ITEM 1. BUSINESS.
Overview
We are one of the largest motion picture exhibitors in the United States. As of December 31, 2004, we owned, operated or had an interest in 282 theatres with 2,188 screens located in 36 states, making us the second largest exhibitor in the country by number of theatres and the fourth largest by number of screens. We owned 68 of these theatres, leased 212 of these theatres and operated an additional two theatres under shared ownership. Of our 282 theatres, 243 show films on a first-run basis and 39 are discount theatres.
We target small to mid-size non-urban markets. We estimate that more than 80% of our theatres are located in communities with populations of fewer than 100,000 people. We believe there are several benefits of operating in small to mid-size markets, including:
• Less competition from other exhibitors. We believe a majority of our theatres have limited competition for patrons. We believe most of our markets are already adequately screened and our smaller markets in particular cannot support significantly more screens. In addition, because most of our principal competitors are focused on building megaplexes, we do not expect many of our markets to be targeted by our competitors for new theatres.
• Lower operating costs. We believe that we benefit from lower labor, occupancy and maintenance costs than most other large exhibitors. For example, as of December 31, 2004, approximately 47% of our hourly employees worked for the federal minimum wage. Additionally, we own 68, or approximately 24%, of our theatres, which we believe provides us with further cost benefits. We believe the percentage of our owned theatres is among the highest of the large public theatre exhibitors.
• Fewer alternative entertainment opportunities. In our typical markets, patrons have fewer entertainment alternatives than in larger markets, where options such as professional sports and cultural events are more likely to be available.
• Greater access to film product. We believe we are the sole exhibitor in approximately 78% of our film licensing zones, which we believe provides us with greater flexibility in selecting films that meet the preferences of patrons in our markets.
The following table sets forth geographic information regarding our theatre circuit as of December 31, 2004:
From time to time, we convert weaker performing theatres to discount theatres for the exhibition of films that have previously been shown on a first-run basis. Many of these theatres are typically in smaller markets where we are the only exhibitor in the market. At December 31, 2004, we operated 39 theatres with 163 screens as discount theatres. We also operate a very small number of theatres for the exhibition of first-run films at a reduced admission price.
We are the sole exhibitor in many of the small to mid-size markets in which we operate. The introduction of a competing theatre in these markets could significantly impact the performance of our theatres. In addition, the type of motion pictures preferred by patrons in these markets is typically more limited than in larger markets, which increases the importance of selecting films that will appeal to patrons in our specific theatre markets.
Theatre Development and Operations
Development
We carefully review small to mid-size markets to evaluate the return on capital of opportunities to build new theatres or renovate our existing theatres. The circumstances under which we believe we are best positioned to benefit from building new theatres are in markets in which:
• we believe building a new theatre provides an attractive cash flow opportunity;
• we already operate a theatre and could best protect that market by expanding our presence; or
• a film licensing zone is currently underserved by an exhibitor.
In general, we do not believe that building theatres in film licensing zones in which competitors operate provides attractive investment opportunities for us.
Our bankruptcy, as discussed below under the caption “Our Reorganization”, and the excessive number of screens resulting from the industry’s overbuilding of theatres in the last few years have been significant influences on our current growth strategy. We opened three theatres during the year ended December 31, 2004. If opportunities exist where new construction will be profitable to us, we will consider building additional theatres in future periods. Additionally, as opportunities present themselves for consolidation we will evaluate each instance to obtain the highest level of return on investment.
The following table shows information about the changes in our theatre circuit during the periods presented:
Operations
Our theatre operations are under the supervision of our Chief Operating Officer, General Manager of Operations and four division managers. The division managers are responsible for implementing our operating policies and supervising our eighteen operating districts. Each operating district has a district manager who is responsible for overseeing the day-to-day operations of our theatres. Corporate policy development, strategic planning, site selection and lease negotiation, theatre design and construction, concession purchasing, film licensing, advertising, and financial and accounting activities are centralized at our corporate headquarters.
We have an incentive bonus program for theatre-level management, which provides for bonuses based on incremental improvements in theatre profitability, including concession sales. As part of this program, we evaluate “mystery shopper” reports on the quality of service, cleanliness and film presentation at individual theatres.
Box office admissions. The majority of our revenues come from the sale of movie tickets. For the year ended December 31, 2004, box office admissions totaled $331.5 million, or 67% of total revenues. At December 31, 2004, of our 282 theatres, 243 showed “first-
run” films, which we license from distributors owned by the major studios, as well as from independent distributors. The remaining 39 of our theatres featured films at a discount price.
Most of the tickets we sell are sold at our theatre box offices immediately before the start of a film. As of December 31, 2004, at 44 of our theatres, patrons can buy tickets in advance either over the phone or on the Internet. These alternate sales methods do not currently represent a meaningful portion of our revenues, nor are they expected to be in the near term.
Concessions. Concession sales are our second largest revenue source after box office admissions, constituting 30% of total revenues for the year ended December 31, 2004. Our strategy emphasizes quick and efficient service built around a limited menu primarily focused on higher margin items such as popcorn, candy and soft drinks. In addition, in a limited number of markets, we offer bottled water, frozen drinks, coffee, ice cream, hot dogs and pretzels in order to respond to competitive conditions. We actively seek to promote concession sales through the design and appearance of our concession stands, the introduction of special promotions from time to time, by reducing wait times and by training our employees to up-sell products. In addition, our management incentive bonus program includes concession results as a component of determining the bonus awards. We manage all inventory purchasing centrally with authority required from our central office before orders may be placed.
During 2004, we purchased substantially all of our concession supplies and janitorial supplies from Showtime Concession, except for beverage supplies. We are by far the largest customer of Showtime Concession. Our current agreement with Showtime Concession will expire on December 8, 2006. If this relationship were disrupted, we could be forced to negotiate a number of substitute arrangements with alternative vendors which are likely to be, in the aggregate, less favorable to us than the current arrangement.
During 2004, we purchased our beverage supplies from The Coca-Cola Company. Our current agreement with The Coca-Cola Company will expire on December 31, 2008. Under the agreement, The Coca-Cola Company may raise beverage supply costs and, in fact, increased such costs by 3.3% beginning January 1, 2004 through December 31, 2004. A similar cost increase of 3.7% was implemented for January 1, 2005 through December 31, 2005.
Other revenues. Most of our theatres include electronic video games located in or adjacent to the lobby. We also generate revenues through on-screen advertising on all of our screens. We operate two family entertainment centers under the name Hollywood Connection® which feature multiplex theatres and other forms of family entertainment. These revenue streams comprised the remaining 3% of our revenue generation for the year ended December 31, 2004.
Film Licensing
We obtain licenses to exhibit films by directly negotiating with film distributors. We license films through our booking office located in Columbus, Georgia. Our Senior Vice President - Film, in consultation with our Chief Executive Officer, directs our motion picture bookings. Prior to negotiating for a film license, our Senior Vice President - Film and film-booking personnel evaluate the prospects for upcoming films. The criteria considered for each film include cast, director, plot, performance of similar films, estimated film rental costs and expected MPAA rating. Because we only license a portion of newly released first-run films, our success in licensing depends greatly upon the availability of commercially popular motion pictures, but also upon our knowledge of the preferences of patrons in our markets and insight into trends in those preferences. We maintain a database that includes revenue information on films previously exhibited in our markets. We use this historical information to match new films with particular markets so as to maximize revenues.
The table below depicts the industry’s top 10 films for the year ended December 31, 2004 compared to our top 10 films for the same period, based on reported gross receipts:
Film Rental Fees
We typically enter into licenses that provide for rental fees based on either “firm terms” established prior to the opening of the picture or on a mutually agreed “settlement” upon the conclusion of the film run. Under a firm terms formula, we pay the distributor a specified percentage of the box office receipts, and this percentage declines over the term of the run. Firm term film rental fees are generally the greater of (1) 60 to 70% of gross box office receipts, gradually declining to as low as 30% over a period of four to seven weeks or (2) a specified percentage (e.g., 90%) of the excess gross box office receipts over a negotiated allowance for theatre expenses (commonly known as a “90-10” arrangement). The settlement process allows for negotiation based upon how a film actually performs. A firm terms agreement could result in lower than anticipated film rent if the film outperforms expectations especially with respect to the film’s run and, conversely, there is a downside risk when the film underperforms. Many of our distributors award aggregate percentage terms for the run of the film. Under such an agreement, a set percentage is paid for the entire run of the film with no adjustments for “90-10s”. This provides an advantage for the exhibitors when a picture has a short run life, where under a firm term arrangement film rent would be higher. Conversely, the exhibitor is at risk of higher film rent costs when the film has a longer run life and firm term arrangements would provide for lower film rent.
Film Licensing Zones
Film licensing zones are geographic areas established by film distributors where any given film is allocated to only one theatre within that area. In our markets, these zones generally encompass three to five miles. In film licensing zones where we have little or no competition, we obtain film licenses by selecting a film from among those offered and negotiating directly with the distributor. In competitive film licensing zones, a distributor will allocate its films among the exhibitors in the zone. When films are licensed under the allocation process, a distributor will choose which exhibitor is offered a movie and then that exhibitor will negotiate film rental terms directly with the distributor for the film.
Relationship With Distributors
We depend on, among other things, the quality, quantity, availability and acceptance by movie-going customers of the motion pictures produced by the motion picture production companies and licensed for exhibition to the motion picture exhibitors by distribution companies. Disruption in the production of motion pictures by the major studios and/or independent producers or poor performance of motion pictures could have an adverse effect on our business.
While there are numerous distributors that provide quality first-run movies to the motion picture exhibition industry, the following ten major distributors accounted for approximately 86.3% of our box office admissions for the year ended December 31, 2004: Buena Vista, DreamWorks, Fox, MGM/UA, Miramax, New Line Cinema, Paramount, Sony, Universal and Warner Brothers.
Management Information Systems
We have developed a proprietary computer system, which we call IQ-Zero, that is installed in each of our theatres. IQ-Zero allows us to centralize most theatre-level administrative functions at our corporate headquarters, creating significant operating leverage. IQ-Zero allows corporate management to monitor ticket and concession sales and box office and concession staffing on a daily basis, enabling our theatre managers to focus on the day-to-day operations of the theatre.
In addition, it also coordinates payroll, tracks theatre invoices and generates operating reports analyzing film performance and theatre profitability. IQ-Zero also generates information we use to quickly detect theft. IQ-2000 is an enhanced version of the IQ-Zero system and has been installed in our theatres built since 1999. IQ-2000 facilitates new services such as advanced ticket sales and Internet ticket sales. Its expanded capacity allows for future growth and more detailed data tracking and trend analysis. There is active communication between the theatres and corporate headquarters, which allows our senior management to react to vital profit and staffing information on a daily basis and perform the majority of the theatre-level administrative functions.
Competition
The motion picture exhibition industry is fragmented and highly competitive. In markets where we are not the sole exhibitor, we compete against regional and independent operators as well as the larger theatre circuit operators.
Our operations are subject to varying degrees of competition with respect to film licensing, attracting customers, obtaining new theatre sites or acquiring theatre circuits. In those areas where real estate is readily available, there are few barriers preventing competing companies from opening theatres near one of our existing theatres, which may have a material adverse effect on our theatres. Competitors have built or are planning to build theatres in certain areas in which we operate, which have resulted and may continue to result in excess capacity in such areas which adversely affects attendance and pricing at our theatres in such areas.
From the mid- to late-1990s, industry screen count grew faster than attendance. As a result of this rapid overbuilding, the total number of screens reached an all-time high of 37,396 in 2000, according to the MPAA. When the economics of many of these theatres became unsustainable, most major exhibitors, ourselves included, were required to restructure and to close underperforming locations. After reaching a low of approximately 35,200 screens, the industry has grown back to 36,162 screens as of December 31, 2004. We believe that the growth rate of the industry is inline with demand and a positive indicator of the health of the industry.
The opening of large multiplexes and theatres with stadium seating by us and certain of our competitors has tended to, and is expected to continue to, draw audiences away from certain older and smaller theatres, including theatres operated by us. In addition, demographic changes and competitive pressures can lead to a theatre location becoming impaired. However, at this time we are not aware of any such situations.
In addition to competition with other motion picture exhibitors, our theatres face competition from a number of alternative motion picture exhibition delivery systems, such as cable television, satellite and pay-per-view services and home video systems. The expansion of such delivery systems could have a material adverse effect upon our business and results of operations. We also compete for the public’s leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants.
Regulatory Environment
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. Certain consent decrees resulting from such cases bind certain major motion picture distributors and require the motion pictures of such distributors to be offered and licensed to exhibitors, including us, on a theatre-by-theatre basis. Consequently, exhibitors such as our company cannot assure themselves of a supply of motion pictures by entering into long-term arrangements with major distributors but must compete for licenses on a film-by-film and theatre-by-theatre basis.
The Americans with Disabilities Act (“ADA”), which became effective in 1992, and certain state statutes and local ordinances, among other things, require that places of public accommodation, including theatres (both existing and newly constructed), be accessible to patrons with disabilities. The ADA requires that theatres be constructed to permit persons with disabilities full use of a theatre and its facilities. Also, the ADA may require certain modifications be made to existing theatres in order to make them accessible to patrons and employees who are disabled. For example, we are aware of several lawsuits that have been filed against other exhibitors by disabled moviegoers alleging that certain stadium seating designs violate the ADA.
On June 30, 1998, we executed a settlement agreement with the U.S. Department of Justice under Title III of the ADA. Under the settlement agreement, we agreed to complete the readily achievable removal of barriers to accessibility, or alternatives to barrier removal, at two theatres in Des Moines, Iowa and to distribute to all of our theatres a questionnaire designed to assist our management in the identification of existing and potential barriers and a threshold determination of what steps might be available for removal of such existing and potential barriers. We were not required to pay any damages or fines. We construct new theatres to be accessible to the disabled and believe we are otherwise in substantial compliance with applicable regulations relating to accommodating the needs of the disabled. We have a Director of ADA Compliance to monitor our ADA requirements.
Our theatre operations are also subject to federal, state and local laws governing such matters as construction, renovation and operation of our theatres as well as wages, working conditions, citizenship, and health and sanitation requirements and licensing. We believe that our theatres are in material compliance with such requirements.
We own, manage and/or operate theatres and other properties which may be subject to certain U.S. federal, state and local laws and regulations relating to environmental protection, including those governing past or present releases of hazardous substances. Certain of these laws and regulations may impose joint and several liability on certain statutory classes of persons for the costs of investigation or remediation of such contamination, regardless of fault or the legality of original disposal. These persons include the present or former owner or operator of a contaminated property and companies that generated, disposed of or arranged for the disposal of hazardous substances found at the property. Other environmental laws, such as those regulating wetlands, may affect our site development activities, and some environmental laws, such as those regulating the use of fuel tanks, could affect our ongoing operations. Additionally, in the course of maintaining and renovating our theatres and other properties, we periodically encounter asbestos containing materials that must be handled and disposed of in accordance with federal, state and local laws, regulations and ordinances. Such laws may impose liability for release of asbestos containing materials and may entitle third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos containing materials. We believe that our activities are in material compliance with such requirements.
Employees
As of December 31, 2004, we had approximately 7,821 employees, of which 38 were covered by collective bargaining agreements and 7,277 were part-time. As of December 31, 2004, approximately 47% of our hourly employees were paid at the federal minimum wage and, accordingly, the minimum wage largely determines our labor costs for those employees. We believe we are more dependent upon minimum wage employees than most other motion picture exhibitors. Although our ability to secure employees at the minimum wage in our smaller markets is advantageous to us because it lowers our labor costs, we are also more likely than other exhibitors to be immediately and adversely affected if the minimum wage is raised.
Legal Proceedings
From time to time, we are involved in routine litigation and legal proceedings in the ordinary course of our business, such as personal injury claims, employment matters, contractual disputes and claims alleging ADA violations. Currently, we have approximately $1.0 million reserved for pending litigation. Beyond this, we have no pending litigation or proceedings that we believe will have a material adverse effect, either individually or in the aggregate, upon us. In addition, we emerged from bankruptcy under chapter 11 on January 31, 2002. The chapter 11 filing and our subsequent reorganization are discussed under “Our Reorganization.”
Trademarks and Trade-Names
We own or have rights to trademarks or trade-names that are used in conjunction with the operations of our theatres. We own Carmike Cinemas® and Hollywood Connection®, C and Design® and Wynnsong Cinemas® trademarks. In addition, our logo is our trademark. Coca-Cola® is a registered trademark used in this annual report on Form 10-K and is owned by and belongs to The Coca-Cola Company.
Website Access
Our website address is www.carmike.com. You may obtain free electronic copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, at our website under the heading “Corporate Information.”
These reports are available on our website as soon as reasonably practicable after we electronically file such material, or furnish it to, the Securities and Exchange Commission.
Our Reorganization
On August 8, 2000, we and our subsidiaries Eastwynn Theatres, Inc., Wooden Nickel Pub, Inc. and Military Services, Inc. filed voluntary petitions for relief under chapter 11 of the bankruptcy code. On January 4, 2002, the United States Bankruptcy Court for the District of Delaware entered an order confirming our Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated as of November 14, 2001. The plan of reorganization became effective on January 31, 2002.
In our reorganization, substantially all of our unsecured and partially secured liabilities as of August 8, 2000, were subject to compromise or other treatment until the plan of reorganization was confirmed by the bankruptcy court. Generally, actions to enforce or otherwise effect repayment of all pre-chapter 11 liabilities as well as all pending litigation against us were stayed while we continued our business operations as debtors-in-possession.
On February 11, 2005, the Company filed a motion seeking an order entering a final decree closing the bankruptcy cases. On March 15, 2005, the United States Bankruptcy Court of the District of Delaware entered a final decree closing the bankruptcy cases.
Our reorganization resulted from a sequence of events and the unforeseen effect that these events had in the aggregate on us. Weak film performance during the summer of 2000 contributed to our lower revenues for that summer, which were significantly below our internal projections. Like our competitors, we had increased our costs by expending significant funds in building megaplexes and in making improvements to existing theatres in order to attract and accommodate larger audiences. Consequently, the effect of poor summer returns was substantial on our efforts to comply with the financial covenants under our then $200 million revolving credit facility and $75 million term loan credit agreement, which we sometimes refer to as the pre-reorganization bank facilities. On June 30, 2000, we were in technical default of certain financial covenants contained in the pre-reorganization bank facilities and were unable to negotiate amendments with the lenders to resolve these compliance issues, as we had been able to do in the past. On July 28, 2000, the agents under the pre-reorganization bank facilities issued a payment blockage notice to us and the indenture trustee for our 9 3/8% senior subordinated notes due 2009, prohibiting our payment of the semi-annual interest payment in the amount of $9.4 million due to
the noteholders on August 1, 2000. Faced with, among other things, significant operating shortfalls, unavailability of credit and problems dealing with our lenders, we voluntarily filed for bankruptcy in order to continue our business.
In the course of our reorganization, we rejected leases on 136 underperforming theatres and also negotiated modifications to our leases on 35 additional theatres. In addition, we converted $45.7 million of debt and $55.0 million of preferred stock into an aggregate of 67.8% of our common stock. The holders of our cancelled Class A and Class B common stock received in the aggregate 22.2% of our common stock under the plan of reorganization. These actions decreased our ongoing interest obligations. We also agreed to pay, over a five-year period, the claims of our general unsecured creditors allowed or otherwise undisputed in the bankruptcy case in connection with our reorganization, plus interest at an annual rate of 9.4%. We estimate that our aggregate liability as of December 31, 2004 for general unsecured creditors was approximately $1.3 million, which includes our estimated liability for damages resulting from the rejection of executory contracts and unexpired leases that have not been allowed or that otherwise remain disputed. We refer to these claims as “disputed claims”. As of December 31, 2004, total accrued interest on the disputed claims was $338,000. If we are unable to resolve the disputed claims with the unsecured creditors, we may petition the bankruptcy court to resolve them.
Risk Factors
The following are risk factors for Carmike.
Our business will be adversely affected if there is a decline in the number of motion pictures available for screening or in the appeal of motion pictures to patrons.
Our business depends to a substantial degree on the availability of suitable motion pictures for screening in our theatres and the appeal of such motion pictures to patrons in our specific theatre markets. Our results of operations will vary from period to period based upon the number and popularity of the motion pictures we show in our theatres. A disruption in the production of motion pictures by, or a reduction in the marketing efforts of, the major studios and/or independent producers, a lack of motion pictures, the poor performance of motion pictures in general or the failure of motion pictures to attract the patrons in our theatre markets will likely adversely affect our business and results of operations.
Our substantial lease and debt obligations could impair our financial flexibility and our competitive position.
We now have, and will continue to have, significant debt obligations. Our current long-term debt obligations are as follows:
We also have, and will continue to have, significant lease obligations. As of December 31, 2004, our total capital, operating and long-term financing obligations for leases with terms over one year totaled $691.8 million.
These obligations could have important consequences for us. For example, they could:
• limit our ability to obtain necessary financing in the future and make it more difficult for us to satisfy our lease and debt obligations;
• require us to dedicate a substantial portion of our cash flow to payments on our lease and debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements;
• make us more vulnerable to a downturn in our business and limit our flexibility to plan for, or react to, changes in our business; and
• place us at a competitive disadvantage compared to competitors that might have stronger balance sheets or better access to capital by, for example, limiting our ability to enter into new markets or renovate our theatres.
If we are unable to meet our lease and debt obligations, we could be forced to restructure or refinance our obligations, to seek additional equity financing or to sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations.
We may not generate sufficient cash flow to meet our needs.
Our ability to service our indebtedness and to fund potential capital expenditures for theatre construction, expansion or renovation will require a significant amount of cash, which depends on many factors beyond our control. Our ability to make scheduled payments of principal, to pay the interest on or to refinance our indebtedness is subject to general industry economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations to meet our needs.
Our business is subject to significant competitive pressures.
Large multiplex theatres, which we and some of our competitors built, have tended to and are expected to continue to draw audiences away from certain older theatres, including some of our theatres. In addition, demographic changes and competitive pressures can lead to the impairment of a theatre. Over the last several years, we and many of our competitors have closed a significant number of theatres. Our competitors or smaller entrepreneurial developers may purchase or lease these abandoned buildings and reopen them as theatres in competition with us.
We face varying degrees of competition from other motion picture exhibitors with respect to licensing films, attracting customers, obtaining new theatre sites and acquiring theatre circuits. In those areas where real estate is readily available, there are few barriers preventing competing companies from opening theatres near one of our existing theatres. Competitors have built and are planning to build theatres in certain areas in which we operate. In the past, these developments have resulted and may continue to result in excess capacity in those areas, adversely affecting attendance and pricing at our theatres in those areas. Even where we are the only exhibitor in a film licensing zone (and therefore do not compete for films), we still may experience competition for patrons from theatres in neighboring zones. There have also been a number of consolidations in the film exhibition industry, and the impact of these consolidations could have an adverse effect on our business if greater size would give larger operators an advantage in negotiating licensing terms.
Our theatres also compete with a number of other motion picture delivery systems including cable television, pay-per-view, video disks and cassettes, satellite and home video systems. New technologies for motion picture delivery (such as video on demand) could also have a material adverse effect on our business and results of operations. While the impact of these alternative types of motion picture delivery systems on the motion picture exhibition industry is difficult to determine precisely, there is a risk that they could adversely affect attendance at motion pictures shown in theatres.
Theatres also face competition from a variety of other forms of entertainment competing for the public’s leisure time and disposable income, including sporting events, concerts, live theatre and restaurants.
Our revenues vary significantly depending upon the timing of the motion picture releases by distributors.
Our business is seasonal, with higher revenues generated during the summer months and year-end holiday season. While motion picture distributors have begun to release major motion pictures more evenly throughout the year, the most marketable motion pictures are usually released during the summer months and the year-end holiday season, and we usually earn more during those periods than in other periods during the year. Additionally, the unexpected emergence of a “hit” film may occur in these or other periods. As a result, the timing of motion picture releases affects our results of operations, which may vary significantly from quarter to quarter and year to year.
If we do not comply with the covenants in our credit agreements or otherwise default under them, we may not have the funds necessary to pay all our amounts that could become due.
On February 4, 2004, we completed an offering of $150 million of 7.500% senior subordinated notes due 2014 to institutional investors and entered into senior secured credit facilities consisting of a $50 million revolving credit facility and a $100 million five-
year term loan. The notes offering and the credit facilities replaced our post-bankruptcy term loan credit agreement, post-bankruptcy revolving credit agreement and 10 3/8% senior subordinated notes, which had been in place since our reorganization. Under the indenture that governs the 7.500% senior subordinated notes and the agreements relating to the new senior secured credit facilities, we are subject to limitations on our ability to incur additional indebtedness, make capital expenditures and other customary covenants.
We may be unable to fund our additional capital needs.
Our access to capital may be limited because of our current leverage. In addition, because of our bankruptcy, we may have difficulty obtaining financing for new development on terms that we find attractive. Traditional sources of financing new theatres through landlords may be unavailable for a number of years.
The opening of large multiplexes by our competitors and the opening of newer theatres with stadium seating in certain of our markets have led us to reassess a number of our theatre locations to determine whether to renovate or to dispose of underperforming locations. Further advances in theatre design may also require us to make substantial capital expenditures in the future or to close older theatres that cannot be economically renovated in order to compete with new developments in theatre design.
We are subject to restrictions imposed by our lenders that limit the amount of our capital expenditures. As a result, we may be unable to make the capital expenditures that we would otherwise believe necessary. In addition, we cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated revenue growth will be realized or that future capital will be available for us to fund our capital expenditure needs.
We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.
As of December 31, 2004, after utilizing approximately $28.5 million for 2004, we had approximately $84.7 million of federal and state operating loss carryforwards with which to offset our future taxable income. The federal and state net operating loss carryforwards will begin to expire in the year 2020.
The determination of whether we underwent an ownership change for purposes of section 382 as a result of the issuance of common stock pursuant to our plan of reorganization (the “Plan Stock Issuance”) is subject to a number of highly complex legal issues and factual uncertainties. In our federal income tax return for 2002, we reported the Plan Stock Issuance as causing a section 382 ownership change, although the matter is not free from doubt and arguments can be advanced to support the contrary position. Based on our reported tax treatment, we believe that the special exception in section 382(l)(5) available to debtors in bankruptcy applied, so that our net operating loss carryforwards did not become subject to a section 382 limitation as a result of the Plan Stock Issuance. If, however, we underwent a second ownership change within two years following our date of reorganization - that is, by January 31, 2004 - and assuming that the Plan Stock Issuance caused an ownership change, our net operating losses would have become subject to a section 382 limitation of zero and their future use effectively would have been eliminated. The sale of shares in the offering of August, 2004, caused the Company to undergo an “ownership change” within the meaning of section 382 (g) of the Internal Revenue Code of 1986, as amended. The ownership change will subject our net operating loss carryforwards to an annual limitation on their use, which will restrict our ability to use them to offset our taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of the Company’s stock at the time of the ownership change multiplied by a specified tax-exempt interest rate, and is further increased by certain “built-in gains” recognized during the five-year period following the ownership change. Such limitation is projected to be $26.9 million per year for the first five years and will decrease to approximately $15 million per year thereafter.
Deterioration in our relationships with any of the major film distributors could adversely affect our access to commercially successful films and could adversely affect our business and results of operations.
Our business depends to a significant degree on maintaining good relationships with the major film distributors that license films to our theatres. Deterioration in our relationships with any of the major film distributors could adversely affect our access to commercially successful films and adversely affect our business and results of operations. We suffered such deterioration for a period of time while we were in bankruptcy. When we commenced our bankruptcy, several film distributors ceased supplying us with new film product in light of their claims against us for exhibition fees aggregating approximately $37.2 million. Those film distributors recommenced supplying us with new film product upon our agreeing to pay their claims in full, which we did in 17 weekly installments ending on December 26, 2000.
Because 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, we cannot ensure a supply of motion pictures by entering into long-term arrangements with major
distributors. Rather, we must compete for licenses on a film-by-film and theatre-by-theatre basis and are required to negotiate licenses for each film and for each theatre individually.
Our success depends on our ability to retain key personnel.
We believe that our success is due in part to our experienced management team. We depend in large part on the continued contribution of our senior management and, in particular, Michael W. Patrick, our President and Chief Executive Officer. Losing the services of one or more members of our senior management could adversely affect our business and results of operations. We entered into a five-year employment agreement with Michael W. Patrick as Chief Executive Officer on January 31, 2002, the term of which extends for one year each December 31, provided that neither we nor Mr. Patrick chooses not to extend the agreement. We maintain no key man life insurance policies for any senior officers or managers except for a $1.8 million policy covering Mr. Patrick.
We face uncertainties related to digital cinema.
If a digital cinema roll-out progresses rapidly, we may not have adequate resources to finance the conversion costs. Digital cinema is in an experimental stage in the motion picture exhibition industry. There are multiple parties competing to be the leading manufacturer of digital cinema technology. However, there are significant obstacles to the acceptance of digital cinema, including quality of image and costs. Electronic projectors will require substantial investment in re-equipping theatres. If the conversion process rapidly accelerates, we may have to raise additional capital to finance the conversion costs associated with it. The additional capital necessary may not, however, be available to us on terms we deem acceptable.
A prolonged economic downturn could materially affect our business by reducing amounts consumers spend on attending movies.
Our business depends on consumers voluntarily spending discretionary funds on leisure activities. Movie theatre attendance may be affected by prolonged negative trends in the general economy that adversely affect consumer spending. Any reduction in consumer confidence or disposable income in general may affect the demand for movies or severely impact the motion picture production industry such that our business and operations could be adversely affected.
Compliance with the Americans with Disabilities Act could require us to incur significant capital expenditures and litigation costs in the future.
The Americans with Disabilities Act of 1990, or the ADA, and certain state statutes and local ordinances, among other things, require that places of public accommodation, including both existing and newly constructed theatres, be accessible to customers with disabilities. The ADA requires that theatres be constructed to permit persons with disabilities full use of a theatre and its facilities. The ADA may also require that certain modifications be made to existing theatres in order to make them accessible to patrons and employees who are disabled. We are subject to a settlement agreement arising from a complaint filed with the U.S. Department of Justice concerning theatres operated by us in Des Moines, Iowa. As a result of the settlement agreement, we removed barriers to accessibility at two Des Moines theatres and distributed to all of our theatre managers a questionnaire designed to assist our central management in identifying existing and potential barriers and determining what steps might be available for removal of such existing and potential barriers.
We are aware of several lawsuits that have been filed against other motion picture exhibitors by disabled moviegoers alleging that certain stadium seating designs violated the ADA. If we fail to comply with the ADA, remedies could include imposition of injunctive relief, fines, awards for damages to private litigants and additional capital expenditures to remedy non-compliance. Imposition of significant fines, damage awards or capital expenditures to cure non-compliance could adversely affect our business and operating results.
We are subject to other federal, state and local laws which limit the manner in which we may conduct our business.
Our theatre operations are subject to federal, state and local laws governing matters such as construction, renovation and operation of our theatres as well as wages, working conditions, citizenship and health and sanitation requirements and licensing. While we believe that our theatres are in material compliance with these requirements, we cannot predict the extent to which any future laws or regulations that regulate employment matters will impact our operations. At December 31, 2004, approximately 47% of our hourly employees were paid at the federal minimum wage and, accordingly, the minimum wage largely determines our labor costs for those employees. Increases in the minimum wage will increase our labor costs.
Disruption of our relationship with our primary concession suppliers could harm our margins on concessions.
We purchase substantially all of our concession supplies, except for beverage supplies, as well as janitorial supplies from Showtime Concession Supply, Inc. and are by far its largest customer. In return for our concession supplies, we pay Showtime Concession at set prices that are based on the type of concession supplied. Our current agreement with Showtime Concession will expire on December 8, 2006. If this relationship were disrupted, we could be forced to negotiate a number of substitute arrangements with alternative vendors which are likely to be, in the aggregate, less favorable to us than the current arrangement.
We purchase our beverage supplies from The Coca-Cola Company. On January 1, 2004 we entered into a new agreement with the Coca-Cola Company. Under the agreement, The Coca-Cola Company may raise beverage supply costs by 3% to 5% annually beginning January 1, 2004 through the term of the agreement. If beverage supply costs are increased at a higher rate or we are unable to negotiate favorable terms with The Coca-Cola Company or a competing beverage supplier when the agreement is up for renewal, our margins on concessions may be negatively impacted.
Our development of new theatres poses a number of risks.
We plan to continue to expand our operations through the development of new theatres and the expansion of existing theatres. Developing new theatres poses a number of risks. Construction of new theatres may result in cost overruns, delays or unanticipated expenses related to zoning or tax laws. Desirable sites for new theatres may be unavailable or expensive, and the markets in which new theatres are located may deteriorate over time. Additionally, the market potential of new theatre sites cannot be precisely determined, and our theatres may face competition in new markets from unexpected sources. Newly constructed theatres may not perform up to our expectations.
We face significant competition for potential theatre locations and for opportunities to acquire existing theatres and theatre circuits. Because of this competition, we may be unable to add to our theatre circuit on terms we consider acceptable.
If we determine that assets are impaired, we will be required to recognize a charge to earnings.
The opening of large multiplexes and theatres with stadium seating by us and certain of our competitors has tended to, and is expected to continue to, draw audiences away from certain older theatres, including some of our theatres. In addition, demographic changes and competitive pressures can lead to the impairment of a theatre. Whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable, we review those assets to be held and used in the business for impairment of long-lived assets and goodwill. We also periodically review and monitor our internal management reports and the competition in our markets for indicators of impairment of individual theatres. If we determine that assets are impaired, we are required to recognize a charge to earnings.
We had impairment charges in four of the last five fiscal years totaling $142.1 million. Our impairment charge recognized for 2001 was significantly larger than in prior years due to the write-off of leasehold improvements on rejected theatres, the impact of closing owned theatres, the diminished value of our entertainment centers and the write-down of surplus equipment removed from closed theatres. Additionally, in 2001 we included equipment in the theatre valuation calculations based on the reduced capital building program in the future as well as the excess supply of equipment in inventory. We incurred no impairment charge in 2002. For fiscal years 2003 and 2004, our impairment charge was $1.1 and $.9 million respectively. Through December 31, 2004, we believe we have properly tested for impairments. There can be no assurance that we will not take additional charges in the future related to the impairment of our assets.
Our growth strategy includes acquisitions. We may not be able to identify suitable acquisition candidates, complete acquisitions or integrate acquisitions successfully.
We may acquire theatres and/or theatre circuits in order to expand into new markets and to enhance our position in existing markets nationally. We cannot assure you, however, that we will be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, obtain necessary financing on acceptable terms, complete proposed acquisitions, successfully integrate acquired businesses and theatres into our existing operations or expand into new markets. Once integrated, acquired operations and theatres may not achieve levels of revenues, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected. In addition, future acquisitions may also result in potentially dilutive issuances of equity securities. We cannot assure you that difficulties encountered with acquisitions will not have a material adverse effect on our business, financial condition and results of operations.
Our business makes us vulnerable to future fears of terrorism.
If future terrorist incidents or threats cause our customers to avoid crowded settings such as theatres, our attendance would be adversely affected.
Our certificate of incorporation and bylaws contain provisions that make it more difficult to effect a change in control of the Company.
Certain provisions of our certificate of incorporation and bylaws and the Delaware General Corporation Law could have the effect of delaying, deterring or preventing a change in control of the Company not approved by the Board of Directors, even if the change in control were in the stockholders’ interests. Under our certificate of incorporation, our Board of Directors has the authority to issue up to one million shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While we have no present intention to issue shares of preferred stock, an issuance of preferred stock in the future could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, our bylaws provide that a special meeting of the stockholders of the Company may only be called by the Chairman, President or Secretary, at the request in writing of a majority of our Board of Directors or at the request in writing of stockholders owning at least 66 2/3% of our capital stock then issued and outstanding and entitled to vote.
Further, we are subject to the anti-takeover provisions of section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of section 203 could have the effect of delaying or preventing a change of control that could be advantageous to the stockholders.
ITEM 2.
ITEM 2. PROPERTIES.
As of December 31, 2004, we owned 68 of our theatres and leased 212 of our theatres. We operated an additional two theatres under shared ownership.
We typically enter into long-term leases that provide for the payment of fixed monthly rentals, contingent rentals based on a percentage of revenue over a specified amount and the payment of property taxes, common area maintenance, insurance and repairs. We, at our option, can renew a substantial portion of our theatre leases at the then fair rental rate for various periods with renewal periods of up to 20 years.
We own our headquarters building, which has approximately 48,500 square feet, in Columbus, Georgia. Pursuant to the terms of industrial revenue bonds which were issued in connection with the construction of the corporate office, our interest in the building is encumbered by a lien in favor of the Downtown Development Authority of Columbus, Georgia.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are involved in routine litigation and legal proceedings in the ordinary course of our business, such as personal injury claims, employment matters, contractual disputes and claims alleging ADA violations. The Company has established a reserve of $1.0 million for potential litigation. The Company relied on the provisions of Financial Accounting Standard No. 5 “Accounting for Contingencies” in establishing this reserve. The Company determined that it was probable that a liability had been incurred based on the filing of a lawsuit by the EEOC as described below. Additionally, the Company determined the amount of the loss could be reasonably estimated based on the demands of the claimants. Currently, we do not have any pending litigation or proceedings that we believe will have a material adverse effect, either individually or in the aggregate, upon us.
On or about September 16, 2004, the Equal Employment Opportunity Commission (“EEOC”) filed a lawsuit against Carmike in the U.S. District Court, E.D. North Carolina, alleging that seven named claimants and “other similarly situated male employees” were sexually harassed by a male supervisor who worked at the Carmike 15 Theater in Raleigh, North Carolina from February 2003 until his termination in mid-October 2003. Carmike learned, only after this alleged harasser had stopped working for Carmike, that he had a criminal record relating to indecent liberties with a minor. In its lawsuit, the EEOC seeks injunctive and monetary relief, including compensatory and punitive damages and costs. Carmike filed its answer and defenses to the EEOC’s complaint on November 15, 2004. On or about November 4, 2004, a motion to intervene was filed on behalf of five claimants and family members/guardians of five other claimants. The proposed complaint submitted with the motion to intervene included claims under state and federal law, including claims of negligent hiring, promotion, and retention, negligent training and supervision, assault, intentional and negligent infliction of emotional distress, sexual harassment, and retaliation/constructive discharge. In the proposed complaint, the intervenors seek injunctive and monetary relief, including compensatory and punitive damages, attorneys’ fees, and costs. The motion to
intervene was granted on November 23, 2004 and the intervenors served their complaint on December 9, 2004. Carmike timely answered the intervenors’ complaint on January 14, 2005. The case is now in the discovery period.
We are prepared to defend these claims vigorously and believe that resolution of these claims will not have a material adverse effect on our business or financial position. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may have a material adverse effect on our results of operation in a particular period.
On August 8, 2000, we and our subsidiaries Eastwynn Theatres, Inc., Wooden Nickel Pub, Inc. and Military Services, Inc. filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On January 4, 2002, the Bankruptcy Court entered an order confirming our Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Plan”), dated as of November 14, 2001. The Plan became effective on January 31, 2002. On February 11, 2005, the Company filed a motion seeking an order entering a final decree closing the bankruptcy cases. On March 15, 2005, the United States Bankruptcy Court of the District of Delaware entered a final decree closing the bankruptcy cases.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the last quarter of the year ended December 31, 2004.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information as of March 12, 2005 regarding the executive officers of Carmike. For purposes of this section, references to Carmike include Carmike’s predecessor, Martin Theatres, Inc.
Michael W. Patrick has served as Carmike’s President since October 1981, director since April 1982, Chief Executive Officer since March 1989 and Chairman of the Board of Directors since January 2002. Mr. Patrick also serves as member of the Board’s Executive Committee. He joined Carmike in 1970 and served in a number of operational and film booking and buying capacities prior to becoming President. Mr. Patrick serves as a director of the Will Rogers Institute, and he is a member of the Board of Trustees of Columbus State University Foundation, Inc.
Fred W. Van Noy joined Carmike in 1975. He served as a District Manager from 1984 to 1985 and as Western Division Manager from 1985 to 1988, when he became Vice President - General Manager. December 1997, he was elected to the position of Senior Vice President - Operations. In November 2000, he became Senior Vice President and Chief Operating Officer. Mr. Van Noy is also a member of Carmike’s Board of Directors.
Martin A. Durant joined Carmike in July 1999 as Senior Vice President - Finance, Treasurer and Chief Financial Officer. Prior to joining Carmike, Mr. Durant was Senior Vice President - Corporate Services for AFLAC Incorporated, a Columbus, Georgia based international holding company, for a period of ten years. Prior to his position with AFLAC he was President of a venture capital firm located in Florida. Mr. Durant began his career with KPMG Peat Marwick and is a Certified Public Accountant.
Anthony J. Rhead joined Carmike in June 1981 as manager of the booking office in Charlotte, North Carolina. In July 1983, Mr. Rhead became Vice President - Film, in December 1997, he was elected Senior Vice President - Film and in January 2002 he was elected Senior Vice President - Film and Secretary. Prior to joining Carmike, he worked as a film booker for Plitt Theatres, Inc. from 1973 to 1981.
H. Madison Shirley joined Carmike in 1976 as a theatre manager. He served as a District Manager from 1983 to 1987 and as Director of Concessions from 1987 until 1990. He became Vice President - Concessions in 1990 and Senior Vice President - Concessions and Assistant Secretary in December 1997.
Gary F. Krannacker joined Carmike in May 1994 as District Manager. In October 1995, he was promoted to Regional Manager. In February 1998, Mr. Krannacker was promoted to Mid-West Division Manager. He became General Manager-Operations in 2003
and was elected to his current position of Vice President-General Manager, Theatre Operations in 2004. Prior to joining Carmike, Mr. Krannacker worked in the theatre industry at Cinema World Theatres for sixteen years.
Philip A. Smitley joined Carmike in April 1997 as Controller. In January 1998, he was elected to his present position of Assistant Vice President and Controller. In March 1999, he assumed the duties of interim Chief Financial Officer pending the appointment of Martin A. Durant in July 1999. Prior to joining Carmike, Mr. Smitley was Divisional Controller - Transportation of Burnham Service Corporation, a trucking company. On March 22, 2002, Mr. Smitley filed a personal voluntary petition for relief under Chapter 7 of the Federal Bankruptcy Code in the United States Bankruptcy Court of the Middle District of Alabama. This petition was discharged on August 2, 2002.
All of the executive officers were serving as our executive officers or those of our subsidiaries when we filed our voluntary petition for relief under the bankruptcy code.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is currently traded on the Nasdaq National Market under the symbol “CKEC.” The last reported sale price of the common stock on March 11, 2005 was $34.28 per share. The table below sets forth the high and low closing prices of our common stock from January 1, 2003 through December 31, 2004:
As of March 11, 2005, there were approximately 252 record holders of our common stock and there were no shares of any other class of stock issued and outstanding.
During fiscal year 2004, we did not make any sales of unregistered equity securities.
Beginning the second quarter of 2004, our Board of Directors declared a quarterly dividend of $0.175 per share. We intend to pay quarterly dividends for the foreseeable future at our board’s discretion, subject to many considerations, including limitations imposed by covenants in the indenture for our 7.500% senior subordinated notes and our credit facilities, operating results, capital requirements and other factors. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Material Credit Agreement and Covenant Compliance.”
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The consolidated selected historical financial and other data below should be read in conjunction with “Item 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and operating results should be read in conjunction with “Item 6. Selected Financial and Other Data” and our audited annual consolidated financial statements and accompanying notes.
Results of Operations
Financial Reporting During Reorganization
In connection with our bankruptcy proceedings, we were required to report in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, (“SOP 90-7”). SOP 90-7 requires, among other things, (i) that pre-petition liabilities that are subject to compromise be segregated in our consolidated balance sheet as liabilities subject to compromise and (ii) the identification of all transactions and events that are directly associated with our reorganization in the consolidated statement of operations.
Seasonality
Typically, movie studios release films with the highest expected revenues during the summer and the holiday period between Thanksgiving and Christmas, causing seasonal fluctuations in revenues. However, movie studios are increasingly introducing more popular film titles throughout the year. In addition, in years where Christmas falls on a weekend day, our revenues are typically lower because our patrons generally have shorter holiday periods away from work or school.
Revenues
We derive almost all of our revenues from box office admissions and concession sales. We recognize admissions revenues when movie tickets are sold at the box office, and concession sales revenues when the products are sold in the theatre. Admissions and concession sales revenues depend primarily upon attendance, ticket price and the price and volume of concession sales. Our attendance is affected by the quality and timing of movie releases and our ability to obtain films that appeal to patrons in our markets. We record proceeds from the sale of gift cards and other advanced sale-type certificates in current liabilities and recognize admission and concession revenue when a holder redeems a gift card or other advanced sale-type certificate. We recognize unredeemed gift cards and other advanced sale-type certificates upon expiration.
Expenses
Film exhibition costs vary according to box office admissions and are accrued based on the specified splits of receipts in firm term agreements with movie distributors. The agreements usually provide for a decreasing percentage of box office admissions to be paid to the movie studio over the first few weeks of the movie’s run, subject to a floor for later weeks. Where firm terms do not apply, film exhibition costs are accrued based on estimates of the final settlement that is agreed between us and the movie studio after the completion of the movie’s run.
Concession cost of sales are incurred as products are sold. We purchase substantially all of our beverage supplies from The Coca-Cola Company. We purchase substantially all of our other concession supplies from a single vendor of which we are the principal customer.
Other theatre operating costs include labor, utilities and occupancy, and facility lease expenses. Labor costs have both a variable and fixed cost component. During non-peak periods, a minimum number of staff is required to operate a theatre facility. However, to handle attendance volume increases, theatre staffing and thus salaries and wages vary in relation to revenues. Utilities, repairs and maintenance services also have variable and fixed costs components. Our occupancy expenses and property taxes are primarily fixed costs, as we are generally required to pay applicable taxes, insurance and fixed minimum rent.
Our general and administrative expenses include costs not specific to theatre operations, and are composed primarily of corporate overhead.
Net Operating Losses
As of December 31, 2004, after utilizing approximately $28.5 million for 2004, we had approximately $84.7 million of federal and state operating loss carryforwards with which to offset our future taxable income. The federal and state net operating loss carryforwards will begin to expire in the year 2020.
The Company is limited in using its’ net operating losses. Such limitation is projected to be $26.9 million per year for the first five years (beginning 2004) and will decrease to approximately $15 million per year thereafter.
Our ability to utilize such net operating losses is also subject to certain uncertainties regarding the application of Section 382 of the Internal Revenue Code of 1986, as amended, to prior changes in ownership of the Company, including the change resulting from the Company’s reorganization in January 2002. See “Risk Factors - We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability” for more information regarding these uncertainties.
Operating Statement Information
The following table sets forth for the periods indicated the percentage of total revenues represented by certain items reflected in our consolidated statements of operations:
(1) Film exhibition costs include advertising expenses net of co-op reimbursements.
(2) All costs are expressed as a percentage of total revenues, except film exhibition costs, which are expressed as a percentage of admissions revenues, and concession costs, which are expressed as a percentage of concession and other revenues.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues.
The Company collects substantially all of its revenues from the sales of admission tickets and concessions. The table below provides a comparative summary of the operating data for this revenue generation.
Total revenues increased 0.3% for the year ended December 31, 2004 compared to the year ended December 31, 2003, due to increased revenues from concessions and other revenues, generally offset by decreased admission sales. Admissions decreased 0.2% to $331.5 million in 2004 from $332.1 million in 2003 due to a 5.8% decrease in overall attendance partially offset by a 4.9% increase in average ticket price. Concessions and other revenue increased 1.2% to $163.0 million in 2004 from $161.0 million in 2003 due to a 6.9% increase in concession sales per patron and a $0.7 million increase in other revenues. Other revenues consist of game machine revenue, screen advertising, family entertainment center revenue and other miscellaneous items. Due to higher year-over-year revenues and lower screen count, our revenues per average screen increased 2.3% to $224,048 from $218,954.
We operated and 282 theatres with 2,188 screens at December 31, 2004 and 299 theatres with 2,253 screens at December 31, 2003.
Cost of operations.
The table below summarizes operating expense data for the periods presented.
Film exhibition costs fluctuate in direct relation to the increases and decreases in admissions revenue. Film exhibition costs for the year ended December 31, 2004 declined as compared to the year ended December 31, 2003 due to the drop in admission revenue as well as a higher percentage of aggregate percentage deals which lowered overall film rent expenses. Aggregate arrangements fix the film rent percentage as opposed to typical graduated scale contracts. Aggregate percentage deals on short-run films tend to have an overall lower percentage cost for the film. As a percentage of admissions revenue, film exhibition costs were to 52.6% for the year ended December 31, 2004, as compared to 54.3% for the year ended December 31, 2003.
Concessions costs fluctuate with the changes in concessions revenue. As a percentage of concessions and other revenues, concession costs were 10.4% for the year ended December 31, 2004 as compared to 11.2% for the year ended December 31, 2003. This reduction was due to slightly higher concession prices as well as improved terms with our concession suppliers.
Other theatre operating costs for the year ended December 31, 2004 increased due to increases in rent, utilities and repair costs compared to the year ended December 31, 2003, as well as the establishment of a reserve of $1.0 million for potential litigation. For more information concerning this reserve see Item 3 Legal Proceedings.
General and administrative expenses for the year ended December 31, 2004 increased compared to the year ended December 31, 2003 due to professional fees related to Sarbanes-Oxley compliance and overall increases in other expenses.
Depreciation and amortization expenses for the year ended December 31, 2004 increased compared to the year ended December 31, 2003. This increase reflects the effect of purchases of fixed assets related to the opening of three new theatres in 2004 as well as construction related to retrofits and maintenance-related capital expenditures.
Gain on sales of property and equipment for the year ended December 31, 2004 decreased compared to the year ended December 31, 2003 due to lower sales of surplus property. We sold two previously closed theatres and two parcels of land during the year ended December 31, 2004 compared to 10 theatres and three parcels of land during the year ended December 31, 2003.
Operating Income. Operating income for the year ended December 31, 2004 decreased 0.8% to $71.1 million compared to $71.7 million for the year ended December 31, 2003. As a percentage of revenues, the operating income for the year ended December 31, 2004 was 14.4% compared to 14.5% for the year ended December 31, 2003.
Interest expense. Interest expense for the year ended December 31, 2004 decreased 39.2% to $26.1 million from $42.9 million for the year ended December 31, 2003. The decrease is related directly to lower indebtedness and interest rates obtained through our debt refinancing, and a result of the resolution of liabilities subject to compromise the Company reversed approximately $4.5 million of interest expense recorded on disputed claims.
Loss on extinguishment of debt. On February 4, 2004, the Company refinanced its debt which resulted in the write-off of $1.8 million of loan fees related to the post-bankruptcy credit facilities and a pre-payment premium on the retirement of the 10.375% senior subordinated notes of $7.5 million.
Reorganization costs. Reorganization costs for the year ended December 31, 2004 consisted of a credit of $12.4 million, compared to a credit of $4.1 million for the year ended December 31, 2003. These credits are the result of changes in estimates on liabilities subject to compromise, partially offset by professional and other expenses. On February 11, 2005, the Company filed a motion seeking an order entering a final decree closing the bankruptcy cases. On March 15, 2005, the United States Bankruptcy Court of the District of Delaware entered a final decree closing the bankruptcy cases.
Income tax expense. We recognized an income tax expense of $18.2 million for the year ended December 31, 2004, representing a combined federal and state tax rate of 37.5%, compared to an income tax benefit of $73.5 million for the year ended December 31, 2003. During the quarter ended December 31, 2003, we determined that the available positive evidence carried more weight than the historical negative evidence and concluded it was more likely than not that the net deferred tax assets would be realized in future periods. Therefore, the $78.4 million valuation allowance was released creating an income tax benefit for 2003. The positive evidence management considered included operating income for 2002 and 2003, our subsequent stock offering and refinancing, resulting in significant prospective interest expense reduction, and anticipated operating income and cash flows for future periods in sufficient amounts to realize the net deferred tax assets.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues.
The Company collects substantially all of its revenues from the sales of admission tickets and concessions. The table below provides a comparative summary of the operating data for this revenue generation.
Total revenues decreased 2.6% for the year ended December 31, 2003 compared to the year ended December 31, 2002 due to decreases in total attendance, which decreased both admission and concessions revenue, generally offset by increases in per patron pricing. Admissions revenue decreased 3.1% to $332.1 million in 2003 from $342.8 million in 2002 due to a 4.0% decrease in overall attendance and a 0.6% increase in average ticket price. Concessions and other revenue decreased 1.6% to $161.0 million in 2003 from $163.7 million in 2002 due to the attendance decrease, and a 0.5% increase in concession sales per patron which were partially offset by a $2.5 million increase in other revenues. Other revenues consist of game machine revenue, screen advertising, family entertainment center revenue and other miscellaneous items. As a result, our revenues per average screen decreased 1.7% to $218,954 from $222,738.
We operated 299 theatres with 2,253 screens at December 31, 2003 and 308 theatres with 2,262 screens at December 31, 2002.
Cost of operations.
The table below summarizes operating expense data for the periods presented.
Film exhibition costs fluctuate in direct relation to the increases and decreases in admissions revenue. Film exhibition costs declined due to the drop in revenue as well a higher percentage of aggregate percentage deals which lowered the overall film rent expenses. As a percentage of admissions revenue, film exhibition costs were 54.3% for the year ended December 31, 2003 as compared to 55.2% for the year ended December 31, 2002.
Concessions costs fluctuate with the changes in concessions revenue. As a percentage of concessions and other revenues, concession costs were 11.2% for the year ended December 31, 2003 as compared to 11.8% for the year ended December 31, 2002.
Other theatre operating costs for the year ended December 31, 2003 decreased due to cost control measures taken during lower business volumes.
General and administrative expenses for the year ended December 31, 2003 increased compared to the year ended December 31, 2002 due to increased valuation of deferred stock compensation.
Depreciation and amortization for the year ended December 31, 2003 remained relatively flat compared to the year ended December 31, 2002.
Gain on sales of property and equipment for the year ended December 31, 2003 increased compared to the year ended December 31, 2002 due to higher sales of surplus property. We sold 10 theatres and three parcels of land during the year ended December 31, 2003 compared to five theatres and two parcels of land during the year ended December 31, 2002.
Operating Income. Operating income for the year ended December 31, 2003 decreased 0.1% to $71.7 million compared to $71.6 million for the year ended December 31, 2002. As a percentage of revenues, the operating income for the year ended December 31, 2003 was 14.5% compared to 14.1% for the year ended December 31, 2002.
Interest expense. Interest expense for the year ended December 31, 2003 decreased 60.0% to $42.2 million from $105.5 million for the year ended December 31, 2002. The decrease is due to interest payments made on January 31, 2002 in conjunction with our emergence from Chapter 11.
Reorganization costs Reorganization costs for 2003 consisted of a credit of $4.8 million as a result of changes in estimates on liabilities subject to compromise, partially offset by $0.7 million of professional and other expenses. We incurred reorganization costs of $20.5 million in 2002, including $8.0 million of professional fees and $8.9 million in non-cash transactions related to the extinguishment of pre-bankruptcy debt and other items totaling $3.6 million.
Income tax expense (benefit). For the period ending December 31, 2004, the Company recognized an income tax expense of $18.2 million. Additionally, we will pay approximately $569 thousand in alternative minimum taxes for the year ended December 31, 2004. During the quarter ended December 31, 2003, we determined the available positive evidence carried more weight than the historical negative evidence and concluded it was more likely than not that the net deferred tax assets would be realized in future periods. Therefore, the $78.4 million valuation allowance was released creating an income tax benefit for 2003. The positive evidence management considered included operating income for 2003 and 2002, our subsequent stock offering and refinancing, resulting in significant prospective interest expense reduction, and anticipated operating income and cash flows for future periods in sufficient amounts to realize the net deferred tax assets. We recognized an income tax benefit of $73.5 million in 2003. The income tax benefit recorded in 2002 is the result of the Job Creation and Worker Assistance Act of 2002, which allowed for additional carryback of net operating losses resulting in a cash refund of approximately $14.7 million. As is customary, the Internal Revenue Service reviews refunds of this size. This review was completed on November 25, 2003 with no adjustments made by the Internal Revenue Service. The new provision also temporarily suspends the 90% limitation found in Internal Revenue Code Section 56(d)(1) on the use of net operating loss carrybacks arising in tax years ending in 2001 and 2002 for alternative minimum tax purposes.
Liquidity and Capital Resources
General
Our revenues are collected in cash and credit card payments. Because we receive our revenues in cash prior to the payment of related expenses, we have an operating “float” which partially finances our operations. We had working capital of $3.0 million as of December 31, 2004 compared to a working capital deficit of $22.1 million at December 31, 2003. The change in working capital is primarily due to our refinancing completed on February 4, 2004. See “Note 10- Debt” of the Notes to Consolidated Financial Statements.
At December 31, 2004, we had available borrowing capacity of $50 million under our revolving credit facility and approximately $56.9 million in cash and cash equivalents on hand. The material terms of our revolving credit facility are described below in “Material Credit Agreements and Covenant Compliance”.
Net cash provided by operating activities was $59.4 million for the year ended December 31, 2004 compared to net cash provided by operating activities of $53.3 million for the year ended December 31, 2003. This change is due to increased profit from operations related primarily to lower interest expenses, offset by changes in accounts payable, payments to general unsecured creditors and other reorganization items. Net cash used in investing activities was $35.4 million for the year ended December 31, 2004 compared to net cash used in investing activities of $12.2 million for the year ended December 31, 2003 due to increased construction of new theatres. For the year ended December 31, 2004 net cash used in financing activities was $8.3 million compared to $53.3 million for the year ended December 31, 2003 due to our refinancing.
Net cash provided by operating activities was $53.3 million for the year ended December 31, 2003 compared to net cash provided by operating activities of $16.3 million for the year ended December 31, 2002. This change is due to increased profit from operations related primarily to lower interest expenses, offset by changes in accounts payable, payments to general unsecured creditors and other
reorganization items. Net cash used in investing activities was $12.2 million for the year ended December 31, 2003 compared to net cash used in investing activities of $14.6 million for the year ended December 31, 2002. For the year ended December 31, 2003 net cash used in financing activities was $53.3 million compared to $42.4 million for the year ended December 31, 2002.
Our liquidity needs are funded by operating cash flow, sales of surplus assets, availability under our credit agreements and short term float. The exhibition industry is very seasonal with the studios normally releasing their premiere film product during the holiday season or summer months. This seasonal positioning of film product makes our needs for cash vary significantly from quarter to quarter. Additionally, the ultimate performance of the film product, any time during the calendar year, will have the most dramatic impact on our cash needs.
We plan to make the maximum capital expenditures allowed under the revolving credit facility for the foreseeable future. The revolving credit facility currently limits capital expenditures to $50 million annually, plus the carryover of any unused portion for the life of the facility. We anticipate we will add approximately 141 screens during the course of 2005 and close approximately 35 screens in older theatres where leases will not be renewed. The expenses associated with exiting these closed theatres typically relate to costs associated with removing owned equipment and is not material to our operations.
Our ability to service our indebtedness will require a significant amount of cash. Our ability to generate this cash will depend largely on future operations. Based upon our current level of operations, we believe that cash flow from operations, available cash, sales of surplus assets and borrowings under our credit agreements will be adequate to meet our liquidity needs for the next twelve months. However, the possibility exists that, if our liquidity needs are not met and we are unable to service our indebtedness, we could come into technical default under any of our debt instruments, causing the agents or trustees for those instruments to declare all payments due immediately or, in the case of the senior debt, to issue a payment blockage to the more junior debt. A similar situation contributed to the circumstances that led us to file our voluntary petition for relief under chapter 11 in August 2000, as described in “Our Reorganization.”
We cannot make assurances that our business will continue to generate significant cash flow to fund our liquidity needs. We are dependent to a large degree on the public’s acceptance of the films released by the studios. We are also subject to a high degree of competition and low barriers of entry into our industry. In the future, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot make assurances that we will be able to refinance any of our indebtedness or raise additional capital through other means, on commercially reasonable terms or at all. If we have insufficient cash flow to fund our liquidity needs and are unable to refinance our indebtedness or raise additional capital, we could come into technical default under our debt instruments as described below. In addition, we may be unable to pursue growth opportunities in new and existing markets and to fund our capital expenditure needs.
Material Credit Agreements and Covenant Compliance
As described below, our credit and leasing facilities contain certain restrictive provisions which, among other things, limit additional indebtedness, limit capital expenditures, limit the payment of dividends and other defined restricted payments, require that certain debt to capitalization ratios be maintained and require minimum levels of defined cash flows.
Revolving Credit Facility
On February 4, 2004, we entered into a revolving credit facility with Goldman Sachs Credit Partners L.P. as sole lead arranger, sole book runner and sole syndication agent and Wells Fargo Foothill, Inc. as administrative agent and collateral agent. The revolving credit facility provides for borrowings of up to $50.0 million. The interest rate for borrowings under the revolving credit facility is set from time to time at our option (subject to certain conditions set forth in the revolving credit facility) at either: (1) a specified base rate plus 2.25% or (2) LIBOR plus 3.25% per annum. The final maturity date of the facility is August 4, 2008.
The revolving credit facility contains covenants which, among other things, limit our ability, and that of our restricted subsidiaries, to:
• pay dividends or make any other restricted payments;
• create liens on our assets;
• make certain investments;
• dispose of interests in our subsidiaries;
• consolidate, merge, transfer or sell assets or acquire properties or businesses;
• enter into transactions with our affiliates; and
• engage in any sale-leaseback or similar transaction involving any of our assets.
Our revolving credit facility generally prohibits us from incurring additional indebtedness or materially amending the terms of any agreement relating to existing indebtedness without lender approval. In particular, our revolving credit agreement generally prohibits us from incurring additional indebtedness other than purchase money debt or capital leases less than $10.0 million, acquired debt less than $10.0 million or subordinated debt or other unsecured debt less than $2.5 million, in each case subject to compliance with financial covenants.
Subsequent to December 31, 2004, we executed Amendment No. 1 to our revolving credit facility. This amendment modified the definition of “Consolidated Capital Expenditures” and increased the amount allowable as capital expenditures from $35 million to $40 million for the year ended December 31, 2004 and $50 million annually, plus the carryover of any unused portion for the remaining life of the credit facility. Had we not negotiated this amendment we would have been in default under the maximum consolidated capital expenditures financial covenant for the year ended December 31, 2004.
The revolving credit facility also contains financial covenants that require us to maintain specified ratios of consolidated total debt to adjusted EBITDA (no greater than 4.50 to 1.00) and adjusted EBITDA to consolidated cash interest expense (not less than 2.00 to 1.00). The terms governing each of these ratios are defined in the revolving credit facility.
Borrowings under the revolving credit facility are pledged by first priority security interests in substantially all of our tangible and intangible assets, including the capital stock of our subsidiaries. All of our subsidiaries guaranteed our obligations under the revolving credit facility.
Term Loan Facility
On February 4, 2004, we entered into a term loan facility with Goldman Sachs Credit Partners L.P. as sole lead arranger, sole book runner and sole syndication agent and National City Bank as administrative agent and collateral agent. The term loan facility provides for borrowings of $100.0 million, which were drawn on the closing of the facility. The interest rate for the borrowings under the term loan facility is equal to, at our option, (1) a specified base rate plus 2.25% or (2) LIBOR plus 3.25% per annum. The final maturity date of the loan is February 4, 2009. Under the facility we are required to make annual principal amortization payments of $1.0 million or $250,000 per quarter.
The term loan facility contains certain negative covenants that, among other things, limit our ability, and that of our restricted subsidiaries, to:
• pay dividends or make any other restricted payments;
• create liens on our assets;
• make certain investments;
• dispose of interests in our subsidiaries;
• consolidate, merge, transfer or sell assets or acquire properties or businesses;
• enter into transactions with our affiliates; and
• engage in any sale-leaseback or similar transaction involving any of our assets.
Under our term loan facility, we are generally permitted to incur additional debt so long as we maintain a ratio of adjusted EBITDA to consolidated fixed charges of greater than or equal to 2.00 to 1.00. Notwithstanding this limitation, we are also permitted to incur other indebtedness, including purchase money debt and capital leases less than $12.5 million, acquired debt of less than $12.5 million and other unsecured debt of up to $7.5 million.
The lenders under the term loan facility have a second priority security interest in substantially all our tangible and intangible assets, including the capital stock of our subsidiaries. All of the security interests and liens that secure the term loan facility are junior and
subordinate to the liens and security interests of the collateral agent under the revolving facility. Our subsidiaries guaranteed our obligations under the term loan facility.
We may voluntarily pre-pay the term loan, in whole or in part, at (1) 103.0% of the amount repaid if such repayment occurs on or prior to the first anniversary of the closing of the term loan facility; (2) 102.0% of the amount repaid if such repayment occurs after the first anniversary but before the second anniversary; (3) 101.0% of the amount repaid if such repayment occurs after the second anniversary but before the third anniversary and (4) 100% of the amount repaid if such repayment occurs after the third anniversary.
Upon a change in control, as defined in the term loan facility agreement, subject to certain exceptions, we are required to offer to repurchase from each lender all or any portion of each lender’s term loans at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.
7.500% Senior Subordinated Notes
On February 4, 2004, we completed an offering of $150.0 million in aggregate principal amount of 7.500% senior subordinated notes due February 15, 2014 to institutional investors.
The indenture contains covenants, which, among other things, limit our ability, and that of our restricted subsidiaries, to:
• make restricted payments;
• create liens on our assets;
• consolidate, merge or otherwise transfer or sell all or substantially all of our assets;
• engage in certain sales of less than all or substantially all of our assets;
• incur additional indebtedness;
• issue certain types of stock; and
• enter into transactions with affiliates.
In addition, under the terms of the indenture governing the notes, we are prohibited from incurring any subordinated debt that is senior in any respect in right of payment to the notes. We completed an exchange of the notes for registered notes with the same terms in August, 2004.
Upon a change of control, as defined in the indenture, subject to certain exceptions, we are required to offer to repurchase from each holder all or any part of each holder’s notes at a purchase price of 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of purchase.
The indenture contains customary events of default for agreements of that type, including payment defaults, covenant defaults and bankruptcy defaults. If any event of default under the indenture occurs and is continuing, then the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.
Our subsidiaries have guaranteed the notes and such guarantees are junior and subordinated to the subsidiary guarantees of our senior debt on the same basis as the notes are junior and subordinated to the senior debt. Interest at 7.500% per annum from the issue date to maturity is payable on the notes each February 15 and August 15. The notes are redeemable at our option under certain conditions.
In conjunction with this refinancing, we wrote-off loan fees relating to the post-bankruptcy credit facilities of $1.8 million and paid pre-payment premiums to retire the 10 3/8% senior subordinated notes in the amount of $7.8 million.
Contractual Obligations
As of December 31, 2004, our long-term debt obligations, obligations to general unsecured creditors pursuant to the plan of reorganization and future minimum payments under capital leases and operating leases with terms over one year and the agreement with our chief executive officer (except as indicated) were as follows:
Off-Balance Sheet Arrangements
As of December 31, 2004, we did not have any off-balance sheet financing transactions or arrangements other than disclosed in the table above.
Asset Impairments
In 2004 and 2003, we identified impairments of asset values for certain theatres which we reflected as operating expenses in our consolidated financial statements. Based on our analysis, no such charges were required in 2002.
The table below sets out certain information concerning these impairments:
The impairment charges in 2004 and 2003 were primarily caused by reductions in estimated theatre cash flows due to the impact of new or increased competition on certain older, auditorium-style theatres, negative evaluation of the operating results produced from theatres previously converted to discount theatres, or our inability to improve a marginal theatre’s operating results to a level that would support the carrying value of the long-lived assets.
Critical Accounting Policies
The preparation of our financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. On an on-going basis, we evaluate our estimates and judgments,
including those related to leasing transactions, depreciation of property and equipment, income taxes, litigation and other contingencies and, in particular, those related to impairment of long-lived assets including goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions and such difference could be material. All critical accounting estimates have been discussed with our audit committee.
We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation, or cost adjusted for recognized impairments. Assets held for disposal are reported at the lower of the asset’s carrying amount or its fair value less costs to sell. Amortization of assets recorded under capital leases is included with depreciation expense in the accompanying consolidated statements of operations.
We compute depreciation on a straight-line basis as follows:
Building and improvements
20-30 years
Leasehold improvements*
15-30 years
Leasehold interests*
15-30 years
Capital leases*
15-30 years
Long-term financing assets
30 years
Equipment
5-15 years
* Number of years is based on the terms of the applicable lease
Impairment of Long-lived Assets, Including Goodwill
Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as a purchase. The provisions of SFAS 142, “Goodwill and Other Intangible Assets,” were adopted on January 1, 2002. The provisions prohibit the amortization of goodwill and indefinite-lived intangible assets and require that these assets be tested periodically for impairment at least annually. We consider all of our consolidated operations to be our reporting unit for SFAS 142 purposes. The Company tests goodwill for impairment during the fourth quarter of its fiscal year (or on an interim basis should an event occur that may reduce the fair value of the reporting unit below its carrying value). As of December 31, 2004 and 2003, our financial statements included acquisition related goodwill of $23.4 million, net of previous amortization.
We account for our property and equipment in accordance with the Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We periodically review and monitor our internal management reports and the competition in our markets for indicators of impairment. We consider a trend of operating results that are not in line with management’s expectations to be the primary indicator of potential impairment. An additional impairment indicator used by management is the existence of competition in a market, either from third parties or from our own expansion. For purposes of SFAS No. 144, assets are evaluated for impairment at the theatre level except when multiple theatres are located in the same geographic area. Management believes this is the lowest level for which there are identifiable cash flows. We deem there to be an impairment if a forecast of undiscounted future operating cash flows directly related to the theatre or market, including estimated disposal value if any, is less than its carrying amount. If there is a determination of an impairment, the loss is measured as the amount by which the carrying amount of the theatre or market exceeds its fair value. Fair value is based on management’s estimates which are based on using the best information available, including prices for similar theatres or the results of valuation techniques such as discounting estimated future cash flows. Considerable judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.
See “Asset Impairments” above for additional information regarding the effects on the 2004 and 2003 consolidated financial statements.
Bankruptcy Matters
As debtors-in-possession, we had the right, subject to bankruptcy court approval and certain other limitations, to assume or reject executory contracts and unexpired leases during our reorganization. Any damages resulting from rejection of executory contracts or unexpired leases were treated as general unsecured claims in our reorganization. During our reorganization, we received approval from the bankruptcy court to reject theatre leases on 136 of our theatre locations. We estimate that our aggregate liability at December 31, 2004 for general unsecured creditors is approximately $1.3 million, which includes our estimated liability for damages resulting from the rejection of executory contracts and unexpired leases which we have not already paid. As of December 31, 2004, total accrued interest on those claims was $338,000. All of these claims are disputed. As such, we cannot presently determine with certainty the ultimate liability that may result; however, the bankruptcy court still maintains jurisdiction over certain matters related to the implementation of the plan of reorganization, including the unresolved disputed claims. We have made our best estimate of such liability given the facts available at this time. If we are unable to resolve these claims with the unsecured creditors we may petition the bankruptcy court to resolve them. On February 11, 2005, the Company filed a motion seeking an order entering a final decree closing the bankruptcy cases. On March 15, 2005, the United States Bankruptcy Court of the District of Delaware entered a final decree closing the bankruptcy cases.
Leases
We operate most of our theatres under non-cancelable operating lease agreements. These leases generally provide for the payment of fixed monthly rentals, property taxes, common area maintenance, insurance and repairs. Certain of these leases provide for escalating lease payments over the terms of the leases. Moreover, certain leases also include contingent rental fees based on a percentage of sales. At our option, we can renew a substantial portion of our theatre leases, at the then fair rental rate, for various periods with the maximum renewal period generally totaling 10-20 years. For financial statement purposes, the total amount of base rentals over the terms of the leases is charged to expense on the straight-line method over the initial lease terms. Rental expense in excess of lease payments is recorded as a deferred rental liability and is amortized to rental expense over the remaining term of the lease.
Percentage Rent
Several leases have a contingent component called percentage rent. Percentage rent is based on a percentage of defined revenue factors over a fixed breakpoint for the lease year as described within the lease. We accrue for this contingent liability monthly based on the trailing twelve months activity of the affected theatre. Payment of this liability is defined within the lease and the accrual is reconciled at the end of the lease year.
Financing Obligations
The Company is considered the owner of certain assets during construction under the provisions of Emerging Issues Task Force No. 97-10, as we pay directly for a substantial portion of the construction costs. Once construction is completed, we consider the requirements under Financial Accounting Standards No. 98 for sale treatment, and if the arrangement does not meet such requirements, we record the reimbursement of some of the construction costs from the landlord as a financing obligation. The obligation is amortized over the lease term based on the rent payments designated in the contract.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under the SFAS No. 109, the liability method is used in accounting for income taxes.
In 2000, we established a valuation allowance in accordance with the provisions of Statement of SFAS No. 109, “Accounting for Income Taxes”. We periodically review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets only as reassessment indicates that it is more likely than not that the deferred tax assets will be realized. For the year ended December 31, 2003, we determined that it is more likely than not that the deferred tax assets will be realized in the future. Accordingly, the valuation of approximately $78.4 million was released and a deferred tax asset of $72.0 million was recognized. If our profitability significantly decreases it could negatively impact our ability to utilize the deferred tax asset.
Impact of Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (“SFAS 123(R)”). SFAS 123(R) revises FASB Statement of Financial Accounting Standards No. 123, “Accounting for stock-based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition, FAS 123(R) supercedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees (“APB 25”), and amends FASB Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“SFAS 95”).
SFAS 123(R) requires companies to use fair value to measure stock-based compensation awards and cease using the “intrinsic value” method of accounting, which APB No. 25 allowed, and resulted in no expense for many awards of stock options where the exercise price of the option equaled the price of the underlying stock at grant date. The fair value of the award is not remeasured after its initial estimation on the grant date (except under specific circumstances).
SFAS 123(R) must be adopted no later than for periods beginning after June 15, 2005. Based on our valuation under the Black-Scholes option valuation model, presently used by the Company and still appropriate under SFAS 123(R), the Company estimates additional deferred compensation expense from adoption to be approximately $1.0 million for the years ended December 31, 2005 and 2006. The Company will evaluate other valuation methods, prior to implementation, to determine the most accurate for the Company.
Recent Developments
None
Information About Forward-Looking Statements
This annual report contains forward-looking statements within the meaning of the federal securities laws. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the SEC or in connection with oral statements made to the press, potential investors or others. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words, “believes,” “expects,” “anticipates,” “plans,” “estimates” or similar expressions. These statements include, among others, statements regarding our strategies, sources of liquidity, and the opening of new theatres during 2004.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on beliefs and assumptions of our management, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding expected pricing levels, competitive conditions and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
• the availability of suitable motion pictures for exhibition in our markets;
• competition in our markets;
• competition with other forms of entertainment;
• the effect of our leverage on our financial condition; and
• other factors, including the risk factors discussed on pages 14 through 22 in this annual report.
We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various market risks. We have floating rate debt instruments and, therefore, are subject to the market risk related to changes in interest rates. Interest paid on our debt is largely subject to changes in interest rates in the market. Our revolving credit facility and our five-year term loan credit facility are based on a structure that is priced over an index or LIBOR rate option. An increase of 1% in interest rates would increase the interest expense on our $100 million term loan credit agreement, $1 million on an annual basis. If our $50 million revolving credit agreement was fully drawn a 1% increase in interest rates would increase interest expense $500,000 on an annual basis. The interest rate on our 7.500% senior subordinated notes is fixed and changes in interest rates will have no effect on annual interest expense.
A substantial number of our theatre leases have increases contingent on Consumer Price Index (“CPI”) changes. A 1.0% change in CPI would not have a material effect on rent expense.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements for the year ended December 31, 2004.
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Carmike Cinemas, Inc. :
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Carmike Cinemas, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 15, 2005
Report Of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Carmike Cinemas, Inc.
We have audited the accompanying consolidated statement of operations, stockholders’ equity and cash flows of Carmike Cinemas, Inc. and subsidiaries for the year ended December 31, 2002. Our audit also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Carmike Cinemas, Inc. and subsidiaries for the year ended December 31, 2002, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002 the Company ceased amortization of goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
Ernst & Young LLP
Atlanta, Georgia
March 3, 2003 except for
the restatement for lease accounting as described
in the Company’s Form 10-K/A filed on December 6, 2004,
as to which date is December 6, 2004
CONSOLIDATED BALANCE SHEETS
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands, except for share data)
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands, except per share data)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands)
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands)
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CARMIKE CINEMAS, INC. and SUBSIDIARIES
December 31, 2004
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On August 8, 2000 (the “Petition Date”), Carmike and its subsidiaries, Eastwynn Theatres, Inc. (“Eastwynn”), Wooden Nickel Pub, Inc. (“Wooden Nickel”) and Military Services, Inc. (“Military Services”) (collectively “the Company”) filed voluntary petitions for relief under Chapter 11 (the “Chapter 11 Cases”) of the United States Bankruptcy Code. In connection with the Chapter 11 Cases, the Company was required to report in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, (“SOP 90-7”). SOP 90-7 requires, among other things, (i) that pre-petition liabilities that are subject to compromise be segregated in the Company’s consolidated balance sheet as liabilities subject to compromise and (ii) the identification of all transactions and events that are directly associated with the reorganization of the Company in the Consolidated Statements of Operations. Carmike’s plan of reorganization was approved on January 4, 2002 and became effective on January 31, 2002.
On February 11, 2005, the Company filed a motion seeking an order entering a final decree closing the bankruptcy cases. On March 15, 2005, the United States Bankruptcy Court of the District of Delaware entered a final decree closing the bankruptcy cases.
Description of Business
The primary business of the Company is the operation of motion picture theatres which generate revenues principally through admissions and concessions sales. The Company considers itself to be in a single segment. Substantially all revenues are received in cash and are recognized as income at the point of sale. Ten major distributors in the motion picture industry produced films which accounted for approximately 86.3%, 99.8% and 97.7% of the Company’s admission revenues in 2004, 2003 and 2002, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and such difference could be material. Management’s most significant estimates are insurance reserves, bonus accruals, impairments, property and income taxes and liabilities subject to compromise.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of three months or less at the date of purchase and consist primarily of money market accounts and deposits. Deposits with banks are federally insured in limited amounts.
Debt Issuance Costs
Upon emergence from Chapter 11, all of the debt issuance costs relating to the pre-petition debt were written off to reorganization costs. The debt issuance costs relating to the new debt were capitalized and are being amortized to interest expense over the term of the related debt.
Inventories
Inventories, principally concessions and theatre supplies, are stated at the lower of cost (first-in, first-out method) or market.
Investments in Unconsolidated Affiliates
Our investments in privately held entities are accounted for under either the equity or consolidation method, whichever is appropriate for the particular investment. The appropriate method is determined by our ability to exercise significant influence over the investee, through either quantity of voting stock or other means. We regularly review our investments for impairment issues and propriety of current accounting treatment. The primary method we use to determine whether or not impairment exists is to compare the valuation of our investment with the underlying value of the entity in which we have an investment. We can determine the underlying value of the entity based on a number of factors, including the execution of business strategy and the steps that it has and is taking in the execution of that strategy, and the entity’s subsequent financing activity. If we determine that impairment exists, we would recognize
the loss in other income (expense) in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.”
Investments in which we maintain a 20% to 50% interest, or otherwise have the ability to exercise significant influence, are accounted for under the equity method. Investments in which we have less than a 20% interest and over which we do not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value. We monitor both equity and cost basis investments for other than temporary declines in value and make reductions in carrying values when appropriate.
Property and Equipment
Property and equipment are carried at cost or cost adjusted for recognized impairments. Assets held for disposal are reported at the lower of the asset’s carrying amount or its fair value less costs to sell. Amortization of assets recorded under capital leases is included with depreciation expense in the accompanying consolidated statements of operations. Depreciation is computed on a straight-line basis as follows:
Building and improvements
20-30 years
Leasehold improvements*
15-30 years
Leasehold interests*
15-30 years
Capital leases*
15-30 years
Long-term financing assets
30 years
Equipment
5-15 years
* Number of years is based on the term of the applicable lease
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was $33.8 million, $33.4 million and $33.7 million, respectively.
Goodwill
Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as a purchase. The provisions of SFAS 142, “Goodwill and Other Intangible Assets,” were adopted on January 1, 2002. The provisions prohibit the amortization of goodwill and indefinite-lived intangible assets and require that these assets be tested periodically for impairment at least annually. We consider all of our consolidated operations to be our reporting unit for SFAS 142 purposes. The Company tests goodwill for impairment during the fourth quarter of its fiscal year (or on an interim basis should an event occur that may reduce the fair value of the reporting unit below its carrying value.). As of December 31, 2004 and 2003, our financial statements included acquisition- related goodwill of $23.4 million, net of previous amortization.
Assets Held for Sale
Certain assets have been identified for disposition, a portion of which is undeveloped land. The value of these assets are reported in the assets held for sale pending the completion of their sale and are held at the lower of their carrying amount or fair value less costs to sell. The carrying value of these assets are reviewed annually as to relative market conditions and are used in accordance with SFAS No. 144. Disposition of these assets is contingent on current market conditions and we cannot be assured that they will be sold at a value equal to or greater than the current carrying value.
Deferred Revenue
The Company records proceeds from the sale of gift cards and other advanced sale-type certificates in current liabilities and recognized admission and concession revenue when a holder redeems a gift card or other advanced sale-type certificate. We recognize unredeemed gift cards and other advanced sale-type certificates upon expiration.
Impairment of Property and Equipment
The Company accounts for its property and equipment in accordance with the Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company annually reviews and monitors its internal management reports and the competition in its markets for indicators of impairment.
The Company considers a trend of operating results that are not in agreement with management’s expectations to be its primary indicator of potential impairment. An additional impairment indicator used by management is the existence of competition in a
market, either from third parties or from the Company’s own expansion. For purposes of SFAS No. 144, property and equipment are evaluated for impairment at the theatre level except when multiple theatres are located in the same geographical area. The Company deems a theatre or market to be impaired if a forecast of undiscounted future operating cash flows directly related to the theatre or market, including estimated disposal value if any, is less than its carrying amount. If a theatre or market is determined to be impaired, the loss is measured as the amount by which the carrying amount of the theatres within the market exceeds its fair value. Fair value is based on management’s estimates, which are based on using the best information available, including prices for similar theatres or the results of valuation techniques such as discounting estimated future cash flows. Considerable judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rate and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. For the year ended December 31, 2003, the Company determined that it is more likely than not that certain deferred tax assets will be realized in the future and accordingly, it was appropriate to release the valuation allowance and recognize a tax benefit of $73.5 million.
Advertising
The company expenses advertising costs when incurred. Advertising expense represents less than two percent of our operating expenses each year.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure” (“SFAS No. 148”). SFAS No. 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-based Compensation” (“SFAS No. 123”), to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 was effective for financial statements of the Company for fiscal years ending 2002 and for interim periods beginning on January 1, 2003.
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for stock Issued to Employees (“APB No. 25”). Reflected in the 2004, 2003 and 2002 Statement of Operations is $5.8, $6.0 and $3.6 million, respectively, of stock-based employee compensation cost related to the stock grants ($3.2, $3.2 and $2.9 million, respectively, from fixed accounting and $2.6, $2.8 and $.07 million, respectively, from variable accounting.)
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For SFAS No. 123 purposes, the fair value of each option grant and stock based award has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
The estimated fair value of the options granted during 2003 was $12.12 per share. Had compensation cost been determined consistent with SFAS No. 123, utilizing the assumptions detailed above, the Company’s pro forma net income (loss) and pro forma basic income (loss) per share would have increased (decreased) to the following amounts (in thousands, except share data):
Earnings Per Share
Earnings per share is presented in conformity with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”), for all periods presented. In accordance with SFAS No. 128, basic net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding plus common stock equivalents for each period. Stock grants to acquire shares of common stock under the 2002 Stock Plan were not included in 2002 as their effect would be antidilutive. The number of antidilutive shares were 180,000 and 152,000 for years 2003 and 2002, respectively. There were no antidilutively shares in 2004.
Leases
The Company has various non-cancelable operating lease agreements. The theatre leases generally provide for the payment of fixed monthly rentals, property taxes, common area maintenance, insurance and repairs. Certain of these leases provide for escalating lease payments over the terms of the leases. Moreover, certain leases also include contingent rental fees based on a percentage of sales. The Company, at its option, can renew a substantial portion of its theatre leases, at the then fair rental rate, for various periods with the maximum renewal period generally totaling 15-20 years. For financial statement purposes, the total amount of base rentals over the term of the leases is charged to expense on the straight-line method over the lease terms. Rental expense in excess of lease payments is recorded as a deferred rental liability.
Financing Obligations
The Company is considered the owner of certain assets during construction under the provisions of EITF 97-10, as we pay directly for a substantial portion of the construction costs. Once construction is completed, we consider the requirements under SFAS 98 for sale treatment, and if the arrangement does not meet such requirements, we record the reimbursement of some of the construction costs from the landlord as a financing obligation. The obligation is amortized over the lease term based on the rent payments designated in the contract.
Derivatives
The Company recognizes all derivative financial instruments, such as interest rate swap contracts, in the consolidated financial statements at fair value. Changes in the fair value of derivative financial instruments are either periodically recorded in income or in stockholders’ equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. If an interest rate swap agreement is terminated, any resulting gain or loss would be deferred and amortized to interest expense over the remaining life of the hedged debt instrument. In the event of early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized to income coincident with the extinguishment. As of December 31, 2004 the Company had no derivative financial instruments.
Benefit Plans
The Company has a non-qualified deferred compensation plan for certain of its executive officers. Under this plan, the Company contributes ten percent of the employee’s taxable compensation to a secular trust designated for the employee. The Company also has a benefit plan for certain non-executive employees, of which contributions to the plans are at the discretion of the Company’s executive management. Contributions related to these plans are not material to the Company’s results of operations.
Reclassifications
Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(R) , “Share Based Payment” (“SFAS 123(R)”). SFAS 123(R) revises FASB Statement of Financial Accounting Standards No. 123, “Accounting for stock-based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. In addition, SFAS 123(R) supercedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for stock Issued to Employees (“APB 25”), and amends FASB Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“SFAS 95”).
SFAS 123(R) requires companies to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting., which APB No. 25 allowed, and resulted in no expense for many awards of stock options where the exercise price of the option equaled the price of the underlying stock at grant date. The fair value of the award is not remeasured after its initial estimation on the grant date (except under specific circumstances).
SFAS 123(R) must be adopted no later than for periods beginning after June 15, 2005. Based on our valuation under the Black-Scholes option valuation model, presently used by the Company and still appropriate under SFAS 123(R), the Company estimates additional deferred compensation expense from adoption to be approximately $1.0 million for the years ended December 31, 2005 and 2006. The Company will evaluate other valuation methods, prior to implementation, to determine the most accurate for the Company.
NOTE 2 - PROCEEDINGS UNDER CHAPTER 11
In the Chapter 11 Cases, discussed in Note 1, substantially all unsecured and partially secured liabilities as of the Petition Date were subject to compromise or other treatment until a plan of reorganization was confirmed by the bankruptcy court. Generally, actions to enforce or otherwise effect repayment of all pre-chapter 11 liabilities as well as all pending litigation against the Company were stayed while the Company continued their business operations as debtors-in-possession.
The Company could not pay pre-petition debts without prior bankruptcy court approval during the Chapter 11 Cases. Immediately after the commencement of the Chapter 11 Cases, the Company sought and obtained several orders from the bankruptcy court which were intended to stabilize its business and enable the Company to continue operations as debtors-in-possession. The most significant of these orders: (i) permitted the Company to operate its consolidated cash management system during the Chapter 11 Cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 Cases; (ii) authorized payment of pre-petition wages, vacation pay and employee benefits and reimbursement of employee business expenses; (iii) authorized payment of pre-petition sales and use taxes owed by the Company; (iv) authorized the Company to pay up to $2.3 million of pre-petition obligations to critical vendors, common carriers and workers’ compensation insurance to aid the Company in maintaining operation of its theatres and approximately $37 million to film distributors; and (v) authorized debt service payments for the loan related to Industrial Revenue Bonds issued by the Downtown Development Authority of Columbus, Georgia.
As debtors-in-possession, the Company had the right during the reorganization period, subject to bankruptcy court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, “assumption” means that the Company agrees to perform its obligations and cure all existing defaults under the contract or lease, and “rejection” means that the Company is relieved from its obligations to perform further under the contract or lease but is subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases were treated as general unsecured claims in the Chapter 11 Cases. During the Chapter 11 Cases, the Company received approval from the bankruptcy court to reject theatre leases relating to 136 theatre locations. The Company estimated the ultimate liability that may result from rejecting leases and reported it as Liabilities Subject to Compromise in the balance sheet. However, the ultimate liability may differ from such estimates based on settlements of claims that have or may be filed in the future.
As a result of the Chapter 11 Cases, no principal or interest payments were made on unsecured pre-petition debt. On October 27, 2000, the Company received bankruptcy court approval to make debt service payments for the loan related to Industrial Revenue Bonds issued by the Downtown Development Authority of Columbus, Georgia. The Company reached an agreement with its creditor constituencies that provides for the payment of cash collateral and adequate protection, as those terms are defined in the Bankruptcy Code. The Company made payments to the secured lenders in the amount of $8,272,821 on March 5, 2001 and made payments of $500,000 per month as adequate protection payments. All of these payments are treated as principal payments under the creditor agreement.
Additionally, after the Petition Date, the Company could not declare dividends for its Preferred stock. Preferred stock dividends of $7.0 million and $2.3 million were in arrears at December 31, 2001 and 2000. The terms of the Preferred stock agreement provided, with respect to dividend arrearages, that the dividend accrual rate increases to 8.5%. In view of the Company having ceased making scheduled dividend payments on the Preferred stock after the Petition Date, the holders of the Preferred stock designated two additional directors to the Company’s Board of Directors. Also, during the Chapter 11 Cases, the Company reached an agreement to restructure its master lease facility with MoviePlex Realty Leasing, L.L.C. (“MoviePlex”) and entered into the Second Amended and Restated Master Lease, dated as of September 1, 2001 (the “ Master Lease”). Under the Master Lease, Carmike entered into a 15-year lease for the six MoviePlex properties with an option to extend the term for an additional five years. The original MoviePlex Lease was terminated and prepetition defaults of $493,680 under the original MoviePlex Lease were paid. The initial first twelve months base rent for the six theatres is an aggregate of $5.4 million per annum ($450,000 per month), subject to periodic increases thereafter and certain additional rent obligations such as percentage rent.
All past due rent, additional rent, and/or other sums due to MoviePlex under the terms of the Master Lease bear interest from the date which is five days from the date the amounts were due until paid by Carmike at the rate of 2% above the published prime rate of Wachovia Bank, N.A. Under the Master Lease, Carmike pays all real estate taxes with respect to the leased premises.
When the plan of reorganization became effective on January 31, 2002, Carmike filed with the Secretary of State for the State of Delaware the Amended and Restated Certificate of Incorporation, which cancelled all then existing Class A and Class B common stock and preferred stock of the Company and established authorized capital stock of twenty million (20,000,000) shares of reorganized Carmike common stock, par value $.03 per share, and one million (1,000,000) shares of reorganized Carmike Preferred stock, par value $1.00 per share. The Company currently at December 31, 2004 had 12,162,622 shares of reorganized Carmike common stock outstanding.
Material features of the plan of reorganization were:
On the effective date of the reorganization, the Company entered into a term loan credit agreement (the “Post-Bankruptcy Credit Agreement”), which governed the terms of the post-bankruptcy Bank Debt. The Company’s subsidiaries guaranteed the Company’s obligations under the Post-Bankruptcy Credit Agreement. The lenders under the Post-Bankruptcy Credit Agreement had (i) a second priority, perfected lien on owned real property and, to the extent landlord approval was obtained or not required, leased real property of the Company and its subsidiaries; (ii) a second priority, perfected security interest in the equity interests of Company subsidiaries or 50% owned entities; and (iii) a second priority, security interest in substantially all personal property and specified small receivables owned by the Company and its subsidiaries. All of the security interests and liens that secured the post-bankruptcy Bank Debt under the Post-Bankruptcy Credit Agreement were junior and subordinate to the liens and security interests of the collateral agent under the Post-Bankruptcy Revolving Credit Agreement.
The reorganization value of the assets of the Company immediately before the effective date of the reorganization was greater than the total of all post-petition liabilities and allowed claims and the plan of reorganization does not result in a change in ownership as defined by Statement of Position 90-7; accordingly, the Company will continue to recognize its results on the historical basis of accounting.
Reorganization costs for the periods ended December 31, 2004, 2003 and 2002, respectively, are as follows (in thousands):
Cash used in reorganization activities for 2004, 2003 and 2002 are as follows (in thousands):
NOTE 3 - LIABILITIES SUBJECT TO COMPROMISE
The principal categories of obligations classified as Liabilities Subject to Compromise under the Chapter 11 Cases are identified below. The amounts in total may vary significantly from the stated amounts of proofs of claims filed with the bankruptcy court, and may be subject to future adjustments depending on bankruptcy court action, further developments with respect to potential disputed claims, and determination as to the value of any collateral securing claims or other events.
A summary of the principal categories of claims classified as Liabilities Subject to Compromise at December 31, 2004 and 2003 are as follows (in thousands):
NOTE 4 - IMPAIRMENT OF PROPERTY AND EQUIPMENT
The impairment charges of $0.9 million and $1.1 million in 2004 and 2003, respectively, were primarily attributable to changes in competition in some of our markets. These changes caused a decrease in profitability in nine and four theatres, which operate 30 and 27 screens, respectively, to a point below the carrying value of the long-lived assets. There was no impairment of long-lived assets during the year ended December 31, 2002.
NOTE 5 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company purchased the remaining equity interest in its unconsolidated affiliates located in South Carolina. The purchase of this equity was approximately $3.5 million in cash and assumed liabilities and as of the year ended December 31, 2004 has consolidated all affiliates.
The Company has a 50% equity interest in a partnership that operates two theatres in Mason City, Iowa, which is not consolidated into our statement of operations.
NOTE 6 - OTHER ASSETS
Other assets are as follows:
NOTE 7 - PROPERTY AND EQUIPMENT
The Company did not obtain any property or equipment under capital leases during 2004 or 2003. The Company recorded one long-term financing arrangement totalling $6.2 million in 2004 and two long-term financing arrangements for $4.6 million in 2003.
The following amounts related to capital lease and long-term financing assets are included in property and equipment (in thousands):
NOTE 8 - CAPITALIZED INTEREST AND CASH PAID FOR INTEREST
The Company capitalized interest in connection with its construction of long-lived assets. Interest incurred and interest capitalized are as follows (in thousands):
NOTE 9 - ACCRUED EXPENSES
Accrued expenses include the following (in thousands):
NOTE 10 - DEBT
Debt consisted of the following (in thousands):
2004 Financing Transactions
Revolving Credit Facility
On February 4, 2004, we entered into a revolving credit facility with Goldman Sachs Credit Partners L.P. as sole lead arranger, sole book runner and sole syndication agent and Wells Fargo Foothill, Inc. as administrative agent and collateral agent. The revolving credit facility provides for borrowings of up to $50.0 million. The interest rate for borrowings under the revolving credit facility is set from time to time at our option (subject to certain conditions set forth in the revolving credit facility) at either: (1) a specified base rate plus 2.25% or (2) LIBOR plus 3.25% per annum. The final maturity date of the facility is August 4, 2008.
The revolving credit facility contains covenants which, among other things, limit our ability, and that of our restricted subsidiaries, to:
• pay dividends or make any other restricted payments;
• create liens on our assets;
• make certain investments;
• dispose of interests in our subsidiaries;
• consolidate, merge, transfer or sell assets or acquire properties or businesses;
• enter into transactions with our affiliates; and
• engage in any sale-leaseback or similar transaction involving any of our assets.
Our revolving credit facility generally prohibits us from incurring additional indebtedness or materially amending the terms of any agreement relating to existing indebtedness without lender approval. In particular, our revolving credit agreement generally prohibits us from incurring additional indebtedness other than purchase money debt or capital leases less than $10.0 million, acquired debt less than $10.0 million or subordinated debt or other unsecured debt less than $2.5 million, in each case subject to compliance with financial covenants.
Subsequent to December 31, 2004, we executed Amendment No. 1 to our revolving credit facility. This amendment modified the definition of “Consolidated Capital Expenditures” and increased the amount allowable as capital expenditures from $35 million to $40 million for the year ended December 31, 2004 and $50 million annually, plus the carryover of any unused portion for the remaining life of the credit facility. Had we not negotiated this amendment we would have been in default under the maximum consolidated capital expenditures financial covenant for the year ended December 31, 2004.
Our failure to comply with any of these covenants, including compliance with the financial ratios, is an event of default under the revolving credit facility, in which case, the agent may, and if requested by the lenders holding a certain minimum percentage of the commitments shall, terminate the revolving credit facility with respect to additional advances and may declare all or any portion of the obligations due and payable. Other events of default under the revolving credit facility include:
• our failure to pay principal or interest on the loans when due and payable, or our failure to pay certain expenses;
• the occurrence of a change of control, as defined in the agreement; or
• a breach or default by us or our subsidiaries under the term loan facility, the indenture relating to the 7.500% senior subordinated notes or other debt exceeding $2.5 million in any single case, or $5.0 million in the aggregate.
Borrowings under the revolving credit facility are secured by first priority security interests in substantially all of our tangible and intangible assets, including the capital stock of our subsidiaries. All of our subsidiaries guaranteed our obligations under the revolving credit facility.
Term Loan Facility
On February 4, 2004, we entered into a term loan facility with Goldman Sachs Credit Partners L.P. as sole lead arranger, sole book runner and sole syndication agent and National City Bank as administrative agent and collateral agent. The term loan facility provides for borrowings of $100.0 million, which were drawn on the closing of the facility. The interest rate for the borrowings under the term loan facility is equal to, at our option, (1) a specified base rate plus 2.25% or (2) LIBOR plus 3.25% per annum. The final maturity date of the loan is February 4, 2009. Under the facility we are required to make principal amortization payments of $250,000 per quarter.
The term loan facility contains certain negative covenants that, among other things, limit our ability, and that of our restricted subsidiaries, to:
• pay dividends or make any other restricted payments;
• create liens on our assets;
• make certain investments;
• dispose of interests in our subsidiaries;
• consolidate, merge, transfer or sell assets or acquire properties or businesses;
• enter into transactions with our affiliates; and
• engage in any sale-leaseback or similar transaction involving any of our assets.
Under our term loan facility, we are generally permitted to incur additional debt so long as we maintain a ratio of adjusted EBITDA to consolidated fixed charges of greater than or equal to 2.00 to 1.00. Notwithstanding this limitation, we are also permitted to incur other indebtedness, including purchase money debt and capital leases less than $12.5 million, acquired debt of less than $12.5 million and other unsecured debt of up to $7.5 million.
The lenders under the term loan facility have a second priority security interest in substantially all our tangible and intangible assets, including the capital stock of our subsidiaries. All of the security interests and liens that secure the term loan facility are junior and subordinate to the liens and security interests of the collateral agent under the revolving facility. Our subsidiaries guaranteed our obligations under the term loan facility.
We may voluntarily pre-pay the term loan, in whole or in part, at (1) 103.0% of the amount repaid if such repayment occurs on or prior to the first anniversary of the closing of the term loan facility; (2) 102.0% of the amount repaid if such repayment occurs after the first anniversary but before the second anniversary; (3) 101.0% of the amount repaid if such repayment occurs after the second anniversary but before the third anniversary and (4) 100% of the amount repaid if such repayment occurs after the third anniversary.
Upon a change in control, as defined in the term loan facility agreement, subject to certain exceptions, we are required to offer to repurchase from each lender all or any portion of each lender’s term loans at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.
7.500% Senior Subordinated Notes
On February 4, 2004, we completed an offering of $150.0 million in aggregate principal amount of 7.500% senior subordinated notes due February 15, 2014 to institutional investors.
The indenture contains covenants, which, among other things, limit our ability, and that of our restricted subsidiaries, to:
• make restricted payments;
• create liens on our assets;
• consolidate, merge or otherwise transfer or sell all or substantially all of our assets;
• engage in certain sales of less than all or substantially all of our assets;
• incur additional indebtedness;
• issue certain types of stock; and
• enter into transactions with affiliates.
In addition, under the terms of the indenture governing the notes, we are prohibited from incurring any subordinated debt that is senior in any respect in right of payment to the notes. We completed an exchange of the notes for registered notes with the same terms in August, 2004.
Upon a change of control, as defined in the indenture, subject to certain exceptions, we are required to offer to repurchase from each holder all or any part of each holder’s notes at a purchase price of 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of purchase.
The indenture contains customary events of default for agreements of that type, including payment defaults, covenant defaults and bankruptcy defaults. If any event of default under the indenture occurs and is continuing, then the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.
Our subsidiaries have guaranteed the notes and such guarantees are junior and subordinated to the subsidiary guarantees of our senior debt on the same basis as the notes are junior and subordinated to the senior debt. Interest at 7.500% per annum from the issue date to maturity is payable on the notes each February 15 and August 15. The notes are redeemable at our option under certain conditions.
In conjunction with this refinancing, we wrote-off loan fees relating to the post-bankruptcy credit facilities of $1.8 million and paid pre-payment premiums to retire the 10 3/8% senior subordinated notes in the amount of $7.8 million.
Our long-term debt obligations and obligations to general unsecured creditors pursuant to the plan of reorganization were as follows:
NOTE 11 - INCOME TAXES
As of December 31, 2004 and 2003, the Company had net deferred tax assets of approximately $54.4 million and $72.0 million, respectively. The net deferred tax asset as of December 31, 2002 was fully offset by a valuation allowance of $78.4 million. For the period ended December 31, 2003, the Company determined that it is more likely than not that certain deferred tax assets will be realized in the future and accordingly, it was appropriate to release the valuation allowance and recognize a tax benefit of $73.5 million. The positive evidence management considered included operating income for 2002 and 2003, its subsequent stock offering and refinancing resulting in significant prospective interest expense reduction and anticipated operating income and cash flows for future periods in sufficient amounts to realize the net deferred tax assets.
The income tax benefit recorded in 2002 was the result of the Job Creation and Worker Assistance Act of 2002, which allowed for additional carryback of net operating losses resulting in a cash refund of approximately $14.7 million. For the years ended December 31, 2004 and 2003, the Company’s alternative minimum tax provision was $569,000 and $500,000, respectively.
The provision for income tax expense (benefit) is summarized as follows (in thousands):
The consolidated income tax provision was different from the amount computed using the U.S. statutory income tax rate for the following reasons (in thousands):
Significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):
During 2004, the Company utilized net operating losses of approximately $28.5 million, respectively and has $84.7 million of federal and state operating loss carryforwards with which to offset our future taxable income. The federal and state operating loss carryforwards begin to expire in the year 2020. In addition, the Company’s alternative minimum tax credit carryforward has an indefinite carryforward life.
NOTE 12 - STOCKHOLDERS’ EQUITY
At December 31, 2001, the Company’s authorized capital consisted of 22.5 million shares of Class A common stock, $.03 par value, 5 million shares of Class B common stock, $.03 par value, and one million shares of Series A preferred stock, $1.00 par value. Each share of Class A common stock entitled the holder to one vote per share, whereas a share of Class B common stock entitled the holder to ten votes per share. Each share of Class B common stock was entitled to cash dividends, when declared, in an amount equal to 85% of the cash dividends payable on each share of Class A common stock. Class B common stock was convertible at any time by the holder into an equal number of shares of Class A common stock.
The Series A preferred stock paid quarterly cash dividends at an annual rate of 5.5% and was convertible at the option of the holder, into the Company’s Class A common stock at $25.00 per share (subject to anti-dilution adjustments). The Series A preferred stock was not subject to mandatory redemption or sinking fund provisions but did have involuntary liquidation rights for $55 million. Each share of the Series A preferred stock was convertible into four shares of the Class A common stock. During the course of the Chapter 11 Cases, the Company could not declare dividends for its preferred stock. Dividends of $9.3 million on Preferred stock were in arrears at December 31, 2001. The terms of the preferred stock agreement provided that the dividend rate increased to 8.5% for arrearages.
Upon emergence from Chapter 11 on January 31, 2002, both Class A and Class B common stock, as well as the Series A preferred stock, were cancelled and shares of common stock were issued. The common stock, $0.03 par value, consists of 20 million authorized shares, of which approximately 9 million were outstanding as of December 31, 2003. Of the 20 million authorized shares, one million shares were reserved for issuance under the 2002 Stock Plan.
Additionally, the Company has new preferred stock, $1.00 par value, with one million authorized shares, of which no shares were outstanding as of December 31, 2004.
The Company had shares of Class A common stock in 2001 and has shares of common stock in 2002 and 2003 reserved for future issuance as follows (in thousands):
See Note 2-Proceedings Under Chapter 11
Stock Plans
Upon emergence from Chapter 11, the Company’s Board of Directors approved a new management incentive plan, the Carmike Cinemas, Inc. 2002 Stock Plan (the “2002 Stock Plan”). The Board of Directors has approved the grant of 780,000 shares under the 2002 stock Plan to Michael W. Patrick, the Company’s Chief Executive Officer. Pursuant to the terms of Mr. Patrick’s employment agreement dated January 31, 2002 these shares will be delivered in three equal installments on January 31, 2005, 2006 and 2007 unless, prior to the delivery of any such installment, Mr. Patrick’s employment is terminated for Cause (as defined in his employment agreement) or he has violated certain covenants set forth in such employment agreement. In May 2002, the Company’s Stock Option Committee (which administered the 2002 stock Plan prior to August 2002) approved grants of the remaining 220,000 shares to a group of seven other members of senior management. These shares are to be earned over a three year period, commencing with the year ended December 31, 2002, with the shares being earned as the executive achieves specific performance goals set for the executive to be achieved during each of these years. In some instances the executive may earn partial amounts of his or her stock grant based on graded levels of performance. Shares earned each year will vest and be receivable approximately two years after the calendar year in which they were earned, provided, with certain exceptions, the executive remains an employee of the Company. One of the seven grants to senior executives includes a grant of 35,000 shares to a former employee of the Company.
Pursuant to an agreement with the former employee, the Company will deliver to the former employee the 17,000 shares earned in connection with his performance in 2002. These 17,000 shares vested on January 31, 2005. Of the 220,000 shares granted to members of senior management, 69,250 shares were earned for the year ended December 31, 2002 and 14,250 shares were forfeited. However, the Compensation Committee (currently named the Compensation and Nominating Committee) approved two additional grants of 5,500 shares to two members of senior management on March 7, 2003, which shares are deemed to be earned and subject only to vesting requirements. For the year ended December 31, 2003, 62,980 shares were earned and 15,520 shares were forfeited. On May 21, 2004, the Compensation, Nominating and Corporate Governance Committee approved one additional grant of 1,130 shares, which vest on January 31, 2006, to one member of senior management. For the year ended December 31, 2004, 33,000 shares were earned and 8,000 shares were forfeited. On October 11, 2004, the Compensation, Nominating and Corporate Governance Committee approved one additional grant of 10,000 shares, vested on January 15, 2005, to one member of senior management.
Therefore, of the original 220,000 shares granted to members of senior management, 204,360 shares are deemed to have been earned, subject only to vesting requirements, 15,640 shares have been forfeited (after adjusting for the grant of previously forfeited shares). The Company has included in stockholders’ equity $15.4 million and $9.6 million at December 31, 2004 and December 31, 2003, respectively, related to the 2002 stock Plan.
On May 31, 2002, the Board of Directors adopted the Carmike Cinemas, Inc. Non-Employee Directors Long-Term Stock Incentive Plan (the “Directors Incentive Plan”), which was approved by the stockholders on August 14, 2002. The purpose of the Directors Incentive Plan is to provide incentives that will attract, retain and motivate qualified and experienced persons for service as non-employee directors of Carmike. There are a total of 75,000 shares reserved under the Directors Incentive Plan. The Board of Directors approved a grant of 5,000 shares each to two independent directors on August 14, 2002. Additionally, the Board of Directors approved stock option grants of 5,000 shares in September 2003 and 5,000 shares in April 2004 for new directors. The option grant price was based on the fair market value of the stock on the date of the grant. These grants of 20,000 shares in the aggregate during 2002, 2003 and 2004 represent the only stock options outstanding under the Directors Incentive Plan prior the plan being superseded on May 21, 2004, the effective date of the 2004 Incentive stock Plan.
On July 19, 2002, the Board of Directors adopted the Carmike Cinemas, Inc. Employee and Consultant Long-Term Stock Incentive Plan (the “Employee Incentive Plan”), which was approved by the stockholders on August 14, 2002. The purpose of the Employee Incentive Plan is to provide incentives, competitive with those of similar companies, which will attract, retain and motivate qualified and experienced persons to serve as employees and consultants of the Company and to further align such employees’ and consultants’ interest with those of the Company’s stockholders. There are a total of 500,000 shares reserved under the Employee Incentive Plan. The Company granted an aggregate of 150,000 options pursuant to this plan on March 7, 2003 to three members of senior management. The exercise price for the 150,000 stock options is $21.79 per share, and 75,000 options vest on December 31, 2005 and 75,000 options vest on December 31, 2006. On December 18, 2003, the Company granted an aggregate of 180,000 options to six members of management. The exercise price for the 180,000 options is $35.63 and they vest ratably over three years beginning December 31, 2005 through December 31, 2007. These grants of 330,000 shares in the aggregate during 2003 represent the only stock options outstanding under the Employee Incentive Plan prior the plan being superseded on May 21, 2004, the effective date of the 2004 Incentive Stock Plan.
On March 31, 2004, the Board of Directors adopted the Carmike Cinemas, Inc. 2004 Incentive Stock Plan, which was approved by the stockholders on May 21, 2004. The 2004 Incentive Stock Plan replaced the Employee Incentive Plan and the Directors Incentive Plan. The Compensation and Nominating Committee (or similar committee) may grant stock options, stock grants, stock units, and stock appreciation rights under the 2004 Incentive Stock Plan to certain eligible employees and to outside directors. There are 1,055,000 shares of common stock reserved for issuance pursuant to grants made under the 2004 Incentive Stock Plan in addition any shares which may be forfeited under the Employee Incentive Plan and the Directors Incentive Plan after the effective date of the 2004 Incentive Stock Plan.
Changes in outstanding stock options were as follows (in thousands, except for exercise price per share):
As of December 31, 2004, 20,000 shares are exercisable.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
The Company received approval from the bankruptcy court to reject leases relating to 136 theatre locations over the course of the proceeding. The Company has recorded a liability in Liabilities Subject to Compromise based on reasonable estimates of our exposure for these rejections.
Future minimum payments under capital leases and operating leases with terms over one year and which had not been rejected by the Company in the Chapter 11 Cases as of December 31, 2004, are as follows (in thousands):
(1) Within the operating leases is a commitment to enter into a transaction that will be accounted for as a financing obligation in the amount of $6.3 million. The Company is required to make payments on this lease prior to the closing of the financing.
Long-term financing obligations are comprised of various leases with terms ranging between 10-20 years and effective annual percentage rates between 10% -24%.
Rent expense was approximately $43.3 million, $42.3 million and $43.1 million for 2004, 2003 and 2002, respectively. In addition, the Company had approximately $3.6 million, $4.0 million and $6.0 million in contingent rental payments for 2004, 2003 and 2002, respectively.
NOTE 14 - CONDENSED FINANCIAL DATA
The Company and its wholly owned subsidiaries have fully, unconditionally, and jointly and severally guaranteed the Company’s obligations under the 7.500% senior subordinated notes. The Company has several unconsolidated affiliates that are not guarantors of the 7.500% senior subordinated notes.
Condensed consolidating financial data for the guarantor subsidiaries is as follows (in thousands):
Condensed Consolidating Balance Sheets
As of December 31, 2004
Condensed Consolidating Statements of Operations
For Year Ended December 31, 2004
Condensed Consolidating Statements of Cash Flow
For Year Ended December 31, 2004
Condensed Consolidating Balance Sheets
As of December 31, 2003
Condensed Consolidating Statements of Operations
For Year Ended December 31, 2003
Condensed Consolidating Statements of Cash Flow
For Year Ended December 31, 2003
Condensed Consolidating Statements of Operations
For Year Ended December 31, 2002
Condensed Consolidating Statements of Cash Flow
For Year Ended December 31, 2002
NOTE 15- LITIGATION
The Company is subject to various claims and lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of the Company.
NOTE 16 - FINANCIAL INSTRUMENTS
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located in the southeastern United States and Company policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standings of those financial institutions that are considered in the Company’s investment strategy.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates their fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the balance sheets for accounts receivable and accounts payable approximated their fair value. Accounts receivable are determined based on specified percentages within film distribution agreements for advertising. Accounts payable are based on costs incurred not paid in the current period.
Long-term debt: The carrying amount of the Company’s long-term debt borrowings are reported at the lower of cost or fair value. Our former 10 3/8% senior subordinated notes had a fair value of $161.5 million ($154.3 million x 1.04688) based on the tender price. The carrying amount is determined by the contractual agreement.
NOTE 17 - QUARTERLY RESULTS (Unaudited)
In thousands, except for per share data
Net income per common share calculations for each of the above quarters is based on the weighted average number of shares outstanding for each period and the sum of the quarters may not necessarily equal the net income per common share amount for the year.
The Company reversed its income tax valuation allowance in the fourth quarter of 2003. See Note 11 for additional information.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Ernst & Young LLP (“Ernst & Young”) audited Carmike’s consolidated financial statements for the year ended December 31, 2002. On April 7, 2003 Carmike determined not to renew the engagement of Ernst & Young, and appointed PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) as its new independent accountants, effective immediately. This determination followed Carmike’s decision to seek proposals from independent accountants to audit Carmike’s financial statements for the fiscal year ended December 31, 2003. The decision not to renew the engagement of Ernst & Young and to retain PricewaterhouseCoopers was approved by Carmike’s Audit Committee. Ernst & Young was dismissed effective as of April 7, 2003.
During Carmike’s fiscal year ended December 31, 2002 and the subsequent interim period through April 7, 2003, there were no disagreements between Carmike and Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to Ernst & Young’s satisfaction would have caused them to make reference to the subject matter of the disagreement in connection with their reports.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within Carmike’s most recent fiscal year and the subsequent interim period through April 7, 2003.
The audit reports of Ernst & Young on the consolidated financial statements of Carmike and its subsidiaries for the fiscal year ended December 31, 2002 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.
During Carmike’s fiscal year ended December 31, 2002, and the subsequent interim period through April 7, 2003, Carmike did not consult with PricewaterhouseCoopers regarding any of the matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
As required by Securities and Exchange Commission rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. There were no changes to our internal control over financial reporting during the fourth quarter ended December 31, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed by the company in the reports we file or submit under the Exchange Act is accumulated and communicated to our Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
As of the date of the filing of this Form 10-K we are in the process of testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires an annual management report of the effectiveness of our internal controls over financial reporting and for our Independent Registered Public Accounting Firm to attest to this report. The SEC has granted certain accelerated filers, including Carmike, an option to extend the compliance deadline for Section 404 for an additional 45 days. We have opted to utilize this 45 day extension, and therefore, this Form 10-K does not include our management’s report regarding our internal controls nor the related attestation report from our Independent Registered Public Accounting Firm. We anticipate completing this process and filing these reports in an amended Form 10-K, which we intend to file in April of 2005. Currently, we are not aware of any material weaknesses in our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Board of Directors, its committees and the selection of director nominees is incorporated by reference from the section entitled “Corporate Governance” contained in the Proxy Statement relating to the 2005 Annual Meeting of Stockholders of Carmike (hereinafter, the “2005 Proxy Statement”).
Other information regarding the directors of Carmike is incorporated by reference from the section entitled “Election of Directors” contained in the 2005 Proxy Statement.
Information regarding the executive officers of Carmike is set forth in Part I of this Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K.
Information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the 2005 Proxy Statement.
Carmike adopted the Carmike Cinemas, Inc. Code of Ethics for Senior Executive and Financial Officers that applies to Carmike’s principal executive officer and senior financial officers, among others, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission (“SEC”) promulgated thereunder. The Code of Ethics, is available on our website, www.carmike.com. In the event that we make changes in, or provide waivers from, the provisions of the Code of Ethics that the SEC requires us to disclose, we intend to disclose these events on our website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated by reference from the sections entitled “Executive Compensation and Other Information” and “Compensation and Nominating Committee Interlocks and Insider Participation” contained in the 2005 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Certain information required by this item is incorporated by reference from the sections entitled “Security Ownership of Certain Beneficial Holders,” “Security Ownership of Management” and “Compensation Plans” contained in the 2005 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Information regarding certain relationships and related party transactions is incorporated by reference from the section entitled “Certain Relationships and Related Party Transactions” contained in the 2005 Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information regarding principal accountant fees and services is incorporated by reference from the section entitled “Fees Paid to Independent Auditors” contained in the 2005 Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of Carmike Cinemas, Inc. are included in Item 8. Financial Statements And Supplementary Data.
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets - December 31, 2004 and 2003
Consolidated statements of operations - Years ended December 31, 2004, 2003 and 2002
Consolidated statements of cash flows - Years ended December 31, 2004, 2003 and 2002
Consolidated statements of stockholders’ equity - Years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements - December 31, 2004
(a)(2) This report also includes the following Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted because they are not applicable or not required under the related instructions, or because the required information is shown either in the consolidated financial statements or in the notes thereto.
(a)(3) Listing of Exhibits
Periodic reports, proxy statements and other information filed by Carmike with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Commission also maintains a web site (http://www.sec.gov) that makes available reports, proxy statements and other information regarding Carmike. Carmike’s SEC file number reference is Commission File No. 000-14993.
10.5
Aircraft Lease, dated July 1, 1983, as amended June 30, 1986, by and between C.L.P. Equipment and Carmike Cinemas, Inc. (filed as Exhibit 10(h) to Carmike’s Registration Statement on Form S-1 (Registration No. 33-8007) and incorporated herein by reference).
10.6
Summary of Extensions of Aircraft Lease Agreement and Equipment Lease Agreement which are Exhibits 10(e) and 10(k) (filed as Exhibit 10(o) to Carmike’s Form 10-K (Registration No. 000-14993) for the year ended December 31, 1991 and incorporated herein by reference).
10.7
Second Amended and Restated Master Lease, dated September 1, 2001, between MoviePlex Realty Leasing, L.L.C. and Carmike Cinemas, Inc. (filed as Exhibit 10.17 to Carmike’s Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
10.8*
Trust Agreement, dated as of July 16, 1999, between Carmike Cinemas, Inc., Michael W. Patrick, F. Lee Champion, III and Larry M. Adams (filed as Exhibit 10.23 to Carmike’s Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
10.9*
Carmike Cinemas, Inc. Employee Retention and Severance Plan (filed as Exhibit 10.22 to Carmike’s Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
10.10*
Carmike Cinemas, Inc. 2002 Stock Plan (filed as Exhibit 4.2 to Carmike’s Form S-8 (Registration No. 333-85194) filed March 29, 2002 and incorporated herein by reference).
10.11*
Employment Agreement, dated as of January 31, 2002, between Carmike Cinemas, Inc. and Michael W. Patrick (filed as Exhibit 10 to Carmike’s Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference).
10.12*
Carmike Cinemas, Inc. Non-Employee Directors Long-Term stock Incentive Plan (filed as Appendix C to Carmike’s 2002 Definitive Proxy Statement filed July 24, 2002 and incorporated herein by reference).
10.13*
Carmike Cinemas, Inc. Employee and Consultant Long-Term stock Incentive Plan (filed as Appendix D to Carmike’s 2002 Definitive Proxy Statement filed July 24, 2002 and incorporated herein by reference).
10.14*
Form of Separation Agreement and schedule of officers who have entered into such agreement (filed as Exhibit 10.1 to Carmike’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference).
10.15*
Michael W. Patrick Dividend-Related Bonus Agreement, effective as of January 29, 2004, between Carmike Cinemas, Inc. and Michael W. Patrick (filed as Exhibit 10.3 to Carmike’s Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference).
10.16
Form of Indemnification Agreement and Schedule of Directors who have entered into such agreement (filed as Exhibit 10.1 to Carmike’s Form S-3 (Registration No. 333-117403) filed July 16, 2004 and incorporated herein by reference).
10.17
Indemnification Agreement, effective as of December 10, 2004, by and between Carmike Cinemas, Inc. and Fred W. Van Noy (filed as Exhibit 10.1 to Carmike’s Current Report on Form 8-K filed on January 24, 2005 and incorporated herein by reference).
10.18
First Amendment to Second Amended and Restated Master Lease, dated as of July 12, 2004, between MoviePlex Realty Leasing L.L.C. and Carmike Cinemas, Inc. (filed an Exhibit 10.2 to Carmike’s Form S-3 (Registration No. 333-117403) filed July 16, 2004 and incorporated herein by reference).
10.19
Letter Agreement, dated as of June 23, 2004, by and among Carmike Cinemas, Inc. and Goldman, Sachs & Co. regarding the Exchange and Registration Rights Agreement dated January 29, 2004 (filed as Exhibit 10.1 to Carmike’s S-4/A (Registration No. 333-115134) filed July 22, 2004 and incorporated herein by reference).
10.20*
Carmike Cinemas, Inc. 2004 Incentive Stock Plan (filed as Appendix A to Carmike’s Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, filed on April 16, 2004 and incorporated herein by reference).
Computation of per share earnings (provided in Note 1 to the Notes to Audited Consolidated Financial Statements included in this report under the caption “Earnings Per Share”).
List of Subsidiaries.
23.1
Consent of PricewaterhouseCoopers LLP.
23.2
Consent of Ernst & Young LLP.
31.1
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.
(b) Exhibits
The response to this portion of Item 15 is submitted as a separate section of this report.
(c) Financial Statement Schedules
See Item 15(a) (1) and (2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated and as of the date indicated above.
Signature
Title
/s/ Michael W. Patrick
President, Chief Executive Officer and
Michael W. Patrick
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Martin A. Durant
Senior Vice President and
Martin A. Durant
Chief Financial Officer
(Principal Financial Officer)
/s/ Philip A. Smitley
Assistant Vice President - Controller
(Principal Accounting Officer)
Philip A. Smitley
/s/ Alan J. Hirschfield
Director
Alan J. Hirschfield
/s/ S. David Passman III
Director
S. David Passman III
/s/ Carl L. Patrick, Jr.
Director
Carl L. Patrick, Jr.
/s/ Kenneth A. Pontarelli
Director
Kenneth A. Pontarelli
/s/ Roland C. Smith
Director
Roland C. Smith
/s/ Fred W. Van Noy
Senior Vice President, Chief Operating Officer and
Director
Fred W. Van Noy
/s/ Patricia A. Wilson
Director
Patricia A. Wilson
Schedule II - Valuation and Qualifying Accounts
Carmike Cinemas, Inc. and Subsidiaries
December 31, 2004 (in thousands of dollars)
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Board of Directors
of Carmike Cinemas, Inc.:
Our audits of the consolidated financial statements referred to in our report dated March 15, 2005 appearing in this Annual Report on Form 10-K of Carmike Cinemas, Inc. also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K for the years ended December 31, 2004 and 2003. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 15, 2005