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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to _______
Commission File Number 1-11604
CARMIKE CINEMAS, INC.
(Exact Name Of Registrant As Specified in Its Charter)
DELAWARE 58-1469127
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1301 FIRST AVENUE, COLUMBUS, GEORGIA 31901
(Address of Principal Executive Offices) (Zip Code)
(706) 576-3400
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
---------------------------------------------- ------------------------------------------
CLASS A COMMON STOCK, PAR VALUE $.03 PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K |_|
As of March 1, 1999, 9,942,487 shares of Class A Common Stock, par
value $.03 per share, were outstanding and the aggregate market value of the
shares of the Class A Common Stock held by non-affiliates of the registrant was
approximately $148,473,795. As of March 1, 1999, 1,420,700 shares of Class B
Common Stock, par value $.03 per share, were outstanding, all of which shares
are held by affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of Carmike Cinemas, Inc.'s Proxy Statement relating
to the 1999 Annual Meeting of Stockholders are incorporated by reference into
Part III.
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TABLE OF CONTENTS
PAGE
NUMBER
Part I ------
Item 1. Business..................................................................................3
Item 2. Properties...............................................................................18
Item 3. Legal Proceedings........................................................................18
Item 4. Submission of Matters to a Vote of Security Holders......................................18
Executive Officers of the Registrant................................................................19
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................21
Item 6. Selected Financial and Operating Data....................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...............................................................................24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................33
Item 8. Financial Statements and Supplementary Data..............................................33
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure...............................................................................34
*Part III
Item 10. Directors and Executive Officers of the Registrant.......................................34
Item 11. Executive Compensation...................................................................34
Item 12 Security Ownership of Certain Beneficial Owners and Management...........................34
Item 13 Certain Relationships and Related Transactions...........................................34
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................35
*Incorporated by reference from 1999 Proxy Statement.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), including, in particular, forward-looking statements under the headings
"Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "slate" and
similar expressions are intended to identify such forward-looking statements;
however, this Report also contains other forward-looking statements in addition
to historical information. Carmike cautions that there are various important
factors that could cause actual results to differ materially from those
indicated in the forward-looking statements; accordingly, there can be no
assurance that such indicated results will be realized. Among the important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements are the factors set forth below in
"Item 1. Business -- Factors That May Affect Future Performance." By making
these forward-looking statements, Carmike does not undertake to update them in
any manner except as may be required by its disclosure obligations in filings it
makes with the Securities and Exchange Commission (the "Commission") under the
Federal securities laws.
In this Report, the words "Company," "Carmike," "we," "our," "ours,"
and "us" refer to Carmike Cinemas, Inc. and its subsidiaries. Information in
this Report as to the number of theatres and screens operated by us and average
screens per theatre as of December 31, 1998 is net of theatres scheduled to be
closed pursuant to our restructuring plan. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset
Impairments and Restructuring Charge."
PART I
ITEM 1. BUSINESS.
OVERVIEW
Carmike is the largest motion picture exhibitor in the United States in
terms of number of theatres operated and is the third largest in terms of the
number of screens operated. As of December 31, 1998, Carmike operated 468
theatres with an aggregate of 2,658 screens located in 36 states. Carmike's
theatres are located in small to mid-sized communities ranging in population
size from approximately 7,700 to 456,000. As of December 31, 1998, management
believes that Carmike was the sole exhibitor in approximately 65.0% of its film
licensing zones and was the leading exhibitor in approximately 83.0% of its film
licensing zones.
Carmike was organized as a Delaware corporation in April 1982 in
connection with the leveraged buy-out of its predecessor, the Martin Theatres
circuit, by present management of Carmike. The principal executive offices of
Carmike are located at 1301 First Avenue, Columbus, Georgia 31901, and the
telephone number is (706) 576-3400.
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RECENT DEVELOPMENTS
Subordinated Debt Placement
On February 3, 1999, Carmike sold in a private placement (the
"Subordinated Debt Placement") $200.0 million in principal amount of its 9 3/8%
Senior Subordinated Notes due 2009 (the "Notes") to Goldman, Sachs & Co., First
Union Capital Markets, a division of Wheat First Securities, Inc., and ING
Baring Furman Selz LLC (collectively, the "Initial Purchasers"). Under the
Indenture relating to the Notes, Carmike will pay interest on the Notes on
February 1 and August 1 of each year. The first such payment will be made on
August 1, 1999. Carmike has the option to redeem all or a portion of the Notes
at any time on or after February 1, 2004. Before February 1, 2002, Carmike may
redeem up to 35.0% of the aggregate principal amount of the Notes issued under
the Indenture with the proceeds of certain offerings of Carmike's equity
securities. If Carmike experiences specific kinds of changes in control, Carmike
must offer to repurchase the Notes.
The proceeds from the sale of the Notes were used to redeem three
series of Carmike's senior notes held by certain institutional investors (the
"Senior Notes"). In connection with the redemption of Senior Notes and the
amendment to Carmike's revolving credit facility described below, Carmike
expects to recognize an extraordinary charge of approximately $10.2 million
($6.1 million after income taxes) in the first quarter of 1999 to reflect the
repayment premiums associated with the retirement of the Senior Notes and the
related write-off of deferred financing costs.
Refinancing Arrangements
On January 29, 1999, Carmike amended and restated its revolving credit
facility (as amended, the "Revolving Credit Facility"). In addition, on February
25, 1999, Carmike entered into a $75.0 million Term Loan B, the proceeds of
which were applied to repay revolving credit borrowings. Following application
of the proceeds of the Term Loan B, the maximum available borrowings under the
Revolving Credit Facility was reduced from $275.0 million to $200.0 million. The
Revolving Credit Facility also has an increased interest rate on borrowings and
revised and additional financial covenants. In connection with the amendment and
restatement of the Revolving Credit Facility, Carmike also amended and restated
its Master Lease with Movieplex Realty Leasing, L.L.C. to provide for security
interests and guarantees and to amend certain covenants contained therein. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
THEATRE OPERATIONS
Carmike's revenues are generated primarily from admissions and
concessions sales. Additional revenues, which are not material, are generated
from electronic video games installed in the lobbies of some of its theatres and
on-screen advertising. The following table sets forth as of December 31, 1998
(after giving effect to the restructuring plan hereinafter described) certain
information regarding the 468 theatres and 2,658 screens operated by Carmike:
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STATE THEATRES SCREENS STATE THEATRES SCREENS
- ----- -------- ------- ----- -------- -------
Alabama................24 177 Nebraska................9 32
Arkansas...............12 93 New Mexico..............1 2
Colorado...............11 64 New York................1 8
Delaware................2 12 North Carolina.........65 373
Florida................16 89 North Dakota............9 45
Georgia................37 247 Ohio....................8 43
Idaho...................9 24 Oklahoma...............14 66
Illinois................3 13 Pennsylvania...........38 202
Indiana.................2 13 South Carolina.........26 147
Iowa...................20 130 South Dakota............8 50
Kansas..................2 12 Tennessee..............39 229
Kentucky...............11 53 Texas..................17 80
Louisiana...............3 22 Utah...................12 72
Maryland................2 12 Virginia...............15 88
Michigan................2 10 Washington..............1 1
Minnesota..............13 66 West Virginia...........5 30
Missouri................1 8 Wisconsin...............7 46
Montana................16 77 Wyoming.................7 22
In accordance with a restructuring plan adopted by Carmike's Board of
Directors in December 1998, Carmike will close or dispose of 28 theatres with an
aggregate of 116 screens during the next year. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Impairments and Restructuring Charge." Theatres scheduled for disposition
are not included in the above table.
From time to time, Carmike converts marginally profitable theatres to
"Discount Theatres" for the exhibition of films that have previously been shown
on a first-run basis. Carmike also operates certain theatres for the exhibition
of first-run films at a reduced admission price. These theatres are typically in
a smaller market where Carmike is the only exhibitor in the market. At December
31, 1998, Carmike operated 64 theatres with 250 screens as Discount Theatres.
As of December 31, 1998, Carmike owned 88 of its theatres, had 322
ground and improvement leases and had 49 ground leases, excluding theatres
scheduled to be closed in 1999. An additional nine theatres were operated by
Carmike under shared ownership.
Carmike's theatre operations are under the supervision of its Senior
Vice President -- Operations and four division managers. The division managers
are responsible for implementing Company operating policies and supervising
Carmike's eighteen operating districts. Each operating district has a district
manager who is responsible for overseeing the day-to-day operations of Carmike's
theatres. Corporate policy development, strategic planning, site selection and
lease negotiation, theatre design and construction, concession purchasing, film
licensing, advertising, and financial and accounting activities are centralized
at the corporate headquarters of Carmike.
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Carmike has implemented an incentive bonus program for theatre level
management which provides for bonuses based on incremental improvements in
theatre profitability, including concession sales. As part of this program,
Carmike evaluates "mystery shopper" reports on the quality of service,
cleanliness and film presentation at individual theatres.
Carmike relies upon advertisements and movie schedules published in
newspapers to inform its customers of film selections and show times. Newspaper
advertisements are typically displayed in a single group for all Carmike's
theatres located in the newspaper's circulation area. In addition, Carmike
utilizes radio spots and promotions to further market its films. Major
distributors frequently share the cost of newspaper and radio advertising.
Carmike also exhibits in its theatres previews of coming attractions and films
presently playing on Carmike's other screens in the same market area. In
addition, Carmike sells gift certificates and offers a discount ticket plan to
attract groups of patrons to its theatres.
THEATRE DEVELOPMENT
Carmike's growth strategy primarily involves the development of new
theatres and the addition of screens and other improvements to existing
theatres, and selective acquisitions of theatres as available. During 1998,
Carmike opened 16 new theatres with 182 screens, added 16 auditoriums to its
existing theatres and retrofit 114 auditoriums at certain of its theatres. At
December 31, 1998, Carmike had 152 screens under construction, and intends to
develop approximately 382 screens during 1999. Carmike's capital expenditures
during 1998 aggregated approximately $146.7 million, net of lease financings,
and Carmike estimates that capital expenditures in connection with its
development plans will aggregate approximately $129.0 million, net of lease
financings, during 1999. Carmike expects that theatre construction, expansion
and renovation and capital expenditures will be approximately $75.0 million, net
of lease financings, for 2000.
Carmike has designed a prototype multiplex theatre which can be adapted
and sized to a particular location, which management believes results in
construction and operating cost savings. Carmike's typical new multiplex is
designed for a market with a population of between 100,000 to 250,000, has 12 to
20 screens (with 16 screens being typical), and features digital stereo surround
sound, oversized screens, plush seating with cup holders and a spacious lobby.
Stadium seating will be included in or added to certain theatres located in
Carmike's larger markets, where appropriate. Carmike currently has 303 screens
with stadium seating and plans to provide stadium seating in another 465
auditoriums during 1999. Carmike estimates that the average cost of a new
16-screen multiplex will be approximately $9.0 million ($4.0 million if the land
and improvements are leased rather than owned).
FILM LICENSING
Carmike obtains licenses to exhibit films by directly negotiating with
or, in rare circumstances, submitting bids to film distributors. Carmike
licenses films through its booking office located in Columbus, Georgia.
Carmike's Senior Vice President -- Film, in consultation with Carmike's
President, directs Carmike's motion picture bookings.
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Prior to negotiating or bidding for a film license, Carmike's Senior
Vice President -- Film and film booking personnel evaluate the prospects for
upcoming films. The criteria considered for each film include cast, director,
plot, performance of similar films, estimated film rental costs and expected
MPAA rating. Successful licensing depends greatly upon the availability of
commercially popular motion pictures, knowledge of the tastes of residents in
markets served by each theatre and insight into the trends in those tastes.
Carmike maintains a database that includes revenue information on films
previously exhibited in its markets. This historical information is then
utilized by Carmike to match new films with particular markets so as to maximize
revenues.
The major film distributors generally release during the summer and
holiday seasons, primarily Thanksgiving and Christmas, those films which they
anticipate to be the most successful. Consequently, Carmike has historically
generated higher revenues during such periods.
Film Rental Fees
Film licenses typically specify rental fees based on the higher of a
gross box office receipts formula or an adjusted gross box office receipts
formula. Under a gross box office receipts formula, the distributor receives a
specified percentage of box office receipts, with the percentage declining over
the term of the run. Carmike's film rental fees typically begin at 60.0% of
admission revenues and gradually decline to as low as 30.0% over a period of
four to eight weeks. Under an adjusted gross box office receipts formula
(commonly known as a "90/10" clause), the distributor receives a specified
percentage (i.e., 90.0%) of the excess of box office receipts over a negotiated
amount for house expenses. In addition, Carmike is occasionally required to pay
non-refundable guarantees of film rentals, to make advance payments of film
rentals, or both, in order to obtain a license for a film. Although not
specifically contemplated by the provisions of film licenses, the terms of film
licenses generally (with the exception of Universal, Fox, Sony and DreamWorks)
are adjusted or re-negotiated subsequent to exhibition of the film in relation
to its success.
Film Licensing Zones
Film licensing zones are geographic areas (generally encompassing a
radius of three to five miles) established by film distributors where any given
film is allocated to only one theatre within that area. In film licensing zones
where Carmike has little or no competition, Carmike obtains film licenses by
selecting a film from among those offered and negotiating directly with the
distributor. In competitive film licensing zones, a distributor will either
require the exhibitors in the zone to bid for a film or will allocate its films
among the exhibitors in the zone. When films are licensed under the allocation
process, a distributor will choose which exhibitor is offered a movie and then
that exhibitor will negotiate film rental terms directly with the distributor
for the film. Over the past several years, distributors have generally used the
allocation rather than the bidding process to license their films. When films
are licensed through a bidding process, exhibitors compete for licenses based
upon economic terms. Carmike currently does not bid for films in any of its film
licensing zones.
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First-Run Films
Carmike predominantly licenses "first-run" films. If a film has
substantial remaining potential following its first-run, Carmike may license it
for a subsequent run (a "sub-run"). Although average daily sub-run attendance is
often less than average daily first-run attendance, sub-run film cost is
generally less than first-run film cost. Additionally, sub-runs enable Carmike
to exhibit a variety of films during periods in which there are few new
releases.
Relationship with Distributors
Carmike depends on, among other things, the quality, quantity,
availability and acceptance by movie going customers of the motion picture
product produced by the motion picture production companies and licensed for
exhibition to the motion picture exhibitors by distribution companies.
Disruption in the production of motion pictures by the major studios and/or
independent producers or poor performance of motion pictures could have an
adverse effect on the business of Carmike. The motion picture production and
distribution industry in the United States is led by a few major movie studios
and their distribution operations, but no single distributor dominates the
market. See "-- Regulatory Environment." Accordingly, Carmike's business is
dependent upon the availability of marketable pictures and its relationships
with distributors.
While there are numerous distributors which provide quality first-run
movies to the motion picture exhibition industry, the following nine major
distributors accounted for approximately 92.0% of Carmike's admission revenues
during the year ended December 31, 1998: Buena Vista, Warner Brothers, Fox,
Paramount, Universal, DreamWorks, MGM/UA, Sony and New Line. Carmike licenses
films from a number of distributors and believes that its relationships with
distributors generally are satisfactory.
CONCESSIONS
Concessions sales are Carmike's second largest revenue source after box
office admissions, constituting 29.0% of total revenues for 1998. Carmike's
strategy emphasizes quick and efficient service built around a limited menu
primarily focused on higher margin items such as popcorn, candy and soft drinks.
In addition, Carmike has introduced a limited number of new products, such as
bottled water, coffee and ice cream, at certain of its theatre locations.
Carmike actively seeks to promote concessions sales through the design and
appearance of its concession stands, the introduction of special promotions from
time to time, and the training of its employees to cross sell products. In
addition, Carmike's management incentive bonus program includes concession
results as a component of determining the bonus awards.
Carmike negotiates prices for its concessions supplies directly with
concessions vendors on a national or regional basis to obtain high volume
discounts or bulk rates.
MANAGEMENT INFORMATION SYSTEMS
Carmike has a significant commitment to its major operating systems,
some of which have been developed internally. Carmike's proprietary computer
system, IQ-Zero, which is installed in all of its theatres, allows Carmike to
centralize most theatre-level administrative
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functions at its corporate headquarters, creating significant operating
leverage. IQ-Zero allows corporate management to monitor ticket and concessions
sales and box+office and concession staffing on a daily basis. Carmike's
integrated management information system, centered around IQ-Zero, also
coordinates payroll, tracks theatre invoices and generates operating reports
analyzing film performance and theatre profitability. Accordingly, there is
active communication between the theatres and corporate headquarters, which
allows senior management to react to vital profit and staffing information on a
daily basis and perform the majority of the theatre-level administrative
functions, thereby enabling the theatre manager to focus on the day-to-day
operations of the theatre.
ADDITIONAL REVENUE STREAMS
Carmike actively engages in efforts to develop revenue streams in
addition to admissions and concessions revenues. Certain of Carmike's theatres
include electronic video games located adjacent to or in the lobby, and
on-screen advertising is provided on a number of Carmike's screens, each of
which provides additional revenues to Carmike. Since 1997, Carmike has opened
five family entertainment centers under the name Hollywood Connection(R),
including three which were developed pursuant to a joint venture with Wal-Mart,
and which feature multiplex theatres and other forms of entertainment. Carmike
is currently evaluating this concept and is also exploring alternate revenue
sources such as advertising and marketing programs on beverage and popcorn
containers.
COMPETITION
The motion picture exhibition industry is fragmented and highly
competitive. In markets where it is not the sole exhibitor, Carmike competes
against regional and independent operators as well as the larger theatre circuit
operators.
Carmike's operations are subject to varying degrees of competition with
respect to film licensing, attracting customers, obtaining new theatre sites or
acquiring theatre circuits. Carmike believes that the principal competitive
factors with respect to film licensing include licensing terms, seating
capacity, location and prestige of an exhibitor's theatres, quality of
projection and sound at the theatres and the exhibitor's ability and willingness
to promote the films. The competition for customers is dependent upon factors
such as the availability of popular films, location of the theatres, customer
comfort, quality of projection and sound and the ticket prices. Carmike believes
that its admission prices are competitive with admission prices of competing
theatres. In those areas where real estate is readily available, there are few
barriers preventing competing companies from opening theatres near one of
Carmike's existing theatres, which may have a material adverse effect on
Carmike's theatres. In addition, competitors have built or are planning to build
theatres in certain areas in which Carmike operates, which may result in excess
capacity in such areas and may adversely affect attendance and pricing at
Carmike's theatres in such areas.
The opening of large multiplexes and theatres with stadium seating by
Carmike and certain of its competitors has tended to, and is expected to
continue to, draw audiences away from certain older theatres, including theatres
operated by Carmike. In addition, demographic changes and competitive pressures
can lead to a theatre location becoming impaired.
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Certain trends in the theatre exhibition industry favor larger better
capitalized companies, creating an environment for consolidation. Recently, a
number of significant acquisitions and consolidations in the movie exhibition
industry have been completed. For example, the combination of the Loews Theatres
exhibition business of Sony Pictures Entertainment Inc. with Cineplex Odeon
Corporation, which was completed in May 1998, has resulted in a combined
company, Loews Cineplex Entertainment Corporation, with approximately 2,900
screens in 458 locations. In December 1997, the investment firm of Kohlberg
Kravis Roberts & Co. ("KKR") consummated its acquisition of Act III Cinemas,
Inc. ("Act III"). In early 1998, KKR and Hicks, Muse, Tate & Furst, Inc. ("Hicks
Muse") announced a joint agreement to acquire Regal Cinemas, Inc. ("Regal
Cinemas") and to subsequently combine Regal Cinemas with Act III and with United
Artists Theatre Company ("United Artists"), which Hicks Muse had proposed to
acquire. Hicks Muse subsequently withdrew its offer to acquire United Artists;
however, the combination of Regal Cinemas with Act III has resulted in a
combined company with approximately 3,300 screens in 392 locations. Carmike
cannot predict what impact such consolidations may have on Carmike's future
results of operations.
In addition to competition with other motion picture exhibitors,
Carmike's theatres face competition from a number of alternative motion picture
exhibition delivery systems, such as cable television, satellite and
pay-per-view services and home video systems. The expansion of such delivery
systems (such as video on demand) could have a material adverse effect upon
Carmike's business and results of operations. Carmike also competes for the
public's leisure time and disposable income with all forms of entertainment,
including sporting events, concerts, live theatre and restaurants.
REGULATORY ENVIRONMENT
The distribution of motion pictures is in large part regulated by
federal and state antitrust laws and has been the subject of numerous antitrust
cases. Certain consent decrees resulting from such cases bind certain major
motion picture distributors and require the motion pictures of such distributors
to be offered and licensed to exhibitors, including Carmike, on a
theatre-by-theatre basis. Consequently, exhibitors such as Carmike cannot assure
themselves of a supply of motion pictures by entering into long-term
arrangements with major distributors but must compete for licenses on a
film-by-film and theatre-by-theatre basis.
The Americans with Disabilities Act (the "ADA"), which became effective
in 1992, and certain state statutes and local ordinances, among other things,
require that places of public accommodation, including theatres (both existing
and newly constructed), be accessible to patrons with disabilities. The ADA
requires that theatres be constructed to permit persons with disabilities full
use of a theatre and its facilities and reasonable access to work stations and
may require that certain modifications be made to existing theatres in order to
make such theatres accessible to certain theatre patrons and employees who are
disabled. For example, Carmike is aware of several recent lawsuits that have
been filed against other exhibitors by disabled moviegoers alleging that certain
stadium seating designs violate the ADA. On June 30, 1998, Carmike executed a
Settlement Agreement with the U.S. Department of Justice under Title III of the
ADA. Under the Settlement Agreement, Carmike agreed to complete the readily
achievable removal of barriers to accessibility, or alternatives to barrier
removal, at two theatres operated by Carmike in Des Moines, Iowa and to
distribute to all of its theatres a questionnaire designed to
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assist its management in the identification of existing and potential barriers
and a threshold determination of what steps might be available for removal of
such existing and potential barriers. Carmike is currently assessing the impact
of such questionnaires on its theatres. Carmike constructs new theatres to be
accessible to the disabled and believes it is otherwise in substantial
compliance with applicable regulations relating to accommodating the needs of
the disabled.
Carmike's theatre operations are also subject to federal, state and
local laws governing such matters as construction, renovation and operation of
its theatres, as well as wages, working conditions, citizenship, and health and
sanitation requirements and licensing. Carmike believes that its theatres are in
material compliance with such requirements. At December 31, 1998, approximately
71.0% of Carmike's employees were paid at the federal minimum wage and,
accordingly, the minimum wage largely determines Carmike's labor costs for those
employees.
Carmike owns, manages and/or operates theatres and other properties
which may be subject to certain U.S. federal, state and local laws and
regulations relating to environmental protection, including those governing past
or present releases of hazardous substances. Certain of these laws and
regulations may impose joint and several liability on certain statutory classes
of persons for the costs of investigation or remediation of such contamination,
regardless of fault or the legality of original disposal. These persons include
the present or former owner or operator of a contaminated property, and
companies that generated, disposed of or arranged for the disposal of hazardous
substances found at the property. Additionally, in the course of maintaining and
renovating its theatres and other properties, Carmike periodically encounters
asbestos containing materials ("ACMs") that must be handled and disposed in
accordance with federal, state and local laws, regulations and ordinances. Such
laws may impose liability for release of ACMs and may entitle third parties to
seek recovery from owners or operators of real properties for personal injury
associated with ACMs.
TRADEMARKS AND TRADENAMES
Carmike owns or has rights to trademarks or trade names that it uses in
conjunction with the operation of its theatres. Carmike owns the Carmike
Cinemas(R) and Hollywood Connection(R) trademarks.
EMPLOYEES
As of December 31, 1998, Carmike had approximately 10,234 employees, of
which 54 are covered by collective bargaining agreements. Carmike considers its
relations with its employees to be good.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
In addition to other factors and matters discussed elsewhere herein,
factors that, in the view of Carmike, could cause actual results to differ
materially from those discussed in forward-looking statements are set forth
below. All forward-looking statements attributable to Carmike or persons acting
on our behalf are expressly qualified in their entirety by the following
cautionary statements.
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Seasonality
Our business is generally seasonal, with higher revenues generated
during the summer and holiday seasons. While motion picture distributors have
begun to release major motion pictures evenly throughout the year, the most
marketable motion pictures are usually released during the summer and the
year-end holiday periods. Additionally, the unexpected emergence of a hit film
may occur in these or other periods. As a result, the timing of motion picture
releases affects our results of operations, which may vary significantly from
quarter to quarter. Moreover, to the extent that certain "event" films are
distributed more widely than in the past, our margins may be hurt as a result of
the higher film licensing fees payable during the early period of a film's run.
For the year ended December 31, 1998, the percentages of our admissions revenue
by quarter were as follows: first quarter 24.4%; second quarter 23.0%; third
quarter 27.9%; and fourth quarter 24.7%.
Dependence upon Motion Picture Production and Performance
Our business depends on the availability of suitable motion pictures
for screening in our theatres and the appeal of such motion pictures in our
theatre markets. We mainly license first-run motion pictures. Our results of
operations will vary from period to period based upon the quantity and quality
of the motion pictures we show in our theatres. For example, in the first
quarter of 1998, we benefited from the unexpectedly long run and success of
"Titanic," while in the second quarter of 1998 our results were adversely
impacted by the disappointing performance of certain "event" films. A disruption
in the production of motion pictures, lack of motion pictures or poor
performance of motion pictures in theatres could adversely affect our business
and results of operations.
Dependence on Relationships with Motion Picture Distributors
Our business depends to a significant degree on maintaining good
relations with the major film distributors that license films to our theatres.
While there are numerous motion picture distributors that provide quality
first-run movies to the motion picture exhibition industry, the following nine
distributors accounted for approximately 92.0% of our admission revenues for the
fiscal year ended December 31, 1998 -- Buena Vista, DreamWorks, Fox, New Line
Cinema, Paramount, Sony, United Artists, Universal and Warner Brothers. No
single distributor dominates the market. A deterioration in our relationships
with any of the major film distributors could adversely affect our access to
commercially successful films and could adversely affect our business and
results of operations.
Government Regulation
Like others in our industry, we are subject to certain federal, state
and local laws and regulations which limit the manner in which we may conduct
our business. The distribution of motion pictures is in large part regulated by
federal and state antitrust laws and has been the subject of numerous antitrust
cases. As a result of these laws and cases, we cannot ensure a supply of motion
pictures by entering into long term arrangements with major distributors.
Instead, we must compete for film licenses on a film by film and theatre by
theatre basis.
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The ADA and certain state statutes and local ordinances, among other
things, require that places of public accommodation, including theatres (both
existing and newly constructed), be accessible to customers with disabilities.
The ADA may require that certain modifications be made to existing theatres in
order to make such theatres accessible to certain theatre patrons and employees
who are disabled. The ADA requires that theatres be constructed to permit
persons with disabilities full use of a theatre and its facilities and
reasonable access to work stations. We are aware of several recent lawsuits that
have been filed against other exhibitors by disabled moviegoers alleging that
certain stadium seating designs violated the ADA. We have established a program
to review and evaluate our theatres and to make changes that may be required by
law. Although we believe that the cost of complying with the ADA will not
adversely affect our business and results of operations, we cannot predict the
extent to which the ADA or any future laws or regulations regarding the needs of
the disabled will impact our operations.
Competition
The opening of large multiplexes and theatres with stadium seating by
us and certain of our competitors has tended to, and is expected to continue to,
draw audiences away from certain older theatres, including theatres operated by
us. In addition, demographic changes and competitive pressures can lead to the
impairment of a theatre. In addition to competition from other motion picture
exhibitors, we face competition from other forms of entertainment. We face
varying degrees of competition with respect to licensing films, attracting
customers, obtaining new theatre sites and acquiring theatre circuits. There
have been a number of recent consolidations in the movie theatre industry, and
the impact of such consolidations could have an adverse effect on our business.
Even where we are the only exhibitor in a film licensing zone, we may still
experience competition for moviegoers from theatres in a neighboring zone. In
addition, our theatres compete with a number of other types of motion picture
delivery systems, such as pay television, pay-per-view, satellite and home video
systems. While the impact of such delivery systems on the motion picture
industry is difficult to determine precisely, there is a risk that they will
adversely affect attendance at motion pictures shown in theatres. Movie theatres
also face competition from a variety of other forms of entertainment competing
for the public's leisure time and disposable income, including sporting events,
concerts, live theatre and restaurants.
Expansion Plans
We have in the past expanded our operations through theatre
acquisitions and new theatre openings. We intend to continue pursuing an
expansion strategy by:
- developing new theatres;
- expanding our existing theatres; and
- selectively acquiring existing theatres and theatre circuits.
Developing new theatres poses a number of risks. Construction of new
theatres may result in cost overruns, delays or unanticipated expenses related
to zoning or tax law considerations. Desirable sites for new theatres may be
unavailable or expensive, and the market locations for new theatres may
deteriorate over time. Additionally, the market potential of new theatre sites
cannot be precisely determined, and our theatres may face competition in new
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markets from unexpected sources. Newly constructed theatres may not perform up
to management's expectations. Additionally, there is a risk that we may not be
able to manage growth as effectively as we have in the past if we expand our
existing operations.
We face significant competition for potential theatre locations and for
opportunities to acquire existing theatres and theatre circuits. Because of this
competition, we may be unable to make acquisitions on terms we consider
acceptable.
Future Capital Requirements
Our industry is undergoing a transition as newer theatres with stadium
seating are attracting moviegoers away from older theatres. As of December 31,
1998, we have 152 screens under construction, and we expect to add an aggregate
of 382 screens during 1999. We anticipate that all of the theatres scheduled to
be added in 1999 will provide stadium seating. We anticipate that our
construction, expansion and renovation program will require capital expenditures
of approximately $129.0 million, net of lease financings, in 1999, and
approximately $75.0 million, net of lease financings, in 2000.
Like others in our industry, we have been required to recognize charges
associated with the write-down and closing of underperforming theatres primarily
as a result of the emergence of new competition in the marketplace. The opening
of large multiplexes by our competitors and the opening of newer theatres with
stadium seating in certain of our markets have led us to reassess a number of
our theatre locations to determine whether to renovate or to dispose of
underperforming locations. In accordance with our restructuring plan, we will
close 28 theatres in 1999 having an aggregate of 116 screens. The opening of new
multiplexes by our competitors will likely continue to draw audiences away from
our older theatres unless we continue to make significant capital expenditures.
We have budgeted for 1999 approximately $6.2 million to retrofit approximately
83 screens to strengthen our market position in certain markets. We will lose
revenue from those theatres while they are being renovated. As of December 31,
1998, after giving effect to our construction, expansion and renovation program,
approximately 25.4% of our auditoriums featured stadium seating. Further
advances in theatre design may also require us to make substantial capital
expenditures in the future, or to close older theatres that cannot be
economically renovated, to compete with new developments in theatre design.
We believe that we will be able to satisfy our currently anticipated
capital needs for theatre construction, expansion and renovation and possible
acquisitions for at least the next two years by cash flow from operations and
available cash, together with borrowings under our Revolving Credit Facility,
additional sales of debt or equity securities, and additional bank financings
and other forms of long-term debt. We may also enter into sales and leasebacks
of theatre properties to supplement our current sources of capital. However, we
cannot assure you that our business will generate sufficient cash flow from
operations, that we will satisfy the requirements for borrowing under the
Revolving Credit Facility, that currently anticipated revenue growth and
operating improvements will be realized or that future capital will be available
to us to enable us to fund our capital expenditure needs.
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Impairment of Assets
The opening of large multiplexes and theatres with stadium seating by
us and certain of our competitors has tended to, and is expected to continue to,
draw audiences away from certain older theatres, including theatres operated by
us. In addition, demographic changes and competitive pressures can lead to the
impairment of a theatre. We review for impairment of long-lived assets and
goodwill related to those assets to be held and used in the business whenever
events or changes in circumstances indicate that the carrying amount of an asset
or a group of assets may not be recoverable. We also periodically review and
monitor our internal management reports and the competition in our markets for
indicators of impairment of individual theatres. In the fourth quarter of 1998,
we identified impairments of asset values for certain of our theatres. As a
result, we recognized a non-cash impairment charge of approximately $38.3
million in the fourth quarter of 1998 to reduce the carrying value of
approximately 145 theatres with approximately 610 screens. We also recorded an
impairment charge, effective January 1, 1996, upon our adoption of FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. There can be no assurance that we will not
take additional charges in the future related to the impairment of assets.
Substantial Leverage
We have now and will continue to have a significant amount of
indebtedness. Our substantial indebtedness could have important consequences.
For example, it could:
- make it more difficult for us to satisfy our obligations with respect
to our indebtedness;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, capital expenditures
for theatre construction, expansion, renovation or acquisition, and
other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors
that have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds. And, failing to comply with those covenants could result in an
event of default which, if not cured or waived, could have a material
adverse effect on us.
Despite current indebtedness levels, we and our subsidiaries may still
be able to incur substantially more debt. This could further exacerbate the
risks described above. The terms of the agreements governing our indebtedness do
not fully prohibit us or our subsidiaries from
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doing so. If new debt is added to our and our subsidiaries' current debt levels,
the related risks that we and they now face could intensify.
Ability to Service Debt
To service our indebtedness, we will require a significant amount of
cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make scheduled payments of principal of, or to pay the interest
on, or to refinance our indebtedness, or to fund planned capital expenditures
for theatre construction, expansion and renovation or theatre acquisition will
depend on our future performance. Our future performance is, to a certain
extent, subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Based upon our current
level of operations and anticipated increases in revenues and cash flow as a
result of our theatre construction, expansion and renovation program, and the
scheduled closing of certain underperforming theatres, we believe that cash flow
from operations and available cash, together with available borrowings under our
Revolving Credit Facility and cash that could be generated from lease financing
arrangements and/or sales of additional debt or equity securities, will be
adequate to meet our future liquidity needs for at least the next two years.
We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that currently anticipated revenue growth
and operating improvements will be realized or that future capital will be
available to us from the sale of debt or equity securities, additional bank
financings, other long-term debt or lease financings in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness, or
raise additional capital through other means, on commercially reasonable terms
or at all.
Dependence upon Senior Management
We believe that our success is due to our experienced management team.
We depend in large part on the continued contribution of our senior management,
including Michael W. Patrick, Carmike's President. Losing the services of one or
more members of our senior management could adversely affect our business and
results of operations. We have an employment agreement with Michael W. Patrick
which is automatically renewed each year and we maintain key man life insurance
covering him.
Risks Associated with the Year 2000
The Year 2000 issue refers generally to the data structure problems
that will prevent systems from properly recognizing dates after the year 1999.
We have implemented a Year 2000 compliance program designed to ensure that our
computer systems and applications will function properly beyond 1999. In light
of our compliance efforts, we do not believe that the Year 2000 issue will
adversely affect our business and results of operations. However, we cannot
assure you that our systems will be Year 2000 compliant prior to December 31,
1999, or that the failure of any such system will not adversely affect our
business and results of operations. To the extent the Year 2000 problem
adversely affects the business and results of operations of third parties
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with whom we have important relationships, such as vendors, suppliers and
financial institutions, the Year 2000 problem could also adversely affect our
business and results of operations. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
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ITEM 2. PROPERTIES.
As of December 31, 1998, Carmike owned 88 of its theatres, had 322
ground and improvement leases and had 49 ground leases, excluding theatres
scheduled to be closed in 1999. An additional nine theatres were operated by
Carmike under shared ownership.
Carmike's leases are generally entered into on a long-term basis. The
theatre leases generally provide for the payment of fixed monthly rentals,
contingent rentals based on a percentage of revenue over a specified amount, and
the payment of property taxes, common area maintenance, insurance and repairs.
Carmike, at its option, can renew a substantial portion of its theatre leases,
at the then fair rental rate for various periods with the maximum renewal period
totaling 40 years.
Carmike owns its headquarters building, which has approximately 48,500
square feet, in Columbus, Georgia. Pursuant to the terms of industrial revenue
bonds which were issued in connection with the construction of the corporate
offices, Carmike's interest in the building is encumbered by a Deed to Secure
Debt and Security Agreement in favor of the Downtown Development Authority of
Columbus, Georgia.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Carmike is involved in routine litigation and legal
proceedings in the ordinary course of its business, such as personal injury
claims, employment matters, contractual disputes and claims alleging ADA
violations. Currently, Carmike does not have pending any litigation or
proceedings that management believes will have a material adverse effect, either
individually or in the aggregate, upon Carmike.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the last quarter of the year ended December 31, 1998.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information as of March 15, 1999
regarding the executive officers of Carmike. For purposes of this section,
references to Carmike include Carmike's predecessor, Martin Theatres, Inc.
NAME AGE TITLE
- ---- --- -----
C.L. Patrick.........................80 Chairman of the Board of Directors
Michael W. Patrick...................48 President, Chief Executive Officer and Director
F. Lee Champion, III.................48 Senior Vice President, General Counsel, Secretary and Director
Larry M. Adams.......................55 Senior Vice President -- Information Systems
P. Lamar Fields......................44 Senior Vice President -- Real Estate
Anthony J. Rhead.....................57 Senior Vice President -- Film
H. Madison Shirley...................47 Senior Vice President-- Concessions and Assistant Secretary
Fred W. Van Noy......................42 Senior Vice President -- Operations
James R. Davis.......................60 Vice President -- Technical
Marilyn B. Grant.....................51 Vice President -- Advertising
Philip A. Smitley....................40 Assistant Vice President and Controller
C.L. PATRICK, who has served as Chairman of the Board of Directors of
Carmike since April 1982, joined Carmike in 1945, became its General Manager in
1948 and served as President of Carmike from 1969 to 1970. He served as
President of Fuqua Industries, Inc. from 1970 to 1978 and as Vice Chairman of
the Board of Directors of Fuqua Industries, Inc. from 1978 to 1982. Mr. Patrick
is a director emeritus of Columbus Bank & Trust Company. Messrs. Michael W.
Patrick and Carl L. Patrick, Jr., a director of Carmike, are the sons of Mr.
C.L. Patrick.
MICHAEL W. PATRICK has served as President of Carmike since October
1981, as a director of Carmike since April 1982 and as Chief Executive Officer
since March 29, 1989. He joined Carmike in 1970 and served in a number of
operational and film booking and buying capacities prior to becoming President.
Mr. Patrick serves as a director of Columbus Bank & Trust Company and the Will
Rogers Institute, and he is a member of the Board of Trustees of Columbus State
University Foundation, Inc.
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F. LEE CHAMPION, III joined Carmike in January 1998 as Senior Vice
President, General Counsel and Secretary. In December 1998, he was elected a
director of Carmike. Prior to joining Carmike, Mr. Champion practiced law with
the firm of Champion and Champion.
LARRY M. ADAMS joined Carmike as Data Processing Manager in July 1973.
In August, 1982, he became Vice President -- Informational Systems and in
December 1997 he became Senior Vice President -- Information Systems. In March
1999, Mr. Adams assumed the duties of interim chief accounting officer.
P. LAMAR FIELDS joined Carmike in January 1983 as Director of Real
Estate. He served in this position until 1985 when he became Vice President --
Development. In December 1997 he was elected to his present position of Senior
Vice President -- Real Estate.
ANTHONY J. RHEAD joined Carmike in June 1981 as manager of the booking
office in Charlotte, North Carolina. In July 1983, Mr. Rhead became Vice
President -- Film of Carmike and in December 1997 was elected Senior Vice
President -- Film. Prior to joining Carmike, he worked as a film booker for
Plitt Theatres, Inc. from 1973 to 1981.
H. MADISON SHIRLEY joined Carmike in 1976 as a theatre manager. He
served as a District Manager from 1983 to 1987 and as Director of Concessions
from 1987 until 1990. He became Vice President -- Concessions in 1990 and Senior
Vice President -- Concessions and Assistant Secretary in December 1997.
FRED W. VAN NOY joined Carmike in 1975. He served as a District Manager
from 1984 to 1985 and as Western Division Manager from 1985 to 1988, when he
became Vice President -- General Manager. In December 1997, he was elected to
his present position as Senior Vice President -- Operations.
JAMES R. DAVIS joined Carmike in 1990 as Technical Director. He served
in this position until December 1995, when he was elected to his present
position as Vice President -- Technical.
MARILYN B. GRANT joined Carmike in 1975 as a bookkeeper. She served as
Advertising Coordinator from 1984 to 1985 and became the Director of Advertising
in 1985. In August 1990, she was elected to her present position as Vice
President -- Advertising.
PHILIP A. SMITLEY joined Carmike in April 1997 as Controller. In
January 1998, he was elected to his present position of Assistant Vice President
and Controller. In March 1999, he assumed the duties of interim chief financial
officer. Prior to joining Carmike, Mr. Smitley was Divisional Controller --
Transportation of Burnham Service Corporation, a trucking company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Carmike's Class A Common Stock, par value $.03 per share (the "Class A
Common Stock"), is traded on the New York Stock Exchange under the symbol "CKE."
The following table sets forth the high and low sales prices of the Class A
Common Stock as reported by the New York Stock Exchange for the periods
indicated.
HIGH LOW
------------- ----------
1997
First Quarter............................................. $ 29 $ 23 1/8
Second Quarter............................................ 35 1/8 28 1/2
Third Quarter............................................. 32 3/4 27 3/16
Fourth Quarter............................................ 33 3/8 28 3/16
1998
First Quarter............................................. $ 32 1/2 $ 27 1/8
Second Quarter............................................ 33 1/16 25 11/16
Third Quarter............................................. 27 11/16 17 5/8
Fourth Quarter............................................ 21 11/16 15 1/16
On March 1, 1999, the last reported sale price of the Class A Common
Stock on the New York Stock Exchange was $15.875 per share. As of March 1, 1999,
there were approximately 741 and three holders of record of Carmike's Class A
Common Stock and Class B Common Stock, par value $.03 per share (the "Class B
Common Stock"), respectively.
Carmike has never declared or paid any cash dividends on its Class A
Common Stock or Class B Common Stock. Carmike currently intends to retain future
earnings for use in the expansion and operation of its business and, therefore,
does not anticipate paying dividends in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of Carmike's board of
directors and will depend on Carmike's earnings, capital requirements, financial
condition and other relevant factors. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note E of Notes to Consolidated Financial Statements
regarding restrictions in Carmike's debt instruments on Carmike's ability to pay
dividends.
On November 22, 1998, GS Capital Partners III, L.P. and certain other
affiliates of Goldman, Sachs & Co. purchased an aggregate of 550,000 shares of
Carmike's 5.5% Series A Senior Cumulative Convertible Exchangeable Preferred
Stock, par value $1.00 per share (the "Series A Preferred Stock"), for an
aggregate purchase price of $55.0 million. This preferred stock placement was
exempt from registration under Section 4(2) of the Securities Act as a
transaction not involving a public offering. In addition, the purchasers of the
Series A Preferred Stock are sophisticated and had access to information about
Carmike.
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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
The selected consolidated Statement of Income and Balance Sheet data
set forth below were derived from the consolidated financial statements of
Carmike. This information should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Carmike's Consolidated Financial Statements and related Notes
thereto.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 (1) 1996 (2) 1997 (2) 1998 (3)
---------- ---------- ---------- ---------- -----------
(IN MILLIONS EXCEPT PERCENTAGES, RATIOS AND OPERATING DATA)
STATEMENT OF INCOME DATA:
Revenues:
Admissions ....................... $ 232.1 $ 253.7 $ 296.6 $ 319.2 $ 330.5
Concessions and other ............ 95.5 111.0 130.1 139.4 151.1
---------- ---------- ---------- ---------- ----------
Total revenues .............. 327.6 364.7 426.7 458.6 481.6
Costs and expenses:
Film exhibition costs ............ 123.6 135.6 157.0 169.7 177.8
Concession costs ................. 12.2 15.0 17.3 18.3 19.9
Other theatre operating costs .... 119.0 143.7 164.1 175.1 187.9
General and administrative ....... 5.1 5.5 6.0 6.4 7.1
Depreciation and amortization .... 22.5 27.2 28.4 33.4 37.5
Impairment of long-lived assets .. -- -- 45.4 -- 38.3
Restructuring charge ............. -- -- -- -- 34.7
---------- ---------- ---------- ---------- ----------
282.4 327.0 418.2 402.9 503.2
---------- ---------- ---------- ---------- ----------
Operating income (loss) ..... 45.2 37.7 8.5 55.7 (21.6)
Interest expense ..................... 17.0 16.0 20.3 23.1 27.2
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .... 28.2 21.7 (11.8) 32.6 (48.8)
Income tax expense (benefit) ......... 11.2 8.7 (4.5) 12.4 (18.2)
---------- ---------- ---------- ---------- ----------
Net income (loss) .................... $ 17.0 $ 13.0 $ (7.3) $ 20.2 $ (30.6)
---------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding:
Basic ................................ 8,312 11,161 11,174 11,277 11,356
---------- ---------- ---------- ---------- ----------
Diluted .............................. 8,477 11,260 11,174 11,366 11,356
---------- ---------- ---------- ---------- ----------
Earnings (loss) per common share:
Basic ................................ $ 2.04 $ 1.17 $ (0.65) $ 1.79 $ (2.73)
---------- ---------- ---------- ---------- ----------
Diluted .............................. $ 2.00 $ 1.16 $ (0.65) $ 1.78 $ (2.73)
---------- ---------- ---------- ---------- ----------
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AS OF DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------------------------------------
(in millions, except operating data)
BALANCE SHEET DATA:
Cash and cash equivalents ............ $ 17.9 $ 11.3 $ 5.6 $ 16.5 $ 17.8
Property and equipment, net .......... 294.0 371.9 388.0 497.1 573.6
Total assets ......................... 377.6 478.0 489.4 620.0 697.5
Total long-term obligations, including
current maturities (4) ........... 153.3 230.5 268.3 360.7 351.8
Total shareholders' equity ........... 172.0 185.1 178.0 202.9 226.3
OPERATING DATA:
Theatre locations (5) ................ 445 519 519 520 468
Screens (5) .......................... 1,942 2,383 2,518 2,720 2,658
Average screens per location ......... 4.4 4.6 4.9 5.2 5.7
Total attendance (in thousands) ...... 59,660 64,496 74,213 75,336 77,763
Total average screens in operation ... 1,852 2,151 2,476 2,644 2,733
Average ticket price ................. $ 3.89 $ 3.93 $ 4.00 $ 4.24 $ 4.25
Average concession per patron ........ $ 1.46 $ 1.59 $ 1.62 $ 1.68 $ 1.79
- ------------------------
(1) During the year ended December 31, 1995, Carmike acquired, in various
acquisitions, 83 theatres with 377 screens.
(2) See Note D of Notes to Consolidated Financial Statements with respect
to acquisitions.
(3) Preferred stock dividends on the Series A Preferred Stock totaled
$332,000. See Note H of Notes to Consolidated Financial Statements.
(4) Excludes long-term reserves and deferred income tax liabilities;
includes current maturities of long-term indebtedness and capital lease
obligations.
(5) Excludes 28 theatres with 116 screens at December 31, 1998, which will
be closed by Carmike in accordance with its restructuring plan.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of Carmike's financial condition and operating
results should be read in conjunction with "Item 6. Selected Financial and
Operating Data" and Carmike's Consolidated Financial Statements and Notes
thereto.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve a number of risks
and uncertainties. Factors which could cause Carmike's actual results in future
periods to differ materially include, but are not limited to, the availability
of suitable motion pictures for exhibition in Carmike's markets, the
availability of opportunities for expansion, the effect of consolidations in the
movie exhibition industry and competition with other forms of entertainment and
the factors set forth in "Item 1. Business -- Factors That May Affect Future
Performance," as well as other factors discussed or identified from time to time
in Carmike's filings with the Commission.
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGE
Asset Impairments
The opening of large multiplexes and theatres with stadium seating by
Carmike and certain of its competitors has tended to, and is expected to
continue to, draw audiences away from certain older theatres, including theatres
operated by Carmike. In addition, demographic changes and competitive pressures
can lead to the impairment of a theatre. Carmike reviews for impairment of
long-lived assets and goodwill related to those assets to be held and used in
the business whenever events or changes in circumstances indicate that the
carrying amount of an asset or a group of assets may not be recoverable. Carmike
also periodically reviews and monitors its internal management reports and the
competition in its markets for indicators of impairment of individual theatres.
In the fourth quarter of 1998, Carmike identified impairments of asset values
for 145 theatres with 610 screens. The 145 theatres included a further
impairment for 46 theatres that were part of the 1996 impairment charge (see
discussion below). There can be no assurance that Carmike will not take
additional charges in the future related to the impairment of assets.
The 1998 impairment charge of approximately $38.3 million
(approximately $24.1 million after income taxes or $2.12 per diluted share) is a
non-cash charge which reduced the carrying value of property and equipment by
$29.4 million (costs of $49.0 million less accumulated depreciation and
amortization of $19.6 million) and the excess of purchase price over net assets
of businesses acquired by $8.9 million.
The 1998 impairment was primarily caused by reductions in estimated
theatre cash flows due to (i) the impact of new or increased competition on
certain of Carmike's older, auditorium-style theatres, (ii) Carmike's negative
evaluation of the operating results produced from theatres previously converted
to discount houses or (iii) Carmike's inability to improve a marginal theatre's
operating results.
Carmike accounts for its long-lived assets in accordance with the
Financial Accounting Standards Board Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and
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for Long-Lived Assets to be Disposed Of. The initial non-cash charge upon
Carmike's adoption of Statement No. 121 during 1996 was approximately $45.4
million (approximately $28.2 million after income taxes or $2.52 per diluted
share) to reduce the carrying amount of certain of Carmike's theatres. The 1996
impairment resulted from management's evaluation of recoverability of asset
values of individual theatres. Prior to 1996, Carmike's long-lived assets were
evaluated on a market by market basis for impairment. The 1996 impairment
included a reduction in the carrying value of property and equipment by $34.3
million (costs of $52.6 million less accumulated depreciation and amortization
of $18.3 million) and in the excess of purchase price over net assets of
businesses acquired by $11.1 million.
As a result of the reduced carrying amount of the impaired assets due
to the 1996 impairment charge, depreciation and amortization expense for 1998,
1997 and 1996 was reduced by approximately $3.5 million, $3.8 million and $4.2
million, respectively (1998 -- $2.2 million after income taxes or $.19 per
diluted share; 1997 -- $2.4 million after income taxes or $.21 per diluted
share; 1996 -- $2.6 million after income taxes or $.23 per diluted share).
Depreciation and amortization for 1999 will be reduced by approximately $6.7
million as a result of the 1998 and 1996 impairment charges.
The 1998 and 1996 impairment charges are reflected as operating
expenses in Carmike's Consolidated Financial Statements.
Restructuring Charge
In December 1998, Carmike's Board of Directors approved a restructuring
plan involving the closure or disposition of 28 theatres (116 screens) in
certain markets that did not fit Carmike's operating and growth strategies (the
"Restructuring Plan"). In accordance with the Restructuring Plan, the theatres
are scheduled to be closed during 1999. Carmike has recognized a charge of
approximately $34.7 million (approximately $21.5 million after income taxes or
$1.89 per diluted share) to establish reserves for the future cash expenditures
related to these theatres. The established reserves are primarily for future
lease payments payable in accordance with the terms of the lease agreements and
for certain lease related costs. There are no material employee termination
costs as a result of the closure of these theatres. Disbursements of the
restructuring reserves for 1999 are estimated to total approximately $4.6
million.
Revenues during the years ended December 31, 1998, 1997 and 1996 for
the theatres identified for closure under the Restructuring Plan were
approximately $8.7 million, $14.6 million and $17.3 million, respectively.
Operating income (losses) during the years ended December 31, 1998, 1997 and
1996 for the theatres included in the Restructuring Plan were approximately
$(3.6) million, $(.5) million and $1.1 million, respectively.
25
26
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the percentage
of total revenues represented by certain items reflected in Carmike's
Consolidated Statements of Operations:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------
Revenues:
Admissions ............................... 70.9% 69.6% 69.5% 69.6% 68.6%
Concessions and other .................... 29.1 30.4 30.5 30.4 31.4
----- ----- ----- ----- -----
Total revenues ......................... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Film exhibition costs (1) ................ 37.7 37.2 36.8 37.0 36.9
Concession costs ......................... 3.7 4.1 4.0 4.0 4.1
Other theatre operating costs ............ 36.3 39.4 38.4 38.2 39.0
General and administrative ............... 1.6 1.5 1.4 1.4 1.5
Depreciation and amortization ............ 6.9 7.5 6.7 7.3 7.8
Impairment of long-lived assets .......... -- -- 10.7 -- 8.0
Restructuring charge ..................... -- -- -- -- 7.2
----- ----- ----- ----- -----
86.2 89.7 98.0 87.9 104.5
----- ----- ----- ----- -----
Operating income (loss) ................ 13.8 10.3 2.0 12.1 (4.5)
Interest expense ............................ 5.2 4.4 4.7 5.0 5.6
Income (loss) before income taxes ........... 8.6 5.9 (2.7) 7.1 (10.1)
Income tax expense (benefit) ................ 3.4 2.4 (1.0) 2.7 (3.8)
----- ----- ----- ----- -----
Net income (loss) ........................... 5.2% 3.5% (1.7)% 4.4% (6.3)%
===== ===== ===== ===== =====
Other Information:
Film exhibition costs as % of
admissions revenue (1) ................. 53.2% 53.5% 52.9% 53.1% 53.8%
Concession costs as a % of concessions ... 13.8% 14.4% 14.2% 14.4% 14.3%
- -------------------
(1) Film exhibition costs include advertising expenses net of co-op
reimbursements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues for the year ended December 31, 1998 increased 5.0% to
$481.6 million from $458.6 million. This increase consists of an $11.3 million
increase in admissions and an $11.7 million increase in concessions and other.
These increases are due primarily to the additional revenues generated by the
increase in the average number of screens in operation and an increase in the
average concessions sale per patron, partially offset by the loss in revenues at
theatres closed during the period for renovation. Attendance per average screen
was 28,453 for 1998 compared to 28,493 for 1997. Revenue per average screen was
$176,205 for 1998 compared to $173,449 for 1997. Average admission prices were
relatively unchanged at $4.25 for 1998 compared to $4.24 the previous year with
the average concessions sale per patron increasing 6.5% to $1.79 for 1998 from
$1.68 for 1997.
Cost of theatre operations (film exhibition costs, concession costs and
other theatre operating costs) increased 6.2% to $385.6 million from $363.1
million due to films that did not play for an extended period of time, which
provides greater percentage payments to the
26
27
distributors, more screens in operation and higher attendance numbers. As a
percentage of revenue, cost of operations increased from 79.2% of total revenues
in 1997 to 80.1% of total revenues in 1998.
General and administrative costs increased 10.9% to $7.1 million from
$6.4 million reflecting additional general and administrative costs incurred in
connection with the additional screens added in 1997 and 1998. As a percentage
of total revenues, general and administrative costs increased only slightly to
1.47% from 1.40% in 1997.
Depreciation and amortization increased 12.3% to $37.5 million from
$33.4 million as a result of the increased screens in operation from the
Company's acquisitions and expansions in 1997 and 1998. These amounts have also
been reduced due to the 1996 impairment charge from the Company's adopting
Statement No. 121 (see Note B of Notes to Consolidated Financial Statements).
Interest expense increased to $27.2 million from $23.1 million due to
the increase in the average amount of outstanding debt.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 increased 7.5% to
$458.6 million from $426.7 million. This increase consists of a $22.6 million
increase in admissions and a $9.3 million increase in concessions and other.
Overall attendance increased 1.5% due to the additional screens in operation
acquired in 1997 and 1996 (see Note D of Notes to Consolidated Financial
Statements). Attendance per average screen declined 5.0% during the year ended
December 31, 1997 compared to the year ended December 31, 1996. Revenue per
average screen was $173,449 for 1997 compared to $172,345 for 1996. Average
admission prices increased 6.0% to $4.24 from $4.00 and the average concessions
sales per patron increased 3.7% to $1.68 from $1.62. Also included in
concessions and other were a higher level of gains on sales of assets and
additional income from Carmike's new family entertainment center, The Hollywood
Connection(R).
Cost of theatre operations increased 7.3% to $363.1 million from $338.4
million due to the increased number of screens in operation and the increase in
attendance. As a percentage of revenues, cost of theatre operations decreased
from 79.3% to 79.2%.
General and administrative costs increased 6.6% to $6.4 million from
$6.0 million reflecting additional general and administrative costs incurred in
connection with the additional screens added in 1996 and 1997. As a percentage
of total revenues, general and administrative costs remained the same at 1.4%.
Depreciation and amortization increased 17.7% to $33.4 million from
$28.4 million as a result of the increased screens in operation. This amount has
also been reduced due to the 1996 impairment charge from adopting Statement No.
121 (see Note B of Notes to Consolidated Financial Statements).
Interest expense increased 14.1% to $23.1 million from $20.3 million
for the year ended December 31, 1996. This increase reflects a higher average
amount of debt outstanding for the year
27
28
ended December 31, 1997. The increase in Carmike's debt during 1997 resulted
from capital expenditures incurred in connection with theatre acquisitions and
expansions. Carmike's average cost of debt in 1997 declined to 7.0% from 7.9% in
1996.
LIQUIDITY AND CAPITAL RESOURCES
Carmike's revenues are collected in cash and credit cards, principally
through admissions and theatre concessions. Because its revenues are received in
cash and cash equivalents prior to the payment of related expenses, Carmike has
an operating "float" which partially finances its operations.
Carmike entered into a revolving credit facility on October 17, 1997,
and amended and restated this facility on January 29, 1999. The Revolving Credit
Facility matures November 10, 2002 and bears interest at LIBOR plus 2.25%.
Carmike is obligated to pay a commitment fee of .5% on the unused portion of the
facility. In addition, on February 25, 1999 Carmike entered into a $75.0 million
Term Loan B, the proceeds of which were applied to repay revolving credit
borrowings. The Term Loan B matures March 30, 2005 and bears interest at LIBOR
plus 2.75%. Following application of the proceeds of the Term Loan B, the
maximum available borrowings under the Revolving Credit Facility was reduced
from $275.0 million to $200.0 million. At March 15, 1999, Carmike had $108.9
million available for borrowings under the Revolving Credit Facility.
Carmike also obtains liquidity through its theatre leasing
arrangements. The cost of constructing a new theatre is reduced substantially if
Carmike leases the real estate and improvements rather than purchasing them. As
of December 31, 1998, Carmike had 49 ground leases and 322 ground and
improvement leases, excluding theatres scheduled to be closed in 1999. Minimum
annual rent payments on these theatres totaled $53.1 million in 1998 and are
expected to increase in 1999. Carmike is a party to a master lease facility (the
"Master Lease") with Movieplex Realty Leasing, L.L.C., which provides up to
$75.0 million for financing the development of multiplex theatres, of which
approximately $52.8 million was available as of December 31, 1998. Theatres
leased pursuant to the Master Lease have lease terms of 16 years. In connection
with the amendment and restatement of the Revolving Credit Facility on January
29, 1999, Carmike also amended and restated its Master Lease to provide for
security interests and guarantees and to amend certain covenants contained
therein.
The Revolving Credit Facility, the Term Loan B and the Master Lease
contain certain restrictive provisions which, among other things, limit
additional indebtedness of Carmike, limit the payment of dividends and other
defined restricted payments, require that certain debt to capitalization ratios
be maintained and require minimum levels of cash flows.
Carmike's capital expenditures arise principally in connection with the
development of new theatres, renovation and expansion of existing theatres and
theatre acquisitions. During 1998, such capital expenditures totaled $146.7
million, net of lease financings. Carmike estimates that capital expenditures
for 1999 will be approximately $129.0 million, net of any lease financings.
Carmike expects to build 22 new theatres having an aggregate of 334 screens, add
48 stadium seating auditoriums to existing theatres, and retrofit approximately
83 existing auditoriums in 1999. Carmike estimates that the average cost of a
new 16-screen multiplex will
28
29
be approximately $9.0 million ($4.0 million if the land and improvements are
leased rather than owned). Carmike intends to enter into leasing arrangements
whenever possible in order to minimize capital requirements. Carmike expects
that capital expenditures for theatre construction, expansion and renovation
will be approximately $75.0 million, net of lease financings for 2000. Carmike
believes that its currently anticipated capital needs for theatre construction,
expansion and renovation and possible acquisitions for at least the next two
years will be satisfied by the cash and cash equivalents and short-term
investments on hand, borrowings under the Revolving Credit Facility, additional
sale of debt and/or equity securities, additional bank financings and other
forms of long-term debt and internally generated cash flow. Additionally,
Carmike may supplement its current sources of capital through sales and
leasebacks of theatre properties where market conditions for such transactions
are favorable.
Cash from operating activities was $92.0 million for the year ended
December 31, 1998, compared to $63.1 million for the year ended December 31,
1997. Net cash used in investing activities was $138.3 million for the year
ended December 31, 1998 as compared to $135.6 million for the year ended
December 31, 1997. This increase in cash used in investing activities was
primarily due to increased capital expenditures for Carmike's theatres. For the
years ended December 31, 1998 and 1997, cash provided by financing activities
was $47.5 million and $83.5 million, respectively. This decrease in cash
provided by financing activities was due to net repayments of indebtedness of
approximately $9.0 million in 1998, net of proceeds of $54.0 million from the
1998 issuance of preferred stock as compared to net borrowings of approximately
$80.0 million in 1997.
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance our indebtedness, or to fund planned capital
expenditures for theatre construction, expansion, renovation or acquisition will
depend on our future performance. Our future performance is, to a certain
extent, subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Based upon our current
level of operations and anticipated increases in revenues and cash flow as a
result of our theatre construction, expansion and renovation program, and the
scheduled closing of certain underperforming theatres, we believe that cash flow
from operations and available cash, together with available borrowings under the
Revolving Credit Facility, lease financing arrangements and/or sales of
additional debt or equity securities, will be adequate to meet our future
liquidity needs for at least the next two years.
We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that currently anticipated revenue growth
and operating improvements will be realized or that future capital will be
available to us from the sale of debt or equity securities, additional bank
financings, other long-term debt or lease financings in an amount sufficient to
enable us to pay our indebtedness, or to fund our other liquidity needs. We may
need to refinance all or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness or
raise additional capital through other means, on commercially reasonable terms
or at all. See "Item 1. Business -- Factors That May Affect Future Performance
- -- Future Capital Requirements," "-- Substantial Leverage" and "-- Ability to
Service Debt."
29
30
SEASONALITY AND INFLATION
The major film distributors generally release those films which they
anticipate to be the most successful during the summer and holiday seasons.
Consequently, Carmike has historically generated higher revenues during such
periods.
Carmike adjusts its prices periodically and will continue to do so as
competitive conditions permit. In general, management believes that inflation
has not had a significant impact on the operations of Carmike in any of the
periods discussed above.
YEAR 2000
The Year 2000 issue refers generally to the data structure problem that
may prevent systems from properly recognizing dates after the year 1999. The
Year 2000 issue affects information technology ("IT") systems, such as computer
programs and various types of electronic equipment that process date information
by using only two digits rather than four digits to define the applicable year,
and thus may recognize a date using "00" as the year 1900 rather than the year
2000. The issue also affects some non-IT systems, such as devices which rely on
a microcontroller to process date information. The Year 2000 issue could result
in system failures or miscalculations, causing disruptions of a company's
operations. Moreover, even if a company's systems are Year 2000 compliant, a
problem may exist to the extent that the data that such systems process is not.
Carmike's State of Readiness
Carmike has implemented a Year 2000 compliance program designed to
ensure that Carmike's computer systems and applications will function properly
beyond 1999. Carmike's Year 2000 compliance program has three phases: (1)
identification, (2) remediation (including modification, upgrading and
replacement) and (3) testing. Carmike's Year 2000 compliance program is an
ongoing process involving continual evaluation and may be subject to a change in
response to new developments.
Carmike has three material internal IT systems: (1) its accounting
system, (2) its proprietary IQ-Zero point-of-sale system and (3) a film system
through which Carmike manages the booking of the films shown in its theatres.
Carmike has completed the identification, remediation and testing phases with
respect to its accounting system. Although Carmike has completed the
identification and remediation phases with respect to its IQ-Zero and film
systems, the testing phase will not be completed until after the first quarter
of 1999. Carmike has conducted a survey of its theatres and has not identified
any non-IT systems the failure of which to be Year 2000 compliant would have a
material adverse effect on Carmike's business, operating results or financial
condition. Carmike has surveyed its material vendors and suppliers (including
concession, technical and film suppliers) and the financial institutions with
whom it has material relationships. Based on such survey, Carmike is not aware
of any material third-party Year 2000 risks.
30
31
Costs to Address Carmike's Year 2000 Issues
Carmike estimates that the cost of remediation of problems related to
Year 2000 issues will be less than $50,000. This cost includes the cost of
upgrading its film system.
Carmike's Contingency Plan
If Carmike's internal IT systems are not Year 2000 compliant on a
timely basis, Carmike plans to operate such systems manually until any Year 2000
issues are remediated. Such remediation may result in loss of data and
information and increased costs of operations. In addition, if the IQ-Zero
system failed to operate properly due to Year 2000 problems, local management
staff may not be able to focus their attention on their customers and theatre
needs. Carmike expects to maintain close contact with the third parties with
whom Carmike has material relationships, such as vendors, suppliers and
financial institutions, to ensure that such third parties' Year 2000 issues do
not affect Carmike's operations.
The Risks of Carmike's Year 2000 Issues
In light of its compliance efforts, Carmike does not believe that the
Year 2000 issue will materially adversely affect operations or results of
operations, and does not expect implementation to have a material impact on
Carmike's financial statements. However, there can be no assurance that
Carmike's systems will be Year 2000 compliant prior to December 31, 1999, or
that the failure of any such system will not have a material adverse effect on
Carmike's business, operating results and financial condition. To the extent the
Year 2000 problem has a material adverse effect on the business, operations or
financial condition of third parties with whom Carmike has material
relationships, such as vendors, suppliers and financial institutions, the Year
2000 problem could also have a material adverse effect on Carmike's business,
results of operations and financial condition.
RISK MANAGEMENT AND MARKET SENSITIVE INSTRUMENTS
Carmike is exposed to various market risks. These exposures primarily
relate to changes in interest rates.
Floating Interest Rate Risk: Based on Carmike's floating rate debt
outstanding at December 31, 1998, a 100 basis point increase in market rates
would increase interest expense and decrease income before income taxes by
approximately $2.3 million. The amount was determined by calculating the effect
of the hypothetical interest rate on Carmike's floating rate debt outstanding at
December 31, 1998.
Fixed Interest Rate Risk: The fair market value of long-term fixed
interest rate debt is also subject to interest rate risk. Generally, the fair
market value of fixed interest rate debt will increase as interest rates fall
and decrease as interest rates rise. The estimated fair value of Carmike's total
long-term fixed rate debt at December 31, 1998, after adjustment for the
restructuring of Carmike's indebtedness in the first quarter of 1999, was
approximately $200.0 million which equaled its value at the February 3, 1999
date of issuance. (See Note E of Notes to Consolidated Financial Statements.) A
hypothetical 100 basis point decrease in the prevailing interest rates at the
date of issuance in 1999 would result in an increase in fair value of total
long-
31
32
term debt by approximately $12.8 million. Fair market values are based on
estimates made by investment bankers.
Interest Rate Swaps: Carmike enters into interest rate swap agreements
to manage its exposure to interest rate changes. The swaps involve the exchange
of fixed and variable interest rate payments without exchanging the notional
principal amount. Payments or receipts on the agreements are recorded as
adjustments to interest expense. At December 31, 1998, Carmike had outstanding
interest rate swap agreements, maturing at various dates through 2003, with an
aggregate notional principal amount of $70.0 million. Under these agreements,
Carmike pays a fixed rate based on LIBOR and receives a floating interest rate.
These swaps effectively change Carmike's payment of interest on $70.0 million of
variable rate debt to fixed rate debt.
The fair values of these interest rate swap agreements represent the
estimated receipts or payments that would be made to terminate the agreements.
At December 31, 1998, Carmike would have paid approximately $1.3 million to
terminate the agreements. A 1.0% decrease in LIBOR would increase the amount
paid by approximately $.7 million. The fair value is based on counterparty
quotes, considering current interest rates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. Carmike expects to adopt
Statement No. 133 effective January 1, 2000. The Statement will require Carmike
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Carmike does not anticipate that the
adoption of Statement No. 133 will have a significant effect on its results of
operations or financial position.
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33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Included in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management and Market Sensitive
Instruments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements for the years ended December 31, 1998, 1997
and 1996
Report of Ernst & Young LLP, Independent Auditors...............................................F-1
Consolidated Balance Sheets.....................................................................F-2
Consolidated Statements of Operations...........................................................F-4
Consolidated Statements of Cash Flows...........................................................F-5
Consolidated Statements of Shareholders' Equity.................................................F-6
Notes to Consolidated Financial Statements......................................................F-8
33
34
Report Of Independent Auditors
Board of Directors and Shareholders
Carmike Cinemas, Inc.
We have audited the accompanying consolidated balance sheets of Carmike
Cinemas, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Carmike Cinemas, Inc. and subsidiaries at December 31, 1998
and 1997 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
Columbus, Georgia
February 25, 1999
F-1
35
CONSOLIDATED BALANCE SHEETS
CARMIKE CINEMAS, INC. AND SUBSIDIARIES
(IN THOUSANDS)
DECEMBER 31
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,771 $ 16,545
Short-term investments 801 3,042
Accounts and notes receivable 522 758
Inventories 3,851 3,082
Prepaid expenses 5,886 5,448
Recoverable construction allowances under capital
leases -0- 2,100
--------- ---------
TOTAL CURRENT ASSETS 28,831 30,975
OTHER ASSETS
Investments in and advances to partnerships 20,334 14,148
Deferred income taxes-- Note I 14,059 -0-
Other 3,753 9,669
--------- ---------
38,146 23,817
PROPERTY AND EQUIPMENT -- Notes B, D, E and F
Land 60,846 59,546
Buildings and improvements 261,887 184,769
Leasehold improvements 176,004 177,970
Leasehold interests 22,221 37,921
Equipment 212,976 185,955
--------- ---------
733,934 646,161
Accumulated depreciation and amortization (160,322) (149,105)
--------- ---------
573,612 497,056
EXCESS OF PURCHASE PRICE OVER NET
ASSETS OF BUSINESSES ACQUIRED --
Notes B and D 56,954 68,149
--------- ---------
$ 697,543 $ 619,997
========= =========
F-2
36
DECEMBER 31
1998 1997
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 45,533 $ 26,122
Accrued expenses-- Notes A and C 37,842 17,833
Current maturities of long-term indebtedness and capital lease
obligations 1,290 19,077
-------- --------
TOTAL CURRENT LIABILITIES 84,665 63,032
LONG-TERM LIABILITIES
Long-term debt, less current maturities-- Note E 232,013 222,242
Senior Notes-- Note E 79,870 79,870
Capital lease obligations, less current maturities -- Note F
38,587 39,550
Restructuring reserve, less current portion -- Note C 30,099 -0-
Other 6,000 -0-
Deferred income taxes -- Note I -0- 12,431
-------- --------
386,569 354,093
Commitments and contingencies -- Notes C, E, F and J
SHAREHOLDERS' EQUITY -- Notes D, E, G, and H
5.5% Series A Senior Cumulative Convertible Exchangeable Preferred Stock,
$1.00 par value, authorized 1,000,000 shares, issued and outstanding
550,000 shares; involuntary liquidation value of $ 55,000,000 550 -0-
Class A Common Stock, $.03 par value, one vote per share, authorized
22,500,000 shares, issued and outstanding 9,942,487 and 9,918,587 shares,
respectively 298 298
Class B Common Stock, $.03 par value, ten votes per share, authorized
5,000,000 shares, issued and outstanding
1,420,700 shares 43 43
Paid-in capital 158,543 104,677
Retained earnings 66,875 97,854
-------- --------
226,309 202,872
-------- --------
697,543 619,997
======== ========
See accompanying notes
F-3
37
CONSOLIDATED STATEMENTS OF OPERATIONS
CARMIKE CINEMAS, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- --------- -----------
Revenues:
Admissions $ 330,534 $ 319,235 $ 296,629
Concessions and other 151,034 139,363 130,097
--------- --------- -----------
481,568 458,598 426,726
Costs and expenses:
Film exhibition costs 177,754 169,672 156,968
Concession costs 19,911 18,334 17,252
Other theatre operating costs 187,870 175,103 164,149
General and administrative expenses 7,115 6,352 5,959
Depreciation and amortization expenses 37,502 33,443 28,408
Impairments of long-lived assets-- Note B 38,300 -0- 45,447
Restructuring charge-- Note C 34,699 -0- -0-
--------- --------- -----------
503,151 402,904 418,183
--------- --------- -----------
OPERATING INCOME (LOSS) (21,583) 55,694 8,543
Interest expense 27,230 23,142 20,289
--------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (48,813) 32,552 (11,746)
Income tax expense (benefit)-- Note I (18,166) 12,366 (4,469)
--------- --------- -----------
NET INCOME (LOSS) (30,647) 20,186 (7,277)
Preferred stock dividends (332) -0- -0-
--------- --------- -----------
NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCK $ (30,979) 20,186 (7,277)
========= ========= ===========
Weighted average shares outstanding:
Basic 11,356 11,277 11,174
Effect of dilutive securities - employee stock
options -0- 89 -0-
--------- --------- -----------
Diluted 11,356 11,366 11,174
========= ========= ===========
Earnings (loss) per common share:
Basic $ (2.73) $ 1.79 $ (.65)
========= ========= ===========
Diluted $ (2.73) $ 1.78 $ (.65)
========= ========= ===========
See accompanying no