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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
Commission File Number 001-33401
CINEMARK HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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20-5490327 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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3900 Dallas Parkway |
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Suite 500 |
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Plano, Texas
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75093 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (972) 665-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o Accelerated filer
o
Non-accelerated filer
þ
Smaller reporting company
o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant on June 29, 2007, computed by reference to the closing price for the registrants common
stock on the New York Stock Exchange on such date was $537,746,840 (30,605,967 shares at a closing
price per share of $17.57).
As of February 29, 2008, 107,056,131 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrants definitive proxy statement, in connection with its 2008 Annual
Meeting of Stockholders, to be filed within 120 days of December 31, 2007, are incorporated by
reference into Part III, Items 10-14, of this annual report on Form 10-K.
Cautionary Statement Regarding Forward-Looking Statements
This annual report on Form 10-K includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, based on our current expectations, assumptions, estimates and projections
about our business and our industry. They include statements relating to:
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future revenues, expenses and profitability; |
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the future development and expected growth of our business; |
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projected capital expenditures; |
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attendance at movies generally or in any of the markets in which we operate; |
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the number or diversity of popular movies released and our ability to successfully
license and exhibit popular films; |
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national and international growth in our industry; |
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competition from other exhibitors and alternative forms of entertainment; and |
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determinations in lawsuits in which we are defendants. |
You can identify forward-looking statements by the use of words such as may, should,
will, could, estimates, predicts, potential, continue, anticipates, believes,
plans, expects, future and intends and similar expressions which are intended to identify
forward-looking statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. In evaluating forward-looking statements, you should
carefully consider the risks and uncertainties described in the Risk Factors section in Item 1A
of this Form 10-K and elsewhere in this Form 10-K. All forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements and risk factors contained in this Form 10-K. Forward-looking statements contained in
this Form 10-K reflect our view only as of the date of this Form 10-K. We undertake no obligation,
other than as required by law, to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Certain Definitions
Unless the context otherwise requires, all references to we, our, us, the issuer or
Cinemark relate to Cinemark Holdings, Inc. and its consolidated subsidiaries, including Cinemark,
Inc., Cinemark USA, Inc. and Century Theatres, Inc. Unless otherwise specified, all operating and
other statistical data for the U.S. include one theatre in Canada. All references to Latin America
are to Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Honduras, Mexico,
Nicaragua, Panama and Peru. Unless otherwise specified, all operating and other statistical data
are as of and for the year ended December 31, 2007.
1
PART I
Item 1. Business
Our Company
Cinemark Holdings, Inc. and subsidiaries (the Company) are leaders in the motion picture
exhibition industry in terms of both revenues and the number of screens in operation, with theatres
in the United States (U.S.), Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras,
El Salvador, Nicaragua, Costa Rica, Panama and Colombia. The Company also managed theatres in the
U.S., Canada, Brazil and Colombia during the year ended December 31, 2007.
On April 2, 2004, an affiliate of Madison Dearborn Partners, LLC, (MDP), acquired
approximately 83% of the capital stock of Cinemark, Inc., pursuant to which a newly formed
subsidiary owned by an affiliate of MDP was merged with and into Cinemark, Inc., with Cinemark,
Inc. continuing as the surviving corporation (the MDP Merger). Simultaneously, an affiliate of
MDP purchased shares of Cinemark, Inc.s common stock for $518.2 million in cash and became
Cinemark, Inc.s controlling stockholder. Lee Roy Mitchell, Chairman and then Chief Executive
Officer, the Mitchell Special Trust and certain members of management collectively retained a
minority ownership of Cinemark, Inc.s capital stock. In December 2004, MDP sold a portion of its
stock in Cinemark, Inc. to outside investors and in July 2005, Cinemark, Inc. issued additional
shares to another outside investor.
On August 2, 2006, Cinemark Holdings, Inc. was formed as the Delaware holding company of
Cinemark, Inc. On August 7, 2006, the Cinemark, Inc. stockholders entered into a share exchange
agreement pursuant to which they agreed to exchange their shares of Class A common stock for an
equal number of shares of common stock of Cinemark Holdings, Inc. (Cinemark Share Exchange). The
Cinemark Share Exchange was completed on October 5, 2006 and facilitated the acquisition of Century
Theatres, Inc., a national theatre chain headquartered in San Rafael, California with 77 theatres
and 1,017 screens in 12 states, for a purchase price of approximately $681 million and the
assumption of approximately $360 million of Century debt (Century Acquisition). On October 5,
2006, Cinemark, Inc. became a wholly owned subsidiary of Cinemark Holdings, Inc. Prior to October
5, 2006, Cinemark Holdings, Inc. had no assets, liabilities or operations. The accompanying
consolidated financial statements are reflective of the change in reporting entity that occurred as
a result of the Cinemark Share Exchange. Cinemark Holdings, Inc.s consolidated financial
statements reflect the accounting basis of its stockholders for all periods presented. On April 24, 2007, Cinemark Holdings, Inc. completed an initial
public offering of its common stock.
As of December 31, 2007, we managed our business under two operating segments U.S. markets
and international markets, in accordance with Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and Related Information. See Note 22 to the
consolidated financial statements.
Our principal executive offices are at 3900 Dallas Parkway, Suite 500, Plano, Texas 75093. Our
telephone number is (972) 665-1000. We maintain a corporate website at www.cinemark.com. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments, are available on our website free of charge under the heading Investor Relations SEC
Filings as soon as practicable after such reports are filed or furnished electronically to the
Securities and Exchange Commission.
Description of Business
We are a leader in the motion picture exhibition industry with 408 theatres and 4,665 screens
in the U.S. and Latin America. Our circuit is the third largest in the U.S. with 287 theatres and
3,654 screens in 38 states. We are the most geographically diverse circuit in Latin America with
121 theatres and 1,011 screens in 12 countries. During the year ended December 31, 2007, over 212
million patrons attended our theatres. Our modern theatre circuit features stadium seating for
approximately 81% of our first-run screens.
We selectively build or acquire new theatres in markets where we can establish and maintain a
leading market position. We believe our portfolio of modern theatres provides a preferred
destination for moviegoers and contributes to our significant cash flows from operating activities.
Our significant presence in the U.S. and Latin America has made us an important distribution
channel for movie studios, particularly as they look to increase revenues generated in Latin
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America. Our market leadership is attributable in large part to our senior executives, who
average approximately 33 years of industry experience and have successfully navigated us through
multiple business cycles.
We grew our total revenue per patron at a compound annual growth rate, (CAGR), during the
last three fiscal years of 11.5%. Revenues, operating income and net income for the year ended
December 31, 2007, were $1,682.8 million, $113.0 million and $88.9 million, respectively. At
December 31, 2007 we had cash and cash equivalents of $338.0 million and long-term debt of $1,523.7
million. Approximately $607.8 million of our long-term debt accrues interest at variable rates.
Motion Picture Industry Overview
Domestic Markets
The U.S. motion picture exhibition industry has a track record of long-term growth, with box
office revenues growing at a CAGR of 5.1% over the last 15 years. Against this background of steady
long-term growth, the exhibition industry has experienced periodic short-term increases and
decreases in attendance, and consequently box office revenues. In 2007, the motion picture
exhibition industry continued to experience growth with box office revenues increasing
5.4% over 2006, compared to an increase of 3.5% in 2006 over 2005. We believe box office revenues will continue to
perform well in 2008 with a solid slate of films, including Harry Potter and the Half-Blood Prince,
Indiana Jones and the Kingdom of the Crystal Skull, Chronicles of Narnia: Prince Caspian, The Dark
Knight, Wall-E, Hancock, The Mummy: Tomb of the Dragon Emperor and the release of 3-D movies such
as Hannah Montana & Miley Cyrus: Best of Both Worlds and Journey to the Center of the Earth. In
2009, a broad slate of 3-D films is expected, including Monsters vs. Aliens, Ice Age 3, and Avatar.
The
following table represents the results of a survey by MPAA Worldwide Market Research (MPAA), published during March 2008, outlining the historical trends in U.S. box office revenues for the
ten year period from 1997 to 2007:
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U.S. Box |
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Office Revenues |
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Attendance |
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Average Ticket |
Year |
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($ in millions) |
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(in millions) |
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Price |
1997 |
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$ |
6,216 |
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1,354 |
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$ |
4.59 |
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1998 |
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$ |
6,760 |
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1,438 |
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$ |
4.69 |
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1999 |
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$ |
7,314 |
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1,440 |
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$ |
5.08 |
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2000 |
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$ |
7,468 |
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1,383 |
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$ |
5.39 |
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2001 |
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$ |
8,125 |
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1,438 |
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$ |
5.66 |
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2002 |
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$ |
9,272 |
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1,599 |
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$ |
5.81 |
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2003 |
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$ |
9,165 |
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1,521 |
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$ |
6.03 |
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2004 |
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$ |
9,215 |
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1,484 |
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$ |
6.21 |
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2005 |
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$ |
8,832 |
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1,376 |
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$ |
6.41 |
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2006 |
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$ |
9,138 |
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1,395 |
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$ |
6.55 |
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2007 |
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$ |
9,629 |
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1,400 |
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$ |
6.88 |
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International Markets
International growth also continues to be solid. According to MPAA, international box office
revenues grew steadily at a CAGR of 11.9% from 2003 to 2007 as a result of the increasing acceptance
of moviegoing as a popular form of entertainment throughout the world, ticket price increases and
new theatre construction.
Growth in Latin America is expected to be fueled by a combination of continued development of
modern theatres, attractive demographics (i.e., a significant teenage population), quality product
from Hollywood and the emergence of a local film industry. In many Latin American countries the
local film industry had been dormant because of the lack of
sufficient theatres to exhibit the film
product. The development of new modern multiplex theatres has revitalized the local film industry
and, in Mexico, Brazil and Argentina, successful local film product often provides incremental
growth opportunities.
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We believe many international markets for theatrical exhibition have historically been
underserved and that certain of these markets, especially those in Latin America, will continue to
experience growth as additional modern stadium-styled theatres are introduced.
Drivers of Continued Industry Success
We believe the following market trends will drive the continued growth and strength of our
industry:
Importance of Theatrical Success in Establishing Movie Brands and Subsequent Markets.
Theatrical exhibition is the primary distribution channel for new motion picture releases. A
successful theatrical release which brands a film is one of the major factors in determining its
success in downstream markets, such as DVDs, network and syndicated television, video on-demand,
pay-per-view television and downloading utilizing the Internet.
Increased Importance of International Markets for Box Office Success. International markets
continue to be an increasingly important component of the overall box office revenues generated by
Hollywood films, accounting for $17.1 billion, or 64% of 2007 total worldwide box office revenues
according to MPAA. With continued growth of the international motion picture exhibition industry,
we believe the relative contribution of markets outside North America will become even more
significant.
Increased Investment in Production and Marketing of Films by Distributors. As a result of the
additional revenues generated by domestic, international and downstream markets, studios have
increased production and marketing expenditures at a CAGR of 8.2%
and 10.1%, respectively, since 2004, according to MPAA. Production and
marketing expenditures for 2007 increased by 18.1% and 12.7%, respectively over 2006.
Stable Long-term Attendance Trends. We believe that long-term trends in motion picture
attendance in the U.S. will continue to benefit the industry. Despite historical economic and
industry cycles, domestic attendance has grown at a 1.6% CAGR over the last 15 years to 1.4 billion
patrons in 2007. According to Nielsen Entertainment/NRG, 77% of moviegoers stated their overall
theatre experience in 2007 was time and money well spent. Additionally, younger moviegoers in the
U.S. continue to be the most frequent patrons.
Reduced Seasonality of Revenues. Box office revenues have historically been highly seasonal,
with a majority of blockbusters being released during the summer and year-end holiday season. In
recent years, the seasonality of motion picture exhibition has become less pronounced as studios
have begun to release films more evenly throughout the year. This benefits exhibitors by allowing
more effective allocation of the fixed cost base throughout the year.
Convenient and Affordable Form of Out-Of-Home Entertainment. Moviegoing continues to be one of
the most convenient and affordable forms of out-of-home entertainment, with an estimated average
ticket price in the U.S. of $6.88 in 2007. Average prices in 2007 for other forms of out-of-home
entertainment in the U.S., including sporting events and theme parks, range from approximately
$23.50 to $65.25 per ticket according to MPAA. Movie ticket prices have risen at approximately the
rate of inflation, while ticket prices for other forms of out-of-home entertainment have increased
at higher rates.
Competitive Strengths
We believe the following strengths allow us to compete effectively:
Solid Operating Performance and Discipline. We generated operating income and net income of
$113.0 million and $88.9 million, respectively, for the year ended December 31, 2007. Our solid
operating performance is a result of our financial discipline, such as negotiating favorable
theatre level economics and controlling theatre operating costs. We believe the continued
integration of the Century Acquisition will result in additional revenues and cost efficiencies to
further improve our margins.
Leading Position in Our U.S. Markets. We have a leading share in the U.S. metropolitan and
suburban markets we serve. For the year ended December 31, 2007, we ranked either first or second
based on box office revenues in 22 out of our top 25 U.S. markets, including the San Francisco Bay
Area, Dallas, Houston and Sacramento. On average, the population in
domestic markets where over 80% of our theatres are located, including Dallas,
Las Vegas and Phoenix, is expected to grow 52% faster than the
average growth rate of the U.S. population over the next five years,
as reported by BIAfn and U.S. census data.
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Strategically Located in Heavily Populated Latin American Markets. Since 1993, we have
invested throughout Latin America due to the growth potential of the region. We operate 121
theatres and 1,011 screens in 12 countries, generating revenues of $333.6 million for the year
ended December 31, 2007. We have successfully established a significant presence in major cities in
the region, with theatres in twelve of the fifteen largest metropolitan areas. With the most
geographically diverse circuit in Latin America, we are an important distribution channel to the
movie studios. The regions improved economic climate and rising disposable income are also a
source for growth. We are well-positioned with our modern, large-format theatres and new screens to
take advantage of this favorable economic environment for further growth and diversification of our
revenues.
Modern Theatre Circuit. We have one of the most modern theatre circuits in the industry which
we believe makes our theatres a preferred destination for moviegoers in our markets. We feature
stadium seating in approximately 81% of our first run auditoriums and approximately 82% of our
international screens also feature stadium seating. During 2007, we continued our organic expansion
by opening 257 screens. We currently have commitments to build 225 additional screens over the next
three years.
Solid Balance Sheet with Significant Cash Flow from Operating Activities. We generate
significant cash flow from operating activities as a result of several factors, including
managements ability to contain costs, predictable revenues and a geographically diverse, modern
theatre circuit requiring limited maintenance capital expenditures.
Additionally, a strategic advantage that enhances our cash flows, is
our ownership of land and buildings for 43 of our theatres. We believe our expected level
of cash flow generation will provide us with the strategic and financial flexibility to pursue
growth opportunities, support our debt payments and make dividend
payments to our stockholders. As of December 31, 2007, we had cash of
$338.0 million.
Experienced Management with Focused Operating Philosophy. Led by Chairman and founder Lee Roy
Mitchell, Chief Executive Officer Alan Stock, President and Chief Operating Officer Timothy Warner
and Chief Financial Officer Robert Copple, our management team has an average of approximately 33
years of theatre operating experience executing a focused strategy which has led to consistent
operating results. Our operating philosophy has centered on providing a superior viewing experience
and selecting less competitive markets or clustering in strategic metropolitan and suburban markets
in order to generate a high return on invested capital. This focused strategy includes strategic
site selection, building appropriately-sized theatres for each of our markets, and managing our
properties to maximize profitability. As a result, we grew our
admissions and concession revenues per patron at the highest CAGR
during the last four fiscal years among the three largest motion
picture exhibitors in the U.S.
Our Strategy
We believe our operating philosophy and management team will enable us to continue to enhance
our leading position in the motion picture exhibition industry. Key components of our strategy
include:
Establish and Maintain Leading Market Positions. We will continue to seek growth opportunities
by building or acquiring modern theatres that meet our strategic, financial and demographic
criteria. We will continue to focus on establishing and maintaining a leading position in the
markets we serve.
Continue to Focus on Operational Excellence. We will continue to focus on achieving
operational excellence by controlling theatre operating costs. Our margins reflect our track record
of operating efficiency.
Selectively Build in Profitable, Strategic Latin American Markets. Our international expansion
will continue to focus primarily on Latin America through construction of American-style,
state-of-the-art theatres in major urban markets.
Dividend Policy
During August 2007, we initiated a quarterly dividend policy. Consistent with the disclosures
in our 424(b)(1) prospectus, the dividend for the second quarter of 2007 was based upon the
quarterly dividend rate of $0.18 per common share, prorated based on the April 27, 2007 closing
date of our initial public offering. Based on such proration, our board of directors declared a
cash dividend of $0.13 per share of common stock, which was paid on September 18, 2007. The
dividend for the third quarter was the first dividend paid by us reflecting a full quarter since
our initial public offering and was paid in the amount of $0.18 per share of common stock on
December 18, 2007. We paid dividends of approximately $33.1 million in the aggregate during 2007.
The dividend for the fourth quarter of 2007 was paid in the amount of $0.18 per share of common
stock on March 14, 2008. We, at the discretion of our board of directors and subject to applicable
law, anticipate paying regular quarterly dividends on our common stock for the foreseeable future.
The amount, if any, of
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the dividends to be paid in the future will depend upon our then available cash, anticipated
cash needs, overall financial condition, loan agreement restrictions, future prospects for earnings
and cash flows, as well as other relevant factors.
Theatre Operations
As of December 31, 2007, we operated 408 theatres and 4,665 screens in 38 states, one Canadian
province and 12 Latin American countries. Our theatres in the U.S. are primarily located in
mid-sized U.S. markets, including suburbs of major metropolitan areas. We believe these markets are
generally less competitive and generate high, stable margins. Our theatres in Latin America are
primarily located in major metropolitan markets, which we believe are generally underscreened. The
following tables summarize the geographic locations of our theatre circuit as of December 31, 2007.
United States Theatres
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Total |
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Total |
State |
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Theatres |
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Screens |
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Texas |
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78 |
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1,054 |
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California |
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63 |
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710 |
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Ohio |
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20 |
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221 |
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Utah |
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12 |
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155 |
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Nevada |
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10 |
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154 |
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Colorado |
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8 |
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127 |
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Illinois |
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9 |
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122 |
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Oregon |
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7 |
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102 |
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Arizona |
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6 |
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94 |
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Kentucky |
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7 |
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83 |
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Pennsylvania |
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5 |
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73 |
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Oklahoma |
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6 |
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67 |
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Louisiana |
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5 |
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58 |
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New Mexico |
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4 |
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54 |
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Virginia |
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4 |
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52 |
|
Indiana |
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5 |
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46 |
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North Carolina |
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4 |
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41 |
|
Mississippi |
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3 |
|
|
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41 |
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Florida |
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2 |
|
|
|
40 |
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Iowa |
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4 |
|
|
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39 |
|
Arkansas |
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3 |
|
|
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30 |
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Washington |
|
|
2 |
|
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30 |
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Georgia |
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2 |
|
|
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27 |
|
New York |
|
|
2 |
|
|
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27 |
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South Carolina |
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2 |
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22 |
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Kansas |
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|
1 |
|
|
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20 |
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Michigan |
|
|
1 |
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16 |
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Alaska |
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1 |
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16 |
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New Jersey |
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|
1 |
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16 |
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Missouri |
|
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1 |
|
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15 |
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South Dakota |
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1 |
|
|
|
14 |
|
Tennessee |
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|
1 |
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14 |
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Wisconsin |
|
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1 |
|
|
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14 |
|
Massachusetts |
|
|
1 |
|
|
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12 |
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Delaware |
|
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1 |
|
|
|
10 |
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West Virginia |
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1 |
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|
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10 |
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Minnesota |
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|
1 |
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8 |
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Montana |
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|
1 |
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8 |
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Total United States |
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|
286 |
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|
|
3,642 |
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Canada |
|
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1 |
|
|
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12 |
|
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Total |
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287 |
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|
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3,654 |
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6
International Theatres
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Total |
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Total |
Country |
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Theatres |
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Screens |
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Brazil |
|
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40 |
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|
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339 |
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Mexico |
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31 |
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|
|
304 |
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Chile |
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|
12 |
|
|
|
91 |
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Central America(1) |
|
|
12 |
|
|
|
81 |
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Argentina |
|
|
9 |
|
|
|
77 |
|
Colombia |
|
|
9 |
|
|
|
56 |
|
Peru |
|
|
4 |
|
|
|
37 |
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Ecuador |
|
|
4 |
|
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26 |
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Total |
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|
121 |
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|
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1,011 |
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Includes Honduras, El Salvador, Nicaragua, Costa Rica and Panama. |
We first entered Latin America with the opening of theatres in Chile in 1993 and Mexico in
1994. Since 1993, through our focused international strategy, we have developed into the most
geographically diverse circuit in Latin America. We presently have theatres in twelve of the
fifteen largest metropolitan areas in Latin America. We have balanced our risk through a
diversified international portfolio with operations in twelve countries in Latin America. In
addition, we have achieved significant scale in Mexico and Brazil, the two largest Latin American
economies.
We believe that certain markets within Latin America continue to be underserved and
penetration of movie screens per capita in Latin American markets is substantially lower than in
the U.S. and European markets. We will continue to build and expand our presence in underserved
international markets, with emphasis on Latin America, and fund our expansion primarily with cash
flow generated in those markets. We are able to mitigate exposure in the costs of our international
operations to currency fluctuations by using local currencies to fund substantially all aspects of
our operations, including film and facility lease expense. Our geographic diversity throughout
Latin America has allowed us to maintain consistent revenue growth notwithstanding currency
fluctuations that may affect any particular market.
Film Licensing
In the U.S., we license films from film distributors that are owned by major film production
companies or from independent film distributors that distribute films for smaller production
companies. For new release films, film distributors typically establish geographic zones and offer
each available film to one theatre in each zone. The size of a film zone is generally determined by
the population density, demographics and box office revenues potential of a particular market or
region. We currently operate theatres in 235 first run film zones in the U.S. New film releases are
licensed at the discretion of the film distributors. As the sole exhibitor in approximately 85% of
the first run film zones in which we operate, we have maximum access to film product, which allows
us to select those pictures we believe will be the most successful in our markets from those
offered to us by distributors. We usually license films on an allocation basis in film zones where
we face competition.
In the international markets in which we operate, distributors do not allocate film to a
single theatre in a geographic film zone, but allow competitive theatres to play the same films
simultaneously. In these markets, films are still licensed on a theatre-by-theatre and film-by-film
basis. Our theatre personnel focus on providing excellent customer service, and we provide a modern
facility with the most up-to-date sound systems, comfortable stadium style seating and other
amenities typical of modern American-style multiplexes, which we believe gives us a competitive
advantage in markets where competing theatres play the same films. Of the 1,011 screens we operate
in international markets approximately 72% have no direct competition from other theatres.
Our film rental licenses in the U.S. typically specify that rental fees are based on either
mutually agreed upon firm terms or a sliding scale formula, which are established prior to the
opening of the picture, or on a mutually agreed upon settlement at the conclusion of the picture
run. Under a firm terms formula, we pay the distributor a specified percentage of box office
receipts, which reflects either a mutually agreed upon aggregate rate for the life of the film or
rates that decline over the term of the run. Firm term film rental fees that decline over the term
of the run generally start at 60% to
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70% of box office receipts, gradually declining to as low as 30% over a period of four to
seven weeks. Under the sliding scale formula, film rental is paid as a percentage of box office
revenues using a pre-determined matrix based upon box office performance of the film. The
settlement process allows for negotiation of film rental fees upon the conclusion of the film run
based upon how the film performs. Internationally, our film rental licenses are based on mutually
agreed upon firm terms established prior to the opening of the picture. The film rental percentages
paid by our international locations are generally lower than in the U.S. markets and gradually
decline over a period of several weeks.
We
operate seven art theatres with 27 screens under the CinéArts brand. We also regularly
play art and independent films at eleven other theatres. CinéArts allows us to take advantage of
the growth in the art and independent market driven by the more mature patron. There has been an
increased interest in art, foreign and documentary films. High profile film festivals, such as the
Sundance Film Festival, have contributed to growth and interest in this genre. Recent hits such as
Juno, There Will Be Blood and No Country For Old Men have demonstrated the box office potential of
art and independent films.
Concessions
Concession sales are our second largest revenue source, representing approximately 30.7% of
total revenues for the year ended December 31, 2007. Concession sales have a much higher margin
than admissions sales. We have devoted considerable management effort to increase concession sales
and improve operating margins. These efforts include implementation of the following strategies:
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Optimization of product mix. Concession products are primarily comprised of various
sizes of popcorn, soft drinks and candy. Different varieties and flavors of candy and soft
drinks are offered at theatres based on preferences in that particular geographic region.
Specially priced combos are launched on a regular basis to increase average concession
purchases as well as to attract new buyers. Kids meals are also offered and packaged
towards younger patrons. |
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Staff training. Employees are continually trained in suggestive-selling and
upselling techniques. Consumer promotions conducted at
the concession stand always include a motivational element which rewards theatre staff for
exceptional combo sales during the period. |
A formalized crew program is in place to reward front line employees who excel in delivering
rapid service. The Speed of Service (SOS) program is held annually to kick off peak business
periods and refresh training and the importance of speed at the front line.
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Theatre design. Our theatres are designed to optimize efficiencies at the concession
stands, which include multiple service stations to facilitate serving more customers
quicker. We strategically place large concession stands within theatres to heighten
visibility, reduce the length of concession lines, and improve traffic flow around the
concession stands. Centurys concession areas are designed as individual self-service
stations which allow customers to select their choice of refreshments and proceed to the
cash register. This design presents efficient service, enhanced choice and superior
visibility of concession items. Concession designs in many of our new
theatres have begun to incorporate the
benefits experienced with the Century model. |
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Cost control. We negotiate prices for concession supplies directly with concession
vendors and manufacturers to obtain bulk rates. Concession supplies are distributed through
a national distribution network. The concession distributor supplies and distributes
inventory to the theatres, which place volume orders directly with the vendors to replenish
stock. The concession distributor is paid a percentage fee for warehousing and delivery of
concession goods on a weekly basis. |
Participation in National CineMedia
In March 2005, Regal Entertainment, Inc., (Regal), and AMC Entertainment, Inc., (AMC),
formed National CineMedia, LLC, (NCM), and on July 15, 2005, we joined NCM, as one of the founding
members. NCM operates the largest in-theatre network in the U.S. which delivers digital advertising
content and digital non-film event content to the screens and lobbies of the three largest motion
picture exhibitors in the country. The digital projectors are
currently used to display advertising and are not intended to
be used to exhibit digital film content or digital cinema. NCMs primary activities that
impact us include the following activities:
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Advertising: NCM develops, produces, sells and distributes a branded, pre-feature
entertainment and advertising program called FirstLook, along with an advertising program
for its lobby entertainment network and various marketing and promotional products in
theatre lobbies; |
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CineMeetings: NCM provides live and pre-recorded networked and single-site meetings and
events in the theatres throughout its network; and |
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Digital Programming Events: NCM distributes live and pre-recorded concerts, sporting
events and other non-film entertainment programming to theatres across its digital network. |
We believe that the reach, scope and digital delivery capability of NCMs network provides an
effective platform for national, regional and local advertisers to reach a young, affluent and
engaged audience on a highly targeted and measurable basis.
On February 13, 2007, we received $389.0 million in connection with National CineMedia, Inc.s
or NCM Inc.s, initial public offering and related transactions, or the NCM Transaction. As a
result of these transactions, we no longer receive a percentage of NCMs revenue but rather a
monthly theatre access fee. In addition, we are entitled to receive mandatory quarterly
distributions of excess cash from NCM. Prior to the initial public offering of NCM Inc. common
stock, our ownership interest in NCM was approximately 25% and subsequent to the completion of the
offering we own an approximate 14% interest in NCM. See Note 7 to the consolidated financial
statements.
In our international markets, we generally outsource our screen advertising to local companies
who have established relationships with local advertisers that provide similar benefits as NCM.
Participation in Digital Cinema Implementation Partners
On February 12, 2007, we, AMC and Regal, entered into a joint venture known as Digital Cinema
Implementation Partners LLC, (DCIP), to facilitate the implementation of digital cinema in our
theatres and to establish agreements with major motion picture studios for the financing of digital
cinema. Future digital cinema developments will be managed by DCIP, subject to certain approvals by
us, AMC and Regal.
Marketing
In the U.S., we rely on newspaper display advertisements, paid for by film distributors,
newspaper directory film schedules, generally paid for by us, and Internet advertising, which has
emerged as an attractive media source to inform patrons of film titles and showtimes. Radio and
television advertising spots, generally paid for by film distributors, are used to promote certain
motion pictures and special events. We also exhibit previews of coming attractions and films
presently playing on the other screens which we operate in the same theatre or market. We have
successfully used the Internet to provide patrons access to movie times, the ability to buy and
print their tickets at home and purchase gift cards and other advanced sale-type certificates. The
Internet is becoming a popular way to check movie showtimes and to
view movie previews. Many newspapers add an
Internet component to their advertising and add movie showtimes to their Internet sites. We use
monthly web contests with film distributor partners to drive traffic to our website and ensure that
customers visit often. In addition, we work on a regular basis with all of the film distributors to
promote their films with local, regional and national programs that are exclusive to our theatres.
These may involve customer contests, cross-promotions with third parties, media on-air tie-ins and
other means to increase traffic to a particular film showing at one of our theatres.
Internationally, we partner with large multi-national corporations, in the larger metropolitan
areas in which we have theatres, to promote our brand, our image and to increase attendance levels
at our theatres. Our customers are encouraged to register on our website to receive weekly
information via e-mail for showtime information, invitations to special screenings, sponsored
events and promotional information. In addition, our customers can request to receive showtime
information via their cellular phones.
Our marketing department also focuses on maximizing ancillary revenue, which includes the sale
of our gift cards, gift certificates and discount tickets, which are called SuperSavers. We market
these programs to such business representatives as realtors, human resource managers, incentive
program managers and hospital and pharmaceutical personnel. Gift cards and gift certificates can be
purchased at our theatres. Gift cards, gift certificates and SuperSavers are
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also sold online, via phone, fax, email and regular mail and fulfilled in-house from the local
corporate office. Additionally, we sell SuperSavers through third party retailers.
Online Sales
Our patrons may purchase advance tickets for all of our domestic screens and 339 of our
international screens by accessing our corporate website at www.cinemark.com or www.fandango.com.
Our Internet initiatives help improve customer satisfaction, allowing patrons who purchase tickets
over the Internet to often bypass lines at the box office by printing their tickets at home or
picking up their tickets at kiosks in the theatre lobby.
Point of Sale Systems
We developed our own proprietary point of sale system to further enhance our ability to
maximize revenues, control costs and efficiently manage operations. The system is currently
installed in all of our U.S. theatres and our one Canadian theatre. The point of sale system
provides corporate management with real-time admissions and concession revenues reports that allow
managers to make timely changes to movie schedules, including extending film runs, increasing the
number of screens on which successful movies are being played, or substituting films when gross
receipts do not meet expectations. Real-time seating and box office information is available to box
office personnel, preventing overselling of a particular film and providing faster and more
accurate responses to customer inquiries regarding showtimes and available seating. The system
tracks concession sales, provides in-theatre inventory reports allowing for efficient inventory
management and control, has multiple language capabilities, offers numerous ticket pricing options,
integrates Internet ticket sales and processes credit card transactions. Barcode scanners, pole
displays, touch screens, credit card readers and other equipment are integrated with the system to
enhance its functions. In our international locations, we currently use other point of sale systems
that have either been developed internally or by third parties, which have been certified as
compliant with applicable governmental regulations.
Competition
We are one of the leading motion picture exhibitors in terms of both revenues and the number
of screens in operation. We compete against local, regional, national and international exhibitors
with respect to attracting patrons, licensing films and developing new theatre sites.
We are the sole exhibitor in approximately 85% of the 235 first run film zones in which our
first run U.S. theatres operate. In film zones where there is no direct competition from other
theatres, we select those films we believe will be the most successful from among those offered to
us by film distributors. Where there is competition, we usually license films based on an
allocation process. Of the 1,011 screens we operate outside of the U.S., approximately 72% of those
screens have no direct competition from other theatres. The principal competitive factors with
respect to film licensing are:
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location, accessibility and capacity of an exhibitors theatre; |
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theatre comfort; |
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quality of projection and sound equipment; |
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level of customer service; and |
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licensing terms. |
The competition for customers is dependent upon factors such as the availability of popular
films, the location of theatres, the comfort and quality of theatres and ticket prices. Our ticket
prices are competitive with ticket prices of competing theatres.
We also face competition from a number of other motion picture exhibition delivery systems,
such as DVDs, network and syndicated television, video on-demand, pay-per-view television and
downloading utilizing the Internet. We do not believe that these additional distribution channels
have adversely affected theatre attendance; however, we can give no assurance that these or other
alternative delivery systems will not have an adverse impact on attendance in the future. We
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also face competition from other forms of entertainment competing for the publics leisure
time and disposable income, such as concerts, theme parks and sporting events.
Corporate Operations
We maintain a corporate office in Plano, Texas that provides oversight for our domestic and
international theatres. Domestic operations include theatre operations support, film licensing and
settlements, human resources, legal, finance and accounting, operational audit, theatre maintenance
and construction, Internet and information systems, real estate and marketing. Our U.S. operations
are divided into sixteen regions, each of which is headed by a region leader.
International personnel in the corporate office include our President of Cinemark
International, L.L.C. and vice presidents/directors in charge of film licensing, concessions,
theatre operations support, theatre maintenance and construction, real estate, legal, operational
audit, information systems and accounting. We have a chief financial officer in both Brazil and
Mexico, which are our two largest international markets. We have eight regional offices in Latin
America responsible for the local management of operations in twelve individual countries. Each
regional office is headed by a general manager and includes personnel in film licensing, marketing,
human resources, operations and accounting. The regional offices are staffed with nationals from
the region to overcome cultural and operational barriers.
Employees
We have approximately 12,300 employees in the U.S., approximately 10% of whom are full time
employees and 90% of whom are part time employees. We have approximately 4,400 employees in our
international markets, approximately 39% of whom are full time employees and approximately 61% of
whom are part time employees. Seventeen U.S. employees are represented by unions under collective
bargaining agreements. Some of our international locations are subject to union regulations. We
regard our relations with our employees to be satisfactory.
Regulations
The distribution of motion pictures is largely regulated by federal and state antitrust laws
and has been the subject of numerous antitrust cases. We have not been a party to such cases, but
the manner in which we can license films from certain major film distributors is subject to consent
decrees resulting from these cases. Consent decrees bind certain major film distributors and
require the films of such distributors to be offered and licensed to exhibitors, including us, on a
theatre-by-theatre and film-by-film basis. Consequently, exhibitors cannot assure themselves a
supply of films by entering long-term arrangements with major distributors, but must negotiate for
licenses on a theatre-by-theatre and film-by-film basis.
We are subject to various general regulations applicable to our operations including the
Americans with Disabilities Act of 1990, or the ADA. We develop new theatres to be accessible to
the disabled and we believe we are in substantial compliance with current regulations relating to
accommodating the disabled. Although we believe that our theatres comply with the ADA, we have been
a party to lawsuits which claim that our handicapped seating arrangements do not comply with the
ADA or that we are required to provide captioning for patrons who are deaf or are severely hearing
impaired.
Our theatre operations are also subject to federal, state and local laws governing such
matters as wages, working conditions, citizenship, health and sanitation requirements and
licensing.
Financial Information About Geographic Areas
We have operations in the U.S., Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru,
Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Colombia, which are reflected in the
consolidated financial statements. See Note 22 to the consolidated financial statements for segment
information.
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Item 1A. Risk Factors
Our business depends on film production and performance.
Our business depends on both the availability of suitable films for exhibition in our theatres
and the success of those pictures in our markets. Poor performance of films, the disruption in the
production of films due to events such as a strike by directors, writers or actors, or a reduction
in the marketing efforts of the film distributors to promote their films could have an adverse
effect on our business by resulting in fewer patrons and reduced revenues.
A deterioration in relationships with film distributors could adversely affect our ability to
obtain commercially successful films.
We rely on the film distributors for the motion pictures shown in our theatres. The film
distribution business is highly concentrated, with six major film distributors accounting for
approximately 78% of U.S. box office revenues and 42 of the top 50 grossing films during 2007.
Numerous antitrust cases and consent decrees resulting from these cases impact the distribution of
motion pictures. The consent decrees bind certain major film distributors to license films to
exhibitors on a theatre-by-theatre and film-by-film basis. Consequently, we cannot guarantee a
supply of films by entering into long-term arrangements with major distributors. We are therefore
required to negotiate licenses for each film and for each theatre. A deterioration in our
relationship with any of the six major film distributors could adversely affect our ability to
obtain commercially successful films and to negotiate favorable licensing terms for such films,
both of which could adversely affect our business and operating results.
We face intense competition for patrons and film licensing which may adversely affect our
business.
The motion picture industry is highly competitive. We compete against local, regional,
national and international exhibitors. We compete for both patrons and licensing of motion
pictures. The competition for patrons is dependent upon such factors as the availability of popular
motion pictures, the location and number of theatres and screens in a market, the comfort and
quality of the theatres and pricing. Some of our competitors have greater resources and may have
lower costs. The principal competitive factors with respect to film licensing include licensing
terms, number of seats and screens available for a particular picture, revenue potential and the
location and condition of an exhibitors theatres. If we are unable to license successful films,
our business may be adversely affected.
The oversupply of screens in the motion picture exhibition industry and other factors may
adversely affect the performance of some of our theatres.
During the period between 1996 and 2000, theatre exhibitor companies emphasized the
development of large multiplexes. The strategy of aggressively building multiplexes was adopted
throughout the industry and resulted in an oversupply of screens in the North American exhibition
industry and negatively impacted many older multiplex theatres more than expected. Many of these
theatres have long lease commitments making them financially burdensome to close prior to the
expiration of the lease term, even theatres that are unprofitable. Where theatres have been closed,
landlords have often made rent concessions to small independent or regional operators to keep the
theatres open since theatre buildings are typically limited in alternative uses. As a result, some
analysts believe that there continues to be an oversupply of screens in the North American
exhibition industry, as screen counts have increased each year since 2003. If competitors build
theatres in the markets we serve, the performance of some of our theatres could be adversely
affected due to increased competition.
An increase in the use of alternative or downstream film distribution channels and other
competing forms of entertainment may drive down movie theatre attendance and limit ticket price
growth.
We face competition for patrons from a number of alternative motion picture distribution
channels, such as DVDs, network and syndicated television, video on-demand, pay-per-view television
and downloading utilizing the Internet. We also compete with other forms of entertainment competing
for our patrons leisure time and disposable income such as concerts, amusement parks and sporting
events. A significant increase in popularity of these alternative film distribution channels and
competing forms of entertainment could have an adverse effect on our business and results of
operations.
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Our results of operations may be impacted by shrinking video release windows.
Over the last decade, the average video release window, which represents the time that elapses
from the date of a films theatrical release to the date a film is available on DVD, an important
downstream market, has decreased from approximately six months to approximately four months. We
cannot assure you that this release window, which is determined by the film studios, will not
shrink further or be eliminated altogether, which could have an adverse impact on our business and
results of operations.
We have substantial long-term lease and debt obligations, which may restrict our ability to
fund current and future operations.
We have significant long-term debt service obligations and long-term lease obligations. As of
December 31, 2007, we had $1,574.4 million in long-term debt obligations, $121.2 million in capital
lease obligations and $1,958.4 million in long-term operating lease obligations. We incurred $145.6
million of interest expense for the year ended December 31, 2007. We incurred $212.7 million of
rent expense for the year ended December 31, 2007 under operating leases (with terms, excluding
renewal options, ranging from one to 30 years). Our substantial lease and debt obligations pose
risk to you by:
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making it more difficult for us to satisfy our obligations; |
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requiring 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, acquisitions and other corporate requirements and to
pay dividends; |
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impeding our ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions and general corporate purposes; |
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subjecting us to the risk of increased sensitivity to interest rate increases on our
variable rate debt, including our borrowings under our senior secured credit facility; and |
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making us more vulnerable to a downturn in our business and competitive pressures and
limiting our flexibility to plan for, or react to, changes in our business. |
Our ability to make scheduled payments of principal and interest with respect to our
indebtedness and service our lease obligations will depend on our ability to generate cash flow
from our operations. To a certain extent, our ability to generate cash flow is subject to general
economic, financial, competitive, regulatory and other factors that are beyond our control. We
cannot assure you that we will continue to generate cash flow at current levels. If we fail to make
any required payment under the agreements governing our indebtedness or fail to comply with the
financial and operating covenants contained in them, we would be in default and our lenders would
have the ability to require that we immediately repay our outstanding indebtedness. If we fail to
make any required payment under our leases, we would be in default and our landlords would have the
ability to terminate our leases and re-enter the premises. Subject to the restrictions contained in
our indebtedness agreements, we expect to incur additional indebtedness from time to time to
finance acquisitions, capital expenditures, working capital requirements and other general business
purposes. In addition, we may need to refinance all or a portion of our indebtedness, including
Cinemark USA, Inc.s senior secured credit facility and Cinemark, Inc.s 9 3/4% senior discount
notes, on or before maturity. However, we may not be able to refinance all or any of our
indebtedness on commercially reasonable terms or at all.
We are subject to various covenants in our debt agreements that restrict our ability to enter
into certain transactions.
The agreements governing our debt obligations contain various financial and operating
covenants that limit our ability to engage in certain transactions, that require us not to allow
specific events to occur or that require us to apply proceeds from certain transactions to reduce
indebtedness. If we fail to make any required payment under the agreements governing our
indebtedness or fail to comply with the financial and operating covenants contained in them, we
would be in default, and our debt holders would have the ability to require that we immediately
repay our outstanding indebtedness. Any such defaults could materially impair our financial
condition and liquidity. We cannot assure you that we would be able to refinance our outstanding
indebtedness if debt holders require repayments as a result of a default.
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General political, social and economic conditions can adversely affect our attendance.
Our results of operations are dependent on general political, social and economic conditions,
and the impact of such conditions on our theatre operating costs and on the willingness of
consumers to spend money at movie theatres. If consumers discretionary income declines as a result
of an economic downturn, our operations could be adversely affected. If theatre operating costs,
such as utility costs, increase due to political or economic changes, our results of operations
could be adversely affected. Political events, such as terrorist attacks, could cause people to
avoid our theatres or other public places where large crowds are in attendance.
Our foreign operations are subject to adverse regulations and currency exchange risk.
We have 121 theatres with 1,011 screens in twelve countries in Latin America. Brazil and
Mexico represented approximately 9.3% and 4.5% of our consolidated 2007 revenues, respectively.
Governmental regulation of the motion picture industry in foreign markets differs from that in the
United States. Regulations affecting prices, quota systems requiring the exhibition of
locally-produced films and restrictions on ownership of land may adversely affect our international
operations in foreign markets. Our international operations are subject to certain political,
economic and other uncertainties not encountered by our domestic operations, including risks of
severe economic downturns and high inflation. We also face the additional risks of currency
fluctuations, hard currency shortages and controls of foreign currency exchange and transfers
abroad, all of which could have an adverse effect on the results of our international operations.
We may not be able to generate additional revenues or realize value from our
investment in NCM.
We joined Regal and AMC as founding members of NCM in 2005. After the completion of NCM Inc.s
initial public offering, we continue to own a 14% interest in NCM. In connection with the NCM Inc.
initial public offering, we modified our Exhibitor Services Agreement to reflect a shift from
circuit share expense under the prior exhibitor service agreement, which obligated NCM to pay us a
percentage of revenue, to a monthly theatre access fee. The theatre access fee has significantly
reduced the contractual amounts paid to us by NCM.
Cinema advertising is a small component of the U.S. advertising market. Accordingly, NCM
competes with larger, established and well known media platforms such as broadcast radio and
television, cable and satellite television, outdoor advertising and Internet portals. NCM also
competes with other cinema advertising companies and with hotels, conference centers, arenas,
restaurants and convention facilities for its non-film related events to be shown in our
auditoriums. In-theatre advertising may not continue to attract advertisers or NCMs in-theatre
advertising format may not continue to be received favorably by the theatre-going public. If NCM is
unable to continue to generate expected sales of advertising, it may not maintain the level of
profitability we hope to achieve, its results of operations may be adversely affected and our
investment in and revenues from NCM may be adversely impacted.
We are subject to uncertainties related to digital cinema, including potentially high costs of
re-equipping theatres with projectors to show digital movies.
Digital cinema is still in an experimental stage in our industry. Some of our competitors have
commenced a roll-out of digital equipment for exhibiting feature films. There are multiple parties
vying for the position of being the primary generator of the digital projector roll-out for
exhibiting feature films. However, significant obstacles exist that impact such a roll-out plan
including the cost of digital projectors, the substantial investment in re-equipping theatres and
determining who will be responsible for such costs. We cannot assure you that we will be able to
obtain financing arrangements to fund our portion of the digital cinema roll-out nor that such
financing will be available to us on acceptable terms, if at all.
We are subject to uncertainties relating to future expansion plans, including our ability to
identify suitable acquisition candidates or site locations.
We have greatly expanded our operations over the last decade through targeted worldwide
theatre development and the Century Acquisition. We will continue to pursue a strategy of expansion
that will involve the development of new theatres and may involve acquisitions of existing theatres
and theatre circuits both in the U.S. and internationally. There is significant competition for new
site locations and for existing theatre and theatre circuit acquisition opportunities. As a result
of such competition, we may not be able to acquire attractive site locations, existing theatres or
theatre circuits on terms we consider acceptable. We cannot assure you that our expansion strategy
will result in improvements to our
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business, financial condition or profitability. Further, our expansion programs may require
financing above our existing borrowing capacity and internally generated funds. We cannot assure
you that we will be able to obtain such financing nor that such financing will be available to us
on acceptable terms.
If we do not comply with the Americans with Disabilities Act of 1990 and a consent order we
entered into with the Department of Justice, we could be subject to further litigation.
Our theatres must comply with Title III of the ADA and analogous state and local laws.
Compliance with the ADA requires among other things that public facilities reasonably accommodate
individuals with disabilities and that new construction or alterations made to commercial
facilities conform to accessibility guidelines unless structurally impracticable for new
construction or technically infeasible for alterations. In March 1999, the Department of Justice,
or DOJ, filed suit against us in Ohio alleging certain violations of the ADA relating to wheelchair
seating arrangements in certain of our stadium-style theatres and seeking remedial action. We and
the DOJ have resolved this lawsuit and a consent order was entered by the U.S. District Court for
the Northern District of Ohio, Eastern Division, on November 15, 2004. Under the consent order, we
are required to make modifications to wheelchair seating locations in fourteen stadium-style movie
theatres and spacing and companion seating modifications in 67 auditoriums at other stadium-styled
movie theatres. These modifications must be completed by November 2009. We are currently in
compliance with the consent order. Upon completion of these modifications, these theatres will
comply with wheelchair seating requirements, and no further modifications will be required to our
other stadium-style movie theatres in the United States existing on the date of the
consent order. In addition, under the consent order, the DOJ approved the seating plans for nine
stadium-styled movie theatres then under construction and also created a safe harbor framework for
us to construct all of our future stadium-style movie theatres. The DOJ has stipulated that all
theatres built in compliance with the consent order will comply with the wheelchair seating
requirements of 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 depend on key personnel for our current and future performance.
Our current and future performance depends to a significant degree upon the continued
contributions of our senior management team and other key personnel. The loss or unavailability to
us of any member of our senior management team or a key employee could significantly harm us. We
cannot assure you that we would be able to locate or employ qualified replacements for senior
management or key employees on acceptable terms.
We are subject to impairment losses due to potential declines in the fair value of our assets.
We review long-lived assets for impairment on a quarterly basis or whenever events or changes
in circumstances indicate the carrying amount of the assets may not be fully recoverable.
We assess many factors when determining whether to impair individual theatre assets, including
actual theatre level cash flows, future years budgeted theatre level cash flows, theatre property
and equipment carrying values, theatre goodwill carrying values, the age of a recently built
theatre, competitive theatres in the marketplace, changes in foreign currency exchange rates, the
impact of recent ticket price changes, available lease renewal options and other factors considered
relevant in our assessment of impairment of individual theatre assets. The impairment evaluation is
based on the estimated cash flows from continuing use through the remainder of the theatres useful
life. The remainder of the useful life correlates with the available remaining lease period, which
includes the probability of renewal periods, for leased properties and a period of twenty years for
fee owned properties. If the estimated cash flows are not sufficient to recover a long-lived
assets carrying value, we then compare the carrying value of the asset group (theatre) with its
estimated fair value. Fair value is determined based on a multiple of cash flows, which was seven
times for 2005 and eight times for the evaluations performed during 2006 and 2007. When estimated
fair value is determined to be lower than the carrying value of the asset group (theatre), the
asset group (theatre) is written down to its estimated fair value. Significant judgment is involved
in estimating cash flows and fair value. Managements estimates are based on historical and
projected operating performance as well as recent market transactions.
We also test goodwill and other intangible assets for impairment at least annually in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill and other intangible
assets are tested for impairment at the reporting unit level at least annually or whenever events
or changes in circumstances indicate the carrying value may not be recoverable. Factors considered
include significant underperformance relative to historical or projected business and
15
significant negative industry or economic trends. Goodwill impairment is evaluated using a
two-step approach requiring us to compute the fair value of a reporting unit (generally at the
theatre level), and compare it with its carrying value. If the carrying value of the theatre
exceeds its fair value, a second step would be performed to measure the potential goodwill
impairment. Fair value is estimated based on a multiple of cash flows, which was seven times for
2005 and eight times for the evaluations performed during 2006 and 2007. Significant judgment is
involved in estimating cash flows and fair value. Managements estimates are based on historical
and projected operating performance as well as recent market transactions. We allocate goodwill at
the theatre level. This results in more volatile impairment charges on an annual basis due to
changes in market conditions and box office performance and the resulting impact on individual
theatres.
We recorded asset impairment charges, including goodwill impairment charges, of $51.7 million,
$28.5 million and $86.6 million for the years ended December 31, 2005, 2006 and 2007, respectively.
We cannot assure you that additional impairment charges will not be required in the future, and
such charges may have an adverse effect on our financial condition and results of operations. See
Managements Discussion and Analysis of Financial Condition and Results of Operations and Notes
10 and 11 to the consolidated financial statements.
Our results of operations vary from period to period based upon the quantity and quality of
the motion pictures that we show in our theatres.
Our results of operations vary from period to period based upon the quantity and quality of
the motion pictures that we show in our theatres. The major film distributors generally release the
films they anticipate will be most successful during the summer and holiday seasons. Consequently,
we typically generate higher revenues during these periods. Due to the dependency on the success of
films released from one period to the next, results of operations for one period may not be
indicative of the results for the following period or the same period in the following year.
Item 2. Properties
United States
As
of December 31, 2007, we operated 244 theatres, with 3,047 screens, pursuant to leases and
own the land and building for 43 theatres, with 607 screens, in the U.S. During 2007, we opened 13
new theatres with 201 screens. Our leases are generally entered into on a long-term basis with
terms, including renewal options, generally ranging from 20 to 45 years. As of December 31, 2007,
approximately 10% of our theatre leases in the U.S., covering 25
theatres with 205 screens, have
remaining terms, including optional renewal periods, of less than five years. Approximately 13% of
our theatre leases in the U.S., covering 31 theatres with 275 screens, have remaining terms,
including optional renewal periods, of between six and 15 years and approximately 77% of our
theatre leases in the U.S., covering 188 theatres with 2,567 screens, have remaining terms,
including optional renewal periods, of more than 15 years. The leases generally provide for a fixed
monthly minimum rent payment, with certain leases also subject to additional percentage rent if a
target annual revenue level is achieved. We lease an office building in Plano, Texas for our
corporate office.
International
As of December 31, 2007, internationally, we operated 121 theatres, with 1,011 screens, all of
which are leased pursuant to ground or building leases. In 2007, we opened seven new theatres with
56 screens in Latin America. Our international leases are generally entered into on a long term
basis with terms generally ranging from 10 to 20 years. The leases generally provide for contingent
rental based upon operating results (some of which are subject to an annual minimum). Generally,
these leases include renewal options for various periods at stipulated rates. Three international
theatres with 26 screens have a remaining term, including optional renewal periods, of less than
five years. Approximately 27% of our international theatre leases, covering 33 theatres and 278
screens, have remaining terms, including optional renewal periods, of between six and 15 years and
approximately 70% of our international theatre leases, covering 85 theatres and 707 screens, have
remaining terms, including optional renewal periods, of more than 15 years.
See Note 21 to the consolidated financial statements for information regarding our domestic
and international lease commitments. We periodically review the profitability of each of our
theatres, particularly those whose lease terms are nearing expiration, to determine whether to
continue its operations.
16
Item 3. Legal Proceedings
We resolved a lawsuit filed by the DOJ in March 1999 which alleged certain violations of the
ADA relating to wheelchair seating arrangements in certain of our stadium-style theatres. We and
the DOJ agreed to a consent order which was entered by the U.S. District Court for the Northern
District of Ohio, Eastern Division, on November 15, 2004. Under the consent order, we are required
to make modifications to wheelchair seating locations in fourteen
stadium-style movie theatres and spacing
and companion seating modifications in 67 auditoriums at other stadium-styled movie theatres. These
modifications must be completed by November 2009. We are currently in compliance with the consent
order. Upon completion of these modifications, these theatres will comply with wheelchair seating
requirements, and no further modifications will be required to our other stadium-style
movie theatres in the United States existing on the date of the consent order. In addition, under
the consent order, the DOJ approved the seating plans for nine stadium-styled movie theatres then
under construction and also created a safe harbor framework for us to construct all of our future
stadium-style movie theatres. The DOJ has stipulated that all theatres built in compliance with the
consent order will comply with the wheelchair seating requirements of the ADA. We do not believe
that our requirements under the consent order will materially affect our business or financial
condition.
From time to time, we are involved in other various legal proceedings arising from the
ordinary course of our business operations, such as personal injury claims, employment matters,
landlord-tenant disputes and contractual disputes, most of which are covered by insurance. We
believe our potential liability, with respect to proceedings currently pending, is not material,
individually or in the aggregate, to our financial position, results of operations and cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
On October 1, 2007, our board of directors approved and recommended to the stockholders an
amendment to the Cinemark Holdings, Inc. 2006 Long Term Incentive Plan (the 2006 Plan). On
October 15, 2007, a majority of the stockholders approved the First Amendment to the 2006 Plan (the
First Amendment) and an Information Statement was filed with the Securities and Exchange
Commission (the SEC) on October 16, 2007. The Information Statement was mailed to all
stockholders on October 22, 2007 to inform the stockholders that we have obtained the written
consent of the requisite holders of common stock to amend the 2006 Plan and to serve as notice to
the stockholders of such action in accordance with Section 228(e) of the Delaware General
Corporation Law. The First Amendment to the 2006 Plan became effective November 12, 2007. A copy
of the First Amendment to the 2006 Plan is attached as Exhibit 10.1 to the Current Report on Form
8-K filed with the SEC on November 15, 2007.
17
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Market Information and Holder
Our common equity consists of common stock, which has traded on the New York Stock Exchange
since April 23, 2007 under the symbol CNK. The following table sets forth the historical high
and low sales prices per share of our common stock as reported by the New York Stock Exchange for
the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
High |
|
Low |
Second Quarter (April 23, 2007 June 30, 2007)
|
|
$ |
20.69 |
|
|
$ |
16.15 |
|
Third Quarter (July 1, 2007 September 30, 2007)
|
|
$ |
19.48 |
|
|
$ |
14.83 |
|
Fourth Quarter (October 1, 2007 December 31, 2007)
|
|
$ |
20.00 |
|
|
$ |
15.81 |
|
On February 29, 2008, there were 39 stockholders of record of our common stock.
Dividend Policy
During August 2007, we initiated a quarterly dividend. Consistent with the disclosures in our
424(b)(1) prospectus, the dividend for the second quarter of 2007 was based upon the quarterly
dividend rate of $0.18 per common share, prorated based on the April 27, 2007 closing date of our
initial public offering. Based on such proration, a cash dividend of $0.13 per share of common
stock was paid on September 18, 2007. The dividend for the third quarter was the first dividend
paid by us reflecting a full quarter since our initial public offering and was paid in the amount
of $0.18 per share of common stock on December 18, 2007. We paid dividends of approximately $33.1
million in the aggregate during 2007. The divided for the fourth quarter of 2007 was paid in the
amount of $0.18 per share of common stock on March 14, 2008. We, at the discretion of the board of
directors and subject to applicable law, anticipate paying regular quarterly dividends on our
common stock for the foreseeable future. The amount, if any, of the dividends to be paid in the
future will depend upon our then available cash, anticipated cash needs, overall financial
condition, loan agreement restrictions, future prospects for earnings and cash flows, as well as
other relevant factors.
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock for
the period April 24, 2007 (the closing price on the first trading date) through December 31, 2007
(our fiscal year end) with the Standard and Poors Corporation Composite 500 Index and a
self-determined peer group of two public companies engaged in the motion picture exhibition
industry. The peer group consists of Regal Entertainment Group and Carmike Cinemas, Inc.
18
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/24/07 |
|
|
12/31/07 |
|
Cinemark Holdings, Inc. |
|
|
$ |
100 |
|
|
|
$ |
90 |
|
|
S&P © 500 |
|
|
|
100 |
|
|
|
|
99 |
|
|
Peer group |
|
|
|
100 |
|
|
|
|
59 |
|
|
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about the securities authorized for issuance under
the equity compensation plans of Cinemark Holdings, Inc. as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Securities Remaining |
|
|
Number of |
|
Weighted |
|
Available for Future |
|
|
Securities to be |
|
Average Exercise |
|
Issuance Under |
|
|
Issued upon |
|
Price of |
|
Equity |
|
|
Exercise of |
|
Outstanding |
|
Compensation Plans |
|
|
Outstanding |
|
Options, |
|
(Excluding |
|
|
Options, Warrants |
|
Warrants and |
|
Securities Reflected |
Plan Category |
|
and Rights |
|
Rights |
|
in the First Column) |
Equity compensation plans approved by security holders |
|
|
6,323,429 |
|
|
$ |
7.63 |
|
|
|
2,202,700 |
|
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,323,429 |
|
|
$ |
7.63 |
|
|
|
2,202,700 |
|
|
|
|
Use of Proceeds
There has been no material change in the planned use of proceeds from our initial public
offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b). Pending
the application of the net proceeds, we have invested the proceeds in short-term, investment-grade
marketable securities or money market obligations. During July and August 2007, we repurchased in
six open market purchases a total of $47.0 million aggregate principal amount at maturity of our 9
3/4% senior discount notes for approximately $42.8 million, including accreted interest of $10.9
million and a cash premium of $2.5 million. During November 2007, we repurchased in one open
market purchase $22.2 million aggregate principal amount at maturity of our 9 3/4% senior discount
notes for approximately $20.9 million, including accreted interest of $5.7 million and a cash
premium of $1.5 million. During March 2008, we repurchased in one open market purchase $10.0
million aggregate principal amount at maturity of our 9 3/4% senior discount notes for approximately
$9.0 million, including accreted interest of $2.9 million. We funded these transactions with the
proceeds from our initial public offering.
19
Item 6. Selected Financial Data
The following tables set forth our selected consolidated financial and operating data for the
periods and at the dates indicated for each of the five most recent years ended December 31, 2007.
The selected historical information for periods through April 1, 2004 are of Cinemark, Inc., the
predecessor, and the selected historical information for all subsequent periods are of Cinemark
Holdings, Inc., the successor. You should read the selected consolidated financial and operating
data set forth below in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and with our Consolidated Financial Statements and related
notes thereto, appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinemark, Inc. |
|
|
|
|
|
|
Cinemark Holdings, Inc. |
|
|
|
|
|
|
Predecessor |
|
Successor |
|
|
|
|
|
|
Period from |
|
|
Period from |
|
|
|
|
|
|
|
|
January 1, |
|
|
April 2, |
|
|
|
|
|
|
|
|
2004 |
|
|
2004 |
|
Year Ended December 31, |
|
|
Year Ended |
|
to |
|
|
to |
|
|
|
|
|
|
|
|
December |
|
April 1, |
|
|
December |
|
|
|
|
|
|
|
|
31, 2003 |
|
2004 |
|
|
31, 2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
Statement of Operations
Data(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions |
|
$ |
597,548 |
|
|
$ |
149,134 |
|
|
|
$ |
497,865 |
|
|
$ |
641,240 |
|
|
$ |
760,275 |
|
|
$ |
1,087,480 |
|
Concession |
|
|
300,568 |
|
|
|
72,480 |
|
|
|
|
249,141 |
|
|
|
320,072 |
|
|
|
375,798 |
|
|
|
516,509 |
|
Other |
|
|
52,756 |
|
|
|
12,011 |
|
|
|
|
43,611 |
|
|
|
59,285 |
|
|
|
84,521 |
|
|
|
78,852 |
|
|
|
|
|
|
|
Total
Revenues |
|
$ |
950,872 |
|
|
$ |
233,625 |
|
|
|
$ |
790,617 |
|
|
$ |
1,020,597 |
|
|
$ |
1,220,594 |
|
|
$ |
1,682,841 |
|
Theatre operating costs |
|
|
582,574 |
|
|
|
140,938 |
|
|
|
|
477,689 |
|
|
|
625,496 |
|
|
|
728,431 |
|
|
|
1,035,360 |
|
Facility lease expense |
|
|
119,517 |
|
|
|
30,915 |
|
|
|
|
97,829 |
|
|
|
138,477 |
|
|
|
161,374 |
|
|
|
212,730 |
|
General and administrative
expenses |
|
|
44,286 |
|
|
|
11,869 |
|
|
|
|
39,803 |
|
|
|
50,884 |
|
|
|
67,768 |
|
|
|
79,518 |
|
Termination of profit
participation agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,952 |
|
Stock option compensation and
change of control expenses
related to the MDP Merger |
|
|
|
|
|
|
31,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
65,085 |
|
|
|
16,865 |
|
|
|
|
61,353 |
|
|
|
86,126 |
|
|
|
99,470 |
|
|
|
151,716 |
|
Impairment of long-lived assets |
|
|
5,049 |
|
|
|
1,000 |
|
|
|
|
36,721 |
|
|
|
51,677 |
|
|
|
28,537 |
|
|
|
86,558 |
|
(Gain) loss on sale of assets
and other |
|
|
(1,202 |
) |
|
|
(513 |
) |
|
|
|
3,602 |
|
|
|
4,436 |
|
|
|
7,645 |
|
|
|
(2,953 |
) |
|
|
|
|
|
|
Total cost of operations |
|
|
815,309 |
|
|
|
233,069 |
|
|
|
|
716,997 |
|
|
|
957,096 |
|
|
|
1,093,225 |
|
|
|
1,569,881 |
|
|
|
|
|
|
|
Operating income |
|
|
135,563 |
|
|
|
556 |
|
|
|
|
73,620 |
|
|
|
63,501 |
|
|
|
127,369 |
|
|
|
112,960 |
|
Interest expense |
|
|
54,163 |
|
|
|
12,562 |
|
|
|
|
58,149 |
|
|
|
84,082 |
|
|
|
109,328 |
|
|
|
145,596 |
|
Income (loss) from continuing
operations before income taxes |
|
|
47,389 |
|
|
|
(12,771 |
) |
|
|
|
10,451 |
|
|
|
(16,000 |
) |
|
|
13,526 |
|
|
|
200,882 |
|
Income (loss) from
discontinued operations, net
of taxes |
|
|
(2,740 |
) |
|
|
(1,565 |
) |
|
|
|
4,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
44,649 |
|
|
$ |
(10,633 |
) |
|
|
$ |
(3,687 |
) |
|
$ |
(25,408 |
) |
|
$ |
841 |
|
|
$ |
88,920 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
(0.09 |
) |
|
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
Diluted |
|
$ |
0.37 |
|
|
$ |
(0.09 |
) |
|
|
$ |
(0.05 |
) |
|
$ |
(0.31 |
) |
|
$ |
0.01 |
|
|
$ |
0.85 |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinemark, Inc. |
|
|
|
|
|
|
Cinemark Holdings, Inc. |
|
|
|
|
|
|
Predecessor |
|
Successor |
|
|
|
|
|
|
Period from |
|
|
Period from |
|
|
|
|
|
|
|
|
January 1, |
|
|
April 2, |
|
|
|
|
|
|
|
|
2004 |
|
|
2004 |
|
Year Ended December 31, |
|
|
Year Ended |
|
to |
|
|
to |
|
|
|
|
|
|
|
|
December |
|
April 1, |
|
|
December |
|
|
|
|
|
|
|
|
31, 2003 |
|
2004 |
|
|
31, 2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges(6) |
|
|
1.80 |
x |
|
|
|
|
|
|
|
1.12 |
x |
|
|
0.88 |
x |
|
|
1.09 |
x |
|
|
1.96 |
x |
Cash flow provided by (used for): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
135,522 |
|
|
$ |
10,100 |
|
|
|
$ |
112,986 |
|
|
$ |
165,270 |
|
|
$ |
155,662 |
|
|
$ |
276,036 |
|
Investing activities(2) |
|
|
(47,151 |
) |
|
|
(16,210 |
) |
|
|
|
(100,737 |
) |
|
|
(81,617 |
) |
|
|
(631,747 |
) |
|
|
93,178 |
|
Financing activities |
|
|
(45,738 |
) |
|
|
346,983 |
|
|
|
|
(361,426 |
) |
|
|
(3,750 |
) |
|
|
439,977 |
|
|
|
(183,715 |
) |
Capital expenditures |
|
|
(51,002 |
) |
|
|
(17,850 |
) |
|
|
|
(63,158 |
) |
|
|
(75,605 |
) |
|
|
(107,081 |
) |
|
|
(146,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinemark, |
|
|
|
|
|
|
Cinemark Holdings, Inc. |
|
|
|
|
Inc. |
|
|
|
|
|
|
Successor |
|
|
|
|
Predecessor |
|
|
|
|
|
|
As of December 31, |
|
|
|
|
2003 |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
107,322 |
|
|
|
$ |
100,248 |
|
|
$ |
182,199 |
|
|
$ |
147,099 |
|
|
$ |
338,043 |
|
Theatre properties and equipment, net |
|
|
775,880 |
|
|
|
|
794,723 |
|
|
|
803,269 |
|
|
|
1,324,572 |
|
|
|
1,314,066 |
|
Total assets |
|
|
960,736 |
|
|
|
|
1,831,855 |
|
|
|
1,864,852 |
|
|
|
3,171,582 |
|
|
|
3,296,892 |
|
Total long-term debt and capital
lease obligations, including current
portion |
|
|
658,431 |
|
|
|
|
1,026,055 |
|
|
|
1,055,095 |
|
|
|
2,027,480 |
|
|
|
1,644,915 |
|
Stockholders equity |
|
|
76,946 |
|
|
|
|
533,200 |
|
|
|
519,349 |
|
|
|
689,297 |
|
|
|
1,019,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cinemark, Inc. |
|
|
|
|
|
|
Cinemark Holdings, Inc. |
|
|
|
|
|
|
Predecessor |
|
Successor |
|
|
|
|
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
from |
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Period from |
|
|
|
|
|
|
|
|
2004 |
|
|
April 2, 2004 |
|
Year Ended December 31, |
|
|
Year Ended |
|
to |
|
|
to |
|
|
|
|
|
|
|
|
December |
|
April 1, |
|
|
December 31, |
|
|
|
|
|
|
|
|
31, 2003 |
|
2004 |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
|
|
|
|
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States(3)(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatres operated (at period end) |
|
|
189 |
|
|
|
191 |
|
|
|
|
191 |
|
|
|
200 |
|
|
|
281 |
|
|
|
287 |
|
Screens operated (at period end) |
|
|
2,244 |
|
|
|
2,262 |
|
|
|
|
2,303 |
|
|
|
2,417 |
|
|
|
3,523 |
|
|
|
3,654 |
|
Total attendance(1) (in 000s) |
|
|
112,581 |
|
|
|
25,790 |
|
|
|
|
87,856 |
|
|
|
105,573 |
|
|
|
118,714 |
|
|
|
151,712 |
|
International(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatres operated (at period end) |
|
|
97 |
|
|
|
95 |
|
|
|
|
101 |
|
|
|
108 |
|
|
|
115 |
|
|
|
121 |
|
Screens operated (at period end) |
|
|
852 |
|
|
|
835 |
|
|
|
|
869 |
|
|
|
912 |
|
|
|
965 |
|
|
|
1,011 |
|
Total attendance(1) (in 000s) |
|
|
60,553 |
|
|
|
15,791 |
|
|
|
|
49,904 |
|
|
|
60,104 |
|
|
|
59,550 |
|
|
|
60,958 |
|
Worldwide(3)(4)(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatres operated (at period end) |
|
|
286 |
|
|
|
286 |
|
|
|
|
292 |
|
|
|
308 |
|
|
|
396 |
|
|
|
408 |
|
Screens operated (at period end) |
|
|
3,096 |
|
|
|
3,097 |
|
|
|
|
3,172 |
|
|
|
3,329 |
|
|
|
4,488 |
|
|
|
4,665 |
|
Total attendance(1) (in 000s) |
|
|
173,134 |
|
|
|
41,581 |
|
|
|
|
137,760 |
|
|
|
165,677 |
|
|
|
178,264 |
|
|
|
212,670 |
|
|
|
|
(1) |
|
Statement of Operations Data (other than net income (loss)) and attendance data
exclude the results of the two United Kingdom theatres and eleven Interstate theatres for all
periods presented as these theatres were sold during the period from April 2, 2004 to
December 31, 2004. The results of operations for these theatres in the 2003 and 2004 periods
are presented as discontinued operations. |
|
(2) |
|
Includes the cash portion of the Century Acquisition purchase price of $531.2
million during the year ended December 31, 2006. |
|
(3) |
|
The data excludes certain theatres operated by us in the U.S. pursuant to
management agreements that are not part of our consolidated operations. |
|
(4) |
|
The data excludes certain theatres operated internationally through our affiliates
that are not part of our consolidated operations. |
|
(5) |
|
The data for 2003 excludes theatres, screens and attendance for eight theatres and
46 screens acquired on December 31, 2003, as the results of operations for these theatres are
not included in our 2003 consolidated results of operations. |
|
(6) |
|
For the purposes of calculating the ratio of earnings to fixed charges, earnings
consist of income (loss) from continuing operations before taxes plus fixed charges excluding capitalized interest. Fixed charges consist
of interest expense, capitalized interest, amortization of debt issue cost and that portion
of rental expense which we believe to be representative of the interest factor. For the
period from January 1, 2004 to April 1, 2004, earnings were insufficient to cover fixed
charges by $12.7 million. |
21
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the financial
statements and accompanying notes included in this report.
Overview
On April 2, 2004, an affiliate of MDP acquired approximately 83% of the capital stock of
Cinemark, Inc., pursuant to which a newly formed subsidiary owned by an affiliate of MDP was merged
with and into Cinemark, Inc. with Cinemark, Inc. continuing as the surviving corporation.
Simultaneously, an affiliate of MDP purchased shares of Cinemark, Inc.s common stock and became
Cinemark, Inc.s controlling stockholder. Lee Roy Mitchell, Chairman and then Chief Executive
Officer, the Mitchell Special Trust, and certain members of management collectively retained a
minority ownership of Cinemark, Inc.s capital stock. In December 2004, MDP sold a portion of its
stock in Cinemark, Inc. to outside investors and in July 2005, Cinemark, Inc. issued additional
shares to another outside investor.
On August 2, 2006, Cinemark Holdings, Inc. was formed as the Delaware holding company of
Cinemark, Inc. On August 7, 2006, the Cinemark, Inc. stockholders entered into a share exchange
agreement pursuant to which they agreed to exchange their shares of Class A common stock for an
equal number of shares of common stock of Cinemark Holdings, Inc. (Cinemark Share Exchange). The
Cinemark Share Exchange was completed on October 5, 2006 and facilitated the acquisition of Century
Theatres, Inc. (Century Acquisition) on that date. On October 5, 2006, Cinemark, Inc. became a
wholly owned subsidiary of Cinemark Holdings, Inc. Prior to October 5, 2006, Cinemark Holdings,
Inc. had no assets, liabilities or operations. The accompanying consolidated financial statements
are reflective of the change in reporting entity that occurred as a result of the Cinemark Share
Exchange. Cinemark Holdings, Inc.s consolidated financial statements reflect the accounting basis
of its stockholders for all periods presented. On
April 24, 2007, Cinemark Holdings, Inc. completed an initial public offering of its common stock.
As of December 31, 2007, we managed our business under two operating segments U.S. markets
and international markets, in accordance with SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information. See Note 22 to the
consolidated financial statements.
Revenues and Expenses
We generate revenues primarily from box office receipts and concession sales with additional
revenues from screen advertising sales and other revenue streams, such as vendor marketing
programs, pay phones, ATM machines and electronic video games located in some of our theatres. Our
investment in NCM has assisted us in expanding our offerings to advertisers, exploring ancillary
revenue sources such as digital video monitor advertising, third party branding, and the use of
theatres for non-film events. In addition, we are able to use theatres during non-peak hours for
concerts, sporting events, and other cultural events. Successful films released during the year
ended December 31, 2007 included Spider-Man 3, Shrek the Third, Pirates of the Caribbean: At
Worlds End and Transformers, which all grossed over $300 million; Harry Potter and the Order of
the Phoenix, Bourne Ultimatum, Ratatouille, I am Legend, National Treasure: Book of Secrets and
300, which all grossed over $200 million; and Fantastic Four: Rise of the Silver Surfer, I now
Pronounce You Chuck and Larry, and Knocked Up. Our revenues are affected by changes in attendance
and average admissions and concession revenues per patron. Attendance is primarily affected by the
quality and quantity of films released by motion picture studios. Films scheduled for release
during 2008 include Harry Potter and the Half-Blood Prince, Indiana Jones and the Kingdom of the
Crystal Skull, Chronicles of Narnia: Prince Caspian, The Dark Knight, Wall-E, Hancock, The Mummy:
Tomb of the Dragon Emperor and the release of 3-D movies such as Hannah Montana & Miley Cyrus: Best
of Both Worlds and Journey to the Center of the Earth. In 2009, a broad slate of 3-D films is
expected, including Monsters vs. Aliens, Ice Age 3, and Avatar.
Film rental costs are variable in nature and fluctuate with our admissions revenues. Film
rental costs as a percentage of revenues are generally higher for periods in which more blockbuster
films are released. Film rental costs can also vary based on the length of a films run. Film rental rates are negotiated on a film-by-film and theatre-by-theatre basis.
Advertising costs, which are expensed as incurred, are primarily fixed at the theatre level as
daily movie directories placed in newspapers represent the largest component of advertising costs.
The monthly cost of these advertisements is based on, among other things, the size of the directory
and the frequency and size of the newspapers circulation.
22
Concession supplies expense is variable in nature and fluctuates with our concession revenues.
We purchase concession supplies to replace units sold. We negotiate prices for concession supplies
directly with concession vendors and manufacturers to obtain bulk rates.
Although salaries and wages include a fixed cost component (i.e. the minimum staffing costs to
operate a theatre facility during non-peak periods), salaries and wages move in relation to
revenues as theatre staffing is adjusted to handle changes in attendance.
Facility lease expense is primarily a fixed cost at the theatre level as most of our facility
leases require a fixed monthly minimum rent payment. Certain of our leases are subject to
percentage rent only while others are subject to percentage rent in addition to their fixed monthly
rent if a target annual revenue level is achieved. Facility lease expense as a percentage of
revenues is also affected by the number of theatres under operating leases versus the number of
theatres under capital leases and the number of fee-owned theatres.
Utilities and other costs include certain costs that are fixed such as property taxes, certain
costs that are variable such as liability insurance, and certain costs that possess both fixed and
variable components such as utilities, repairs and maintenance and security services.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. As such, we are required to make certain
estimates and assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the periods
presented. The significant accounting policies, which we believe are the most critical to aid in
fully understanding and evaluating our reported consolidated financial results, include the
following:
Revenue and Expense Recognition
Revenues are recognized when admissions and concession sales are received at the box office.
Other revenues primarily consist of screen advertising. Screen advertising revenues are recognized
over the period that the related advertising is delivered on-screen or in-theatre. We record
proceeds from the sale of gift cards and other advanced sale-type certificates in current
liabilities and recognize admissions and concession revenue when a holder redeems the card or
certificate. We recognize unredeemed gift cards and other advanced sale-type certificates as
revenue only after such a period of time indicates, based on historical experience, the likelihood
of redemption is remote, and based on applicable laws and regulations. In evaluating the likelihood
of redemption, we consider the period outstanding, the level and frequency of activity, and the
period of inactivity.
Film rental costs are accrued based on the applicable box office receipts and either the
mutually agreed upon firm terms or a sliding scale formula, which are established prior to the
opening of the picture, or estimates of the final mutually agreed upon settlement, which occurs at
the conclusion of the picture run, subject to the film licensing arrangement. Estimates are based
on the expected success of a film over the length of its run in theatres. The success of a film can
typically be determined a few weeks after a film is released when initial box office performance of
the film is known. Accordingly, final settlements typically approximate estimates since box office
receipts are known at the time the estimate is made and the expected success of a film over the
length of its run in theatres can typically be estimated early in the films run. The final film
settlement amount is negotiated at the conclusion of the films run based upon how a film actually
performs. If actual settlements are higher than those estimated, additional film rental costs are
recorded at that time. We recognize advertising costs and any sharing arrangements with film
distributors in the same accounting period. Our advertising costs are expensed as incurred.
Facility lease expense is primarily a fixed cost at the theatre level as most of our facility
leases require a fixed monthly minimum rent payment. Certain of our leases are subject to monthly
percentage rent only, which is accrued each month based on actual revenues. Certain of our other
theatres require payment of percentage rent in addition to fixed monthly rent if a target annual
revenue level is achieved. Percentage rent expense is recorded for these theatres on a monthly
basis if the theatres historical performance or forecasted performance indicates that the annual
target will be reached. The estimate of percentage rent expense recorded during the year is based
on a trailing twelve months of
23
revenues. Once annual revenues are known, which is generally at the end of the year, the
percentage rent expense is adjusted based on actual revenues.
Theatre properties and equipment are depreciated using the straight-line method over their
estimated useful lives. In estimating the useful lives of our theatre properties and equipment, we
have relied upon our experience with such assets and our historical replacement period. We
periodically evaluate these estimates and assumptions and adjust them as necessary. Adjustments to
the expected lives of assets are accounted for on a prospective basis through depreciation expense.
Impairment of Long-Lived Assets
We review long-lived assets for impairment on a quarterly basis or whenever events or changes
in circumstances indicate the carrying amount of the assets may not be fully recoverable. We assess
many factors including the following to determine whether to impair individual theatre assets:
|
|
|
actual theatre level cash flows; |
|
|
|
|
future years budgeted theatre level cash flows; |
|
|
|
|
theatre property and equipment carrying values; |
|
|
|
|
theatre goodwill carrying values; |
|
|
|
|
amortizing intangible asset carrying values; |
|
|
|
|
the age of a recently built theatre; |
|
|
|
|
competitive theatres in the marketplace; |
|
|
|
|
changes in foreign currency exchange rates; |
|
|
|
|
the impact of recent ticket price changes; |
|
|
|
|
available lease renewal options; and |
|
|
|
|
other factors considered relevant in our assessment of impairment of individual theatre
assets. |
Long-lived assets are evaluated for impairment on an individual theatre basis, which we
believe is the lowest applicable level for which there are identifiable cash flows. The impairment
evaluation is based on the estimated cash flows from continuing use through the remainder of the
theatres useful life. The remainder of the useful life correlates with the available remaining
lease period, which includes the probability of renewal periods for leased properties and a period
of twenty years for fee owned properties. If the estimated cash flows are not sufficient to recover
a long-lived assets carrying value, we then compare the carrying value of the asset group
(theatre) with its estimated fair value. Fair values are determined based on a multiple of cash
flows, which was seven times for 2005 and eight times for the evaluations performed during 2006 and
2007. When estimated fair value is determined to be lower than the carrying value of the asset
group (theatre), the asset group (theatre) is written down to its estimated fair value. Significant
judgment is involved in estimating cash flows and fair value. Managements estimates are based on
historical and projected operating performance as well as recent market transactions.
Impairment of Goodwill and Intangible Assets
We evaluate goodwill and tradename for impairment annually at fiscal year-end and any time
events or circumstances indicate the carrying amount of the goodwill and intangible assets may not
be fully recoverable. As a result of the NCM Transaction discussed in Note 7, and more specifically
the modification of the NCM Exhibitor Services Agreement, which significantly reduced the
contractual amounts paid to us, we evaluated the carrying value of our goodwill as of March 31,
2007 (See Notes 10 and 11). We also evaluated the carrying value of our goodwill as of December 31,
2007. We evaluate goodwill for impairment at the reporting unit level (generally a theatre) and
have allocated goodwill to the reporting unit based on an estimate of its relative fair value. The
evaluation is a two-step approach requiring us to compute the fair value of a theatre and compare
it with its carrying value. If the carrying value exceeds fair value, a second step is performed to
measure the potential goodwill impairment. Fair value is determined based on a multiple of cash
flows, which was seven times for 2005 and eight times for the evaluations performed during 2006 and
2007. Significant judgment is involved in estimating cash flows and fair value. Managements
estimates are based on historical and projected operating performance as well as recent market
transactions. Our policy of allocating
24
goodwill at the theatre level results in more volatile impairment charges on an annual basis
due to changes in market conditions and box office performance and the resulting impact on
individual theatres.
Acquisitions
We account for acquisitions under the purchase method of accounting in accordance with SFAS
No. 141, Business Combinations. The purchase method requires that we estimate the fair value of
the assets acquired and liabilities assumed and allocate consideration paid accordingly. For
significant acquisitions, we obtain independent third party valuation studies for certain of the
assets acquired and liabilities assumed to assist us in determining fair value. The estimation of
the fair values of the assets acquired and liabilities assumed involves a number of estimates and
assumptions that could differ materially from the actual amounts recorded.
Income Taxes
We use an asset and liability approach to financial accounting and reporting for income taxes.
Deferred income taxes are provided when tax laws and financial accounting standards differ with
respect to the amount of income for a year and the basis of assets and liabilities. A valuation
allowance is recorded to reduce the carrying amount of deferred tax assets unless it is more likely
than not that such assets will be realized. Income taxes are provided on unremitted earnings from
foreign subsidiaries unless such earnings are expected to be indefinitely reinvested. Income taxes
have also been provided for potential tax assessments. The related tax accruals are recorded in
accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of SFAS No. 109 (FIN 48), which we adopted on January 1, 2007. FIN 48 clarifies the
accounting and reporting for income taxes recognized in accordance with SFAS No. 109, Accounting
for Income Taxes, and the recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. The first step is recognition: We determine whether
it is more likely than not that a tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the technical merits of the
position. In evaluating whether a tax position has met the more-likely-than-not recognition
threshold, we should presume that the position would be examined by the appropriate taxing
authority that would have full knowledge of all relevant information. The second step is
measurement: A tax position that meets the more-likely-than-not recognition threshold is measured
to determine the amount of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. Differences between tax positions taken in a tax return and amounts
recognized in the financial statements result in (1) an increase in a liability for income taxes
payable or (2) a reduction of an income tax refund receivable or a reduction in a deferred tax
asset or an increase in a deferred tax liability or both (1) and (2).
Recent Developments
On February 26, 2008, the Companys board of directors declared a cash dividend for the fourth
quarter of 2007 of $0.18 per share of common stock payable to stockholders of record on March 6,
2008. The dividend was paid on March 14, 2008.
On March 20, 2008, we repurchased in one open market purchase $10.0 million aggregate
principal amount at maturity of our 9 3/4% senior discount notes for approximately $9.0 million,
including accreted interest of $2.9 million. The transaction was funded with proceeds from our
initial public offering.
On March 27,2008, our Board of Directors approved and recommended to the stockholders for approval
at the 2008 annual meeting of stockholders to be held on
May 15, 2008 (the Annual Meeting), an
amendment and restatement of the Cinemark Holdings, Inc. 2006 Long Term Incentive Plan, as amended
(the Restated Incentive Plan). The Restated Incentive Plan amends and restates the Cinemark
Holdings, Inc. 2006 Long Term Incentive Plan, as amended (the 2006 Plan), to (i) increase the
number of shares reserved for issuance from 9,097,360 shares of Common Stock to 19,100,000 shares
of Common Stock and (ii) permit the Compensation Committee to award participants restricted stock
units and performance awards. The right of a participant to exercise or receive a grant of a
restricted stock unit or performance award may be subject to the satisfaction of such performance
or objective business criteria as determined by the Compensation Committee. With the exception of
the changes identified in (i) and (ii) above, the Restated Incentive Plan does not materially
differ from the 2006 Plan. The foregoing does not constitute a complete summary of the Restated
Incentive Plan and is qualified in its entirety by reference to the complete text of the Restated
Incentive Plan to be filed as an appendix to the proxy statement for our Annual Meeting to be
mailed to our stockholders within 120 days after
December 31, 2007.
25
Results of Operations
On October 5, 2006, we completed our acquisition of Century Theatres, Inc. Results of
operations for the year ended December 31, 2006 reflect the inclusion of the Century theatres
beginning on the date of acquisition. Results of operations for the year ended December 31, 2005 do
not include results of operations for the Century theatres.
The following table sets forth, for the periods indicated, the percentage of revenues
represented by certain items reflected in our consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2005 |
|
2006 |
|
2007 |
Operating data (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Admissions |
|
$ |
641.2 |
|
|
$ |
760.3 |
|
|
$ |
1,087.5 |
|
Concession |
|
|
320.1 |
|
|
|
375.8 |
|
|
|
516.5 |
|
Other |
|
|
59.3 |
|
|
|
84.5 |
|
|
|
78.8 |
|
|
|
|
Total revenues |
|
$ |
1,020.6 |
|
|
$ |
1,220.6 |
|
|
$ |
1,682.8 |
|
|
|
|
Theatre operating costs(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Film rentals and advertising |
|
$ |
347.7 |
|
|
$ |
406.0 |
|
|
$ |
589.7 |
|
Concession supplies |
|
|
52.5 |
|
|
|
59.0 |
|
|
|
81.1 |
|
Salaries and wages |
|
|
101.5 |
|
|
|
118.6 |
|
|
|
173.3 |
|
Facility lease expense |
|
|
138.5 |
|
|
|
161.4 |
|
|
|
212.7 |
|
Utilities and other |
|
|
123.8 |
|
|
|
144.8 |
|
|
|
191.3 |
|
|
|
|
Total theatre operating costs |
|
$ |
764.0 |
|
|
$ |
889.8 |
|
|
$ |
1,248.1 |
|
|
|
|
Operating data as a percentage of total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Admissions |
|
|
62.8 |
% |
|
|
62.3 |
% |
|
|
64.6 |
% |
Concession |
|
|
31.4 |
|
|
|
30.8 |
|
|
|
30.7 |
|
Other |
|
|
5.8 |
|
|
|
6.9 |
|
|
|
4.7 |
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
Theatre operating costs(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Film rentals and advertising |
|
|
54.2 |
% |
|
|
53.4 |
% |
|
|
54.2 |
% |
Concession supplies |
|
|
16.4 |
|
|
|
15.7 |
|
|
|
15.7 |
|
Salaries and wages |
|
|
9.9 |
|
|
|
9.7 |
|
|
|
10.3 |
|
Facility lease expense |
|
|
13.6 |
|
|
|
13.2 |
|
|
|
12.6 |
|
Utilities and other |
|
|
12.1 |
|
|
|
11.9 |
|
|
|
11.4 |
|
Total theatre operating costs |
|
|
74.9 |
% |
|
|
72.9 |
% |
|
|
74.2 |
% |
|
|
|
Average screen count (month end average) |
|
|
3,239 |
|
|
|
3,628 |
|
|
|
4,558 |
|
|
|
|
Revenues per average screen |
|
$ |
315,104 |
|
|
$ |
336,437 |
|
|
$ |
369,200 |
|
|
|
|
|
|
|
(1) |
|
All costs are expressed as a percentage of total revenues, except film rentals
and advertising, which are expressed as a percentage of admissions revenues, and concession
supplies, which are expressed as a percentage of concession revenues. |
|
(2) |
|
Excludes depreciation and amortization expense. |
26
Comparison of Years Ended December 31, 2007 and December 31, 2006
Revenues. Total revenues increased $462.2 million to $1,682.8 million for 2007 from $1,220.6
million for 2006, representing a 37.9% increase. The table below, presented by reportable operating
segment, summarizes our year-over-year revenue performance and certain key performance indicators
that impact our revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Operating Segment |
|
International Operating Segment |
|
Consolidated |
|
|
Year Ended |
|
|
|
|
|
Year Ended |
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
December 31, |
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
|
|
2006 |
|
2007 |
|
Change |
|
2006 |
|
2007 |
|
Change |
|
2006 |
|
2007 |
|
Change |
Admissions revenues (in millions) |
|
$ |
577.9 |
|
|
$ |
879.1 |
|
|
|
52.1 |
% |
|
$ |
182.4 |
|
|
$ |
208.4 |
|
|
|
14.3 |
% |
|
$ |
760.3 |
|
|
$ |
1,087.5 |
|
|
|
43.0 |
% |
Concession revenues (in millions) |
|
$ |
297.4 |
|
|
$ |
424.4 |
|
|
|
42.7 |
% |
|
$ |
78.4 |
|
|
$ |
92.1 |
|
|
|
17.5 |
% |
|
$ |
375.8 |
|
|
$ |
516.5 |
|
|
|
37.4 |
% |
Other revenues (in millions) (1) |
|
$ |
59.4 |
|
|
$ |
45.6 |
|
|
|
(23.2 |
)% |
|
$ |
25.1 |
|
|
$ |
33.2 |
|
|
|
32.3 |
% |
|
$ |
84.5 |
|
|
$ |
78.8 |
|
|
|
(6.7 |
)% |
Total revenues (in millions) (1) |
|
$ |
934.7 |
|
|
$ |
1,349.1 |
|
|
|
44.3 |
% |
|
$ |
285.9 |
|
|
$ |
333.7 |
|
|
|
16.7 |
% |
|
$ |
1,220.6 |
|
|
$ |
1,682.8 |
|
|
|
37.9 |
% |
Attendance (in millions) |
|
|
118.7 |
|
|
|
151.7 |
|
|
|
27.8 |
% |
|
|
59.6 |
|
|
|
61.0 |
|
|
|
2.3 |
% |
|
|
178.3 |
|
|
|
212.7 |
|
|
|
19.3 |
% |
Revenues per average screen (1) |
|
$ |
346,812 |
|
|
$ |
376,771 |
|
|
|
8.6 |
% |
|
$ |
306,459 |
|
|
$ |
341,451 |
|
|
|
11.4 |
% |
|
$ |
336,437 |
|
|
$ |
369,200 |
|
|
|
9.7 |
% |
|
|
|
(1) |
|
U.S. operating segment revenues include eliminations of intercompany transactions
with the international operating segment. See Note 22 of our consolidated financial
statements. |
|
|
Consolidated. The increase in admissions revenues of $327.2 million was attributable
to a 19.3% increase in attendance from 178.3 million patrons for 2006 to 212.7 million patrons
for 2007, which contributed $165.0 million, and a 20.0% increase in average ticket price from
$4.26 for 2006 to $5.11 for 2007, which contributed $162.2 million, and reflects the full year
of operations of the 77 Century theatres acquired during the fourth quarter of 2006. The
increase in concession revenues of $140.7 million was attributable to the 19.3% increase in
attendance, which contributed $84.5 million, and a 15.2% increase in concession revenues per
patron from $2.11 for 2006 to $2.43 for 2007, which contributed $56.2 million, and reflects
the full year of operations of the 77 Century theatres acquired during the fourth quarter of
2006. The increase in attendance was attributable to the additional attendance from the 77
Century theatres acquired, the solid slate of films released during 2007 and new theatre
openings. The increases in average ticket price and concession revenues per patron were due to
the higher ticket price structure at the 77 Century theatres acquired, price increases and
favorable exchange rates in certain countries in which we operate. The 6.7% decrease in other
revenues was primarily attributable to reduced screen advertising revenues earned under the
amended Exhibitor Services Agreement with NCM. See Note 7 to the consolidated financial
statements. |
|
|
U.S. The increase in admissions revenues of $301.2 million was attributable to a
27.8% increase in attendance from 118.7 million patrons for 2006 to 151.7 million patrons for
2007, which contributed $160.7 million, and a 18.9% increase in average ticket price from
$4.87 for 2006 to $5.79 for 2007, which contributed $140.5 million, and reflects the full year
of operations of the 77 Century theatres acquired during the fourth quarter of 2006. The
increase in concession revenues of $127.0 million was attributable to the 27.8% increase in
attendance, which contributed $82.6 million, and an 11.6% increase in concession revenues per
patron from $2.51 for 2006 to $2.80 for 2007, which contributed $44.4 million, and reflects
the full year of operations of the 77 Century theatres acquired during the fourth quarter of
2006. The increase in attendance was attributable to the additional attendance from the 77
Century theatres acquired, the solid slate of films released during 2007 and new theatre
openings. The increases in average ticket price and concession revenues per patron were due to
the higher ticket price structure at the 77 Century theatres acquired and price increases. The
23.2% decrease in other revenues was primarily attributable to reduced screen advertising
revenues earned under the amended Exhibitor Services Agreement with NCM. See Note 7 to the
consolidated financial statements. |
|
|
International. The increase in admissions revenues of $26.0 million was attributable
to a 2.3% increase in attendance from 59.6 million patrons for 2006 to 61.0 million patrons
for 2007, which contributed $4.3 million, and an 11.8% increase in average ticket price from
$3.06 for 2006 to $3.42 for 2007, which contributed $21.7 million. The increase in concession
revenues of $13.7 million was attributable to the 2.3% increase in attendance, which
contributed $1.9 million, and a 14.4% increase in concession revenues per patron from $1.32
for 2006 to $1.51 for 2007, which contributed $11.8 million. The increase in attendance was
primarily due to new theatre openings. The increases in average ticket price and concession
revenues per patron were due to price increases and favorable exchange rates in certain
countries in which we operate. |
27
Theatre Operating Costs (excludes depreciation and amortization expense). Theatre operating
costs were $1,248.1 million, or 74.2% of revenues, for 2007 compared to $889.8 million, or 72.9% of
revenues, for 2006. The table below, presented by reportable operating segment, summarizes our
year-over-year theatre operating costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Operating |
|
|
|
|
U.S. Operating Segment |
|
Segment |
|
Consolidated |
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
Film rentals and advertising |
|
$ |
315.4 |
|
|
$ |
485.2 |
|
|
$ |
90.6 |
|
|
$ |
104.5 |
|
|
$ |
406.0 |
|
|
$ |
589.7 |
|
Concession supplies |
|
|
38.7 |
|
|
|
57.8 |
|
|
|
20.3 |
|
|
|
23.3 |
|
|
$ |
59.0 |
|
|
$ |
81.1 |
|
Salaries and wages |
|
|
95.8 |
|
|
|
146.7 |
|
|
|
22.8 |
|
|
|
26.6 |
|
|
$ |
118.6 |
|
|
$ |
173.3 |
|
Facility lease expense |
|
|
117.0 |
|
|
|
161.7 |
|
|
|
44.4 |
|
|
|
51.0 |
|
|
$ |
161.4 |
|
|
$ |
212.7 |
|
Utilities and other |
|
|
108.3 |
|
|
|
149.0 |
|
|
|
36.5 |
|
|
|
42.3 |
|
|
$ |
144.8 |
|
|
$ |
191.3 |
|
|
|
|
Total theatre operating costs |
|
$ |
675.2 |
|
|
$ |
1,000.4 |
|
|
$ |
214.6 |
|
|
$ |
247.7 |
|
|
$ |
889.8 |
|
|
$ |
1,248.1 |
|
|
|
|
|
|
Consolidated. Film rentals and advertising costs were $589.7 million, or 54.2% of
admissions revenues, for 2007 compared to $406.0 million, or 53.4% of admissions revenues, for
2006. The increase in film rentals and advertising costs for 2007 of $183.7 million is due to
a $327.2 million increase in admissions revenues, which contributed $177.3 million, and an
increase in our film rental and advertising rate due to higher rates on certain blockbuster
sequels in 2007, which contributed $6.4 million. Concession supplies expense was $81.1
million, or 15.7% of concession revenues, for 2007 compared to $59.0 million, or 15.7% of
concession revenues, for 2006. The increase in concession supplies expense of $22.1 million is
primarily due to increased concession revenues. |
|
|
|
Salaries and wages increased to $173.3 million for 2007 from $118.6 million for 2006 primarily
due to the additional salaries and wages related to the 77 Century
theatres, the increase in minimum wages in the U.S., and new theatre openings. Facility
lease expense increased to $212.7 million for 2007 from $161.4 million for 2006 primarily due to
the additional expense related to the 77 Century theatres, increased percentage rent related to
the increased revenues and new theatre openings. Utilities and other costs increased to $191.3
million for 2007 from $144.8 million for 2006 primarily due to the additional costs related to
the 77 Century theatres and new theatre openings. |
|
|
U.S. Film rentals and advertising costs were $485.2 million, or 55.2% of admissions
revenues, for 2007 compared to $315.4 million, or 54.6% of admissions revenues, for 2006. The
increase in film rentals and advertising costs for 2007 of $169.8 million is due to a $301.2
million increase in admissions revenues, which contributed $164.4 million, and an increase in
our film rentals and advertising rate due to higher rates on certain blockbuster sequels in
2007, which contributed $5.4 million. Concession supplies expense was $57.8 million, or 13.6%
of concession revenues, for 2007 compared to $38.7 million, or 13.0% of concession revenues,
for 2006. The increase in concession supplies expense of $19.1 million is due to increased
concession revenues, which contributed $16.6 million, and an increase in our concession
supplies rate, which contributed $2.5 million, both of which
were attributable to the 77 Century theatres. |
|
|
|
Salaries and wages increased to $146.7 million for 2007 from $95.8 million for 2006 primarily
due to the additional salaries and wages related to the 77 Century
theatres, the increase in minimum wages in the U.S., and new theatre openings. Facility
lease expense increased to $161.7 million for 2007 from $117.0 million for 2006 primarily due to
the additional expense related to the 77 Century theatres and new theatre openings. Utilities and other costs increased to $149.0
million for 2007 from $108.3 million for 2006 primarily due to the additional costs related to
the 77 Century theatres and new theatre openings. |
|
|
International. Film rentals and advertising costs were $104.5 million, or 50.1% of
admissions revenues, for 2007 compared to $90.6 million, or 49.7% of admissions revenues, for
2006. The increase in film rentals and advertising costs of $13.9 million is due to a $26.0
million increase in admissions revenues, which contributed $12.9 million and an increase in
our film rental and advertising rate, which contributed $1.0 million. Concession supplies
expense was $23.3 million, or 25.3% of concession revenues, for 2007 compared to $20.3
million, or 25.9% of concession revenues, for 2006. The increase in concession supplies
expense of $3.0 million is primarily due to increased concession revenues. |
28
|
|
Salaries and wages increased to $26.6 million for 2007 from $22.8 million for 2006 primarily due
to new theatre openings. Facility lease expense increased to $51.0 million for 2007 from $44.4
million for 2006 primarily due to increased percentage rent related to increased revenues and
new theatre openings. Utilities and other costs increased to $42.3 million for 2007 from $36.5
million for 2006 primarily due to higher utility costs at our existing theatres and new theatre
openings. |
General and Administrative Expenses. General and administrative expenses increased to $79.5
million for 2007 from $67.8 million for 2006 primarily due to a $7.8 million increase in salaries
and wages, a $1.2 million increase in consulting fees, and a $2.5 million increase in service
charges related to increased credit card activity, all of which were
primarily a result of the 77 Century theatres.
Termination of Profit Participation Agreement. Upon consummation of our initial public
offering on April 24, 2007, we exercised our option to terminate the amended and restated profit
participation agreement with our CEO Alan Stock and purchased Mr. Stocks profit interest in two
theatres on May 3, 2007 for a price of $6.9 million pursuant to the terms of the amended and
restated profit participation agreement. In addition, we incurred $0.1 million of payroll taxes
related to the termination. See Note 23 to our consolidated financial statements.
Depreciation and Amortization. Depreciation and amortization expense, including amortization
of favorable leases, was $151.7 million for 2007 compared to $99.5 million for 2006 primarily due
to the Century Acquisition and new theatre openings.
Impairment of Long-Lived Assets. We recorded asset impairment charges on assets held and used
of $86.6 million for 2007 compared to $28.5 million for 2006. Impairment charges for 2007 and 2006
included the write-down of theatres to their fair values. Impairment charges for 2007 consisted of
$14.2 million of theatre properties, $67.7 million of goodwill associated with theatre properties,
and $4.7 million of intangible assets associated with theatre properties. Impairment charges for
2006 consisted of $13.6 million of theatre properties, $13.6 million of goodwill associated with
theatre properties and $1.3 million of intangible assets associated with theatre properties. During
2006, we recorded approximately $658.5 million of goodwill as a result of the Century Acquisition.
We record goodwill at the theatre level, which results in more volatile impairment charges on an
annual basis due to changes in market conditions and box office performance and the resulting
impact on individual theatres. Significant judgment is involved in estimating cash flows and fair
value. Managements estimates are based on historical and projected operating performance as well
as recent market transactions. See Notes 10 and 11 to our consolidated financial statements.
(Gain) Loss on Sale of Assets and Other. We recorded a gain on sale of assets and other of
$3.0 million during 2007 compared to a loss on the sale of assets and other of $7.6 million during
2006. The gain recorded during 2007 primarily related to the sale of real property associated with
one theatre in the U.S. The loss recorded during 2006 primarily related to a loss on the exchange
of a theatre in the United States with a third party, lease termination fees and asset write-offs
incurred due to theatre closures and the retirement of certain theatre assets that were replaced.
Interest Expense. Interest costs incurred, including amortization of debt issue costs, was
$145.6 million for 2007 compared to $109.3 million for 2006. The increase was primarily due to the
financing associated with the Century Acquisition.
Gain on NCM Transaction. We recorded a gain of $210.8 million on the sale of a portion of our
equity investment in NCM in conjunction with the initial public offering of NCM, Inc. during 2007.
Our ownership interest in NCM was reduced from approximately 25% to approximately 14% as part of
this sale of stock in the offering. See Note 7 to our consolidated financial statements.
Gain on Fandango Transaction. We recorded a gain of $9.2 million as a result of the sale of
our investment in stock of Fandango, Inc. See Note 9 to our consolidated financial statements.
Loss on Early Retirement of Debt. During 2007, we recorded a loss on early retirement of debt
of $13.5 million which was a result of the repurchase of $332.1 million aggregate principal amount
of our 9% senior subordinated notes and the repurchase of $69.2 million aggregate principal amount
at maturity of our 9 3/4% senior discount notes, all of which resulted in the write-off of
unamortized debt issue costs and the payment of premiums, fees and expenses. During 2006, we
recorded a loss on early retirement of debt of $8.3 million which was a result of the refinancing
associated with the Century Acquisition, the repurchase of $10.0 million aggregate principal amount
of Cinemark USA, Inc.s 9% senior subordinated notes, and the repurchase of $39.8 million aggregate
principal amount at maturity of Cinemark, Inc.s 9 3/4%
29
senior discount notes, all of which resulted in the write-off of unamortized debt issue costs
and the payment of fees and expenses. See Notes 6 and 13 to our consolidated financial statements.
Distributions from NCM. We recorded distributions received from NCM of $11.5 million during
2007, which were in excess of the carrying value of our investment. See Note 7 to our consolidated
financial statements.
Income Taxes. Income tax expense of $112.0 million was recorded for 2007 compared to $12.7
million recorded for 2006. The effective tax rate of 55.7% for 2007 reflects the impact of our 2007
goodwill impairment charges, which are not deductible for income tax purposes. The effective tax
rate in 2007 net of the impact from the goodwill impairment charges would have been approximately
41.7%. The effective tax rate for 2006 reflects the impact of purchase accounting adjustments
resulting from the Century Acquisition. See Notes 6 and 20 to our consolidated financial
statements.
Comparison of Years Ended December 31, 2006 and December 31, 2005
Revenues. Total revenues increased $200.0 million to $1,220.6 million for 2006 from $1,020.6
million for 2005, representing a 19.6% increase. The table below, presented by reportable operating
segment, summarizes our year-over-year revenue performance and certain key performance indicators
that impact our revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Operating Segment |
|
International Operating Segment |
|
Consolidated |
|
|
Year Ended |
|
|
|
|
|
Year Ended |
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
December 31, |
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
% |
|
|
2005 |
|
2006 |
|
Change |
|
2005 |
|
2006 |
|
Change |
|
2005 |
|
2006 |
|
Change |
Admissions revenues (in millions) |
|
$ |
472.0 |
|
|
$ |
577.9 |
|
|
|
22.4 |
% |
|
$ |
169.2 |
|
|
$ |
182.4 |
|
|
|
7.8 |
% |
|
$ |
641.2 |
|
|
$ |
760.3 |
|
|
|
18.6 |
% |
Concession revenues (in millions) |
|
$ |
248.7 |
|
|
$ |
297.4 |
|
|
|
19.6 |
% |
|
$ |
71.4 |
|
|
$ |
78.4 |
|
|
|
9.8 |
% |
|
$ |
320.1 |
|
|
$ |
375.8 |
|
|
|
17.4 |
% |
Other revenues (in millions) (1) |
|
$ |
35.6 |
|
|
$ |
59.4 |
|
|
|
66.9 |
% |
|
$ |
23.7 |
|
|
$ |
25.1 |
|
|
|
5.9 |
% |
|
$ |
59.3 |
|
|
$ |
84.5 |
|
|
|
42.5 |
% |
Total revenues (in millions) (1) |
|
$ |
756.3 |
|
|
$ |
934.7 |
|
|
|
23.6 |
% |
|
$ |
264.3 |
|
|
$ |
285.9 |
|
|
|
8.2 |
% |
|
$ |
1,020.6 |
|
|
$ |
1,220.6 |
|
|
|
19.6 |
% |
Attendance (in millions) |
|
|
105.6 |
|
|
|
118.7 |
|
|
|
12.4 |
% |
|
|
60.1 |
|
|
|
59.6 |
|
|
|
(1.0 |
)% |
|
|
165.7 |
|
|
|
178.3 |
|
|
|
7.6 |
% |
Revenues per average screen (1) |
|
$ |
321,833 |
|
|
$ |
346,812 |
|
|
|
7.8 |
% |
|
$ |
297,316 |
|
|
$ |
306,459 |
|
|
|
3.1 |
% |
|
$ |
315,104 |
|
|
$ |
336,437 |
|
|
|
6.8 |
% |
|
|
|
(1) |
|
U.S. operating segment revenues include eliminations of intercompany transactions
with the international operating segment. See Note 22 of our consolidated financial
statements. |
|
|
Consolidated. The increase in admissions revenues of $119.1 million was attributable
to a 7.6% increase in attendance from 165.7 million patrons for 2005 to 178.3 million patrons
for 2006, which contributed $57.2 million, and a 10.2% increase in average ticket price from
$3.87 for 2005 to $4.26 for 2006, which contributed $61.9 million. This increase included
additional admissions revenues for the 77 Century theatres acquired during the fourth quarter
of 2006. The increase in concession revenues of $55.7 million was attributable to the 7.6%
increase in attendance, which contributed $30.3 million, and a 9.1% increase in concession
revenues per patron from $1.93 for 2005 to $2.11 for 2006, which contributed $25.4 million.
This increase included additional concession revenues for the 77 Century theatres acquired
during the fourth quarter. The increase in attendance was attributable to the additional
attendance from the 77 Century theatres acquired, the solid slate of films released during
2006 and new theatre openings. The increases in average ticket price and concession revenues
per patron were due to the higher ticket price structure at the 77 Century theatres acquired,
price increases and favorable exchange rates in certain countries in which we operate. The
42.5% increase in other revenues was primarily attributable to incremental screen advertising
revenues resulting from our participation in the NCM joint venture. |
|
|
U.S. The increase in admissions revenues of $105.9 million was attributable to a
12.4% increase in attendance from 105.6 million patrons for 2005 to 118.7 million patrons for
2006, which contributed $58.7 million, and a 8.9% increase in average ticket price from $4.47
for 2005 to $4.87 for 2006, which contributed $47.2 million. This increase included additional
admissions revenues for the 77 Century theatres acquired during the fourth quarter of 2006.
The increase in concession revenues of $48.7 million was attributable to the 12.4% increase in
attendance, which contributed $31.0 million, and a 6.3% increase in concession revenues per
patron from $2.36 for 2005 to $2.51 for 2006, which contributed $17.7 million. This increase
included additional concession revenues for the 77 Century theatres acquired during the fourth
quarter. The increase in attendance was attributable to additional attendance from the 77
Century theatres acquired, the solid slate of films released during 2006 and new theatre
openings. The increases in average ticket price and concession revenues per patron were due to
the higher ticket price structure at |
30
|
|
the 77 Century theatres acquired and price increases. The 66.9% increase in other revenues was
primarily attributable to incremental screen advertising revenues resulting from our
participation in the joint venture with NCM. |
|
|
International. The increase in admissions revenues of $13.2 million was attributable
to an 8.8% increase in average ticket price from $2.82 for 2005 to $3.06 for 2006, which
contributed $14.7 million, partially offset by a 1.0% decrease in attendance, which
contributed $(1.5) million. The decrease in attendance was due to increased competition in
certain markets. The increase in concession revenues of $7.0 million was attributable to a
10.9% increase in concession revenues per patron from $1.19 for 2005 to $1.32 for 2006, which
contributed $7.7 million, partially offset by the 1.0% decrease in attendance, which
contributed $(0.7) million. The increases in average ticket price and concession revenues per
patron were due to price increases and favorable exchange rates in certain countries in which
we operate. |
Theatre Operating Costs (excludes depreciation and amortization expense). Theatre operating
costs were $889.8 million, or 72.9% of revenues, for 2006 compared to $764.0 million, or 74.9% of
revenues, for 2005. The decrease, as a percentage of revenues, was primarily due to the increase in
revenues and the fixed nature of some of our theatre operating costs, such as components of
salaries and wages, facility lease expense, and utilities and other costs. The table below,
presented by reportable operating segment, summarizes our year-over-year theatre operating costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Operating |
|
|
|
|
U.S. Operating Segment |
|
Segment |
|
Consolidated |
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
Film rentals and advertising |
|
$ |
263.7 |
|
|
$ |
315.4 |
|
|
$ |
84.0 |
|
|
$ |
90.6 |
|
|
$ |
347.7 |
|
|
$ |
406.0 |
|
Concession supplies |
|
|
34.5 |
|
|
|
38.7 |
|
|
|
18.0 |
|
|
|
20.3 |
|
|
$ |
52.5 |
|
|
$ |
59.0 |
|
Salaries and wages |
|
|
80.8 |
|
|
|
95.8 |
|
|
|
20.7 |
|
|
|
22.8 |
|
|
$ |
101.5 |
|
|
$ |
118.6 |
|
Facility lease expense |
|
|
97.7 |
|
|
|
117.0 |
|
|
|
40.8 |
|
|
|
44.4 |
|
|
$ |
138.5 |
|
|
$ |
161.4 |
|
Utilities and other |
|
|
90.7 |
|
|
|
108.3 |
|
|
|
33.1 |
|
|
|
36.5 |
|
|
$ |
123.8 |
|
|
$ |
144.8 |
|
|
|
|
Total theatre operating costs |
|
$ |
567.4 |
|
|
$ |
675.2 |
|
|
$ |
196.6 |
|
|
$ |
214.6 |
|
|
$ |
764.0 |
|
|
$ |
889.8 |
|
|
|
|
|
|
Consolidated. Film rentals and advertising costs were $406.0 million, or 53.4% of
admissions revenues, for 2006 compared to $347.7 million, or 54.2% of admissions revenues, for
2005. The increase in film rentals and advertising costs for 2006 of $58.3 million is due to
increased admissions revenues, which contributed $65.7 million, and a decrease in our film
rental and advertising rate, which contributed $(7.4) million. The decrease in film rentals
and advertising costs as a percentage of admissions revenues was due to a more favorable mix
of films resulting in lower average film rental rates in 2006 compared with 2005 which had
certain blockbuster films with higher than average film rental rates. Concession supplies
expense was $59.0 million, or 15.7% of concession revenues, for 2006 compared to $52.5
million, or 16.4% of concession revenues, for 2005. The increase in concession supplies
expense of $6.5 million is primarily due to increased concession revenues, which contributed
$8.5 million, and a decrease in our concession supplies rate, which contributed $(2.0)
million. The decrease in concession supplies expense as a percentage of revenues was primarily
due to concession sales price increases. |
|
|
|
Salaries and wages increased to $118.6 million for 2006 from $101.5 million for 2005 primarily
due to the additional salaries and wages related to the 77 Century theatres, the increase in
attendance and new theatre openings. Facility lease expense increased to $161.4 million for 2006
from $138.5 million for 2005 primarily due to the additional expense related to the 77 Century
theatres, increased percentage rent related to the increased revenues and new theatre openings.
Utilities and other costs increased to $144.8 million for 2006 from $123.8 million for 2005
primarily due to the additional costs related to the 77 Century theatres, higher utility and
janitorial supplies costs at our existing theatres and new theatre openings. |
|
|
U.S. Film rentals and advertising costs were $315.4 million, or 54.6% of admissions
revenues, for 2006 compared to $263.7 million, or 55.9% of admissions revenues, for 2005. The
increase in film rentals and advertising costs for 2006 of $51.7 million is due to increased
admissions revenues, which contributed $59.2 million, and a decrease in our film rentals and
advertising rate, which contributed $(7.5) million. The decrease in film rentals and
advertising costs as a percentage of admissions revenues was due to a more favorable mix of
films resulting in lower average film rental rates in 2006 compared with 2005 which had
certain blockbuster films with higher than average film rental rates. Concession supplies
expense was $38.7 million, or 13.0% of concession revenues, for 2006 compared to |
31
|
|
$34.5 million, or 13.9% of concession revenues, for 2005. The increase in concession supplies
expense of $4.2 million is due to increased concession revenues, which contributed $6.7 million,
and a decrease in our concession supplies rate, which contributed $(2.5) million. The decrease
in concession supplies expense as a percentage of revenues was primarily due to concession sales
price increases. |
|
|
Salaries and wages increased to $95.8 million for 2006 from $80.8 million for 2005 primarily due
to the additional salaries and wages related to the 77 Century theatres, the increase in
attendance and new theatre openings. Facility lease expense increased to $117.0 million for 2006
from $97.7 million for 2005 primarily due to the additional expense related to the 77 Century
theatres, increased percentage rent related to increased revenues and new theatre openings.
Utilities and other costs increased to $108.3 million for 2006 from $90.7 million for 2005
primarily due to the additional costs related to the 77 Century theatres, higher utility and
janitorial supplies costs at our existing theatres and new theatre openings. |
|
|
|
International. Film rentals and advertising costs were $90.6 million, or 49.7% of
admissions revenues, for 2006 compared to $84.0 million, or 49.6% of admissions revenues, for
2005. The increase in film rentals and advertising costs for 2006 is primarily due to
increased admissions revenues. Concession supplies expense was $20.3 million, or 25.9% of
concession revenues, for 2006 compared to $18.0 million, or 25.2% of concession revenues, for
2005. The increase in concession supplies expense of $2.3 million is due to increased
concession revenues, which contributed $1.8 million, and an increase in our concession
supplies rate, which contributed $0.5 million. |
|
|
|
Salaries and wages increased to $22.8 million for 2006 from $20.7 million for 2005 primarily due
to new theatre openings. Facility lease expense increased to $44.4 million for 2006 from $40.8
million for 2005 primarily due to increased percentage rent related to increased revenues and
new theatre openings. Utilities and other costs increased to $36.5 million for 2006 from $33.1
million for 2005 primarily due to higher utility and janitorial supplies costs at our existing
theatres and new theatre openings. |
General and Administrative Expenses. General and administrative expenses increased to $67.8
million for 2006 from $50.9 million for 2005 primarily due to a $3.7 million increase due to
incentive compensation expense, a $3.0 million increase in salaries and wages, a $2.9 million
increase to stock option compensation expense related to the adoption of SFAS No. 123 (R), a $1.3
million increase in service charges related to increased credit card activity, and additional
overhead costs associated with the integration of Century.
Depreciation and Amortization. Depreciation and amortization expense, including amortization
of favorable leases, was $99.5 million for 2006 compared to $86.1 million for 2005 primarily due to
the Century Acquisition and new theatre openings.
Impairment of Long-Lived Assets. We recorded asset impairment charges on assets held and used
of $28.5 million for 2006 compared to $51.7 million for 2005. Impairment charges for 2006 and 2005
included the write-down of theatres to their fair values. Impairment charges for 2006 consisted of
$13.6 million of theatre properties, $13.6 million of goodwill associated with theatre properties
and $1.3 million of intangible assets associated with theatre properties. Impairment charges for
2005 consisted of $6.4 million of theatre properties and $45.3 million of goodwill associated with
theatre properties. We record goodwill at the theatre level, which results in more volatile
impairment charges on an annual basis due to changes in market conditions and box office
performance and the resulting impact on individual theatres. Significant judgment is involved in
estimating cash flows and fair value. Managements estimates are based on historical and projected
operating performance as well as recent market transactions. See Notes 10 and 11 to our
consolidated financial statements.
Loss on Sale of Assets and Other. We recorded a loss on sale of assets and other of $7.6
million during 2006 compared to $4.4 million during 2005. The loss recorded during 2006 primarily
related to a loss on the exchange of a theatre in the United States with a third party, lease
termination fees and asset write-offs incurred due to theatre closures and the replacement of
certain theatre assets. The loss recorded during 2005 was primarily due to property damages
sustained at three of our theatres due to hurricanes along the Gulf of Mexico coast and the
write-off of some theatre equipment that was replaced.
Interest Expense. Interest costs incurred, including amortization of debt issue costs, was
$109.3 million for 2006 compared to $84.1 million for 2005. The increase was primarily due to the
financing associated with the Century Acquisition.
32
Loss on Early Retirement of Debt. During 2006, we recorded a loss on early retirement of debt
of $8.3 million which was a result of the refinancing associated with the Century Acquisition, the
repurchase of $10.0 million aggregate principal amount of Cinemark USA, Inc.s 9% senior
subordinated notes, and the repurchase of $39.8 million aggregate principal amount at maturity of
Cinemark, Inc.s 9 3/4% senior discount notes, all of which resulted in the write-off of unamortized
debt issue costs and the payment of fees and expenses. See Notes 6 and 13 to our consolidated
financial statements.
Income Taxes. Income tax expense of $12.7 million was recorded for 2006 compared to $9.4
million recorded for 2005. The effective tax rate for 2006 reflects the impact of purchase
accounting adjustments resulting from the Century Acquisition. See Notes 6 and 20 to our
consolidated financial statements.
Liquidity and Capital Resources
Operating Activities
We primarily collect our revenues in cash, mainly through box office receipts and the sale of
concession supplies. In addition, a majority of our theatres provide the patron a choice of using a
credit card, in place of cash, which we convert to cash over a range from one to six days. Because
our revenues are received in cash prior to the payment of related expenses, we have an operating
float and historically have not required traditional working capital financing. Cash provided by
operating activities amounted to $165.3 million,
$155.7 million and $276.0 million for the years
ended December 31, 2005, 2006 and 2007, respectively. The increase in cash provided by operating
activities for the year ended December 31, 2007 is primarily due to the proceeds received from NCM
for the modification of our Exhibitor Services Agreement with NCM. See Note 7 to our consolidated
financial statements for further discussion of the NCM Transaction.
Since the issuance of the 9 3/4% senior discount notes on March 31, 2004, interest has accreted
rather than been paid in cash, which has benefited our operating cash flows for the periods
presented. Interest will be paid in cash commencing September 15, 2009, at which time our operating
cash flows will be impacted by these cash payments.
Investing Activities
Our investing activities have been principally related to the development and acquisition of
additional theatres. New theatre openings and acquisitions historically have been financed with
internally generated cash and by debt financing, including borrowings under our senior secured
credit facility. Cash provided by (used for) investing activities amounted to $(81.6) million,
$(631.7) million and $93.2 million for the years ended December 31, 2005, 2006 and 2007,
respectively. The increase in cash used for investing activities for the year ended December 31,
2006 is primarily due to the cash portion of the Century Acquisition purchase price (see Note 6 to
our consolidated financial statements) and increased capital expenditures. The increase in cash
provided by investing activities for the year ended December 31, 2007 is primarily due to the
proceeds received from NCM for the sale of a portion of our equity investment in NCM in conjunction
with NCM Inc.s initial public offering and the sale of our investment in stock of Fandango, Inc.,
partially offset by increased capital expenditures. See Notes 7 and 9 to our consolidated financial
statements for further discussion of the NCM Transaction and the Fandango Transaction,
respectively.
Capital expenditures for the years ended December 31, 2005, 2006 and 2007 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New |
|
Existing |
|
|
Period |
|
Theatres |
|
Theatres |
|
Total |
Year Ended December 31, 2005 |
|
$ |
50.3 |
|
|
$ |
25.3 |
|
|
$ |
75.6 |
|
Year Ended December 31, 2006 |
|
$ |
68.8 |
|
|
$ |
38.3 |
|
|
$ |
107.1 |
|
Year Ended December 31, 2007 |
|
$ |
113.3 |
|
|
$ |
33.0 |
|
|
$ |
146.3 |
|
During October 2006, we completed the Century Acquisition for a purchase price of
approximately $681.2 million and the assumption of approximately $360.0 million of debt of Century.
Of the total purchase price, $150.0 million consisted of the issuance of shares of Cinemark
Holdings, Inc.s common stock. We also incurred approximately $7.4 million in transaction costs.
See Note 6 to our consolidated financial statements for further discussion of this acquisition.
We continue to expand our U.S. theatre circuit. During the year ended December 31, 2007, we
opened 13 new theatres with 201 screens, closed five theatres with 36 screens and sold two theatres
with 34 screens. At December 31,
33
2007, our total domestic screen count was 3,654 screens (12 of which are in Canada). At December
31, 2007, we had signed commitments to open ten new theatres with 128 screens in domestic markets
during 2008 and open five new theatres with 78 screens subsequent to 2008. We estimate the
remaining capital expenditures for the development of all of the 206 domestic screens will be
approximately $94.7 million. Actual expenditures for continued theatre development and acquisitions
are subject to change based upon the availability of attractive opportunities.
We also continue to expand our international theatre circuit. We opened seven new theatres
with 56 screens and closed one theatre with ten screens during the year ended December 31, 2007, bringing our total international screen
count to 1,011 screens. At December 31, 2007, we had signed commitments to open three new theatres
with 19 screens in international markets during 2008. We estimate the remaining capital
expenditures for the development of these 19 international screens will be approximately $10.8
million. Actual expenditures for continued theatre development and acquisitions are subject to
change based upon the availability of attractive opportunities.
We plan to fund capital expenditures for our continued development with cash flow from
operations, borrowings under our senior secured credit facility, subordinated note borrowings,
proceeds from sale leaseback transactions and/or sales of excess real estate.
During June 2007, we invested $1.5 million in a joint venture with AMC and Regal called
Digital Cinema Implementation Partners LLC (DCIP). We are accounting for our investment in DCIP
under the equity method of accounting. See Note 8 to our consolidated financial statements.
Financing Activities
Cash provided by (used for) financing activities was $(3.8) million, $440.0 million and
$(183.7) million during the years ended December 31, 2005, 2006 and 2007, respectively. The
increase in cash provided by financing activities for the year ended December 31, 2006 was
primarily due to the cash received under our senior secured credit facility partially offset by the
pay-off of long-term debt assumed in the Century Acquisition and the pay-off of our former senior
secured credit facility. The increase in cash used for financing activities for the year ended
December 31, 2007 was primarily due to the repurchase of $332.1 million aggregate principal amount
of our 9% senior subordinated notes and $69.2 million aggregate principal amount at maturity of our
9 3/4% senior discount notes, which were partially offset by the net proceeds from our initial public
offering of approximately $245.9 million.
In August 2007, we initiated a quarterly dividend policy. Consistent with the disclosures in
our 424(b)(1) prospectus, the dividend for the second quarter of 2007 was based on a dividend rate
of $0.18 per share of common stock, prorated based on the April 27, 2007 closing of our initial
public offering. Based on such proration, our board of directors declared a cash dividend for the
second quarter of 2007 of $0.13 per share of common stock payable to stockholders of record on
September 4, 2007, which was paid with available cash on September 18, 2007. The dividend for the
third quarter was the first dividend paid by us reflecting a full quarter since our initial public
offering and was paid in the amount of $0.18 per share of common stock on December 18, 2007. We
paid dividends of approximately $33.1 million in the aggregate during 2007. The dividend for the
fourth quarter of 2007 was paid in the amount of $0.18 per share of common stock on March 14, 2008.
On March 6, 2007, we commenced an offer to purchase for cash, on the terms and subject to the
conditions set forth in an Offer to Purchase and Consent Solicitation Statement, any and all of our
9% senior subordinated notes, of which $332.2 million aggregate principal amount remained
outstanding. In connection with the tender offer, we solicited consents for certain proposed
amendments to the indenture to remove substantially all restrictive covenants and certain events of
default provisions. On March 20, 2007, the early settlement date, approximately $332.0 million
aggregate principal amount of the 9% senior subordinated notes were tendered and repurchased by us
for approximately $360.2 million including accrued interest and premiums paid. We funded the
repurchase with the net proceeds received from the NCM Transaction (see Note 7). On March 20, 2007,
we and the Bank of New York Trust Company, N.A., as trustee to the Indenture dated February 11,
2003, executed the Fourth Supplemental Indenture. The Fourth Supplemental Indenture became
effective on March 20, 2007 and it amends the Indenture by eliminating substantially all
restrictive covenants and certain events of default provisions. On April 3, 2007, we repurchased
an additional $0.1 million aggregate principal amount of the 9% senior subordinated notes tendered
after the early settlement date.
On April 24, 2007, we completed our initial public offering. We sold 13,888,889 shares of our
common stock and selling stockholders sold an additional 14,111,111 shares of common stock at a
price of $17.955 ($19 per share less underwriting discounts). The net proceeds (before expenses)
we received were $249.4 million and we paid approximately $3.5 million in legal, accounting and
other fees. The selling stockholders granted the underwriters a 30-day option to
34
purchase up to an additional 2,800,000 shares of our common stock at a price of $17.955 ($19
per share less underwriting discounts). On May 21, 2007, the underwriters purchased an additional
269,100 shares from the selling stockholders pursuant to this option. We did not receive any
proceeds from the sale of shares by the selling stockholders. We have utilized a portion of the
net proceeds to repurchase a portion of our 9 3/4% senior discount notes and we expect to continue to
use the remaining net proceeds from the offering to repurchase a portion of the remaining
outstanding 9 3/4% senior discount notes or repay debt outstanding under the senior secured credit
facility. The 9 3/4% senior discount notes are not currently subject to repurchase at our option.
Accordingly, if we are unable to repurchase the 9 3/4% senior discount notes at acceptable prices, we
expect to use the net proceeds to repay term loan debt outstanding under the senior secured credit
facility. We have significant flexibility in applying the net proceeds from our initial public
offering. We have invested the proceeds in short-term, investment-grade marketable securities or
money market obligations.
During July and August 2007, we repurchased in six open market purchases a total of $47.0
million aggregate principal amount at maturity of our 9 3/4% senior discount notes for approximately
$42.8 million, including accreted interest of $10.9 million and a cash premium of $2.5 million.
During November 2007, we repurchased in one open market purchase $22.2 million aggregate principal
amount at maturity of our 9 3/4% senior discount notes for approximately $20.9 million, including
accreted interest of $5.7 million and a cash premium of $1.5 million. We funded the transactions
with proceeds from our initial public offering. As of December 31, 2007, we had outstanding
approximately $466.4 million aggregate principal amount at maturity of our 9 3/4% senior discount
notes.
We may from time to time, subject to compliance with our debt instruments, purchase on the
open market our debt securities depending upon the availability and prices of such securities.
Long-term debt consisted of the following as of December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
December 31, 2007 |
Cinemark USA, Inc. term loan |
|
$ |
1,117,200 |
|
|
$ |
1,101,686 |
|
Cinemark, Inc. 9 3/4% senior discount notes due 2014 |
|
|
434,073 |
|
|
|
415,768 |
|
Cinemark USA, Inc. 9% senior subordinated notes due 2013 |
|
|
350,820 |
|
|
|
184 |
|
Other long-term debt |
|
|
9,560 |
|
|
|
6,107 |
|
|
|
|
Total long-term debt |
|
|
1,911,653 |
|
|
|
1,523,745 |
|
Less current portion |
|
|
14,259 |
|
|
|
9,166 |
|
|
|
|
Long-term debt, less current portion |
|
$ |
1,897,394 |
|
|
$ |
1,514,579 |
|
|
|
|
As of December 31, 2007, we had borrowings of $1,101.7 million outstanding on the term loan
under our senior secured credit facility, $415.8 million accreted principal amount outstanding
under our 9 3/4% senior discount notes and approximately $0.2 million aggregate principal amount
outstanding under the 9% senior subordinated notes, respectively, and had approximately
$149.9 million in available borrowing capacity under our revolving credit facility. We were in full
compliance with all covenants governing our outstanding debt at December 31, 2007.
As of December 31, 2007, our long-term debt obligations, scheduled interest payments on
long-term debt, future minimum lease obligations under non-cancelable operating and capital leases,
scheduled interest payments under capital leases, outstanding letters of credit, obligations under
employment agreements and purchase commitments for each period indicated are summarized as follows:
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
(in millions) |
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
After |
Contractual Obligations |
|
Total |
|
One Year |
|
1 - 3 Years |
|
4 - 5 Years |
|
5 Years |
Long-term debt (1) |
|
$ |
1,574.4 |
|
|
$ |
9.2 |
|
|
$ |
26.2 |
|
|
$ |
282.8 |
|
|
$ |
1,256.2 |
|
Scheduled interest payments on long-term debt(2) |
|
$ |
605.8 |
|
|
|
73.8 |
|
|
|
226.6 |
|
|
|
224.1 |
|
|
|
81.3 |
|
Operating lease obligations |
|
$ |
1,958.4 |
|
|
|
177.1 |
|
|
|
349.2 |
|
|
|
328.7 |
|
|
|
1,103.4 |
|
Capital lease obligations |
|
$ |
121.2 |
|
|
|
4.7 |
|
|
|
10.3 |
|
|
|
10.9 |
|
|
|
95.3 |
|
Scheduled interest payments on capital leases |
|
$ |
113.6 |
|
|
|
12.3 |
|
|
|
23.1 |
|
|
|
20.8 |
|
|
|
57.4 |
|
Letters of credit |
|
$ |
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements |
|
$ |
10.5 |
|
|
|
3.5 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
Purchase commitments(3) |
|
$ |
138.2 |
|
|
|
88.9 |
|
|
|
47.6 |
|
|
|
1.5 |
|
|
|
0.2 |
|
|
|
|
Total obligations(4) |
|
$ |
4,522.2 |
|
|
$ |
369.6 |
|
|
$ |
690.0 |
|
|
$ |
868.8 |
|
|
$ |
2,593.8 |
|
|
|
|
|
|
|
(1) |
|
Includes the 93/4% senior discount notes in the aggregate principal amount at
maturity of $466.4 million. |
|
(2) |
|
Amounts include scheduled interest payments on fixed rate and variable rate debt
agreements. Estimates for the variable rate interest payments were based on interest
rates in effect on December 31, 2007. The average interest rates on our fixed rate and
variable rate debt were 8.2% and 6.7%, respectively, as of December 31, 2007. |
|
(3) |
|
Includes estimated capital expenditures associated with the construction of new
theatres to which we were committed as of December 31, 2007. |
|
(4) |
|
The contractual obligations table excludes the Companys FIN 48 liabilities of
$15.5 million because the Company cannot make a reliable estimate of the timing of the
related cash payments. |
Cinemark, Inc. 9 3/4% Senior Discount Notes
On March 31, 2004, in connection with the MDP merger, Cinemark, Inc. issued approximately
$577.2 million aggregate principal amount at maturity of 9 3/4% senior discount notes due 2014.
Interest on the notes accretes until March 15, 2009 up to their aggregate principal amount. Cash
interest will accrue and be payable semi-annually in arrears on March 15 and September 15,
commencing on September 15, 2009. Due to Cinemark, Inc.s holding company status, payments of
principal and interest under these notes will be dependent on loans, dividends and other payments
from its subsidiaries. Cinemark, Inc. may redeem all or part of the 9 3/4% senior discount notes on
or after March 15, 2009.
On September 22, 2005, Cinemark, Inc. repurchased $1.8 million aggregate principal amount at
maturity of its 9 3/4% senior discount notes as part of an open market purchase for approximately
$1.3 million, including accreted interest. During May 2006, as part of four open market purchases,
Cinemark, Inc. repurchased $39.8 million aggregate principal amount at maturity of its 9 3/4% senior
discount notes for approximately $31.7 million, including accreted interest of $5.4 million and a
cash premium of $1.4 million. Cinemark, Inc. funded these transactions with available cash from its
operations.
During July and August 2007, Cinemark, Inc. repurchased in six open market purchases a total
of $47.0 million aggregate principal amount at maturity of its 9 3/4% senior discount notes for
approximately $42.8 million, including accreted interest of $10.9 million and a cash premium of
$2.5 million. During November 2007, as part of an open market purchase, Cinemark, Inc. repurchased
$22.2 million aggregate principal amount at maturity of its 9 3/4% senior discount notes for
approximately $20.9 million, including accreted interest of $5.7 million and a cash premium of $1.5
million. We funded these transactions with proceeds from our initial public offering.
As of December 31, 2007, the accreted principal balance of the notes was approximately
$415.8 million and the aggregate principal amount at maturity was approximately $466.4 million.
The indenture governing the 9 3/4% senior discount notes contains covenants that limit, among
other things, dividends, transactions with affiliates, investments, sales of assets, mergers,
repurchases of our capital stock, liens and additional indebtedness. The dividend restriction
contained in the indenture prevents Cinemark, Inc. from paying a dividend or otherwise distributing
cash to its stockholders unless (1) it is not in default, and the distribution would not cause it
to be in default, under the indenture; (2) it would be able to incur at least $1.00 more of
indebtedness without the ratio of its consolidated cash flow to its fixed charges (each as defined
in the indenture, and calculated on a pro forma
36
basis for the most recently ended four full fiscal quarters for which internal financial
statements are available, using certain assumptions and modifications specified in the indenture,
and including the additional indebtedness then being incurred) falling below two to one (the
senior notes debt incurrence ratio test); and (3) the aggregate amount of distributions made
since March 31, 2004, including the distribution proposed, is less than the sum of (a) half of its
consolidated net income (as defined in the indenture) since February 11, 2003, (b) the net proceeds
to it from the issuance of stock since April 2, 2004, and (c) certain other amounts specified in
the indenture, subject to certain adjustments specified in the indenture. The dividend restriction
is subject to certain exceptions specified in the indenture.
Upon certain specified types of change of control of Cinemark, Inc., Cinemark, Inc. would be
required under the indenture to make an offer to repurchase all of the 9 3/4% senior discount notes
at a price equal to 101% of the accreted value of the notes plus accrued and unpaid interest, if
any, through the date of repurchase.
Senior Secured Credit Facility
On October 5, 2006, in connection with the Century Acquisition, Cinemark USA, Inc., entered
into a senior secured credit facility. The senior secured credit facility provides for a seven year
term loan of $1.12 billion and a $150 million revolving credit line that matures in six years
unless Cinemark USA, Inc.s 9% senior subordinated notes have not been refinanced by August 1, 2012
with indebtedness that matures no earlier than seven and one-half years after the closing date of
the senior secured credit facility, in which case the maturity date of the revolving credit line
becomes August 1, 2012. The net proceeds of the term loan were used to finance a portion of the
$531.2 million cash portion of the Century Acquisition, repay in full the $253.5 million
outstanding under the former senior secured credit facility, repay approximately $360.0 million of
existing indebtedness of Century and to pay for related fees and expenses. The revolving credit
line was left undrawn at closing. The revolving credit line is used for general corporate purposes.
At December 31, 2007, there was $1,101.7 million outstanding under the term loan and no
borrowings outstanding under the revolving credit line. Approximately $149.9 million was available
for borrowing under the revolving credit line, giving effect to a $0.1 million letter of credit
outstanding. The average interest rate on outstanding borrowings under the senior secured credit
facility at December 31, 2007 was 6.7% per annum.
Under the term loan, principal payments of $2.8 million are due each calendar quarter
beginning December 1, 2006 through September 30, 2012 and increase to $263.2 million each calendar
quarter from December 31, 2012 to maturity at October 5, 2013. Prior to the amendment to the senior
secured credit facility discussed below, the term loan accrued interest, at Cinemark USA, Inc.s
option, at: (A) the base rate equal to the higher of (1) the prime lending rate as set forth on the
British Banking Association Telerate page 5 or (2) the federal funds effective rate from time to
time plus 0.50%, plus a margin that ranges from 0.75% to 1.00% per annum, or (B) a eurodollar
rate plus a margin that ranges from 1.75% to 2.00% per annum, in each case as adjusted pursuant to
Cinemark USA, Inc.s corporate credit rating. Borrowings under the revolving credit line bear
interest, at Cinemark USA, Inc.s option, at: (A) a base rate equal to the higher of (1) the prime
lending rate as set forth on the British Banking Association Telerate page 5 and (2) the federal
funds effective rate from time to time plus 0.50%, plus a margin that ranges from 0.50% to
1.00% per annum, or (B) a eurodollar rate plus a margin that ranges from 1.50% to 2.00% per
annum, in each case as adjusted pursuant to Cinemark USA, Inc.s consolidated net senior secured
leverage ratio as defined in the credit agreement. Cinemark USA, Inc. is required to pay a
commitment fee calculated at the rate of 0.50% per annum on the average daily unused portion of the
new revolving credit line, payable quarterly in arrears, which rate decreases to 0.375% per annum
for any fiscal quarter in which Cinemark USA, Inc.s consolidated net senior secured leverage ratio
on the last day of such fiscal quarter is less than 2.25 to 1.0.
On March 14, 2007, Cinemark USA, Inc. amended its senior secured credit facility to, among
other things, modify the interest rate on the term loans under the senior secured credit facility,
modify certain prepayment terms and covenants, and facilitate the tender offer for the 9% senior
subordinated notes. The term loans now accrue interest, at Cinemark USA, Inc.s option, at: (A) the
base rate equal to the higher of (1) the prime lending rate as set forth on the British Banking
Association Telerate page 5, or (2) the federal funds effective rate from time to time plus 0.50%,
plus a margin that ranges from 0.50% to 0.75% per annum, or (B) a eurodollar rate plus a margin
that ranges from 1.50% to 1.75%, per annum. In each case, the margin is a function of the corporate
credit rating applicable to the borrower. The interest rate on the revolving credit line was not
amended. Additionally, the amendment removed any obligation to prepay amounts outstanding under the
senior secured credit facility in an amount equal to the amount of the net cash proceeds received
from the NCM Transaction or from excess cash flows, and imposed a 1% prepayment premium for one
year on certain prepayments of the term loans.
37
Cinemark USA, Inc.s obligations under the senior secured credit facility are guaranteed by
Cinemark Holdings, Inc., Cinemark, Inc., CNMK Holding, Inc., and certain of Cinemark USA, Inc.s
domestic subsidiaries and are secured by mortgages on certain fee and leasehold properties and
security interests in substantially all of Cinemark USA, Inc.s and the guarantors personal
property, including, without limitation, pledges of all of Cinemark USA, Inc.s capital stock, all
of the capital stock of Cinemark, Inc., CNMK Holding, Inc. and certain of Cinemark USA, Inc.s
domestic subsidiaries and 65% of the voting stock of certain of its foreign subsidiaries.
The senior secured credit facility contains usual and customary negative covenants for
agreements of this type, including, but not limited to, restrictions on Cinemark USA, Inc.s
ability, and in certain instances, its subsidiaries and Cinemark Holdings, Inc.s, Cinemark,
Inc.s and CNMK Holding, Inc.s ability, to consolidate or merge or liquidate, wind up or dissolve;
substantially change the nature of its business; sell, transfer or dispose of assets; create or
incur indebtedness; create liens; pay dividends, repurchase stock and voluntarily repurchase or
redeem the 9 3/4% senior discount notes; and make capital expenditures and investments. The senior
secured credit facility also requires Cinemark USA, Inc. to satisfy a consolidated net senior
secured leverage ratio covenant as determined in accordance with the senior secured credit
facility. The dividend restriction contained in the senior secured credit facility prevents us and
any of our subsidiaries from paying a dividend or otherwise distributing cash to its stockholders
unless (1) we are not in default, and the distribution would not cause us to be in default, under
the senior secured credit facility; and (2) the aggregate amount of certain dividends,
distributions, investments, redemptions and capital expenditures made since October 5, 2006,
including the distribution currently proposed, is less than the sum of (a) the aggregate amount of
cash and cash equivalents received by Cinemark Holdings, Inc. or Cinemark USA, Inc. as common
equity since October 5, 2006, (b) Cinemark USA, Inc.s consolidated EBITDA minus 1.75 times its
consolidated interest expense, each as defined in the senior secured credit facility, since
October 1, 2006, (c) $150 million and (d) certain other amounts specified in the senior secured
credit facility, subject to certain adjustments specified in the senior secured credit facility.
The dividend restriction is subject to certain exceptions specified in the senior secured credit
facility.
The senior secured credit facility also includes customary events of default, including, among
other things, payment default, covenant default, breach of representation or warranty, bankruptcy,
cross-default, material ERISA events, certain types of change of control, material money judgments
and failure to maintain subsidiary guarantees. If an event of default occurs, all commitments under
the senior secured credit facility may be terminated and all obligations under the senior secured
credit facility could be accelerated by the lenders, causing all loans outstanding (including
accrued interest and fees payable thereunder) to be declared immediately due and payable.
During March 2007, we entered into two interest rate swap agreements with effective dates of
August 13, 2007 and terms of five years each. The interest rate swaps were designated to hedge
approximately $500.0 million of our variable rate debt obligations. Under the terms of the interest
rate swap agreements, we pay fixed rates of 4.918% and 4.922% on $375.0 million and $125.0 million,
respectively, of variable rate debt and receive interest at a variable rate based on the 3-month
LIBOR. The 3-month LIBOR rate on each reset date determines the variable portion of the interest
rate-swaps for the three-month period following the reset date. No premium or discount was incurred
upon us entering into the interest rate swaps because the pay and receive rates on the interest
rate swaps represented prevailing rates for each counterparty at the time the interest rate swaps
were consummated. The interest rate swaps qualify for cash flow hedge accounting treatment in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and
as such, we have effectively hedged our exposure to variability in the future cash flows
attributable to the 3-month LIBOR on $500.0 million of variable rate debt. The change in the fair
value of the interest rate swaps is recorded on our consolidated balance sheet as an asset or
liability with the effective portion of the interest rate swaps gains or losses reported as a
component of other comprehensive income and the ineffective portion reported in earnings. At
December 31, 2007, the estimated aggregate fair value of the interest rate swaps was a liability of
approximately $18.4 million.
Cinemark USA, Inc. 9% Senior Subordinated Notes
On February 11, 2003, Cinemark USA, Inc. issued $150 million aggregate principal amount of
9% senior subordinated notes due 2013 and on May 7, 2003, Cinemark USA, Inc. issued an additional
$210 million aggregate principal amount of 9% senior subordinated notes due 2013, collectively
referred to as the 9% senior subordinated notes. Interest is payable on February 1 and August 1 of
each year.
On April 6, 2004, as a result of the MDP Merger and in accordance with the terms of the
indenture governing the 9% senior subordinated notes, Cinemark USA, Inc. made a change of control
offer to repurchase the 9% senior
38
subordinated notes at a purchase price of 101% of the aggregate principal amount.
Approximately $17.8 million aggregate principal amount of the 9% senior subordinated notes were
tendered. The payment of the change of control price was funded with available cash by Cinemark
USA, Inc. on June 1, 2004.
During May 2006, as part of three open market purchases, Cinemark USA, Inc. repurchased
$10.0 million aggregate principal amount of its 9% senior subordinated notes for approximately
$11.0 million, including accrued and unpaid interest. The transactions were funded by Cinemark USA,
Inc. with available cash from operations.
On March 6, 2007, Cinemark USA, Inc. commenced an offer to purchase for cash any and all of
its then outstanding $332.2 million aggregate principal amount of 9% senior subordinated notes. In
connection with the tender offer, Cinemark USA, Inc. solicited consents for certain proposed
amendments to the indenture to remove substantially all restrictive covenants and certain events of
default provisions. On March 20, 2007, the early settlement date, Cinemark USA, Inc. repurchased
$332.0 million aggregate principal amount of 9% senior subordinated notes and executed a
supplemental indenture removing substantially all of the restrictive covenants and certain events
of default. Cinemark USA, Inc. used the proceeds from the NCM Transaction and cash on hand to
purchase the 9% senior subordinated notes tendered pursuant to the tender offer and consent
solicitation. On March 20, 2007, we and the Bank of New York Trust Company, N.A., as trustee to the
Indenture dated February 11, 2003, executed the Fourth Supplemental Indenture. The Fourth
Supplemental Indenture became effective on March 20, 2007 and it amends the Indenture by
eliminating substantially all restrictive covenants and certain events of default provisions. On
April 3, 2007, Cinemark USA, Inc. repurchased an additional $0.1 million aggregate principal amount
of the 9% senior subordinated notes tendered after the early settlement date.
As of December 31, 2007, Cinemark USA, Inc. had outstanding approximately $0.2 million
aggregate principal amount of 9% senior subordinated notes. Cinemark USA, Inc. may redeem the
remaining 9% senior subordinated notes on or after February 1, 2008.
Former Senior Secured Credit Facility
On April 2, 2004, Cinemark USA, Inc. amended its then existing senior secured credit facility
in connection with the MDP Merger. The former senior secured credit facility provided for a $260
million seven year term loan and a $100 million six and one-half year revolving credit line. The
net proceeds from the former senior secured credit facility were used to repay the term loan under
its then existing senior secured credit facility of approximately $163.8 million and to redeem the
approximately $94.2 million aggregate principal amount of its then outstanding $105.0 million
aggregate principal amount 8 1/2% senior subordinated notes due 2008 that were tendered pursuant to
the tender offer.
On October 5, 2006, in connection with the Century Acquisition, the $253.5 million outstanding
under the former senior secured credit facility was repaid in full with a portion of the proceeds
from the senior secured credit facility.
Covenant Compliance
The indenture governing the 9 3/4% senior discount notes requires us to have a fixed charge
coverage ratio (as determined under the indenture) of at least 2.0 to 1.0 in order to incur
additional indebtedness, issue preferred stock or make certain restricted payments, including
dividends to our parent. Fixed charge coverage ratio is defined as the ratio of our consolidated
cash flow to our fixed charges for the four most recent fiscal quarters, giving pro forma effect to
certain events as specified in the indenture. Fixed charges is defined as our consolidated interest
expense, subject to certain adjustments as provided in the indenture. Consolidated cash flow as
defined in the indenture is substantially consistent with our presentation of Adjusted EBITDA
below. Because our failure to meet the fixed charge coverage ratio described above could restrict
our ability to incur debt or make dividend payments, management believes that the indenture
governing the 9 3/4% senior discount notes and these covenants and Adjusted EBITDA are material to
us. As of December 31, 2007, fixed charge coverage ratio under the indenture was in excess of the
2.0 to 1.0 requirement described above.
Adjusted EBITDA and Adjusted EBITDA margin should not be construed as alternatives to net
income or operating income as indicators of operating performance or as alternatives to cash flow
provided by operating activities as measures of liquidity (as determined in accordance with GAAP).
Furthermore, Adjusted EBITDA may not be comparable to similarly titled measures reported by other
companies.
39
The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
Year ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
(In thousands) |
Net Income (loss) |
|
$ |
(25,408 |
) |
|
$ |
841 |
|
|
$ |
88,920 |
|
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
9,408 |
|
|
|
12,685 |
|
|
|
111,962 |
|
Interest expense(1) |
|
|
84,082 |
|
|
|
109,328 |
|
|
|
145,596 |
|
Gain on NCM Transaction |
|
|
|
|
|
|
|
|
|
|
(210,773 |
) |
Gain on Fandango transaction |
|
|
|
|
|
|
|
|
|
|
(9,205 |
) |
Loss on early retirement of debt |
|
|
46 |
|
|
|
8,283 |
|
|
|
13,456 |
|
Other income |
|
|
(4,627 |
) |
|
|
(3,768 |
) |
|
|
(15,497 |
) |
Termination of profit participation agreement |
|
|
|
|
|
|
|
|
|
|
6,952 |
|
Depreciation and amortization |
|
|
81,952 |
|
|
|
95,821 |
|
|
|
148,781 |
|
Amortization of net favorable leases |
|
|
4,174 |
|
|
|
3,649 |
|
|
|
2,935 |
|
Impairment of long-lived assets |
|
|
51,677 |
|
|
|
28,537 |
|
|
|
86,558 |
|
(Gain) loss on sale of assets and other |
|
|
4,436 |
|
|
|
7,645 |
|
|
|
(2,953 |
) |
Deferred lease expenses |
|
|
3,137 |
|
|
|
4,717 |
|
|
|
5,979 |
|
Amortization of long-term prepaid rents |
|
|
1,258 |
|
|
|
1,013 |
|
|
|
1,146 |
|
Share based awards compensation expense |
|
|
|
|
|
|
2,864 |
|
|
|
3,081 |
|
|
|
|
Adjusted EBITDA |
|
$ |
210,135 |
|
|
$ |
271,615 |
|
|
$ |
376,938 |
|
|
|
|
|
|
|
(1) |
|
Includes amortization of debt issue costs. |
As of December 31, 2007, we are in full compliance with all agreements, including related
covenants, governing our outstanding debt.
Ratings
We are rated by nationally recognized rating agencies. The significance of individual ratings
varies from agency to agency. However, companies assigned ratings at the top end of the range
have, in the opinion of certain rating agencies, the strongest capacity for repayment of debt or
payment of claims, while companies at the bottom end of the range have the weakest capability.
Ratings are always subject to change and there can be no assurance that our current ratings will
continue for any given period of time. A downgrade of our debt ratings, depending on the extent,
could increase the cost to borrow funds. Below are our latest ratings per category, which were
current as of February 29, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard and |
Category |
|
Moodys |
|
Poors |
Cinemark, Inc. 9 3/4% Senior Discount Notes |
|
|
B3 |
|
|
CCC+ |
Cinemark USA, Inc. Senior Secured Credit Facility |
|
Ba3 |
|
|
B |
|
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements. Among other requirements, this statement defines fair value, establishes
a framework for using fair value to measure assets and liabilities, and expands disclosures about
fair value measurements. The statement applies whenever other statements require or permit assets
or liabilities to be measured at fair value. SFAS No. 157 is effective for us beginning January 1,
2008 (January 1, 2009 for nonfinancial assets and liabilities). Adoption of this statement is not
expected to have a significant impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. This statement provides companies with an option to report selected
financial assets and liabilities at fair
40
value that are not required to be measured at fair value. SFAS No. 159 establishes
presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities. We have not
elected to measure eligible items at fair value upon initial adoption. SFAS No. 159 is effective
for us beginning January 1, 2009. Adoption of this statement is not expected to have a significant
impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. This statement
requires all business combinations completed after the effective date to be accounted for by
applying the acquisition method (previously referred to as the purchase method); expands the
definition of transactions and events that qualify as business combinations; requires that the
acquired assets and liabilities, including contingencies, be recorded at the fair value determined
on the acquisition date and changes thereafter reflected in income, not goodwill; changes the
recognition timing for restructuring costs; and requires acquisition costs to be expensed as
incurred. Adoption of SFAS No. 141(R) is required for business combinations that occur after
December 15, 2008. Early adoption and retroactive application of SFAS No. 141(R) to fiscal years
preceding the effective date is not permitted. We are evaluating the adoption of SFAS No. 141(R)
and its impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated
Financial Statements. This statement establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically,
this statement requires the recognition of a noncontrolling interest (minority interest) as equity
in the consolidated financial statements and separate from the parents equity. The amount of net
income attributable to the noncontrolling interest will be included in consolidated net income on
the face of the income statement. SFAS No. 160 clarifies that changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. We are evaluating the adoption of SFAS No. 160 and its impact on
our consolidated financial statements.
Seasonality
Our revenues have historically been seasonal, coinciding with the timing of releases of motion
pictures by the major distributors. Generally, the most successful motion pictures have been
released during the summer, extending from May to mid-August, and during the holiday season,
extending from Thanksgiving through year-end. The unexpected emergence of a hit film during other
periods can alter this seasonality trend. The timing of such film releases can have a significant
effect on our results of operations, and the results of one quarter are not necessarily indicative
of results for the next quarter or for the same period in the following year.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to financial market risks, including changes in interest rates, foreign
currency exchange rates and other relevant market prices.
Interest Rate Risk
We are currently party to variable rate debt facilities. An increase or decrease in interest
rates would affect interest costs relating to our variable rate debt facilities. At December 31,
2007, there was an aggregate of approximately $607.8 million of variable rate debt outstanding
under these facilities (net of $500.0 million of debt subject to the interest rate swaps discussed
below). Based on the interest rate levels in effect on the variable rate debt outstanding at
December 31, 2007, a 100 basis point increase in market interest rates would increase our annual
interest expense by approximately $6.1 million.
During March 2007, we entered into two interest rate swap agreements with effective dates of
August 13, 2007 and terms of five years each. The interest rate swaps were designated to hedge
approximately $500.0 million of our variable rate debt obligations. Under the terms of the interest
rate swap agreements, we pay fixed rates of 4.918% and 4.922% on $375.0 million and $125.0 million,
respectively, of variable rate debt and receive interest at a variable rate based on the 3-month
LIBOR. The 3-month LIBOR rate on each reset date determines the variable portion of the interest
rate-swaps for
41
the three-month period following the reset date. No premium or discount was incurred upon us
entering into the interest rate swaps because the pay and receive rates on the interest rate swaps
represented prevailing rates for each counterparty at the time the interest rate swaps were
consummated. The interest rate swaps qualify for cash flow hedge accounting treatment in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and as such, we
have effectively hedged our exposure to variability in the future cash flows attributable to the
3-month LIBOR on $500.0 million of variable rate debt. The change in the fair values of the
interest rate swaps is recorded on our consolidated balance sheet as an asset or liability with the
effective portion of the interest rate swaps gains or losses reported as a component of other
comprehensive income and the ineffective portion reported in earnings. At December 31, 2007, the
estimated aggregate fair value of the interest rate swaps was a liability of approximately $18.4
million.
The tables below provide information about our fixed rate and variable rate long-term debt
agreements as of December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity as of December 31, 2007 |
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
Interest |
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
Value |
|
Rate |
Fixed rate (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
966.6 |
|
|
$ |
966.6 |
|
|
$ |
940.1 |
|
|
|
8.2 |
% |
Variable rate |
|
|
9.2 |
|
|
|
13.8 |
|
|
|
12.4 |
|
|
|
11.2 |
|
|
|
271.6 |
|
|
|
289.6 |
|
|
|
607.8 |
|
|
|
612.8 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
Total debt |
|
$ |
9.2 |
|
|
$ |
13.8 |
|
|
$ |
12.4 |
|
|
$ |
11.2 |
|
|
$ |
271.6 |
|
|
$ |
1,256.2 |
|
|
$ |
1,574.4 |
|
|
$ |
1,552.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity as of December 31, 2006 |
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
Interest |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
|
Value |
|
Rate |
Fixed rate |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
886.4 |
|
|
$ |
886.5 |
|
|
$ |
812.1 |
|
|
|
9.5 |
% |
Variable rate |
|
|
14.2 |
|
|
|
14.9 |
|
|
|
12.8 |
|
|
|
12.4 |
|
|
|
11.2 |
|
|
|
1,061.2 |
|
|
|
1,126.7 |
|
|
|
1,146.8 |
|
|
|
7.4 |
% |
|
|
|
|
|
|
|
Total debt |
|
$ |
14.3 |
|
|
$ |
14.9 |
|
|
$ |
12.8 |
|
|
$ |
12.4 |
|
|
$ |
11.2 |
|
|
$ |
1,947.6 |
|
|
$ |
2,013.2 |
|
|
$ |
1,958.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $500.0 million of the Cinemark USA, Inc. term loan, which represents the
debt hedged with our interest rate swap agreements. |
Foreign Currency Exchange Rate Risk
We are also exposed to market risk arising from changes in foreign currency exchange rates as
a result of our international operations. Generally, we export from the U.S. certain of the
equipment and construction interior finish items and other operating supplies used by our
international subsidiaries. Principally all the revenues and operating expenses of our
international subsidiaries are transacted in the countrys local currency. Generally accepted
accounting principles in the U.S. require that our subsidiaries use the currency of the primary
economic environment in which they operate as their functional currency. If our subsidiaries
operate in a highly inflationary economy, generally accepted accounting principles in the U.S.
require that the U.S. dollar be used as the functional currency for the subsidiary. Currency
fluctuations result in us reporting exchange gains (losses) or foreign currency translation
adjustments relating to our international subsidiaries depending on the inflationary environment of
the country in which we operate. Based upon our equity ownership in our international subsidiaries
as of December 31, 2007, holding everything else constant, a 10% immediate, simultaneous,
unfavorable change in all of the foreign currency exchange rates to which we are exposed, would
decrease the aggregate net book value of our investments in our international subsidiaries by
approximately $36 million and would decrease the aggregate net income of our international
subsidiaries by approximately $1.7 million.
42
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed on the Index on page F-1 of this
Form 10-K. Such financial statements and supplementary data are included herein beginning on page
F-3.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A (T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2007, we carried out an evaluation required by the 1934 Act, under the
supervision and with the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-15(e) of the 1934 Act. Based on this evaluation, our principal
executive officer and principal financial officer concluded that, as of December 31, 2007, our
disclosure controls and procedures were effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the 1934 Act is
recorded, processed, summarized, and reported within the time periods specified in the SECs rules
and forms and were effective to provide reasonable assurance that such information is accumulated
and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosures.
Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. The Companys internal control
framework and processes are designed to provide reasonable assurance to management and the board of
directors regarding the reliability of financial reporting and the preparation of the Companys
consolidated financial statements in accordance with the accounting principles generally accepted
in the United States of America. Management has assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007 based on criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated
Framework. As a result of this assessment, management concluded that, as of December 31, 2007, our
internal control over financial reporting is effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 that was
conducted during the quarter ended December 31, 2007 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control
over financial reporting will prevent or detect all error and fraud. Any control system, no matter
how well designed and operated, is based upon certain assumptions and can provide only reasonable,
not absolute, assurance that its objectives will be met. Further, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been detected.
43
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated by reference to the Companys Proxy Statement for its Annual Stockholders Meeting
(under the headings Election of Directors, Corporate Governance and Executive Officers) to be
held on May 15, 2008 and to be filed with the Securities and Exchange Commission within 120 days
after December 31, 2007.
Item 11. Executive Compensation
Incorporated by reference to the Companys Proxy Statement for its Annual Stockholders Meeting
(under the heading Executive Compensation) to be held on May 15, 2008 and to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2007.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Incorporated by reference to the Companys Proxy Statement for its Annual Stockholders Meeting
(under the headings Security Ownership of Certain Beneficial Owners and Management) to be held on
May 15, 2008 and to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to the Companys Proxy Statement for its Annual Stockholders Meeting
(under the heading Certain Relationships and Related Transactions) to be held on May 15, 2008 and
to be filed with the Securities and Exchange Commission within 120 days after December 31, 2007.
Item 14. Principal Accounting Fees and Services
Incorporated by reference to the Companys Proxy Statement for its Annual Stockholders Meeting
(under the heading Board Committees Fees Paid to Independent Registered Public Accounting Firm)
to be held on May 15, 2008 and to be filed with the Securities and Exchange Commission within 120
days after December 31, 2007.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents Filed as Part of this Report
|
1. |
|
The financial statement schedules and related data listed in the accompanying Index
beginning on page F-1 are filed as a part of this report. |
|
|
2. |
|
The exhibits listed in the accompanying Index beginning on page E-1 are filed as a part
of this report. |
(b) Exhibits
See the accompanying Index beginning on page E-1.
(c) Financial Statement Schedules
None
All schedules not identified above have been omitted because they are not required, are not
applicable or the information is included in the consolidated financial statements or notes
contained in this report.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
Dated: March 28, 2008 |
|
CINEMARK HOLDINGS, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BY:
|
|
/s/ Alan W. Stock |
|
|
|
|
|
|
|
|
Alan W. Stock
|
|
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BY:
|
|
/s/ Robert Copple |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Copple |
|
|
|
|
|
|
|
|
Chief Financial Officer and |
|
|
|
|
|
|
|
|
Principal Accounting Officer |
|
|
POWER OF ATTORNEY
Each person whose signature appears below hereby severally constitutes and appoints Alan W.
Stock and Robert Copple his true and lawful attorney-in-fact and agent, each with the power of
substitution and resubstitution, for him in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K and to file the same, with accompanying exhibits and other
related documents, with the Securities and Exchange Commission, and ratify and confirm all that
said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be
done by virtue of said appointment.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Name |
|
Title |
|
Date |
/s/ Lee Roy Mitchell
|
|
Chairman of the Board of Directors and Director
|
|
March 28, 2008 |
|
|
|
|
|
Lee Roy Mitchell |
|
|
|
|
|
|
|
|
|
/s/ Alan W. Stock
|
|
Chief Executive Officer
|
|
March 28, 2008 |
|
|
|
|
|
Alan W. Stock
|
|
(principal executive officer) |
|
|
|
|
|
|
|
/s/ Robert Copple
|
|
Executive Vice President; Treasurer and Chief Financial
|
|
March 28, 2008 |
|
|
|
|
|
Robert Copple
|
|
Officer (principal financial and accounting officer) |
|
|
|
|
|
|
|
/s/ Benjamin D. Chereskin
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Benjamin D. Chereskin |
|
|
|
|
|
|
|
|
|
/s/ Vahe A. Dombalagian
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Vahe A. Dombalagian |
|
|
|
|
|
|
|
|
|
/s/ Peter R. Ezersky
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Peter R. Ezersky |
|
|
|
|
|
|
|
|
|
/s/ Enrique F. Senior
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Enrique F. Senior |
|
|
|
|
|
|
|
|
|
/s/ Raymond W. Syufy
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Raymond W. Syufy |
|
|
|
|
|
|
|
|
|
/s/ Carlos M. Sepulveda
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Carlos M. Sepulveda |
|
|
|
|
|
|
|
|
|
/s/ Roger T. Staubach
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Roger T. Staubach |
|
|
|
|
|
|
|
|
|
/s/ Donald G. Soderquist
|
|
Director
|
|
March 28, 2008 |
|
|
|
|
|
Donald G. Soderquist |
|
|
|
|
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to our stockholders. An annual report and
proxy material may be sent to our stockholders subsequent to the filing of this Form 10-K. We shall
furnish to the Securities and Exchange Commission copies of any annual report or proxy material
that is sent to our stockholders.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES |
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS: |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
|
|
FINANCIAL STATEMENTS OF 50-PERCENT-OR-LESS-OWNED INVESTEE |
|
|
F-40 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cinemark Holdings, Inc.
Plano, Texas
We have audited the accompanying consolidated balance sheets of Cinemark Holdings, Inc. and
subsidiaries (the Company) as of December 31, 2006 and 2007, and the related consolidated
statements of operations, stockholders equity and comprehensive income (loss), and cash flows for
each of the three years in the period ended December 31, 2007. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also 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, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Cinemark Holdings, Inc. and subsidiaries as of December 31,
2006 and 2007, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2007 the Company changed
its method of accounting for uncertainty in income taxes to adopt
Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
SFAS No. 109.
/s/ Deloitte & Touche LLP
Dallas, Texas
March 24, 2008
F-2
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
147,099 |
|
|
$ |
338,043 |
|
Inventories |
|
|
6,058 |
|
|
|
7,000 |
|
Accounts receivable |
|
|
31,165 |
|
|
|
35,368 |
|
Income tax receivable |
|
|
8,946 |
|
|
|
18,339 |
|
Current deferred tax asset |
|
|
4,661 |
|
|
|
5,215 |
|
Prepaid expenses and other |
|
|
8,424 |
|
|
|
10,070 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
206,353 |
|
|
|
414,035 |
|
|
|
|
|
|
|
|
|
|
THEATRE PROPERTIES AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land |
|
|
104,578 |
|
|
|
97,532 |
|
Buildings |
|
|
420,642 |
|
|
|
389,581 |
|
Property under capital lease |
|
|
143,776 |
|
|
|
178,347 |
|
Theatre furniture and equipment |
|
|
517,054 |
|
|
|
558,483 |
|
Leasehold interests and improvements |
|
|
490,861 |
|
|
|
572,081 |
|
Theatres under construction |
|
|
18,113 |
|
|
|
22,481 |
|
|
|
|
|
|
|
|
Total |
|
|
1,695,024 |
|
|
|
1,818,505 |
|
Less accumulated depreciation and amortization |
|
|
370,452 |
|
|
|
504,439 |
|
|
|
|
|
|
|
|
Theatre properties and equipment, net |
|
|
1,324,572 |
|
|
|
1,314,066 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,205,423 |
|
|
|
1,134,689 |
|
Intangible assets net |
|
|
360,752 |
|
|
|
353,047 |
|
Investments in and advances to affiliates |
|
|
11,390 |
|
|
|
3,662 |
|
Deferred charges and other assets net |
|
|
63,092 |
|
|
|
77,393 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
1,640,657 |
|
|
|
1,568,791 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,171,582 |
|
|
$ |
3,296,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
14,259 |
|
|
$ |
9,166 |
|
Current portion of capital lease obligations |
|
|
3,649 |
|
|
|
4,684 |
|
Accounts payable |
|
|
47,272 |
|
|
|
50,977 |
|
Accrued film rentals |
|
|
47,862 |
|
|
|
42,140 |
|
Accrued interest |
|
|
23,706 |
|
|
|
8,735 |
|
Accrued payroll |
|
|
21,686 |
|
|
|
21,614 |
|
Accrued property taxes |
|
|
22,165 |
|
|
|
23,031 |
|
Accrued other current liabilities |
|
|
50,223 |
|
|
|
57,975 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
230,822 |
|
|
|
218,322 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
1,897,394 |
|
|
|
1,514,579 |
|
Capital lease obligations, less current portion |
|
|
112,178 |
|
|
|
116,486 |
|
Deferred income taxes |
|
|
198,320 |
|
|
|
168,475 |
|
Long-term portion FIN 48 liability |
|
|
|
|
|
|
15,500 |
|
Deferred lease expenses |
|
|
14,286 |
|
|
|
19,235 |
|
Deferred revenue NCM |
|
|
|
|
|
|
172,696 |
|
Deferred revenues and other long-term liabilities |
|
|
12,672 |
|
|
|
36,214 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
2,234,850 |
|
|
|
2,043,185 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (see Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS IN SUBSIDIARIES |
|
|
16,613 |
|
|
|
16,182 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 300,000,000 shares authorized,
92,560,622 shares outstanding at December 31, 2006 and
106,983,684 shares outstanding at December 31, 2007 |
|
|
93 |
|
|
|
107 |
|
Additional paid-in-capital |
|
|
685,433 |
|
|
|
939,327 |
|
Retained earnings (deficit) |
|
|
(7,692 |
) |
|
|
47,074 |
|
Accumulated other comprehensive income |
|
|
11,463 |
|
|
|
32,695 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
689,297 |
|
|
|
1,019,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
3,171,582 |
|
|
$ |
3,296,892 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-3
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
Admissions |
|
$ |
641,240 |
|
|
$ |
760,275 |
|
|
$ |
1,087,480 |
|
Concession |
|
|
320,072 |
|
|
|
375,798 |
|
|
|
516,509 |
|
Other |
|
|
59,285 |
|
|
|
84,521 |
|
|
|
78,852 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,020,597 |
|
|
|
1,220,594 |
|
|
|
1,682,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Film rentals and advertising |
|
|
347,727 |
|
|
|
405,987 |
|
|
|
589,717 |
|
Concession supplies |
|
|
52,507 |
|
|
|
59,020 |
|
|
|
81,074 |
|
Salaries and wages |
|
|
101,431 |
|
|
|
118,616 |
|
|
|
173,290 |
|
Facility lease expense |
|
|
138,477 |
|
|
|
161,374 |
|
|
|
212,730 |
|
Utilities and other |
|
|
123,831 |
|
|
|
144,808 |
|
|
|
191,279 |
|
General and administrative expenses |
|
|
50,884 |
|
|
|
67,768 |
|
|
|
79,518 |
|
Termination of profit participation
agreement |
|
|
|
|
|
|
|
|
|
|
6,952 |
|
Depreciation and amortization |
|
|
81,952 |
|
|
|
95,821 |
|
|
|
148,781 |
|
Amortization of favorable leases |
|
|
4,174 |
|
|
|
3,649 |
|
|
|
2,935 |
|
Impairment of long-lived assets |
|
|
51,677 |
|
|
|
28,537 |
|
|
|
86,558 |
|
(Gain) loss on sale of assets and other |
|
|
4,436 |
|
|
|
7,645 |
|
|
|
(2,953 |
) |
|
|
|
|
|
|
|
|
|
|
Total cost of operations |
|
|
957,096 |
|
|
|
1,093,225 |
|
|
|
1,569,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
63,501 |
|
|
|
127,369 |
|
|
|
112,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(84,082 |
) |
|
|
(109,328 |
) |
|
|
(145,596 |
) |
Interest income |
|
|
6,600 |
|
|
|
7,040 |
|
|
|
18,263 |
|
Gain on NCM transaction |
|
|
|
|
|
|
|
|
|
|
210,773 |
|
Gain on Fandango transaction |
|
|
|
|
|
|
|
|
|
|
9,205 |
|
Foreign currency exchange gain (loss) |
|
|
(1,276 |
) |
|
|
(258 |
) |
|
|
438 |
|
Loss on early retirement of debt |
|
|
(46 |
) |
|
|
(8,283 |
) |
|
|
(13,456 |
) |
Distributions from NCM |
|
|
|
|
|
|
|
|
|
|
11,499 |
|
Dividend income |
|
|
|
|
|
|
101 |
|
|
|
50 |
|
Equity in income (loss) of affiliates |
|
|
227 |
|
|
|
(1,646 |
) |
|
|
(2,462 |
) |
Minority interests in income of
subsidiaries |
|
|
(924 |
) |
|
|
(1,469 |
) |
|
|
(792 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(79,501 |
) |
|
|
(113,843 |
) |
|
|
87,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
(16,000 |
) |
|
|
13,526 |
|
|
|
200,882 |
|
Income taxes |
|
|
9,408 |
|
|
|
12,685 |
|
|
|
111,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(25,408 |
) |
|
$ |
841 |
|
|
$ |
88,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE Basic |
|
$ |
(0.31 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE Diluted |
|
$ |
(0.31 |
) |
|
$ |
0.01 |
|
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
Retained |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Paid-in |
|
|
Earnings |
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
|
Issued |
|
|
Amount |
|
|
Capital |
|
|
(Deficit) |
|
|
Income (Loss) |
|
|
Total |
|
|
Income (Loss) |
|
|
|
|
|
|
|
Balance at January 1, 2005 |
|
|
81,876 |
|
|
$ |
82 |
|
|
$ |
527,627 |
|
|
$ |
16,875 |
|
|
$ |
(11,384 |
) |
|
$ |
533,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,408 |
) |
|
|
|
|
|
|
(25,408 |
) |
|
$ |
(25,408 |
) |
Issuance of stock |
|
|
655 |
|
|
|
1 |
|
|
|
4,999 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Tax adjustment related to MDP merger fees |
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,639 |
|
|
|
6,639 |
|
|
|
6,639 |
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
82,531 |
|
|
$ |
83 |
|
|
$ |
532,544 |
|
|
$ |
(8,533 |
) |
|
$ |
(4,745 |
) |
|
$ |
519,349 |
|
|
$ |
(18,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
|
|
|
|
|
841 |
|
|
$ |
841 |
|
Issuance of stock Century Acquisition |
|
|
10,025 |
|
|
|
10 |
|
|
|
149,990 |
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
|
|
Exercise of stock options |
|
|
5 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
Share based awards compensation expense |
|
|
|
|
|
|
|
|
|
|
2,864 |
|
|
|
|
|
|
|
|
|
|
|
2,864 |
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,208 |
|
|
|
16,208 |
|
|
|
16,208 |
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
92,561 |
|
|
$ |
93 |
|
|
$ |
685,433 |
|
|
$ |
(7,692 |
) |
|
$ |
11,463 |
|
|
$ |
689,297 |
|
|
$ |
17,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,920 |
|
|
|
|
|
|
|
88,920 |
|
|
$ |
88,920 |
|
Tax adjustment related to the adoption of FIN48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,093 |
) |
|
|
|
|
|
|
(1,093 |
) |
|
|
|
|
Issuance of stock for initial public offering, net of fees |
|
|
13,889 |
|
|
|
14 |
|
|
|
245,835 |
|
|
|
|
|
|
|
|
|
|
|
245,849 |
|
|
|
|
|
Issuance of restricted stock |
|
|
22 |
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
Exercise of stock options, net of equity award repurchase |
|
|
512 |
|
|
|
|
|
|
|
3,625 |
|
|
|
|
|
|
|
|
|
|
|
3,625 |
|
|
|
|
|
Share based awards compensation expense |
|
|
|
|
|
|
|
|
|
|
2,881 |
|
|
|
|
|
|
|
|
|
|
|
2,881 |
|
|
|
|
|
Tax benefit related to stock option exercises |
|
|
|
|
|
|
|
|
|
|
1,353 |
|
|
|
|
|
|
|
|
|
|
|
1,353 |
|
|
|
|
|
Distributions to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,061 |
) |
|
|
|
|
|
|
(33,061 |
) |
|
|
|
|
Fair value adjustment on interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,348 |
) |
|
|
(11,348 |
) |
|
|
(11,348 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,580 |
|
|
|
32,580 |
|
|
|
32,580 |
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
106,984 |
|
|
$ |
107 |
|
|
$ |
939,327 |
|
|
$ |
47,074 |
|
|
$ |
32,695 |
|
|
$ |
1,019,203 |
|
|
$ |
110,152 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-5
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(25,408 |
) |
|
$ |
841 |
|
|
$ |
88,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
71,870 |
|
|
|
90,081 |
|
|
|
144,629 |
|
Amortization of intangible and other assets |
|
|
14,256 |
|
|
|
9,389 |
|
|
|
7,087 |
|
Amortization of long-term prepaid rents |
|
|
1,258 |
|
|
|
1,013 |
|
|
|
1,146 |
|
Amortization of debt issue costs |
|
|
2,740 |
|
|
|
3,342 |
|
|
|
4,727 |
|
Amortization of deferred revenues, deferred lease incentives and other |
|
|
(660 |
) |
|
|
(424 |
) |
|
|
(2,508 |
) |
Amortization of debt premium |
|
|
(3,105 |
) |
|
|
(3,096 |
) |
|
|
(678 |
) |
Impairment of long-lived assets |
|
|
51,677 |
|
|
|
28,537 |
|
|
|
86,558 |
|
Share based awards compensation expense |
|
|
|
|
|
|
2,864 |
|
|
|
3,081 |
|
Gain on NCM transaction |
|
|
|
|
|
|
|
|
|
|
(210,773 |
) |
Gain on Fandango transaction |
|
|
|
|
|
|
|
|
|
|
(9,205 |
) |
(Gain) loss on sale of assets and other |
|
|
4,436 |
|
|
|
7,645 |
|
|
|
(2,953 |
) |
Write-off unamortized debt issue costs and debt premium
related to the early retirement of debt |
|
|
46 |
|
|
|
5,811 |
|
|
|
(15,661 |
) |
Accretion of interest on senior discount notes |
|
|
38,549 |
|
|
|
40,425 |
|
|
|
41,423 |
|
Deferred lease expenses |
|
|
3,137 |
|
|
|
4,717 |
|
|
|
5,979 |
|
Deferred income tax expenses |
|
|
(12,332 |
) |
|
|
(7,011 |
) |
|
|
(34,614 |
) |
Equity in (income) loss of affiliates |
|
|
(227 |
) |
|
|
1,646 |
|
|
|
2,462 |
|
Minority interests in income of subsidiaries |
|
|
924 |
|
|
|
1,469 |
|
|
|
792 |
|
Tax benefit related to stock option exercises |
|
|
|
|
|
|
|
|
|
|
1,353 |
|
Other |
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(309 |
) |
|
|
787 |
|
|
|
(942 |
) |
Accounts receivable |
|
|
(4,102 |
) |
|
|
(9,884 |
) |
|
|
(4,203 |
) |
Prepaid expenses and other |
|
|
(649 |
) |
|
|
1,678 |
|
|
|
(1,646 |
) |
Other assets |
|
|
(12,373 |
) |
|
|
(2,370 |
) |
|
|
(4 |
) |
Advances with affiliates |
|
|
(121 |
) |
|
|
(143 |
) |
|
|
200 |
|
Accounts payable and accrued liabilities |
|
|
14,082 |
|
|
|
82 |
|
|
|
2,120 |
|
Interest paid on repurchased senior discount notes |
|
|
|
|
|
|
(5,381 |
) |
|
|
(16,592 |
) |
Increase in deferred revenues related to NCM transaction |
|
|
|
|
|
|
|
|
|
|
174,001 |
|
Increase in deferred revenues related to Fandango transaction |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Other long-term liabilities |
|
|
1,198 |
|
|
|
5,734 |
|
|
|
1,323 |
|
Income tax receivable/payable |
|
|
20,181 |
|
|
|
(22,090 |
) |
|
|
5,014 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
165,270 |
|
|
|
155,662 |
|
|
|
276,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to theatre properties and equipment |
|
|
(75,605 |
) |
|
|
(107,081 |
) |
|
|
(146,304 |
) |
Proceeds from sale of theatre properties and equipment |
|
|
1,317 |
|
|
|
6,446 |
|
|
|
37,532 |
|
Increase in escrow deposit due to like-kind exchange |
|
|
|
|
|
|
|
|
|
|
(22,739 |
) |
Acquisition of Century Theatres, Inc., net of cash acquired |
|
|
|
|
|
|
(531,383 |
) |
|
|
|
|
Purchase of shares in National CineMedia |
|
|
(7,329 |
) |
|
|
|
|
|
|
|
|
Net proceeds from sale of NCM stock |
|
|
|
|
|
|
|
|
|
|
214,842 |
|
Net proceeds from sale of Fandango stock |
|
|
|
|
|
|
|
|
|
|
11,347 |
|
Investment in joint venture DCIP |
|
|
|
|
|
|
|
|
|
|
(1,500 |
) |
Other |
|
|
|
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
|
(81,617 |
) |
|
|
(631,747 |
) |
|
|
93,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from initial public offering |
|
|
|
|
|
|
|
|
|
|
245,849 |
|
Issuance of common stock |
|
|
5,000 |
|
|
|
35 |
|
|
|
3,626 |
|
Dividends paid to stockholders |
|
|
|
|
|
|
|
|
|
|
(33,061 |
) |
Retirement of senior discount notes |
|
|
(1,302 |
) |
|
|
(24,950 |
) |
|
|
(43,136 |
) |
Retirement of senior subordinated notes |
|
|
|
|
|
|
(10,000 |
) |
|
|
(332,066 |
) |
Proceeds from senior secured credit facility |
|
|
|
|
|
|
1,120,000 |
|
|
|
|
|
Proceeds from other long-term debt |
|
|
660 |
|
|
|
2,330 |
|
|
|
|
|
Payoff of long-term debt assumed in Century acquisition |
|
|
|
|
|
|
(360,000 |
) |
|
|
|
|
Payoff of former senior secured credit facility |
|
|
|
|
|
|
(253,500 |
) |
|
|
|
|
Repayments of other long-term debt |
|
|
(6,671 |
) |
|
|
(8,895 |
) |
|
|
(19,438 |
) |
Payments on capital leases |
|
|
|
|
|
|
(839 |
) |
|
|
(3,759 |
) |
Debt issue costs |
|
|
(239 |
) |
|
|
(22,926 |
) |
|
|
|
|
Other |
|
|
(1,198 |
) |
|
|
(1,278 |
) |
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
(3,750 |
) |
|
|
439,977 |
|
|
|
(183,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS |
|
|
2,048 |
|
|
|
1,008 |
|
|
|
5,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
81,951 |
|
|
|
(35,100 |
) |
|
|
190,944 |
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
100,248 |
|
|
|
182,199 |
|
|
|
147,099 |
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
182,199 |
|
|
$ |
147,099 |
|
|
$ |
338,043 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION (see Note 19)
The accompanying notes are an integral part of the consolidated financial statements.
F-6
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Cinemark Holdings, Inc. and subsidiaries (the Company) are leaders in the motion
picture exhibition industry in terms of both revenues and the number of screens in operation, with
theatres in the United States (U.S.), Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru,
Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Colombia. The Company also managed
additional theatres in the U.S., Canada, Brazil, and Colombia during the year ended December 31,
2007.
Basis of Presentation On April 2, 2004, an affiliate of Madison Dearborn Partners, LLC, or
MDP, acquired approximately 83% of the capital stock of Cinemark, Inc., pursuant to which a newly
formed subsidiary owned by an affiliate of MDP was merged with and into Cinemark, Inc., with
Cinemark, Inc. continuing as the surviving corporation (the MDP Merger). Simultaneously, an
affiliate of MDP purchased shares of Cinemark, Inc.s common stock and became Cinemark, Inc.s
controlling stockholder. Lee Roy Mitchell, Chairman and then Chief Executive Officer, the Mitchell
Special Trust and certain members of management collectively retained a minority ownership of
Cinemark, Inc.s capital stock. In December 2004, MDP sold a portion of its stock in Cinemark,
Inc. to outside investors and in July 2005, Cinemark, Inc. issued additional shares to another
outside investor.
On August 2, 2006, Cinemark Holdings, Inc. was formed as the Delaware holding company of
Cinemark, Inc. On August 7, 2006, the Cinemark, Inc. stockholders entered into a share exchange
agreement pursuant to which they agreed to exchange their shares of Class A common stock for an
equal number of shares of common stock of Cinemark Holdings, Inc. (Cinemark Share Exchange). The
Cinemark Share Exchange was completed on October 5, 2006 and facilitated the acquisition of Century
Theatres, Inc. (Century Acquisition) on that date. On October 5, 2006, Cinemark, Inc. became a wholly
owned subsidiary of Cinemark Holdings, Inc. Prior to October 5, 2006, Cinemark Holdings,
Inc. had no assets, liabilities or operations. The accompanying consolidated financial statements are
reflective of the change in reporting entity that occurred as a result of the Cinemark Share
Exchange. Cinemark Holdings, Inc.s consolidated financial statements reflect the accounting basis
of its stockholders for all periods presented. On
April 24, 2007, Cinemark Holdings, Inc. completed an initial public offering of its common stock.
Principles of Consolidation The consolidated financial statements include the accounts of
Cinemark Holdings, Inc. and subsidiaries. Majority-owned subsidiaries that the Company has control
of are consolidated while those subsidiaries of which the Company owns between 20% and 50% and does
not control are accounted for as affiliates under the equity method. Those subsidiaries of which
the Company owns less than 20% are generally accounted for as affiliates under the cost method,
unless the Company is deemed to have the ability to exercise significant influence over the
affiliate, in which case the Company would account for its investment under the equity method. The
results of these subsidiaries and affiliates are included in the consolidated financial statements
effective with their formation or from their dates of acquisition. Significant intercompany
balances and transactions are eliminated in consolidation.
Cash and Cash Equivalents Cash and cash equivalents consist of operating funds held in
financial institutions, petty cash held by the theatres and highly liquid investments with
remaining maturities of three months or less when purchased. At December 31, 2007, our cash
investments were primarily in money market funds.
Inventories Concession and theatre supplies inventories are stated at the lower of cost
(first-in, first-out method) or market.
F-7
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Theatre Properties and Equipment Theatre properties and equipment are stated at cost less
accumulated depreciation and amortization. Additions to theatre properties and equipment include
the capitalization of $74, $86, and $618 of interest incurred during the development and
construction of theatres in the years ended December 31, 2005, 2006 and 2007, respectively.
Depreciation is provided using the straight-line method over the estimated useful lives of the
assets as follows:
|
|
|
Category |
|
Useful Life |
Buildings on owned land
|
|
40 years |
Buildings on leased land
|
|
Lesser of lease term or useful life |
Buildings under capital lease
|
|
Lesser of lease term or useful life |
Theatre furniture and equipment
|
|
5 to 15 years |
Leasehold interests and improvements
|
|
Lesser of lease term or useful life |
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company evaluates theatre properties and equipment for impairment in conjunction with
the preparation of its quarterly consolidated financial statements or whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully recoverable. When
estimated cash flows will not be sufficient to recover a long-lived assets carrying amount, an
impairment review is performed in which the Company compares the carrying value of the asset group
(theatre) with its estimated fair value, which is determined based on a multiple of cash flows. The
multiple was eight times for the evaluations performed during 2007 and 2006 and seven times for
2005. When estimated fair value is determined to be lower than the carrying value of the asset
group (theatre), the asset group (theatre) is written down to its estimated fair value. Significant
judgment is involved in estimating cash flows and fair value. Managements estimates are based on
historical and projected operating performance as well as recent market transactions. See Note 11.
The Company has made certain reclassifications between the cost of theatre properties and
equipment and the related accumulated depreciation for the December 31, 2006 balance sheet. These
reclassifications were made to properly reflect the results of impairment charges recorded on such
assets. The impact on theatre properties and equipment, net as of December 31, 2006 was zero.
Goodwill and Other Intangible Assets Goodwill is the excess of cost over fair value of
theatre businesses acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and tradename are tested for impairment at the reporting unit level at least
annually or whenever events or changes in circumstances indicate the carrying value may not be
recoverable. Factors considered include significant underperformance relative to historical or
projected business and significant negative industry or economic trends. Goodwill impairment is
evaluated using a two-step approach requiring the Company to compute the fair value of a reporting
unit (generally at the theatre level), and compare it with its carrying value. If the carrying
value of the theatre exceeds its fair value, a second step is performed to measure the potential
goodwill impairment. Fair value is estimated based on a multiple of cash flows. The multiple was
eight times for the goodwill impairment evaluations performed during 2007 and 2006 and seven times
for 2005. Significant judgment is involved in estimating cash flows and fair value. Managements
estimates are based on historical and projected operating performance as well as recent market
transactions. See Notes 10 and 11.
F-8
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Intangible assets consist of goodwill, tradenames, capitalized licensing fees, vendor
contracts, net favorable leases, and other intangible assets. The table below summarizes the
amortization method used for each type of intangible asset:
|
|
|
Intangible Asset |
|
Amortization Method |
Goodwill
|
|
Indefinite-lived |
Tradename
|
|
Indefinite-lived |
Capitalized licensing fees
|
|
Straight-line method over 15 years. The
remaining terms of the underlying agreements
range from 7 to 12 years. |
Vendor contracts
|
|
Straight-line method over the terms of the
underlying contracts. The remaining terms of
the underlying contracts range from 1 to 15
years. |
Net favorable leases
|
|
Based on the pattern in which the economic
benefits are realized over the terms of the
lease agreements. The remaining terms of the
lease agreements range from 1 to 29 years. |
Other intangible assets
|
|
Straight-line method over the terms of the
underlying agreement. The remaining term of the
underlying agreement is 11 years. |
Deferred Charges and Other Assets Deferred charges and other assets consist of debt issue
costs, long-term prepaid rents, construction advances and other deposits, equipment to be placed in
service and other assets. Debt issue costs are amortized using the straight-line method (which
approximates the effective interest method) over the primary financing terms of the related debt
agreement. Long-term prepaid rents represent advance rental payments on operating leases. These
payments are recognized to facility lease expense over the period for which the rent was paid in
advance as outlined in the lease agreements. These periods generally range from 10 to 20 years.
Lease Accounting The Company accounts for leased properties under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases", and other
authoritative accounting literature. SFAS No. 13 requires that the Company evaluate each lease for
classification as either a capital lease or an operating lease. According to SFAS No. 13, if
substantially all of the benefits and risks of ownership have been transferred to the lessee, the
lessee records the lease as a capital lease at its inception. The Company performs this evaluation
at the inception of the lease and when a modification is made to a lease. If the lease agreement
calls for a scheduled rent increase during the lease term, the Company, in accordance with
Financial Accounting Standards Board (FASB) Technical Bulletin 85-3, Accounting for Operating
Leases with Scheduled Rent Increases", recognizes the lease expense on a straight-line basis over
the lease term as deferred lease expense. The Company determines the straight-line rent expense
impact of an operating lease upon inception of the lease. For leases in which the Company is
involved with construction of the theatre, the Company accounts for the lease during the
construction period under the provisions of Emerging Issues Task Force (EITF) 97-10, The Effect
of Lessee Involvement in Asset Construction". The landlord is typically responsible for
constructing a theatre using guidelines and specifications agreed to by the Company and assumes
substantially all of the risk of construction. In accordance with EITF 97-10, if the Company
concludes that it has substantially all of the construction period risks, it records a construction
asset and related liability for the amount of total project costs incurred during the construction
period. At the end of the construction period, the Company considers SFAS No. 98, Accounting for
Leases: Sale-leaseback Transactions Involving Real Estate", to determine if the transaction
qualifies for sale-leaseback accounting treatment in regards to lease classification.
Deferred Revenues Advances collected on long-term screen advertising, concession and other
contracts are recorded as deferred revenues. In accordance with the terms of the agreements, the
advances collected on such contracts are recognized during the period in which the advances are
earned, which may differ from the period in which the advances are collected.
Revenue and Expense Recognition Revenues are recognized when admissions and concession sales
are received at the box office. Other revenues primarily consist of screen advertising. Screen
advertising revenues are recognized over the period that the related advertising is delivered
on-screen or in-theatre. The Company records proceeds from the sale of gift cards and other
advanced sale-type certificates in current liabilities and recognizes admissions and concession
revenue when a holder redeems the card or certificate. The Company recognizes unredeemed gift cards
and other advanced sale-type certificates as revenue only after such a period of time indicates,
based on historical experience, the likelihood of redemption is remote, and based on applicable
laws and regulations. In evaluating the likelihood of
redemption, the Company considers the period outstanding, the level and frequency of activity,
and the period of
F-9
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
inactivity. The Company recognized unredeemed gift cards and other advance
sale-type certificates as revenues in the amount of $3,374, $4,421 and $3,975 during the years
ended December 31, 2005, 2006 and 2007, respectively.
Film rental costs are accrued based on the applicable box office receipts and either the
mutually agreed upon firm terms or sliding scale formula, which are established prior to the
opening of the picture, or estimates of the final mutually agreed upon settlement, which occurs at
the conclusion of the picture run, subject to the film licensing arrangement. Estimates are based
on the expected success of a film over the length of its run in theatres. The success of a film can
typically be determined a few weeks after a film is released when initial box office performance of
the film is known. Accordingly, final settlements typically approximate estimates since box office
receipts are known at the time the estimate is made and the expected success of a film over the
length of its run in theatres can typically be estimated early in the films run. The final film
settlement amount is negotiated at the conclusion of the films run based upon how a film actually
performs. If actual settlements are higher than those estimated, additional film rental costs are
recorded at that time. The Company recognizes advertising costs and any sharing arrangements with
film distributors in the same accounting period. The Companys advertising costs are expensed as
incurred. Advertising expenses for the years ended December 31, 2005, 2006 and 2007 were $15,927,
$15,726 and $17,252, respectively.
Accounting for Share Based Awards Subsequent to the MDP Merger, the Company established a
long term incentive plan (see Note 18). The weighted average fair value per share of stock options
granted by the Company during 2004 and 2005 was $7.63 (all of which had an exercise price equal to
the market value at the date of grant). For each 2004 and 2005 grant, compensation expense under
the fair value method of SFAS No. 123 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 |
|
January 28, 2005 |
|
|
Grant |
|
Grant |
Expected life |
|
6.5 |
years |
|
6.5 |
years |
Expected volatility (1) |
|
|
39 |
% |
|
|
44 |
% |
Risk-free interest rate |
|
|
3.79 |
% |
|
|
3.93 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Grant date fair value |
|
$ |
3.51 |
|
|
$ |
3.80 |
|
|
|
|
(1) |
|
Expected volatility is based on historical
volatility of the common stock price of comparable public
companies. |
Forfeitures were estimated based on the Companys historical stock option activity.
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment, which established
accounting standards for all transactions in which an entity exchanges its equity instruments for
goods and services. SFAS No. 123(R) eliminated the intrinsic value measurement objective in
Accounting Principles Board (APB) Opinion No. 25 and generally requires a Company to measure the
cost of employee services received in exchange for an award of equity instruments based on the fair
value of the award on the date of the grant. The standard requires grant date fair value to be
estimated using either an option-pricing model, consistent with the terms of the award, or a market
observed price, if such a price exists. Such costs must be recognized over the period during which
an employee is required to provide service in exchange for the award (which is usually the vesting
period). The standard also requires a Company to estimate the number of instruments that will
ultimately be forfeited, rather than accounting for forfeitures as they occur.
The Company applied SFAS No. 123(R) using the modified prospective method, under which it
recognized compensation cost for all awards granted, modified or settled on or after January 1,
2006 and for the unvested portion of previously granted awards that were outstanding on January 1,
2006. Accordingly, prior periods have not been restated. The Company had approximately 4,554,253
unvested options outstanding on January 1, 2006. The Company recorded compensation expense of
$2,864 and a tax benefit of approximately $1,003 during the year ended December 31, 2006 and
recorded compensation expense of $2,881 and a tax benefit of approximately $1,008 during the year
ended December 31, 2007 related to these options. As of December 31, 2007, the unrecognized
compensation expense related to these options was $3,580 and the weighted average period over which
this remaining compensation expense will be recognized is approximately 1.25 years.
F-10
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
The Company applied Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its stock option plans prior to the adoption of SFAS No. 123(R).
Had compensation costs been determined based on the fair value at the date of grant for awards
under the stock option plans, consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure, the Companys net loss for the year ended December 31, 2005 would have been reduced to
the pro-forma amount indicated below:
|
|
|
|
|
Net loss as reported |
|
$ |
(25,408 |
) |
Compensation expense included in reported net loss, net of tax |
|
|
|
|
Compensation expense under fair-value method, net of tax |
|
|
(2,964 |
) |
|
|
|
|
Pro-forma net loss |
|
$ |
(28,372 |
) |
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
As Reported |
|
$ |
(0.31 |
) |
Pro-forma |
|
$ |
(0.35 |
) |
During October 2007, the Company granted 21,880 shares of restricted stock to its independent
directors. The fair value of the shares was approximately $400 based on the market value of the
Companys stock on the date of grant. The awards fully vest on June 29, 2008 after one year of
service. The Company recorded compensation expense of $200 related to these awards during the year
ended December 31, 2007. The remaining unrecognized compensation expense related to these awards of $200 will be
recorded during 2008.
Income Taxes The Company uses an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income taxes are provided when tax laws and financial
accounting standards differ with respect to the amount of income for a year and the basis of assets
and liabilities. A valuation allowance is recorded to reduce the carrying amount of deferred tax
assets unless it is more likely than not that such assets will be realized. Income taxes are
provided on unremitted earnings from foreign subsidiaries unless such earnings are expected to be
indefinitely reinvested. Income taxes have also been provided for potential tax assessments. The
related tax accruals are recorded in accordance with FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of SFAS No. 109 (FIN 48), which the Company
adopted on January 1, 2007. FIN 48 clarifies the accounting and reporting for income taxes
recognized in accordance with SFAS No. 109, Accounting
for Income Taxes, and the recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken
in income tax returns. The evaluation of a tax position in accordance with FIN 48 is a two-step
process. The first step is recognition: The Company determines whether it is more likely than not
that a tax position will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In evaluating whether a tax
position has met the more-likely-than-not recognition threshold, the Company should presume that
the position would be examined by the appropriate taxing authority that would have full knowledge
of all relevant information. The second step is measurement: A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Differences between tax positions taken in a tax return and amounts recognized in the financial
statements result in (1) an increase in a liability for income taxes payable or (2) a reduction of
an income tax refund receivable or a reduction in a deferred tax asset or an increase in a deferred
tax liability or both (1) and (2).
Segments As of December 31, 2007, the Company managed its business under two reportable
operating segments, U.S. markets and international markets, in accordance with SFAS No. 131
Disclosures About Segments of an Enterprise and Related Information. See Note 22.
Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ from those estimates.
F-11
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Foreign Currency Translations The assets and liabilities of the Companys foreign
subsidiaries are translated into U.S. dollars at current exchange rates as of the balance sheet
date, and revenues and expenses are translated at average monthly exchange rates. The resulting
translation adjustments are recorded as a separate component of stockholders equity.
Fair Values of Financial Instruments Fair values of financial instruments, including the
Companys interest rate swap agreements, are estimated by the Company using available market
information and other valuation methods. Values are based on available market quotes or estimates
using a discounted cash flow approach based on the interest rates currently available for similar
instruments. The fair values of financial instruments for which estimated fair value amounts are
not specifically presented are estimated to approximate the recorded values.
Acquisitions The Company accounts for acquisitions under the purchase method of accounting
in accordance with SFAS No. 141, Business Combinations. The purchase method requires that the
Company estimate the fair value of the assets acquired and liabilities assumed and allocate
consideration paid accordingly. For significant acquisitions, the Company obtains independent third
party valuation studies for certain of the assets acquired and liabilities assumed to assist the
Company in determining fair value. The estimation of the fair values of the assets acquired and
liabilities assumed involves a number of estimates and assumptions that could differ materially
from the actual amounts recorded.
Comprehensive Income (Loss) Total comprehensive income (loss) for the years ended December
31, 2005, 2006 and 2007, was $(18,769), $17,049 and $110,152, respectively. Total comprehensive
income (loss) consists of net income (loss), foreign currency translation adjustments and fair
value adjustments on the Companys interest rate swap agreements.
2. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Among other
requirements, this statement defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value measurements. The
statement applies whenever other statements require or permit assets or liabilities to be measured
at fair value. SFAS No. 157 is effective for the Company beginning January 1, 2008 (January 1, 2009
for nonfinancial assets and liabilities). Adoption of this statement is not expected to have a
significant impact on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. This statement provides companies with an option to report selected
financial assets and liabilities at fair value that are currently not required to be measured at
fair value. SFAS No. 159 establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement attributes for similar
types of assets and liabilities. SFAS No. 159 is effective for the Company beginning January 1,
2009. The Company has elected not to measure eligible items at fair value upon initial adoption.
Adoption of this statement is not expected to have a significant impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This statement
requires all business combinations completed after the effective date to be accounted for by
applying the acquisition method (previously referred to as the purchase method); expands the
definition of transactions and events that qualify as business combinations; requires that the
acquired assets and liabilities, including contingencies, be recorded at the fair value determined
on the acquisition date and changes thereafter reflected in income, not goodwill; changes the
recognition timing for restructuring costs; and requires acquisition costs to be expensed as
incurred. Adoption of SFAS No. 141(R) is required for business combinations that occur after
December 15, 2008. Early adoption and retroactive application of
SFAS No. 141(R) to fiscal years
preceding the effective date is not permitted. The Company is evaluating the adoption of SFAS No.
141(R) and its impact on the Companys consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated
Financial Statements. This statement establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically,
this statement requires the recognition of a noncontrolling interest (minority interest) as equity
in the consolidated financial statements and separate from the parents equity. The amount of net
income attributable to the noncontrolling interest will be included in consolidated net income
F-12
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
on
the face of the income statement. SFAS No. 160 clarifies that changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is
evaluating the adoption of SFAS No. 160 and its impact on the Companys consolidated financial
statements.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
On April 24, 2007, the Company completed an initial public offering of its common stock. The
Company sold 13,888,889 shares of its common stock and selling stockholders sold an additional
14,111,111 shares of common stock at a price of $17.955 ($19 per share less underwriting
discounts). The net proceeds (before expenses) received by the Company were $249,375 and the
Company paid approximately $3,526 in legal, accounting and other fees, all of which are recorded in
additional paid-in-capital. The selling stockholders granted the underwriters a 30-day option to
purchase up to an additional 2,800,000 shares of the Companys common stock at a price of $17.955
($19 per share less underwriting discounts). On May 21, 2007, the underwriters purchased an
additional 269,100 shares from the selling stockholders pursuant to this option. The Company did
not receive any proceeds from the sale of shares by the selling stockholders. The Company has
utilized a portion of the net proceeds that it received from the offering to repurchase a portion
of its outstanding 9 3/4% senior discount notes. See Note 13. The Company expects to continue to
use the net proceeds to repurchase a portion of the remaining 9 3/4% senior discount notes or repay
debt outstanding under the senior secured credit facility. The 9 3/4% senior discount notes are not
currently subject to repurchase at the Companys option. Accordingly, if the Company is unable to
repurchase the 9 3/4% senior discount notes at acceptable prices, the Company expects to use a
portion of the remaining net proceeds to repay term loan debt outstanding under the senior secured
credit facility. The Company has significant flexibility in applying the net proceeds from the
initial public offering. The Company has invested the remaining net proceeds in short-term,
investment-grade marketable securities or money market funds.
4. EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss) by the weighted average
number of shares of all classes of common stock outstanding during the period. Diluted earnings
(loss) per share is computed by dividing income (loss) by the weighted average number of shares of
common stock and potentially dilutive common equivalent shares outstanding determined under the
treasury stock method. The following table sets forth the computation of basic and diluted
earnings (loss) per share (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Net income (loss) |
|
$ |
(25,408 |
) |
|
$ |
841 |
|
|
$ |
88,920 |
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in 000s) |
|
|
82,199 |
|
|
|
84,948 |
|
|
|
102,177 |
|
|
|
|
Net income (loss) per common share |
|
$ |
(0.31 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in 000s) |
|
|
82,199 |
|
|
|
84,948 |
|
|
|
102,177 |
|
Common equivalent shares for stock options (in 000s) |
|
|
|
|
|
|
1,670 |
|
|
|
2,543 |
|
|
|
|
Weighted average common and common equivalent shares
outstanding (in 000s) |
|
|
82,199 |
|
|
|
86,618 |
|
|
|
104,720 |
|
|
|
|
Net income (loss) per common and common equivalent share |
|
$ |
(0.31 |
) |
|
$ |
0.01 |
|
|
$ |
0.85 |
|
|
|
|
F-13
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
5. DIVIDEND PAYMENTS
In August 2007, the Company initiated a quarterly dividend policy. Consistent with the
disclosures in the Companys 424(b)(1) prospectus, the dividend for the second quarter of 2007 was
based on a dividend rate of $0.18 per share, prorated based on the April 27, 2007 closing of the
Companys initial public offering. Based on the above proration, the Companys board of directors
declared a cash dividend for the second quarter of 2007 of $0.13 per common share payable to
stockholders of record on September 4, 2007, which was paid on September 18, 2007. On November 9,
2007, the Companys board of directors declared a cash dividend for the third quarter of 2007 of
$0.18 per common share payable to stockholders of record on December 3, 2007. The dividend was
paid on December 18, 2007. The aggregate amount of dividends paid to stockholders during 2007 was
$33,061.
6. ACQUISITION OF CENTURY THEATRES, INC. AND RELATED REFINANCING OF CERTAIN LONG-TERM DEBT
On October 5, 2006, the Company completed its acquisition of Century Theatres, Inc.
(Century), a national theatre chain headquartered in San Rafael, California with approximately 77
theatres in 12 states, for a purchase price of approximately $681,225 and the assumption of
approximately $360,000 of debt of Century. Of the total purchase price, $150,000 consisted of the
issuance of shares of Cinemark Holdings, Inc.s common stock. The Company also incurred
approximately $7,448 in transaction costs.
The transaction was accounted for under the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations. The following table represents the allocation of purchase
price to the assets acquired and liabilities assumed:
|
|
|
|
|
Current assets (1) |
|
$ |
32,635 |
|
Fixed assets (2) |
|
|
548,451 |
|
Goodwill (2) |
|
|
640,436 |
|
Tradename |
|
|
136,000 |
|
Other long term assets |
|
|
4,956 |
|
Net unfavorable leases |
|
|
(9,360 |
) |
Current liabilities |
|
|
(74,488 |
) |
Other long term liabilities (2) |
|
|
(229,957 |
) |
|
|
|
|
Total |
|
$ |
1,048,673 |
|
|
|
|
|
|
|
|
(1) |
|
Includes cash of $7,290. |
|
(2) |
|
In 2007, the Company adjusted its preliminary purchase price
allocation to fixed assets (increase of $29,398), goodwill (decrease of $18,110)
and other long-term liabilities (increase of $11,288) due to additional
information obtained regarding the fair value of these assets and liabilities
acquired. |
The tradename and net unfavorable leases are presented as intangible assets on the Companys
consolidated balance sheets as of December 31, 2006 and 2007. Goodwill represents the excess of the
costs of acquiring Century over amounts assigned to assets acquired, including identifiable
intangible assets, and liabilities assumed. The goodwill recorded as a result of the Century
Acquisition is not deductible for tax purposes.
On October 5, 2006, the Company entered into a senior secured credit facility, which provided
for a $1,120,000 term loan and a $150,000 revolving credit line. The net proceeds of the new term
loan were used to fund a portion of the $531,225 cash portion of the purchase price, to pay off
approximately $360,000 under Centurys existing senior credit facility and to refinance amounts
under the Companys existing senior secured credit facility of approximately $253,500. The Company
used approximately $53,000 of its existing cash to fund the payment of the remaining portion of the
purchase price and related transaction expenses. Additionally, the Company advanced approximately
$17,000 of cash to Century to satisfy working capital obligations. See Note 13 for further
discussion of long-term debt.
The Century Acquisition is reflected in the Companys consolidated statements of operations
for the period subsequent to the transaction date and is reported in the Companys U.S. operating
segment. The pro forma financial
F-14
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
information presented below sets forth the Companys pro forma
consolidated statements of operations for the years ended December 31, 2005 and 2006 to give effect
to the Century Acquisition as if the acquisition had occurred at the
beginning of each period. This information is presented for comparative purposes only and does
not purport to represent what the Companys results of operations would have been had the
transaction occurred on the date indicated or to project its results of operations for any future
period.
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
Pro Forma |
|
|
Year Ended |
|
Year Ended |
|
|
December 31, 2005 |
|
December 31, 2006 |
|
|
(unaudited) |
Revenues |
|
|
|
|
|
|
|
|
Admissions |
|
$ |
982,699 |
|
|
$ |
1,029,881 |
|
Concession |
|
|
457,190 |
|
|
|
487,416 |
|
Other |
|
|
74,559 |
|
|
|
94,807 |
|
|
|
|
Total revenues |
|
$ |
1,514,448 |
|
|
$ |
1,612,104 |
|
Cost of operations |
|
|
|
|
|
|
|
|
Film rentals and advertising |
|
|
526,002 |
|
|
|
546,144 |
|
Concession supplies |
|
|
72,631 |
|
|
|
75,359 |
|
Salaries and wages |
|
|
154,072 |
|
|
|
160,689 |
|
Facility lease expense |
|
|
194,394 |
|
|
|
206,950 |
|
Utilities and other |
|
|
169,507 |
|
|
|
184,699 |
|
General and administrative expenses (1) |
|
|
77,338 |
|
|
|
84,619 |
|
Depreciation and amortization (2)(3) |
|
|
140,994 |
|
|
|
141,416 |
|
Impairment of long-lived assets |
|
|
51,677 |
|
|
|
28,943 |
|
Loss on sale of assets and other |
|
|
9,393 |
|
|
|
7,706 |
|
|
|
|
Total cost of operations |
|
|
1,396,008 |
|
|
|
1,436,525 |
|
Operating income |
|
|
118,440 |
|
|
|
175,579 |
|
Interest expense (4) |
|
|
(162,131 |
) |
|
|
(168,051 |
) |
Other income (expense) |
|
|
6,105 |
|
|
|
(4,556 |
) |
|
|
|
Income (loss) before income taxes |
|
|
(37,586 |
) |
|
|
2,972 |
|
Income taxes (5) |
|
|
2,176 |
|
|
|
6,520 |
|
|
|
|
Net loss |
|
$ |
(39,762 |
) |
|
$ |
(3,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.43 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
(1) |
|
Gives effect to the elimination of change of control payments of
$15,672 to Centurys management for the year ended December 31, 2006. |
|
(2) |
|
Reflects increase in depreciation related to the fair value of the theatre
properties and equipment pursuant to purchase accounting for the Century Acquisition. |
|
(3) |
|
Reflects the amortization associated with intangible assets recorded pursuant
to purchase accounting for the Century Acquisition. |
|
(4) |
|
Reflects interest expense and amortization of debt issue costs resulting from
the changes to the Companys debt structure pursuant to the Century Acquisition. |
|
(5) |
|
Reflects the tax effect of the aforementioned proforma adjustments at the
Companys statutory income tax rate of 39%. |
7. INVESTMENT IN NATIONAL CINEMEDIA LLC AND TRANSACTION RELATED TO ITS INITIAL PUBLIC OFFERING
In March 2005, Regal Entertainment Inc. (Regal) and AMC Entertainment Inc. (AMC) formed
National CineMedia, LLC, or NCM, and on July 15, 2005, the Company joined NCM, as one of the
founding members. NCM operates the largest digital in-theatre network in the U.S. for providing
cinema advertising and non-film events and combines the cinema advertising and non-film events
businesses of the three largest motion picture companies in the U.S. Upon joining NCM, the Company
and NCM entered into an Exhibitor Services Agreement, pursuant to which NCM provides advertising,
promotion and event services to the Companys theatres. On February 13, 2007, National CineMedia,
Inc., or NCM Inc., a newly formed entity that now serves as a member and the sole manager of NCM,
completed an initial public offering of its common stock. In connection with the NCM Inc. initial
public offering, the
F-15
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Company amended its operating agreement with NCM and the Exhibitor Services
Agreement pursuant to which NCM provides advertising, promotion and event services to the Companys
theatres. In connection with NCM Inc.s initial public offering and the transactions described
below (the NCM Transaction), the Company received an aggregate of $389,003.
Prior to pricing the initial public offering of NCM Inc., NCM completed a recapitalization
whereby (1) each issued and outstanding Class A unit of NCM was split into 44,291 Class A units,
and (2) following such split of Class A Units, each issued and outstanding Class A Unit was
recapitalized into one common unit and one preferred unit. As a result, the Company received
14,159,437 common units and 14,159,437 preferred units. All existing preferred units of NCM, or
55,850,951 preferred units, held by Regal, AMC and the Company were redeemed on a pro-rata basis on
February 13, 2007. NCM utilized the proceeds of its new $725,000 term loan facility and a portion
of the proceeds it received from NCM Inc. from its initial public offering to redeem all of its
outstanding preferred units. Each preferred unit was redeemed for $13.7782 and the Company received
approximately $195,092 as payment in full for redemption of all of the Companys preferred units in
NCM. Upon payment of such amount, each preferred unit was cancelled and the holders of the
preferred units ceased to have any rights with respect to the preferred units.
At the closing of the initial public offering, the underwriters exercised their over-allotment
option to purchase additional shares of common stock of NCM Inc. at the initial public offering
price, less underwriting discounts and commissions. In connection with the over-allotment option
exercise, Regal, AMC and the Company each sold to NCM Inc. common units of NCM on a pro-rata basis
at the initial public offering price, less underwriting discounts and expenses. The Company sold
1,014,088 common units to NCM Inc. for proceeds of $19,910, and upon completion of this sale of
common units, the Company owned 13,145,349 common units of NCM. The net proceeds of $215,002 from
the above described stock transactions were applied against the Companys existing investment basis
in NCM of $4,069 until such basis was reduced to $0 with the remaining $210,933 of proceeds net of
$160 of transaction related costs, recorded as a gain of $210,773 in the consolidated statement of
operations for the year ended December 31, 2007.
NCM also paid the Company a portion of the proceeds it received from NCM Inc. in the initial
public offering for agreeing to modify NCMs payment obligation under the prior Exhibitor Services
Agreement. The modification agreed to by the Company reflects a shift from circuit share expense
under the prior Exhibitor Services Agreement, which obligated NCM to pay the Company a percentage
of revenue, to the monthly theatre access fee described below. The theatre access fee will
significantly reduce the contractual amounts paid to the Company by NCM. In exchange for the
Company agreeing to so modify the agreement, NCM paid the Company approximately $174,001 upon
modification of the Exhibitor Services Agreement on February 13, 2007, the proceeds of which were
recorded as deferred revenue on the Companys consolidated balance sheet. The Company believes
this payment approximates the fair value of the Exhibitor Services Agreement modification. The
deferred revenue is being amortized into other revenues over the life of the agreement using the
units of revenue method. Regal and AMC similarly amended their exhibitor service agreements with
NCM.
In consideration for NCMs exclusive access to the Companys theatre attendees for on-screen
advertising and use of off-screen locations within the Companys theatres for the lobby
entertainment network and lobby promotions, the Company will receive a monthly theatre access fee
under the Exhibitor Services Agreement. The theatre access fee is composed of a fixed payment per
patron, initially seven cents, and a fixed payment per digital screen, which may be adjusted for
certain enumerated reasons. The payment per theatre patron will increase by 8% every five years,
with the first such increase taking effect after the end of fiscal 2011, and the payment per
digital screen, initially eight hundred dollars per digital screen per year, will increase annually
by 5%, beginning after 2007. The theatre access fee paid in the aggregate to Regal, AMC and the
Company will not be less than 12% of NCMs Aggregate Advertising Revenue (as defined in the
Exhibitor Services Agreement), or it will be adjusted upward to reach this minimum payment.
Additionally, with respect to any on-screen advertising time provided to the Companys beverage
concessionaire, the Company is required to purchase such time from NCM at a negotiated rate. The
Exhibitor Services Agreement has, except with respect to certain limited services, a term of 30
years.
Prior to the initial public offering of NCM Inc. common stock, the Companys ownership
interest in NCM was approximately 25% and subsequent to the completion of the offering the Company
held a 14% interest in NCM. Subsequent to NCM Inc.s initial public offering, the Company
continues to account for its investment in NCM under the equity method of accounting due to its
ability to exercise significant control over NCM. The Company has substantial
F-16
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
rights as a founding
member, including the right to designate a total of two nominees to the ten-member board of
directors of NCM Inc., the sole manager. So long as the Company owns at least 5% of NCMs
membership interests, approval of at least 90% (80% if the board has less than 10 directors) will
be required before NCM Inc. may take certain actions including but not limited to mergers and
acquisitions, issuance of common or preferred shares, approval of NCM Inc.s budget, incurrence of
indebtedness, entering into or terminating material agreements, and modifications to its articles
of incorporation or bylaws. Additionally, if any of the Companys director designees are not
appointed to the board of
directors of NCM Inc., nominated by NCM Inc. or elected by NCM Inc.s stockholders, then the
Company (so long as the Company continues to own at least 5% of NCMs membership interest) will be
entitled to approve certain actions of NCM including without limitation, approval of the budget,
incurrence of indebtedness, consummating or amending material agreements, approving dividends,
amending the NCM operating agreement, hiring or termination of the chief executive officer, chief
financial officer, chief technology officer or chief marketing officer of NCM and the dissolution
or liquidation of NCM.
During the years ended December 31, 2005, 2006 and 2007, the Company recorded equity losses of
$0, $1,705 and $1,284, respectively. The Company recognized $72, $29,388 and $5,664 of other
revenue from NCM during the years ended December 31, 2005, 2006 and 2007, respectively. The Company
had a receivable due from NCM of $13,386 and $225 as of December 31, 2006 and 2007, respectively,
related to screen advertising and other ancillary revenue. The Company is entitled to receive
mandatory quarterly distributions of excess cash from NCM. During the year ended December 31, 2007,
the Company received distributions of approximately $11,499 which were in excess of the carrying
value of its investment in NCM and are reflected as distributions from NCM on the consolidated
statement of operations for the year ended December 31, 2007.
As of December 31, 2007, the Company owned 13,145,349 common units of NCM. Each common unit is
convertible into one share of NCM Inc. common stock. As of December 31, 2007, the fair market
value of the Companys shares in NCM was approximately $331,394 based on a closing price of $25.21
per share of NCM Inc. common stock on December 31, 2007.
8. INVESTMENT IN DIGITAL CINEMA IMPLEMENTATION PARTNERS
On February 12, 2007, the Company, AMC and Regal entered into a joint venture known as Digital
Cinema Implementation Partners LLC (DCIP) to facilitate the implementation of digital cinema in
the Companys theatres and to establish agreements with major motion picture studios for the
financing of digital cinema. Future digital cinema developments will be managed by DCIP, subject to
the Companys approval along with the Companys partners, AMC and Regal. During the year ended
December 31, 2007, the Company invested $1,500 for a one-third ownership interest in DCIP. The
Company is accounting for its investment in DCIP under the equity method of accounting. During the
year ended December 31, 2007, the Company recorded equity losses of approximately $1,240, relating
to this investment. The Companys investment basis in DCIP was $260 at December 31, 2007, which is
included in investments in and advances to affiliates on the consolidated balance sheet.
9. SALE OF INVESTMENT IN FANDANGO, INC.
In May 2007, Fandango, Inc., an on-line ticketing distributor, executed a merger agreement,
which resulted in the Company selling its investment in stock of Fandango, Inc. for approximately
$14,147 of consideration (the Fandango Transaction). Approximately $1,390 of the consideration
is in escrow to secure certain indemnification obligations contained in the merger agreement, which
is included in accounts receivable on the consolidated balance sheet. The Company paid $2,800 of
the cash consideration to Syufy Enterprises, LP in accordance with the terms of agreements entered
into as part of the Century Acquisition. The carrying value of the Companys investment in stock
of Fandango, Inc. was $2,142. As a result of the sale of its investment, the Company recorded a
gain of $9,205 in the consolidated statement of operations for the year ended December 31, 2007.
As part of the sale of its investment in stock of Fandango, Inc., the Company amended its
exclusive ticketing and distribution agreement with Fandango, Inc. Certain sections of the
agreement were modified in which the Company no longer is entitled to receive additional shares of
stock in Fandango, Inc. nor share in future adjusted profits of Fandango, Inc. In exchange for the
amendment, Fandango, Inc. paid the Company $5,000. The proceeds of $5,000 were recorded as
F-17
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
deferred revenue on the Companys consolidated balance sheet and are being amortized straight-line
over the term of the amended ticketing and distribution agreement, which expires in December 2011.
In accordance with the terms of its senior secured credit facility, the Company used
approximately $9,914 of the net proceeds to pay down its term loan. The payment was made on August
10, 2007 and was applied against the current portion of long-term debt.
10. GOODWILL AND OTHER INTANGIBLE ASSETS NET
The Companys goodwill is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
International |
|
|
|
|
Operating |
|
Operating |
|
|
|
|
Segment |
|
Segment |
|
Total |
Balance at
January 1, 2006 |
|
$ |
401,397 |
|
|
$ |
150,140 |
|
|
$ |
551,537 |
|
Acquisition of Century Theatres, Inc. (1) |
|
|
658,546 |
|
|
|
|
|
|
|
658,546 |
|
Impairment charges |
|
|
(5,116 |
) |
|
|
(8,478 |
) |
|
|
(13,594 |
) |
Foreign currency translation adjustments and other (2) |
|
|
1,989 |
|
|
|
6,945 |
|
|
|
8,934 |
|
|
|
|
Balance at December 31, 2006 |
|
$ |
1,056,816 |
|
|
$ |
148,607 |
|
|
$ |
1,205,423 |
|
Purchase price allocation adjustment for Century Acquisition (1) |
|
|
(18,109 |
) |
|
|
|
|
|
|
(18,109 |
) |
Impairment charges |
|
|
(60,154 |
) |
|
|
(7,571 |
) |
|
|
(67,725 |
) |
Foreign currency translation adjustment and other (2) |
|
|
595 |
|
|
|
14,505 |
|
|
|
15,100 |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
979,148 |
|
|
$ |
155,541 |
|
|
$ |
1,134,689 |
|
|
|
|
|
|
|
(1) |
|
See Note 6 regarding the acquisition of Century Theatres, Inc.
|
|
(2) |
|
U.S. operating segment includes one theatre located in Canada. |
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company reviews
goodwill for impairment on an annual basis at fiscal year-end or whenever events or changes in
circumstances indicate the carrying value of goodwill might exceed its estimated fair value.
As a result of the NCM Transaction discussed in Note 7, and more specifically the modification
of the NCM Exhibitor Services Agreement with the Company, which significantly reduced the
contractual amounts paid to the Company, the Company evaluated the carrying value of its goodwill
as of March 31, 2007 resulting in the majority of the 2007 goodwill impairment charges reflected
above in the table. The Company also performed its annual evaluation as of December 31, 2007.
The Company evaluates goodwill for impairment at the reporting unit level (generally a
theatre) and has allocated goodwill to the reporting unit based on an estimate of its relative fair
value. The evaluation is a two-step approach requiring the Company to compute the estimated fair
value of a theatre and compare it with its carrying value. If the carrying value exceeds estimated
fair value, a second step is performed to measure the potential goodwill impairment. Fair values
are determined based on a multiple of cash flows, which was seven times for 2005 and eight times
for the evaluations performed during 2006 and 2007. Significant judgment is involved in estimating
cash flows and fair value. Managements estimates are based on historical and projected operating
performance as well as recent market transactions. The Companys policy of allocating goodwill at
the theatre level results in more volatile impairment charges on an annual basis due to changes in
market conditions and box office performance and the resulting impact on individual theatres.
F-18
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
As of December 31, intangible assets-net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation |
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments |
|
Balance at |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
December 31, |
|
|
2006 |
|
Additions |
|
Amortization |
|
Impairment |
|
Other |
|
2007 |
Intangible assets with finite lives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized licensing fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
5,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,138 |
|
Accumulated amortization |
|
|
(1,139 |
) |
|
|
|
|
|
|
(426 |
) |
|
|
|
|
|
|
|
|
|
|
(1,565 |
) |
|
|
|
Net carrying amount |
|
$ |
3,999 |
|
|
$ |
|
|
|
$ |
(426 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,573 |
|
|
|
|
Vendor contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
56,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447 |
|
|
|
56,973 |
|
Accumulated amortization |
|
|
(19,924 |
) |
|
|
|
|
|
|
(3,418 |
) |
|
|
|
|
|
|
|
|
|
|
(23,342 |
) |
|
|
|
Net carrying amount |
|
$ |
36,602 |
|
|
$ |
|
|
|
$ |
(3,418 |
) |
|
$ |
|
|
|
$ |
447 |
|
|
$ |
33,631 |
|
|
|
|
Net favorable leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
21,999 |
|
|
|
|
|
|
|
|
|
|
|
(4,611 |
) |
|
|
3,303 |
|
|
|
20,691 |
|
Accumulated amortization |
|
|
(12,023 |
) |
|
|
|
|
|
|
(2,935 |
) |
|
|
|
|
|
|
(623 |
) |
|
|
(15,581 |
) |
|
|
|
Net carrying amount |
|
$ |
9,976 |
|
|
$ |
|
|
|
$ |
(2,935 |
) |
|
$ |
(4,611 |
) |
|
$ |
2,680 |
|
|
$ |
5,110 |
|
|
|
|
Other intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
69 |
|
Accumulated amortization |
|
|
(16 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
Net carrying amount |
|
$ |
54 |
|
|
$ |
|
|
|
$ |
(4 |
) |
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
49 |
|
|
|
|
Total net intangible assets with
finite lives |
|
$ |
50,631 |
|
|
$ |
|
|
|
$ |
(6,783 |
) |
|
$ |
(4,611 |
) |
|
$ |
3,126 |
|
|
$ |
42,363 |
|
Intangible assets with indefinite
lives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename |
|
|
310,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
563 |
|
|
|
310,681 |
|
Other unamortized intangible assets |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
Total intangible assets net |
|
$ |
360,752 |
|
|
$ |
|
|
|
$ |
(6,783 |
) |
|
$ |
(4,611 |
) |
|
$ |
3,689 |
|
|
$ |
353,047 |
|
|
|
|
|
|
|
|
|
Amortization expense of $7,087 for the year ended December 31, 2007 included $6,783 of
amortization for intangible assets and $304 of amortization for other assets. Estimated aggregate
future amortization expense for intangible assets is as follows: |
|
|
|
|
|
For the year ended December 31, 2008 |
|
$ |
6,404 |
|
For the year ended December 31, 2009 |
|
|
5,287 |
|
For the year ended December 31, 2010 |
|
|
5,005 |
|
For the year ended December 31, 2011 |
|
|
4,551 |
|
For the year ended December 31, 2012 |
|
|
3,686 |
|
Thereafter |
|
|
17,430 |
|
|
|
|
|
Total |
|
$ |
42,363 |
|
|
|
|
|
F-19
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
11. IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company reviews long-lived assets for impairment on a quarterly basis or whenever
events or changes in circumstances indicate the carrying amount of the assets may not be fully
recoverable.
The Company considers actual theatre level cash flows, future years budgeted theatre level
cash flows, theatre property and equipment carrying values, theatre goodwill carrying values,
amortizing intangible assets carrying values, the age of a recently built theatre, competitive
theatres in the marketplace, changes in foreign currency exchange rates, the impact of recent
ticket price changes, available lease renewal options and other factors in its assessment of
impairment of individual theatre assets. Long-lived assets are evaluated for impairment on an
individual theatre basis, which the Company believes is the lowest applicable level for which there
are identifiable cash flows. The impairment evaluation is based on the estimated cash flows from
continuing use through the remainder of the theatres useful life. The remainder of the useful life
correlates with the available remaining lease period, which includes the probability of renewal
periods for leased properties and a period of twenty years for fee owned properties. If the
estimated cash flows are not sufficient to recover a long-lived assets carrying value, the Company
then compares the carrying value of the asset group (theatre) with its estimated fair value. Fair
value is determined based on a multiple of cash flows, which was seven times for 2005 and eight
times for the evaluations performed during 2006 and 2007. When estimated fair value is determined
to be lower than the carrying value of the asset group (theatre), the asset group (theatre) is
written down to its estimated fair value. Significant judgment is involved in estimating cash flows
and fair value. Managements estimates are based on historical and projected operating performance
as well as recent market transactions.
The Companys long-lived asset impairment losses are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
United States theatre properties |
|
$ |
5,626 |
|
|
$ |
9,467 |
|
|
$ |
12,423 |
|
International theatre properties |
|
|
750 |
|
|
|
4,142 |
|
|
|
1,799 |
|
|
|
|
Subtotal |
|
$ |
6,376 |
|
|
$ |
13,609 |
|
|
$ |
14,222 |
|
Intangible assets (see Note 10) |
|
|
|
|
|
|
1,334 |
|
|
|
4,611 |
|
Goodwill (see Note 10) |
|
|
45,301 |
|
|
|
13,594 |
|
|
|
67,725 |
|
|
|
|
Impairment of long-lived assets |
|
$ |
51,677 |
|
|
$ |
28,537 |
|
|
$ |
86,558 |
|
|
|
|
As a result of the NCM Transaction discussed in Note 7, and more specifically the modification
of the NCM Exhibitor Services Agreement with the Company, which significantly reduced the
contractual amounts paid to the Company, the Company evaluated the carrying value of its goodwill
as of March 31, 2007 resulting in the majority of the 2007 goodwill impairment charges reflected
above in the table.
12. DEFERRED CHARGES AND OTHER ASSETS NET
As of December 31, deferred charges and other assets net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Balance at |
|
|
December 31, 2006 |
|
December 31, 2007 |
Debt issue costs |
|
$ |
39,646 |
|
|
$ |
37,660 |
|
Less: Accumulated amortization |
|
|
(4,794 |
) |
|
|
(9,522 |
) |
|
|
|
Subtotal |
|
|
34,852 |
|
|
|
28,138 |
|
Long-term prepaid rents |
|
|
16,283 |
|
|
|
17,457 |
|
Construction advances and other deposits |
|
|
1,869 |
|
|
|
24,080 |
|
Equipment to be placed in service |
|
|
3,990 |
|
|
|
4,821 |
|
Brazil value added tax deposit |
|
|
3,943 |
|
|
|
409 |
|
Other |
|
|
2,155 |
|
|
|
2,488 |
|
|
|
|
Total |
|
$ |
63,092 |
|
|
$ |
77,393 |
|
|
|
|
F-20
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
During the year ended December 31, 2007, the Company incurred new debt issue costs of $244
related to the senior secured credit facility and wrote off $794 of debt issue costs related to its
repurchase of $332,066 aggregate principal amount of its 9% senior subordinated notes and $1,437
of debt issue costs related to its repurchase of $69,155 aggregate principal amount at maturity of
its 9 3/4% senior discount notes.
13. LONG-TERM DEBT
Long-term debt as of December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Balance at |
|
|
December 31, 2006 |
|
December 31, 2007 |
|
|
|
Cinemark, Inc. 9 3/4% senior discount notes due 2014 |
|
$ |
434,073 |
|
|
$ |
415,768 |
|
Cinemark USA, Inc. term loan |
|
|
1,117,200 |
|
|
|
1,101,686 |
|
Cinemark USA, Inc. 9% senior subordinated notes due 2013 |
|
|
350,820 |
|
|
|
184 |
|
Other long-term debt |
|
|
9,560 |
|
|
|
6,107 |
|
|
|
|
Total long-term debt |
|
|
1,911,653 |
|
|
|
1,523,745 |
|
Less current portion |
|
|
14,259 |
|
|
|
9,166 |
|
|
|
|
Long-term debt, less current portion |
|
$ |
1,897,394 |
|
|
$ |
1,514,579 |
|
|
|
|
Senior Discount Notes
On March 31, 2004, in connection with the MDP merger, Cinemark, Inc. issued approximately
$577,173 aggregate principal amount at maturity of 9 3/4% senior discount notes due 2014. Interest on
the notes accretes until March 15, 2009 up to their aggregate principal amount. Cash interest will
accrue and be payable semi-annually in arrears on March 15 and September 15, commencing on
September 15, 2009. Due to Cinemark, Inc.s holding company status, payments of principal and
interest under these notes will be dependent on loans, dividends and other payments from its
subsidiaries. Cinemark, Inc. may redeem all or part of the 9 3/4% senior discount notes on or after
March 15, 2009.
On September 22, 2005, Cinemark, Inc. repurchased $1,840 aggregate principal amount at
maturity of its 9 3/4% senior discount notes as part of an open market purchase for approximately
$1,302 including accreted interest. During May 2006, as part of four open market purchases,
Cinemark, Inc. repurchased $39,775 aggregate principal amount at maturity of its 9 3/4% senior
discount notes for approximately $31,745, including accreted interest of $5,381 and a cash premium
of $1,414. Cinemark, Inc. funded these transactions with available cash from its operations. The
Company recorded a loss on early retirement of debt of $46 and $2,375 during the years ended
December 31, 2005 and 2006, respectively, related to the repurchases noted above, which included
premiums paid and the write-off of unamortized debt issue costs.
During July and August 2007, Cinemark, Inc. repurchased in six open market purchases a total
of $47,000 aggregate principal amount at maturity of its 9 3/4% senior discount notes for
approximately $42,758, including accreted interest of $10,932 and a cash premium of $2,495. During
November 2007, Cinemark, Inc. repurchased in one open market purchase $22,155 aggregate principal
amount at maturity of its 9 3/4% senior discount notes for approximately $20,936 including accreted
interest of $5,660 and a cash premium of $1,472. Cinemark, Inc. funded these transactions with
proceeds from the Companys initial public offering. The Company recorded a loss on early
retirement of debt of $5,504 during the year ended December 31, 2007, related to the 2007
repurchases noted above, which consisted of premiums paid, other fees and the write-off of
unamortized debt issue costs.
As of December 31, 2007, the accreted principal balance of the notes was approximately
$415,768 and the aggregate principal amount at maturity was approximately $466,403.
The indenture governing the 9 3/4% senior discount notes contains covenants that limit, among
other things, dividends, transactions with affiliates, investments, sales of assets, mergers,
repurchases of Cinemark, Inc.s capital stock, liens and additional indebtedness. The dividend
restriction contained in the indenture prevents Cinemark, Inc. from paying a dividend or otherwise
distributing cash to its stockholders unless (1) it is not in default, and the distribution
would not cause it to be in default, under the indenture; (2) it would be able to incur at
least $1.00 more of indebtedness without the ratio of its consolidated cash flow to its fixed
charges (each as defined in the indenture, and calculated on a
F-21
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
pro forma basis for the most recently ended four full fiscal quarters for which internal
financial statements are available, using certain assumptions and modifications specified in the
indenture, and including the additional indebtedness then being incurred) falling below two to one
(the senior notes debt incurrence ratio test); and (3) the aggregate amount of distributions made
since March 31, 2004, including the distribution proposed, is less than the sum of (a) half of its
consolidated net income (as defined in the indenture) since February 11, 2003, (b) the net proceeds
to it from the issuance of stock since April 2, 2004, and (c) certain other amounts specified in
the indenture, subject to certain adjustments specified in the indenture. The dividend restriction
is subject to certain exceptions specified in the indenture.
Upon certain specified types of change of control of Cinemark, Inc., Cinemark, Inc. would be
required under the indenture to make an offer to repurchase all of the 9 3/4% senior discount notes
at a price equal to 101% of the accreted value of the notes plus accrued and unpaid interest, if
any, through the date of repurchase.
Senior Secured Credit Facility
On October 5, 2006, in connection with the Century Acquisition, Cinemark USA, Inc., entered
into a senior secured credit facility. The senior secured credit facility provides for a seven year
term loan of $1,120,000 and a $150,000 revolving credit line that matures in six years unless
Cinemark USA, Inc.s 9% senior subordinated notes have not been refinanced by August 1, 2012 with
indebtedness that matures no earlier than seven and one-half years after the closing date of the
senior secured credit facility, in which case the maturity date of the revolving credit line
becomes August 1, 2012. The net proceeds of the term loan were used to finance a portion of the
$531,225 cash portion of the Century Acquisition, repay in full the $253,500 outstanding under the
former senior secured credit facility, repay approximately $360,000 of existing indebtedness of
Century and to pay for related fees and expenses. The revolving credit line was left undrawn at
closing. The revolving credit line is used for general corporate purposes.
At December 31, 2007, there was $1,101,686 outstanding under the term loan and no borrowings
outstanding under the revolving credit line. Approximately $149,931 was available for borrowing
under the revolving credit line, giving effect to a $69 letter of credit outstanding. The average
interest rate on outstanding borrowings under the senior secured credit facility at December 31,
2007 was 6.7% per annum.
Under the term loan, principal payments of $2,800 are due each calendar quarter beginning
December 31, 2006 through September 30, 2012 and increase to $263,200 each calendar quarter from
December 31, 2012 to maturity at October 5, 2013. Prior to the amendment to the senior secured
credit facility discussed below, the term loan accrued interest, at Cinemark USA, Inc.s option,
at: (A) the base rate equal to the higher of (1) the prime lending rate as set forth on the British
Banking Association Telerate page 5 or (2) the federal funds effective rate from time to time plus
0.50%, plus a margin that ranges from 0.75% to 1.00% per annum, or (B) a eurodollar rate plus a
margin that ranges from 1.75% to 2.00% per annum, in each case as adjusted pursuant to Cinemark
USA, Inc.s corporate credit rating. Borrowings under the revolving credit line bear interest, at
Cinemark USA, Inc.s option, at: (A) a base rate equal to the higher of (1) the prime lending rate
as set forth on the British Banking Association Telerate page 5 and (2) the federal funds effective
rate from time to time plus 0.50%, plus a margin that ranges from 0.50% to 1.00% per annum, or
(B) a eurodollar rate plus a margin that ranges from 1.50% to 2.00% per annum, in each case as
adjusted pursuant to Cinemark USA, Inc.s consolidated net senior secured leverage ratio as defined
in the credit agreement. Cinemark USA, Inc. is required to pay a commitment fee calculated at the
rate of 0.50% per annum on the average daily unused portion of the revolving credit line, payable
quarterly in arrears, which rate decreases to 0.375% per annum for any fiscal quarter in which
Cinemark USA, Inc.s consolidated net senior secured leverage ratio on the last day of such fiscal
quarter is less than 2.25 to 1.0.
On March 14, 2007, Cinemark USA, Inc. amended its senior secured credit facility to, among
other things, modify the interest rate on the term loans under the senior secured credit facility,
modify certain prepayment terms and covenants, and facilitate the tender offer for the 9% senior
subordinated notes. The term loans now accrue interest, at Cinemark USA, Inc.s option, at: (A) the
base rate equal to the higher of (1) the prime lending rate as set forth on the British Banking
Association Telerate page 5, or (2) the federal funds effective rate from time to time plus 0.50%,
plus a margin that ranges from 0.50% to 0.75% per annum, or (B) a eurodollar rate plus a margin
that ranges from 1.50% to 1.75%,
per annum. In each case, the margin is a function of the corporate credit rating applicable to
the borrower. The interest rate on the revolving credit line was not amended. Additionally, the
amendment removed any obligation to prepay
F-22
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
amounts outstanding under the senior secured credit facility in an amount equal to the amount of
the net cash proceeds received from the NCM Transaction or from excess cash flows, and imposed a 1%
prepayment premium for one year on certain prepayments of the term loans.
Cinemark USA, Inc.s obligations under the senior secured credit facility are guaranteed by
Cinemark Holdings, Inc., Cinemark, Inc., CNMK Holding, Inc., and certain of Cinemark USA, Inc.s
domestic subsidiaries and are secured by mortgages on certain fee and leasehold properties and
security interests in substantially all of Cinemark USA, Inc.s and the guarantors personal
property, including, without limitation, pledges of all of Cinemark USA, Inc.s capital stock, all
of the capital stock of Cinemark, Inc., CNMK Holding, Inc. and certain of Cinemark USA, Inc.s
domestic subsidiaries and 65% of the voting stock of certain of its foreign subsidiaries.
The senior secured credit facility contains usual and customary negative covenants for
agreements of this type, including, but not limited to, restrictions on Cinemark USA, Inc.s
ability, and in certain instances, its subsidiaries and Cinemark Holdings, Inc.s, Cinemark,
Inc.s and CNMK Holding, Inc.s ability, to consolidate or merge or liquidate, wind up or dissolve;
substantially change the nature of its business; sell, transfer or dispose of assets; create or
incur indebtedness; create liens; pay dividends, repurchase stock and voluntarily repurchase or
redeem the 9 3/4% senior discount notes; and make capital expenditures and investments. The senior
secured credit facility also requires Cinemark USA, Inc. to satisfy a consolidated net senior
secured leverage ratio covenant as determined in accordance with the senior secured credit
facility. The dividend restriction contained in the senior secured credit facility prevents the
Company and any of our subsidiaries from paying a dividend or otherwise distributing cash to its
stockholders unless (1) the Company is not in default, and the distribution would not cause the
Company to be in default, under the senior secured credit facility; and (2) the aggregate amount of
certain dividends, distributions, investments, redemptions and capital expenditures made since
October 5, 2006, including the distribution currently proposed, is less than the sum of (a) the
aggregate amount of cash and cash equivalents received by Cinemark Holdings, Inc. or Cinemark USA,
Inc. as common equity since October 5, 2006, (b) Cinemark USA, Inc.s consolidated EBITDA minus
1.75 times its consolidated interest expense, each as defined in the senior secured credit
facility, since October 1, 2006, (c) $150 million and (d) certain other amounts specified in the
senior secured credit facility, subject to certain adjustments specified in the senior secured
credit facility. The dividend restriction is subject to certain exceptions specified in the senior
secured credit facility.
The senior secured credit facility also includes customary events of default, including, among
other things, payment default, covenant default, breach of representation or warranty, bankruptcy,
cross-default, material ERISA events, certain types of change of control, material money judgments
and failure to maintain subsidiary guarantees. If an event of default occurs, all commitments under
the senior secured credit facility may be terminated and all obligations under the senior secured
credit facility could be accelerated by the lenders, causing all loans outstanding (including
accrued interest and fees payable thereunder) to be declared immediately due and payable.
Senior Subordinated Notes
On February 11, 2003, Cinemark USA, Inc. issued $150,000 aggregate principal amount of
9% senior subordinated notes due 2013 and on May 7, 2003, Cinemark USA, Inc. issued an additional
$210,000 aggregate principal amount of 9% senior subordinated notes due 2013, collectively referred
to as the 9% senior subordinated notes. Interest is payable on February 1 and August 1 of each
year.
On April 6, 2004, as a result of the MDP Merger and in accordance with the terms of the
indenture governing the 9% senior subordinated notes, Cinemark USA, Inc. made a change of control
offer to repurchase the 9% senior subordinated notes at a purchase price of 101% of the aggregate
principal amount. Approximately $17,750 aggregate principal amount of the 9% senior subordinated
notes were tendered. The payment of the change of control price was funded with available cash by
Cinemark USA, Inc. on June 1, 2004.
During May 2006, as part of three open market purchases, Cinemark USA, Inc. repurchased
$10,000 aggregate principal amount of its 9% senior subordinated notes for approximately $10,977,
including cash premiums paid and accrued and unpaid interest. The transactions were funded by
Cinemark USA, Inc. with available cash from operations. The Company recorded a loss on early
retirement of debt of $126 during the year ended December 31, 2006 related to the 2006 repurchases discussed above, which included the write-off of unamortized debt issue costs
and tender offer repurchase costs, including premiums paid, related to the retired senior
subordinated notes.
F-23
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
On March 6, 2007, Cinemark USA, Inc. commenced an offer to purchase for cash any and all of
its then outstanding $332,250 aggregate principal amount of 9% senior subordinated notes. In
connection with the tender offer, Cinemark USA, Inc. solicited consents for certain proposed
amendments to the indenture to remove substantially all restrictive covenants and certain events of
default provisions. On March 20, 2007, the early settlement date, Cinemark USA, Inc. repurchased
$332,000 aggregate principal amount of 9% senior subordinated notes and executed a supplemental
indenture removing substantially all of the restrictive covenants and certain events of default.
Cinemark USA, Inc. used the proceeds from the NCM Transaction and cash on hand to purchase the
9% senior subordinated notes tendered pursuant to the tender offer and consent solicitation. On
March 20, 2007, the Company and the Bank of New York Trust Company, N.A., as trustee to the
Indenture dated February 11, 2003, executed the Fourth Supplemental Indenture. The Fourth
Supplemental Indenture became effective on March 20, 2007 and it amends the Indenture by
eliminating substantially all restrictive covenants and certain events of default provisions. On
April 3, 2007, Cinemark USA, Inc. repurchased an additional $66 aggregate principal amount of the
9% senior subordinated notes tendered after the early settlement date. The Company recorded a loss
on early retirement of debt of $7,952 during the year ended December 31, 2007, related to the 2007
repurchases discussed above, which consisted of tender offer repurchase costs, including premiums
paid and other fees, and the write-off of unamortized debt issue costs, partially offset by the
write-off of an unamortized bond premium.
As of December 31, 2007, Cinemark USA, Inc. had outstanding approximately $184 aggregate
principal amount of 9% senior subordinated notes. Cinemark USA, Inc. may redeem the remaining
9% senior subordinated notes on or after February 1, 2008.
Former Senior Secured Credit Facility
On April 2, 2004, Cinemark USA, Inc. amended its then existing senior secured credit facility
in connection with the MDP Merger. The amended senior secured credit facility provided for a
$260,000 seven year term loan and a $100,000 six and one-half year revolving credit line. The net
proceeds from the amended senior secured credit facility were used to repay the then existing term
loan of approximately $163,764 and to redeem the approximately $94,165 aggregate principal amount
of Cinemark USA, Inc.s then outstanding $105,000 aggregate principal amount 81/2% senior
subordinated notes due 2008 that were tendered pursuant to the tender offer.
On October 5, 2006, in connection with the Century Acquisition, the $253,500 outstanding under
the former senior secured credit facility was repaid in full with a portion of the proceeds from
the senior secured credit facility. During the year ended December 31, 2006, the Company recorded a
loss on early retirement of debt of $5,782 related to the write-off unamortized debt issue costs
associated with the former senior secured credit facility.
F-24
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Covenant Compliance and Debt Maturity
As of December 31, 2007, the Company was in full compliance with all agreements, including
related covenants, governing its outstanding debt. The Companys long-term debt at December 31,
2007 matures as follows:
|
|
|
|
|
2008 |
|
$ |
9,166 |
|
2009 |
|
|
13,775 |
|
2010 |
|
|
12,452 |
|
2011 |
|
|
11,200 |
|
2012 |
|
|
271,600 |
|
Thereafter |
|
|
1,256,187 |
|
|
|
|
|
Total |
|
$ |
1,574,380 |
|
|
|
|
|
The estimated fair value of the Companys long-term debt at December 31, 2007 was
approximately $1,552,892. This amount does not include prepayment penalties that would be incurred
upon the early extinguishment of certain debt issues.
Debt issue costs of $37,660, less accumulated amortization of $9,522, are related to the
senior discount notes, senior subordinated notes, the senior secured credit facility and other debt
agreements and are included in deferred charges and other assets net, on the consolidated balance
sheets at December 31, 2007 (See Note 12).
14. INTEREST RATE SWAP AGREEMENTS
During March 2007, the Company entered into two interest rate swap agreements with effective
dates of August 13, 2007 and terms of five years each. The interest rate swaps were designated to
hedge approximately $500,000 of the Companys variable rate debt obligations under its senior
secured credit facility. Under the terms of the interest rate swap agreements, the Company pays
fixed rates of 4.918% and 4.922% on $375,000 and $125,000, respectively, of variable rate debt and
receives interest at a variable rate based on the 3-month LIBOR. The 3-month LIBOR rate on each
reset date determines the variable portion of the interest rate swaps for the three-month period
following the reset date. No premium or discount was incurred upon the Company entering into the
interest rate swaps because the pay and receive rates on the interest rate swaps represented
prevailing rates for each counterparty at the time the interest rate swaps were consummated. The
interest rate swaps qualify for cash flow hedge accounting treatment in accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, and as such, the Company
has effectively hedged its exposure to variability in the future cash flows attributable to the
3-month LIBOR on $500,000 of variable rate debt. The change in the fair values of the interest rate
swaps is recorded on the Companys consolidated balance sheet as an asset or liability with the
effective portion of the interest rate swaps gains or losses reported as a component of other
comprehensive income and the ineffective portion reported in earnings.
As of December 31, 2007, the interest rate swaps were a liability with an aggregate fair value
of approximately $18,422, which has been recorded as a component of deferred revenues and other
long-term liabilities with a corresponding amount of $18,422 ($11,348 net of deferred taxes)
recorded as a decrease in accumulated other comprehensive income on the Companys consolidated
balance sheet. The interest rate swaps exhibited no ineffectiveness during the year ended December
31, 2007.
15. FOREIGN CURRENCY TRANSLATION
The accumulated other comprehensive income account in stockholders equity of $11,463 and
$32,695 at December 31, 2006 and December 31, 2007, respectively, includes the cumulative foreign
currency adjustments of $11,463 and $44,043, respectively, from translating the financial
statements of the Companys international subsidiaries.
In 2006 and 2007, all foreign countries where the Company has operations, including Brazil
were deemed non-highly inflationary. Thus, any fluctuation in the currency results in a cumulative
foreign currency translation adjustment to the accumulated other comprehensive income account
recorded as an increase in, or reduction of, stockholders equity.
F-25
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
On December 31, 2007, the exchange rate for the Brazilian real was 1.77 reais to the U.S.
dollar (the exchange rate was 2.14 reais to the U.S. dollar at December 31, 2006). As a result, the
effect of translating the December 31, 2007 Brazilian financial statements into U.S. dollars is
reflected as a cumulative foreign currency translation adjustment to the accumulated other
comprehensive income account as an increase in stockholders equity of $47,233. At December 31,
2007, the total assets of the Companys Brazilian subsidiaries were U.S. $204,661.
On December 31, 2007, the exchange rate for the Mexican peso was 10.92 pesos to the U.S.
dollar (the exchange rate was 10.82 pesos to the U.S. dollar at December 31, 2006). As a result,
the effect of translating the December 31, 2007 Mexican financial statements into U.S. dollars is
reflected as a cumulative foreign currency translation adjustment to the accumulated other
comprehensive income account as a decrease in stockholders equity of $949. At December 31, 2007,
the total assets of the Companys Mexican subsidiaries were U.S. $162,937.
16. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company had the following investments in and advances to affiliates at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
|
|
Investment in National CineMedia LLC investment, at equity |
|
$ |
5,353 |
|
|
$ |
|
|
Fandango, Inc. investment, at cost |
|
|
2,142 |
|
|
|
|
|
Investment in DCIP investment at equity 33% interest |
|
|
|
|
|
|
260 |
|
Cinemark Core Pacific, Ltd. (Taiwan) investment, at
cost 14% interest |
|
|
1,383 |
|
|
|
1,383 |
|
Other |
|
|
2,512 |
|
|
|
2,019 |
|
|
|
|
Total |
|
$ |
11,390 |
|
|
$ |
3,662 |
|
|
|
|
The Companys investment in NCM was reduced from $5,353 at December 31, 2006 to $0 at December
31, 2007 due to equity losses of $1,284 and the NCM Transaction discussed in Note 7.
The Companys investment in Fandango was reduced from $2,142 at December 31, 2006 to $0 at
December 31, 2007 as a result of the Fandango Transaction discussed in Note 9.
During the year ended December 31, 2007, the Company invested $1,500 for a one-third ownership
in DCIP. The Companys basis was reduced to $260 as a result of equity losses of $1,240 recorded
during 2007. See Note 8.
17. MINORITY INTERESTS IN SUBSIDIARIES
Minority ownership interests in subsidiaries of the Company are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
|
|
Cinemark Partners II 49.2% interest |
|
$ |
8,862 |
|
|
$ |
8,260 |
|
Cinemark Equity Holdings Corp. (Central America) 49.9% interest |
|
|
2,263 |
|
|
|
2,344 |
|
Cinemark Colombia, S.A. 49.0% interest |
|
|
2,483 |
|
|
|
2,766 |
|
Greeley Ltd. 49.0% interest |
|
|
1,422 |
|
|
|
1,244 |
|
Cinemark del Ecuador, S.A. 40.0% interest |
|
|
994 |
|
|
|
1,196 |
|
Cinemark de Mexico, S.A. de C.V. 0.6% interest |
|
|
346 |
|
|
|
326 |
|
Others |
|
|
243 |
|
|
|
46 |
|
|
|
|
Total |
|
$ |
16,613 |
|
|
$ |
16,182 |
|
|
|
|
F-26
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
18. CAPITAL STOCK
Common Common stockholders are entitled to vote on all matters submitted to a vote of the
Companys stockholders. Subject to the rights of holders of any then outstanding shares of the
Companys preferred stock, the Companys common stockholders are entitled to any dividends that may
be declared by the board of directors. The shares of the Companys common stock are not subject to
any redemption provisions. The Company has no issued and outstanding shares of preferred stock.
The Companys ability to pay dividends is effectively limited by its status as a holding
company and the terms of its indenture and its subsidiarys senior secured credit facility, which
also significantly restrict the ability of certain of the Companys subsidiaries to pay dividends
directly or indirectly to the Company. Furthermore, certain of the Companys foreign subsidiaries
currently have a deficit in retained earnings which prevents the Company from declaring and paying
dividends from those subsidiaries.
All stock information has been adjusted to give effect to a 2.9585-for-1 stock split effected
by the Company on April 9, 2007.
Share Based Awards Upon consummation of the MDP Merger on April 2, 2004, all Cinemark,
Inc.s stock options outstanding prior to the MDP Merger immediately vested and the majority were
repurchased and the then existing stock option plans, which included the Independent Director Stock
Options and the Long Term Incentive Plan, were terminated.
On September 30, 2004, Cinemark, Inc.s board of directors and the majority of its
stockholders approved the 2004 Long Term Incentive Plan (the 2004 Plan) under which 9,097,360
shares of common stock are available for issuance to selected employees, directors and consultants
of the Company. The 2004 Plan provided for restricted share grants, incentive option grants and
nonqualified option grants.
On August 2, 2006, Cinemark Holdings, Inc. was formed as the Delaware holding company of
Cinemark, Inc. Under a share exchange agreement dated August 7, 2006, each outstanding share of
Cinemark, Inc.s Class A common stock was exchanged for an equivalent number of shares of Cinemark
Holdings, Inc. common stock. The share exchange was completed on October 5, 2006.
In November 2006, Cinemark Holdings, Inc.s board of directors amended the 2004 Plan to
provide that no additional awards may be granted under the 2004 Plan. At that time, the Board of
Cinemark Holdings, Inc. and the majority of Cinemark Holdings, Inc.s stockholders approved the
2006 Long Term Incentive Plan (the 2006 Plan). The 2006 Plan is substantially similar to the 2004
Plan.
During October 2007, the Companys board of directors and a majority of its stockholders
approved an amendment to the 2006 Plan that allows option holders, at the discretion of the
Compensation Committee of the Companys board of directors, to exercise options to purchase common
stock by directing the Company to retain an equivalent number of shares having a fair market value
equal to all or part of the exercise price of the exercised options. The amendment did not result
in any additional compensation expense to the Company.
Stock Options On September 30, 2004, the Company granted options to purchase 6,986,731
shares of its common stock under the 2004 Plan at an exercise price of $7.63 per option. The
exercise price was equal to the fair market value of the Companys common stock on the date of
grant. Options to purchase 692,976 shares vested immediately and the remaining options granted in
2004 vest daily over the period ending April 1, 2009. The options expire ten years from the grant
date. On January 28, 2005, the Company granted options to purchase 12,055 shares of its common
stock under the Plan at an exercise price of $7.63 per option (equal to the market value at the
date of grant). The options vest daily over five years and the options expire ten years from the
grant date.
F-27
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
For each 2004 and 2005 grant, the fair values of the options were estimated on the dates of
grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
January 28, |
|
|
2004 |
|
2005 |
|
|
Grant |
|
Grant |
Expected life |
|
6.5 years |
|
6.5 years |
Expected volatility(1) |
|
39% |
|
44% |
Risk-free interest rate |
|
3.79% |
|
3.93% |
Dividend yield |
|
0% |
|
0% |
Grant date fair value |
|
$3.51 |
|
$3.80 |
|
|
|
(1) |
|
Expected volatility is based on historical volatility of the common
stock price of comparable public companies. |
Forfeitures were estimated based on the Companys historical stock option activity.
A summary of stock option activity and related information for the years ended December 31,
2005, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, 2005 |
|
December 31, 2006 |
|
December 31, 2007 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Price |
Outstanding at January 1 |
|
|
6,986,731 |
|
|
$ |
7.63 |
|
|
|
6,998,786 |
|
|
$ |
7.63 |
|
|
|
6,980,593 |
|
|
$ |
7.63 |
|
Granted |
|
|
12,055 |
|
|
$ |
7.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
(13,590 |
) |
|
$ |
7.63 |
|
|
|
(112,416 |
) |
|
$ |
7.63 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
(4,603 |
) |
|
$ |
7.63 |
|
|
|
(544,748 |
) |
|
$ |
7.63 |
|
|
|
|
Outstanding at December 31 |
|
|
6,998,786 |
|
|
$ |
7.63 |
|
|
|
6,980,593 |
|
|
$ |
7.63 |
|
|
|
6,323,429 |
|
|
$ |
7.63 |
|
|
|
|
Options exercisable at
December 31 |
|
|
2,444,533 |
|
|
$ |
7.63 |
|
|
|
3,834,295 |
|
|
$ |
7.63 |
|
|
|
4,647,460 |
|
|
$ |
7.63 |
|
|
|
|
All options outstanding at December 31, 2007 have a weighted average remaining contractual
life of approximately 6.75 years. The aggregate intrinsic value of stock options outstanding and
stock options exercisable at December 31, 2007 was approximately $59,251 and $43,547, respectively.
Below is a summary of the Companys nonvested stock options as of and for the year ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
Nonvested Stock Options |
|
Shares |
|
Fair Value |
Outstanding at January 1, 2007 |
|
|
3,146,298 |
|
|
$ |
3.51 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(1,357,913 |
) |
|
$ |
3.51 |
|
Forfeited |
|
|
(112,416 |
) |
|
$ |
3.51 |
|
|
|
|
Outstanding at December 31, 2007 |
|
|
1,675,969 |
|
|
$ |
3.51 |
|
|
|
|
F-28
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Restricted Stock - During October 2007, the Company issued 21,880 shares of restricted stock
to its independent directors at a purchase price of $0.001 per share. The fair value of the shares
was approximately $400 based on the market value of the Companys stock on the date of grant, which
was $18.28 per share. These restricted stock awards fully vest on June 29, 2008 after one year of
service. The Company recorded compensation expense of $200 related to these awards during the year
ended December 31, 2007. The remaining unrecognized compensation expense of $200 will be recognized
during 2008. Upon vesting, the Company receives a tax deduction. The recipients of the restricted
stock are entitled to receive dividends and to vote their respective shares, however the sale and
transfer of the restricted shares is prohibited during the restriction period. The restricted
shares are also subject to the terms and conditions of the 2006 Plan.
A summary of restricted stock activity for the years ended December 31, 2005, 2006 and 2007 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
Outstanding at January 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
21,880 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31 |
|
|
|
|
|
|
|
|
|
|
21,880 |
|
|
|
|
19. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated statements of cash
flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Cash paid for interest |
|
$ |
45,166 |
|
|
$ |
65,716 |
|
|
$ |
132,029 |
|
Net cash paid for income taxes |
|
$ |
2,911 |
|
|
$ |
27,044 |
|
|
$ |
139,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in construction lease obligations related to construction of theatres |
|
$ |
(4,312 |
) |
|
$ |
395 |
|
|
$ |
(2,546 |
) |
Changes in accounts payable and accrued expenses for the acquisition of
theatre properties and equipment |
|
$ |
8,945 |
|
|
$ |
3,662 |
|
|
$ |
(9,754 |
) |
Exchange of theatre properties |
|
$ |
|
|
|
$ |
5,400 |
|
|
$ |
|
|
Theatre properties and equipment acquired under capital lease |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,102 |
|
Issuance of common stock as a result of the Century Acquisition |
|
$ |
|
|
|
$ |
150,000 |
|
|
$ |
|
|
During December 2007, the Company sold the land and building for one of its theatres for
approximately $22,739, resulting in a gain of approximately $2,653. The Company has elected to use
these proceeds to purchase a like-kind property in accordance with certain tax guidelines in the
Internal Revenue Code. As a result of this election, the proceeds were deposited to an escrow
account to which the Company does not have access until it has identified the like-kind property to
purchase with the proceeds. As of December 31, 2007, the proceeds from this sale are included as
Deferred Charges and Other Assets on the Companys consolidated balance sheet.
F-29
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
20. INCOME TAXES
Income (loss) before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
(21,925 |
) |
|
$ |
7,315 |
|
|
$ |
188,117 |
|
Foreign |
|
|
5,925 |
|
|
|
6,211 |
|
|
|
12,765 |
|
|
|
|
Total |
|
$ |
(16,000 |
) |
|
$ |
13,526 |
|
|
$ |
200,882 |
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
17,653 |
|
|
$ |
19,280 |
|
|
$ |
123,754 |
|
Foreign |
|
|
2,115 |
|
|
|
2,416 |
|
|
|
5,519 |
|
State |
|
|
1,972 |
|
|
|
868 |
|
|
|
17,304 |
|
|
|
|
Total current expense |
|
|
21,740 |
|
|
|
22,564 |
|
|
|
146,577 |
|
Deferred: |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(9,778 |
) |
|
|
(14,532 |
) |
|
|
(33,103 |
) |
Foreign |
|
|
24 |
|
|
|
4,354 |
|
|
|
286 |
|
State |
|
|
(2,578 |
) |
|
|
299 |
|
|
|
(1,798 |
) |
|
|
|
Total deferred expense |
|
|
(12,332 |
) |
|
|
(9,879 |
) |
|
|
(34,615 |
) |
|
|
|
Income tax expense |
|
$ |
9,408 |
|
|
$ |
12,685 |
|
|
$ |
111,962 |
|
|
|
|
A reconciliation between income tax expense and taxes computed by applying the applicable
statutory federal income tax rate to income (loss) before income taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Computed normal tax expense |
|
$ |
(5,600 |
) |
|
$ |
4,734 |
|
|
$ |
70,309 |
|
Goodwill impairments |
|
|
14,310 |
|
|
|
4,722 |
|
|
|
23,050 |
|
Foreign inflation adjustments |
|
|
(2,332 |
) |
|
|
1,803 |
|
|
|
(620 |
) |
State and local income taxes, net of federal income tax benefit |
|
|
1,030 |
|
|
|
759 |
|
|
|
10,078 |
|
Foreign losses not benefited and other changes in valuation allowance |
|
|
(448 |
) |
|
|
1,926 |
|
|
|
(536 |
) |
Foreign tax rate differential |
|
|
(33 |
) |
|
|
946 |
|
|
|
3,721 |
|
Foreign dividends, including Section 965 |
|
|
3,158 |
|
|
|
578 |
|
|
|
1,405 |
|
Other net |
|
|
(677 |
) |
|
|
(2,783 |
) |
|
|
4,555 |
|
|
|
|
Income tax expense |
|
$ |
9,408 |
|
|
$ |
12,685 |
|
|
$ |
111,962 |
|
|
|
|
F-30
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
The tax effects of significant temporary differences and tax loss and tax credit carryforwards
comprising the net long-term deferred income tax liability at
December 31, 2006 and 2007 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
Deferred liabilities: |
|
|
|
|
|
|
|
|
Theatre properties and equipment |
|
$ |
125,950 |
|
|
$ |
164,407 |
|
Deferred intercompany sale |
|
|
7,207 |
|
|
|
13,719 |
|
Intangible asset contracts |
|
|
12,394 |
|
|
|
11,505 |
|
Intangible asset tradenames |
|
|
117,019 |
|
|
|
117,197 |
|
Intangible asset net favorable leases |
|
|
3,695 |
|
|
|
1,731 |
|
|
|
|
Total deferred liabilities |
|
|
266,265 |
|
|
|
308,559 |
|
|
|
|
Deferred assets: |
|
|
|
|
|
|
|
|
Deferred lease expenses |
|
|
3,937 |
|
|
|
7,375 |
|
Theatre properties and equipment |
|
|
5,915 |
|
|
|
7,248 |
|
Deferred revenue related to NCM Transaction and Fandango Transaction |
|
|
|
|
|
|
67,961 |
|
Capital lease obligations |
|
|
44,477 |
|
|
|
46,194 |
|
Bonds |
|
|
7,598 |
|
|
|
(989 |
) |
Interest rate swaps agreements |
|
|
0 |
|
|
|
7,074 |
|
Debt issue costs |
|
|
2,194 |
|
|
|
557 |
|
Tax loss carryforward |
|
|
15,535 |
|
|
|
14,359 |
|
AMT and other credit carryforwards |
|
|
2,583 |
|
|
|
2,903 |
|
Other expenses, not currently deductible for tax purposes |
|
|
(771 |
) |
|
|
2,489 |
|
|
|
|
Total deferred assets |
|
|
81,468 |
|
|
|
155,171 |
|
|
|
|
Net deferred income tax liability before valuation allowance |
|
|
184,797 |
|
|
|
153,388 |
|
Valuation allowance |
|
|
8,862 |
|
|
|
9,872 |
|
|
|
|
Net deferred income tax liability |
|
$ |
193,659 |
|
|
$ |
163,260 |
|
|
|
|
Net deferred tax liability foreign |
|
$ |
11,256 |
|
|
|
11,542 |
|
Net deferred tax liability U.S. |
|
|
182,403 |
|
|
|
151,718 |
|
|
|
|
Total of all deferrals |
|
$ |
193,659 |
|
|
$ |
163,260 |
|
|
|
|
The
Companys valuation allowance increased from $8,862 at December 31, 2006 to $9,872 at
December 31, 2007. This change was primarily due to utilization of Mexican asset tax credits and an
increase in foreign tax credit and state net operating loss carryovers.
The Companys foreign tax credit carryforwards begin expiring in 2015. The foreign net
operating losses began expiring in 2002; however, some losses may be carried forward indefinitely.
Certain of the Companys state net operating losses expired in 2006. The vast majority of state
net operating losses may be carried forward for up to twenty years with the last expiring year
being 2026.
Management continues to reinvest the undistributed earnings of its foreign subsidiaries.
Accordingly, deferred U.S. federal and state income taxes are not provided on the undistributed
earnings of these foreign subsidiaries. As of December 31, 2007, the cumulative amount of
undistributed earnings of these foreign subsidiaries on which the Company has not recognized income
taxes was approximately $141,000.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized
an increase to its liability for uncertain tax positions of approximately $1,093, which was
accounted for as a cumulative effect on beginning retained earnings at January 1, 2007. At the
adoption date, the Company had approximately $12,084 of gross unrecognized tax benefits, including
interest and penalties. Of this amount, $7,931 represents the amount of unrecognized tax benefits
that, if recognized, would impact the effective income tax rate. The Company recognizes interest
and/or penalties related to income tax matters in income tax expense. As of January 1, 2007 the
Company had $1,572 accrued for the payment of interest and penalties.
F-31
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
The following is a reconciliation of the total amounts of unrecognized tax benefits excluding
interest and penalties since the inception of FIN 48:
|
|
|
|
|
|
|
2007 |
|
Balance at January 1, 2007 |
|
$ |
10,512 |
|
Gross increases tax positions in prior period |
|
|
1,432 |
|
Gross
increases current-period tax positions |
|
|
549 |
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
12,493 |
|
|
|
|
|
As of December 31, 2007, the Company had $15,500 of gross unrecognized tax benefits, including
interest and penalties. Of this amount, $10,768 represents the amount of unrecognized tax benefits
that, if recognized, would impact the effective income tax rate. As of December 31, 2007 the
Company had $3,007 accrued for interest and/or penalties.
Cinemark files income tax returns in multiple jurisdictions throughout the US and Latin
America. In the US, we are currently under audit by the Internal Revenue Service for the 2002,
2003 and 2004 tax years. Due to uncertainty regarding the timing of the settlement of tax audits,
it is possible that there could be significant changes in the amounts of unrecognized tax benefits
in 2008, but the amount of such changes cannot be estimated as of December 31, 2007.
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and multiple state and foreign jurisdictions, and the Company is routinely under
audit by many different tax authorities. Management believes that its accrual for tax liabilities
is adequate for all open audit years based on its assessment of many factors including past
experience and interpretations of tax law. This assessment relies on estimates and assumptions and
may involve a series of complex judgments about future events. The Company is no longer subject to
income tax audits from the Internal Revenue Service for years before 2002. The Company is no
longer subject to state income tax examinations by tax authorities in its major state jurisdictions
for years before 2002. The Company is no longer subject to non-US income tax examinations by tax
authorities in its major non-U.S. tax jurisdictions for years before 1998.
21. COMMITMENTS AND CONTINGENCIES
Leases The Company conducts a significant part of its theatre operations in leased
properties under noncancelable operating and capital leases with terms generally ranging from 10 to
25 years. In addition to the minimum annual lease payments, some of the leases provide for
contingent rentals based on operating results of the theatre and most require the payment of taxes,
insurance and other costs applicable to the property. The Company can renew, at its option, a
substantial portion of the leases at defined or then market rental rates for various periods. Some
leases also provide for escalating rent payments throughout the lease term. A liability for
deferred lease expenses of $14,286 and $19,235 at December 31, 2006 and 2007, respectively, has
been provided to account for lease expenses on a straight-line basis, where lease payments are not
made on such a basis. Rent expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Fixed rent expense |
|
$ |
110,995 |
|
|
$ |
130,726 |
|
|
$ |
164,915 |
|
Contingent rent expense |
|
|
27,482 |
|
|
|
30,648 |
|
|
|
47,815 |
|
|
|
|
Facility lease expense |
|
|
138,477 |
|
|
|
161,374 |
|
|
|
212,730 |
|
Corporate office rent expense |
|
|
1,432 |
|
|
|
1,609 |
|
|
|
1,996 |
|
|
|
|
Total rent expense |
|
$ |
139,909 |
|
|
$ |
162,983 |
|
|
$ |
214,726 |
|
|
|
|
F-32
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Future minimum lease payments under noncancelable operating and capital leases that have
initial or remaining terms in excess of one year at December 31, 2007 are due as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Capital |
|
|
|
Leases |
|
|
Leases |
|
2008 |
|
$ |
177,089 |
|
|
$ |
17,002 |
|
2009 |
|
|
176,433 |
|
|
|
17,057 |
|
2010 |
|
|
172,767 |
|
|
|
17,310 |
|
2011 |
|
|
166,705 |
|
|
|
16,272 |
|
2012 |
|
|
161,947 |
|
|
|
16,423 |
|
Thereafter |
|
|
1,103,437 |
|
|
|
150,691 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,958,378 |
|
|
$ |
234,755 |
|
|
|
|
|
|
|
|
Amounts representing interest payments |
|
|
|
|
|
|
(113,585 |
) |
|
|
|
|
|
|
|
|
Present value of future minimum payments |
|
|
|
|
|
$ |
121,170 |
|
Current portion of capital lease obligations |
|
|
|
|
|
|
4,684 |
|
|
|
|
|
|
|
|
|
Capital lease obligations, less current portion |
|
|
|
|
|
$ |
116,486 |
|
|
|
|
|
|
|
|
|
Employment Agreements On March 12, 2004, the Company entered into new employment agreements
with certain executives which became effective upon the consummation of the MDP Merger on April 2,
2004. In addition, in connection with the MDP Merger, the Company paid a one-time special bonus in
the amount of $2,400 to Lee Roy Mitchell and in the amount of $50 to each of Alan Stock, Tim Warner
and Robert Copple. Set forth below is a summary of the Companys employment agreements.
Lee Roy Mitchell
The Company entered into an employment agreement with Lee Roy Mitchell pursuant to which Mr.
Mitchell currently serves as the Companys Chairman. The employment agreement became effective upon
the consummation of the MDP Merger. The initial term of the employment agreement is three years,
subject to an automatic extension for a one-year period, unless the employment agreement is
terminated. Mr. Mitchell received a base salary of approximately $795 during 2007, which is subject
to annual review for increase (but not decrease) each year by the Companys board of directors or
committee or delegate thereof. In addition, Mr. Mitchell is eligible to receive an annual cash
incentive bonus upon the Company meeting certain performance targets established by the board or
the compensation committee for the fiscal year. Mr. Mitchell is also entitled to additional fringe
benefits including life insurance benefits of not less than $5,000, disability benefits of not less
than 66% of base salary, a luxury automobile and a membership at a country club. The employment
agreement provides for severance payments upon termination of employment, the amount and nature of
which depends upon the reason for the termination of employment. If Mr. Mitchell resigns for good
reason or is terminated by the Company without cause (as defined in the agreement), Mr. Mitchell
will receive: accrued compensation (which includes base salary and a pro rata bonus) through the
date of termination; his annual base salary as in effect at the time
of termination for a period of twelve months following such
termination; an amount equal to the most recent annual bonus he
received prior to the date of termination; and any previously vested stock options and accrued benefits, such as retirement
benefits, in accordance with the terms of the plan or agreement pursuant to which such options or
benefits were granted. Mr. Mitchells equity-based or performance-based awards
will become fully vested and exercisable upon such termination or
resignation and Mr. Mitchell may
choose to continue to participate in the Companys benefit plan
for a period of twelve months from the date of such termination.
In the event Mr. Mitchells employment is terminated due to his death or disability, Mr.
Mitchell or his estate will receive: accrued compensation (which includes base salary and a pro
rata bonus) through the date of termination; any previously vested stock options and accrued
benefits, such as retirement benefits, in accordance with the terms of the plan or agreement
pursuant to which such options or benefits were granted; his annual base salary as in effect at the
time of termination for a period of six months following the date
Mr. Mitchell is first unable to substantially perform his
duties under his employment agreement; a lump sum payment equal
to an additional six months
F-33
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
of base
salary payable six months after the date of such six month period, and
any benefits payable to Mr. Mitchell and or his beneficiaries in accordance with the terms of any
applicable benefit plan.
In the event Mr. Mitchells employment is terminated by the Company for cause or under a
voluntary termination (as defined in the agreement), Mr. Mitchell will receive: accrued base salary
through the date of termination; and any previously vested rights under a stock option or similar
incentive compensation plan in accordance with the terms of such plan.
Unless
Mr. Mitchells employment is terminated by us for cause or
under a voluntary termination, Mr. Mitchell will also be entitled, for a period of five years, to tax preparation assistance
upon termination of his employment. The employment agreement contains various covenants, including covenants related to
confidentiality, non-competition (other than certain permitted activities as defined therein) and
non-solicitation.
Tandy Mitchell, Alan Stock, Robert Copple, Timothy Warner, Robert Carmony, John Lundin and Michael
Cavalier
The Company entered into executive employment agreements with each of Tandy Mitchell, Alan
Stock, Robert Copple, Timothy Warner, Robert Carmony, John Lundin and Michael Cavalier pursuant to
which Mrs. Mitchell and Messrs. Stock, Copple, Warner, Carmony, Lundin and Cavalier currently
serve, respectively, as the Companys Executive Vice President, Chief Executive Officer, Executive
Vice President and Chief Financial Officer, President and Chief Operating Officer, Senior Vice
President New Technology and Training, Vice President of Film Licensing and Senior Vice President
General Counsel. The employment agreements became effective upon the consummation of the MDP
Merger. The initial term of each employment agreement is three years, subject to automatic
extensions for a one-year period at the end of each year of the term, unless the agreement is
terminated. Pursuant to the employment agreements, each of these individuals receives a base
salary, which is subject to annual review for increase (but not decrease) each year by the
Companys board of directors or committee or delegate thereof. In addition, each of these
executives is eligible to receive an annual cash incentive bonus upon the Companys meeting certain
performance targets established by the Companys board of directors or the compensation committee
for the fiscal year.
The Companys board of directors has adopted a stock option plan and granted each executive
stock options to acquire such number of shares as set forth in that executives employment
agreement. The executives stock options vest and become exercisable twenty percent per year on a
daily pro rata basis and shall be fully vested and exercisable five years after the date of the
grant, as long as the executive remains continuously employed by the Company. Upon consummation of
a sale of the Company, the executives stock options will accelerate and become fully vested.
The employment agreement with each executive provides for severance payments on substantially
the same terms as the employment agreement for Mr. Mitchell. Each executive will also be entitled to office space and support services for a period of not
more than three months following the date of any termination except for termination for cause. The
employment agreements contain various covenants, including covenants related to confidentiality,
non-competition and non-solicitation.
Retirement Savings Plan The Company has a 401(k) retirement savings plan for the benefit of
all employees and makes contributions as determined annually by the board of directors.
Contribution payments of $1,295 and $1,430 were made in 2006 (for plan year 2005) and 2007 (for
plan year 2006), respectively. A liability of approximately $1,795 has been recorded at December
31, 2007 for contribution payments to be made in 2008 (for plan year 2007).
Letters of Credit and Collateral The Company had outstanding letters of credit of $69, in
connection with property and liability insurance coverage, at December 31, 2006 and 2007.
Litigation and Litigation Settlements DOJ Litigation In March 1999, the Department of
Justice (DOJ) filed suit in the U.S. District Court, Northern District of Ohio, Eastern Division,
against the Company alleging certain
F-34
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
violations of the Americans with Disabilities Act of 1990 (the
ADA) relating to the Companys wheelchair seating arrangements and seeking remedial action. An
order granting summary judgment to the Company was issued in November 2001. The Department of
Justice appealed the district courts ruling with the Sixth Circuit Court of Appeals. On November
7, 2003, the Sixth Circuit Court of Appeals reversed the summary judgment and sent the case back to
the district court for further review without deciding whether wheelchair seating at the Companys
theatres comply with the ADA. The Sixth Circuit Court of Appeals also stated that if the district
court found that the theatres did not comply with the ADA, any remedial action should be
prospective only. The Company and the United States have resolved this lawsuit. A consent order was
entered by the U.S. District Court for the Northern District of Ohio, Eastern Division, on November
15, 2004. This consent order fully and finally resolves the United States v. Cinemark USA, Inc.
lawsuit, and all claims asserted against the Company in that lawsuit have been dismissed with
prejudice. Under the consent order, the Company will make modifications to wheelchair seating
locations in fourteen stadium-style movie theatres, and spacing and companion seating modifications
at 67 auditoriums at other stadium-styled movie theatres. These modifications must be completed by
November 2009. Upon completion of these modifications, such theatres will comply with all existing
and pending ADA wheelchair seating requirements, and no further modifications will be required to
the Companys other stadium-style movie theatres in the United States existing on the date of the
consent order. Under the consent order, the DOJ approved the seating plans for nine stadium-styled
movie theatres under construction. The Company and the DOJ have also created a safe harbor
framework for the Company to construct all of its future stadium-style movie theatres. The DOJ has
stipulated that all theatres built in compliance with the consent order will comply with the
wheelchair seating requirements of the ADA. The Company believes that its obligations under the
consent order are not material in the aggregate to its financial position, results of operations
and cash flows.
From time to time, the Company is involved in other various legal proceedings arising from the
ordinary course of its business operations, such as personal injury claims, employment matters,
landlord-tenant disputes and contractual disputes, most of which are covered by insurance. The
Company believes its potential liability with respect to proceedings currently pending is not
material, individually or in the aggregate, to the Companys financial position, results of
operations and cash flows.
F-35
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
22. SEGMENTS
At December 31, 2007, the Company identified its international market and its U.S. market as
separate reportable operating segments. The international segment consists of operations in Mexico,
Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica, Panama and
Colombia. The U.S. segment includes U.S. and Canada operations. Each segments revenue is derived
from admissions and concession sales and other ancillary revenues, primarily screen advertising.
The primary measure of segment profit and loss the Company uses to evaluate performance and
allocate its resources is Adjusted EBITDA, as defined in the reconciliation table below. The
Companys management evaluates the performance of its assets on a consolidated basis. Below is a
breakdown of select financial information by reportable operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
757,902 |
|
|
$ |
936,684 |
|
|
$ |
1,352,042 |
|
International |
|
|
264,314 |
|
|
|
285,854 |
|
|
|
333,624 |
|
Eliminations |
|
|
(1,619 |
) |
|
|
(1,944 |
) |
|
|
(2,825 |
) |
|
|
|
Total revenues |
|
$ |
1,020,597 |
|
|
$ |
1,220,594 |
|
|
$ |
1,682,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
155,987 |
|
|
$ |
217,845 |
|
|
$ |
309,800 |
|
International |
|
|
54,148 |
|
|
|
53,770 |
|
|
|
67,138 |
|
|
|
|
Total Adjusted EBITDA |
|
$ |
210,135 |
|
|
$ |
271,615 |
|
|
$ |
376,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
U.S. |
|
$ |
80,786 |
|
|
$ |
110,496 |
|
International |
|
|
26,295 |
|
|
|
35,808 |
|
|
|
|
Total Capital Expenditures |
|
$ |
107,081 |
|
|
$ |
146,304 |
|
|
|
|
The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Net income (loss) |
|
$ |
(25,408 |
) |
|
$ |
841 |
|
|
$ |
88,920 |
|
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
9,408 |
|
|
|
12,685 |
|
|
|
111,962 |
|
Interest expense (1) |
|
|
84,082 |
|
|
|
109,328 |
|
|
|
145,596 |
|
Gain on NCM Transaction |
|
|
|
|
|
|
|
|
|
|
(210,773 |
) |
Gain on Fandango transaction |
|
|
|
|
|
|
|
|
|
|
(9,205 |
) |
Loss on early retirement of debt |
|
|
46 |
|
|
|
8,283 |
|
|
|
13,456 |
|
Other income |
|
|
(4,627 |
) |
|
|
(3,768 |
) |
|
|
(15,497 |
) |
Termination of profit participation agreement |
|
|
|
|
|
|
|
|
|
|
6,952 |
|
Depreciation and amortization |
|
|
81,952 |
|
|
|
95,821 |
|
|
|
148,781 |
|
Amortization of net favorable leases |
|
|
4,174 |
|
|
|
3,649 |
|
|
|
2,935 |
|
Impairment of long-lived assets |
|
|
51,677 |
|
|
|
28,537 |
|
|
|
86,558 |
|
(Gain) loss on sale of assets and other |
|
|
4,436 |
|
|
|
7,645 |
|
|
|
(2,953 |
) |
Deferred lease expenses |
|
|
3,137 |
|
|
|
4,717 |
|
|
|
5,979 |
|
Amortization of long-term prepaid rents |
|
|
1,258 |
|
|
|
1,013 |
|
|
|
1,146 |
|
Share based awards compensation expense |
|
|
|
|
|
|
2,864 |
|
|
|
3,081 |
|
|
|
|
Adjusted EBITDA |
|
$ |
210,135 |
|
|
$ |
271,615 |
|
|
$ |
376,938 |
|
|
|
|
|
|
|
(1) Includes amortization of debt issue costs. |
F-36
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
Financial Information About Geographic Areas
We have operations in the U.S., Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru,
Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Colombia, which are reflected in the
consolidated financial statements. Below is a breakdown of select financial information by
geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
2005 |
|
2006 |
|
2007 |
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada |
|
$ |
757,902 |
|
|
$ |
936,684 |
|
|
$ |
1,352,042 |
|
Mexico |
|
|
74,919 |
|
|
|
71,589 |
|
|
|
74,983 |
|
Brazil |
|
|
112,182 |
|
|
|
128,555 |
|
|
|
157,158 |
|
Other foreign countries |
|
|
77,213 |
|
|
|
85,710 |
|
|
|
101,483 |
|
Eliminations |
|
|
(1,619 |
) |
|
|
(1,944 |
) |
|
|
(2,825 |
) |
|
|
|
Total |
|
$ |
1,020,597 |
|
|
$ |
1,220,594 |
|
|
$ |
1,682,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2007 |
|
|
|
Theatres properties and
equipment, net |
|
|
|
|
|
|
|
|
U.S. and Canada |
|
$ |
1,169,456 |
|
|
$ |
1,137,244 |
|
Mexico |
|
|
51,272 |
|
|
|
59,201 |
|
Brazil |
|
|
55,749 |
|
|
|
72,635 |
|
Other foreign countries |
|
|
48,095 |
|
|
|
44,986 |
|
|
|
|
Total |
|
$ |
1,324,572 |
|
|
$ |
1,314,066 |
|
|
|
|
23. OTHER RELATED PARTY TRANSACTIONS
The Company leases one theatre from Plitt Plaza Joint Venture (Plitt Plaza) on a
month-to-month basis. Plitt Plaza is indirectly owned by Lee Roy Mitchell. Annual rent is
approximately $118 plus certain taxes, maintenance expenses and insurance. The Company recorded
$152, $149 and $120 of facility lease and other operating expenses payable to Plitt Plaza joint
venture during the years ended December 31, 2005, 2006 and 2007, respectively.
The Company manages one theatre for Laredo Theatre, Ltd. (Laredo). The Company is the sole
general partner and owns 75% of the limited partnership interests of Laredo. Lone Star Theatres,
Inc. owns the remaining 25% of the limited partnership interests in Laredo and is 100% owned by Mr.
David Roberts, Lee Roy Mitchells son-in-law. Under the agreement, management fees are paid by
Laredo to the Company at a rate of 5% of annual theatre revenues up to $50,000 and 3% of annual
theatre revenues in excess of $50,000. The Company recorded $201, $191 and $82 of management fee
revenues during the years ended December 31, 2005, 2006 and 2007, respectively, and received $675,
$600 and $0 of distributions from Laredo during the years ended December 31, 2005, 2006 and 2007,
respectively. All such amounts are included in the Companys consolidated financial statements with
the intercompany amounts eliminated in consolidation.
The Company leases 25 theatres and two parking facilities from Syufy Enterprises, LP (Syufy)
or affiliates of Syufy, which owns approximately 8% of the Companys issued and outstanding shares
of common stock. Raymond Syufy is one of the Companys directors and is an officer of the general
partner of Syufy. Of these 27 leases, 22 have fixed minimum annual rent in an aggregate amount of
approximately $23,280. Of these 22 leases with fixed minimum annual rent, 17 have a remaining lease
term plus extension option(s) that exceed 30 years, four have a remaining lease term plus extension
option(s) that exceed 17 years, and one has a remaining lease term of approximately two years.
Three
F-37
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
of these 22 leases have triggering events that allow the Company to convert the fixed minimum
rent to a fixed percentage of gross sales as defined in the lease with the further right to
terminate the lease if the theatre level cash flow drops below $0. Five of these 22 leases have
triggering events that allow the Company to terminate the lease prior to expiration of the term.
The five leases without minimum annual rent have rent based upon a specified percentage of gross
sales as defined in the lease with no minimum annual rent. Four of these percentage rent leases
expire in approximately nine months but have automatic 12 month renewal options, and the Company
has the right to terminate the leases if theatre level cash flow drops below $0. One of these
percentage rent leases has a remaining term of 9 months and Syufy has the right to terminate this
lease prior to the end of the term.
The Company also has an office lease with Syufy for corporate office space in San Rafael,
California. The lease will expire in September 2008. The lease has a fixed minimum annual rent of
approximately $300.
The Company entered into an amended and restated profit participation agreement on March 12,
2004 with its CEO, Alan Stock, which became effective on April 2, 2004, and amended the profit
participation agreement with Mr. Stock in effect since May 2002. Under the agreement, Mr. Stock
received a profit interest in two theatres once the Company recovered its capital investment in
these theatres plus its borrowing costs. After the Companys initial public offering, the Company
exercised its option to terminate the amended and restated profit participation agreement and
purchased Mr. Stocks interest in the theatres on May 3, 2007 for a price of $6,853 pursuant to the
terms of the agreement. The Company also paid payroll taxes of approximately $99 related to the
payment made to terminate the amended and restated profit participation agreement. The aggregate
amount paid of $6,952 is reflected within cost of operations in the Companys consolidated
statement of operations for the year ended December 31, 2007 and the agreement with Mr. Stock has
been terminated.
Prior to the completion of the Century Acquisition, Century Theatres, Inc. owned certain
shares of Fandango, Inc., an on-line ticketing distributor. In connection with the Century
Acquisition, the Company agreed to pay Syufy the cash proceeds received by the Company in
connection with any sale of such shares of Fandango, Inc. up to a maximum amount of $2,800. As
discussed in Note 9, the Company sold all of its shares of Fandango, Inc. stock during May 2007 for
approximately $14,147 of consideration and paid $2,800 of the cash consideration to Syufy in
accordance with the Century Acquisition agreement.
24. VALUATION AND QUALIFYING ACCOUNTS
The Companys valuation allowance for deferred tax assets for the years ended December 31,
2005, 2006 and 2007 were as follows:
|
|
|
|
|
|
|
Valuation Allowance |
|
|
|
for Deferred |
|
|
|
Tax Assets |
|
Balance at January 1, 2005 |
|
$ |
7,383 |
|
Additions |
|
|
2,232 |
|
Deductions |
|
|
(2,680 |
) |
|
|
|
|
Balance at December 31, 2005 |
|
$ |
6,935 |
|
Additions |
|
|
4,225 |
|
Deductions |
|
|
(2,298 |
) |
|
|
|
|
Balance at December 31, 2006 |
|
$ |
8,862 |
|
Additions |
|
|
2,370 |
|
Deductions |
|
|
(1,360 |
) |
|
|
|
|
Balance at December 31, 2007 |
|
$ |
9,872 |
|
|
|
|
|
F-38
CINEMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except share and per share data
25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter(5) |
|
Fourth Quarter (1) (2) |
|
Full Year |
|
|
|
Revenues |
|
$ |
245,989 |
|
|
$ |
295,105 |
|
|
$ |
287,995 |
|
|
$ |
391,505 |
|
|
$ |
1,220,594 |
|
Operating income |
|
$ |
24,574 |
|
|
$ |
43,482 |
|
|
$ |
30,131 |
|
|
$ |
29,182 |
|
|
$ |
127,369 |
|
Net income (loss) |
|
$ |
5,790 |
|
|
$ |
13,104 |
|
|
$ |
2,276 |
|
|
$ |
(20,329 |
) |
|
$ |
841 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.03 |
|
|
$ |
(0.22 |
) |
|
$ |
0.01 |
|
Diluted |
|
$ |
0.07 |
|
|
$ |
0.15 |
|
|
$ |
0.03 |
|
|
$ |
(0.22 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
First Quarter(3) |
|
Second Quarter |
|
Third Quarter(5) |
|
Fourth Quarter (4) (5) |
|
Full Year |
|
|
|
Revenues |
|
$ |
378,022 |
|
|
$ |
440,036 |
|
|
$ |
471,499 |
|
|
$ |
393,284 |
|
|
$ |
1,682,841 |
|
Operating income (loss) |
|
$ |
(10,326 |
) |
|
$ |
43,518 |
|
|
$ |
66,444 |
|
|
$ |
13,324 |
|
|
$ |
112,960 |
|
Net income (loss) |
|
$ |
118,211 |
|
|
$ |
47,870 |
|
|
$ |
(23,396 |
) |
|
$ |
(53,765 |
) |
|
$ |
88,920 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.28 |
|
|
$ |
0.46 |
|
|
$ |
(0.22 |
) |
|
$ |
(0.50 |
) |
|
$ |
0.87 |
|
Diluted |
|
$ |
1.25 |
|
|
$ |
0.45 |
|
|
$ |
(0.22 |
) |
|
$ |
(0.50 |
) |
|
$ |
0.85 |
|
|
|
|
(1) |
|
During the fourth quarter of 2006, the Company acquired Century Theatres, Inc.
(See Note 6). |
|
(2) |
|
During the fourth quarter of 2006, the Company recorded goodwill impairment
charges of $13,594 and recorded additional interest expense related to the senior secured
credit facility. |
|
(3) |
|
During the first quarter of 2007, the Company recorded a gain of $210,773 on
the sale of a portion of its ownership in NCM (See Note 7) and recorded impairment
charges of $49,730 (See Notes 10 and 11). |
|
(4) |
|
During the fourth quarter of 2007, the Company recorded impairment charges of
$26,169 (See Notes 10 and 11). |
|
(5) |
|
Diluted earnings per share calculations for the third quarter 2006, the third
quarter 2007 and fourth quarter 2007 exclude common share equivalents of 743, 2,220, and
2,382, respectively, as they were anti-dilutive. |
26. SUBSEQUENT EVENT DIVIDEND DECLARATION
On February 26, 2008, the Companys board of directors declared a cash dividend for the fourth
quarter of 2007 of $0.18 per share of common stock payable to stockholders of record on March 6,
2008. The dividend was paid on March 14, 2008.
27. SUBSEQUENT EVENT REPURCHASE OF SENIOR DISCOUNT NOTES
On March 20, 2008, in one open market purchase, the Company repurchased $10,000 aggregate
principal amount at maturity of its 9 3/4% senior discount notes for approximately $8,950. The
Company funded the transaction with proceeds from its initial public offering. As a result of the
transaction, the Company will record a loss on early retirement of debt of approximately $40, which
primarily includes the write-off of unamortized debt issue costs related to the repurchased notes.
F-39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members of
National CineMedia, LLC
Centennial, Colorado
We have audited the accompanying balance sheets of National CineMedia LLC (the Company) as of
December 27, 2007 and as of December 28, 2006 and the related statements of operations, members
equity (deficit) and cash flows for the period February 13, 2007 through December 27, 2007, the
period December 29, 2006 through February 12, 2007, for the year ended December 28, 2006, and for
the period March 29, 2005 through December 29, 2005. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits 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. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also 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,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial
position of National CineMedia LLC as of December 27, 2007 and the related statements of
operations, members equity (deficit) and cash flows for the period February 13, 2007 through
December 27, 2007, the period December 29, 2006 through February 12, 2007, for the year ended
December 28, 2006, and for the period March 29, 2005 through December 29, 2005 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 21, 2008
F-40
`
NATIONAL CINEMEDIA, LLC
BALANCE SHEETS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
December 27, 2007 |
|
|
December 28, 2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7.5 |
|
|
$ |
6.7 |
|
Receivables, net of allowance of $1.5 million in 2007
and $1.1 million in 2006 |
|
|
91.6 |
|
|
|
63.9 |
|
Prepaid expenses |
|
|
1.9 |
|
|
|
1.6 |
|
Prepaid management fees to managing member |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
101.5 |
|
|
|
72.2 |
|
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $17.3 million in 2007 and $12.7 million in 2006 |
|
|
22.2 |
|
|
|
12.6 |
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Debt issuance costs, net |
|
|
13.0 |
|
|
|
0.2 |
|
Investment in affiliate |
|
|
7.0 |
|
|
|
|
|
Restricted cash |
|
|
0.3 |
|
|
|
|
|
Other assets |
|
|
0.2 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
20.5 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
144.2 |
|
|
$ |
90.0 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6.6 |
|
|
$ |
5.4 |
|
Amounts due to founding members |
|
|
15.8 |
|
|
|
53.9 |
|
Amounts due to managing member |
|
|
16.7 |
|
|
|
|
|
Accrued payroll and related expenses |
|
|
7.2 |
|
|
|
6.4 |
|
Accrued expenses |
|
|
10.0 |
|
|
|
5.5 |
|
Deferred revenue |
|
|
3.3 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
59.6 |
|
|
|
74.6 |
|
OTHER LIABILITIES: |
|
|
|
|
|
|
|
|
Unit option plan payable |
|
|
|
|
|
|
1.9 |
|
Interest rate swap agreements and other liabilities |
|
|
14.4 |
|
|
|
|
|
Borrowings |
|
|
784.0 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
798.4 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
858.0 |
|
|
|
86.5 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEMBERS EQUITY (DEFICIT) |
|
|
(713.8 |
) |
|
|
3.5 |
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
144.2 |
|
|
$ |
90.0 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-41
NATIONAL CINEMEDIA, LLC
STATEMENTS OF OPERATIONS
(In millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Period |
|
|
|
|
|
|
|
|
February 13, |
|
|
December 29, |
|
|
|
|
|
Period March |
|
|
2007 through |
|
|
2006 through |
|
Year Ended |
|
29, 2005 through |
|
|
December 27, |
|
|
February 12, |
|
December 28, |
|
December 29, |
|
|
2007 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising (including revenue from
founding members of $40.9 and $0.0
for all remaining periods) |
|
$ |
282.7 |
|
|
|
$ |
20.6 |
|
|
$ |
188.2 |
|
|
$ |
56.0 |
|
Administrative feesfounding members |
|
|
|
|
|
|
|
0.1 |
|
|
|
5.4 |
|
|
|
30.8 |
|
Meetings and events |
|
|
25.4 |
|
|
|
|
2.9 |
|
|
|
25.4 |
|
|
|
11.7 |
|
Other |
|
|
0.2 |
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
Total |
|
|
308.3 |
|
|
|
|
23.6 |
|
|
|
219.3 |
|
|
|
98.8 |
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising operating costs |
|
|
9.1 |
|
|
|
|
1.1 |
|
|
|
9.2 |
|
|
|
6.3 |
|
Meetings and events operating costs |
|
|
15.4 |
|
|
|
|
1.4 |
|
|
|
11.1 |
|
|
|
5.4 |
|
Network costs |
|
|
13.3 |
|
|
|
|
1.7 |
|
|
|
14.7 |
|
|
|
9.2 |
|
Theatre access fees/circuit share
costsfounding members |
|
|
41.5 |
|
|
|
|
14.4 |
|
|
|
130.1 |
|
|
|
38.6 |
|
Selling and marketing costs |
|
|
40.9 |
|
|
|
|
5.2 |
|
|
|
38.2 |
|
|
|
24.9 |
|
Administrative costs |
|
|
10.0 |
|
|
|
|
2.8 |
|
|
|
16.4 |
|
|
|
9.8 |
|
Administrative fee- managing member |
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance plan costs |
|
|
1.5 |
|
|
|
|
0.4 |
|
|
|
4.2 |
|
|
|
8.5 |
|
Depreciation and amortization |
|
|
5.0 |
|
|
|
|
0.7 |
|
|
|
4.8 |
|
|
|
3.0 |
|
Other costs |
|
|
0.9 |
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
146.8 |
|
|
|
|
27.7 |
|
|
|
229.3 |
|
|
|
105.7 |
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
161.5 |
|
|
|
|
(4.1 |
) |
|
|
(10.0 |
) |
|
|
(6.9 |
) |
Interest Expense, Net |
|
|
47.8 |
|
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
113.7 |
|
|
|
$ |
(4.2 |
) |
|
$ |
(10.5 |
) |
|
|
(6.9 |
) |
|
|
|
|
|
|
See accompanying notes to financial statements.
F-42
NATIONAL CINEMEDIA, LLC
STATEMENTS OF MEMBERS EQUITY/ (DEFICIT)
AND COMPREHENSIVE INCOME
(In millions, except share data)
|
|
|
|
|
|
|
Total |
|
Members Equity |
|
|
|
|
BalanceMarch 29, 2005 |
|
|
|
|
Issuance of initial units at inception date in exchange for
contributed assets, net of liabilities assumed |
|
$ |
0.9 |
|
Issuance of additional units in exchange for cash |
|
$ |
7.3 |
|
Contribution of Severance Plan payments |
|
$ |
8.5 |
|
Net loss |
|
$ |
(6.9 |
) |
|
|
|
|
BalanceDecember 29, 2005 |
|
$ |
9.8 |
|
|
|
|
|
Capital contribution from Members |
|
$ |
0.9 |
|
Contribution of Severance Plan payments |
|
$ |
4.2 |
|
Distribution to Members |
|
$ |
(0.9 |
) |
Net loss |
|
$ |
(10.5 |
) |
|
|
|
|
BalanceDecember 28, 2006 |
|
$ |
3.5 |
|
|
|
|
|
Contribution of Severance Plan payments |
|
$ |
0.4 |
|
Net loss |
|
$ |
(4.2 |
) |
|
|
|
|
BalanceFebruary 12, 2007 |
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
|
|
Members Equity |
|
|
|
|
BalanceFebruary 13, 2007 |
|
$ |
(0.3 |
) |
Contribution of Severance Plan payments |
|
$ |
1.5 |
|
Capital contribution from managing member |
|
$ |
746.1 |
|
Capital contribution from founding members |
|
$ |
11.2 |
|
Distribution to managing member |
|
$ |
(53.3 |
) |
Distributions to founding members |
|
$ |
(1,521.6 |
) |
Reclassification of unit option plan |
|
$ |
2.3 |
|
Comprehensive Income: |
|
|
|
|
Unrealized (loss) on cash flow hedge |
|
$ |
(14.4 |
) |
Net income |
|
$ |
113.7 |
|
|
|
|
|
Total Comprehensive Income, net of tax |
|
$ |
99.3 |
|
Share-based compensation expense |
|
$ |
1.0 |
|
|
|
|
|
BalanceDecember 27, 2007 |
|
$ |
(713.8 |
) |
|
|
|
|
See accompanying notes to financial statements.
F-43
NATIONAL CINEMEDIA, LLC
STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Period |
|
|
|
|
|
|
|
|
February 13, |
|
|
December 29, |
|
|
|
|
|
Period March |
|
|
2007 through |
|
|
2006 through |
|
Year Ended |
|
29, 2005 through |
|
|
December 27, |
|
|
February 12, |
|
December 28, |
|
December 29, |
|
|
2007 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) |
|
$ |
113.7 |
|
|
|
$ |
(4.2 |
) |
|
$ |
(10.5 |
) |
|
$ |
(6.9 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5.0 |
|
|
|
|
0.7 |
|
|
|
4.8 |
|
|
|
3.0 |
|
Non-cash severance plan and share-based compensation |
|
|
2.5 |
|
|
|
|
0.7 |
|
|
|
6.1 |
|
|
|
8.0 |
|
Amortization of debt issuance costs and loss on
repayment of debt |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivablesnet |
|
|
(40.3 |
) |
|
|
|
12.6 |
|
|
|
(27.3 |
) |
|
|
(36.6 |
) |
Increase (decrease) in accounts payable and accrued
expenses |
|
|
10.4 |
|
|
|
|
(4.4 |
) |
|
|
4.4 |
|
|
|
8.2 |
|
(Decrease) increase in amounts due to founding
members and managing member |
|
|
(51.1 |
) |
|
|
|
(3.7 |
) |
|
|
33.4 |
|
|
|
20.5 |
|
Payment of severance plan costs |
|
|
|
|
|
|
|
|
|
|
|
(3.5 |
) |
|
|
|
|
Increase (decrease)in other |
|
|
(1.3 |
) |
|
|
|
0.5 |
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
40.6 |
|
|
|
|
2.2 |
|
|
|
8.3 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(13.8 |
) |
|
|
|
(0.5 |
) |
|
|
(6.3 |
) |
|
|
(5.9 |
) |
Investment in restricted cash |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in investment in affiliate |
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(21.1 |
) |
|
|
|
(0.5 |
) |
|
|
(6.3 |
) |
|
|
(5.9 |
) |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement (payment) of offering costs and fees |
|
|
4.7 |
|
|
|
|
(0.1 |
) |
|
|
(4.0 |
) |
|
|
|
|
Proceeds of short-term borrowings from founding members |
|
|
|
|
|
|
|
|
|
|
|
3.0 |
|
|
|
9.5 |
|
Repayments of short-term borrowings to founding members |
|
|
|
|
|
|
|
|
|
|
|
(4.3 |
) |
|
|
(8.2 |
) |
Proceeds from borrowings |
|
|
924.0 |
|
|
|
|
13.0 |
|
|
|
66.0 |
|
|
|
|
|
Repayments of borrowings |
|
|
(150.0 |
) |
|
|
|
(13.0 |
) |
|
|
(56.0 |
) |
|
|
|
|
Payment of debt issuance costs |
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3 |
|
Contributions from managing member |
|
|
746.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from founding member contributions |
|
|
7.5 |
|
|
|
|
|
|
|
|
0.9 |
|
|
|
0.2 |
|
Distribution to founding members and managing member |
|
|
(1,538.0 |
) |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(20.3 |
) |
|
|
|
(0.1 |
) |
|
|
4.7 |
|
|
|
8.8 |
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(0.8 |
) |
|
|
|
1.6 |
|
|
|
6.7 |
|
|
|
|
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
8.3 |
|
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
7.5 |
|
|
|
$ |
8.3 |
|
|
$ |
6.7 |
|
|
$ |
|
|
|
|
|
|
|
|
(Continued)
See accompanying notes to financial statements.
F-44
NATIONAL CINEMEDIA, LLC
STATEMENTS OF CASH FLOWS (CONTINUED)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
Period |
|
|
|
|
|
|
|
|
February 13, |
|
|
December 29, |
|
|
|
|
|
Period March |
|
|
2007 through |
|
|
2006 through |
|
Year Ended |
|
29, 2005 through |
|
|
December 27, |
|
|
February 12, |
|
December 28, |
|
December 29, |
|
|
2007 |
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
|
|
|
Supplemental disclosure of non-cash financing and
investing activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution for severance plan payments |
|
$ |
1.5 |
|
|
|
$ |
0.4 |
|
|
$ |
4.2 |
|
|
$ |
8.5 |
|
Increase in distributions payable to founding
members and managing member |
|
$ |
37.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions from members collected after period end |
|
$ |
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in property and equipment not requiring
cash in the period |
|
$ |
0.6 |
|
|
|
|
|
|
|
$ |
0.3 |
|
|
|
|
|
Increase in deferred offering costs |
|
|
|
|
|
|
|
|
|
|
$ |
0.5 |
|
|
|
|
|
Unit option plan reclassified to equity |
|
$ |
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
44.0 |
|
|
|
$ |
0.1 |
|
|
$ |
0.4 |
|
|
|
|
|
See accompanying notes to financial statements.
F-45
NATIONAL CINEMEDIA, LLC
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
National CineMedia, LLC (NCM LLC or the Company) commenced operations on April 1, 2005
and operates the largest digital in-theatre network in North America that allows NCM to
distribute advertising, business meeting, and Fathom event services under long-term exhibitor
services agreements (ESAs) with American Multi-Cinema, Inc. (AMC), a wholly owned subsidiary
of AMC Entertainment Inc. (AMCE), Regal Cinemas, Inc., a wholly owned subsidiary of Regal
Entertainment Group (Regal), and Cinemark USA, Inc. (Cinemark USA), a wholly owned
subsidiary of Cinemark Holdings, Inc. (Cinemark). AMC, Regal and Cinemark and their
affiliates are referred to in this document as founding members. NCM LLC also provides such
services to certain third-party theater circuits under Network Affiliate Agreements which expire
at various dates.
NCM LLC was formed through the combination of the operations of National Cinema Network,
Inc. (NCN), a wholly owned subsidiary of AMCE, and Regal CineMedia Corporation (RCM), a
wholly owned subsidiary of Regal. In accordance with the Contribution and Unit Holders Agreement
entered into on that date by NCM LLC, NCN, and RCM, 16,387,670 units were issued to NCN and
27,903,330 units were issued to Regal CineMedia Holdings, LLC (RCM Holdings) in exchange for
the contribution of $0.9 million of cash and other assets, net of liabilities assumed. All
assets contributed to and liabilities assumed by NCM LLC were recorded on NCM LLCs records in
the amounts as reflected on the Members historic accounting records, based on the application
of accounting principles for the formation of a joint venture under Emerging Issues Task Force
(EITF) 98-4, Accounting by a Joint Venture for Businesses Received at its Formation. Although
legally structured as a limited liability company, NCM LLC was considered a joint venture for
accounting purposes given the joint control provisions of the operating agreement among the
members, consistent with Accounting Principles Board (APB) Opinion No. 18, The Equity Method
of Accounting for Investments in Common Stock.
On July 15, 2005, in exchange for a cash contribution of $7.3 million, 11,559,951 units
were issued to Cinemark Media, Inc. (Cinemark Media), a wholly owned subsidiary of Cinemark
USA, Inc.
As the result of final adjustments to the valuations attributed to the contributed assets
and liabilities resulting from AMCEs merger on December 23, 2004, with Marquee Holdings Inc.,
NCN contributed additional cash to NCM LLC during 2006, which was then distributed to RCM
Holdings and Cinemark Media, thus having no impact on the assets and liabilities of NCM LLC.
On February 13, 2007, National CineMedia, Inc. (NCM, Inc. or managing member), a
Company formed by NCM LLC and incorporated in the State of Delaware with the sole purpose of
becoming a member and sole manager of NCM, LLC, closed its initial public offering (IPO).
NCM, Inc. used the net proceeds from the IPO to purchase a 44.8% interest in NCM LLC, paying NCM
LLC $746.1 million, which included reimbursement to NCM LLC for expenses it advanced related to
the NCM, Inc. IPO and paying the founding members $78.5 million for a portion of the NCM LLC
units owned by them. NCM LLC paid $686.3 million of the funds received from NCM, Inc. to the
founding members as consideration for their agreement to modify the then-existing ESAs.
Proceeds received by NCM LLC from NCM, Inc. of $59.8 million, together with $709.7 million net
proceeds from NCM LLCs new senior secured credit facility (see Note 7) entered into
concurrently with the completion of NCM, Inc.s IPO were used to redeem $769.5 million in NCM
LLC preferred units held by the founding members. The preferred units were created immediately
prior to the NCM, Inc. IPO in a non-cash recapitalization of each membership unit into one
common unit and one preferred unit. Immediately prior to this non-cash recapitalization, the
existing common units and employee unit options (see Note 8) were split on a 44,291-to-1 basis.
All unit and per unit amounts in these financial statements reflect the impact of this split.
At December 27, 2007, NCM LLC had 93,850,951 membership units outstanding, of which 42,000,000
(44.8%) were owned by NCM, Inc., 21,230,712 (22.6%) were owned by RCM, 17,474,890 (18.6%) were
owned by AMC, and 13,145,349 (14.0%) were owned by Cinemark.
In connection with the completion of the NCM, Inc.s IPO, NCM, Inc. and the founding
members entered into a third amended and restated limited liability company operating agreement
of NCM LLC (LLC Operating Agreement). Under the LLC Operating Agreement, NCM, Inc. became a
member and the sole manager of NCM LLC. As the sole manager, NCM, Inc. is able to control all of
the day to day business affairs and decision-making of NCM LLC without the approval of any other
member. NCM, Inc. cannot be removed as manager of NCM LLC. NCM LLC entered into a management
services agreement with NCM, Inc. pursuant to which NCM, Inc. agrees to provide certain specific
management services to NCM LLC, including those services typically provided by the individuals
serving in the positions of president and chief executive officer, president of sales and chief
marketing officer, executive vice president
F-46
NATIONAL CINEMEDIA, LLC
NOTES TO FINANCIAL STATEMENTS
and chief financial officer, executive vice president and chief technology and operations
officer and executive vice president and general counsel. In exchange for the services, NCM LLC
reimburses NCM, Inc. for compensation and other expenses of the officers and for certain
out-of-pocket costs (see Note 6). NCM LLC also provides administrative and support services to
NCM, Inc. such as office facilities, equipment, supplies, payroll and accounting and financial
reporting. The management services agreement also provides that NCM LLC employees may
participate in the NCM, Inc. equity incentive plan (see Note 8). NCM LLC will indemnify NCM Inc.
for any losses arising from NCM Inc.s performance under the management services agreement,
except that NCM Inc. will indemnify NCM LLC for any losses caused by NCM Inc.s willful
misconduct or gross negligence.
Under the amended and restated ESAs with the founding members, subject to limited
exceptions, NCM LLC is the exclusive provider of advertising services to the founding members
for a 30-year term (with a five-year right of first refusal commencing one year before the end
of the term) and meetings and event services to the founding members for an initial five-year
term, with an automatic five-year renewal providing certain financial tests are met. In
exchange for the right to provide these services to the founding members, NCM LLC is required to
pay to the founding members a theatre access fee which is a specified calculation based on the
attendance at the founding member theatres and the number of digital screens in founding member
theatres. Prior to the NCM, Inc. IPO, NCM LLC paid to the founding members a percentage of NCM
LLCs advertising revenue as advertising circuit share. Upon the completion of the NCM, Inc.
IPO, the founding members assigned to NCM LLC all legacy contracts, which are generally
contracts for advertising sold by the founding members prior to the formation of NCM LLC but
which were unfulfilled at the date of formation. In addition, the founding members made
additional time available for sale by NCM LLC, subject to a first right to purchase the time, if
needed, by the founding members to fulfill advertising obligations with their in-theatre
beverage concessionaries. NCM, Inc. also entered into employment agreements with five executive
officers to carry out obligations entered into pursuant to a management services agreement
between NCM, Inc. and NCM LLC.
Basis of Presentation
The financial statements contained herein were prepared in accordance with accounting
principles generally accepted in the United States of America. The results of operations for
the period ended December 27, 2007 are presented in two periods, reflecting operations prior to
and subsequent to the NCM, Inc. IPO. The period from December 29, 2006 through February 12,
2007 is referred to as the 2007 pre-IPO period. The period from February 13, 2007 through
December 27, 2007 is referred to as the 2007 post-IPO period. Separate periods have been
presented because there were significant changes at the time of the IPO of NCM, Inc. due to the
ESA modifications and related expenses thereunder, and significant changes to revenue
arrangements and contracts with the founding members.
The financial statements for both the 2007 pre-IPO period and 2007 post-IPO period give
effect to allocations of revenues and expenses made using relative percentages of founding
member attendance or days in each period, discrete events and other methods management
considered to be a reasonable reflection of the results for such periods.
The Company has established various accounting policies that govern the application of
accounting principles generally accepted in the United States of America in the preparation and
presentation of NCM LLCs financial statements. Certain accounting policies involve significant
judgments, assumptions and estimates by management that have a material impact on the carrying
value of certain assets and liabilities, which management considers critical accounting
policies. The judgments, assumptions and estimates used by management are based on historical
experience, knowledge of the accounts and other factors, which are believed to be reasonable
under the circumstances and are evaluated on an ongoing basis. Because of the nature of the
judgments and assumptions made by management, actual results could differ from these judgments
and estimates, which could have a material impact on the carrying values of assets and
liabilities and the results of operations of NCM LLC. As a result of the various related-party
agreements discussed above and in Note 6, the operating results as presented are not necessarily
indicative of the results that would have occurred if all agreements were with non-related third
parties.
The founding members received all of the proceeds NCM LLC received from NCM, Inc. at the
date of NCM, Inc.s IPO and the related issuance of debt, except for amounts needed to pay
out-of-pocket costs of the financings and other expenses, and $10.0 million to repay outstanding
amounts under NCM LLCs then-existing revolving line of credit agreement. In conformity with
accounting guidance of Securities and Exchange Commission concerning monetary consideration paid
to promoters, such as the founding members, in exchange for property conveyed by the promoters
and because the founding members had no cost basis in the ESAs, all payments to the founding
members with the proceeds of the managing members IPO and related debt issuance, amounting to
approximately $1.456 billion, have been accounted for as distributions, except for the payments
to liquidate accounts payable to the founding members arising from the ESAs.