration Rights Agreement, the Company agreed that, unless the Exchange Offer is not permitted by applicable law or Commission policy, it would (i) file with the Commission a Registration Statement under the Securities Act with respect to the Exchange Notes within 60 days after the Closing Date, (ii) use its best efforts to cause such Registration Statement to become effective under the Securities Act within 150 days after the Closing Date and (iii) commence the Exchange Offer and use its best efforts to issue, on or prior to 30 days after the date on which the Registration Statement was declared effective by the Commission, Exchange Notes in exchange for all Private Notes tendered prior thereto in the Exchange Offer. A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement. The Registration Statement is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement and the Purchase Agreement. RESALE OF THE EXCHANGE NOTES With respect to the Exchange Notes, based upon an interpretation by the staff of the Commission set forth in certain no-action letters issued to third parties, the Company believes that a Holder (other than (i) a broker-dealer who purchases such Exchange Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) any such Holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who exchanges Private Notes for Exchange Notes in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement with any person to participate, in a distribution of the Exchange Notes, will be allowed to resell Exchange Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the Exchange Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any Holder acquires Exchange Notes in the Exchange Offer for the purpose of distributing or participating in the distribution of the Exchange Notes or is a broker-dealer, such Holder cannot rely on the position of the staff of the Commission enumerated in certain no-action letters issued to third parties and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives Exchange Notes for its own account in exchange for Private Notes, where such Private Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Private Notes where such Private Notes were acquired by such broker-dealer as a result of market-making or other trading activities. Pursuant to the Registration Rights Agreement, the Company has agreed to make this Prospectus, as it may be amended or supplemented from time to time, available to broker-dealers for use in connection with any resale for a period of 180 days after the Expiration Date. See "Plan of Distribution." TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Private Notes validly tendered and not withdrawn prior to the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 22
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principal amount of outstanding Private Notes surrendered pursuant to the Exchange Offer. Private Notes may be tendered only in integral multiples of $1,000. The form and terms of the Exchange Notes are the same as the form and terms of the Private Notes except that (i) the exchange will be registered under the Securities Act and, therefore, the Exchange Notes will not bear legends restricting the transfer thereof and (ii) Holders of the Exchange Notes will not be entitled to any of the rights of Holders of Private Notes under the Registration Rights Agreement, which rights will terminate upon the consummation of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as the Private Notes (which they replace) and will be issued under, and be entitled to the benefits of, the Indenture, which also authorized the issuance of the Private Notes, such that both series of Notes will be treated as a single class of debt securities under the Indenture. As of the date of this Prospectus, $100.0 million in aggregate principal amount of the Private Notes are outstanding. Only a registered Holder of the Private Notes (or such Holder's legal representative or attorney-in-fact) as reflected on the records of the Trustee under the Indenture may participate in the Exchange Offer. There will be no fixed record date for determining registered Holders of the Private Notes entitled to participate in the Exchange Offer. Holders of the Private Notes do not have any appraisal or dissenters' rights under the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the provisions of the Registration Rights Agreement and the applicable requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder. The Company shall be deemed to have accepted validly tendered Private Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of Private Notes for the purposes of receiving the Exchange Notes from the Company. Holders who tender Private Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Private Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes described below, in connection with the Exchange Offer. See "-- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time on , 1998, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will (i) notify the Exchange Agent of any extension by oral or written notice, and (ii) mail to the registered Holders an announcement thereof which shall include disclosure of the approximate number of Private Notes deposited to date, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its reasonable discretion, (i) to delay accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any conditions set forth below under "-- Conditions" shall not have been satisfied, to terminate the Exchange Offer by giving oral or written notice of such delay, extension or termination to the Exchange Agent. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered Holders. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered Holders, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to the registered Holders, if the Exchange Offer would otherwise expire during such five to ten business day period. 23
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INTEREST ON THE EXCHANGE NOTES The Exchange Notes will bear interest at a rate equal to 10 1/2% per annum. Interest on the Exchange Notes will be payable semi-annually in arrears on each April 15 and October 15, commencing October 15, 1998. Holders of Exchange Notes will receive interest on October 15, 1998 from the date of initial issuance of the Private Notes. Holders of Private Notes that are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Private Notes. PROCEDURES FOR TENDERING Only a registered Holder of Private Notes may tender such Private Notes in the Exchange Offer. To tender in the Exchange Offer, a Holder of Private Notes must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile to the Exchange Agent at the address set forth below under "-- Exchange Agent" for receipt prior to the Expiration Date. In addition, either (i) certificates for such Private Notes must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such procedure is available, into the Exchange Agent's account at the Depositary pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date or (iii) the Holder must comply with the guaranteed delivery procedures described below. The tender by a Holder that is not withdrawn prior to the Expiration Date will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner(s) of the Private Notes whose Private Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Private Notes, either make appropriate arrangements to register ownership of the Private Notes in such owner's name or obtain a properly completed bond power from the registered Holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal described below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Private Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box titled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be made by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized signature guarantee programs identified in the Letter of Transmittal (an "Eligible Institution"). 24
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If the Letter of Transmittal is signed by a person other than the registered Holder of any Private Notes listed therein, such Letter of Transmittal must be endorsed or accompanied by a properly completed bond power, signed by such registered Holder as such registered Holder's name appears on such Private Notes. If the Letter of Transmittal or any Private Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Exchange Agent and the Depositary have confirmed that any financial institution that is a participant in the Depositary's system may utilize the Depositary's Automated Tender Offer Program to tender Private Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Private Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Private Notes not properly tendered or any Private Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Private Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Private Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Private Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Private Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. While the Company has no present plan to acquire any Private Notes that are not tendered in the Exchange Offer or to file a registration statement to permit resales of any Private Notes that are not tendered pursuant to the Exchange Offer, the Company reserves the right in its sole discretion to purchase or make offers for any Private Notes that remain outstanding subsequent to the Expiration Date or, as set forth below under "-- Conditions," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Private Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. By tendering, each Holder of Private Notes will represent to the Company that, among other things, (i) Exchange Notes to be acquired by such Holder of Private Notes in connection with the Exchange Offer are being acquired by such Holder in the ordinary course of the respective business of such Holder, (ii) such Holder has no arrangement or understanding with any person to participate in the distribution of the Exchange Notes, (iii) if such Holder is a resident of the State of California, it falls under the self-executing institutional investor exemption set forth under Section 25102(i) of the Corporate Securities Law of 1968 and Rules 260.102.10 and 260.105.14 of the California Blue Sky Regulations, (iv) if such Holder is a resident of the Commonwealth of Pennsylvania, it falls under the self-executing institutional investor exemption set forth under Sections 203(c), 102(d) and (k) of the Pennsylvania Securities Act of 1972, Section 102.111 of the Pennsylvania Blue Sky Regulations and an interpretive opinion dated November 16, 1985, (v) such Holder acknowledges and agrees that any person who is a broker-dealer registered under the Exchange Act or is participating in the Exchange Offer for the purposes of distributing the Exchange Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the Exchange Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in certain no-action letters, (vi) such Holder understands that a secondary resale transaction described in clause (v) above and any resales of Exchange Notes obtained by such Holder in exchange for Private Notes acquired by such Holder directly from the Company should be covered by an effective registration statement containing the selling securityholder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the Commission and (vii) such Holder is not an "affiliate," as defined in Rule 405 under the Securities Act, of the Company. If the Holder is a broker-dealer that will 25
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receive Exchange Notes for such Holder's own account in exchange for Private Notes that were acquired as a result of market-making activities or other trading activities, such Holder will be required to acknowledge in the Letter of Transmittal that such Holder will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, such Holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. RETURN OF PRIVATE NOTES If any tendered Private Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Private Notes are withdrawn or are submitted for a greater principal amount than the Holders desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be returned without expense to the tendering Holder thereof (or, in the case of Private Notes tendered by book-entry transfer into the Exchange Agent's account at the Depositary pursuant to the book-entry transfer procedures described below, such Private Notes will be credited to an account maintained with the Depositary) as promptly as practicable. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Private Notes at the Depositary for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Depositary's systems may make book-entry delivery of Private Notes by causing the Depositary to transfer such Private Notes into the Exchange Agent's account at the Depositary in accordance with the Depositary's procedures for transfer. However, although delivery of Private Notes may be effected through book-entry transfer at the Depositary, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at the address set forth below under "-- Exchange Agent" on or prior to the Expiration Date or pursuant to the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Private Notes and (i) whose Private Notes are not immediately available or (ii) who cannot deliver their Private Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number(s) of such Private Notes and the principal amount of Private Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or a facsimile thereof), together with the certificate(s) representing the Private Notes in proper form for transfer or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) Such properly executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Private Notes in proper form for transfer and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Private Notes according to the guaranteed delivery procedures set forth above. 26
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WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Private Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration Date. To withdraw a tender of Private Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private Notes to be withdrawn (including the certificate number or numbers and principal amount of such Private Notes) and (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Private Notes were tendered (including any required signature guarantees). All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company in its sole discretion, whose determination shall be final and binding on all parties. Any Private Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Private Notes so withdrawn are validly retendered. Properly withdrawn Private Notes may be retendered by following one of the procedures described above under "The Exchange Offer -- Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or exchange the Exchange Notes for, any Private Notes, and may terminate the Exchange Offer as provided herein before the acceptance of such Private Notes, if the Exchange Offer violates applicable law, rules or regulations or an applicable interpretation of the staff of the Commission. If the Company determines in its reasonable discretion that any of these conditions are not satisfied, the Company may (i) refuse to accept any Private Notes and return all tendered Private Notes to the tendering Holders, (ii) extend the Exchange Offer and retain all Private Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Private Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Private Notes that have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered Holders of the Private Notes, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered Holders, if the Exchange Offer would otherwise expire during such five to ten business day period. TERMINATION OF CERTAIN RIGHTS All rights under the Registration Rights Agreement (including registration rights) of Holders of the Private Notes eligible to participate in the Exchange Offer will terminate upon consummation of the Exchange Offer except with respect to the Company's continuing obligations (i) to indemnify such Holders (including any broker-dealers) and certain parties related to such Holders against certain liabilities (including liabilities under the Securities Act), (ii) to provide, upon the request of any Holder of a transfer-restricted Private Note, the information required by Rule 144A(d)(4) under the Securities Act in order to permit resales of such Private Notes pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration Statement effective to the extent necessary to ensure that it is available for resales of transfer-restricted Private Notes by broker-dealers for a period of up to one year from the Expiration Date and (iv) to provide copies of the latest version of the Prospectus to broker-dealers upon their request during such one year period. LIQUIDATED DAMAGES In the event of a Registration Default (as defined in the Registration Rights Agreement), the Company will pay Liquidated Damages to each Holder of Transfer Restricted Securities (as defined below), with respect to the first 90-day period immediately following the occurrence of such Registration Default in an 27
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amount equal to $0.05 per week per $1,000 principal amount of Private Notes constituting Transfer Restricted Securities held by such Holder. Transfer Restricted Securities shall mean each Private Note until (i) the date on which such Private Note has been exchanged for an Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of such Private Note for one or more Exchange Notes, the date on which such Exchange Notes are sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of this Prospectus, (iii) the date on which such Private Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement (as defined in the Registration Rights Agreement) or (iv) the date on which such Private Note is distributed to the public pursuant to Rule 144(k) under the Securities Act. The amount of Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Private Notes constituting Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.50 per week per $1,000 principal amount of Private Notes constituting Transfer Restricted Securities. Following the cure of all Registration Defaults, the accrual of all Liquidated Damages will cease. The filing and effectiveness of the Registration Statement of which this Prospectus is a part and the consummation of the Exchange Offer will eliminate all rights of the Holders of Private Notes eligible to participate in the Exchange Offer to receive damages that would have been payable if such actions had not occurred. Holders of Transfer Restricted Securities will be required to make certain representations to the Company (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Transfer Restricted Securities included in the Shelf Registration Agreement and benefit from the provisions regarding Liquidated Damages set forth above. EXCHANGE AGENT Norwest Bank Minnesota, National Association, has been appointed as Exchange Agent of the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: [Download Table] By Registered or Certified Mail: By Hand Delivery: Norwest Bank Minnesota, Northstar East Bldg. National Association 608 2nd Ave. S. Corporate Trust Operations 12th Floor P.O. Box 1517 Corporate Trust Ser. Minneapolis, MN 55480-1517 Minneapolis, MN By Overnight Delivery: By Facsimile: Norwest Bank Minnesota, (612) 667-4927 National Association Corporate Trust Operations Norwest Center Confirm by Telephone Sixth and Marquette (612) 667-9764 Minneapolis, MN 55480-0113 FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. 28
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The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company and are estimated in the aggregate to be approximately $300,000. Such expenses include registration fees, fees and expenses of the Exchange Agent and the Trustee, accounting and legal fees and printing costs, among others. The Company will pay all transfer taxes, if any, applicable to the exchange of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of the Private Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. CONSEQUENCE OF FAILURES TO EXCHANGE Participation in the Exchange Offer is voluntary. Holders of the Private Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. The Private Notes that are not exchanged for the Exchange Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Private Notes may be resold only (i) to a person whom the seller reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a transaction meeting the requirements of Rule 144 under the Securities Act, (iii) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, (iv) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), (v) to the Company or (vi) pursuant to an effective registration statement and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction. ACCOUNTING TREATMENT For accounting purposes, the Company will recognize no gain or loss as a result of the Exchange Offer. The expenses of the Exchange Offer will be amortized over the term of the Exchange Notes. 29
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USE OF PROCEEDS The Company will not receive any proceeds from the Exchange Offer. The net proceeds from the Private Offering, which were approximately $96.0 million after deducting discounts, commissions and estimated fees and expenses incurred in connection therewith, were applied to repay approximately $2.6 million outstanding under the Old Revolving Credit Facility and to finance the Acquisitions. The remainder will be used to finance the construction of identified new theaters and general corporate purposes. For a description of the indebtedness repaid with the proceeds of the Private Offering, see "Description of Certain Indebtedness." The following table sets forth the estimated sources and uses of funds in connection with the Acquisitions, the Private Offering, the Equity Contribution, the repayment of the Old Credit Facility and execution of the Revolving Credit Facility (collectively, the "Transactions"), pro forma as of March 31, 1998. [Download Table] (IN THOUSANDS) -------------- TOTAL SOURCES: Senior Subordinated Notes.................... $100,000 Equity Contribution.......................... 3,000 -------- Total Sources...................... $103,000 ======== TOTAL USES: Landmark Acquisition......................... $ 62,204 StarTime Acquisition......................... 17,135 AMC Acquisition.............................. 1,285 Repay Old Credit Facility.................... 2,625 Transaction fees and expenses(1)............. 5,000 Excess cash proceeds......................... 14,751 -------- Total Uses......................... $103,000 ======== --------------- (1) Includes fees of approximately $1.0 million related to the Revolving Credit Facility. (2) During the three months ended March 31, 1998, the Company received a $10.0 million equity investment. These proceeds were used to repay approximately $3.9 million outstanding under the Old Revolving Credit Facility, acquire certain theater assets from StarTime and AMC for approximately $4.5 and $.4 million, respectively, and general corporate purposes. 30
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CASH AND CASH EQUIVALENTS AND CAPITALIZATION The following table sets forth the cash and cash equivalents and capitalization of Silver Cinemas as of March 31, 1998 on an actual basis and on a pro forma basis to reflect the Transactions. See "Use of Proceeds." This table should be read in conjunction with the consolidated financial statements of Silver Cinemas, Landmark and StarTime, including the related notes thereto, "Unaudited Pro Forma Financial Data" and "Selected Consolidated Financial and Operating Data" included elsewhere in this Prospectus. [Download Table] MARCH 31, 1998 -------------------- ACTUAL PRO FORMA ------- --------- (IN THOUSANDS) Cash and cash equivalents................................... $ 116 $ 14,867 ======= ======== Debt (including current maturities): Old Credit Facility(1).................................... $ 2,625 $ -- Revolving Credit Facility(2).............................. -- -- 10 1/2% Senior Subordinated Notes due 2005................ -- 100,000 Capital leases............................................ -- 4,923 Other..................................................... 95 315 ------- -------- Total debt........................................ 2,720 105,238 ------- -------- Stockholders' equity(3)..................................... 23,139 26,139 ------- -------- Total capitalization........................................ $25,859 $131,377 ======= ======== --------------- (1) Concurrently with the Private Offering, the Company paid all of the existing indebtedness under the Old Credit Facility (approximately $20.1 million as of April 9, 1998). (2) DLJ Capital Funding, Inc. has committed to provide the Company with a five year revolving credit facility with aggregate availability of $40.0 million. See "Description of Revolving Credit Facility." (3) On March 3, 1998, the Company issued an aggregate of $10.0 million of additional equity consisting of Series A Preferred Stock and Common Stock to Brentwood. Concurrently with the Private Offering, DLJ Fund Investment Partners II, L.P. purchased $3.0 million of Silver Cinemas' equity consisting of Series A Preferred Stock and Common Stock. 31
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UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data (the "Pro Forma Financial Data") has been derived by the application of pro forma adjustments to the historical consolidated financial statements of Silver Cinemas which give effect to the Transactions as if each such transaction had been completed at the date or as of the beginning of the period presented. The Pro Forma Financial Data assume that the Company acquired all of the theaters subject to the StarTime Asset Purchase Agreement and the Landmark Asset Purchase Agreement at the date or as of the beginning of the period presented. The purchase prices of the Acquisitions were determined based upon arm's length negotiations between Silver Cinemas and the respective sellers and have been allocated primarily to theater properties and equipment and goodwill. Management believes no material change to these preliminary purchase price allocations will result from the final determination of the fair market values of the net assets acquired. The Pro Forma Financial Data does not give effect to any events occurring after consummation of the Acquisitions, other than increased other revenues from new screen advertising agreements, reduced concession supplies costs associated with a new fountain drink contract and reduced expenses associated with new insurance agreements, which were negotiated by the Company as a result of the higher combined attendance and drink sales and a more diversified real estate portfolio anticipated from the Acquisitions; and reduced general and administrative expenses as a result of the absorption of such costs by the Company's post-Transactions overhead structure. Although management believes that additional revenue enhancements, cost reductions, and operating expense synergies will be realized after the Company has integrated the acquired businesses and has consolidated administrative functions (which may take up to a year to achieve), including (i) increased other revenues associated with an increase in vending machine sales and other advertising revenue, (ii) reduced theater-level payroll at StarTime and Landmark associated with a reduction in theater level employees, the reorganization of employees' work schedules and the diversification of employees' functions at Landmark theaters; (iii) reduced advertising expenses at StarTime as a result of consolidated advertisements and utilizing free directory advertisements in a local newspaper for the Company's three theaters located in Denver, Colorado; and (iv) elimination of one-time items associated with outside consultants, such adjustments are not provided for in the definition of "pro forma" pursuant to Regulation S-X under the Securities Act and these items have not been reflected in the Pro Forma Financial Data. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Acquisition Synergies," "Risk Factors -- Business Risks Associated with the Acquisitions" and "Risk Factors -- Risk of Failure to Obtain Landlord Consents." The Pro Forma Financial Data is subject to numerous assumptions and estimates that are subject to change and, in many cases, are beyond the control of the Company. The Pro Forma Financial Data should be read in conjunction with the historical financial statements of Silver Cinemas, Landmark and StarTime and the notes thereto. 32
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS) [Enlarge/Download Table] SILVER HISTORICAL PRO FORMA CINEMAS STARTIME LANDMARK AMC(2) COMBINED ADJUSTMENTS PRO FORMA ------- -------- -------- ------ ---------- ----------- --------- (IN THOUSANDS) Revenues: Admissions.................. $10,368 $16,554 $45,903 $1,547 $74,372 $(1,500)(3) $72,872 Concessions................. 8,098 12,522 10,061 1,164 31,845 (880)(3) 30,965 Other....................... 296 756 990 61 2,103 348 (3,4) 2,451 ------- ------- ------- ------ ------- ------- ------- Total................ 18,762 29,832 56,954 2,772 108,320 (2,032) 106,288 Costs and expenses: Costs of operations: Film rentals.............. 4,484 5,710 20,734 627 31,555 (538)(3) 31,017 Concession supplies....... 1,462 2,027 2,096 193 5,778 (785)(3,4) 4,993 Salaries and wages........ 3,065 5,643 9,448 668 18,824 (542)(3) 18,282 Facility leases........... 3,312 7,529 6,067 381 17,289 (703)(3) 16,586 Advertising............... 755 1,280 2,478 161 4,674 (192)(3) 4,482 Utilities and other....... 3,024 5,249 4,999 542 13,814 (658)(3,4) 13,156 General and administrative.......... 1,901 1,393 5,191 8,485 (2,773)(5) 5,712 Depreciation and amortization............ 1,479 1,786 4,929 8,194 1,032 (6,7) 9,226 ------- ------- ------- ------ ------- ------- ------- Total................ 19,482 30,617 55,942 2,572 108,613 (5,159) 103,454 ------- ------- ------- ------ ------- ------- ------- Operating income (loss)....... (720) (785) 1,012 200 (293) 3,127 2,834 Interest expense.............. (353) (941) (748) (2,042) (9,154)(8) (11,196) Amortization of debt issue costs....................... (55) (55) (745)(8) (800) Interest income and other (expense), net.............. (28) 95 67 67 ------- ------- ------- ------ ------- ------- ------- Income (loss) before income taxes....................... (1,156) (1,631) 264 200 (2,323) (6,772) (9,095) Income tax expense (benefit)................... 17 (618) 496 (105) 205(10) 100 ------- ------- ------- ------ ------- ------- ------- Net income (loss)............. $(1,173) $(1,013) $ (232) $ 200 $(2,218) $(6,977) $(9,195) ======= ======= ======= ====== ======= ======= ======= EBITDA(1)..................... $ 759 $ 1,001 $ 5,941 $ 200 $ 7,901 $ 4,159 $12,060 ======= ======= ======= ====== ======= ======= ======= 33
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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS) [Enlarge/Download Table] SILVER HISTORICAL PRO FORMA CINEMAS STARTIME LANDMARK AMC(2) COMBINED ADJUSTMENTS PRO FORMA ------- -------- -------- ------ ---------- ----------- --------- REVENUES: Admissions........... $2,560 $ 3,582 $12,643 $325 $19,110 $ (194)(3) $18,916 Concessions.......... 2,129 2,799 2,813 244 7,985 (146)(3) 7,839 Other................ 113 128 204 15 460 96(3,4) 556 ------ ------- ------- ---- ------- ------- ------- Total......... 4,802 6,509 15,660 584 27,555 (244) 27,311 COSTS AND EXPENSES: Cost of Operations: Film Rentals....... 986 1,203 5,924 145 8,258 (51)(3) 8,207 Concession supplies......... 309 416 581 49 1,355 (180)(3,4) 1,175 Salaries and wages............ 855 1,253 2,470 140 4,718 (73)(3) 4,645 Facility leases.... 780 1,939 1,646 81 4,446 (166)(3) 4,280 Advertising........ 144 280 278 31 733 (33)(3) 700 Utilities and other............ 954 1,105 1,295 130 3,484 (70)(3,4) 3,414 General and administrative..... 590 315 1,357 2,262 (657)(5) 1,605 Depreciation and amortization....... 476 387 1,290 2,153 268(6,7) 2,421 ------ ------- ------- ---- ------- ------- ------- Total......... 5,094 6,898 14,841 576 27,409 (962) 26,447 ------ ------- ------- ---- ------- ------- ------- Operating income (loss)............... (292) (389) 819 8 146 718 864 Interest expense....... (157) (163) (162) (482) (2,318)(8) (2,800) Amortization of debt issue costs.......... (34) (34) (166)(8) (200) Interest income and other (expense), net.................. 10 (1,241) (1,231) 1,253(9) 22 ------ ------- ------- ---- ------- ------- ------- Income (loss) before income taxes......... (473) (1,793) 657 8 (1,601) (513) (2,114) Income tax expense (benefit)............ 23 (686) 392 (271) 346(10) 75 ------ ------- ------- ---- ------- ------- ------- Net income (loss)...... $ (496) $(1,107) $ 265 $ 8 $(1,330) $ (859) $(2,189) ====== ======= ======= ==== ======= ======= ======= EBITDA(1).............. $ 184 $ (2) $ 2,109 $ 8 $ 2,229 $ 986 $ 3,285 ====== ======= ======= ==== ======= ======= ======= 34
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER ATTENDEE DATA) (1) The term EBITDA, as used herein, represents operating income plus depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, the Company has included information concerning EBITDA in this Prospectus because it is used by certain investors and analysts as a measure of a company's ability to service its debt obligations. EBITDA should not be used as an alternative to, or be considered more meaningful than, operating income, net income, or cash flow as an indicator of the Company's operating performance. (2) Derived from the unaudited combined theater-level historical 1997 operating results of three theaters acquired through the AMC Acquisition. (3) Reflects the elimination of revenues and costs of theaters not purchased in the StarTime Acquisition and the Landmark Acquisition and reflects the Acquisition of Landmark's Main Art Theater, which occurred in June 1997, as if it had occurred on January 1, 1997. (4) Reflects an increase in other revenues as a result of new on-screen advertising agreements not previously in effect for Silver Cinemas and Landmark. Concession supplies costs have been reduced to reflect cost savings for Silver Cinemas, StarTime and Landmark associated with the negotiation of a new fountain drink contract. Utilities and other costs have been reduced to reflect cost savings associated with the negotiation of new insurance agreements for Silver Cinemas' theaters. The Company was able to negotiate these new agreements as a result of the Acquisitions and the higher combined attendance and drink sales and the more diversified real estate portfolio of the combined operations. These new agreements are reflected in the following pro forma adjustments: [Enlarge/Download Table] THREE MONTHS YEAR ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 -------------------- ----------------- Increase in other revenue...................... $ 94 $375 Decrease in concession supplies cost........... 163 650 Decrease in utilities and other costs.......... 7 125 (5) Reflects the elimination of general and administrative costs of $1,143 and $252 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively, for StarTime because such costs will be absorbed by the Company's existing overhead structure after the consummation of the Acquisitions. In addition, general and administrative expenses of $1,630 and $405 for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively, have been eliminated for Landmark officers and administrative employees not hired or replaced by the Company and for employment contract adjustments upon the consummation of the Landmark Acquisition. (6) Reflects an increase in depreciation expense to reflect differences between pro forma depreciation expense based on the fair values of acquired theater properties and equipment over useful lives of ten to 20 years and historical depreciation expense over useful lives primarily ranging from three to 40 years. [Enlarge/Download Table] THREE MONTHS YEAR ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 -------------------- ----------------- Pro forma depreciation expense................. $ 1,630 $ 6,081 Historical depreciation expense................ (1,570) (5,984) ------- ------- Pro forma adjustment........................... $ 60 $ 97 ======= ======= (7) Reflects an increase in amortization expense to reflect the difference between historical amortization expense and amortization of the purchase price amounts allocated to the fair values of (i) goodwill (over 20 years), and (ii) other identifiable intangible assets, such as organization costs and non-competition agreements, over the life of the related intangible asset (generally four to five years). 35
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[Enlarge/Download Table] THREE MONTHS YEAR ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 -------------------- ----------------- Pro forma amortization expense: Goodwill..................................... $ 659 $ 2,610 Other intangible assets...................... 134 535 ----- ------- 793 3,145 Historical amortization expense: Goodwill..................................... (447) (1,840) Other intangible assets...................... (138) (370) ----- ------- Pro forma adjustment................. $ 208 $ 935 ===== ======= Pro forma other intangible assets as of March 31, 1998 include net organizational costs of $116. In April 1998, the AICPA issued Statement of Policy 98-5 -- "Reporting on the Costs of Start Up Activities", which provides guidance on the financial reporting of organizational costs and is effective for fiscal years beginning after December 15, 1998. Initial application should be reported as the cumulative effect of a change in accounting principles resulting in the write off of unamortized organizational costs as of January 1, 1999 and expensing of such costs as incurred, thereafter. (8) Reflects interest expense on the Notes, amortization of debt issue costs and the elimination of historical interest expense associated with indebtedness repaid in connection with the Private Offering. [Enlarge/Download Table] THREE MONTHS YEAR ENDED ENDED MARCH 31, 1998 DECEMBER 31, 1997 -------------------- ----------------- Historical combined interest expense........... $ 482 $ 2,097 Less: Amounts in historical combined for refinanced and extinguished debt............. (307) (1,401) Add: Interest expense on Senior Subordinated Notes........................................ 2,625 10,500 Amortization of debt issue costs............. 200 800 ------ ------- Pro forma interest expense........... $3,000 $11,996 ====== ======= (9) Reflects the elimination of loss on sale of theater assets to the Company of $1,253 for StarTime during the three months ended March 31, 1998. (10) Reflects income tax provision for state income taxes. No federal income tax provision has been provided due to the net loss in the Unaudited Pro Forma Consolidated Statements of Operations. 36
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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 [Enlarge/Download Table] SILVER ACQUISITION OFFERING CINEMAS STARTIME LANDMARK ADJUSTMENTS TOTAL ADJUSTMENTS PRO FORMA ------- -------- -------- ----------- -------- ----------- --------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents............ $ 116 $ 319 $ 577 $ (896)(1) $ 116 $14,751(3) $ 14,867 Accounts receivable.................. 221 152 (221)(1) 152 152 Inventories.......................... 148 186 178 (14)(1) 498 498 Prepaid expenses and other........... 211 1,588 943 (2,088)(1) 654 654 ------- -------- ------- -------- -------- ------- -------- Total current assets........ 475 2,314 1,850 (3,219) 1,420 14,751 16,171 Theater properties and equipment: Land................................. 610 1,407 140(2) 2,157 2,157 Buildings............................ 3,880 6,054 320(2) 10,254 10,254 Leasehold interests and improvements....................... 2,165 27,243 (1,595)(2) 27,813 27,813 Theater furniture and equipment...... 7,041 21,833 4,910 (13,451)(2) 20,333 20,333 Theaters under construction.......... 293 2,149 2,040 (2,150)(2) 2,332 2,332 Less accumulated depreciation and amortization....................... (937) (11,193) (5,859) 17,052(2) (937) (937) ------- -------- ------- -------- -------- ------- -------- Net......................... 13,052 12,789 35,795 316 61,952 61,952 Goodwill, net........................ 10,711 2,204 21,714 18,074(2) 52,703 52,703 Other assets, net.................... 2,935 83 476 612(2) 4,106 5,000(3) 9,106 ------- -------- ------- -------- -------- ------- -------- Total Assets................ $27,173 $ 17,390 $59,835 $ 15,783 $120,181 $19,751 $139,932 ======= ======== ======= ======== ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................... $ 600 $ 1,100 $ 4,602 $ (1,932)(1) $ 4,370 $ $ 4,370 Accrued film rentals................. 260 (1) 260 260 Accrued payroll...................... 305 957 (1) 1,262 1,262 Accrued property taxes and other liabilities........................ 149 501 239 (501)(1) 388 388 Payable to parent company............ 132 (132)(1) Current portion of capital lease obligation......................... 284 284 284 Current portion of long term debt.... 6 1,536 171 (1,707)(1) 6 6 ------- -------- ------- -------- -------- ------- -------- Total current liabilities... 1,320 3,137 6,385 (4,272) 6,570 6,570 Long term debt: Existing Credit Facility............. 2,625 2,625 (2,625)(3) Note payable......................... 89 3,995 1,085 (4,860)(1) 309 309 Capital leases....................... 4,639 4,639 4,639 Senior Subordinated Notes............ 80,624(2) 80,624 19,376(2) 100,000 ------- -------- ------- -------- -------- ------- -------- Total long term debt........ 2,714 3,995 5,724 75,764 88,197 16,751 104,948 Other long-term obligations.......... 3,043 6,152 (6,920)(1,2) 2,275 2,275 Redeemable preferred stock........... 3,000 (3,000)(1) Stockholders' equity: Preferred stock...................... 25,301 3,802 (3,802)(1) 25,301 2,988(3) 28,289 Common stock......................... 1 1 (1)(1) 1 1 Additional paid-in capital........... 101 1,814 41,046 (42,860)(1) 101 12(3) 113 Stockholder notes receivable......... (214) (214) (214) Retained earnings (deficit).......... (2,050) (1,402) 528 874(1) (2,050) (2,050) ------- -------- ------- -------- -------- ------- -------- Total stockholders' equity.................... 23,139 4,215 41,574 (45,789) 23,139 3,000 26,139 ------- -------- ------- -------- -------- ------- -------- Total Liabilities and Stockholders' Equity............................. $27,173 $ 17,390 $59,835 $ 15,783 $120,181 $19,751 $139,932 ======= ======== ======= ======== ======== ======= ======== 37
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 (IN THOUSANDS) (1) Represents the elimination of assets, liabilities, and stockholders' equity of StarTime and Landmark that were not purchased or assumed in the Acquisitions. (2) Represents the allocation of the excess of the cash consideration for StarTime, Landmark and AMC over the historical carrying value of the net assets acquired after March 31, 1998 to the fair values of net assets acquired, as follows: [Download Table] STARTIME LANDMARK AMC TOTAL -------- -------- ------ -------- Cash consideration........................ $ 17,135 $ 62,204 $1,285 $ 80,624 Landmark commitments assumed: Employment contracts.................... 875 875 Lease commitment........................ 1,400 1,400 Less historical carrying value of net tangible assets acquired................ (10,827) (26,935) (100) (37,862) -------- -------- ------ -------- Excess purchase prices.................... $ 6,308 $ 37,544 $1,185 $ 45,037 ======== ======== ====== ======== Allocation of excess purchase prices: Excess fair value of theater properties and equipment........................ $ 250 $ 2,100 $ -- $ 2,350 Noncompete agreements................... 194 500 694 Goodwill................................ 5,864 34,944 1,185 41,993 -------- -------- ------ -------- Total........................... $ 6,308 $ 37,544 $1,185 $ 45,037 ======== ======== ====== ======== (3) Represents the sources of funds from the Private Offering and the Equity Contribution, and the related use of the proceeds therefrom, as follows: [Download Table] Sources of Funds: Senior Subordinated Notes................................. $100,000 Equity Contribution....................................... 3,000 -------- Total sources..................................... $103,000 ======== Uses of Funds: Landmark Acquisition...................................... $ 62,204 StarTime Acquisition...................................... 17,135 AMC Acquisition........................................... 1,285 Repayment of Old Credit Facility.......................... 2,625 Transaction fees and expenses............................. 5,000 Excess cash proceeds...................................... 14,751 -------- Total uses........................................ $103,000 ======== 38
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA SILVER CINEMAS The following table sets forth selected consolidated financial and operating data for Silver Cinemas derived from the audited financial statements for the periods ended and as of December 31, 1996 and 1997 and from unaudited financial statements for the three months ended and as of March 31, 1997 and 1998. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Silver Cinemas' consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. [Enlarge/Download Table] PERIOD FROM MAY 10, 1996 THREE MONTHS ENDED (DATE OF INCEPTION) YEAR ENDED MARCH 31, TO DECEMBER 31, DECEMBER 31, ------------------ 1996 1997 1997 1998 ------------------- ------------ ------- ------- (IN THOUSANDS, EXCEPT THEATER AND SCREEN DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................. $ 1,420 $18,762 $ 3,968 $ 4,802 Theater operating costs................... 1,219 16,102 3,407 4,028 General and administrative expenses....... 577 1,901 389 590 Depreciation and amortization............. 103 1,479 304 476 Operating loss............................ (479) (720) (132) (292) Interest expense.......................... -- 353 28 157 Amortization of debt issue costs.......... -- 55 34 Net loss.................................. (382) (1,173) (163) (496) CONSOLIDATED OTHER FINANCIAL DATA: Deficiency of earnings to fixed charges(1)............................. $ (382) $(1,156) $ (160) $ (472) Theater level cash flow(2)................ 201 2,660 561 774 Theater level cash flow margin(3)......... 14.2% 14.2% 14.1% 16.1% EBITDA(4)................................. $ (376) $ 759 $ 172 $ 184 Net cash provided (used) by operating activities............................. 733 757 (219) (314) Net cash provided (used) by investing activities............................. (13,180) (9,047) (3,985) (5,970) Net cash provided (used) by financing activities............................. 17,156 3,857 31 6,123 Capital expenditures(5)................... 182 4,556 776 386 THEATER DATA: Theaters.................................. 18 27 19 31 Screens................................... 102 165 109 191 CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents................. $ 4,709 $ 276 $ 535 $ 116 Theater properties and equipment -- net... 3,361 8,688 5,294 13,052 Total assets.............................. 17,827 21,927 17,399 27,173 Total long-term debt, including current portion................................ 2,000 6,597 2,000 2,720 Stockholders' equity...................... 14,774 13,633 14,642 23,138 --------------- (1) Earnings consist of net loss before taxes, plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs and one third of rent expense on operating leases treated as representative of the interest factor attributable to rent expense. (2) Theater level cash flow represents operating income plus depreciation and amortization plus general and administrative expenses. The Company believes theater level cash flow provides useful information regarding the Company's ability to generate cash flow at the theater level; however, theater level cash 39
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flow does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for cash flow from operations as an indicator of operating performance or as a measure of liquidity. (3) Theater level cash flow margin represents theater level cash flow divided by revenues. (4) EBITDA represents operating income plus depreciation and amortization. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance, cash flow or as a measure of liquidity. (5) Capital expenditures includes only the amounts expended for purchase of property and equipment. LANDMARK The following table sets forth selected consolidated financial and operating data for Landmark derived from the audited financial statements for the periods ended and as of December 31, 1997, December 31, 1996, June 30, 1996 and March 31, 1996 and for the period ended March 31, 1995, and from unaudited financial statements for the three months ended and as of March 31, 1997 and 1998 and for the period ended March 31, 1994. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Landmark's consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. [Enlarge/Download Table] THREE MONTHS SIX MONTHS THREE MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, JUNE 30, DECEMBER 31, DECEMBER 31, ----------------- 1994 1995 1996 1996 1996 1997 1997 1998 ---------- ---------- ---------- ------------ ------------ ------------ ------- ------- (IN THOUSANDS, EXCEPT THEATER, SCREEN AND RATIO DATA) (Predecessor) (Successor) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues................ $41,588 $46,401 $51,143 $11,576 $29,581 $56,954 $17,023 $15,660 Theater operating costs................. 32,949 37,654 42,105 10,244 23,305 45,822 13,070 12,194 General and administrative expenses.............. 3,293 3,634 4,225 1,189 2,426 5,191 1,210 1,357 Depreciation and amortization.......... 2,983 3,241 3,569 906 2,237 4,929 1,177 1,290 Operating income........ 2,363 1,872 1,244 (763) 1,613 1,012 1,566 819 Interest expense........ 531 516 716 237 458 748 215 162 Net income (loss)....... 1,100 700 207 (647) 495 (232) 651 265 CONSOLIDATED OTHER FINANCIAL DATA: Ratio of earnings to fixed charges(1)...... 1.84x 1.54x 1.18x 1.69x 1.09x 2.82x 1.93x Deficiency of earnings available to cover fixed charges(1)...... $(1,000) Theater level cash flow(2)............... $ 8,639 $ 8,747 $ 9,038 1,332 $ 6,276 $11,132 $ 3,953 $ 3,466 Theater level cash flow margin(3)............. 20.8% 18.9% 17.7% 11.5% 21.2% 19.5% 23.2% 22.1% EBITDA(4)............... $ 5,346 $ 5,113 $ 4,813 $ 143 $ 3,850 $ 5,941 $ 2,742 $ 2,109 THEATER DATA: Theaters................ 45 50 52 52 50 49 50 49 Screens................. 103 125 140 140 138 140 138 140 CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents........... $ 1,192 $ 2,004 $ -- $ 577 Theater properties and equipment -- net...... 35,632 35,023 34,879 35,795 Total assets............ 61,476 60,749 58,746 59,835 Total long-term debt and capital leases, including current portion............... 8,583 6,371 8,197 6,179 Shareholder's equity.... 36,660 41,309 45,160 41,574 --------------- (1) Earnings consist of net income before taxes, plus fixed charges. Fixed charges consist of interest expense, and one third of rent expense on operating leases treated as representative of the interest factor attributable to rent expense. (2) Theater level cash flow represents operating income plus depreciation and amortization plus general and administrative expenses. The Company believes theater level cash flow provides useful information regarding the Company's ability to generate cash flow at the theater level; however, theater level cash flow does not represent cash flow from operations as defined by generally accepted accounting principles 40
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and should not be considered as a substitute for cash flow from operations as an indicator of operating performance or as a measure of liquidity. (3) Theater level cash flow margin represents theater level cash flow divided by revenues. (4) EBITDA represents operating income plus depreciation and amortization. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance, cash flow or as a measure of liquidity. 41
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Unaudited Pro Forma Financial Data" and the consolidated financial statements, including notes thereto, of Silver Cinemas and Landmark appearing elsewhere in this Prospectus. Certain information in this section includes forward-looking statements. Such forward-looking statements relate to the Company's financial condition, results of operations, expansion plans and business. Actual results could differ materially from the forward-looking statements due to, among other things, the risks and uncertainties noted under the heading "Risk Factors" in this Prospectus. OVERVIEW Silver Cinemas was formed by Steve Holmes, Tom Owens and Brentwood in May 1996 to effect a consolidation and build-up of specialty-film and second-run theaters in the fragmented motion picture exhibition industry. Silver Cinemas' strategy is to acquire theaters in underserved markets, to upgrade and expand theaters to provide a high-quality movie-going experience and to improve profitability by combining certain administrative functions, obtaining volume purchasing discounts and executing tighter operating controls. Since its inception, Silver Cinemas has experienced rapid revenue growth through theater acquisition and the development of new theaters. During fiscal year 1996, Silver Cinemas acquired 18 theaters with 102 screens. During fiscal year 1997, Silver Cinemas acquired eight additional theaters with a total of 52 screens, constructed one theater with ten screens and added one screen to an existing theater. By December 31, 1997, Silver Cinemas operated 27 theaters with an aggregate of 165 screens in ten states. See "Business -- Recent and Pending Acquisitions" and "Business -- Recent and Pending Theater Construction." Silver Cinemas has been able to effect superior improvements in the operating performance of the acquired theaters. For example, Silver Cinemas' first two acquisitions, Movie One and MI Theaters, have shown theater level cash flow increases of 31.7% for the nine months ended September 30, 1997 compared to the same period during 1996, prior to Silver Cinemas' ownership of the theaters. Silver Cinemas expects that its future revenue growth will be derived primarily from the operation of its existing theaters, the acquisition and construction of new theaters and the addition of screens and seating to existing theaters. RESULTS OF OPERATIONS OF SILVER CINEMAS The following table sets forth, for the periods indicated, Silver Cinemas' operating results in thousands of dollars and as a percentage of total revenues: [Enlarge/Download Table] PERIOD FROM MAY 10, 1996 (DATE OF INCEPTION) THREE MONTHS ENDED MARCH 31, TO DECEMBER 31, YEAR ENDED -------------------------------------- 1996 DECEMBER 31, 1997 1997 1998 -------------------- ----------------- ---------------- ----------------- Revenues: Admissions............................. $ 787 55.4% $10,368 55.3% $2,220 56.0% $ 2,560 53.3% Concessions............................ 610 43.0 8,098 43.2 1,704 42.9 2,129 44.3 Other.................................. 23 1.6 296 1.5 44 1.1 113 2.4 ------ ----- ------- ----- ------ ----- ------- ----- Total............................ 1,420 100.0 18,762 100.0 3,968 100.0 4,802 100.0 Costs and expenses: Cost of operations: Film rentals......................... 378 26.6 4,484 23.9 951 24.0 986 20.5 Concession supplies.................. 111 7.8 1,462 7.8 311 7.8 309 6.5 Salaries and wages................... 276 19.4 3,065 16.3 621 15.7 855 17.8 Facility leases...................... 207 14.6 3,312 17.7 622 15.7 780 16.2 Advertising.......................... 46 3.2 755 4.0 135 3.4 144 3.0 Utilities and other.................. 201 14.2 3,024 16.1 767 19.3 953 19.9 ------ ----- ------- ----- ------ ----- ------- ----- Total............................ 1,219 85.8 16,102 85.8 3,407 85.9 4,027 83.9 ------ ----- ------- ----- ------ ----- ------- ----- General and administrative expenses...... 577 40.6 1,901 10.1 389 9.8 590 12.3 Depreciation and amortization............ 103 7.3 1,479 7.9 304 7.7 476 9.9 ------ ----- ------- ----- ------ ----- ------- ----- Operating income (loss).................. $ (479) (33.7)% $ (720) (3.8)% $ (132) (3.3)% $ (291) (6.1)% ====== ===== ======= ===== ====== ===== ======= ===== 42
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM MAY 10, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 Meaningful comparisons of the year ended December 31, 1997 and the period from May 10, 1996 to December 31, 1996 are not possible given the short operating history of those theaters purchased late in 1996. The significant increases from 1996 to 1997 in revenue, expenses and depreciation and amortization are the result of operating 18 theaters acquired in 1996 for a full year, plus the additional nine theaters acquired throughout 1997. The following presents the primary revenue and expense categories for Silver Cinemas. Revenues. Silver Cinemas' revenues are generated primarily from box office admission receipts and concession sales. For the year ended December 31, 1997 and the period from May 10, 1996 (date of inception) to December 31, 1996, admissions revenues comprised approximately 55% of total revenues for both periods and concessions revenues comprised approximately 43% of total revenue for both periods. The remaining approximately 2% of revenue for those periods was derived primarily from electronic video games located in theater lobbies. Admissions Revenues. Box office admission receipts are based on the level of theater attendance and the average ticket price. Attendance levels are primarily affected by the commercial appeal of released films, and to a lesser extent, by the comfort and quality of the theater, competition from other local theaters and population growth in the geographic markets Silver Cinemas serves. Silver Cinemas' ticket prices vary throughout the circuit depending upon such things as type of theater (second-run or first-run), local competition and local economies, as well as special discounts and pricing promotions. Admissions revenue is recorded net of applicable sales taxes. Concessions Revenues. Concessions revenues represent a significant portion of a theater's overall profitability. Silver Cinemas' primary concession products are soft drinks, popcorn, candy and certain other products on a regional basis. The majority of concession products are generally offered in three or four sizes. Retail prices are determined according to size as well as local competition. Concessions revenues are recorded net of applicable sales taxes. In an effort to increase concession sales, Silver Cinemas is constantly reviewing new products, adjusting pricing, creating convenience and value-oriented combinations, and continually training concession personnel in the techniques of up-selling and cross selling. In addition Silver Cinemas has remodeled concession stands at certain theaters to make them more efficient and attractive. Theater managers and assistant managers are motivated through concession commission programs. Film Rental Expenses. Film rental fees are paid directly to the film distribution companies and are directly related to the popularity of a film and the length of time since that film's release. Film rental costs are calculated on a percentage of admission revenues and generally decline the longer the film has been showing. Most terms of film licenses are finalized subsequent to exhibition of the film in a process known as "settlement." The final terms of the film licenses consider, among other things, the actual success of a film relative to original expectations and the exhibitor's relationship with the film distributor. Concession Supplies Expenses. Concession supplies are regularly purchased in bulk through Silver Cinemas' distributors and vendors. Concession product is generally ordered weekly from the distributors in order to prevent the build-up of inventory at the theaters. Concession costs also include the cost of spoiled and wasted concession inventory. Salaries and Wage Expenses. Salaries and wages include payroll taxes, employee benefits, commissions on concession sales and bonuses for the theater managers and all theater staff. Typically only the theater manager and the assistant manager are paid a base salary. The wages paid to the remaining staff are based on an hourly wage rate. Silver Cinemas continually adjusts staffing levels based upon attendance levels. In order to monitor payroll levels, management measures salary and wage expense in relation to attendance through payroll per attendee. For the year ended December 31, 1997, Silver Cinemas experienced payroll per attendee of $0.49. 43
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Facility Lease Expenses. Facility lease expenses consist primarily of a fixed monthly minimum rent payment. In addition, several theater leases contain contingency rent that is based on a percentage of revenue after such revenue reaches a certain dollar amount. Advertising Expenses. The largest component of advertising costs consists of daily movie directories placed in local newspapers to advertise Silver Cinemas' theaters and showtimes. In select markets Silver Cinemas participates in "co-op" arrangements whereby the exhibitors in those markets share the cost of film advertisement in newspapers with the film distributors. The cost of newspaper ads is generally based on the size of the directory. Silver Cinemas anticipates lowering advertising costs in those cities which have multiple theaters as a result of the Acquisitions. The savings will be realized through consolidating directory ads and receiving greater purchasing discounts. Utilities and Other Expenses. Utilities and other expenses consist primarily of utilities, insurance, property taxes, repair and maintenance and cleaning. General and Administrative Expenses. General and administrative expenses are comprised of various expenses related to the management and operation of its theaters and consist primarily of management and office salaries, payroll taxes, related employee benefit costs, professional fees, insurance costs and general office expenses. Depreciation and Amortization. Depreciation and amortization expense includes the depreciation of theater equipment and buildings, the amortization of theater lease costs, goodwill, and certain non-compete agreements. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 Revenues. Silver Cinemas' revenues are generated primarily from box office admission receipts and concession sales. For the three months ended March 31, 1997 and three months ended March 31, 1998, admissions revenues comprised 56.0% and 53.3% of total revenues respectively and concession revenues comprised approximately 42.9% and 44.3% of total revenues respectively. The remaining 1.1% and 2.4% of total revenues was derived primarily from electronic video games located in the theater lobbies. Admissions Revenues. Admissions revenue increased $0.3 million or 15.3% to $2.6 million during the three months ended March 31, 1998. The increased admissions revenue was primarily the result of the addition of 12 newly acquired theaters representing 82 screens. The average ticket price for the circuit decreased slightly from $1.68 to $1.67. Concessions Revenues. Concession revenue increased $0.4 million or 25.0% to $2.1 million during the three months ended March 31, 1998. The increased concession revenue was primarily the result of the newly acquired theaters and a 7.0% increase in the average concession sale per attendee from $1.29 to $1.38 due to upselling sales techniques and retail price adjustments. Film Rental Expenses. Film rental expenses as a percentage of admissions revenue decreased from 42.8% to 38.5% as a result of acquiring additional discount theaters which have lower film rental expenses compared to first run theaters. Concession Supplies Expenses. Concession costs as a percentage of concession revenue decreased in 1998 from 18.3% of concession sales to 14.5% primarily as the result of negotiating lower wholesale prices, standardizing menus, and the adjustment of retail prices to reflect local market conditions. Salaries and Wage Expenses. Payroll expense increased from $0.6 million for the three months ended March 31, 1997 to $0.9 million for the three months ended March 31, 1998 due primarily to the addition of the newly acquired theatres. Facility Lease Expenses. Facility Leases increased $0.2 million to $0.8 million for the three months ended March 31, 1998 from $0.6 million for the three months ended March 31, 1997. The increase in facility lease expense is primarily attributable to the additional theatres operated at March 31, 1998. 44
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Advertising Expenses. Advertising expenses were essentially flat from the three months ended March 31, 1997. Advertising expenses comprised 3.4% and 3.0% of total revenues for the three months ended March 31, 1997 and the three months ended March 31, 1998 respectively. Utilities and Other Expenses. Utilities and other expenses increased from $0.8 million to $1.0 million for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. The increase was primarily the result of the additional theaters operated at March 31, 1998. General & Administrative Expenses. General & Administrative expenses increased from $0.4 million to $0.6 million for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. The increase was primarily the result of increased payroll costs associated with the Company's expansion. Depreciation and Amortization. Depreciation and amortization increased $0.2 million to $0.5 million for the three months ended March 31, 1998 from $0.3 million for the three months ended March 31, 1997. The increase was primarily the result of the additional theaters operated at March 31, 1998. 45
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RESULTS OF OPERATIONS OF LANDMARK The following table sets forth the predecessor basis three month periods ended March 31 and June 30, 1996 and the successor basis six month period ended December 31, 1996 to arrive at a total for the 12 months ended December 31, 1996, which is compared to the year ended December 31, 1997 of Landmark. Management of Silver Cinemas has arrived at the total for the 12 months ended December 31, 1996 by combining, without adjustments, the three and six month periods with the three month period. The three month period ended March 31, 1996 has not been derived from audited financial statements. This three month period has been provided to Silver Cinemas by Landmark. This information is provided herein for the purpose of constructing a period for comparison with the year ended December 31, 1997; however, Silver Cinemas makes no representations as to its usefulness for such purpose. The information for the three month periods ended March 31, 1997 and 1998 was derived from unaudited interim financial statements. The following discussion should be read in conjunction with Landmark's consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. The following table sets forth, for the periods indicated, Landmark's operating results in thousands of dollars and as a percentage of total revenues: [Enlarge/Download Table] PREDECESSOR PREDECESSOR SUCCESSOR COMBINED SUCCESSOR THREE MONTHS THREE MONTHS SIX MONTHS YEAR YEAR ENDED ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1996 1996 1996 1997 ------------ ------------ ------------ --------------- --------------- (Predecessor) (Successor) Revenues: Admissions............. $12,374 $ 9,314 $23,960 $45,648 80.8% $45,903 80.6% Concessions............ 2,660 2,060 5,044 9,764 17.3 10,061 17.7 Other.................. 309 202 577 1,088 1.9 990 1.7 ------- ------- ------- ------- ----- ------- ----- Total........... 15,343 11,576 29,581 56,500 100.0 56,954 100.0 Cost of revenues: Film rentals and advertising........... $ 6,405 $ 5,078 $11,995 $23,478 41.6% $23,212 40.8% Cost of concessions.... 509 456 1,039 2,004 3.6 2,096 3.7 Payroll and related expenses.............. 2,260 2,128 4,610 8,998 15.9 9,448 16.6 Occupancy costs........ 1,730 1,708 3,689 7,127 12.6 7,071 12.4 Other theater operating expenses.............. 959 874 1,972 3,805 6.7 3,995 7.0 ------- ------- ------- ------- ----- ------- ----- Total........... 11,863 10,244 23,305 45,412 80.4 45,822 80.5 ------- ------- ------- ------- ----- ------- ----- -- -- -- -- -- -- -- General and administrative......... 1,357 1,189 2,426 4,972 8.8 5,191 9.1 Depreciation and amortization........... 977 906 2,237 4,120 7.3 4,929 8.7 -- -- -- -- -- -- -- ------- ------- ------- ------- ----- ------- ----- Operating income (loss)................. $ 1,146 $ (763) $ 1,613 $ 1,996 3.5% $ 1,012 1.8% ======= ======= ======= ======= ===== ======= ===== THREE MONTHS ENDED MARCH 31, --------------------------------- 1997 1998 --------------- --------------- Revenues: Admissions............. $13,648 80.2% $12,643 80.7% Concessions............ 3,085 18.1 2,813 18.0 Other.................. 290 1.7 204 1.3 ------- ----- ------- ----- Total........... 17,023 100.0 15,660 100.0 Cost of revenues: Film rentals and advertising........... 7,204 42.3 6,202 39.6 Cost of concessions.... 623 3.7 581 3.7 Payroll and related expenses.............. 2,351 13.8 2,470 15.8 Occupancy costs........ 1,600 9.4 1,646 10.5 Other theater operating expenses.............. 1,292 7.6 1,295 8.3 ------- ----- ------- ----- Total........... 13,070 76.8 12,194 77.9 ------- ----- ------- ----- -- -- -- -- General and administrative......... 1,210 7.1 1,357 8.7 Depreciation and amortization........... 1,177 6.9 1,290 8.2 -- -- -- -- ------- ----- ------- ----- Operating income (loss)................. $ 1,566 9.2% $ 819 5.2% ======= ===== ======= ===== YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Admissions revenues. Admissions revenues increased $0.2 million or 0.5% to $45.9 million during the year ended December 31, 1997. The increased admissions revenue was primarily the result of a 4.0% increase in the average ticket price from $5.72 to $5.95, partially offset by a 3.3% reduction in attendance from 7,974,962 to 7,712,422. Landmark benefits from having an average ticket price that is substantially higher than the national average ticket price ($5.95 vs. $4.59 for 1997 respectively) and strong customer loyalty due to their dedication to the specialty-film market. Concessions revenues. Concessions revenues increased $0.3 million or 3.0% to $10.1 million during the year ended December 31, 1997. The increased concession revenue was primarily the result of a 6.6% increase in the average concession sale per attendee from $1.22 to $1.30, partially offset by a 3.3% reduction in attendance from 7,974,962 to 7,712,422. In addition to offering the traditional movie theater concessions of 46
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popcorn, soft drinks and candy, Landmark theaters work with local vendors to provide specialty items that cater to their customers, such as fresh pastry, specialty coffees, and desserts. Film and advertising expenses. Film rental and advertising expenses as a percentage of admissions revenue decreased from 51.4% to 50.6% as a result of more aggressive film settlement as well as the ability to extend the run of several successful releases during 1997. Landmark's film rental rates are typically below film rental rates of first-run theaters, which average in the low to mid 50% range. The low film rental expense combined with the above average ticket price contributes to Landmark's overall profitability. Cost of concessions. Concession costs as a percentage of concession revenue increased slightly in 1997 from 20.5% to 20.8%. Concession costs for Landmark are at the higher end of the range for theater circuits. Landmark's higher rate is partially attributable to the lower-margined specialty concession items offered (cookies, coffee, desserts), increased spoilage and fewer volume discounts. Payroll and related expense. Payroll expense increased from $9.0 million for the twelve months ended December 31, 1996 to $9.4 million for the year ended December 31, 1997. Payroll per attendee, a key measure for staff efficiency, increased from $1.13 per attendee to $1.22 per attendee. The increase is partially attributable to the addition of a dedicated ticket taker at the majority of theaters, and the opening of two new theaters, which typically require more staff prior to and shortly after opening. Occupancy costs. Occupancy costs were flat from the prior year at $7.1 million. General and administrative expenses. General and administrative expenses increased from $5.0 million for the year ended December 31, 1996 to $5.2 million for the year ended December 31, 1997. The increase was primarily the result of management bonuses, travel associated with new site development and increased corporate occupancy expenses. These increases were partially offset by a reduction in legal expenses associated with the successful defense of litigation relating to a theater lease in 1996. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 Revenues. Landmark Theatres' revenues are generated primarily from box office admission receipts and concession sales. For the three months ended March 31, 1997 and three months ended March 31, 1998, admissions revenues comprised 80.2% and 80.7% of total revenues respectively and concession revenues comprised approximately 18.0% of total revenues for both periods. The remaining 1.7% and 1.3% of total revenues for the three months ended March 31, 1997 and the three months ended March 31, 1998 respectively was derived primarily from film screenings. Admissions revenues. Admissions revenue decreased $1.0 million or 7.4% to $12.6 million during the three months ended March 31, 1998. The decreased admissions revenue was primarily the result of a decline in attendance of approximately 9.3%. The decrease in attendance was partially offset by an increase in the circuits' average ticket price from $5.88 for the three months ended March 31, 1997 to $6.01 for the three months ended March 31, 1998. Concessions revenues. Concession revenue decreased $0.3 million or 8.8% to $2.8 million during the three months ended March 31, 1998. The decreased concession revenue was primarily the result of the 9.3% drop in attendance. The decrease in attendance was partially offset by a 1.0% increase in the average concession sale per attendee. Film and advertising expenses. Film rental expenses as a percentage of admissions revenue decreased from 42.3% to 39.6% as a result of more aggressive film settlement and newsprint advertising rebates. Cost of Concessions. Concession costs declined slightly due to the decrease in concession sales. As a percentage of total revenues, concession supplies expenses remained flat at 3.7%. Payroll and related. Payroll expense increased from $2.4 million for the three months ended March 31, 1997 to $2.5 million for the three months ended March 31, 1998. The increase is partially attributable to work schedules that were not reduced as attendance levels declined. 47
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Occupancy costs. Occupancy costs were relatively flat at $1.6 million for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. General and administrative expenses. General and Administrative expenses increased from $1.2 million to $1.4 million for the three months ended March 31, 1998 compared to the three months ended March 31, 1997. The increase was primarily the result of increased payroll and related expenses. LIQUIDITY AND CAPITAL RESOURCES Revenues are collected in cash, primarily through box office receipts and the sale of concession items. Because revenues are received in cash prior to the payment of related expenses, there are, in effect, no accounts receivable. This, in combination with minimal inventory requirements, creates a negative working capital position, which provides certain operating capital. During 1996 and 1997 Silver Cinemas' capital requirements were the result of theater acquisitions, renovation of existing theaters, and construction of a new theater. Such capital expenditures were financed with equity financing, bank borrowings, and internally generated cash. On April 7, 1997, Silver Cinemas entered into the Old Credit Facility, which, subject to the restrictions therein, provides Silver Cinemas through the Issue Date the ability to borrow up to $25.0 million. In December 1997, Silver Cinemas did not comply with certain coverage ratio provisions of the Old Credit Facility. Silver Cinemas' lender amended these provisions and issued a waiver of default. The Company repaid all of the indebtedness under the Old Credit Facility with proceeds from the Private Offering. The Company intends to enter into the Revolving Credit Facility. Until such time that the Company enters into the Revolving Credit Facility, the Company will not be able to borrow under any credit facility. The Company has obtained a commitment from DLJ Capital Funding, Inc. for the Revolving Credit Facility. The Revolving Credit Facility is expected to allow the Company to borrow up to $40.0 million subject to certain restrictive covenants. See "Description of Revolving Credit Facility." Under the Revolving Credit Facility, the Company will be required to maintain specified financial ratios and tests, including a ratio of Funded Debt to Adjusted EBIDTA below a specified maximum, and above minimum fixed charge coverage levels and minimum interest coverage levels. The inability of the Company to meet such ratios and tests will result in the Company being unable to borrow under the Revolving Credit Facility, in addition to constituting a default under the Revolving Credit Facility. In such circumstances, the Company could be unable to effect its acquisition strategy or fund capital expenditures. See "Risk Factors -- Restrictive Covenants of Revolving Credit Facility; Inability to Borrow Additional Amounts." The Company expects to use the amounts available under the Revolving Credit Facility to finance future capital expenditures and acquisitions. See "Risk Factors -- Restrictive Covenants of Revolving Credit Facility; Inability to Borrow Additional Amounts." During 1998, the Company expects to spend approximately $6.5 million to construct two six-screen specialty-film theaters in St. Louis, Missouri and Waltham, Massachusetts, one six-screen second-run theater in Joliet, Illinois and one six-screen first-run theater in Flint, Michigan. Also during 1998 the Company plans to spend approximately $1.2 million to add three screens to an existing second-run theater in Laredo, Texas and to convert a second-run theater in Yukon, Oklahoma to stadium seating. The Company expects that the portion of the proceeds of the Private Offering not used for the Acquisitions or to repay bank borrowings, together with amounts available under the Revolving Credit Facility and cash flow, should be sufficient to fund the Company's operations and growth strategy for approximately 18 to 24 months. INFLATION Inflation has not had a significant impact on Silver Cinemas' operations to date. 48
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SEASONALITY Silver Cinemas' quarterly results of operations tend to be affected by film release patterns by producers and distributors, and the commercial success of films. In the past, the year-end holiday season and the summer resulted in higher-than-average quarterly revenues for Silver Cinemas. Landmark's quarterly results of operations tend to be affected by film release patterns by producers and distributors of independent films. In the past, Landmark has experienced higher-than-average quarterly revenues during the first three months of the year. During 1997 and 1996 approximately 35% and 31%, respectively of Landmark's revenue was earned during the first quarter. Combined, the seasonal fluctuations of Silver Cinemas and StarTime tend to offset each other. ACQUISITION SYNERGIES As a result of the Acquisitions, the Company expects to achieve cost savings and incremental revenues within the first year following the Issue Date, including (i) increased other revenues associated with an increase in vending machine sales and other advertising revenue, (ii) reduced theater level payroll, (iii) reduced advertising expenses and (iv) elimination of one-time consulting fees. These acquisition synergies are not considered in the Pro Forma Consolidated Statement of Operations contained elsewhere in this Prospectus, as such adjustments are not provided for in the definition of "pro forma" pursuant to Regulation S-X under the Securities Act. There can be no assurance that the acquisition synergies will occur or continue in the future. Actual results may differ materially due to economic and competitive uncertainties and other contingencies, including, without limitation, the possibility that theater managers may not have sufficient managerial skills to properly implement reorganization of employees work schedules and employees may not be able to handle efficiently diversified functions. See "Risk Factors -- Business Risks Associated with the Acquisitions," "Risk Factors -- Risks of Failure to Obtain Landlord Consents" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Revenue Synergies: The Company expects to achieve revenue synergies due to the placement of vending machines throughout its second-run theaters and the implementation of innovative advertising mediums. Projected first year revenues are estimated below: [Download Table] (IN THOUSANDS) (i) New bulk candy vending machines at 27 theaters............. $ 70 (ii) New audio advertising at all of the Company's theaters..... 332 ---- Total...................................................... $402 ==== Cost Synergies: By implementing the Company's operational philosophy, the Company believes it can substantially reduce the cost of operating its newly acquired theaters. The majority of the Company's cost savings will be achieved as a result of reducing the number of theater-level employees at StarTime and Landmark, the reorganization of employees' work schedules and the diversification of employee functions at Landmark. The cost savings are based on management's belief that it can reduce theater-level payroll expenses at StarTime theaters to approximately $0.49 per attendee and at Landmark theaters to approximately $1.01 per attendee. Management anticipates that these reductions will be fully implemented within one year of closing the StarTime Acquisition and the Landmark Acquisition. As a reference, Silver Cinemas achieved a $0.49 payroll per attendee for the year ended December 31, 1997. Assuming the Company achieves its payroll per attendee goals, the Company could potentially 49
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save approximately $2.7 million in the first year. Assuming 1997 attendance levels and the Company's projected payroll per attendee goal, the following payroll savings are anticipated: [Enlarge/Download Table] ADJUSTED THEATER- THEATER- ADJUSTED LEVEL THEATER- LEVEL THEATER- COST PAYROLL/ LEVEL PAYROLL/ LEVEL SAVINGS PER COST ATTENDEE(A) PAYROLL(B) ATTENDEE(A) PAYROLL(B) ATTENDEE(A) SAVINGS ----------- -------------- ----------- -------------- ----------- -------------- (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) StarTime............. $0.61 $5,645 $0.49 $4,576 $0.12 $1,069 Landmark............. 1.22 9,317 1.01 7,730 0.21 1,586 ------ Total...... $2,655 ====== --------------- (a) Based on attendance for the year ended December 31, 1997 of 9,281,347 at StarTime and 7,632,964 at Landmark. (b) Excludes theater level payroll from those StarTime and Landmark theaters not acquired. Advertising expense savings will be achieved as a result of consolidating advertisements and utilizing free directory advertisements in a local newspapers. Estimated savings are projected to be approximately $36,000 in the first year. Other expense savings are projected as the Company foresees a reduced need for outside consultants. Based on what the previous entities paid for such services, the Company anticipates saving approximately $91,000 in the first full year of operations. 50
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BUSINESS GENERAL The Company is the largest exhibitor of specialty motion pictures and one of the largest operators of second-run theaters in the United States. The Company operates 106 theaters with 524 screens located in eighteen states. The 106 theaters are comprised of 49 specialty motion picture theaters, 49 second-run theaters and eight first-run theaters. The Company's strategy is to acquire theaters in under-served markets, to upgrade and expand theaters to provide a high-quality movie-going experience and to improve the profitability of theaters by combining certain administrative functions, obtaining volume discounts and implementing tighter operating controls. On a pro forma basis for the year ended December 31, 1997 and the three months ended March 31, 1998, the Company generated revenue of approximately, $106.3 million and $27.3 million, respectively, and pro forma EBITDA (as defined) of $12.1 million and $3.3 million, respectively. The Company's specialty-film theaters exhibit alternatives to commercial first-run movies. The specialty-film niche is composed of art films, foreign pictures and independent releases such as Good Will Hunting, The Full Monty, The Apostle, Shine, Sling Blade and The English Patient which are generally released in limited numbers to selected markets. Studios such as Disney, Universal, Sony, Paramount, Twentieth Century Fox and New Line have begun to distribute specialty-films through dedicated distribution subsidiaries (Miramax, October Films, Sony Pictures Classics, Paramount's specialty-film division, Fox Searchlight Pictures and Fine Line, respectively). Management believes that the recent success of independent films in garnering Academy Award nominations and Academy Awards will further drive independent film production, particularly from these "independent" subsidiaries which seek the recognition of these prestigious, high profile awards. According to Exhibitor Relation Company, Inc., the number of new films released by independent producers and distributors was increased from 158 in 1992 to 295 in 1997. In addition to the prestige of the Academy Awards, the generally lower budgets and higher potential returns on capital invested in specialty films makes the production of these films financially appealing to the studios. Specialty films are also attractive to exhibitors since the specialty-film niche tends to benefit from higher average admission prices and lower film rental expense than first-run operators, resulting in higher operating margins. Finally, the specialty-film niche, which generally appeals to more mature and upscale audiences, is expected to continue to benefit from favorable demographic trends as a result of the aging of the "baby boom" generation The Company's second-run theaters offer major studio productions, generally six to ten weeks after their initial release dates, at significantly lower admission prices than commercial first-run theaters, ranging from $1.00 to $2.00. The Company believes that these lower prices make the level of revenues from second-run theaters less susceptible to economic recession. The Company enjoys more favorable film booking arrangements and film buying terms at its second-run theaters than its commercial first-run counterparts. With far fewer second-run screens than first-run screens nationwide, there is typically little competition for prints of commercial films, enabling the Company to screen its choice of successful commercial films. First-run theaters, on the other hand, must aggressively compete for films from distributors and generally screen only a subset of new releases. In addition to its film booking advantage, the Company's second-run theaters also benefit from lower film rental expense and a larger proportion of high-margin concession sales as a percentage of overall revenue. Finally, the Company's lower admission prices for its second-run theaters appeal especially to teen audiences and older patrons, segments of the population which are expected to experience steady growth over the next decade. Founded in May 1996, the Company completed seven acquisitions, representing 26 theaters with an aggregate total of 154 screens as of December 31, 1997. In addition, the Company completed two construction projects, increasing its total number of theaters and screens to 27 and 165, respectively. Management has successfully integrated these theaters into its operations by implementing new operating standards, management controls and information systems. In addition, the Company has added new seating, improved sound and projection equipment, and broadened concession offerings in many locations. The impact of these improvements, which have helped increase profitability, are reflected in the operating performance of the Company's first two acquisitions in November 1996, Movie One and MI Theaters, consisting of 102 screens at 18 theaters. Based on actual results for the nine months ended September 30, 1997, theater level cash flow at these 51
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theaters increased 31.7% compared to the nine months ended September 30, 1996, prior to the Company's ownership of the theaters. BUSINESS STRATEGY The Company's strategy is to increase revenue and cash flow by (i) acquiring specialty motion picture and second-run theaters and first-run theaters in non-competitive markets, (ii) improving operations at acquired theaters, (iii) building new state-of-the-art multiplexes in selected markets, and (iv) adding additional screens, seating capacity, state-of-the-art sound and projection systems, and other exhibition or concession equipment at its existing theaters. Pursue Strategic Acquisitions. The Company has successfully pursued a disciplined acquisition strategy and intends to continue to acquire and integrate theaters in both the specialty-film and second-run niches. Management believes that there are many attractive acquisition candidates in the highly-fragmented exhibition industry. Management believes that the recent consolidation trend in the exhibition industry is driving many major exhibitors to dispose of non-core properties, many of which are second-run or specialty- film theaters that do not fit those companies' commercial first-run strategies. In addition, the growth of megaplexes (theaters with 16 or more screens) has created another avenue of potential growth for the Company through the conversion of existing commercial first-run theaters to theaters with a specialty-film or second-run format at an attractive cost. Leverage Existing Infrastructure and Control Operating Cost. The Company has successfully integrated and improved the operations of its acquisitions. Management believes significant opportunities exist to leverage its existing infrastructure over future acquisitions and realize significant operating improvements through the implementation of superior operating procedures, management oversight and its state-of-the-art management information system. Specific areas of improvement include (i) labor scheduling, (ii) film selection and lineup, (iii) cash control, (iv) pricing policies, and (v) purchasing discounts on concession contracts. Additionally, many of the smaller chains lack the sophisticated information systems employed by the Company, which the Company believes are necessary to effectively manage a geographically diverse group of theaters. Examples of management's ability to acquire and improve operations of theaters include the acquisitions of Movie One and MI Theaters, both completed in November 1996. Based on actual results for the nine months ended September 30, 1997, these two groups of theaters have shown theater level cash flow increases of 31.7% compared to the same period in the previous year, prior to the Company's ownership of the theaters. Capitalize on Leading Position in Specialty-Film Segment. The Company, through Landmark, is the largest exhibitor of specialty motion pictures and the only specialty-film exhibitor with a national presence. The Company has a leading presence in, among others, the following major markets: Los Angeles, San Francisco, Boston, Dallas, Houston, Seattle, Cleveland, Minneapolis, Denver, Milwaukee and New Orleans. The Company plans to use its experience in the specialty-film niche to establish a presence in the following strategic new markets: Chicago, Detroit, St. Louis and Washington D.C. Landmark achieved its leading presence by developing strong relationships with specialty-film distributors, many of whom rely on the Company's expertise in distributing and marketing specialty films. These relationships enable the Company to secure film prints in limited release and secure a period of exclusivity in exhibiting selected new films in many of its markets. For example, for films such as The English Patient, Good Will Hunting and Shine, the Company had exclusive rights to the films for up to three weeks in selected markets. Expand Established Second-Run Operations. The Company believes it is the leading operator of second-run theaters in most of its markets, operating 49 second-run theaters with 336 screens in 15 states. By offering patrons a high-quality alternative to commercial first-run exhibitors at a low price, the Company avoids direct competition with commercial first-run theaters. In addition, the second-run niche offers other attractive characteristics which include (i) lower film costs as a percentage of admission revenue, (ii) greater percentage of total revenue from high margin concessions, (iii) greater recession resistance due to lower admission prices, and (iv) lower seasonal variability than commercial first-run exhibitors due to a staggered film release schedule. 52
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Provide a Superior Movie-Going Experience. The Company seeks to provide audiences with a high quality viewing experience, comparable to that available at new commercial first-run theaters. To enhance the movie-going experience, the Company invests in high quality projection and stereo sound equipment, comfortable chairs with wide seats and cup-holder armrests, and appealing lobby and concession areas. Since many competitors in the specialty-film and second-run exhibition niches do not focus on these aspects of operations, management believes that this strategy provides it with a distinct competitive advantage. Pursue Attractive Construction Opportunities. The Company continually evaluates existing and new markets for new theater locations for specialty, second run, and, in selected situations, commercial first-run theaters. The Company generally seeks to develop theaters in markets that are under-served as a result of changing demographic trends or the aging or obsolescence of existing theaters. Some of the factors management considers in determining whether to develop a theater in a particular location are the market's population, average household income, education levels, proximity to retail corridors, convenient roadway access, proximity to competing theaters, and the effect on the Company's existing theaters in the market, if any. Leverage Experienced Management Team and Strong Sponsorship. The Company's senior management team averages over 21 years of experience in the exhibition industry, and members of senior management have been heavily involved in the rapid growth of exhibition companies such as Cinemark USA, Inc. and The Landmark Theatre Group, Inc. In addition, the Company enjoys the strong equity sponsorship of Brentwood and certain members of management. See "Principal Stockholders." On March 3, 1998, Brentwood made an additional equity contribution of $10.0 million, bringing its aggregate equity investment to $25.0 million. RECENT AND PENDING ACQUISITIONS From its inception through December 31, 1997, the Company completed seven acquisitions, representing 26 theaters with an aggregate of 154 screens. In April 1998, the Company acquired the assets of Landmark for cash consideration of approximately $62.2 million pursuant to an asset purchase agreement (the "Landmark Asset Purchase Agreement") with Metromedia International Group, Inc. ("Metromedia"). Landmark, with 140 screens at 49 locations, was the largest exhibitor of specialty motion pictures in the United States, with theaters located in California, Colorado, Louisiana, Massachusetts, Michigan, Minnesota, Ohio, Texas, Washington and Wisconsin. In April 1998, the Company completed the acquisition of 202 screens at 27 locations operating predominately under the name Super Saver Cinemas pursuant to an asset purchase agreement (the "StarTime Asset Purchase Agreement") with StarTime Cinema, Inc. ("StarTime") for approximately $21.6 million. (In the first quarter of 1998, the Company acquired two of the 27 locations for approximately $4.6 million.) The theaters acquired from StarTime are second-run theaters located in Arizona, California, Colorado, Florida, Nebraska, New York, Ohio, Oklahoma, Texas and Wisconsin. In April 1998, the Company completed the acquisition of 17 screens at three theaters for approximately $1.7 million from AMC Entertainment, Inc. ("AMC"). (In the first quarter of 1998, the Company acquired two of the three AMC theaters for approximately $0.5 million.) These theaters include one specialty-film theater in Michigan and two second-run theaters in Texas. The following table sets forth the Company's completed and pending acquisitions since its inception in June 1996. COMPLETED AND PENDING ACQUISITIONS [Download Table] DATE SELLER THEATERS SCREENS STATE ---- ------ -------- ------- ----- 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 53
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[Enlarge/Download Table] DATE SELLER THEATERS SCREENS STATE ---- ------ -------- ------- ----- May 1997 United Artists 1 4 TX September 1997 Westminster(1) 2 11 CO April 1998 AMC 3 17 MI, TX April 1998 StarTime 27 202 AZ, CA, CO, FL, NE, NY, OH, OK, TX, WI April 1998 Landmark 49 140 CA, CO, LA, MA, MI, MN, OH, TX, WA, WI --- --- 105 513 Total === === --------------- (1) Theaters operated pursuant to management agreement. RECENT AND PENDING THEATER CONSTRUCTION The Company continually evaluates existing and new markets for the construction and expansion of specialty, second-run and, in selected situations, commercial first-run theaters. The Company generally seeks to develop theaters in markets that are under-served as a result of changing demographic trends or the aging or obsolescence of existing theaters. Some of the factors management considers in determining whether to develop a theater in a particular location are the market's population, average household income, education levels, proximity to retail corridors, convenient roadway access, proximity to competing theaters, and the effect on the Company's existing theaters in the market, if any. The Company completed the construction of its first second-run multiplex theater with ten screens in Des Moines, Iowa in June 1997. The Company also completed the expansion of its existing facility in LaPlace, Louisiana in September 1997, which increased the number of screens from six to seven and the number of seats from 734 to 970. In addition, the Company recently executed leases contingent upon the construction of four theaters with 24 screens in Illinois, Massachusetts, Missouri and Michigan. The following table summarizes the Company's completed and projected expansions of existing theaters and constructions of new theaters since its inception in June 1996. COMPLETED AND PROJECTED THEATER CONSTRUCTION AND EXPANSION [Enlarge/Download Table] ADDITIONAL DATE LOCATION FORMAT TYPE OF PROJECT SCREENS ---- -------- ------ --------------- ---------- June 1997 Des Moines, IA Second-run New theater 10 September 1997 LaPlace, LA Second-run Addition to existing theater 1 Second quarter 1998 St. Specialty New theater 6 Louis,MO(1) Third quarter 1998 Waltham, MA(1) Specialty New theater 6 Fourth quarter 1998 Flint, MI(1) First-run New theater 6 Fourth quarter 1998 Yukon, OK Second-run Conversion to stadium seating -- First quarter 1999 Roseville, MI Second-run New theater 8 First quarter 1999 Joliet, IL(2) Second-run New theater 6 First quarter 1999 Laredo, TX Second-run Addition to existing theater 3 --------------- (1) Lease executed, construction started. (2) Lease executed. In addition, the Company expects to commence construction of four additional specialty-film theaters, representing approximately 34 screens, by the fourth quarter of 1998. OVERVIEW OF THE EXHIBITION INDUSTRY The domestic motion picture exhibition industry is comprised of approximately 490 exhibitors, approximately 255 of which operate four or more screens at one or more locations, according to the National Association of Theater Owners ("NATO"). As of May 1997, the ten largest exhibitors (in terms of number of screens) controlled approximately 51% of the total screens in the United States, with no single exhibitor controlling more than 9% of the total screens. 54
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According to data released by the Motion Picture Association of America (the "MPAA"), the total U.S. box office sales of approximately $6.4 billion in 1997 was a record for the exhibition industry. Attendance and domestic box office revenue have grown since 1992 at compounded annual growth rates of approximately 3.4% and 5.5%, respectively. The following table summarizes the recent historical trends in U.S. theater attendance, average ticket price, and box office sales since 1992. U.S. EXHIBITION STATISTICS [Download Table] ATTENDANCE AVG. TICKET PRICE BOX OFFICE SALES YEAR (MILLIONS) (DOLLARS) (MILLIONS) ---- ---------- ----------------- ---------------- 1992 1,173 $4.15 $4,871 1993 1,244 4.14 5,154 1994 1,292 4.18 5,396 1995 1,263 4.35 5,493 1996 1,339 4.41 5,911 1997 1,386 4.59 6,360 As a result of increased revenues from the successful release of films in both movie theaters and other distribution channels, film production companies have increased the number of films being produced in recent years. Revenues from all distribution channels grew by more than 250% over the past ten years to $20 billion in 1996. The increased revenue potential from film distribution in recent years can be attributed to increased demand resulting from the domestic and international growth of the motion picture exhibition industry and the home video industry, and the significantly increased channel capacity created by enhanced cable and satellite-based transmission systems. Management believes that the recent critical and commercial success of smaller budget, independent films will further drive independent film production, particularly from the "independent" subsidiaries of major studios which desire the recognition of these prestigious, high profile awards. Independent producers and distributors such as (i) Gramercy Pictures ("Gramercy"), (ii) Turner Pictures, which includes New Line Distribution, Inc. ("New Line"), Fine Line Features ("Fine Line"), and Castle Rock Entertainment, and (iii) Dreamworks SKG, the highly publicized partnership among Jeffrey Katzenberg, Steven Spielberg and David Geffen, should help maintain film production at a high level. These independent film producers, along with the "independent" subsidiaries of the major distributors such as Miramax Films, Inc. ("Miramax") which is owned by Buena Vista Pictures Distribution, Inc. ("Buena Vista"), October Films ("October") which is owned by Universal Pictures ("Universal"), the new specialty film division of Paramount Pictures, Sony Pictures Classics ("Sony Classics") which is owned by Sony Pictures Releasing ("Sony"), and Fox Searchlight Pictures ("Fox Searchlight") which is owned by Twentieth Century Fox ("Fox"), have found increasing success with Academy of Motion Picture Arts and Sciences Awards ("the Academy Awards"). In addition, the generally lower budgets and higher potential returns on capital invested in specialty films make them financially appealing to the studios. 55
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The table summarizes recent nominations and awards for independent films at the Academy Awards. RECENT ACADEMY AWARDS AND NOMINATIONS FOR INDEPENDENT FILMS [Enlarge/Download Table] YEAR FILM DISTRIBUTOR NOMINATIONS AWARDS ---- ---- ----------- ----------- ------ 1996 The English Patient Miramax 11 Best Picture Best Director Best Supporting Actress Best Art Direction Best Cinematography Best Costume Design Best Film Editing Best Original Dramatic Score Best Sound 1996 Fargo Gramercy 7 Best Actress Best Original Screenplay 1996 Shine Fine Line 5 Best Actor 1996 Sling Blade Miramax 2 Best Adapted Screenplay 1996 Emma Miramax 2 Best Original Music or Comedy Score 1996 Secrets & Lies October 5 -- 1996 Trainspotting Miramax 1 -- 1996 Marvin's Room Miramax 1 -- 1996 Angels & Insects Samuel Goldwyn Co. 1 -- 1995 Dead Man Walking Gramercy 4 Best Actress 1995 The Usual Suspects Gramercy 2 Best Supporting Actor Best Original Screenplay 1995 The Postman (Il Miramax 5 Best Original Dramatic Score Postino) 1995 Mighty Aphrodite Miramax 2 Best Supporting Actress 1995 Restoration Miramax 2 Best Art Direction Best Costume Design 1995 Shanghai Triad Sony Classics 2 -- 1995 Georgia Miramax 1 -- Continuing this trend of independent film successes, independent films such as The Full Monty, Good Will Hunting, Wings of the Dove, The Sweet Hereafter and The Apostle received 31 Academy Award nominations for 1997. Management believes that continued high levels of independent film production should complement the Company's efforts to expand its presence in the specialty-film niche of the exhibition industry. In addition, management believes that certain demographic trends favor the theater exhibition industry, and particularly the specialty-film and second-run niches. Information obtained from the U.S. Bureau of Census indicates that the number of 12 to 20 year-olds in the United States, the largest movie-going segment of the population, is projected to grow an aggregate of 7.5% through the year 2000. This segment of the movie-going population tends to favor second-run films in particular due to their attractive price point. In addition, according to the MPAA, the number of movie patrons over 40 years old as a percentage of the total movie audience has more than doubled from approximately 14% in 1986 to 32% in 1996. This trend in theater attendance seems to be following the highly publicized aging of the "baby boom" generation. Management believes that major studios have recognized this trend and are producing an increasing number of wide-release commercial films targeted to a more mature audience, including such notable recent films as Mr. Holland's Opus (Buena Vista), Courage Under Fire (Fox), Sense and Sensibility (Sony), Evita (Buena Vista), The Mirror Has Two Faces (Sony), and Braveheart (Paramount). The wider appeal of more mature films should also complement the Company's strategy of expanding its presence in the specialty-film niche of the industry since this niche has traditionally appealed to a slightly more mature audience demographic. 56
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OPERATIONS SPECIALTY-FILM EXHIBITION Through the acquisition of Landmark, the Company is the largest exhibitor in the United States of specialty films both in terms of number of screens and number of theaters dedicated to these films. The Company operates 49 theaters and 139 screens dedicated to specialty-films in California, Colorado, Louisiana, Massachusetts, Michigan, Minnesota, Ohio, Texas, Washington, and Wisconsin. The Company holds the largest or second largest market share of the specialty-film exhibition business in the following major markets: Los Angeles, San Francisco, Seattle, Dallas, Houston, Denver, Minneapolis, Boston, Cleveland, Detroit, Palo Alto, Berkeley, San Diego, Milwaukee, Sacramento and New Orleans. The specialty-film exhibition business is the largest niche of the exhibition industry outside of traditional commercial first-run exhibition in terms of box office revenue generated. In 1996, according to Entertainment Data, Inc., films released by independent distributors and "independent" subsidiaries of major distributors such as Miramax, October Films, and Fine Line generated an estimated $500 million of box office revenue. Based on the Company's 1996 box office revenue from specialty-films, the Company maintains a market share of approximately 9% of the total box office revenue generated by specialty-films. The Company is responsible for a substantially higher percentage of certain films' total domestic box office revenue due to the strategic location of Landmark's theaters. The following table presents a summary of selected recent films for which Landmark has been responsible for a significant portion of the total domestic gross box office, as of September 1997. SELECTED INDEPENDENT FILM REVENUE GENERATED AT LANDMARK THEATERS [Download Table] LANDMARK PERCENTAGE GROSS BOX OFFICE OF ------------------------ NATIONAL YEAR FILM DISTRIBUTOR NATIONAL LANDMARK GROSS ---- ---- ----------- -------- -------- ---------- (IN THOUSANDS) 1997 Shall We Dance Miramax $6,479 $1,290 19.9% 1997 Kolya Miramax 5,731 1,060 18.5 1997 Waiting for Guffman Sony Classics 2,893 1,162 40.2 1996 Lone Star Sony Classics 12,409 2,331 18.8 1996 Secrets & Lies October 12,116 1,917 15.8 1995 The Postman Miramax 21,846 2,795 12.8 1994 The Last Seduction October 5,843 981 16.8 SECOND-RUN EXHIBITION The Company is one of the largest exhibitors of second-run films in the United States in terms of number of screens and operated 49 theaters and 336 screens dedicated to the second-run format in Arizona, California, Colorado, Florida, Nebraska, New York, Ohio, Oklahoma, Texas, Vermont, Washington and Wisconsin. Management estimates that the second-run niche of the theater exhibition industry represents approximately 5% of theater and film revenues but as much as 10% of the nation's screens. Management further believes that most of the estimated 125 companies which operate second-run theaters also operate first-run theaters. The Company's second-run theaters typically charge admission prices of $1.00 to $2.00 but provide the same amenities to customers as first-run theaters. The Company's second-run theaters typically offer wall-to-wall screens, comfortable seating with cupholder armrests, stereo sound, attractive concession stands, clean and inviting lobby areas, and video games or game rooms. Management believes that offering this type of "first-run quality" theatrical experience for a second-run price is the key to generating large audiences at second-run theaters and subsequently increasing the profitability of the theaters. The Company's second-run 57
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theaters benefit from lower film costs and a greater proportion of total revenue from concession sales than at comparable first-run theaters. Management believes that its second-run theaters appeal to many customer groups, but in particular allow it to serve (i) families with children, (ii) patrons who miss a film during its first-run exhibition, and (iii) customers who may not be able to afford to attend first-run theaters on a frequent basis. Management further believes that its second-run format allows the Company to expand the number of potential customers beyond traditional first-run moviegoers. In addition to being able to draw customers from a wider group of potential moviegoers, second-run theaters tend to enjoy better film booking arrangements and film buying terms than their commercial first-run counterparts. Film rental costs are generally significantly lower in the second-run format than in the first-run format. Due to the smaller number of second-run screens in comparison with the number of first-run screens in the country, there is typically very little competition among second-run theaters for prints of commercially successful films. In addition, each second-run theater typically comprises its own film zone. As a result, the Company's second-run theaters generally benefit from the ability to screen all successful commercial films, as opposed to the average commercial first-run theater which receives only a subset of these movies. OTHER EXHIBITION Occasionally, as has been the case with the MI Theaters and Movie One acquisitions, the Company may acquire and continue to operate certain commercial first-run theaters in conjunction with acquisitions of specialty-film and second-run film theaters. In addition, the commercial first-run theaters that have been acquired to date and those anticipated to be acquired in the future have largely been and will continue to be in film zones with no other competitors or in smaller cities with few first-run competitors. The Company operates eight commercial first-run theaters comprised of 49 screens. As the Company continues to grow, management does not expect its commercial first-run business to expand beyond the current proportion of approximately 10% to 15% of the Company's total screens. CONCESSIONS Concession sales are the second largest source of revenue for the Company after box office admissions, representing approximately 29.1% and 28.7% of total combined pro forma revenues for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. The Company has devoted considerable management effort to increasing concession sales and improving the income margins from concession sales. These efforts include implementation of the following strategies: - Optimization of product mix. The Company's primary concession products include popcorn, soft drinks and candy sold at each of the Company's theaters. In addition, different varieties and brands of candy and other concession items are offered at theaters based on preferences in a particular geographic region. The Company has also implemented "combo meals" and "movie meals" for children and senior citizens, both of which offer a pre-selected assortment of concession products for a slightly discounted price. Management believes that these concession packages tend to increase overall concession revenue. - Introduction of new products. The Company continues to evaluate and introduce new concession products designed to attract additional concession purchases. Management considers adding new products in many locations, including bottled water, bulk candy, frozen yogurt and ice cream. - Staff training. Employees are continually trained in "cross-selling" and "upselling" techniques. This training occurs through on-the-job training. - Theater design. New theaters are designed to include multiple point-of-sale terminals at the concession stand, making it easier to serve large numbers of customers rapidly. Strategic placement of large concession stands with fast-flow drink dispenser heads within theaters heightens their visibility, aids in reducing the length of concession lines and improves traffic flow around the concession stands. 58
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- Cost control. The Company negotiates prices for its concession supplies with concession distributors on a bulk rate. The concession distributors provide inventory and distribution services to the theaters, which place volume orders directly with the concession distributors. The concession distributors are paid a fee for such service equal to a percentage of the Company's concession supply purchases. The Company believes that utilization of concession distributors is more cost effective than establishing a concession warehousing network owned by the Company. FILM LICENSING The Company licenses films from distributors on a film-by-film, theater-by-theater basis. Film buyers negotiate directly with major distributors and independent distributors on behalf of the Company. Successful licensing depends in part upon the exhibitor's knowledge of trends and historical film preferences of the residents in the market served by each theater, as well as on the availability of commercially successful motion pictures. The Company's film buyers have significant experience in the theater industry and have developed long-standing relationships with distributors. The Company's specialty-film theaters license films primarily from independent film distributors, foreign film distributors, and "independent" subsidiaries of major film distributors (collectively "independent distributors"). Similar to the major film distributors, independent distributors typically establish geographic film licensing zones and allocate each available film to a single theater within that zone. The size of a film zone is generally determined by the population density, demographics and box office potential of a particular market or region, and can range from a radius of approximately five miles in metropolitan and suburban markets to up to 15 miles in smaller towns. In general, the major distributors try to place a print of each wide-release film in as many film zones as possible (often exceeding 3,000 prints), whereas independent distributors typically exhibit their films in 300 or fewer zones. The limited number of prints available of specialty films makes the runs of these films generally more exclusive in any given market. Management believes, however, that due to its significant presence in the specialty-film niche, the Company has been able to and will continue to be able to secure an adequate number of prints of films that it feels will be successful. Management also believes that its large percentage of total national box office of specialty films gives the Company the ability to negotiate more favorable film rental agreements than most other specialty-film exhibitors. For example, for films such as The English Patient, Good Will Hunting and Shine, the Company had exclusive rights to the films for up to three weeks in selected markets. The Company's second-run theaters generally enjoy better film booking arrangements and film buying terms than comparable commercial first-run theaters. Film rental costs are generally significantly lower in the second-run format than in the first-run format, and the Company has had no difficulty to date in securing the films that it believed would be most successful in its respective markets. Due to the smaller number of second-run screens in comparison with the number of first-run screens nationwide, there is typically very little competition among second-run theaters for prints of commercially successful films. In addition, each second-run theater typically comprises its own film zone. As a result, the Company's second-run theaters generally benefit from the ability to screen all successful commercial films, as opposed to the average commercial first-run theater which receives only a subset of these movies. Based on the different film release schedule in the second-run format, management also has the benefit of knowing how successful each film was in its first run prior to committing to that film for a second run. 59
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MANAGEMENT INFORMATION SYSTEMS The Company has made a significant commitment to its management information systems in order to enhance its ability to control costs and efficiently manage the Company's theaters. The Company's corporate office receives daily reports generated by the management information system with detailed admission and concession revenue information as well as attendance figures from the previous day. This information allows management to make quick adjustments to movie schedules, including prolonging runs or adding screens for films with higher gross revenues and substituting films when gross revenues cease to meet goals. Real-time seating and box office information is available in certain locations to box office personnel, making it possible for theater management to avoid overselling a particular film, to provide faster and more accurate responses to customer inquiries regarding showings and available seating, as well as the ability to make advanced ticket sales by telephone. The information system also tracks concession sales and total deposits, leading to better inventory management and control. MARKETING In order to attract customers, the Company relies principally on newspaper display advertisements (substantially paid for by film distributors) and newspaper directory film schedules (generally paid for by the Company) to inform customers of film titles and show times. Newspaper directory film display advertisements are typically displayed in a single group for all of the Company's theaters located in the newspaper's circulation area. Radio and television advertising spots (generally paid for by film distributors) are used to promote certain movies and special events. The Company also exhibits previews of coming attractions and films presently playing on other screens it operates in the same theater or market. Upon the opening of a new theater, the Company undertakes additional one-time marketing efforts, such as special promotions, advertising and contests. EMPLOYEES The Company has approximately 2,300 employees, of which approximately 85% are part-time employees who are paid on an hourly basis. Film projectionists at certain of the Company's theaters in California, Colorado, Ohio, Massachusetts, Minnesota, Texas, and Washington are represented by the International Alliance of Theatrical Stage Employees pursuant to collective bargaining agreements. In addition, janitors at the Company's theater in Berkeley, California are represented by the Theatrical Janitors Union. These collective bargaining agreements, which cover an aggregate of 84 of the Company's employees, expire at various periods through 2001. The Company believes its relations with its employees are good. The Company's expansion into new markets may increase the number of employees represented by unions. PROPERTIES Of the 106 theaters operated by the Company, 90 are leased, 11 are owned, three buildings are owned by the Company on properties covered by ground leases, and two are operated pursuant to a management agreement. The Company's leases typically have remaining terms from one to 25 years, with options to extend the leases for up to ten additional years. The leases typically require escalating minimum annual rent payments during the term of the lease which are negotiated at the signing of the lease. During the next five years approximately 50 theater leases (representing 200 screens) will expire, representing approximately 49% of all the Company's theaters (38% of all screens). Of those coming due within the next five years, leases at 42 theaters (representing 182 screens) will be subject to renewal options. The Company leases office space in Dallas, Texas for its corporate headquarters. COMPETITION The domestic motion picture exhibition industry is highly competitive, particularly in licensing films, attracting patrons and finding new theater sites. According to NATO, there are approximately 490 exhibitors, of which approximately 255 operate four or more screens at one or more locations. As of May 1997, the ten largest exhibitors (in terms of number of screens) controlled approximately 51% of the total screens in the 60
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United States, with no single exhibitor controlling more than 9% of the total screens. Industry participants vary substantially in size, from small independent operators of single screen theaters to large national chains of multi-screen theaters affiliated with large entertainment conglomerates. The Company is the largest exhibitor of specialty motion pictures in the United States based on the number of screens dedicated to these films and in terms of box office revenue generated from these films. In addition, the Company is one of the largest second-run exhibitors in the United States based on the number of screens. The Company competes against local, regional, and national exhibitors, most of which have been in existence significantly longer than the Company and many of which have substantially greater financial resources than the Company. Management believes that the Company is the only exhibitor aggressively pursuing a growth strategy in both specialty-film and second-run exhibition. The Company competes for film based on the location of its theaters and number of competitors within its film zones. In film zones where the Company has little or no direct competition, management selects those pictures that it believes will be most successful in its markets from those offered to it by distributors. The Company faces little or no competition for films in any of its second-run film zones. In addition, the Company is granted a period of exclusivity in its area for selected specialty films at many of its specialty-film theaters. In film zones in which the Company faces competition for films, it generally licenses films based on an allocation process. Management believes that the principal competitive factors in licensing films include: licensing terms; the seating capacity, location, quality, and reputation of an exhibitor's theaters; the quality of projection and sound equipment at the theaters; and the exhibitor's ability and willingness to promote the films. The Company competes for customers based on the availability of popular films, the location of theaters, the comfort and quality of theaters, and ticket prices. Management believes that its admission prices are competitive with admission prices of respective competing theaters. On a pro forma basis for the year ended December 31, 1997 and the three months ended March 31, 1998, the Company achieved an approximate average ticket price of $3.15 and $3.34, respectively. The U.S. average ticket price for the year ended December 31, 1997 was $4.59. The Company's average ticket price is lower than the national average due to the Company's large concentration of second-run theaters. Management believes that the emergence of new motion picture distribution channels has not adversely affected attendance at theaters and that these new channels do not provide an experience comparable to the out-of-home experience of viewing a motion picture in a theater. Management believes that the public will continue to recognize the advantages of viewing a film on a large screen with superior audio and visual quality, while enjoying a variety of concessions and sharing the experience with a large audience. Theatrical exhibition is the primary distribution channel for new motion picture releases. Successful theatrical release of a film in international markets and in "downstream" distribution channels, such as home video, pay-per-view, pay cable, network television, and syndicated television, generally depends on successful theatrical release in the United States. REGULATION The distribution of motion pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. The consent decrees resulting from those cases, to which the Company is not a party, have a material impact on the industry and the Company. These consent decrees bind certain motion picture distributors and require the films of such distributors to be offered and licensed to exhibitors, including the Company, on a film-by-film and theater-by-theater basis. Consequently, the Company cannot assure itself of a supply of motion pictures by entering into long-term arrangements with major distributors, but must compete for its licenses on a film-by-film and theater-by-theater basis. The Company is subject to various general regulations applicable to its operations including the Americans with Disabilities Act (the "ADA"). Management is not currently aware of any pending or threatened action in regard to the Company's compliance with the ADA. 61
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LEGAL PROCEEDINGS From time to time the Company is involved in legal proceedings arising from the ordinary course of its business operations. The Company does not believe that the resolution of these proceedings will have a material adverse effect on the Company's financial condition and results of operations. YEAR 2000 The Company believes that the computer equipment and software used in its operations will function properly with respect to dates in the Year 2000 and thereafter. The Company is in the process of communicating with its significant suppliers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues and the extent to which any products or services purchased by or from such entities are vulnerable to Year 2000 issues. The Company presently believes that the Year 2000 issues will not require the Company to incur any material costs or pose significant operational problems for the Company directly or as a result of any Year 2000 issues of suppliers. 62
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MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following sets forth certain information, regarding the executive officers and directors of the Company: [Download Table] NAME AGE POSITION ---- --- -------- Steven L. Holmes.......... 39 Chief Executive Officer, Chief Financial Officer and Director John M. Sullivan.......... 62 Chairman of the Board of Directors Thomas J. Owens........... 41 President and Director Bert Manzari.............. 52 President of Landmark and Director Ron Reid.................. 56 Executive Vice President, Operations Paul Richardson........... 49 Executive Vice President Stephen Kauzlaric......... 32 Vice President, Treasurer David H. Wong............. 34 Director Christopher A. Laurence... 30 Director James Rosenthal........... 34 Director Thomas E. Davin........... 40 Director Steven L. Holmes, Chief Executive Officer, Chief Financial Officer and Director. Mr. Holmes is a co-founder of the Company, and has served as Chief Executive Officer, Chief Financial Officer and Director since the Company's inception. Prior to joining the Company, from 1993 to 1996, Mr. Holmes served as Chief Financial Officer of Cobblestone Golf Group ("Cobblestone"). Prior to his employment with Cobblestone, Mr. Holmes served as a Director and Chief Financial Officer of Cinemark USA, Inc. ("Cinemark"). Prior to joining Cinemark, Mr. Holmes was a manager at Deloitte & Touche LLP. John M. Sullivan, Chairman of the Board of Directors. Mr. Sullivan has served as a Chairman of the Board of Directors of the Company since its inception in June 1996. He is presently a director of The Scotts Company, Clinical Communications Group Inc., Cobblestone Golf Group, Inc. and Rental Service Corporation. From October 1987 to January 1993, Mr. Sullivan was Chairman of the Board and Chief Executive Officer of Prince Holdings, Inc. Thomas J. Owens, President and Director. Mr. Owens is a co-founder of the Company and has served as President and a Director since the Company's inception. Prior to joining the Company, from 1987 to 1996 Mr. Owens served as the Vice President of Real Estate Development of Cinemark. Prior to joining Cinemark in 1987, Mr. Owens spent six years in commercial real estate in the Austin, Texas area. In 1985, he formed a real estate company specializing in anchor tenant representation, where he worked to acquire locations for Cinemark. Bert Manzari, President of Landmark and Director. Mr. Manzari is President of Landmark Theatre Corp., a subsidiary of the Company, and is a director of the Company. Prior to joining the Company, Mr. Manzari was Senior Vice President, Head Film Buyer of Landmark since 1982. Prior to that time, Mr. Manzari was President and Head Film Buyer for Seven Gables Theaters, a northwestern theater circuit located in Seattle, Washington. Prior to that time, Mr. Manzari opened the Guild Theatre in Albuquerque in 1974, where Mr. Manzari and Paul Richardson expanded this holding into Movie, Inc., a circuit of 13 repertory screens in the south and southwestern parts of the United States. Ron Reid, Executive Vice President, Operations. Mr. Reid has served as Executive Vice President of Operations since December 1996. Prior to joining the Company, Mr. Reid served as Vice President of Construction and Purchasing, Worldwide for Cinemark from 1988 to 1996. Prior to that time, Mr. Reid served as Cinemark's Western Region Operations Manager from 1987 to 1988. Prior to joining Cinemark, Mr. Reid held the position of Director of Operations, overseeing concessions, construction and personnel for Theatre Operators, Inc. for eight years. 63
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Paul Richardson, Executive Vice President. Mr. Richardson will serve as Executive Vice President of the Company upon the closing of Landmark Acquisition. Mr. Richardson has served as Senior Vice President of Operations of Landmark since 1982. Prior to joining Landmark, Mr. Richardson owned and operated Movie, Inc., a circuit of 13 repertory screens in the south and southwestern parts of the United States. Mr. Richardson is responsible for the operation, renovation, acquisition and design of Landmark's theaters. Stephen Kauzlaric, Vice President, Treasurer. Mr. Kauzlaric has served as the Company's Vice President, Treasurer, since September 1997. Prior to joining the Company, Mr. Kauzlaric held several positions with Cobblestone, including Director of Strategic Planning and Director of Acquisitions. Prior to joining Cobblestone, Mr. Kauzlaric was an Assistant Vice President at First Interstate Bank in the real estate developer lending department. David H. Wong, Director. Mr. Wong has served as a director of the Company since its inception in June 1996. Mr. Wong joined Brentwood in July 1989 and is presently a general partner of Brentwood Golf Partners, L.P., Brentwood, Brentwood Buyout Management Partners, L.P. and Brentwood Buyout Partners, L.P. and is a managing member of Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management, L.L.C. Mr. Wong is also a director of Clinical Communications Group Inc., Aspen Marketing Group, Inc., Cobblestone Golf Group, Inc. and Horizon Cellular Telephone Company, Inc. Christopher A. Laurence, Director. Mr. Laurence has served as a director of the Company since its inception in June 1996. Mr. Laurence joined Brentwood in 1991 and is presently a managing member of Brentwood Private Equity, L.L.C. and Brentwood Private Equity Management, L.L.C. Mr. Laurence is also a director of Rental Service Corporation and Aspen Marketing Group, Inc. James Rosenthal, Director. Mr. Rosenthal has served as a Director of the Company since its inception in June 1996. Mr. Rosenthal also serves as Executive Vice President of Business Development for New Line Cinema Corporation, a position he has held since 1992. In his capacity at New Line, Mr. Rosenthal focuses on new business opportunities, mergers and acquisitions, finance, and joint ventures. Prior to this time, Mr. Rosenthal was a Senior Associate with the management consulting firm Booz, Allen & Hamilton. Thomas E. Davin, Director. Thomas E. Davin has served as a director of the Company since March 1998. In June 1997 he was appointed Chief Operating Officer for Taco Bell Corp. Mr. Davin joined Taco Bell Corp. in November 1993 as Vice President and General Manager for the South Central Region. In September 1996, he was named Vice President of Operations. Prior to joining Taco Bell Corp. and since October 1991, Mr. Davin served as Director, Mergers and Acquisitions for PepsiCo. Inc. Mr. Davin is also a director of Cobblestone Golf Group, Inc. EXECUTIVE COMPENSATION The following table sets forth, with respect to the services rendered during the 1997 fiscal year, the total compensation paid by the Company to its five most highly-compensated officers. EXECUTIVE COMPENSATION [Download Table] TOTAL NAME AND PRINCIPAL POSITION SALARY BONUS OTHER --------------------------- -------- ------- ------ Steven L. Holmes.............................. $146,222 $42,635 $9,797 Chief Executive Officer, Chief Financial Officer Thomas J. Owens............................... $144,865 $39,792 $8,434 President Ron Reid...................................... $142,770 $26,125 $7,368 Executive Vice President, Operations John Ralston.................................. $ 72,849 $ 6,000 $1,368 Controller Stephen Kauzlaric............................. $ 27,788 $ 0 $1,962 Vice President, Treasurer 64
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EMPLOYMENT ARRANGEMENTS In connection with the Landmark Acquisition, the Company assumed the employment agreements of two senior executive officers of Landmark. Pursuant to such agreements and the amendments thereto, these executives are entitled to receive certain compensation and benefits through the term of their respective agreement as well as upon the termination of their respective agreement prior to the expiration of such term. Bert Manzari, President of Landmark, receives a salary of $330,000 per year and is eligible to receive a bonus based upon Landmark reaching certain performance targets. In addition, he will be eligible to receive certain payments under a long-term incentive plan based on the future value of the Company. His employment agreement provides that his salary is subject to fixed annual increases. The term of his agreement expires on March 31, 2001. Paul Richardson, Executive Vice President, currently receives a salary of $285,000 per year and is eligible to receive a bonus based upon Landmark reaching certain performance targets. His employment agreement provides that his salary is subject to increase based on the Consumer Price Index after March 31, 1999. In addition, he was given the opportunity to purchase 1000 shares of the Company's common stock. The term of his agreement expires on March 31, 2001. COMPENSATION OF DIRECTORS Members of the Board of Directors of the Company do not receive any compensation for their services as directors. They do receive reimbursement for travel and other expenses incurred in their capacity as directors. 65
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PRINCIPAL STOCKHOLDERS The Company has two classes of voting securities, Common Stock and preferred stock designated as voting Series A Preferred Stock ("Series A Preferred Stock"). The Common Stock and Series A Preferred Stock vote together as a single class. The following table sets forth, as of the date of the closing of the Private Offering, the ownership of Common Stock and Series A Preferred Stock of the Company by each stockholder who is known by the Company to own beneficially more than five percent of the outstanding Common Stock or Series A Preferred Stock, respectively, by each director, by each executive officer listed in the table below, and by all directors and officers as a group. [Enlarge/Download Table] SERIES A COMMON STOCK PREFERRED STOCK PERCENT OF AMOUNT AND NATURE OF PERCENT AMOUNT AND NATURE OF PERCENT ALL VOTING NAME AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS BENEFICIAL OWNERSHIP OF CLASS SECURITIES ---------------- -------------------- -------- -------------------- -------- ---------- Brentwood Associates Buyout Fund II, L.P.(1)....... 82,010 70.0% 249,180 87.7% 82.3% DLJ Fund Investment Partners II, L.P.(2)....................... 12,151 10.4 29,878 10.5 10.4 Steven L. Holmes(3)............. 6,400 5.5 936 0.3 1.8 Thomas J. Owens(3).............. 6,400 5.5 936 0.3 1.8 Ron Reid(3)..................... 3,164 2.7 468 0.2 0.9 John M. Sullivan(1)............. 1,328 1.1 987 0.3 0.6 Stephen Kauzlaric(3)............ 1,000 0.9 0 0 0.2 Paul Richardson(4).............. 1,000 0.9 0 0 0.2 James Rosenthal(1).............. 628 0.5 994 0.3 0.4 Tom Davin(1).................... 546 0.5 745 0.3 0.3 David H. Wong(1)(5)............. 82,010 70.0% 249,180 87.7% 82.3% Christopher A. Laurence(1)(5)... 82,010 70.0% 249,180 87.7% 82.3% All Directors and Officers as a group (eight individuals)(5)............... 20,466 17.5% 5,066 1.8% 6.3% --------------- (1) The address for Brentwood Associates Buyout Fund II, L.P. and Messrs. Davin, Sullivan, Rosenthal, Wong and Laurence is c/o Brentwood Associates, 11150 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025. (2) The address for DLJ Fund Investment Partners II, L.P. is 277 Park Avenue, New York, New York 10172. (3) The address for Messrs. Holmes, Kauzlaric, Owens and Reid is c/o Silver Cinemas International, Inc., 4004 Beltline Road, Suite 205, Dallas, Texas 75244. (4) The address for Mr. Richardson is c/o Landmark Theatre Corp., 2222 S. Barrington Avenue, Los Angeles, California 90064. (5) Includes 82,010 shares of Common Stock and 249,180 shares of Series A Preferred Stock held by Brentwood Associates Buyout Fund II, L.P. Each of Messrs. Wong and Laurence are managing members of the general partner of Brentwood Associates Buyout Fund II, L.P. and may be deemed to share investment and voting control over the shares of Common Stock and Series A Preferred Stock owned by Brentwood Associates Buyout Fund II, L.P. Each of Messrs. Wong and Laurence disclaims beneficial ownership of such shares. 66
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATIONSHIP WITH BRENTWOOD Pursuant to a Corporate Development and Administrative Services Agreement, dated as of July 2, 1996, between Brentwood Private Equity LLC ("BPE"), an affiliate of Brentwood, and the Company, as amended (the "Services Agreement"), BPE has agreed to assist in the corporate development activities of the Company by providing services to the Company, including (i) assistance in analyzing, structuring and negotiating the terms of investments and acquisitions, (ii) researching, identifying, contacting, meeting and negotiating with prospective sources of debt and equity financing, (iii) preparing, coordinating and conducting presentations to prospective sources of debt and equity financing, (iv) assistance in structuring and establishing the terms of debt and equity financing and (v) assistance and advice in connection with the preparation of the Company's financial and operating plans. Pursuant to the Services Agreement, BPE is entitled to receive: (i) financial advisory fees equal to 1.5% of the acquisition cost of the Company's completed acquisitions; (ii) upon the occurrence of certain events, monitoring fees equal to 1% of the aggregate amount of investment in Company by Brentwood; and (iii) reimbursement of its reasonable fees and expenses incurred from time to time (a) in performing the services rendered thereunder and (b) in connection with any investment in, financing of, or sale, distribution or transfer of any interest in the Company by BPE or any person or entity associated with BPE. For the year ended December 31, 1997, BPE was paid $81,505 (including reimbursement of fees and expenses) pursuant to the Services Agreement. No amounts were paid to BPE during the three months ended March 31, 1998. STOCKHOLDERS AGREEMENT The Company and its stockholders (the "Stockholders") have entered into a stockholders agreement (the "Stockholders Agreement") which provides certain restrictions and rights related to the transfer, sale or purchase of Common Stock and Series A Preferred Stock (collectively, the "Company Stock"). Such restrictions and rights include the following: (i) except as set forth below, a Stockholder may not sell or transfer any shares of the Company Stock without first giving the Company the right of first refusal to purchase such shares; (ii) in the event that Brentwood agrees to sell or transfer any of its shares of Common Stock, the other Stockholders shall have the right to sell or transfer a proportionate number of shares of Company Stock as part of such sale or transfer; and (iii) in the event that Brentwood agrees to sell or transfer all of its shares of Company Stock, the other Stockholders shall be obligated to sell or transfer all of their shares of Company Stock as part of such sale or transfer. In connection with the Stockholders Agreement, the Company and the Stockholders have entered into a registration rights agreement which provides that the Stockholders would have certain piggyback rights upon the registration for a public offering of the Company Stock by the Company. 67
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DESCRIPTION OF REVOLVING CREDIT FACILITY The Company repaid all of the indebtedness under the Old Credit Facility with proceeds from the Private Offering. Silver Cinemas, Inc. (the "Borrower"), a subsidiary of the Company, intends to amend and restate such facility (as amended and restated, the "Revolving Credit Facility"). Until the Borrower amends and restates the facility, the Company will not be able to borrow under any credit facility. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ Securities") will act as arranger under the Revolving Credit Facility for a syndicate of financial institutions (collectively, the "Lenders"). The following is a summary description of the principal terms and conditions expected to be contained in the Revolving Credit Facility. The description set forth below does not purport to be complete and is qualified in its entirety by reference to certain agreements setting forth the principal terms and conditions of the Revolving Credit Facility. The Company's obligations under the Revolving Credit Facility will constitute Senior Debt and Guarantor Senior Debt with respect to the Notes. DLJ Capital Funding, Inc. has committed, subject to compliance with customary conditions and satisfactory documents, to provide the Borrower with a five year reducing revolving credit facility with aggregate availability of $40.0 million. The Borrower, subject to execution of a credit agreement (the "Credit Agreement"), may utilize borrowings to fund working capital requirements, including issuance of stand-by and trade letters of credit, and for other general corporate purposes, including the acquisition and construction of theaters. Borrowings under the Revolving Credit Facility will be guaranteed by Silver Cinemas International, Inc., the Company of the Notes, and each of the Company's direct and indirect domestic subsidiaries. The Revolving Credit Facility and the guarantees thereof will be secured by a perfected first priority security interest in substantially all material assets of the Company and its direct and indirect domestic subsidiaries including: (i) fee interests and certain leasehold interests in real property; (ii) accounts receivable, equipment, inventory and intangibles; and (iii) the capital stock of the Company and its direct and indirect domestic subsidiaries. Amounts borrowed under the Revolving Credit Facility will bear interest at a rate per annum equal (at the Borrower's option) to: (i) the Administrative Agent's reserve-adjusted LIBO rate ("LIBOR") plus an applicable margin or (ii) an alternate base rate based on the Administrative Agent's prime rate, plus an applicable margin. Initially, the applicable margin is expected to be 2.75% per annum for LIBOR loans and 1.75% per annum for alternate base rate loans and will be tied to a grid based on the Company's ratio of Funded Debt to Adjusted EBITDA (as each will be defined in the Revolving Credit Facility). The Borrower will be required to pay, on a quarterly basis, a commitment fee on the undrawn portion of the Revolving Credit Facility at an initial rate equal to 0.50% and thereafter at a rate equal to 0.50% or 0.375% per annum depending on the Company's ratio of Funded Debt to Adjusted EBITDA. The Lenders' obligations under the Revolving Credit Facility to advance funds at any time during the five-year term will be subject to certain conditions customary in secured credit facilities, including the absence of a default under the Credit Agreement. Borrowings under the Revolving Credit Facility will reduce quarterly, with an annual reduction of approximately $5.0 million, commencing fifteen months from the execution of the Credit Agreement. In addition, the Revolving Credit Facility will provide for mandatory prepayments of (i) certain net proceeds from the sale of assets, subject to certain exceptions, (ii) all net proceeds from the issuance of debt securities, and (iii) all of the net proceeds from certain equity issuances. The Credit Agreement will contain a number of covenants that, among other things, restrict the ability of the Borrower, the Company and its subsidiaries to dispose of assets, incur additional indebtedness or guarantees, prepay other indebtedness or amend certain debt instruments (including the Notes), pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, make capital expenditures, change the business conducted by the Company or its subsidiaries or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. Consent of the Lenders to acquisitions will be required under certain circumstances. In addition, under the Credit Agreement, the Company will be required to maintain specified financial ratios and tests, including a ratio of Funded Debt to Adjusted EBITDA below a specified maximum, and above minimum fixed charge coverage levels and minimum interest coverage levels. The 68
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inability of the Borrower to meet such ratios and tests will result in the Borrower being unable to borrow under the Revolving Credit Facility, in addition to constituting a default under the Credit Agreement. In such circumstances, the Company could be unable to effect its acquisition strategy or fund capital expenditures. See "Risk Factors -- Restrictive Covenants of Revolving Credit Facility; Inability to Borrow Additional Amounts." The Credit Agreement will contain customary events of default, including without limitation events of default relating to (i) failure to pay principal, interest or fees, (ii) breach of covenants, representations or warranties, (iii) cross default to other indebtedness (including the Notes) or material contracts, (iv) bankruptcy, (v) change of control, (vi) the occurrence of a material adverse effect and (vii) material judgments. The occurrence of any of such events of default could result in acceleration of the Company's obligations under the Credit Agreement and foreclosure on the collateral securing such obligations, which would have a material adverse effect on the holders of the Notes. 69
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DESCRIPTION OF EXCHANGE NOTES The Notes were issued under an indenture (the "Indenture") dated April 15, 1998 by and among the Company, the Guarantors and Norwest Bank, Minnesota, National Association, as Trustee (the "Trustee") in a private transaction not subject to the Securities Act. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA as in effect on the date of the Indenture. A copy of the Indenture and the Registration Rights Agreement may be obtained from the Company or the Initial Purchasers as set forth below under "-- Additional Information." The definitions of certain capitalized terms used in the following summary are set forth below under "-- Certain Definitions." For purposes of this section, references to the "Company" include only the Company and not its Subsidiaries. The Notes are general unsecured obligations of the Company, limited to $115,000,000 aggregate principal amount of which $100.0 million aggregate principal amount was issued in the Private Offering. Additional amounts may be issued in one or more series from time to time subject to the limitations set forth under "-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness." The Notes are subordinated in right of payment to, all existing and future Senior Debt of the Company. The Notes are fully and unconditionally guaranteed on a senior subordinated basis by all of the Company's current Subsidiaries on a joint and several basis. See "-- Guarantees." The Guarantees are general unsecured obligations of the Guarantors and are subordinated in right of payment to all existing and future Guarantor Senior Debt. As of March 31, 1998, on a consolidated pro forma basis after giving effect to the Transactions, the Company and its Subsidiaries would have had $5.2 million of Senior Debt and Guarantor Senior Debt outstanding. All Indebtedness incurred under the Revolving Credit Facility will be Senior Debt of the Company and Guarantor Senior Debt of the Subsidiaries and will be secured by substantially all of the assets of the Company and its Subsidiaries. Except as described in "Change of Control," the Indenture does not contain any provision that would provide protection to the holders of the Notes against a sudden and dramatic decline in credit quality resulting from a takeover, recapitalization or similar restructuring of the Company. If a Change of Control were to occur, it could be the case that the Company would not have adequate funds to repurchase the Notes as required by the Indenture and/or that the Revolving Credit Facility will not permit such repurchase. See "-- Change of Control." The Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of the Notes (the "Holders"). The Company will pay principal (and premium, if any) on the Notes at the Trustee's corporate office in New York, New York. At the Company's option, interest and Liquidated Damages, if any, may be paid at the Trustee's corporate trust office or by check mailed to the registered address of Holders. Any Notes that remain outstanding after the completion of the Exchange Offer, together with the Exchange Notes issued in connection with the Exchange Offer, will be treated as a single class of securities under the Indenture. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $115.0 million, of which an aggregate principal amount of $100.0 million issued in the Private Offering, and will mature on April 15, 2005. Interest on the Notes will accrue at the rate of 10 1/2% per annum and will be payable semiannually in cash on each April 15 and October 15 commencing on October 15, 1998, to the persons who are registered Holders at the close of business on the April 1 and October 1 immediately preceding the applicable interest payment date. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. 70
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The Notes will not be entitled to the benefit of any mandatory sinking fund. REDEMPTION Optional Redemption. The Notes are redeemable, at the Company's option, in whole at any time or in part from time to time, on and after April 15, 2001, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on April 15 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption: [Download Table] YEAR PERCENTAGE ---- ---------- 2001.............................................. 107.875% 2002.............................................. 105.250% 2003.............................................. 102.625% 2004 and thereafter............................... 100.000% Optional Redemption upon Equity Offerings. At any time, or from time to time, on or prior to April 15, 2001, the Company may, at its option, use the net cash proceeds of one or more Equity Offerings (as defined below) to redeem the Notes at a redemption price equal to 110 1/2% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that at least 65% of the principal amount of Notes originally issued under the Indenture remains outstanding immediately after any such redemption. In order to effect the foregoing redemption with the proceeds of any Equity Offering, the Company shall make such redemption not more than 90 days after the consummation of any such Equity Offering. Mandatory Redemption. The Company is not required to make redemption or sinking fund payments with respect to the Notes. SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part; provided, further, that if a partial redemption is made with the proceeds of a Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable redemption price pursuant to the Indenture. SUBORDINATION The payment of all Obligations on the Notes is subordinated in right of payment to the prior payment in full in cash or Cash Equivalents of all Obligations on Senior Debt. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshaling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Company or its property, whether voluntary or involuntary, all Obligations (including interest 71
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accruing after the commencement date of any such proceeding whether or not allowable as a claim in any such proceeding) due or to become due upon all Senior Debt shall first be paid in full in cash or Cash Equivalents before any payment or distribution of any kind or character is made on account of any Obligations on the Notes, or for the acquisition of any of the Notes for cash or property or otherwise (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from the trust described under "-- Legal Defeasance and Covenant Defeasance"). If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees with respect to, any Senior Debt, no payment of any kind or character shall be made by or on behalf of the Company or any other Person on its or their behalf with respect to any Obligations on the Notes or to acquire any of the Notes for cash or property or otherwise (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from the trust described under "-- Legal Defeasance and Covenant Defeasance"). In addition, if any other event of default occurs and is continuing with respect to any Designated Senior Debt, as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt, permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof and if the Representative for the respective issue of Designated Senior Debt gives written notice of the event of default to the Trustee (a "Default Notice"), then, unless and until all events of default have been cured or waived or have ceased to exist or the Trustee receives notice from the Representative for the respective issue of Designated Senior Debt terminating the Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Blockage Period"), neither the Company nor any other Person on its behalf shall (x) make any payment of any kind or character with respect to any Obligations on the Notes (except in Permitted Junior Securities or from the trust described under "-- Legal Defeasance and Covenant Defeasance") or (y) acquire any of the Notes for cash or property or otherwise (except in Permitted Junior Securities or from the trust described under "-- Legal Defeasance and Covenant Defeasance"). Notwithstanding anything herein to the contrary, in no event will a Blockage Period extend beyond 180 days from the date the payment on the Notes was due and only one such Blockage Period may be commenced within any 360 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for commencement of a second Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. By reason of such subordination, in the event of the insolvency of the Company, creditors of the Company who are not holders of Senior Debt, including the Holders of the Notes, may recover less, ratably, than holders of Senior Debt. After giving effect to the Transactions, on a consolidated pro forma basis, at March 31, 1998, the aggregate amount of Senior Debt and Guarantor Senior Debt would have been approximately $5.2 million. GUARANTEES Each Guarantor fully and unconditionally guarantees, on a senior subordinated basis, jointly and severally, to each Holder and the Trustee, the full and prompt payment of the Company's obligations under the Indenture and the Notes, including the payment of principal of and interest on the Notes. The Guarantees are subordinated to Guarantor Senior Debt on the same basis as the Notes are subordinated to Senior Debt. The obligations of each Guarantor are limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of such Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amount pro rata, based on the net assets of each Guarantor, determined in accordance with GAAP. 72
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Each Guarantor may consolidate with or merge into or sell its assets to the Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company without limitation, or with other Persons upon the terms and conditions set forth in the Indenture. See "Certain Covenants -- Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by the Company and the sale complies with the provisions set forth in "Certain Covenants -- Limitation on Asset Sales," the Guarantor's Guarantee will be released. Separate financial statements of the Guarantors are not included herein because such Guarantors are jointly and severally liable with respect to the Company's obligations pursuant to the Notes, and the aggregate net assets, earnings and equity of the Guarantors and the Company are substantially equivalent to the net assets, earnings and equity of the Company on a consolidated basis. CHANGE OF CONTROL The Indenture provides that upon the occurrence of a Change of Control, the Company will be required to offer to purchase all of the Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase. The Indenture provides that, prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control, the Company covenants to (i) repay in full and terminate all commitments under Indebtedness under the Revolving Credit Facility and all other Senior Debt or Guarantor Senior Debt the terms of which require repayment upon a Change of Control or offer to repay in full and terminate all commitments under all Indebtedness under the Revolving Credit Facility and all other such Senior Debt or Guarantor Senior Debt and to repay the Indebtedness owed to each lender which has accepted such offer or (ii) obtain the requisite consents under the Revolving Credit Facility and all other Senior Debt to permit the repurchase of the Notes as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions described below. Within 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 45 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control purchase price for all the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event the Company is required to purchase outstanding Notes pursuant to a Change of Control Offer, the Company expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Restrictions in the Indenture described herein on the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on its property, to make Restricted Payments and to make Asset Sales may make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require repurchase of the Notes, and there can be no assurance that the Company or the acquiring party will have sufficient financial resources to effect such redemption or repurchase. Such restrictions and the restrictions on transactions with Affiliates may, in certain circumstances, make more difficult or discourage any leveraged buyout of the Company or any of its Subsidiaries by the management of the Company. While such restrictions cover a wide variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes protection in all circumstances 73
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from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof. Notwithstanding the foregoing, the Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company, including any requirements to repay in full the Revolving Credit Facility, any such Senior Debt or Guarantor Senior Debt or obtain the consents of such lenders to such Change of Control Offer as set forth in the second paragraph of this Section, and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. CERTAIN COVENANTS The Indenture contains, among others, the following covenants: Limitation on Incurrence of Additional Indebtedness. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company or any of its Restricted Subsidiaries may incur Indebtedness (including, without limitation, Acquired Indebtedness) if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0. Limitation on Restricted Payments. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, (c) make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes or any Preferred Stock of a Restricted Subsidiary or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b) (c) and (d) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company earned during the period beginning on the first day of the fiscal quarter after the Issue Date and ending on the last day of the fiscal quarter ending at least 30 days prior to the date the Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (x) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and 74
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sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of the Company (excluding any such proceeds that have been used to make Investments in Unrestricted Subsidiaries pursuant to clause (vii) of the definition of Permitted Investments); plus (y) without duplication of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any net cash proceeds from a Equity Offering to the extent used to redeem the Notes); plus (z) to the extent that any Investment (other than a Permitted Investment) that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (A) the cash return of capital with respect to such Investment (less the cost of disposition, if any) and (B) the initial amount of such Investment. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of such dividend if the dividend would have been permitted on the date of declaration; (2) the acquisition of any shares of Capital Stock of the Company, either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes or any Preferred Stock of a Restricted Subsidiary either (i) solely in exchange for shares of Qualified Capital Stock of the Company, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no Default or Event of Default shall have occurred and be continuing, repurchases by the Company of Common Stock of the Company from employees of the Company or any of its Subsidiaries or their authorized representatives upon the death, disability or termination of employment of such employees, in an aggregate amount not to exceed $500,000 in any calendar year or $2.5 million in the aggregate; (5) so long as no Default or Event of Default has occurred and is continuing, amounts paid by the Company or its Subsidiaries to Brentwood in accordance with the Administrative Services Agreement. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1), (2)(ii) and (4) shall be included in such calculation. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officers' certificate stating that such Restricted Payment complies with the Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon the Company's latest available internal quarterly financial statements. Limitation on Asset Sales. The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such disposition; and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case of any Senior Debt or Guarantor Senior Debt under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility, (B) to make any investment in assets which constitute or are part of businesses which are materially related to the business of the Company and its Subsidiaries as of the Issue Date or in 100% of the issued and outstanding Capital Stock of a Person the assets of which are principally comprised of such assets ("Replacement Assets"), or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash 75
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Proceeds which have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; provided, however, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $5,000,000 resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $5,000,000, shall be applied as required pursuant to this paragraph). Notwithstanding the immediately preceding paragraph, the Company and its Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (i) at least 80% of the consideration for such Asset Sale constitutes Replacement Assets and (ii) such Asset Sale is for fair market value; provided, that if the total consideration with respect to such Asset Sale is greater than $10.0 million (as determined in good faith by the Company's Board of Directors), the Company shall obtain a fairness opinion from an Independent Financial Advisor; provided further, that any consideration not constituting Replacement Assets received by the Company or any of its Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds subject to the provisions of the immediately preceding paragraph. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary of the Company; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indenture; (3) the Revolving Credit Facility; (4) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary of the Company; (5) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (6) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (7) restrictions arising by customary non-assignment provisions in leases and licenses entered into in the ordinary course of business and consistent with 76
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past practices; (8) restrictions contained in purchase money or capital lease obligations for property acquired in the ordinary course of business; (9) any customary restriction or encumbrance contained in contracts for sale of assets or sales of Capital Stock of Restricted Subsidiaries permitted by the Indenture; or (10) an agreement governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (5) or (6) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such Indebtedness, taken as a whole, are no less favorable to the Company in any material respect than the provisions relating to such encumbrance or restriction contained in agreements whose Indebtedness is being refinanced. Limitation on Liens. The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of its Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes are equally and ratably secured, except for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens securing Senior Debt and Liens securing Guarantor Senior Debt; (C) Liens securing the Notes and the Guarantees; (D) Liens in favor of the Company or a Restricted Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided, however, that such Liens (A) are no less favorable to the Holders and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced and (B) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted Liens. Prohibition on Incurrence of Senior Subordinated Debt. The Company will not incur or suffer to exist Indebtedness that is senior in right of payment to the Notes and subordinate in right of payment to any other Indebtedness of the Company. Merger, Consolidation and Sale of Assets. The Company will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Restricted Subsidiaries) whether as an entirety or substantially as an entirety to any Person unless: (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Restricted Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes, the Indenture and the Registration Rights Agreement on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the "-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall 77
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have occurred and be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The Indenture will provide that upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, in which the Company is not the continuing corporation, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture and the Notes with the same effect as if such surviving entity had been named as such. Each Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and the Indenture in connection with any transaction complying with the provisions of "-- Limitation on Asset Sales") will not, and the Company will not cause or permit any Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Guarantor unless: (i) the entity formed by or surviving any such consolidation or merger (if other than the Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) such entity assumes by supplemental indenture all of the obligations of the Guarantor on the Guarantee; (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (iv) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, the Company could satisfy the provisions of clause (ii) of the first paragraph of this covenant. Any merger or consolidation of a Guarantor with and into the Company (with the Company being the surviving entity) or another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company need only comply with clause (iv) of the first paragraph of this covenant. Limitations on Transactions with Affiliates. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $1.0 million shall be approved by the disinterested members of the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution filed with the Trustee stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $5.0 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. 78
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(b) The restrictions set forth in clause (a) shall not apply to (i) reasonable fees and compensation paid to and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary of the Company as determined in good faith by the Company's Board of Directors or senior management; (ii) transactions exclusively between or among the Company and any of its Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, provided such transactions are not otherwise prohibited by the Indenture; (iii) any agreement as in effect as of the Issue Date or any amendment thereto or any transaction contemplated thereby (including pursuant to any amendment thereto) in any replacement agreement thereto so long as any such amendment or replacement agreement is not more disadvantageous to the Holders in any material respect than the original agreement as in effect on the Issue Date; (iv) so long as no Default or Event of Default has occurred and is continuing, amounts paid by the Company or its Subsidiaries to Brentwood in accordance with the Administrative Services Agreement; and (v) Restricted Payments permitted by the Indenture. Additional Subsidiary Guarantees. If the Company or any of its Restricted Subsidiaries transfers or causes to be transferred, in one transaction or a series of related transactions, any property to any Restricted Subsidiary that is not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another Restricted Subsidiary having total assets with a book value in excess of $500,000, then such transferee or acquired or other Restricted Subsidiary shall (i) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Notes and the Indenture on the terms set forth in the Indenture and (ii) deliver to the Trustee an opinion of counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture. Conduct of Business. The Company and its Restricted Subsidiaries will not engage in any businesses which are not the same, similar or related to the businesses in which the Company and its Restricted Subsidiaries are engaged on the Issue Date. Reports to Holders. The Indenture will provide that the Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA sec. 314(a). EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": (i) the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); (ii) the failure to pay the principal on any Notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); (iii) a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 30 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Notes (except in the case of a default with respect 79
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to the "Merger, Consolidation and Sale of Assets" covenant, which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Restricted Subsidiary of the Company, or the acceleration of the final stated maturity of any such Indebtedness if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $5.0 million or more at any time; (v) one or more judgments in an aggregate amount in excess of $5.0 million shall have been rendered against the Company or any of its Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; (vi) certain events of bankruptcy affecting the Company or any of its Significant Subsidiaries; or (vii) any of the Guarantees ceases to be in full force and effect or any of the Guarantees is declared to be null and void and unenforceable or any of the Guarantees is found to be invalid or any of the Guarantors denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the Indenture). If an Event of Default (other than an Event of Default specified in clause (vi) above with respect to the Company) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same (i) shall become immediately due and payable or (ii) if there are any amounts outstanding under the Revolving Credit Facility, shall become immediately due and payable upon the first to occur of an acceleration under the Revolving Credit Facility or five Business Days after receipt by the Company and the Representative under the Revolving Credit Facility of such Acceleration Notice. If an Event of Default specified in clause (vi) above occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. In the event of a declaration of acceleration of the Notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (iv) of the first paragraph of this section, the declaration of acceleration of the Notes shall be automatically annulled if the holders of any Indebtedness described in clause (iv) have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (i) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction, and (ii) all existing Events of Default, except nonpayment of principal or interest on the Notes that became due solely because of the acceleration of the Notes, have been cured or waived. The Indenture will provide that, at any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the Trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. 80
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The Holders of a majority in principal amount of the Notes may waive any existing Default or Event of Default under the Indenture, and its consequences, except a default in the payment of the principal of or interest on any Notes. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture and under the TIA. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity. Subject to all provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Under the Indenture, the Company is required to provide an officers' certificate to the Trustee promptly upon any such officer obtaining knowledge of any Default or Event of Default (provided that such officers shall provide such certification at least annually whether or not they know of any Default or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have its obligations and the obligations of the Guarantors discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, except for (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the Notes when such payments are due, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (iii) the rights, powers, trust, duties and immunities of the Trustee and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Indenture, the Revolving Credit Facility or 81
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any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; (viii) the Company shall have delivered to the Trustee an opinion of counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Senior Debt, including, without limitation, those arising under the Indenture and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (ix) certain other customary conditions precedent are satisfied. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Notes to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. MODIFICATION OF THE INDENTURE From time to time, the Company, the Guarantors and the Trustee, without the consent of the Holders, may amend the Indenture for certain specified purposes, including curing ambiguities, defects or inconsistencies, so long as such change does not, in the opinion of the Trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel. Other modifications and amendments of the Indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture, except that, without the consent of each Holder affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Notes; (iii) reduce the principal of or change or have the effect of changing the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any Notes payable in money other than that stated in the Notes; (v) make any change in provisions of the Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default; or (vi) amend, change or modify in any material respect the obligation of the Company to make and consummate a Change of Control Offer after the occurrence of a Change of Control or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated, in either such case, or modify any of the provisions or definitions with respect thereto. Any modification or change of the provisions of the Indenture or the related definitions affecting subordination in any manner which adversely affects the holders of Designated Senior Debt or 82
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Designated Guarantor Senior Debt will also require the consent of the holders of such Designated Senior Debt or Designated Guarantor Senior Debt. GOVERNING LAW The Indenture provides that it, the Notes and the Guarantees will be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. THE TRUSTEE The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Indenture and the provisions of the TIA contain certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee will be permitted to engage in other transactions; provided that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Subsidiaries or assumed in connection with the acquisition of assets from such Person and in each case not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary of the Company or such acquisition, merger or consolidation. "Administrative Services Agreement" means that certain Corporate Development and Administrative Services Agreement between the Company and Brentwood dated as of July 2, 1996, as such agreement has been amended by that certain First Amendment thereto dated on or about the Issue Date, as such agreement is in effect on the Issue Date. "Affiliate" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary of the Company in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary of the Company, or shall be merged with or into the Company or any Restricted Subsidiary of the Company, or (b) the acquisition by the Company or any Restricted Subsidiary of the Company of the assets of any Person (other than a Restricted Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprises any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company 83
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or any of its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or (b) any other property or assets of the Company or any Restricted Subsidiary of the Company other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Restricted Subsidiaries receive aggregate consideration of less than $500,000, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company or any Restricted Subsidiary as permitted under "Merger, Consolidation and Sale of Assets," and (iii) any permitted Restricted Payment. "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Brentwood" means Brentwood Private Equity LLP. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "Cash Equivalents" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250.0 million; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the Indenture); (ii) (A) prior to the initial public offering of the Common Stock of the Company, both (x) the Permitted Holders shall own less than 50% of the aggregate ordinary voting power ("Voting Power") represented by the issued and outstanding Capital Stock of the Company and (y) any Person or Group (other than the Permitted Holders(s)) shall become the owner, directly or indirectly, beneficially or of record, of shares representing Voting Power greater than that owned by the Permitted Holders or (B) subsequent to the initial public offering of the Common Stock of the Company, both (x) the Permitted Holders shall own less than 35% of the aggregate Voting Power represented by the issued and 84
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outstanding Capital Stock of the Company and (y) any other Person or Group (other than Permitted Holders) shall become the owner, directly or indirectly, beneficially or of record, of shares representing greater than 35% of the aggregate Voting Power of the Company; or (iii) the replacement of a majority of the Board of Directors of the Company over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "Common Stock" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes of such Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary, unusual or nonrecurring gains or losses or taxes attributable to sales or dispositions outside the ordinary course of business), (B) Consolidated Interest Expense and (C) Consolidated Non-cash Charges less any non-cash items increasing Consolidated Net Income for such period, all as determined on a consolidated basis for such Person and its Restricted Subsidiaries in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect (i) on a pro forma basis for the period of such calculation to the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period and (ii) on a pro forma basis (calculated in accordance with Article 11 of Regulation S-X under the Securities Act) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (provided that such Consolidated EBITDA shall be included only to the extent includable pursuant to the definition of "Consolidated Net Income") attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the 85
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rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense, plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of such Person or of any Restricted Subsidiary of such Person (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local tax rate of such Person, expressed as a decimal. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication: (i) the aggregate of the interest expense of such Person and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including without limitation, (a) any amortization of debt discount and amortization or write-off of deferred financing costs, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP; but, (iii) excluding the amortization of debt discount and amortization or write-off of deferred financing costs. "Consolidated Net Income" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom (a) after-tax gains from Asset Sales or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains, (c) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary of the referent Person or is merged or consolidated with the referent Person or any Restricted Subsidiary of the referent Person, (d) the net income (but not loss) of any Restricted Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise, (e) the net income of any Person, other than a Restricted Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or to a Wholly Owned Restricted Subsidiary of the referent Person by such Person, (f) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of Consolidated Net Income accrued at any time following the Issue Date, (g) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued), and (h) in the case of a successor to the referent Person by consolidation or merger or as a transferee of the referent Person's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "Consolidated Net Worth" of any Person means the consolidated stockholders' equity of such Person, determined on a consolidated basis in accordance with GAAP, less (without duplication) amounts attributable to Disqualified Capital Stock of such Person. "Consolidated Non-cash Charges" means, with respect to any Person, for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and its Restricted Subsidiaries reducing Consolidated Net Income of such Person and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP (excluding any such charges constituting an extraordinary item or loss or any such charge which requires an accrual of or a reserve for cash charges for any future period). 86
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"Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary of the Company against fluctuations in currency values. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Designated Senior Debt" means (i) Indebtedness under or in respect of the Revolving Credit Facility and (ii) any other Indebtedness constituting Senior Debt or Guarantor Senior Debt which, at the time of determination, has an aggregate principal amount or commitment of at least $25.0 million and is specifically designated in the instrument evidencing such Senior Debt or Guarantor Senior Debt as "Designated Senior Debt" or "Designated Guarantor Senior Debt" by the Company or such Guarantor. "Disqualified Capital Stock" means (i) that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof on or prior to the final maturity date of the Notes and (ii) Preferred Stock of Subsidiaries of the Company. "Equity Offering" means (i) an underwritten public offering of Qualified Capital Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act, (ii) a purchase of Qualified Capital Stock or an additional common equity contribution by any of the Permitted Holders, or (iii) a purchase of Qualified Capital Stock by any person engaged in the movie theatre business which has a total equity market value (as determined in good faith by the Company's Board of Directors) or total private market value in excess of $100.0 million. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "fair market value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "Guarantor" means (i) each Subsidiary of the Company on the Issue Date and (ii) each Restricted Subsidiary that in the future executes a supplemental indenture in which such Restricted Subsidiary agrees to be bound by the terms of the Indenture as a Guarantor; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of the Indenture. "Guarantor Senior Debt" means with respect to any Guarantor, (i) the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) and all other Obligations with respect to any Indebtedness of such Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is 87
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an allowed claim under applicable law) on, and all other amounts and Obligations owing in respect of, (x) all Obligations of every nature of such Guarantor under the Revolving Credit Facility, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities, (y) all Interest Swap Obligations and (z) all obligations under Currency Agreements, in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include (i) any Indebtedness of such Guarantor to a Restricted Subsidiary of such Guarantor or any Affiliate of such Guarantor or any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer or employee of such Guarantor or any Restricted Subsidiary of such Guarantor (including, without limitation, amounts owed for compensation), (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, (iv) Indebtedness represented by Disqualified Capital Stock, (v) any liability for federal, state, local or other taxes owed or owing by such Guarantor, (vi) Indebtedness incurred in violation of the Indenture provisions set forth under "Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Guarantor and (viii) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor. "Indebtedness" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the Company of such Disqualified Capital Stock. "Independent Financial Advisor" means a firm (i) which does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any 88
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purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. For the purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include and be valued at the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions in connection with such Investment or any other amounts received in respect of such Investment; provided that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "Issue Date" means the date of original issuance of the Notes. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any of its Restricted Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements, (c) repayment of Indebtedness that is required to be repaid in connection with such Asset Sale and (d) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Holder(s)" means Brentwood, Steven L. Holmes and Thomas J. Owens. "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Notes issued in the Private Offering, and the Guarantees thereof; (ii) Indebtedness of Company and its Restricted Subsidiaries incurred pursuant to the Revolving Credit Facility, not to exceed $75.0 million reduced by any required permanent repayments as a result of Asset Sales (which are accompanied by a corresponding permanent commitment reduction) thereunder; 89
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(iii) other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon; (iv) Interest Swap Obligations of the Company covering Indebtedness of the Company or any of its Restricted Subsidiaries and Interest Swap Obligations of any Restricted Subsidiary of the Company covering Indebtedness of such Restricted Subsidiary; provided, however, that such Interest Swap Obligations are entered into to protect the Company and its Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness under Currency Agreements; provided that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Restricted Subsidiary of the Company, in each case subject to no Lien (other than a lien in favor of lenders under the Revolving Credit Facility) held by a Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company; provided that if as of any date any Person other than the Company or a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien (other than a lien in favor of lenders under the Revolving Credit Facility) in respect of such Indebtedness, such date shall be deemed the date of the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company of such Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Restricted Subsidiary of the Company, in each case subject to no Lien (other than a lien in favor of lenders under the Revolving Credit Facility); provided that (a) any Indebtedness of the Company to any Wholly Owned Restricted Subsidiary of the Company is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Indenture and the Notes and (b) if as of any date any Person other than a Wholly Owned Restricted Subsidiary of the Company owns or holds any such Indebtedness or any Person holds a Lien (other than a lien in favor of lenders under the Revolving Credit Facility) in respect of such Indebtedness, such date shall be deemed the date of the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two business days of incurrence; (ix) Indebtedness of the Company or any of its Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness; (xi) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount not to exceed $15.0 million at any one time outstanding; (xii) advances or extensions of credit on terms customary in the industry in the form of accounts or other receivables incurred, or pre-paid film rentals, and loan and advances made in settlement of such accounts receivable, all in the ordinary course of business and; 90
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(xiii) purchase money Indebtedness to finance property or assets of the Company or any Restricted Subsidiary of the Company acquired in the ordinary course of business in an aggregate amount not to exceed $10.0 million at any one time outstanding. "Permitted Investments" means (i) Investments by the Company or any Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Wholly Owned Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Wholly Owned Restricted Subsidiary of the Company, (ii) Investments by the Company or any Restricted Subsidiary of the Company in any Person that is or will become immediately after such Investment a Restricted Subsidiary of the Company or that will merge or consolidate into the Company or a Restricted Subsidiary of the Company in an amount not to exceed $5.0 million at any one time outstanding; (iii) Investments in the Company by any Restricted Subsidiary of the Company; provided that any Indebtedness evidencing such Investment is unsecured and subordinated, pursuant to a written agreement, to the Company's obligations under the Notes and the Indenture; (iv) investments in cash and Cash Equivalents; (v) loans and advances to employees and officers of the Company and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $500,000 at any one time outstanding; (vi) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with the Indenture; (vii) Investments in Unrestricted Subsidiaries not to exceed $5.0 million at any one time outstanding plus the proceeds from the sale Qualified Capital Stock after the Issue Date that are not otherwise used to make a Restricted Payment; (viii) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; and (ix) Investments made by the Company or its Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with the "Limitation on Asset Sales" covenant. "Permitted Junior Securities" means equity interests in the Company or debt securities of the Company, in each case as provided for in a plan of reorganization, that are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) and to all Guarantor Senior Debt (and any debt securities issued in exchange for Guarantor Senior Debt) to the same extent as, or to a greater extent than, the Notes are subordinated to Senior Debt pursuant to the Indenture that have a final maturity and a weighted average life to maturity which is the same as or greater than that of the Notes and that are not secured by any collateral. "Permitted Liens" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; 91
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(v) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; provided that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation; (vii) purchase money Liens to finance property or assets of the Company or any Restricted Subsidiary of the Company acquired in the ordinary course of business; provided, however, that (A) the related purchase money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xi) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xii) Liens securing Indebtedness under Currency Agreements; (xiii) Liens securing Acquired Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant; provided that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary of the Company and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary of the Company; (xiv) Liens in favor of sellers of theaters in respect of escrows or other deposits made in the ordinary course of business, but in any event not exceeding 15% of the total consideration; and (xv) the rights of film distributors under film licensing contracts entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business. "Person" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock. 92
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"Refinance" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means any Refinancing by the Company or any Restricted Subsidiary of the Company of Indebtedness incurred in accordance with the "Limitation on Incurrence of Additional Indebtedness" covenant (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (xi), (xii) or (xiii) of the definition of Permitted Indebtedness), in each case that does not (1) result in an increase in the aggregate principal amount of Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; provided that (x) if such Indebtedness being Refinanced is Indebtedness of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced. "Replacement Assets" has the meaning set forth under "-- Limitation on Asset Sales" above. "Representative" means the indenture trustee or other trustee, agent or representative in respect of any Designated Senior Debt; provided that if, and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt. "Restricted Subsidiary" of any Person means any Subsidiary of such Person which at the time of determination is not an Unrestricted Subsidiary. "Revolving Credit Facility" means the Credit Agreement among the Company, Silver Cinemas, Inc., as borrower, the lenders party thereto in their capacities thereunder and DLJ Capital Funding, Inc., together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property. "Senior Debt" means the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other Obligations with respect to, any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Notes. Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, 93
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whether or not such interest is an allowed claim under applicable law) on, and all other amounts and Obligations owing in respect of, (x) all Obligations of every nature of the Company under the Revolving Credit Facility, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities, (y) all Interest Swap Obligations and (z) all obligations under Currency Agreements, in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not include (i) any Indebtedness of the Company to a Subsidiary of the Company or any Affiliate of the Company or any of such Affiliate's Subsidiaries, (ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer or employee of the Company or of any Subsidiary of the Company (including, without limitation, amounts owed for compensation), (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services, (iv) Indebtedness represented by Disqualified Capital Stock, (v) any liability for federal, state, local or other taxes owed or owing by the Company, (vi) Indebtedness incurred in violation of the Indenture provisions set forth under "Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to the Company and (viii) any Indebtedness which is, by its express terms, subordinated in right of payment to any other Indebtedness of the Company. "Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of Regulation S-X under the Securities Act. "Subsidiary", with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such Person that at the time of determination shall be or continue to be designated an Unrestricted Subsidiary by the Board of Directors of such Person in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that (x) the Company certifies to the Trustee that such designation complies with the "Limitation on Restricted Payments" covenant and (y) each Subsidiary to be so designated and each of its Subsidiaries has not at the time of designation, and does not thereafter, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable with respect to any Indebtedness pursuant to which the lender has recourse to any of the assets of the Company or any of its Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving effect to such designation, the Company is able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant and (y) immediately before and immediately after giving effect to such designation, no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly Owned Restricted Subsidiary" of any Person means any Restricted Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Restricted Subsidiary, directors' 94
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qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Restricted Subsidiary of such Person. BOOK-ENTRY; DELIVERY AND FORM Except as described in the next paragraph, the Notes initially will be represented by one or more permanent global certificates in definitive, fully registered form (the "Global Notes"). The Global Notes will be deposited on the Issue Date with, or on behalf of DTC and registered in the name of a nominee of DTC. The Global Notes. The Company expects that pursuant to procedures established by DTC (i) upon the issuance of the Global Notes, DTC or its custodian will credit, on its internal system, the principal amount of Notes of the individual beneficial interests represented by such Global Notes to the respective accounts of persons who have accounts with such depositary and (ii) ownership of beneficial interests in the Global Notes will be shown on, and the transfer of such ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Such accounts initially will be designated by or on behalf of the Initial Purchasers and ownership of beneficial interests in the Global Notes will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Holders may hold their interests in the Global Notes directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. So long as DTC, or its nominee, is the registered owner or holder of the Notes, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Notes for all purposes under the Indenture. No beneficial owner of an interest in the Global Notes will be able to transfer that interest except in accordance with DTC's procedures, in addition to those provided for under the Indenture with respect to the Notes. Payments of the principal of, premium (if any), interest (including Additional Interest) on, the Global Notes will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Company, the Trustee or any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. The Company expects that DTC or its nominee, upon receipt of any payment of principal, premium, if any, interest (including Additional Interest) on the Global Notes, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Notes as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in the Global Notes held through such participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way through DTC's same-day funds system in accordance with DTC rules and will be settled in same day funds. If a holder requires physical delivery of a Certificated Security for any reason, including to sell Notes to persons in states which require physical delivery of the Notes, or to pledge such securities, such holder must transfer its interest in a Global Note, in accordance with the normal procedures of DTC and with the procedures set forth in the Indenture. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Indenture, DTC will exchange the Global Notes for Certificated Securities, which it will distribute to its participants and which will be legended as set forth under the heading "Notice to Investors." 95
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DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Note among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Certificated Securities. If DTC is at any time unwilling or unable to continue as a depositary for the Global Note and a successor depositary is not appointed by the Company within 90 days, Certificated Securities will be issued in exchange for the Global Notes, which certificates will bear the legends referred to under the heading "Notice to Investors." PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with the resale of Exchange Notes received in exchange for Private Notes where such Private Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that for a period of up to one year after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer that requests such document in the Letter of Transmittal for use in connection with any such resale. The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers or any other persons. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed to pay all expenses incident to the Company's performance of, or compliance with, the Registration Rights Agreement and will indemnify the Holders of Private Notes (including any broker-dealers), and certain parties related to such Holders, against certain liabilities, including liabilities under the Securities Act. 96
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LEGAL MATTERS Certain legal matters with respect to the Exchange Notes offered hereby will be passed upon for the Company by Latham & Watkins, Los Angeles, California. EXPERTS The consolidated financial statements of Silver Cinemas as of December 31, 1997 and 1996, and for the year ended December 31, 1997 and the period May 10, 1996 (inception) to December 31, 1996; and the financial statements of Landmark as of December 31, 1997 and for the year then ended appearing in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Landmark as of December 31, 1996 and for the six months ended December 31, 1996, the three months ended June 30, 1996 and the year ended March 31, 1996 have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of StarTime as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 have been included herein and in the registration statement in reliance upon the report of Coopers & Lybrand L.L.P., independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 under the Securities Act with respect to the Exchange Notes offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. For further information with respect to the Company and the Exchange Notes offered hereby, reference is made to the Registration Statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. As a result of the Exchange Offer, the Company will become subject to the informational requirements of the Exchange Act. The Registration Statement (and the exhibits and schedules thereto), as well as the periodic reports and other information filed by the Company with the Commission, may be inspected and copied at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Room 1400, 75 Park Place, New York, New York 10007 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 6061-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois at the prescribed rates. Additionally, the Commission maintains a Web site that contains reports, proxy and information statements regarding registrants that file electronically with the Commission and the address of this site is http://www.sec.gov. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Pursuant to the Indenture, the Company has agreed to furnish to the Trustee and to registered Holders of the Notes, without cost to the Trustee or such registered Holders, copies of all reports and other information that would be required to be filed by the Company with the Commission under the Exchange Act, whether or not the Company is then required to file reports with the Commission. As a result of this Exchange Offer, the Company will become subject to the periodic reporting and other informational requirements of the Exchange Act. In the event that the Company ceases to be subject to the informational requirements of the Exchange Act, the Company has agreed that, so long as any Notes remain outstanding, it will file with the Commission 97
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(but only if the Commission at such time is accepting such voluntary filings) and distribute to Holders of the Private Notes or the Exchange Notes, as applicable, copies of the financial information that would have been contained in such annual reports and quarterly reports, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations," that would have been required to be filed with the Commission pursuant to the Exchange Act. The Company will also furnish such other reports as it may determine or as may be required by law. The principal address of the Company is 4004 Beltline Road, Suite 205, Dallas, Texas 75244, and the Company's telephone number is (972) 503-9851. 98
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INDEX TO FINANCIAL STATEMENTS [Download Table] PAGE ---- SILVER CINEMAS INTERNATIONAL, INC. Independent Auditors' Report -- Deloitte & Touche LLP..... F-3 Consolidated Balance Sheets at December 31, 1997 and 1996................................................... F-4 Consolidated Statements of Operations for Year ended December 31, 1997, and the period from May 10, 1996 (inception) to December 31, 1996....................... F-5 Consolidated Statements of Stockholders' Equity for Year ended December 31, 1997, and the period from May 10, 1996 (inception) to December 31, 1996.................. F-6 Consolidated Statements of Cash Flows for Year ended December 31, 1997 and the period from May 10, 1996 (inception) to December 31, 1996....................... F-7 Notes to Consolidated Financial Statements................ F-8 Unaudited Condensed Consolidated Balance Sheet as of March 31, 1998............................................... F-13 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997..... F-14 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997..... F-15 Notes to Unaudited Interim Condensed Consolidated Financial Statements................................... F-16 THE LANDMARK THEATRE GROUP Independent Auditors' Report -- Deloitte & Touche LLP..... F-17 Consolidated Balance Sheet at December 31, 1997........... F-18 Consolidated Statement of Operations for Year ended December 31, 1997...................................... F-19 Consolidated Statement of Changes in Shareholder's Equity for Year ended December 31, 1997....................... F-20 Consolidated Statement of Cash Flows for Year ended December 31, 1997...................................... F-21 Notes to Consolidated Financial Statements................ F-22 THE LANDMARK THEATRE GROUP Independent Auditors' Report -- KPMG Peat Marwick LLP..... F-27 Consolidated Balance Sheets at December 31, 1996 and March 31, 1996............................................... F-28 Consolidated Statements of Operations for the six months ended December 31, 1996, three months ended June 30, 1996 and Year ended March 31, 1996..................... F-29 Consolidated Statements of Changes in Shareholders' Equity for the six months ended December 31, 1996, three months ended June 30, 1996 and Year ended March 31, 1996................................................... F-30 Consolidated Statements of Cash Flows for the six months ended December 31, 1996, three months ended June 30, 1996 and Year ended March 31, 1996..................... F-31 Notes to Consolidated Financial Statements................ F-32 Unaudited Condensed Consolidated Balance Sheet as of March 31, 1998............................................... F-39 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997..... F-40 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997..... F-41 Notes to Unaudited Interim Condensed Consolidated Financial Statements................................... F-42 F-1
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[Download Table] PAGE ---- STARTIME CINEMA, INC. Independent Auditors' Report -- Coopers & Lybrand L.L.P.................................................. F-43 Consolidated Balance Sheets at December 31, 1997 and 1996................................................... F-44 Consolidated Statements of Operations for Years ended December 31, 1997, 1996 and 1995....................... F-45 Consolidated Statements of Stockholders' Equity for Years ended December 31, 1997, 1996 and 1995................. F-46 Consolidated Statements of Cash Flows for Years ended December 31, 1997, 1996 and 1995....................... F-47 Notes to Consolidated Financial Statements................ F-48 Unaudited Condensed Consolidated Balance Sheet as of March 31, 1998............................................... F-57 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997..... F-58 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997..... F-59 Notes to Unaudited Interim Condensed Consolidated Financial Statements................................... F-60 F-2
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INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Silver Cinemas International, Inc. We have audited the accompanying consolidated balance sheets of Silver Cinemas International, Inc. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1997 and for the period from May 10, 1996 (date of inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Silver Cinemas International, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the year ended December 31, 1997 and for the period from May 10, 1996 (date of inception) to December 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Dallas, Texas March 26, 1998 F-3
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SILVER CINEMAS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS [Enlarge/Download Table] 1997 1996 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents................................. $ 276,497 $ 4,709,457 Inventories............................................... 147,792 100,512 Prepaid expenses and other................................ 264,601 40,588 ----------- ----------- Total current assets.............................. 688,890 4,850,557 THEATER PROPERTIES AND EQUIPMENT: Land...................................................... 50,000 50,000 Buildings................................................. 1,000,000 1,000,000 Leasehold interests and improvements...................... 2,103,055 1,350 Theater furniture and equipment........................... 6,138,930 2,280,630 Theaters under construction............................... 77,575 67,745 ----------- ----------- Total............................................. 9,369,560 3,399,725 Less accumulated depreciation and amortization............ (681,136) (39,179) ----------- ----------- Theater properties and equipment -- net........... 8,688,424 3,360,546 GOODWILL -- NET (Note 2).................................... 10,023,423 8,029,875 OTHER ASSETS -- NET (Note 3)................................ 2,526,562 1,585,738 ----------- ----------- TOTAL............................................. $21,927,299 $17,826,716 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 4)................ $ 6,448 $ 2,000,000 Accounts payable.......................................... 42,599 203,222 Accrued film rentals...................................... 240,170 193,322 Accrued payrolls.......................................... 282,348 203,845 Accrued property taxes and other liabilities.............. 1,132,126 452,792 ----------- ----------- Total current liabilities......................... 1,703,691 3,053,181 LONG-TERM DEBT, less current portion (Note 4)............... 6,590,561 COMMITMENTS AND CONTINGENCIES (Notes 6 and 7) STOCKHOLDERS' EQUITY (Note 5): Series preferred stock, 100,000 shares authorized, no shares issued Series A preferred stock, $.01 par value, 400,000 shares authorized, 152,038 and 151,739 shares issued and outstanding at December 31, 1997 and 1996, respectively........................................... 15,203,800 15,173,900 Common stock, $.01 par value; 200,000 shares authorized, 100,784 and 98,320 shares issued and outstanding at December 31, 1997 and 1996, respectively............... 1,008 983 Additional paid-in capital................................ 99,712 97,295 Stockholder notes receivable.............................. (116,079) (116,436) Accumulated deficit....................................... (1,555,394) (382,207) ----------- ----------- Total stockholders' equity........................ 13,633,047 14,773,535 ----------- ----------- TOTAL............................................. $21,927,299 $17,826,716 =========== =========== See notes to consolidated financial statements. F-4
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SILVER CINEMAS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS [Enlarge/Download Table] PERIOD FROM MAY 10, 1996 YEAR ENDED (DATE OF INCEPTION) DECEMBER 31, TO DECEMBER 31, 1997 1996 ------------ ------------------- REVENUES: Admissions................................................ $10,367,555 $ 787,291 Concessions............................................... 8,097,921 609,634 Other..................................................... 296,102 23,005 ----------- ---------- Total............................................. 18,761,578 1,419,930 COSTS AND EXPENSES: Cost of operations: Film rentals........................................... 4,483,842 378,199 Concession supplies.................................... 1,462,163 110,875 Salaries and wages..................................... 3,064,974 275,754 Facility leases........................................ 3,311,740 207,339 Advertising............................................ 755,337 46,155 Utilities and other.................................... 3,024,285 200,786 General and administrative expenses....................... 1,900,892 576,574 Depreciation and amortization............................. 1,479,090 102,896 ----------- ---------- Total............................................. 19,482,323 1,898,578 ----------- ---------- OPERATING LOSS.............................................. (720,745) (478,648) OTHER INCOME (EXPENSE): Interest expense.......................................... (352,509) Amortization of debt issue costs.......................... (54,907) Interest income and other expense, net (Note 4)........... (28,069) 96,441 ----------- ---------- LOSS BEFORE INCOME TAX EXPENSE.............................. (1,156,230) (382,207) INCOME TAX EXPENSE.......................................... 16,957 ----------- ---------- NET LOSS.................................................... (1,173,187) (382,207) PREFERRED STOCK DIVIDENDS................................... (911,328) (301,803) ----------- ---------- NET LOSS APPLICABLE TO COMMON STOCK......................... $(2,084,515) $ (684,010) =========== ========== See notes to consolidated financial statements. F-5
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SILVER CINEMAS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM MAY 10, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 [Enlarge/Download Table] SERIES A PREFERRED STOCK COMMON STOCK --------------------- ---------------- ADDITIONAL SHAREHOLDER SHARES SHARES PAID-IN NOTES ACCUMULATED ISSUED AMOUNT ISSUED AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL ------- ----------- ------- ------ ---------- ----------- ----------- ----------- Capital stock issuance... 151,739 $15,173,900 98,320 $ 983 $97,295 $(151,210) $ -- $15,120,968 Net loss................. (382,207) (382,207) Payment of stockholder notes receivable....... 34,774 34,774 ------- ----------- ------- ------ ------- --------- ----------- ----------- BALANCE, DECEMBER 31, 1996...... 151,739 15,173,900 98,320 983 97,295 (116,436) (382,207) 14,773,535 Capital stock issuance... 299 29,900 2,464 25 2,417 32,342 Net loss................. (1,173,187) (1,173,187) Payment of stockholder notes receivable....... 357 357 ------- ----------- ------- ------ ------- --------- ----------- ----------- BALANCE, DECEMBER 31, 1997...... 152,038 $15,203,800 100,784 $1,008 $99,712 $(116,079) $(1,555,394) $13,633,047 ======= =========== ======= ====== ======= ========= =========== =========== See notes to consolidated financial statements. F-6
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SILVER CINEMAS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] PERIOD FROM MAY 10, 1996 YEAR ENDED (DATE OF INCEPTION) DECEMBER 31, TO DECEMBER 31, 1997 1996 ------------ ------------------- OPERATING ACTIVITIES: Net loss.................................................. $(1,173,187) $ (382,207) Noncash items in net loss: Depreciation........................................... 642,259 39,179 Amortization........................................... 891,738 63,717 Cash from (used for) working capital: Inventories............................................ (23,705) Prepaid expenses and other............................. (224,013) (40,588) Accounts payable....................................... (160,623) 203,845 Accrued liabilities.................................... 804,685 849,336 ----------- ------------ Net cash from operating activities................ 757,154 733,282 ----------- ------------ INVESTING ACTIVITIES: Acquisitions of theater properties and equipment.......... (4,212,426) (12,386,187) Additions to theater properties and equipment............. (4,555,736) (181,707) Increase in other assets.................................. (278,710) (611,673) ----------- ------------ Net cash used for investing activities............ (9,046,872) (13,179,567) ----------- ------------ FINANCING ACTIVITIES: Proceeds from the issuance of debt........................ 6,600,000 2,000,000 Payments of debt.......................................... (2,002,991) Increase in debt issue costs.............................. (772,950) Proceeds from the issuance of stock....................... 32,342 15,120,968 Payments on stockholder notes receivable.................. 357 34,774 ----------- ------------ Net cash from financing activities................ 3,856,758 17,155,742 ----------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (4,432,960) 4,709,457 CASH AND CASH EQUIVALENTS: Beginning of period....................................... 4,709,457 ----------- ------------ End of period............................................. $ 276,497 $ 4,709,457 =========== ============ SUPPLEMENTAL INFORMATION: Stock issued for notes receivable......................... $ $ 151,210 =========== ============ Cash paid for interest.................................... $ 261,607 $ =========== ============ See notes to consolidated financial statements. F-7
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SILVER CINEMAS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of Silver Cinemas International, Inc. and its wholly-owned subsidiary, Silver Cinemas, Inc. (collectively referred to as the "Company"). All intercompany accounts and transactions have been eliminated. Business -- The Company owns or leases and operates 25 motion picture theaters (154 screens) in 9 states and manages 2 theaters (11 screens) for another party at December 31, 1997. Management Estimates -- In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the period. Actual results could differ significantly from those estimates. Revenues are recognized when admissions and concessions sales are received at the theaters. Film rental costs are accrued based on the applicable box office receipts and the terms of the film licenses. Cash and Cash Equivalents consist of operating funds held in financial institutions, petty cash held by the theaters and highly liquid investments with original maturities of three months or less when purchased. Inventories of concession products are stated at the lower of cost (first-in, first-out method) or market. Theater Properties and Equipment are stated at cost assigned as part of the acquisitions (see Note 2) less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: buildings -- 20 years and theater furniture and equipment -- 10 years. Leasehold interests and improvements are amortized using the straight-line method over the lesser of the lease period or the estimated useful lives of the leasehold improvements. Goodwill is amortized on a straight-line basis over a 20-year period. In the event that facts and circumstances indicated that goodwill may be impaired, an evaluation of continuing value would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with this asset would be compared to its carrying amount to determine if a write down to market value or discounted cash flows value is required. No adjustments were required at December 31, 1997 or 1996. Other Assets, as applicable, are amortized using the straight-line method over five years, and over the four to six year terms of the noncompete and debt agreements. Advertising costs are expensed when incurred. Deferred Income Taxes are provided under the liability method for temporary differences between revenue and expenses recognized for tax return and financial reporting purposes. Financial Instrument disclosure requirements include the estimated fair value of these assets and liabilities. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at fair value because of the short-term maturity of these instruments. In addition, the fair value of the Company's debt obligations were determined to approximate their carrying values since (i) a substantial amount of the December 31, 1997, debt obligations were issued at fair market value during 1997 and (ii) long-term debt amounts are interest rate variable in nature. F-8
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SILVER CINEMAS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS In separate transactions, the Company acquired certain assets and businesses as follows: [Download Table] APPROXIMATE NUMBER NUMBER PURCHASE OF OF EFFECTIVE SELLER PRICE THEATERS SCREENS DATE ------ ----------- -------- ------- ------------- 1996 A.................... $ 580,693 4 22 November 1996 B.................... 11,805,494 14 80 November 1996 ----------- -- --- $12,386,187 18 102 =========== == === 1997 C.................... $ 370,231 1 6 January 1997 D.................... 2,710,889 2 19 January 1997 E.................... 1,097,200 2 12 April 1997 F.................... 34,106 1 4 May 1997 ----------- -- --- $4,212,426 6 41 =========== == === 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: [Download Table] 1997 1996 ---------- ----------- Inventories................................ $ 23,577 $ 100,512 Theater properties and equipment........... 1,414,099 3,218,017 Noncompete agreements...................... 250,000 1,000,000 Goodwill................................... 2,524,750 8,067,658 ---------- ----------- $4,212,426 $12,386,187 ========== =========== Goodwill has been recorded as an intangible asset and is presented net of accumulated amortization of $568,985 and $37,783 at December 31, 1997 and 1996, respectively. Pro forma financial information for 1997 has been omitted as the effect is immaterial. The Company paid $81,505 and $184,500 to a principal stockholder (the "Stockholder") for advisory services for the year ended December 31, 1997 and the period from May 10, 1996 (date of inception) to December 31, 1996, respectively. F-9
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SILVER CINEMAS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. OTHER ASSETS Other assets at December 31, 1997 and 1996 consist of the following: [Download Table] 1997 1996 ---------- ---------- Noncompete agreements....................... $1,250,000 $1,000,000 Debt issue costs............................ 772,949 Organization costs.......................... 52,431 49,153 ---------- ---------- Total............................. 2,075,380 1,049,153 Less accumulated amortization............... (383,982) (25,935) ---------- ---------- Net......................................... 1,691,398 1,023,218 Employee notes receivable................... 186,911 261,435 Equipment, lease and other deposits......... 648,253 301,085 ---------- ---------- Total............................. $2,526,562 $1,585,738 ========== ========== 4. DEBT The following is a summary of debt at December 31, 1997 and 1996: [Download Table] 1997 1996 ---------- ----------- Revolving loan facility.................... $6,500,000 Other...................................... 97,009 Note payable to stockholder (interest at prime plus 2%, paid in April 1997)....... $ 2,000,000 ---------- ----------- Total long-term debt............. 6,597,009 2,000,000 Less current portion....................... (6,448) (2,000,000) ---------- ----------- Long-term debt, less current portion....... $6,590,561 $ -- ========== =========== Credit Agreement -- In April 1997, the Company entered into a Credit Agreement with a group of lenders, which included a reducing, revolving loan facility and a letter of credit facility. Under the reducing, revolving loan facility, the initial commitment is $25 million, subject to certain restrictions, with quarterly reductions of $1,250,000 scheduled June 30, 1999 through March 31, 2001 and $1,875,000 through March 31, 2003. As of December 31, 1997, the Company did not comply with the leverage and EBITDA provisions. These provisions of the Credit agreement were amended as of January 16, 1998 and March 25, 1998, and the Company obtained a waiver for past noncompliance. As such, there was no unused available credit at December 31, 1997. Amounts outstanding under the revolving loan facility bear quarterly interest based on one of the following rates at the Company's option: (i) a variable rate based on the higher of the administrative agent's established commercial lending rate or the federal funds rate plus 0.5% or (ii) a variable rate based on the Eurodollar rate, adjusted in accordance with certain financial ratios. The weighted average interest rate and current interest rate at December 31, 1997, was 7.57% and 7.69%, respectively. The Company pays a commitment fee to the lenders at the rate of 0.375 to 0.5% per annum on the average daily unused portion of the commitment amounts for both the revolving loan and letter of credit facilities. The Credit Agreement contains financial and operating covenants requiring, among other items, the maintenance of certain financial standards, as defined, including interest coverage, leverage and EBITDA. In addition, the Credit Agreement contains various covenants which, among other things, limit the Company's ability to incur additional indebtedness, restrict the Company's ability to invest in and divest of assets, and restrict the Company's ability to pay dividends or redeem or purchase its stock. F-10
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SILVER CINEMAS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1997, the scheduled maturities of debt were as follows: [Download Table] 1998............................................. $ 6,448 1999............................................. 7,122 2000............................................. 7,868 2001............................................. 8,692 2002............................................. 4,634,601 Thereafter....................................... 1,932,278 ---------- $6,597,009 ========== 5. CAPITAL STOCK Cumulative Preferred Stock -- The Company has 500,000 authorized shares of $.01 par value preferred stock at December 31, 1997, with 400,000 shares designated as voting Series A Preferred Stock ("Series A"). Each outstanding Series A share bears a $6.00 cumulative annual dividend which is payable if earned and declared, if the Series A preferred stock is redeemed or if the Company is liquidated. The Company may redeem all Series A shares at any time for $100 per share plus dividends in arrears. As of December 31, 1997 and 1996, aggregate Series A preferred stock dividends of $1,213,131 and $301,803, respectively, are in arrears. At December 31, 1997, the Company has reserved 98,752 and 491 shares of Series A Preferred Stock for potential issuances at $100 per share to the Stockholder and certain officers, respectively. Stockholders' Agreement -- The Company and its stockholders have entered into a stockholders' agreement which provides certain restrictions and rights related to the transfer, sale or purchase of capital shares. 6. LEASES AND OTHER COMMITMENTS Leases -- The Company conducts a significant part of its theater operations in leased premises under noncancelable operating leases with terms of 1 to 15 years. In addition to the minimum annual lease payment, most of these leases provide for contingent rentals based on operating results and require the payment of taxes, insurance and other costs applicable to the property. Generally, these leases include renewal options for various periods at stipulated rates. Rent expense for the year ended December 31, 1997 and for the period from May 10, 1996 (date of inception) to December 31, 1996 (primarily incurred in November and December 1996) totaled $3,177,013 and $234,293, respectively. Future minimum payments under noncancelable operating leases with initial or remaining terms in excess of one year at December 31, 1997, are due as follows: [Download Table] 1998............................................ $ 3,596,042 1999............................................ 3,351,775 2000............................................ 2,705,573 2001............................................ 2,366,104 2002............................................ 1,699,912 Thereafter...................................... 9,472,899 ----------- Total................................. $23,192,305 =========== After December 31, 1997, the Company entered into a lease agreement that is contingent on the lessor's completing construction of a theater facility. Upon satisfaction of the contingency, the lease agreement will require future minimum lease payments estimated to be $5.5 million over 20 years. F-11
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SILVER CINEMAS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Letters of Credit and Collateral -- At December 31, 1997 and 1996, the Company has an outstanding letter of credit of $15,000 in connection with requirements of a film distributor. 7. CONTINGENCIES The Company, in the normal course of business, is party to various legal actions. Management believes that the potential exposure, if any, from such matters would not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. 8. INCOME TAXES The 1997 tax provision results from state income taxes. Deferred tax liabilities (assets) at December 31, 1997 and 1996 consist of the following: [Download Table] 1997 1996 ----------- --------- Gross deferred tax assets: Net operating loss carryforwards......... $(1,700,000) $(385,000) Book accruals and reserves in excess of cumulative tax deductions............. (50,000) (15,000) ----------- --------- Total............................ (1,750,000) (400,000) Gross deferred tax liabilities -- Tax depreciation and amortization in excess of book........................ 400,000 50,000 Valuation allowance........................ 1,350,000 350,000 ----------- --------- $ -- $ -- =========== ========= The Company has provided a full valuation allowance for net deferred tax assets due to the lack of an earnings history. Gross deferred tax assets at December 31, 1997, include net operating loss carryforwards of approximately $1,700,000 for income tax purposes. These net operating loss carryforwards begin to expire in 2011 and may be limited in use in the event of significant changes in the Company's ownership. 9. SUBSEQUENT AND PENDING TRANSACTIONS In March 1998, the Company issued $10 million of Series A preferred stock and common stock to the Stockholder. The Company has entered into definitive agreements to acquire substantially all of the assets of The Landmark Theatre Group and StarTime Cinema, Inc. and three theaters of AMC Entertainment, Inc. for a total purchase price of approximately $85.7 million. F-12
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SILVER CINEMAS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 ASSETS [Download Table] UNAUDITED ----------- CURRENT ASSETS: Cash and equivalents...................................... $ 115,905 Inventories............................................... 147,792 Prepaid expenses and other................................ 211,082 ----------- Total current assets.............................. 474,779 THEATER PROPERTIES AND EQUIPMENT: Land...................................................... 610,000 Buildings................................................. 3,880,000 Leasehold interests and improvements...................... 2,165,228 Theater furniture and equipment........................... 7,041,080 Theater under construction................................ 292,333 ----------- Total............................................. 13,988,641 Less accumulated depreciation and amortization............ (936,753) ----------- Theater properties and equipment, net..................... 13,051,888 GOODWILL -- NET............................................. 10,711,405 OTHER ASSETS -- NET......................................... 2,934,696 ----------- TOTAL............................................. $27,172,768 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt......................... $ 6,000 Accounts payable.......................................... 599,927 Accrued film rentals...................................... 259,671 Accrued payrolls.......................................... 304,887 Accrued property taxes and other liabilities.............. 149,667 ----------- Total current liabilities......................... 1,320,152 LONG-TERM DEBT, less current portion........................ 2,714,162 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series preferred stock, 10,000 shares authorized, no shares issued.......................................... -- Series A preferred stock, $.01 par value, 400,000 shares authorized, 253,013 shares issued and outstanding...... 25,301,322 Common stock, $.01 par value, 200,000 shares authorized, 101,862 shares issued and outstanding.................. 1,019 Additional paid-in capital................................ 100,843 Stockholder notes receivable.............................. (214,443) Accumulated deficit....................................... (2,050,287) ----------- Total stockholders' equity........................ 23,138,454 ----------- TOTAL............................................. $27,172,768 =========== See notes to interim condensed consolidated financial statements. F-13
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SILVER CINEMAS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 [Enlarge/Download Table] UNAUDITED ------------------------ 1998 1997 ---------- ---------- REVENUES: Admissions................................................ $2,560,296 $2,220,040 Concessions............................................... 2,129,201 1,703,857 Other..................................................... 113,230 44,098 ---------- ---------- Total............................................. 4,802,727 3,967,995 COST OF REVENUES: Film Rentals.............................................. 985,759 950,868 Concession supplies....................................... 309,394 310,742 Salaries and wages........................................ 855,060 621,000 Facility leases........................................... 779,830 621,850 Advertising............................................... 144,303 135,621 Utilities and other....................................... 953,242 767,000 General and administrative.................................. 590,160 388,400 Depreciation and amortization............................... 475,850 304,150 ---------- ---------- Total............................................. 5,093,598 4,099,631 ---------- ---------- OPERATING LOSS.............................................. (290,871) (131,636) OTHER INCOME (EXPENSE): Interest expense............................................ (156,542) (28,404) Amortization of debt issuance costs......................... (34,119) Interest income and other expense, net...................... 9,802 ---------- ---------- LOSS BEFORE INCOME TAX EXPENSE.............................. (471,730) (160,040) INCOME TAX EXPENSE.......................................... 23,162 2,299 ---------- ---------- NET INCOME (LOSS)........................................... (494,892) (162,339) PREFERRED STOCK DIVIDENDS................................... (253,055) (227,982) ---------- ---------- NET LOSS APPLICABLE TO COMMON STOCK......................... $ (747,947) $ (390,321) ========== ========== See notes to interim condensed consolidated financial statements. F-14
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SILVER CINEMAS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 [Enlarge/Download Table] UNAUDITED -------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES: Net income (loss)...................................... $ (494,892) $ (162,339) ----------- ----------- Noncash items in net income (loss): Depreciation...................................... 255,617 103,346 Amortization...................................... 254,352 200,804 Cash from (used for) working capital: Inventories....................................... (23,767) Prepaid expenses and other........................ 53,519 (41,333) Accounts payable.................................. 557,328 (15,096) Accrued liabilities............................... (940,419) (281,073) ----------- ----------- Net cash used for operating activities....... (314,495) (219,458) INVESTING ACTIVITIES: Acquisitions of theater properties and equipment....... (5,134,613) (3,027,393) Additions to theater properties and equipment.......... (386,472) (775,867) Increase in other assets............................... (448,465) (181,802) ----------- ----------- Net cash used for investing activities....... (5,969,550) (3,985,062) FINANCING ACTIVITIES: Payments of debt....................................... (3,876,847) Proceeds from the issuance of stock.................... 10,000,300 30,542 ----------- ----------- Net cash from financing activities........... 6,123,453 30,542 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (160,592) (4,173,978) CASH AND CASH EQUIVALENTS: Beginning of period.................................... 276,497 4,709,457 ----------- ----------- End of period.......................................... $ 115,905 $ 535,479 =========== =========== SUPPLEMENTAL INFORMATION: Stock issued for notes receivable...................... $ 98,364 $ -- =========== =========== See notes to interim condensed consolidated financial statements. F-15
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SILVER CINEMAS INTERNATIONAL, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited Interim Condensed Consolidated Financial Statements of Silver Cinemas International, Inc. and subsidiaries (the "Company") include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 1998, and the results of its operations for the three months ended March 31, 1998 and 1997. Due to seasonality of the Company's operations, the results of its operations for the interim periods ended March 31, 1998 and 1997, may not be indicative of the total results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission. The unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of Silver Cinemas International, Inc. and subsidiaries and accompanying notes for the years ended December 31, 1997 and for the period from May 10, 1996 (date of inception) to December 31, 1996. 2. EQUITY ISSUANCE In March 1998, the Company issued 99,595 shares of its Series A preferred stock and 40,500 shares of its common stock to Brentwood Associates Buyout Fund II, L.P. for $10 million. 3. SUBSEQUENT EVENTS In April 1998, the Company issued 29,878 shares of its Series A preferred stock and 12,151 shares of its common stock to DLJ Fund Investment Partners II, L.P. for $3 million. Also in April 1998, the Company completed an offering of $100.0 million of Senior Subordinated Notes due 2005 in a private placement under Section 144A of the Securities Act of 1933. The Company used the net proceeds to fund the acquisition of substantially all of the assets of The Landmark Theatre Group and StarTime Cinema, Inc. and three theaters of AMC Entertainment, Inc., repay borrowings under the credit agreement, and general corporate purposes as follows: [Download Table] Landmark Acquisition...................................... $ 62,204 StarTime Acquisition...................................... 17,135 AMC Acquisition........................................... 1,285 Repay Old Credit Facility................................. 2,625 Transaction fees and expenses(1).......................... 5,000 Excess cash proceeds...................................... 14,751 -------- Total Uses...................................... $103,000 ======== F-16
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INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of The Landmark Theatre Group We have audited the accompanying consolidated balance sheet of The Landmark Theatre Group as of December 31, 1997, and the related consolidated statements of operations, shareholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Landmark Theatre Group as of December 31, 1997, and the results of operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Dallas, Texas March 27, 1998 F-17
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THE LANDMARK THEATRE GROUP CONSOLIDATED BALANCE SHEET ASSETS [Download Table] DECEMBER 31, 1997 ------------ Cash and cash equivalents................................... $ 2,004,000 Accounts receivable......................................... 355,000 Inventories................................................. 145,000 Prepaid expenses............................................ 293,000 Deferred tax assets......................................... 500,000 ----------- Total current assets.............................. 3,297,000 Property and equipment, net................................. 35,023,000 Goodwill, net of accumulated amortization of $1,401,000..... 21,948,000 Other assets................................................ 481,000 ----------- TOTAL............................................. $60,749,000 =========== LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable and accrued expenses....................... $ 5,475,000 Current portion of notes payable............................ 170,000 Current portion of capital lease obligations................ 288,000 Payable to parent company................................... 1,800,000 ----------- Total current liabilities......................... 7,733,000 Notes payable, less current portion......................... 1,211,000 Deferred tax liabilities.................................... 5,760,000 Capital lease obligations, less current portion............. 4,702,000 Other long-term liabilities................................. 34,000 ----------- Total liabilities................................. 19,440,000 ----------- SHAREHOLDER'S EQUITY: Common stock, no par value; authorized, issued and outstanding 100 shares Paid-in capital........................................... 41,046,000 Retained earnings......................................... 263,000 ----------- Total shareholder's equity........................ 41,309,000 ----------- TOTAL............................................. $60,749,000 =========== See notes to consolidated financial statements. F-18
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THE LANDMARK THEATRE GROUP CONSOLIDATED STATEMENT OF OPERATIONS [Download Table] YEAR ENDED DECEMBER 31, 1997 ------------ REVENUES: Admissions................................................ $45,903,000 Concessions............................................... 10,061,000 Other..................................................... 990,000 ----------- Total revenues.................................... 56,954,000 ----------- COST OF REVENUES: Film rentals and advertising.............................. 23,212,000 Cost of concessions....................................... 2,096,000 Payroll and related expenses.............................. 9,448,000 Occupancy costs........................................... 7,071,000 Other theatre operating expenses.......................... 3,995,000 ----------- Total cost of revenues............................ 45,822,000 General and administrative.................................. 5,191,000 Depreciation and amortization............................... 4,929,000 ----------- Total expenses.................................... 55,942,000 ----------- INCOME FROM OPERATIONS...................................... 1,012,000 INTEREST EXPENSE............................................ 748,000 ----------- INCOME BEFORE INCOME TAXES.................................. 264,000 INCOME TAX PROVISION........................................ 496,000 ----------- NET LOSS.................................................... $ (232,000) =========== See notes to consolidated financial statements. F-19
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THE LANDMARK THEATRE GROUP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY [Enlarge/Download Table] COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ----------- --------- ----------- BALANCE, DECEMBER 31, 1996................. $ -- $36,165,000 $ 495,000 $36,660,000 Forgiveness of payable to parent company... -- 4,881,000 4,881,000 Net loss for the year ended December 31, 1997..................................... (232,000) (232,000) ---- ----------- --------- ----------- BALANCE, DECEMBER 31, 1997................. $ -- $41,046,000 $ 263,000 $41,309,000 ==== =========== ========= =========== See notes to consolidated financial statements. F-20
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THE LANDMARK THEATRE GROUP CONSOLIDATED STATEMENT OF CASH FLOWS [Download Table] YEAR ENDED DECEMBER 31, 1997 ------------ OPERATING ACTIVITIES: Net loss.................................................. $ (232,000) Noncash items in net loss Depreciation and amortization............................. 4,929,000 Deferred income taxes..................................... (150,000) Cash from (used for) working capital Receivables............................................... (140,000) Inventories............................................... (16,000) Prepaid expenses.......................................... 132,000 Other assets.............................................. 15,000 Accounts payable and accrued expenses..................... (17,000) Other liabilities......................................... (10,000) ----------- Net cash provided by operating activities......... 4,511,000 ----------- INVESTING ACTIVITIES: Additions to theatre property and equipment............... (1,005,000) Acquisitions of theatre property and equipment............ (2,375,000) ----------- Net cash (used in) investing activities........... (3,380,000) ----------- FINANCING ACTIVITIES: Increase in payable to parent company..................... 1,894,000 Repayment of notes payable and capital leases............. (2,543,000) Proceeds from note payable................................ 330,000 ----------- Net cash (used in) financing activities........... (319,000) ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 812,000 CASH AND CASH EQUIVALENTS: Beginning of period....................................... 1,192,000 ----------- End of period............................................. $ 2,004,000 =========== SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest.................................................. $ 715,000 =========== Income taxes................................................ $ 62,000 =========== SUPPLEMENTAL DISCLOSURE OF NONCASH ITEM: Forgiveness of payable to parent company.................. $ 4,881,000 =========== See notes to consolidated financial statements. F-21
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Landmark Theatre Group (the "Company") is a wholly owned subsidiary of Metromedia International Group ("Metromedia"). The principal subsidiaries of the Company are Landmark Theatre Corporation and Seven Gables Corporation, which operate first-run art and specialty motion picture theatres in ten states, with a significant portion of revenues derived from California. At December 31, 1997, the Company operated 140 screens in 49 theatres. Film Exhibition Revenues -- Theatre admission revenues and related film rental expense are recognized as films are exhibited. Film rental expense represents the distributors' shares of gross box office receipts. Cash Equivalents -- Cash equivalents consist of highly liquid investments with original maturities of three months or less. Inventory -- Inventory consists of concession products on hand at the theatres. Inventory is valued at the lower of cost (using the first-in, first-out method) or market. Property and Equipment -- Property and equipment are carried at cost. The depreciable lives of buildings and equipment are 25 years and 3 to 7 years, respectively. Leasehold improvements are amortized over the lesser of the terms of the respective leases or the estimated useful lives of the improvements. The Company uses the straight-line method to depreciate all depreciable assets. Maintenance and repairs are expensed as incurred. Long-Lived Assets -- The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows without interest costs expected to be generated by the asset. If the carrying value of the assets exceeds the expected future cash flows, an impairment exists and is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Goodwill -- Goodwill has been recognized for the excess of the purchase price over the value of the identifiable net assets acquired. Goodwill is being amortized over 25 years using the straight-line method. Management continuously monitors and evaluates the realizability of recorded intangibles to determine whether their carrying values have been impaired. In evaluating the value and future benefits of the goodwill, their carrying value would be reduced by the excess, if any, of their carrying value over management's best estimate of undiscounted future cash flows over the remaining amortization period. The Company believes that the carrying value of goodwill is not impaired. Income Taxes -- The Company accounts for its income taxes in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 requires the asset and liability method of accounting for deferred income taxes. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments -- The Company's financial instruments under SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," include cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The Company believes that the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and long-term debt are a reasonable estimate of their fair value. F-22
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: [Download Table] DECEMBER 31, 1997 ------------ Land............................................ $ 1,407,000 Building and improvements....................... 6,054,000 Leasehold interest.............................. 18,806,000 Leasehold improvements.......................... 8,355,000 Theatre and office equipment.................... 4,729,000 Construction in progress........................ 476,000 ----------- 39,827,000 Less accumulated depreciation and amortization.................................. (4,804,000) ----------- $35,023,000 =========== Depreciation expense for the year ended December 31, 1997, was $3,990,000. The assets acquired through capitalized theatre leases at December 31, 1997, amount to $4,633,000, and the assets acquired through capitalized equipment leases amount to $1,150,000 for this same period. Accumulated amortization of assets under capitalized leases was $1,295,000 at December 31, 1997. The related depreciation expense for the year ended December 31, 1997 was $414,000. 3. NOTES PAYABLE Notes payable represent obligations incurred in connection with the acquisition of theatres. These notes are collateralized by certain property and equipment. [Download Table] DECEMBER 31, 1997 ------------ Cormorant Associates (monthly payments of $12,700 through October 2003 with the final payment of $611,000; interest rate of 9%)...................... $1,051,000 C. T. Ting (annual payments of $110,000 through January 2000, interest rate of 10%)................. 330,000 ---------- 1,381,000 Less current portion of long-term notes payable....... (170,000) ---------- $1,211,000 ========== A summary of the future annual maturities is as follows: [Download Table] 1998............................................. $ 170,000 1999............................................. 176,000 2000............................................. 182,000 2001............................................. 79,000 2002............................................. 86,000 Thereafter....................................... 688,000 ---------- $1,381,000 ========== F-23
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES The Company's taxable income for the year ended December 31, 1997, was included in a federal income tax return filed by a consolidated group of which Metromedia International Group, Inc. was the parent. Income tax expense (benefit) consisted of the following: [Download Table] YEAR ENDED DECEMBER 31, 1997 ------------ Current................................................. $ 646,000 Deferred................................................ (150,000) --------- Total income tax expense...................... $ 496,000 ========= [Download Table] YEAR ENDED DECEMBER 31, 1997 ------------ Statutory federal income tax rate....................... 34% State income tax, net of federal tax benefit............ 6 Nondeductible amortization -- goodwill.................. 142 Other nondeductible expenses............................ 6 --- 188% === Significant components of the Company's deferred tax assets and liabilities at December 31, 1997, are as follows: [Download Table] DECEMBER 31, 1997 ------------ Deferred tax assets: Accrued expenses...................................... $ 110,000 State taxes........................................... 350,000 Miscellaneous......................................... 40,000 ---------- Total gross deferred tax assets............... 500,000 Valuation allowance ---------- Net deferred tax assets....................... $ 500,000 ========== Deferred tax liabilities -- depreciation................ $5,760,000 ========== 5. LEASES The Company has long-term operating and capital leases, primarily involving theatre facilities and equipment. The leases have varying terms and a portion contains renewal options. Future minimum lease payments under noncancelable operating leases consisted of the following: [Download Table] 1998.................................................... $ 4,860,000 1999.................................................... 4,471,000 2000.................................................... 3,777,000 2001.................................................... 3,609,000 2002.................................................... 3,545,000 Thereafter.............................................. 28,857,000 ----------- $49,119,000 =========== F-24
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The terms of an operating lease obligate the Company to incur costs to bring one of its theatres into compliance with seismic requirements. The Company estimates that related costs will approximate $1,250,000. Certain theatres are leased under operating lease agreements which are subject to rent adjustments based on the consumer price index and expire at various dates through February 2015. Total rent expense (including contingent rentals of $536,000) was $5,786,000 for the year ended December 31, 1997. Future minimum lease payments under capital leases together with the present value of minimum lease payments consisted of the following: [Download Table] 1998.................................................... $ 799,000 1999.................................................... 798,000 2000.................................................... 834,000 2001.................................................... 538,000 2002.................................................... 538,000 Thereafter.............................................. 8,223,000 ----------- 11,730,000 Less amount representing interest....................... 6,740,000 ----------- Present value of future minimum lease payments.......... 4,990,000 Less current portion.................................... 288,000 ----------- $ 4,702,000 =========== The Company has entered into lease agreements that are contingent on the lessors' completing construction of two theatre facilities. Upon satisfaction of this contingency, the lease agreements will require future minimum lease payments estimated to be approximately $13,000,000 over 15 to 25 years. 6. COMMITMENTS AND CONTINGENCIES As of December 31, 1997, the Company has employment agreements with certain principal officers providing for total minimum future annual payments as follows: [Download Table] 1998..................................................... $1,061,000 1999..................................................... 1,088,000 2000..................................................... 1,013,000 2001..................................................... 246,000 ---------- $3,408,000 ========== The employment contracts also provide for additional payments of approximately $2.2 million upon the occurrence of defined events including a sale of the Company's assets (see Note 10). The Company is involved in various lawsuits, claims and inquiries incurred in the normal course of business. Management, based in part upon the advice of its legal counsel, believes that resolution of these matters will not have a material adverse effect on the financial position of the Company or on the results of its operations. 7. RELATED PARTIES On July 10, 1997, Metromedia and Metro-Goldwyn ("MGM"), through its holding company, P&K Acquisition Corp., sold certain entertainment assets of Metromedia (excluding the Landmark Theatre Group) to MGM. The sale was for an aggregate cash consideration of $573 million. Under the terms of the agreement, F-25
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Metromedia sold its film and television library and the production and distribution activities which include Orion Pictures Corporation ("Orion"). The Company licenses films from Orion for exhibition in its theatres. Terms for film licensing agreements between the parties are comparable to those the Company enters into with independent third-party distributors. Orion was paid $426,000 for film rental expense for the six months ended June 30, 1997. 8. 401(k) PLAN The Company has a 401(k) plan covering substantially all employees meeting certain eligibility requirements. Participants may make contributions to the plan from 1% to 15% of their gross salary and are fully vested. Employer contributions to the plan, which are made at the discretion of the Company, are made up to 50% of participant contributions to a maximum of 6% of compensation. The 401(k) contributions expense charged to operations for the year ended December 31, 1997, was $120,000. 9. ACQUISITIONS Effective January 6, 1997, the Company exercised its option to purchase a theatre which was previously classified as a capital lease. The acquisition price was $530,000 payable in three equal annual installments of $110,000 plus a $200,000 down payment. The Company acquired two theatres in June and August 1997 for total cash consideration of $2,375,000. These acquisitions have been accounted for under the purchase method of accounting. Under the purchase method of accounting, the results of operations of the acquired businesses are included in the accompanying consolidated financial statements as of their respective acquisition dates. The assets of the acquired theaters are included based on an allocation of the purchase price as follows: [Download Table] Theater equipment........................................ $ 260,000 Leasehold interests and improvements..................... 2,115,000 ---------- $2,375,000 ========== Pro forma financial information for 1997 has been omitted as the effect is immaterial. 10. SALE AGREEMENT On December 18, 1997, Metromedia entered into an agreement to sell the assets including the assumption of certain liabilities of the Company to Silver Cinemas, Inc. for approximately $62.0 million. F-26
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INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholder of The Landmark Theatre Group: We have audited the accompanying consolidated balance sheets of The Landmark Theatre Group (the Company) as of December 31 and March 31, 1996, and the related consolidated statements of operations, changes in shareholder's equity and cash flows for the six months ended December 31, 1996, three months ended June 30, 1996 and the year ended March 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Landmark Theatre Group as of December 31 and March 31, 1996, and the results of its operations and its cash flows for the six months ended December 31, 1996, three months ended June 30, 1996 and the year ended March 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, effective July 2, 1996, Metromedia International Group, Inc. acquired all of the outstanding stock of The Samuel Goldwyn Company including the Company in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than for the periods before the acquisition and, therefore, is not comparable. KPMG PEAT MARWICK LLP Los Angeles, California December 19, 1997 F-27
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THE LANDMARK THEATRE GROUP CONSOLIDATED BALANCE SHEETS ASSETS [Enlarge/Download Table] DECEMBER 31, MARCH 31, 1996 1996 ------------ ------------- (SUCCESSOR) (PREDECESSOR) Cash and cash equivalents................................... $ 1,192,000 $ 1,115,000 Accounts receivable......................................... 215,000 203,000 Inventories................................................. 129,000 161,000 Prepaid expenses............................................ 425,000 136,000 Deferred tax assets......................................... 500,000 518,000 ----------- ----------- Total current assets.............................. 2,461,000 2,133,000 Property and equipment, net................................. 35,632,000 31,995,000 Goodwill, net of accumulated amortization of $462,000 and $974,000 as of December 31, 1996 and March 31, 1996, respectively.............................................. 22,887,000 3,619,000 Other assets................................................ 496,000 488,000 ----------- ----------- Total assets...................................... $61,476,000 $38,235,000 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable and accrued expenses....................... $ 5,492,000 $ 4,178,000 Current portion of notes payable............................ 1,760,000 494,000 Current portion of capital lease obligations................ 256,000 240,000 Payable to parent company................................... 4,787,000 5,534,000 ----------- ----------- Total current liabilities......................... 12,295,000 10,446,000 Notes payable, less current portion......................... 1,050,000 2,685,000 Deferred tax liabilities.................................... 5,910,000 5,904,000 Capital lease obligations, less current portion............. 5,517,000 5,711,000 Other long-term liabilities................................. 44,000 -- ----------- ----------- Total liabilities................................. 24,816,000 24,746,000 ----------- ----------- Shareholder's equity: Common stock, no par value. Authorized, issued and outstanding 100 shares................................. -- -- Paid-in capital........................................... 36,165,000 11,567,000 Retained earnings......................................... 495,000 1,922,000 ----------- ----------- 36,660,000 13,489,000 ----------- ----------- Total liabilities and shareholder's equity........ $61,476,000 $38,235,000 =========== =========== See accompanying notes to consolidated financial statements. F-28
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THE LANDMARK THEATRE GROUP CONSOLIDATED STATEMENTS OF OPERATIONS [Enlarge/Download Table] SIX MONTHS THREE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, MARCH 31, 1996 1996 1996 ------------ ------------- ------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) Revenues: Admissions........................................ $23,960,000 $ 9,314,000 $41,452,000 Concessions....................................... 5,044,000 2,060,000 8,771,000 Other............................................. 577,000 202,000 920,000 ----------- ----------- ----------- Total revenues............................ 29,581,000 11,576,000 51,143,000 ----------- ----------- ----------- Cost of revenues: Film rentals and advertising...................... 11,995,000 5,078,000 21,543,000 Cost of concessions............................... 1,039,000 456,000 1,877,000 Payroll and related expenses...................... 4,610,000 2,128,000 8,349,000 Occupancy costs................................... 3,689,000 1,708,000 6,783,000 Other theatre operating expenses.................. 1,972,000 874,000 3,553,000 ----------- ----------- ----------- Total cost of revenues.................... 23,305,000 10,244,000 42,105,000 General and administrative.......................... 2,426,000 1,189,000 4,225,000 Depreciation and amortization....................... 2,237,000 906,000 3,569,000 ----------- ----------- ----------- Total expenses............................ 27,968,000 12,339,000 49,899,000 ----------- ----------- ----------- Income (loss) from operations....................... 1,613,000 (763,000) 1,244,000 Interest expense.................................... 458,000 237,000 716,000 ----------- ----------- ----------- Income (loss) before income taxes................... 1,155,000 (1,000,000) 528,000 Provision (benefit) for income taxes................ 660,000 (353,000) 321,000 ----------- ----------- ----------- Net income (loss)......................... $ 495,000 $ (647,000) $ 207,000 =========== =========== =========== See accompanying notes to consolidated financial statements. F-29
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THE LANDMARK THEATRE GROUP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY [Enlarge/Download Table] PAID-IN- RETAINED COMMON STOCK CAPITAL EARNINGS TOTAL ------------ --------------- ----------- ----------- Balance at March 31, 1995........... $ -- $11,567,000 $ 1,715,000 $13,282,000 Net income.......................... -- -- 207,000 207,000 ---- ----------- ----------- ----------- Balance at March 31, 1996........... -- 11,567,000 1,922,000 13,489,000 Net loss for the three months ended June 30, 1996..................... -- -- (647,000) (647,000) ---- ----------- ----------- ----------- Balance at June 30, 1996............ -- 11,567,000 1,275,000 12,842,000 =================================================================================================== Push-down accounting from the acquisition by Orion Pictures Corporation....................... -- 24,598,000 (1,275,000) 23,323,000 ---- ----------- ----------- ----------- Balance at July 1, 1996............. -- 36,165,000 -- 36,165,000 Net income for the six months ended December 31, 1996................. -- -- 495,000 495,000 ---- ----------- ----------- ----------- Balance at December 31, 1996........ $ -- $36,165,000 $ 495,000 $36,660,000 ==== =========== =========== =========== See accompanying notes to consolidated financial statements. F-30
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THE LANDMARK THEATRE GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS [Enlarge/Download Table] THREE SIX MONTHS MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, MARCH 31, 1996 1996 1996 ------------ ------------- ------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) Cash flows from operating activities: Net income (loss)...................................... $ 495,000 $ (647,000) $ 207,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................ 2,237,000 906,000 3,569,000 (Increase) decrease in receivables................... (109,000) 97,000 79,000 (Increase) decrease in inventories................... 56,000 (24,000) 36,000 (Increase) decrease in prepaid expenses.............. (136,000) (153,000) 169,000 (Increase) decrease in other assets.................. (8,000) -- 14,000 Increase (decrease) in accounts payable and accrued expenses.......................................... 1,107,000 207,000 (995,000) Increase (decrease) in deferred income taxes......... 658,000 (352,000) 318,000 Increase in other liabilities........................ 44,000 -- -- ----------- ---------- ----------- Net cash provided by operating activities.... 4,344,000 34,000 3,397,000 ----------- ---------- ----------- Cash flows from investing activities -- additions to property and equipment............................... (2,572,000) (153,000) (2,838,000) ----------- ---------- ----------- Cash flows from financing activities: (Repayments) borrowings from parent company.......... (1,029,000) -- 900,000 Repayment of notes payable and capital leases........ (370,000) (177,000) (849,000) Proceeds from note payable........................... -- -- -- ----------- ---------- ----------- Net cash (used in) provided by financing activities................................. (1,399,000) (177,000) 51,000 ----------- ---------- ----------- Net (decrease) increase in cash and cash equivalents................................ 373,000 (296,000) 610,000 Cash and cash equivalents, beginning of period......... 819,000 1,115,000 505,000 ----------- ---------- ----------- Cash and cash equivalents, end of period............... $ 1,192,000 $ 819,000 $ 1,115,000 =========== ========== =========== Supplemental disclosure of cash paid for: Interest............................................. $ 458,000 237,000 716,000 Income taxes......................................... 2,000 -- -- =========== ========== =========== Supplemental disclosure of noncash item -- acquisitions under capital lease.................................. $ -- $ -- $ 4,769,000 =========== ========== =========== See accompanying notes to consolidated financial statements F-31
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31 AND MARCH 31, 1996 (1) DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Landmark Theatre Group (the Company) was a subsidiary of Heritage Entertainment until December 1991, when both Companies were acquired by the Samuel Goldwyn Company (Goldwyn). The Company was then acquired by Orion Pictures Corporation (Orion), a wholly owned subsidiary of Metromedia International Group (Metromedia), in July 1996. The principal subsidiaries of the Company are Landmark Theatre Corporation and Seven Gables Corporation, which operate first-run art and specialty motion picture theaters in nine states, with a significant portion of revenues derived from California. At March 31, 1996 and December 31, 1996, the Company operated 140 screens in 52 theaters and 138 screens in 50 theaters, respectively. Basis of Presentation Effective July 2, 1996, Metromedia, a publicly traded company and parent corporation of Orion, acquired Goldwyn and the Company in an exchange of stock. The acquisition was accounted for using the purchase method of accounting. The Company has applied push-down accounting reflecting the acquisition and resulting equity in the accompanying consolidated financial statements subsequent to the acquisition date. As a result of the acquisition, the consolidated financial information for periods after the acquisition (Successor) is presented on a different cost basis than for the periods before the acquisition (Predecessor) and, therefore, is not comparable. The purchase price for the Company (excluding Goldwyn) of $36,165,000 has been allocated to the net assets of the Company based on their estimated fair market value at the acquisition date. The balance of the purchase price after allocation to identifiable net assets, $23,349,000, was allocated to goodwill. The consolidated financial statements are presented as if the acquisition occurred on July 1, 1996, rather than the actual purchase date of July 2, 1996. There are no material adjustments or modifications required as a result of this change in presentation. The following pro forma financial information presents the results of operations of the Company as if it had been acquired as of April 1, 1995, after giving effect to amortization of goodwill. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had Metromedia and the Company constituted a single entity during such periods. [Download Table] NINE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1996 1996 ------------ ---------- Revenues................................... $41,157,000 51,143,000 Net loss................................... (314,000) (441,000) Film Exhibition Revenues Theatre admission revenues and related film rental expense are recognized as films are exhibited. Film rental expense represents the distributors' shares of gross box office receipts. Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less. Inventory Inventory consists of concession products on hand at the theatres. Inventory is valued at the lower of cost (using the first-in, first-out method) or market. F-32
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property and Equipment Property and equipment are carried at cost. The depreciable lives of buildings and equipment are 25 years and 3 to 7 years, respectively. Leasehold improvements are amortized over the lesser of the terms of the respective leases or the estimated useful lives of the improvements. The Company uses the straight-line method to depreciate all depreciable assets. Maintenance and repairs are expensed as incurred. Long-Lived Assets Effective March 31, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows without interest costs expected to be generated by the asset. If the carrying value of the assets exceeds the expected future cash flows, an impairment exists and is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations or liquidity. Goodwill Goodwill has been recognized for the excess of the purchase price over the value of the identifiable net assets acquired. The goodwill as of March 31, 1996 resulted from the acquisition of the Company by Goldwyn in 1991. This balance was being amortized over 20 years using the straight-line method. The goodwill at December 31, 1996 resulting from the Orion acquisition is being amortized over 25 years using the straight-line method. Management continuously monitors and evaluates the realizability of recorded intangibles to determine whether their carrying values have been impaired. In evaluating the value and future benefits of the goodwill, their carrying value would be reduced by the excess, if any, of their carrying value over management's best estimate of undiscounted future cash flows over the remaining amortization period. The Company believes that the carrying value of goodwill is not impaired. Payable to Parent Company Intercompany activity relates to the financing of theatre acquisitions, advances and repayments occurring among the Company, Orion, Goldwyn and Metromedia in the normal course of business. Activity also relates to the tax sharing agreement between the Company and Goldwyn. Income Taxes The Company accounts for its income taxes in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 requires the asset and liability method of accounting for deferred income taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the F-33
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) PROPERTY AND EQUIPMENT Property and equipment consisted of the following: [Download Table] DECEMBER 31, MARCH 31, 1996 1996 ------------ ------------- (SUCCESSOR) (PREDECESSOR) Land............................................. $ 1,407,000 $ 1,407,000 Building and improvements........................ 6,054,000 6,576,000 Leasehold interest............................... 18,633,000 21,420,000 Leasehold improvements........................... 7,402,000 8,052,000 Theatre and office equipment..................... 3,513,000 5,523,000 Construction in progress......................... 125,000 84,000 ----------- ------------ 37,134,000 43,062,000 Less accumulated depreciation and amortization... (1,502,000) (11,067,000) ----------- ------------ $35,632,000 $ 31,995,000 =========== ============ Depreciation expense for the six months ended December 31, 1996, the three months ended June 30, 1996 and the year ended March 31, 1996 was $1,775,000, $849,000, and $3,339,000, respectively. The assets acquired through capitalized theatre leases at December 31 and March 31, 1996 amount to $5,182,000, and the assets acquired through capitalized equipment leases amount to $1,150,000 for these same periods. Accumulated amortization of assets under capitalized leases was $1,119,000 and $756,000 at December 31 and March 31, 1996, respectively. The related depreciation expense for the six months ended December 31, 1996, the three months ended June 30, 1996 and for the year ended March 31, 1996 was $242,000, $121,000, and $276,000, respectively. (3) NOTES PAYABLE Notes payable represents obligations incurred in connection with the acquisition of theatres. These notes are collateralized by certain property and equipment. [Enlarge/Download Table] DECEMBER 31, MARCH 31, 1996 1996 ------------ ------------- (SUCCESSOR) (PREDECESSOR) Cinerama Theatres, Inc. (monthly payments of $50,000 through April 1997 with the final payment of $1,561,000 on April 15, 1997; interest rate of prime plus 2%; interest rate at March 31, 1996 and December 31, 1996 of 10.75% and 10.25%, respectively)......................... $ 1,698,000 $1,998,000 Cormorant Associates (monthly payments of $12,700 through October 2003 with the final payment of $611,000; interest rate of 9%).............................................. 1,105,000 1,143,000 Other...................................................... 7,000 38,000 ----------- ---------- 2,810,000 3,179,000 Less current portion of long-term notes payable............ (1,760,000) (494,000) ----------- ---------- $ 1,050,000 $2,685,000 =========== ========== F-34
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the future annual maturities is as follows: [Download Table] 1997............................................. $1,760,000 1998............................................. 60,000 1999............................................. 66,000 2000............................................. 72,000 2001............................................. 78,000 Thereafter....................................... 774,000 ---------- $2,810,000 ========== (4) INCOME TAXES The Company's taxable income for the six months ended December 31, 1996 was included in a Federal income tax return filed by a consolidated group of which Metromedia International Group, Inc. was the parent. Prior to that period, the Company and Goldwyn filed consolidated Federal and certain state income tax returns and had a formal tax sharing agreement. The provisions for income tax in these statements have been provided on a separate-company basis. The current amount provided has been recorded as a payable to Goldwyn, although no repayment terms are specified. Income tax expense (benefit) consisted of the following: [Enlarge/Download Table] SIX MONTHS THREE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, MARCH 31, 1996 1996 1996 ------------ ------------- ------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) Current: Federal.................................... $ 713,000 $(211,000) $ 624,000 State...................................... 234,000 4,000 196,000 Deferred: Federal.................................... (206,000) (80,000) (377,000) State...................................... (81,000) (66,000) (122,000) --------- --------- --------- Total income tax expense (benefit)........................ $ 660,000 $(353,000) $ 321,000 ========= ========= ========= A reconciliation of the statutory Federal income tax rate to the Company's effective rate is presented below: [Enlarge/Download Table] SIX MONTHS THREE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, MARCH 31, 1996 1996 1996 ------------ ------------- ------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) Statutory Federal income tax rate............ 34% 34% 34% State income tax, net of Federal tax benefit.................................... 9 3 9 Nondeductible amortization -- goodwill....... 14 (2) 14 Other nondeductible expenses................. -- -- 4 -- -- -- 57% 35% 61% == == == F-35
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the Company's deferred tax assets and liabilities at December 31, 1996 and March 31, 1996 are as follows: [Download Table] DECEMBER 31, MARCH 31, 1996 1996 ------------ ------------- (SUCCESSOR) (PREDECESSOR) Deferred tax assets: Accrued expenses................................. $ 97,000 $ 99,000 State taxes...................................... 378,000 415,000 Miscellaneous.................................... 25,000 4,000 ---------- ---------- Total gross deferred tax assets.......... 500,000 518,000 Valuation allowance................................ -- -- ---------- ---------- Net deferred tax assets.................. $ 500,000 518,000 ========== ========== Deferred tax liabilities -- depreciation........... $5,910,000 $5,904,000 ========== ========== (5) LEASES The Company has long-term operating and capital leases, primarily involving theatre facilities and equipment. The leases have varying terms and a portion contains renewal options. Future minimum lease payments under noncancelable operating leases consisted of the following: [Download Table] 1997............................................ $ 4,860,000 1998............................................ 3,991,000 1999............................................ 3,385,000 2000............................................ 2,881,000 2001............................................ 2,772,000 Thereafter...................................... 20,011,000 ----------- $37,900,000 =========== The Company is contractually obligated to incur costs of approximately $750,000 to bring one of its theaters into compliance with seismic requirements. Certain theatres are leased under operating lease agreements which are subject to rent adjustments based on the consumer price index and expire at various dates through February 2015. Future minimum lease payments under capital leases together with the present value of minimum lease payments consisted of the following: [Download Table] 1997............................................ $ 868,000 1998............................................ 867,000 1999............................................ 1,382,000 2000............................................ 833,000 2001............................................ 538,000 Thereafter...................................... 8,761,000 ----------- 13,249,000 Less amount representing interest............... (7,476,000) ----------- Present value of future minimum lease payments...................................... 5,773,000 Less current portion............................ (256,000) ----------- $ 5,517,000 =========== F-36
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table represents rent expense for the periods: [Enlarge/Download Table] SIX MONTHS THREE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, MARCH 31, 1996 1996 1996 ------------ ------------- ------------- (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) Total rent expense (including contingent rentals)..................................... $2,663,000 $1,304,000 $5,512,000 Contingent rental expense.................... 265,000 74,000 441,000 (6) COMMITMENT AND CONTINGENCIES The Company is involved in various lawsuits, claims and inquiries incurred in the normal course of business. Management, based in part upon the advice of its legal counsel, believes that resolution of these matters will not have a material adverse effect on the financial position of the Company or on the results of its operations. (7) RELATED PARTIES From December 1991 to June 1996, the Company was a wholly owned subsidiary of Goldwyn, a publicly held motion picture and television production and distribution company. The Company became a wholly owned subsidiary of Metromedia as of July 1996. The Company licenses films from Orion and Goldwyn for exhibition in its theatres. Terms for film licensing agreements between the parties are comparable to those the Company enters into with independent third-party distributors. For the nine months ended December 31, 1996 and year ended March 31, 1996, the Company paid Goldwyn $576,000, and $986,000, respectively, for film rental expenses. Orion was paid $2,013,000 for film rental expense for the six months ended December 31, 1996. (8) 401(k) PLAN Effective January 1, 1995, Goldwyn established a 401(k) plan covering substantially all employees meeting certain eligibility requirements. Participants may make contributions to the plan from 1% to 15% of their gross salary and are fully vested. Employer contributions to the plan, which are made at the discretion of the Company, are made up to 3% of a participant's salary and are fully vested at the time of contribution. The 401(k) contributions expense charged to operations for the nine months ended December 31, 1996 and year ended March 31, 1996 was $64,000 and $63,000, respectively. Effective January 1, 1997, the Goldwyn 401(k) plan was merged into the Orion 401(k) plan. The Orion plan has similar provisions and eligibility requirements; however, effective March 1, 1997, discretionary employer contributions will be made up to 50% of participant contributions to a maximum of 6% of compensation. (9) SUBSEQUENT EVENT Effective January 6, 1997, the Company exercised its option to purchase a theatre which was previously classified as a capital lease. The acquisition price was $530,000 payable in three equal annual installments of $110,000 plus a $200,000 down payment. Interest is to be paid annually on the unpaid balance at an interest rate of 10%. On July 10, 1997, Metromedia and Metro-Goldwyn-Mayer (MGM), through its holding company, P&F Acquisition Corp., sold certain entertainment assets of Metromedia (excluding the Landmark Theatre Group) to MGM. The sale was for an aggregate cash consideration of $573 million. Under the terms of the agreement, F-37
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THE LANDMARK THEATRE GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Metromedia sold its film and television library and the production and distribution activities which include Orion, Goldwyn and Motion Picture Corporation of America (MPCA). The Company acquired two theaters in June and August 1997 for total cash consideration of $2.4 million. On December 18, 1997, Metromedia entered into an agreement to sell the assets and certain liabilities of the Company to Silver Cinemas Inc. for approximately $62 million. F-38
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THE LANDMARK THEATRE GROUP CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 ASSETS [Download Table] UNAUDITED ----------- CURRENT ASSETS: Cash and equivalents...................................... $ 577,000 Accounts receivable....................................... 152,000 Inventories............................................... 178,000 Prepaid expenses and other................................ 943,000 ----------- Total current assets................................. 1,850,000 THEATER PROPERTIES AND EQUIPMENT: Land...................................................... 1,407,000 Buildings................................................. 6,054,000 Leasehold interests and improvements...................... 27,243,000 Theater furniture and equipment........................... 4,910,000 Theaters under construction............................... 2,040,000 ----------- Total................................................ 41,654,000 Less accumulated depreciation and amortization............ (5,859,000) ----------- Theater properties and equipment net................... 35,795,000 GOODWILL -- NET............................................. 21,714,000 OTHER ASSETS -- NET......................................... 476,000 ----------- TOTAL................................................ $59,835,000 =========== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long term debt......................... $ 171,000 Accounts payable.......................................... 4,602,000 Accrued payrolls.......................................... 957,000 Accrued property taxes and other liabilities.............. 239,000 Payable to parent......................................... 132,000 Current portion of capital lease obligation............... 284,000 ----------- Total current liabilities............................ 6,385,000 LONG-TERM DEBT, less current portion........................ 1,085,000 CAPITAL LEASES, less current portion........................ 4,639,000 DEFERRED TAX LIABILITIES.................................... 6,152,000 ----------- Total Liabilities.................................... 18,261,000 ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDER'S EQUITY: Common stock, no par value, 100 shares authorized, issued and outstanding Paid-in capital........................................... 41,046,000 Retained earnings......................................... 528,000 ----------- Total shareholder's equity........................... 41,574,000 ----------- TOTAL................................................ $59,835,000 =========== See notes to interim condensed consolidated financial statements. F-39
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THE LANDMARK THEATRE GROUP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 [Enlarge/Download Table] 1998 1997 ----------- ----------- REVENUES: Admissions................................................ $12,643,000 $13,648,000 Concessions............................................... 2,813,000 3,085,000 Other..................................................... 204,000 290,000 ----------- ----------- Total............................................. 15,660,000 17,023,000 COST OF REVENUES: Film rentals.............................................. 5,924,000 6,462,000 Concession supplies....................................... 581,000 623,000 Salaries and wages........................................ 2,470,000 2,351,000 Facility leases........................................... 1,646,000 1,600,000 Advertising............................................... 278,000 742,000 Utilities and other....................................... 1,295,000 1,292,000 General and administrative.................................. 1,357,000 1,210,000 Depreciation and amortization............................... 1,290,000 1,177,000 ----------- ----------- Total............................................. 14,841,000 15,457,000 ----------- ----------- OPERATING INCOME (LOSS)..................................... 819,000 1,566,000 OTHER INCOME (EXPENSE): Interest expense............................................ (162,000) (215,000) ----------- ----------- LOSS BEFORE INCOME TAX EXPENSE.............................. 657,000 1,351,000 INCOME TAX EXPENSE.......................................... 392,000 700,000 ----------- ----------- NET INCOME (LOSS)........................................... $ 265,000 $ 651,000 =========== =========== See notes to interim condensed consolidated financial statements. F-40
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THE LANDMARK THEATRE GROUP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 [Enlarge/Download Table] UNAUDITED ---------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES: Net income................................................ $ 265,000 $ 651,000 Noncash items in net income: Depreciation and amortization.......................... 1,290,000 1,177,000 Deferred income taxes.................................. 392,000 160,000 Cash from (used for) working capital: Inventories............................................ (33,000) 2,000 Accounts receivable.................................... 203,000 (31,000) Prepaid expenses and other............................. (150,000) 315,000 Accounts payable and accrued liabilities............... 323,000 (134,000) ------------ ------------ Net cash from operating activities................ 2,290,000 2,140,000 INVESTING ACTIVITIES: Additions to theater properties and equipment............. (1,828,000) (193,000) Increase in other assets.................................. 5,000 ------------ ------------ Net cash used for investing activities............ (1,823,000) (193,000) FINANCING ACTIVITIES:....................................... Decrease in payable to parent............................. (1,668,000) (2,753,000) Payments of debt.......................................... (226,000) (386,000) ------------ ------------ Net cash (used for) financing activities.......... (1,894,000) (3,139,000) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,427,000) (1,192,000) CASH AND CASH EQUIVALENTS: Beginning of period....................................... 2,004,000 1,192,000 ------------ ------------ End of period............................................. $ 577,000 $ -- ============ ============ See notes to interim condensed consolidated financial statements. F-41
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THE LANDMARK THEATRE GROUP NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited Interim Condensed Consolidated Financial Statements of The Landmark Theatre Group and subsidiaries (the "Company") include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 1998, and the result of its operations for the three months ended March 31, 1998 and 1997. Due to seasonality of the Company's operations, the results of its operations for the interim periods ended March 31, 1998 and 1997, may not be indicative of the total results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission. The unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the unaudited Consolidated Financial Statements of The Landmark Theatre Group and subsidiaries and accompanying notes for the year ended December 31, 1997, the six months ended December 31, 1996, three months ended June 30, 1996 and the year ended March 31, 1996. 2. SUBSEQUENT EVENT On April 16, 1998, the Company completed the sale of the operating assets used in 47 of its theaters. F-42
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REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors StarTime Cinema, Inc. We have audited the accompanying consolidated balance sheets of StarTime Cinema, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of StarTime Cinema, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. As more fully discussed in Note 13 to the consolidated financial statements, the Company has entered into agreements to sell the majority of its operating assets during 1998. COOPERS & LYBRAND L.L.P. El Paso, Texas March 15, 1998 F-43
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS [Enlarge/Download Table] 1997 1996 ----------- ----------- Current assets: Cash and cash equivalents................................. $ 670,923 $ 3,530,625 Short-term investments.................................... 26,801 119,749 Inventories............................................... 223,940 217,607 Prepaid expenses.......................................... 241,157 236,520 Deferred income taxes..................................... 533,000 106,000 Receivable from vendor and other.......................... 166,885 224,297 Assets held for sale...................................... 4,416,211 -- ----------- ----------- Total current assets.............................. 6,278,917 4,434,798 Property, theater equipment and improvements at cost, net of accumulated depreciation and amortization of $10,899,418 and $9,911,038 for 1997 and 1996.......................... 12,093,959 16,044,116 Deferred income taxes....................................... 261,000 70,000 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $1,371,230 and $1,030,990 for 1997 and 1996......................................... 3,473,465 3,803,705 Other assets, net of accumulated amortization of $197,080 and $134,411 for 1997 and 1996............................ 243,587 316,256 ----------- ----------- Total assets...................................... $22,350,928 $24,668,875 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt...................... $ 4,786,600 $ 1,276,400 Subordinated notes payable................................ 1,312,100 -- Accounts payable.......................................... 392,249 346,584 Accrued film rentals...................................... 456,412 443,611 Other accrued liabilities................................. 966,076 1,094,226 Income taxes payable...................................... -- 19,684 ----------- ----------- Total current liabilities......................... 7,913,437 3,180,505 ----------- ----------- Long-term debt, less current maturities..................... 3,076,712 7,863,312 ----------- ----------- Subordinated notes payable.................................. -- 1,312,100 ----------- ----------- Deferred lease payments..................................... 3,038,211 2,917,695 ----------- ----------- Mandatorily redeemable preferred stock, Series B, $10 par, 2% cumulative convertible, 88,235 shares authorized, 88,235 shares issued and outstanding...................... 3,000,000 3,290,000 ----------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, Series A, $10 par, 6% cumulative convertible, 417,553 shares authorized, 380,263 shares issued and outstanding................................. 3,802,630 3,802,630 Common stock, $.01 par, 1,000,000 shares authorized, 87,500 shares issued and outstanding................... 875 875 Additional paid-in capital................................ 1,814,045 1,814,045 (Accumulated deficit) retained earnings................... (294,982) 487,713 ----------- ----------- Total stockholders' equity........................ 5,322,568 6,105,263 ----------- ----------- Total liabilities and stockholders' equity........ $22,350,928 $24,668,875 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-44
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 [Enlarge/Download Table] 1997 1996 1995 ----------- ----------- ----------- Revenues: Box office receipts................................... $16,553,625 $18,306,082 $17,630,259 Concessions........................................... 12,522,307 13,666,783 13,037,620 Other................................................. 755,891 619,534 588,688 ----------- ----------- ----------- Total revenues................................ 29,831,823 32,592,399 31,256,567 ----------- ----------- ----------- Costs and expenses: Film rentals.......................................... 5,709,965 6,354,443 6,063,669 Concession supplies................................... 2,027,354 2,166,037 2,117,659 ----------- ----------- ----------- 7,737,319 8,520,480 8,181,328 Facility leases....................................... 7,529,262 7,367,246 7,019,107 Salaries and wages.................................... 5,642,893 5,538,700 5,055,653 Advertising........................................... 1,280,336 1,420,507 1,170,618 Utilities............................................. 1,431,606 1,431,170 1,372,154 Other theater......................................... 3,817,035 4,109,741 3,915,349 Depreciation and amortization......................... 1,785,510 1,740,108 1,484,743 General and administrative............................ 1,392,773 1,654,262 1,668,501 ----------- ----------- ----------- Total costs and expenses...................... 30,616,734 31,782,214 29,867,453 ----------- ----------- ----------- Operating (loss) income....................... (784,911) 810,185 1,389,114 ----------- ----------- ----------- Other income (expense): Interest.............................................. (940,952) (810,093) (783,912) Other................................................. 95,168 90,201 140,467 ----------- ----------- ----------- Total other income (expense).................. (845,784) (719,892) (643,445) ----------- ----------- ----------- (Loss) income before income taxes............. (1,630,695) 90,293 745,669 Income tax benefit (expense)............................ 618,000 (42,000) (297,612) ----------- ----------- ----------- Net (loss) income............................. (1,012,695) 48,293 448,057 Dividends and accretion of preferred stock............ 2,202 (386,980) (453,103) ----------- ----------- ----------- Net loss applicable to common stock................... $(1,010,493) $ (338,687) $ (5,046) =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-45
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1997 [Enlarge/Download Table] RETAINED PREFERRED ADDITIONAL EARNINGS STOCK COMMON PAID-IN (ACCUMULATED SERIES A STOCK CAPITAL DEFICIT) TOTAL ---------- ------ ---------- ------------ ----------- Balances, December 31, 1994........... $3,716,330 $875 $1,684,595 $ 831,446 $ 6,233,246 Adjustment of mandatorily redeemable preferred stock, Series B........... -- -- -- (170,000) (170,000) Payment of cash dividends: Preferred stock, Series A; $0.60 per share............................ -- -- -- (222,980) (222,980) Preferred stock, Series B; $0.68 per share............................ -- -- -- (60,123) (60,123) Net income............................ -- -- -- 448,057 448,057 ---------- ---- ---------- ----------- ----------- Balances, December 31, 1995........... 3,716,330 875 1,684,595 826,400 6,228,200 Adjustment of mandatorily redeemable preferred stock, Series B........... -- -- -- (89,000) (89,000) Issuance of preferred stock, Series A................................... 86,300 -- 129,450 -- 215,750 Payment of cash dividends: Preferred stock, Series A; $0.60 per share............................ -- -- -- (222,980) (222,980) Preferred stock, Series B; $0.68 per share............................ -- -- -- (75,000) (75,000) Net income............................ -- -- -- 48,293 48,293 ---------- ---- ---------- ----------- ----------- Balances, December 31, 1996........... 3,802,630 875 1,814,045 487,713 6,105,263 Adjustment of mandatorily redeemable preferred stock, Series B........... -- -- -- 290,000 290,000 Payment of cash dividends, preferred stock, Series B; $0.68 per share.... -- -- -- (60,000) (60,000) Net loss.............................. -- -- -- (1,012,695) (1,012,695) ---------- ---- ---------- ----------- ----------- Balances, December 31, 1997........... $3,802,630 $875 $1,814,045 $ (294,982) $ 5,322,568 ========== ==== ========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-46
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 [Enlarge/Download Table] 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net (loss) income..................................... $(1,012,695) $ 48,293 $ 448,057 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization...................... 1,785,510 1,740,108 1,484,743 Deferred income taxes.............................. (618,000) (118,684) (149,588) Deferred lease expense............................. 120,516 156,998 296,310 Increase (decrease) from changes in: Inventories........................................ (6,333) 27,984 (34,942) Prepaid expenses................................... (4,637) (220,876) 8,324 Income tax refund receivable....................... -- -- 86,940 Receivable from vendor and other................... 57,412 (4,724) (202,525) Accounts payable................................... 45,665 (181,584) 105,210 Accrued liabilities and film rentals............... (115,349) 44,529 589,551 Income taxes payable............................... (19,684) 4,945 14,739 ----------- ----------- ----------- Net cash provided by operating activities..... 232,405 1,496,989 2,646,819 ----------- ----------- ----------- Cash flows from investing activities: Additions to property, theater equipment and improvements....................................... (1,848,655) (1,044,520) (453,376) Purchase of short-term investments.................... -- -- (3,326,977) Proceeds on sale of short-term investments............ 92,948 32,672 6,195,204 Purchase of theaters.................................. -- -- (7,400,000) ----------- ----------- ----------- Net cash used in investing activities......... (1,755,707) (1,011,848) (4,985,149) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from long-term debt.......................... -- 2,275,712 6,010,000 Payments on long-term debt............................ (1,276,400) (929,470) (2,521,428) Proceeds from issuance of preferred stock, Series A... -- 134,850 -- Debt and stock issuance costs......................... -- -- (4,417) Payment of dividends.................................. (60,000) (297,980) (283,103) ----------- ----------- ----------- Net cash (used in) provided by financing activities.................................. (1,336,400) 1,183,112 3,201,052 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents.... (2,859,702) 1,668,253 862,722 Cash and cash equivalents: Beginning of year..................................... 3,530,625 1,862,372 999,650 ----------- ----------- ----------- End of year........................................... $ 670,923 $ 3,530,625 $ 1,862,372 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest........................................... $ 945,628 $ 837,814 $ 738,912 =========== =========== =========== Income taxes....................................... $ 18,672 $ 361,146 $ 355,901 =========== =========== =========== Noncash investing and financing activities: Adjustment of mandatorily redeemable preferred stock, Series B to estimated redemption value............. $ (290,000) $ 89,000 $ 170,000 =========== =========== =========== Exchange of subordinated notes payable for preferred stock, Series A.................................... $ -- $ 80,900 $ -- =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-47
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations StarTime Cinema, Inc. ("StarTime") and its wholly-owned subsidiaries (F.S.A. Super Saver Cinema No. 1 Ltd. and StarTime Properties, Inc.), collectively the "Company", owns and operates 29 discount movie theaters located throughout the United States. The Company does not have a significant market concentration in a specific geographic region as no single market represents more than 8% of revenues. Presentation and Principles of Consolidation The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions are eliminated in consolidation. Certain amounts have been reclassified in 1996 and 1995 to conform to the current presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property, Theater Equipment and Improvements Property, theater equipment and improvements are stated at cost less accumulated depreciation and amortization. Costs assigned to property, theater equipment and improvements of acquired businesses are based on estimated fair value at the date of acquisition. Depreciation for property and theater equipment is provided using the straight-line method over the estimated useful lives of the assets. Theater leasehold improvements are amortized using the straight-line method over the lesser of the lease period or the estimated useful lives of the leasehold improvements. When assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. Interest incurred during construction is capitalized as theater equipment and leasehold improvements. Theater Leases The Company accounts for its theater leases in accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, "Accounting for Operating Leases with Scheduled Rent Increases". Accordingly, scheduled rent increases, which are included in minimum lease payments, are recognized on a straight-line basis over the lease term and amounts recognized as lease expense prior to the date that such amounts are actually payable are recorded as deferred lease payments. Inventories Inventories consist of concession products and certain supplies and are stated at the lower of cost (determined by the first-in, first-out method) or market. Excess of Cost Over Fair Value of Net Assets Acquired Excess of cost over fair value of net assets acquired consists of goodwill related to the 1991 purchase of partnership interests of one of StarTime's subsidiaries and the 1995 acquisition of certain theaters. The 1995 acquisition was accounted for using the purchase method. The purchase included, at fair value, property and theater equipment of $4,659,000. The remaining purchase price of $2,541,000 was allocated to goodwill. F-48
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over the estimated future periods to be benefited, generally seven to twenty years. The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. An impairment of goodwill is recognized when estimated undiscounted future cash flows generated by acquired businesses are determined to not be sufficient to recover goodwill. The amount of goodwill impairment, if any, is measured based on projected discounted cash flows using a discount rate commensurate with the risks involved. Other Assets Other assets include organization costs, issuance costs for debt and a non-compete agreement which are amortized using the straight-line method over five to ten years. The Company paid $200,000 for the non-compete agreement in connection with the 1995 acquisition of certain theaters discussed above. Cash and Cash Equivalents The Company considers cash on hand, cash in banks, certificates of deposit, time deposits and U.S. government and other short-term securities with maturities of three months or less when purchased as cash and cash equivalents. Investments in Debt and Equity Securities Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. Short-term investments at December 31, 1997 and 1996 consisted primarily of mortgage-backed securities which are classified as available for sale. Market values are determined based on quoted market prices. The cost of short-term investments held at December 31, 1997 and 1996 approximates their respective market values. Accordingly, no valuation or offsetting adjustment to stockholders' equity for unrealized holding gains and losses has been made at December 31, 1997 and 1996. Contractual maturities range from seven to twenty-one years. Financial Instruments and Risk Concentration Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and short-term investments. Cash equivalents consist primarily of highly liquid temporary investments and other interest bearing and demand accounts maintained at banks and other financial institutions located in El Paso, Texas as well as the cities where the Company's theaters are located. Financial instruments of the Company for which fair value approximates carrying value include cash and cash equivalents, short-term investments, accounts receivable and accounts payable. The carrying value of the Company's notes payable approximate fair value as they are subject to interest rates which increase and decrease with changes in market rates. It is not practicable to estimate the fair value of the subordinated debt because it is not traded. The fair value of the mandatorily redeemable preferred stock, Series B approximates its carrying value. Fair value is based on the estimated redemption value at each balance sheet date (see Note 7). Income Taxes The Company is a "C" Corporation and files a consolidated Federal income tax return which includes 100% of the income of its subsidiaries. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the F-49
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company's income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Advertising The Company expenses the cost of advertising as it is incurred or the first time the advertising takes place. Advertising expense was approximately $1,280,000, $1,421,000 and $1,171,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 2. PROPERTY, THEATER EQUIPMENT AND IMPROVEMENTS Property, theater equipment and improvements at December 31, 1997 and 1996, consisted of the following: [Enlarge/Download Table] DEPRECIABLE LIVES (YEARS) 1997 1996 ----------- ----------- ----------- Theater leasehold improvements, furniture and equipment....................................... 5 -- 20 $21,884,370 $20,981,024 Buildings......................................... 40 -- 3,600,000 Office equipment.................................. 5 161,635 156,928 ------ ----------- ----------- 22,046,005 24,737,952 Less accumulated depreciation..................... (10,899,418) (9,911,038) ------ ----------- ----------- 11,146,587 14,826,914 Land.............................................. -- -- 700,000 Construction in progress.......................... -- 947,372 517,202 ------ ----------- ----------- $12,093,959 $16,044,116 ====== =========== =========== Fully depreciated assets with an original cost basis of approximately $2,464,000 are still in use and are included in property, theater equipment and improvements at December 31, 1997. Construction in progress at December 31, 1997 included costs related to construction costs of an entertainment plaza, which consists of multiple screens, restaurants and other entertainment related facilities. The Company has planned capital expenditures related to this project of approximately $3.0 million. It is anticipated that the project will be completed during 1998. 3. ASSETS HELD FOR SALE Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards Board No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. The Company assesses impairment of its theaters primarily on a geographic and advertising market approach. The statement also requires recognition of an impairment loss for assets to be disposed of, whether by sale or abandonment, when the carrying amount exceeds the asset's fair value less selling costs. Measurement of the impairment loss is based on fair value of the asset which is generally determined based on the present value of expected future cash flows. No charges to current year operations resulted from adoption of FAS 121. Assets held for sale represents buildings, land and theater equipment of two theaters owned by the Company. The assets are reported at historical cost net of accumulated depreciation recognized through F-50
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1997. Combined theater level operating income for these two facilities amounted to approximately $200,000 in 1997. These assets were sold subsequent to December 31, 1997 (see Note 13). 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following at December 31, 1997 and 1996: [Download Table] 1997 1996 -------- ---------- Accrued taxes and commissions.......................... $256,459 $ 304,606 Accrued interest....................................... 40,520 45,196 Group health........................................... 26,449 52,914 Salary taxes payable................................... 65,275 55,519 Accrued wages.......................................... 309,601 264,848 Accrued sales taxes.................................... 77,224 108,070 Deferred gift book income.............................. 60,129 202,778 Other.................................................. 130,419 60,295 -------- ---------- $966,076 $1,094,226 ======== ========== 5. SUBORDINATED NOTES PAYABLE Subordinated notes payable of $1,312,000 were outstanding as of December 31, 1997 and 1996. The notes are subordinated in payment to the bank debt and bear interest at 10% payable semiannually, with principal due in November 1998. Prior to expiration of associated warrants on November 1, 1996, each $1,000 of subordinated notes payable entitled the holder to purchase eight shares of the Company's Series A Preferred Stock at a price of $25.00 per share. During 1996, certain holders of subordinated notes payable exercised their warrants and purchased 8,630 shares of the Company's Series A Preferred Stock. 6. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996, consisted of the following: [Download Table] 1997 1996 ---------- ---------- Note payable to bank due in monthly installments of $56,000 plus interest at THE WALL STREET JOURNAL interest rate (8.25% at December 31, 1997) plus 1% through January 1, 2001. Collateralized by substantially all assets of the Company and limited personal guarantee of the sole common stockholder............................................... $2,467,712 $3,139,712 Note payable to bank due in monthly installments of $72,050 plus interest at THE WALL STREET JOURNAL interest rate plus 1% through April 2004. Collateralized by substantially all assets of the Company and limited personal guarantee of the sole common stockholder......... 5,395,600 6,000,000 ---------- ---------- 7,863,312 9,139,712 Less current maturities of long-term debt................... 4,786,600 1,276,400 ---------- ---------- $3,076,712 $7,863,312 ========== ========== The loan agreement with the bank contains, among other provisions, requirements for maintaining defined levels of debt service coverage and net worth. Under the terms of the loan agreement with the bank, the Company must obtain authorization before issuing dividends. At December 31, 1997, $3,250,000 of long- F-51
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) term debt has been classified as current due to repayment from the proceeds from sale of assets classified as assets held for sale at December 31, 1997 (see Note 13). The scheduled maturities of long-term debt at December 31, 1997 after adjustment for repayments made in January 1998, are as follows: [Download Table] YEAR ENDING DECEMBER 31, ------------ 1998............................................. $4,786,600 1999............................................. 1,536,600 2000............................................. 1,540,112 ---------- $7,863,312 ========== 7. REDEEMABLE PREFERRED STOCK On August 15, 1994, StarTime issued 88,235 shares of Mandatorily Redeemable Series B Preferred Stock, 2% cumulative convertible, $10 par value ("Series B Preferred Stock") for $3 million. In preference to shares of Series A Preferred Stock, 6% cumulative convertible, $10 par value ("Series A Preferred Stock") and common stock, each share is entitled to 2% cumulative cash dividends per year. Each share of Series B Preferred Stock is convertible into one share of StarTime's common stock at the option of the shareholder and shall automatically be converted into shares of common stock upon the effectiveness of a Qualified Public Offering, as defined in the stock purchase agreement. The Series B Preferred Stock has a liquidation preference of $34 per share over StarTime's Series A Preferred Stock and Common Stock. The holder of the Series B Preferred Stock is entitled to one vote per share held. The Series B Preferred Stock is redeemable at the option of the stockholder in whole or in part at the earlier of 1) the fifth anniversary of the date of issuance; 2) the effective date of any public offering of Common Stock which is not a Qualified Public Offering; 3) the date preceding the closing date of the consolidation or merger of the Company into any other business entity; or 4) the date upon which any shareholder gives the Company written notice that it is in violation of the related stock purchase agreement. However, in connection with the transactions discussed in Note 13, the holder of all outstanding shares of Series B Preferred Stock has agreed to a settlement price of $3 million plus accrued but unpaid dividends. The Series B Preferred Stock was initially recorded at its fair value at the issuance date ($34 per share). The carrying amount is periodically increased or decreased for amounts which are estimated to be payable upon redemption as defined in the stock purchase agreement. The adjustment to the carrying amount is based upon the estimated redemption value at each balance sheet date. These adjustments resulted in a direct increase to retained earnings of $290,000 in 1997 and decreases of $89,000 and $170,000 in 1996 and 1995, respectively. The stock purchase agreement entered into by the Company in conjunction with the issuance of the Series B Preferred Stock contains various covenants, one of which limits the Company's ability to issue dividends to that which is regularly scheduled on the Series A and B Preferred Stock. If in non-compliance, the stockholders have the right to sell the stock back to the Company as discussed above. 8. CAPITAL STOCK The authorized capital stock of StarTime consists of common stock and two classes of preferred stock. The holder of all classes of stock is entitled to one vote per share. StarTime has 380,263 outstanding shares of Series A Preferred Stock. The Series A Preferred Stock has a liquidation preference of $10 per share over StarTime's common stock. Each share of Series A Preferred Stock is convertible into one share of StarTime's common stock upon the effectiveness of a Qualified Public F-52
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Offering. As of December 31, 1997, cumulative unpaid dividends totaled approximately $228,000 and have not been accrued by the Company. 9. STOCK OPTIONS In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of its stock option plans. All outstanding stock options were issued prior to January 1, 1995, therefore the cost recognition provisions of SFAS 123 are not applicable. At December 31, 1997 and 1996, there were non-qualified stock option plans that provide for the purchase of up to 8,500 and 3,500 shares of StarTime's common and Series A Preferred Stock, respectively. The exercise prices for the common stock options range from $25.00 to $37.00 per share. The exercise price for the Series A Preferred Stock is $22.86 per share. All options were immediately exercisable from the date of grant during 1994 and expire five years after the date of grant. At December 31, 1997 and 1996, there were also 3,062 common stock options outstanding at $1.00 which expire in 2002. No options had been exercised as of December 31, 1997. Subsequent to December 31, 1997, common stock options for 3,062 shares were exercised for $1.00. 10. COMMITMENTS AND CONTINGENCIES Commitments The Company conducts its theater operations primarily in leased premises under noncancelable operating leases with initial terms of 15 to 20 years with renewal options. A majority of the Company's operating leases contain purchase options at the termination of the lease term. Most of these leases provide for additional rental payments based on a percentage of box office and concession revenues and require the payment of real estate taxes, insurance, and other costs applicable to the property. No contingent rental payments were made in 1997, 1996 or 1995. Deferred lease payments of approximately $3,038,000 and $2,918,000 have been accrued as of December 31, 1997 and 1996, respectively, to recognize lease expense on a straight-line basis for those leases with deferred or escalating payments. Future minimum lease payments and the effect of recognizing lease expense on leases with escalating or deferred payments on a straight-line basis are as follows: [Download Table] FUTURE CHANGE IN FUTURE MINIMUM DEFERRED MINIMUM LEASE LEASE LEASE YEAR ENDING DECEMBER 31, EXPENSE PAYMENTS PAYMENTS ------------------------ ----------- ---------- ----------- 1998.................................... $ 6,100,433 $ (19,106) $ 6,081,327 1999.................................... 6,215,433 50,282 6,265,715 2000.................................... 6,215,433 113,838 6,329,271 2001.................................... 6,215,433 194,989 6,410,422 2002.................................... 5,862,152 170,232 6,032,384 Thereafter.............................. 39,654,891 2,527,976 42,182,867 ----------- ---------- ----------- $70,263,775 $3,038,211 $73,301,986 =========== ========== =========== F-53
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Rent expense on the theater leases for the three years ended December 31, 1997 was approximately $5,868,000, $5,877,000 and $5,980,000, respectively. Contingencies The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the resolution of the matters will not materially affect the consolidated financial position, results of operations or cash flows of the Company. 11. RELATED PARTY TRANSACTIONS The Company engages in various transactions with related parties, including the common stockholder, preferred stockholders, officers and affiliates. Costs and expenses in 1997, 1996 and 1995 include the following: [Download Table] 1997 1996 1995 ------- -------- -------- Legal fees.................................. $17,490 $ 69,135 $ 71,375 Consulting fees............................. $24,378 $143,137 $147,933 12. INCOME TAXES The components of deferred tax assets and liabilities at December 31, 1997 and 1996 consisted of the following: [Download Table] 1997 1996 ---------- ---------- Deferred tax assets: Deferred lease payments........................... $1,172,000 $1,126,000 Income tax operating loss carryforward............ 493,000 -- Deferred income................................... 23,000 78,000 Group medical expense............................. 17,000 20,000 Other............................................. 1,000 8,000 ---------- ---------- Total deferred tax assets................. 1,706,000 1,232,000 ---------- ---------- Deferred tax liabilities: Theater equipment and improvements................ (627,000) (743,000) Intangible assets................................. (285,000) (313,000) ---------- ---------- Total deferred tax liabilities............ (912,000) (1,056,000) ---------- ---------- Net deferred tax assets................... $ 794,000 $ 176,000 ========== ========== The components of income tax benefit (expense) in the consolidated statements of operations are as follows: [Download Table] 1997 1996 1995 -------- --------- --------- Federal: Current................................ $ -- $(141,000) $(366,562) Deferred............................... 545,000 105,000 132,136 State: Current................................ -- (20,000) (80,638) Deferred............................... 73,000 14,000 17,452 -------- --------- --------- $618,000 $ (42,000) $(297,612) ======== ========= ========= F-54
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The consolidated effective tax rate differs from the statutory U.S. federal tax rate for the following reasons and by the following percentages: [Download Table] 1997 1996 1995 ----- ------- ------- Statutory U.S. federal (tax) benefit rate...... 34.0% (34.0)% (34.0)% Increases: State and local income taxes................. 2.9% (4.4)% (2.4)% Permanent differences........................ 1.0% (8.3)% (1.1)% Other........................................ -- -- (2.4)% ----- ------- ------- 37.9% (46.7)% (39.9)% ===== ======= ======= At December 31, 1997, the Company had an income tax net operating loss carryforward generated by current year income tax losses of approximately $1,279,000. This carryforward will expire in 2012. 13. SUBSEQUENT EVENTS During January 1998, the Company entered into a Property Purchase Agreement (the "Property Agreement") whereby it sold two theaters to include all real and personal property and assignment of all continuing contracts related to ongoing operation of the theaters. The cash selling price was $4,500,000, subject to sales price adjustments as specified by the Property Agreement. Proceeds of $3,250,000 from the sale were used to repay existing debt to the bank. During March 1998, by a majority vote of the stockholders, the Company entered into an Asset Purchase Agreement (the "Asset Agreement") whereby it has agreed to sell the operating assets used in 26 of its theaters and assignment of related leasing agreements and other continuing contracts related to the continuing operation of these theaters. The cash selling price is $16,306,000, subject to adjustment as specified by the Asset Agreement. It is management's intention to use a portion of the proceeds from the sale of these assets to repay approximately $3,600,000 of the remaining balance of debt to the bank. For a period of one year after the closing of the transactions contemplated by the Asset Agreement, the Company may exercise its rights under a put option (the "Put Option") to sell and assign property and leases related to one theater and a management contract for a third party theater that the Company manages. The selling price is $170,000 plus the product of 6.5 times the Theater Level Cash Flow of the Company owned theater for the twelve month period ending as of the last day of the month immediately preceding the date the Put Option is exercised, subject to adjustment as specified in the Put Option. If the sales of operating assets included in the Property and Asset Agreements, other than assets subject to the Put Option, had been consummated as of December 31, 1997 at a combined sales price of $20,806,000, net property, theater equipment and improvements, assets held for sale and net intangible assets included in the accompanying 1997 consolidated balance sheet would have been reduced by approximately $18,500,000, deferred lease payments would have been reduced by approximately $3,000,000, and a pre-tax gain of approximately $5,300,000 would have been recorded for financial reporting purposes. It is anticipated that certain of the proceeds from the Asset Agreement will be used to repay bank debt and subordinated notes payable. In connection with the Asset Agreement, the holder of the 88,235 shares of Series B Preferred Stock has agreed to accept $3 million in exchange for all outstanding shares. This represents the original face value of $3 million. F-55
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). Adoption is required for interim and annual periods beginning after December 15, 1997. SFAS No. 130 requires that comprehensive income and its components, as defined in the Statement, be reported in a company's financial statements. Management does not believe that the adoption of this statement will have a significant impact on the Company. F-56
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 ASSETS [Download Table] UNAUDITED ----------- CURRENT ASSETS: Cash and equivalents...................................... $ 318,907 Accounts receivable....................................... 220,755 Inventories............................................... 186,698 Prepaid expenses and other................................ 107,786 Deferred income taxes..................................... 1,480,230 ----------- Total current assets.............................. 2,314,376 THEATER PROPERTIES AND EQUIPMENT: Theater furniture and equipment........................... 21,832,791 Theaters under construction............................... 2,149,479 ----------- Total............................................. 23,982,270 Less accumulated depreciation and amortization............ (11,192,910) ----------- Theater properties and equipment, net.................. 12,789,360 GOODWILL-NET................................................ 2,203,418 OTHER ASSETS-NET............................................ 82,920 ----------- TOTAL............................................. $17,390,074 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt......................... $ 1,536,000 Subordinated notes payable................................ 1,312,100 Accounts payable.......................................... 1,100,440 Accrued property taxes and other liabilities.............. 500,466 ----------- Total current liabilities......................... 4,449,006 LONG-TERM DEBT, less current portion........................ 2,682,662 DEFERRED LEASE PAYMENTS..................................... 3,042,990 MANDATORILY REDEEMABLE PREFERRED STOCK, Series B, $10 par, 2% cumulative convertible, 88,235 shares authorized, issued and outstanding.................................... 3,000,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, Series A, $10 par, 6% cumulative convertible, 417,553 shares authorized, 380,263 issued and outstanding........................................ 3,802,630 Common stock, $.01 par value, 1,000,000 shares authorized, 87,500 shares issued and outstanding................... 875 Additional paid-in capital................................ 1,814,045 Accumulated deficit....................................... (1,402,134) ----------- Total stockholders' equity........................ 4,215,416 ----------- TOTAL............................................. $17,390,074 =========== See notes to interim condensed consolidated financial statements. F-57
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 [Enlarge/Download Table] 1998 1997 ----------- ---------- UNAUDITED REVENUES: Admission................................................. $ 3,581,782 $4,041,344 Concessions............................................... 2,798,812 3,012,011 Other..................................................... 128,044 165,257 ----------- ---------- Total............................................. 6,508,638 7,218,612 COST OF REVENUES: Film rentals.............................................. 1,202,809 1,353,801 Concession supplies....................................... 416,148 473,442 Salaries and wages........................................ 1,253,344 1,311,588 Facility leases........................................... 1,938,531 1,837,009 Advertising............................................... 279,750 364,772 Utilities and other....................................... 1,105,051 1,376,867 General and administrative.................................. 314,900 365,223 Depreciation and amortization............................... 387,354 440,526 ----------- ---------- Total............................................. 6,897,887 7,523,228 ----------- ---------- OPERATING INCOME (LOSS)..................................... (389,249) (304,616) OTHER INCOME (EXPENSE): Interest expense............................................ (162,889) (244,353) Interest income and other (expense), net (Note 2)........... (1,241,244) 33,714 ----------- ---------- LOSS BEFORE INCOME TAX EXPENSE.............................. (1,793,382) (515,255) INCOME TAX EXPENSE (BENEFIT)................................ (686,230) (195,797) ----------- ---------- NET INCOME (LOSS)........................................... (1,107,152) (319,458) ----------- ---------- Dividends and accretion of preferred stock................ (72,000) (73,000) ----------- ---------- Net loss applicable to common stock....................... $(1,179,152) $ (392,458) =========== ========== See notes to interim condensed consolidated financial statements. F-58
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STARTIME CINEMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 [Enlarge/Download Table] UNAUDITED ---------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES: Net income (loss)......................................... $ (1,107,152) $ (319,458) Noncash items in net income (loss): Depreciation and amortization.......................... 387,354 440,526 Deferred income taxes.................................. (686,230) (195,797) Loss on sale of theater assets......................... 1,253,000 Deferred lease expense................................. 4,779 30,129 Cash from (used for) working capital: Accounts receivable.................................... (53,870) 110,590 Inventories............................................ 37,242 (22,536) Prepaid expenses and other............................. 133,371 157,934 Accounts payable and accrued liabilities............... (213,831) (168,493) ------------ ------------ Net cash from (used for) operating activities..... (245,337) 32,895 INVESTING ACTIVITIES: Proceeds from disposal of theater assets.................. 4,500,000 Additions to theater properties and equipment............. (988,893) (990,833) Increase (decrease) in other assets....................... 26,864 490,494 ------------ ------------ Net cash from (used for) investing activities..... 3,537,971 (500,339) FINANCING ACTIVITIES:....................................... Payments of debt.......................................... (3,644,650) (168,000) ------------ ------------ Net cash (used for) financing activities.......... (3,644,650) (168,000) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (352,016) (635,444) CASH AND CASH EQUIVALENTS: Beginning of period....................................... 670,923 3,530,625 ------------ ------------ End of period............................................. $ 318,907 $ 2,895,181 ============ ============ See notes to interim condensed consolidated financial statements. F-59
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STARTIME CINEMA, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the unaudited Interim Condensed Consolidated Financial Statements of StarTime Cinema, Inc. and subsidiaries (the "Company") include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 1998, and the results of its operations for the three months ended March 31, 1998 and 1997. Due to seasonality of the Company's operations, the results of its operations for the interim period ended March 31, 1998 and 1997, may not be indicative of the total results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission. The unaudited Interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of StarTime Cinema, Inc. and subsidiaries and accompanying notes for the years ended December 31, 1997, 1996 and 1995. 2. SUBSEQUENT EVENT On April 2, 1998, the Company completed the sale of the operating assets used in 25 of its theaters. F-60
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------------------------------------------------------ ------------------------------------------------------ NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS EXCHANGE OFFER NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS CONFIDENTIAL PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS [Download Table] PAGE ---- Summary............................... 4 Risk Factors.......................... 16 Use of Proceeds....................... 30 Capitalization........................ 31 Unaudited Pro Forma Financial Data.... 32 Selected Consolidated Financial and Operating Data...................... 39 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 42 Business.............................. 51 Management............................ 63 Principal Stockholders................ 66 Certain Relationships and Related Transactions........................ 67 Description of Revolving Credit Facility............................ 68 Description of Exchange Notes......... 70 Plan of Distribution.................. 96 Legal Matters......................... 97 Experts............................... 97 Available Information................. 97 Index to Financial Statements......... F-1 ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ $100,000,000 [LOGO] SILVER CINEMAS INTERNATIONAL, INC. 10 1/2% SENIOR SUBORDINATED NOTES DUE 2005 ------------------------ PROSPECTUS ------------------------ , 1998 ------------------------------------------------------ ------------------------------------------------------
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PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company is a Delaware corporation and its Bylaws and Certificate of Incorporation provide for indemnification of its directors, officers, employees and agents to the fullest extent permitted by the Delaware General Corporation Law (the "DGCL"), as the same exists or may hereafter be amended. Section 145 of the DGCL provides in relevant part that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In addition, Section 145 of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Delaware law further provides that nothing in the above-described provisions shall be deemed exclusive of any other rights to indemnification or advancement of expenses to which any person may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 102(b)(7) of the DGCL eliminates the liability of a corporation's directors to a corporation or its stockholders, except for liabilities related to a breach of duty of loyalty, actions not in good faith, and certain other liabilities. II-1
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits Unless otherwise indicated, all exhibits have been previously filed. [Download Table] EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Purchase Agreement, dated April 9, 1998, between Silver Cinemas International, Inc., the Guarantors (as defined therein), Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and Bear, Stearns & Co. Inc. relating to the 10 1/2% Senior Subordinated Notes of Silver Cinemas International, Inc. due 2005. 2.1 Asset Purchase Agreement, dated as of December 17, 1997, between Silver Cinemas, Inc. Landmark Theatre Corporation, Seven Gables Corporation, Parallax Theatre Systems, Inc., San Francisco Landmark Theatre Corporation, and Wisconsin Repertory Cinemas, Inc., The Landmark Theater Group, and Metromedia International Group, Inc. 2.2 Asset Purchase Agreement, dated as of January 22, 1998, between Silver Cinemas, Inc., SCI Acquisition Corp., StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1, Ltd., StarTime Properties, Inc., the Trust formed by that certain Irrevocable Declaration of Trust under deed dated May 14, 1994 for the benefit of StarTime Cinema, Inc., Lloyd Curley, and NationsBanc Capital Corporation. 2.3 Property Purchase Agreement, dated as of January 22, 1998, between Silver Cinemas, Inc., StarTime Properties, Inc., StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1, Ltd., the trust formed by that certain Irrevocable Declaration of Trust under deed dated May 14, 1994 for the benefit of StarTime Cinema, Inc., and Lloyd Curley. 3.1 Certificate of Incorporation, as amended, of Silver Cinemas International, Inc. 3.2 By-Laws of Silver Cinemas International, Inc. 3.3 Certificate of Incorporation of Silver Cinemas, Inc. 3.4 By-Laws of Silver Cinemas, Inc. 3.5 Certificate of Incorporation of SCI Acquisition Corp. 3.6 By-Laws of SCI Acquisition Corp. 3.7 Certificate of Incorporation of Landmark Theatre Corp. 3.8 By-Laws of Landmark Theatre Corp. 4.1 Indenture, dated as of April 15, 1998, between Silver Cinemas International, Inc., the Guarantors (as defined therein) and Norwest Bank Minnesota, National Association, as trustee, relating to $100,000,000 aggregate principal amount of 10 1/2% Senior Subordinated Notes due 2005. 4.2 A/B Exchange Registration Rights Agreement, dated as of April 16, 1998, between Silver Cinemas International, Inc., the Guarantors (as defined therein), Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and Bear, Stearns & Co. Inc. 4.3 Specimen Certificate of 10 1/2% Senior Subordinated Notes due 2005 (the "Private Notes") (included in Exhibit 4.1 hereto). 4.4 Specimen Certificate of 10 1/2% Senior Subordinated Notes due 2005 (the "Exchange Notes") (included in Exhibit 4.1 hereto). *5.1 Opinion of Latham & Watkins regarding the validity of the Exchange Notes. 10.1 Stockholders' Agreement, dated as of August 1, 1996, between Silver Cinemas International, Inc. and the stockholders set forth therein. II-2
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[Download Table] EXHIBIT NO. DESCRIPTION ------- ----------- 10.2 Employment Agreement dated April 16, 1998 between Landmark Theatre Corp. and Bert Manzari. 10.3 Employment Agreement dated April 16, 1998 between Landmark Theatre Corp. and Paul Richardson. 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries of Silver Cinemas International, Inc. *23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1). *23.2 Consent of Deloitte & Touche LLP. *23.3 Consent of KPMG Peat Marwick LLP. *23.4 Consent of Coopers & Lybrand, L.L.P. 24.1 Power of Attorney of Silver Cinemas International, Inc. (included on signature page to this Registration Statement on Form S-4). 25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of Norwest Bank Minnesota, National Association (bound separately). 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal and related documents to be used in conjunction with the Exchange Offer. 99.2 Forms of Notices of Guaranteed Delivery. --------------- * Filed herewith (b) Financial Statement Schedules: None SCHEDULES OMITTED Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules is set forth in the financial statements or the notes thereto. ITEM 22. UNDERTAKINGS. (a) The undersigned registrants hereby undertake that insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim of indemnification against such liabilities (other than the payment by the registrant of expenses incurred or the registrant in the successful defense of any action, suit paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into this Prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. II-3
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(c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (d)(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement; (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4
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SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on July 24, 1998. SILVER CINEMAS INTERNATIONAL, INC. SILVER CINEMAS, INC., SCI ACQUISITIONS CORP., AND LANDMARK THEATRE CORP. By /s/ STEVEN L. HOLMES ------------------------------------ Steven L. Holmes Chief Executive Officer and Chief Financial Officer of Silver Cinemas International, Inc., Silver Cinemas, Inc., SCI Acquisitions Corp., and Landmark Theatre Corp. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacity and on the dates indicated. [Enlarge/Download Table] NAME TITLE DATE ---- ----- ---- /s/ STEVEN L. HOLMES Chief Executive Officer, Chief July 24, 1998 ----------------------------------------------------- Financial Officer and Director Steven L. Holmes * Chairman of the Board of July 24, 1998 ----------------------------------------------------- Directors John M. Sullivan * President of Silver Cinemas July 24, 1998 ----------------------------------------------------- International, Inc., Silver Thomas J. Owens Cinemas, Inc., and SCI Acquisition Corp., and Director * President of Landmark Theatre July 24, 1998 ----------------------------------------------------- Corp. and Director E.L. Manzari * Director July 24, 1998 ----------------------------------------------------- David H. Wong * Director July 24, 1998 ----------------------------------------------------- Christopher A. Laurence * Director July 24, 1998 ----------------------------------------------------- James Rosenthal * Director July 24, 1998 ----------------------------------------------------- Thomas E. Davin * Signed under Power of Attorney Dated June 15, 1998. II-5
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EXHIBIT INDEX [Download Table] EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Purchase Agreement, dated April 9, 1998, between Silver Cinemas International, Inc., the Guarantors (as defined therein), Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and Bear, Stearns & Co. Inc. relating to the 10 1/2% Senior Subordinated Notes of Silver Cinemas International, Inc. due 2005. 2.1 Asset Purchase Agreement, dated as of December 17, 1997, between Silver Cinemas, Inc. Landmark Theatre Corporation, Seven Gables Corporation, Parallax Theatre Systems, Inc., San Francisco Landmark Theatre Corporation, and Wisconsin Repertory Cinemas, Inc., The Landmark Theater Group, and Metromedia International Group, Inc. 2.2 Asset Purchase Agreement, dated as of January 22, 1998, between Silver Cinemas, Inc., SCI Acquisition Corp., StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1, Ltd., StarTime Properties, Inc., the Trust formed by that certain Irrevocable Declaration of Trust under deed dated May 14, 1994 for the benefit of StarTime Cinema, Inc., Lloyd Curley, and NationsBanc Capital Corporation. 2.3 Property Purchase Agreement, dated as of January 22, 1998, between Silver Cinemas, Inc., StarTime Properties, Inc., StarTime Cinema, Inc., F.S.A. Super Saver Cinemas No. 1, Ltd., the trust formed by that certain Irrevocable Declaration of Trust under deed dated May 14, 1994 for the benefit of StarTime Cinema, Inc., and Lloyd Curley. 3.1 Certificate of Incorporation, as amended, of Silver Cinemas International, Inc. 3.2 By-Laws of Silver Cinemas International, Inc. 3.3 Certificate of Incorporation of Silver Cinemas, Inc. 3.4 By-Laws of Silver Cinemas, Inc. 3.5 Certificate of Incorporation of SCI Acquisition Corp. 3.6 By-Laws of SCI Acquisition Corp. 3.7 Certificate of Incorporation of Landmark Theatre Corp. 3.8 By-Laws of Landmark Theatre Corp. 4.1 Indenture, dated as of April 15, 1998, between Silver Cinemas International, Inc., the Guarantors (as defined therein) and Norwest Bank Minnesota, National Association, as trustee, relating to $100,000,000 aggregate principal amount of 10 1/2% Senior Subordinated Notes due 2005. 4.2 A/B Exchange Registration Rights Agreement, dated as of April 16, 1998, between Silver Cinemas International, Inc., the Guarantors (as defined therein), Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown Incorporated and Bear, Stearns & Co. Inc. 4.3 Specimen Certificate of 10 1/2% Senior Subordinated Notes due 2005 (the "Private Notes") (included in Exhibit 4.1 hereto). 4.4 Specimen Certificate of 10 1/2% Senior Subordinated Notes due 2005 (the "Exchange Notes") (included in Exhibit 4.1 hereto). *5.1 Opinion of Latham & Watkins regarding the validity of the Exchange Notes.
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[Download Table] EXHIBIT NO. DESCRIPTION ------- ----------- 10.1 Stockholders' Agreement, dated as of August 1, 1996, between Silver Cinemas International, Inc. and the stockholders set forth therein. 10.2 Employment Agreement dated April 16, 1998 between Landmark Theatre Corp. and Bert Manzari. 10.3 Employment Agreement dated April 16, 1998 between Landmark Theatre Corp. and Paul Richardson. 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries of Silver Cinemas International, Inc. *23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1). *23.2 Consent of Deloitte & Touche LLP. *23.3 Consent of KPMG Peat Marwick LLP. *23.4 Consent of Coopers & Lybrand, L.L.P. 24.1 Power of Attorney of Silver Cinemas International, Inc. (included on signature page to the Registration Statement on Form S-4). 25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939 of Norwest Bank Minnesota, National Association (bound separately). 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal and related documents to be used in conjunction with the Exchange Offer. 99.2 Forms of Notices of Guaranteed Delivery. --------------- * Filed herewith.
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-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS FILED WITH FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SILVER CINEMAS INTERNATIONAL, INC. VOLUME I -------------------------------------------------------------------------------- --------------------------------------------------------------------------------

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