Item 1: Business.
(a) General Development of Business.
CONTINUED EXPANSION
The Company is a world leader in the motion picture exhibition industry in terms of the number of screens in operation. At March 30, 2000, the Company operated 2,760 screens in 257 theatres located in 32 states, Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia, consisting of 2,444 screens in 217 "first run" theatres and 316 screens in 40 "discount" theatres. Of the Company's 2,760 screens, 2,384 (or 86%) were built by the Company during the 1990's, and, as a result, the Company believes it operates one of the most modern theatre circuits in the industry. All of the Company's theatres are multiplex facilities with approximately 95% of the Company's screens located in theatres of six or more screens. The Company believes that its ratio of screens to theatres (10.7 to 1 at March 30, 2000) is the second highest of the ten largest theatre circuits in the U.S. and is more than 50% higher than the industry average. From its fiscal year ended December 31, 1992 through the fiscal year ended December 31, 1999, the Company has increased consolidated revenues approximately 266% from $194.7 million to $712.6 million and has increased EBITDA (as defined herein) approximately 306% from $32.1 million to $130.2 million.
INTERNET STRATEGIES
enowshowing.com
In December 1999, the Company was the first major U.S. movie theatre company to sell movie tickets in real time over the Internet. The Company began testing its own ticketing system in five theatres in the Dallas area. As of March 30, 2000, tickets may be purchased over the Internet for fourteen theatres operated by the Company. Customers may access showtimes and ticketing options at a new site named enowshowing.com developed by the Company and a technology partner. Management believes that internet ticketing will significantly improve customer satisfaction, as customers who purchase tickets over the Internet will be able to bypass the box office and pick tickets up at remote kiosks or at dedicated box office windows. In February 2000, the Company expanded its internet technology by becoming the first U.S. movie theatre company to develop wireless technology to access the Company's showtimes via the enowshowing.com web site by all Palm Pilot(TM) devices, including the new Palm VII. The Company is also in the final stages of completing technology that will permit customers to purchase tickets over the Internet using these wireless devices.
Theatre Entertainment Services
In March 2000, the Company and five other major theatre companies formed a company to launch the leading Internet movie portal. The new company will provide a comprehensive offering of remote ticketing services, showtimes, reviews and movie trailers for the movie-going public via the Internet, telephone and wireless devices. The venture intends to begin selling tickets over the Internet and telephone by the summer of 2000.
The Company entered into an Exclusive Ticketing Distribution Agreement and Advertising Agreement in exchange for stock in the new company. Additionally, the Company has committed to invest additional funds in the new company for additional shares of the new company.
The Company maintains its principal executive offices at 3900 Dallas Parkway, Suite 500, Plano, Texas 75093. Its telephone number at such address is (972) 665-1000. The Company's website is located at www.cinemark.com.
FOREIGN DEVELOPMENTS
In 1999, the Company opened, through its subsidiaries, 16 theatres (125 screens) outside of the U.S. and Canada. At March 30, 2000, the Company operated 69 theatres (606 screens) in Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia. Additionally, the Company opened one first run theatre (12 screens) in Vancouver, Canada through a subsidiary in 1999 and continues to operate one discount theatre (12 screens) through an affiliate in Alberta, Canada. All of the theatres operated outside of the United States (other than the one discount theatre in Alberta, Canada) are "first run" theatres which the Company believes are among the most modern in the international market. The Company's ratio of screens to theatres in these international markets is 8.8 to 1 at March 30, 2000.
In September 1999, Cinemark International, through its wholly owned subsidiary Cinemark Germany GmbH, executed a lease agreement for a movie theatre in Herne, Germany. The theatre (13 screens) is scheduled to open in December 2000.
In September 1999, Cinemark International acquired all of the shares of its Argentine joint venture partner, Prodecine S.A., which owned 50% of the shares of Cinemark Argentina S.A. Cinemark International paid $2.8 million in cash and delivered the following promissory notes bearing interest at the rate of 10% per annum: (a) US$2.5 million due January 2000, (b) US$2.5 million due April 2000, (c) A$2.5 million pesos due July 2000, (d) A$3.5 million pesos due October 2000. The shares of Prodecine S.A., Cinemark Investments Argentina, S.A. and Cinemark Argentina, S.A. owned by Cinemark International were transferred to one of the Company's subsidiaries in December 1999.
(b) Financial Information About Industry Segments.
The Company is a unitary business as described above and as a result does not break out its business into industry segments.
(c) Narrative Description of Business.
GENERAL
THE COMPANY
The Company is a world leader in the motion picture exhibition industry in terms of the number of screens in operation. In 1999, the Company opened an aggregate of 35 theatres (458 screens and 2 IMAX(R)3D screens) in the United States and internationally. At March 30, 2000, the Company operated 2,760 screens
in 257 theatres located in 32 states, Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia, consisting of 2,444 screens in 217 "first run" theatres and 316 screens in 40 "discount" theatres. Of the Company's 2,760 screens, 2,384 (or 86%) were built by the Company during the 1990's, and, as a result, the Company believes it operates one of the most modern theatre circuits in the industry. All of the Company's theatres are multiplex facilities with approximately 95% of the Company's screens located in theatres of six or more screens. The Company believes that its ratio of screens to theatres (10.7 to 1 at March 30, 1999) is the second highest of the ten largest theatre circuits in the U.S. and is more than 50% higher than the industry average. The Company is an industry leader in new theatre construction and operation and, according to industry sources, has constructed more screens than any other exhibitor during the 1990's. The Company believes the attractiveness, comfort and viewing experience provided by its modern facilities result in the Company's theatres more often being the preferred destination for moviegoers in its markets. From its fiscal year ended December 31, 1992 through the fiscal year ended December 31, 1999, the Company has increased consolidated revenues approximately 266% from $194.7 million to $712.6 million and has increased EBITDA (as defined herein) approximately 306% from $32.1 million to $130.2 million.
The Company's management experience and financial flexibility permit it to introduce larger multiplex theatre facilities into areas previously served by smaller theatres, thereby capturing moviegoers who seek more attractive surroundings, wider variety of films, better customer service, shorter lines, more convenient parking and a greater choice of seating to view popular movies. The Company's larger multiplex facilities increase per screen revenues and operating margins and enhance its operating efficiencies. Such theatres enable the Company to present films appealing to several segments of the moviegoing public while serving patrons from common support facilities (such as box office, concession areas, rest rooms and lobby). In addition, larger multiplex facilities provide the Company with greater flexibility in staffing, movie scheduling and equipment utilization while reducing congestion throughout the theatre. Larger multiplex facilities also provide increased flexibility in determining the length of time a film will run. The Company can lengthen the run of a film by switching it to a smaller auditorium after peak demand has subsided and has the potential to generate higher profits as film license agreements typically provide for a lower film rent to be paid later in a film's run.
OVERVIEW OF THE THEATRE INDUSTRY
U.S. box office sales of approximately $7.5 billion in 1999 was the seventh consecutive record year for the industry. Additionally, overall attendance has achieved record levels in three of the last four years. The Company believes the primary reason for the record years is the increased investment in production and marketing of films as well as the substantial construction of new multiplexes throughout America. The following table represents the results of a survey by the National Association of Theatre Owners outlining the historical trends in U.S. theatre attendance, average ticket prices and box office sales for the last ten years.
Theatrical exhibition is the primary distribution channel for new motion picture releases. The Company believes the successful theatrical release of a movie abroad and in "downstream" distribution channels, such as home video and pay-per-view, network and syndicated television, is largely dependent on its successful theatrical release in the U.S. The Company further believes the emergence of new motion picture distribution channels has not adversely affected attendance at theatres as these distribution channels do not provide an experience comparable to the out-of-home experience of viewing a movie in a theatre. The Company believes the public will continue to recognize the advantages of viewing a movie on a large screen with superior audio and visual quality, while enjoying a variety of concessions and sharing the experience with a large audience.
The Company believes that as a result of increased revenues from the successful release of films in both movie theatres and other distribution channels, major film production companies have increased and will continue to increase the number of films being produced. Film producers have increased their revenues from these distribution channels by approximately 259% from 1985 to $21.2 billion in 1997. The increased revenue potential from film distribution in recent years can be attributed to increased demand resulting from the domestic and international growth of the movie theatre industry and the home video industry, and the significantly increased channel capacity created by enhanced cable and satellite-based transmission systems. Moreover, the Company believes independent producers and distributors, such as Gramercy Pictures, Turner Pictures (which includes New Line Cinemas and Castle Rock Entertainment) and Dreamworks SKG, the highly-publicized partnership among Jeffrey Katzenberg, Steven Spielberg and David Geffen, should help increase motion picture production. Additionally, increased revenues permit major film production companies to create "event" films such as Star Wars, Jurassic Park, Independence Day, Titanic and Armageddon, which utilize the latest advances in computer technology to enhance production quality and special effects. The Company believes an increasing supply of quality feature films and "event" films exhibited with advanced projection and stereo sound equipment such as Digital Theatre Sound Systems, Dolby Digital Sound and Sony Dynamic Digital Sound will enhance the moviegoing experience and will increase the theatre attendance of exhibitors with modern multiplex theatres designed to exhibit such motion pictures.
Increased international distribution is also producing important sources of revenue for film distributors and growth opportunities for exhibitors. In 1998, total international box office receipts were $6.8 billion, representing a 10.2% compound annual growth rate since 1994. The Company believes many international markets for theatrical exhibition have historically been underserved due to antiquated and/or run-down theatres, and international markets will continue to experience rapid growth as additional multiplex theatres are introduced.
In addition, the Company believes certain demographic trends favor the theatre exhibition industry. Information obtained from the U.S. Bureau of Census indicates the number of 12 to 20 year olds in the U.S., the largest moviegoing segment of the population, is projected to grow an aggregate of 9.2% through the year 2005. Furthermore, according to MPAA, the number of patrons over 40 years old as a percentage of the total movie
audience has more than doubled from approximately 14% in 1986 to approximately 33% in 1997. The Company believes film producers have recognized the importance of this segment of the population and are producing an increased number of films primarily targeted to this more mature audience.
BUSINESS STRATEGY
The Company intends to continue to grow through new theatre development by applying the same techniques it has implemented since it was founded. The Company believes it is unique among major theatre exhibitors in the development and execution of the following domestic and international new build business strategy:
Build in underserved markets. The Company has built modern multiplex facilities in underserved mid-sized markets as well as megaplex entertainment facilities in major metropolitan areas. In such markets the Company frequently is the sole or leading exhibitor in terms of first run screens operated within a film zone. The "megaplex" entertainment centers are located in major metropolitan areas which are typically 50,000 square-feet or larger complexes having 14 or more screens with screens up to 75 feet in the largest auditoriums and also feature stadium seating, digital sound, restaurant and coffee bar and a large video arcade. Approximately 60% of the Company's first run theatres have stadium seating auditoriums. The Company believes it gains maximum access to film product, and thereby realizes a competitive advantage, by locating its modern multiplex theatres in new and existing film zones where little or no competition for film product exists. The Company will continue to build modern multiplex facilities in select markets.
Continue to maintain discount theatre niche. The Company intends to maintain its discount theatre operations (admission of $1 to $2 per ticket) to serve patrons who miss a film during its first run exhibition or who may not be able to afford to attend first run theatres on a frequent basis. The Company believes its discount theatres allow it to serve these segments of the total moviegoing population, increasing the number of potential customers beyond traditional first run moviegoers. The Company's multiplex discount theatres offer many of the same amenities as its first run theatres, including wall-to-wall screens, comfortable seating with cupholder armrests, digital sound, multiple concession stands and a video game room. The Company's discount theatres generally have higher attendance, lower film costs and a greater proportion of concession revenues than its first run theatres. As of March 30, 2000, approximately 11% of the Company's screens were housed in discount theatres.
Develop modern American-style theatres in underserved international markets. The Company intends to continue to develop multiplex theatres directly or through joint venture arrangements with local partners in underserved international markets. Most of the theatres (approximately 87%) built by the Company internationally are modern stadium seating complexes. The Company's activities to date in international markets have been primarily directed toward Latin America, which the Company believes is severely underscreened. The Company believes the same economic factors giving rise to the multiplex rescreening trend in the U.S. are similarly applicable to international markets. The Company believes it was the first U.S. circuit to open American-style modern multiplex theatres in Mexico and Chile, and has begun developing multiplex theatres directly or through joint venture arrangements with local partners in Argentina, Brazil, Ecuador, Honduras, Peru, El Salvador, Nicaragua, Costa Rica, Colombia, Taiwan, Germany and the United Kingdom.
OPERATIONS
The Company's corporate office, which employed approximately 240 individuals as of March 30, 2000, is responsible for theatre development and site selection, lease negotiation, theatre design and construction, film licensing and settlements, concession vendor negotiations and financial and accounting activities. The Company's domestic theatre operations are divided into eight geographic divisions, each of which is headed by a regional leader. The Company's regional leaders have an average of 17 years experience in the movie theatre industry and each is responsible for supervising approximately 12.5% of the Company's theatre managers. Theatre managers are responsible for the day-to-day operations of the Company's theatres including optimizing staffing, developing innovative theatre promotions, preparing movie schedules, purchasing concession inventory, maintaining a clean and functioning facility and training theatre staff.
To maintain quality and consistency within the Company's theatres, the Company conducts regular inspections of each theatre and operates a program which involves unannounced visits by unidentified customers who report on the quality of service, film presentation and cleanliness of the theatre and has created an innovative training program to address significant training issues. The training program, appropriately named "Mecca of Innovative Training or "MIT", focuses on operational issues inherent in running multiplex theatres. Training is held at the Company's training center in Dallas, Texas. Week long courses are attended by up to twenty theatre managers focusing on maintaining current established standards for uniformity and consistency in the Company's operations as well as providing a brainstorming platform for participants to increase future performance. The Company has developed three courses that both its domestic and international managers attend as they advance with the Company.
Theatre Development
The Company continually evaluates existing and new markets for potential theatre locations. The Company generally seeks to develop theatres in markets that are underscreened as a result of changing demographic trends or that are served by aging theatre facilities. Some of the factors the Company considers in determining whether to develop a theatre in a particular location are the market's population and average household income, the proximity to retail corridors, convenient roadway access, the proximity to competing theatres and the effect on the Company's existing theatres in the market, if any.
The Company has traditionally designed its multiplex theatres with bright colors, neon, tile and marble and state-of-the-art technology, to create a festive and memorable experience for the customer. In 1998, the Company commenced a new branding campaign featuring a new Cinemark logo and theatre design. New art deco graphic treatments and colors have been applied to the Cinemark name and theatres. Richly hued reds and gold have replaced the traditional bright colors; reminiscent of the golden age of Hollywood. Additionally, the Company has designed several prototype theatres, each of which can be adapted to suit the size requirements of a particular location and the availability of parking and to respond to competitive factors or specific area demographics. The Company believes the fully designed prototypes result in significant construction and operating cost savings. More importantly, the Company believes construction and operation of high quality theatres provides significant competitive advantages as theatre patrons, and therefore film distributors, seek clean, conveniently located, modern facilities with state-of-the-art equipment.
The Company's theatres typically contain auditoriums consisting of 100 to 400 seats each and feature wall-to-wall screens, high back rocking chairs with cupholder armrests, digital sound, multiple concession stands and video game rooms. The Company's megaplex facilities typically will exceed 50,000 square feet, feature 14 or more screens with 75 foot screens in the largest auditoriums, stadium seating, digital sound, a pizzeria, a coffee bar and a large video arcade room. The Company believes stadium style auditoriums with digital sound provide an entertainment experience which is superior to that available at a conventional theatre. Jurassic Park, released in the summer of 1993, was the first major motion picture to utilize digital sound. The majority of the films produced
in 1997, 1998 and 1999 had digital soundtracks available as an alternative to the standard stereo soundtrack. More than 90% of the Company's first run theatres have one or more auditoriums with digital sound capabilities, and the Company is continuing to add digital sound capabilities.
Film Licensing
Films are typically licensed from film distributors owned by major film production companies and from independent film distributors that distribute films for smaller production companies. For first run films, film distributors typically establish geographic zones and offer each available film to all theatres in a zone. The size of a film zone is generally determined by the population density, demographics and box office potential of a particular market or region, and can range from a radius of three to five miles in major metropolitan and suburban areas to up to 15 miles in small towns. The Company currently operates theatres in approximately 137 first run film zones. Each film, regardless of the distributor, is generally licensed to only one theatre in each zone. New film releases are licensed at the discretion of the film distributors on an allocation or previewed bid basis. In film zones where the Company has little or no competition, the Company selects those pictures it believes will be most successful. In film zones where the Company faces competition, the Company usually licenses films on an allocation basis. Under an allocation process, a particular distributor will rotate films among exhibitors, typically providing movies to competing exhibitors solely based on the order of their release. For second run films, film distributors establish availability on a market-by-market basis after the completion of exhibition at first run theatres and permit each theatre within a market to exhibit such films without regard to film zones.
The Company licenses films through its booking office located at the Company's corporate headquarters in Plano, Texas. All of the major motion picture studios and distributors also maintain offices in the Dallas, Texas metropolitan area. The Company's film bookers have significant experience in the theatre industry and have developed long-standing relationships with the film distributors. Each film booker is responsible for a geographic region and maintains relationships with representatives of each of the major motion picture studios and distributors having responsibility for their respective geographic regions. The Company licenses films from all of the major distributors and is not dependent on any one studio for motion picture product.
Prior to negotiating for a film license, the Company's booking personnel evaluate the prospects for the film. The criteria considered for each film include cast, director, plot, performance of similar films, estimated film rental costs, expected MPAA rating and the outlook for other upcoming films. Successful licensing depends upon knowledge of the tastes of local residents.
A film license typically specifies a rental fee to be paid to the distributor based on the higher result of either a gross receipts formula or a theatre admissions revenue sharing formula. Under a gross receipts formula, the distributor receives a specified percentage of box office receipts with the percentage generally declining over the term of the run. First run film rental percentages usually begin at 70% of box office receipts and gradually decline to as low as 30% over a period of four to seven weeks. Second run film rental percentages typically begin at 35% of box office receipts and often decline to 30% after the first week. Under the theatre admissions revenue sharing formula (commonly known as the "90/10" clause), the distributor receives a specified percentage (i.e., 90%) of the excess of box office receipts over a negotiated reimbursement for theatre expenses. In general, most distributors follow an industry practice of adjusting or renegotiating the terms of a film license subsequent to exhibition based upon the film's success.
Concessions
Concession sales are the Company's second largest revenue source, representing approximately 31% of total revenues for 1999. The Company has devoted considerable management effort to increasing concession sales and improving
the operating income margins from concession sales. These efforts include implementation of the following strategies:
o Optimization of product mix. The Company's primary concession products are various sizes of popcorn, soft drinks, candy and hot dogs, all of which the Company sells at each of its theatres; however, different varieties and brands of candy and soft drinks are offered at theatres based on preferences in that particular geographic region. The Company has also implemented "combo-meals," and "movie meals" for children and senior citizens, both of which offer a pre-selected assortment of concession products.
o Introduction of new products. The Company continues to introduce new concession products designed to attract additional concession purchases. New offerings have recently included bottled water, bulk candy, frozen yogurt and ice cream. Additionally, the Company has introduced pizza, pastries and specialty coffee in many of its megaplexes.
o Staff training. Employees are continually trained in "cross-selling" and "upselling" techniques. This training occurs through situational role-playing conducted at the Company's "Customer Service University" as well as continual on-the-job training. Individual theatre managers receive a portion of their compensation based on concession sales at their theatres and are therefore motivated to maximize concession purchases.
o Theatre design. Newer theatres are designed to include at least two to three concession stands, with each stand having multiple service stations to make it easier to serve larger numbers of customers rapidly. Strategic placement of large concession stands within theatres heightens their visibility, aids in reducing the length of concession lines and improves traffic flow around the concession stands.
o Cost control. The Company negotiates prices for its concession supplies directly with concession vendors on a bulk rate basis and distributes its concession supplies through a national concession contract distributor. The concession distributor provides inventory and distribution services to the theatres, which place volume orders directly with the concession distributor. The concession distributor is paid a fee for such service equal to a percentage of the Company's concession supply purchases. The Company believes utilization of a concession distributor is more cost effective than establishing a concession warehousing network owned by the Company.
Marketing
In order to attract customers, the Company relies principally upon newspaper display advertisements (substantially paid for by film distributors) and newspaper directory film schedules (generally paid for by the exhibitor) to inform its patrons of film titles and show times. The Company has also developed an internet web page to inform patrons of film titles and show times of all of its domestic theatres and a majority of its international theatres. Radio and television advertising spots (generally paid for by film distributors) are used to promote certain motion pictures and special events. The Company also exhibits previews in its theatres of coming attractions and films presently playing on the other screens which it operates in the same theatre or market.
Theatre Management
Each theatre is managed by one theatre manager and a number of assistant managers. A typical ten screen movie theatre has approximately 40 employees and two to three assistant managers, while a 16-screen megaplex has approximately 200 employees, including eight assistant managers. The theatre manager is paid a salary and a commission based upon concession sales. A theatre manager can increase the profitability of the theatre and his/her own compensation by ensuring that the staff is properly trained to encourage patrons to "trade up" in size or purchase additional concession items. The goal of a theatre manager is to operate a theatre in the most efficient and profitable manner in order to be promoted from managing a smaller theatre to managing a megaplex.
The Company believes strongly in customer service and it promotes this through employee empowerment. Each theatre employee is authorized to deal with all customer needs and complaints in a variety of ways, including offering free tickets or free concession items, if necessary. Prior to peak seasons, the Company teaches its employees customer service at its Customer Service University training program. The Customer Service University is an active training program consisting of role-playing exercises as well as typical classroom instruction.
Management Information Systems
The Company has developed its own point of sale ("POS") management information system to further enhance its ability to maximize revenues, control costs and efficiently manage the Company's theatre circuit. The POS information system provides corporate management with a detailed daily admission and concession revenue report by the start of business the following morning. This information allows management to make real-time adjustments to movie schedules, prolong runs or increase the number of screens on which successful movies are being played and substitute films when gross receipts cease to meet expected goals. Real-time seating and box office information is available to box office personnel, making it possible for theatre management to avoid overselling a particular film and providing faster and more accurate response to customer inquiries regarding showings and available seating. The POS information system also tracks concession sales and provides weekly in-theatre inventory reports, leading to better inventory management and control.
The Company also developed a "Next Generation" version of its current POS system based upon a Windows platform. This enhanced system has multiple language capabilities, unlimited ticket pricing options, and the ability to process credit cards. The Windows platform permits the addition of barcode scanners, pole displays, touch screens, credit card readers and other equipment specific to individual country requirements. Cinemark successfully deployed this system during 1999 in approximately 13% of its domestic theatres and plans to roll out this enhanced system to its top 75 domestic theatres during 2000.
enowshowing.com
In December 1999, the Company was the first major U.S. movie theatre company to sell movie tickets in real time over the Internet The Company began testing its own Internet ticketing system in five theatres in the Dallas area. As of March 30, 2000, tickets may be purchased over the Internet for fourteen theatres operated by the Company. Customers can access showtimes and ticketing options at a new site named enowshowing.com developed by the Company and a technology partner. Management believes that internet ticketing will significantly improve customer satisfaction, as customers who purchase tickets over the Internet will be able to bypass the box office and pick up tickets at remote kiosks or at dedicated box office windows. In February 2000, the Company expanded its internet technology by becoming the first U.S. movie theatre company to develop wireless technology to access the Company's showtimes via the enowshowing.com web site by all Palm Pilot(TM) devices, including the new Palm VII. The Company is also in the final stages of completing technology that will permit customers to purchase tickets over the Internet using these wireless devices.
INTERNATIONAL
The motion picture exhibition business has become increasingly global and rising box office receipts from international markets indicate some international markets are poised for rapid growth. The Company believes its experience in developing and operating multiplex theatres both domestically and internationally provides it with a significant advantage in continuing to develop multiplex facilities in international markets. The Company's strategy in these markets is to form partnerships or joint ventures with local operators, sharing risk and obtaining valuable market insight.
Due to the enormous potential of the international markets, Cinemark International is introducing state-of-the-art multiplex theatres to "under-screened" international markets. As of March 30, 2000, the Company, through its subsidiaries, operates 69 first-run theatres (606 screens) in Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia, with an aggregate of 18 theatres (160 screens) scheduled to open during the remainder of 2000. Additionally, the Company, through a subsidiary, opened one first run theatre (12 screens) in Vancouver, Canada, and through an affiliate continues to operate one discount theatre (12 screens) in Alberta, Canada.
Mexico
The Company, through its subsidiary Cinemark Mexico (USA), Inc. ("Cinemark Mexico"), is developing state-of-the-art multiplex theatres comparable to theatres developed by the Company in the U.S. Cinemark Mexico's operations are conducted through its subsidiary Cinemark de Mexico, S.A. de C.V.. Cinemark Mexico currently operates 20 theatres (192 screens) and plans to open four theatres (39 screens) during 2000. The Company manages all of Cinemark Mexico's theatres pursuant to a management agreement. Cinemark Mexico's theatres are staffed primarily with Mexican nationals who report to the Company's regional and corporate office personnel. The Company provides all corporate operating functions, including film booking and accounting.
Chile
In November 1992, Cinemark International entered into a joint venture agreement with Conate, S.A., a Chilean movie theatre operator ("Conate"), to develop state-of-the-art multiplex theatres in Chile. The joint venture provides for the development of multiplex theatres and the licensing of the Company's technology, trademark and name. The joint venture conducts its business through Cinemark Chile S.A. As of March 30, 2000, the Company indirectly owns approximately 98% of Cinemark Chile, S.A. Cinemark Chile, based in Santiago, Chile, currently operates eleven theatres (89 screens) and plans to open two theatres (10 screens) in 2000.
Argentina
In December 1995, Cinemark International entered into a joint venture agreement with D'Alimenti S.A., an Argentinean corporation ("DASA"), and Prodecine S.A., an Argentinean corporation ("Prodecine"), to develop state-of-the-art multiplex theatres in Argentina. The joint venture agreement also provides for the licensing of the Company's technology, trademark and name. The joint venture's business is conducted through Cinemark Argentina, S.A., which is owned by Cinemark Investments Argentina S.A. and Prodecine (which acquired DASA's interest in the joint venture). In September 1999, Cinemark International acquired all of the shares of its Argentine joint venture partner, Prodecine S.A., which held the remaining 50% of the shares of Cinemark Argentina S.A. Cinemark International paid $2.8 million in cash and delivered the following promissory notes bearing interest at the rate of 10% per annum: (a) totaling US$2.5 million due January 2000, (b) totaling US$2.5 million due April 2000, (c) totaling A$2.5 million pesos due July 2000, (d) totaling A$3.5 million pesos due October 2000. In December 1999, the 100% interests in Prodecine S.A., Cinemark Investments Argentina, S.A., and Cinemark Argentina, S.A. held by Cinemark International were transferred to one of the Company's subsidiaries.
In December 1997, the Company formed a wholly-owned Argentine subsidiary, Cinemark Rio de la Plata Associates S.R.L. ("Cinemark Associates") to develop multiplex theatres in Argentina outside of Cinemark Argentina. The Company consolidated Cinemark Argentina and Cinemark Associates in 1999.
In November 1998, Cinemark International acquired 50% of Cinemark Investments Argentina S.A. from Chilean individuals who acquired such interests from Conate. After giving effect to this transaction, Cinemark International owned 100% of Cinemark Investments Argentina S.A.
The Company, through Cinemark Argentina and Cinemark Associates', currently operates seven theatres (59 screens) in the aggregate and plans to open two theatres (20 screens) in 2000.
Brazil
In 1996, Cinemark LTDA was organized as an indirect subsidiary of Cinemark International. In November 1997, Cinemark International, through a wholly-owned subsidiary, entered into a joint venture agreement with Brazilian strategic partners and converted Cinemark LTDA to a Brazilian corporation, Cinemark Brasil S.A., which is approximately 60% indirectly owned by Cinemark International and approximately 40% owned by Brazilian strategic partners. Cinemark Brasil S.A. currently operates 19 theatres (174 screens) and plans to open six theatres (56 screens) in 2000.
Ecuador
In September 1996, Cinemark International entered into a joint venture agreement with The Wright Group, a group of prominent Ecuadorian individuals and companies, to develop state-of-the-art multiplex theatres in Ecuador. The joint venture agreement provides for the licensing of the Company's technology, trademark and name. The joint venture conducts its business through Cinemark del Ecuador, S.A. ("Cinemark Ecuador") which is 60% owned by Cinemark International and 40% owned by The Wright Group. Cinemark Ecuador currently operates two theatres (16 screens).
Peru
In December 1996, Cinemark International and Conate entered into a joint venture agreement to develop state-of-the-art multiplex theatres in Peru. The joint venture provides for the licensing of the Company's technology, trademark and name. The joint venture conducts its business through Cinemark del Peru, S.A. In January 1999, Cinemark International completed a distribution to the Company of the capital stock it owns in Cinemark del Peru S.A. After giving effect to these transactions, the Company presently owns 100% of Cinemark del Peru, S.A. Cinemark del Peru, S.A. currently operates two theatres (21 screens).
Central America
In January 1997, Cinemark International entered into a joint venture agreement with Cines de Centroamerica to develop state-of-the-art multiplex theatres throughout Central America. The joint venture conducts its business through Cinemark Equity Holdings Corporation which is 50.1% owned by Cinemark International. The joint venture provides for the licensing of the Company's technology, trademarks and name and currently operates seven theatres (45 screens) in four Central American countries (Honduras, El Salvador, Nicaragua and Costa Rica). The Central American joint venture plans to open two theatres (16 screens) in 2000.
Canada
Cinemark International, through its wholly owned subsidiary Cinemark Holdings Canada, Inc., owns a 50% interest in Cinemark Theatres Alberta, Inc. ("Cinemark Alberta") which currently operates one discount theatre (12 screens) managed by the Company pursuant to a management agreement. In August 1999, Cinemark Alberta sold one theatre (12 screens) in Alberta, Canada.
The Company, through its wholly owned subsidiary Cinemark Theatres Canada, also opened one first run theatre (12 screens) in Vancouver, Canada in 1999.
Taiwan
In September 1998, Cinemark International entered into a joint venture agreement with Core Pacific Ltd. to develop state-of-the-art multiplex theatres in Taiwan, Republic of China. The joint venture will conduct its business through Cinemark-Core Pacific Ltd. which is 50.1% owned by Cinemark International and 49.9% owned by Core Pacific Ltd. Cinemark-Core Pacific Ltd. expects to begin construction on one theatre (13 screens) during 2000.
Colombia
In December 1998, Cinemark International entered into a joint venture agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. to develop state-of-the-art multiplex theatres in Colombia. The joint venture will conduct its business through Cinemark Colombia S.A. which is owned 50.1% by Cinemark International, and the remaining 49.9% is collectively owned by Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. The Colombia joint venture currently operates one theatre (10 screens). The Colombian joint venture plans to open one theatre (6 screens) in 2000.
United Kingdom
In September 1998, Cinemark International incorporated Cinemark Theatres U.K. Ltd., an English company, to develop state-of-the-art multiplex theatres in the United Kingdom. Cinemark Theatres U.K. Ltd. is a wholly-owned subsidiary of Cinemark International. Cinemark Theatres U.K. Ltd. expects to begin construction on one theatre (10 screens) in 2000.
Germany
In August 1999, Cinemark International incorporated Cinemark GmbH, a German company, to develop state-of-the-art multiplex theatres in Germany. Cinemark Germany GmbH is a wholly-owned subsidiary of Cinemark International. Cinemark Germany GmbH expects to open one theatre (13 screens) in 2000.
COMPETITION
The Company is the fifth largest motion picture exhibitor in North America in terms of the number of screens in operation. The Company competes against both local and national exhibitors, some of which may have substantially greater financial resources than the Company.
In film zones where the Company has little or no direct competition (approximately 73% of the Company's theatres), the Company selects those pictures it believes will be most successful in its markets from among those offered to it by distributors. Where the Company faces competition, it usually licenses films based on an allocation process. The Company currently operates in approximately 137 first run film zones in the U.S. The Company believes no individual film zone is material to the Company. See "-- Operations -- Film Licensing." The Company believes the principal competitive factors with respect to film licensing include capacity and location of an exhibitor's theatre, theatre comfort, quality of projection and sound equipment, level of customer service and licensing terms. The competition for customers is dependent upon factors such as the availability of popular films, the location of theatres, the comfort and quality of theatres and ticket prices. The Company believes its admission prices at its first run and discount theatres are competitive with admission prices of respective competing theatres.
The Company's theatres face competition from a number of other motion picture exhibition delivery systems, such as network, syndicated and pay television, pay-per-view and home video systems. The impact of such delivery systems on the motion picture exhibition industry is difficult to determine, and there can be no assurance existing or future alternative delivery systems will not have an adverse impact on attendance. The Company's theatres also face competition from other forms of entertainment competing for the public's leisure time and disposable income.
EMPLOYEES
As of March 30, 2000, the Company had approximately 8,000 employees in the U.S., approximately 15% of whom are full time employees in the U.S. and 85% of whom are part time employees. The Company is a party to collective bargaining agreements with eight unions of which approximately 21 employees are members. The Company's international operations typically utilize union labor. The Company considers its relations with its employees to be satisfactory.
REGULATION
The Company is subject to various general regulations applicable to its operations including the Americans with Disabilities Act (the "ADA"). The Company has established a program to review and evaluate the Company's existing theatres and its specifications for new theatres and to make any changes to such theatres and specifications required by the ADA. The Company develops new theatres to be accessible to the disabled and believes it is in substantial compliance where readily achievable with current regulations relating to accommodating the disabled.
Item 2:
Item 2: Properties.
Of the 2,154 screens operated by the Company in the U.S. and Canada at March 30, 2000, 30 theatres (459 screens) were owned and 158 theatres (1,695 screens) are leased pursuant to building leases. The Company's leases are generally entered into on a long term basis with terms (including options) generally ranging from 20 to 40 years. Approximately 5% of the Company's theatre leases (covering 40 screens) have remaining terms (including optional renewal periods) of less than five years and approximately 80% of the Company's theatre leases (covering 1,473 screens) have remaining optional terms (including optional renewal periods) of more than 15 years. Rent is typically calculated as a percentage of box office receipts or total theatre revenues, subject to an annual minimum. The Company leases an office building in Plano, Texas for its corporate office.
See note 10 of the Company's Notes to the Consolidated Financial Statements for information with respect to the Company's lease commitments.
As of March 30, 2000, the Company operated 69 theatres (606 screens) outside of the U.S. and Canada. All of the 69 theatres operated outside of the U.S. are leased pursuant to ground or building leases. The leases generally provide for contingent rental based upon operating results (some of which are subject to an annual minimum). Generally, these leases will include renewal options for various periods at stipulated rates. The Company attempts to obtain lease terms that provide for build-to-suit construction obligations of the landlord. No foreign leases have remaining terms of less than five years, and approximately 89% of the Company's foreign leases (541 screens) have remaining terms (including optional renewal periods) of more than 15 years.
The Company periodically reviews the profitability of each of its theatres, particularly those whose lease terms are about to expire, to determine whether to continue its operations. The Company closed eight theatres (47 screens) in 1999, generally as a result of unfavorable or unavailable lease renewals or individual theatre performance. The closings of these theatres did not have a material effect on the Company's results of operations or financial position. The Company also sold three theatres (23 screens) in 1999.
Item 3:
Item 3: Legal Proceedings.
Austin Litigation
On July 25, 1997, David Witte, Rona Schnall and Laura Brown filed suit in District Court No. 345 of Travis County, Texas against the Company alleging certain violations of the ADA relating to the accessibility of a certain theatre to patrons using wheelchairs. The Company and the plaintiffs have settled this case and the suit was dismissed with prejudice.
El Paso Litigation
On December 10, 1997, Jose G. Lara, E.J. Lozano, Alfredo Juarez, G. Tim Hervey, Earl L. Harbeck, Volar Center for Independent Living, Luis Enrique Chew, Desert Adapt and Myra Murillo (the "Lara Case") filed suit in the United States District Court, Western District of Texas, El Paso Division, against the Company alleging certain violations of the Americans with Disabilities Act of 1990 (the "ADA"). In August 1998, the judge presiding over the case granted plaintiffs motion for summary judgment ruling that the Company's stadium theatre design is in violation of the ADA. The Company is appealing this ruling. Although the Company cannot predict the outcome of the appeal, management believes the Company's potential liability with respect to such proceeding is not material in the aggregate to the Company's financial position, results of operation and cash flows.
In addition to the Lara Case, disabled persons have filed suits in Federal court in Austin, Houston, Beaumont and Mission, Texas alleging certain violations of the ADA identical to those contained in the Lara Case. The Company has filed an answer denying the allegations and claims contained in each of the suits. Although the Company cannot predict the outcome of such litigation, management believes the Company's potential liability with respect to such proceeding is not material in the aggregate to the Company's financial position, results of operation and cash flows. The Federal courts in Mission, Houston, Beaumont, and Austin have granted stays in their respective cases pending the outcome of the appeal in the Lara Case. A motion to stay the proceedings in Beaumont is pending.
DOJ Litigation
In January 1999, the Company filed suit in the United States District Court, Northern District of Texas, Dallas Division, against the Department of Justice ("DOJ") alleging that the DOJ, through its Amicus Curiae brief filed in the Lara Case failed to abide by the requirements of the Administrative Procedures Act (the "APA") in promulgating a new rule of law governing wheelchair accessibility in movie theatres. The Company is seeking a declaratory judgment declaring, among other things, the seating configurations within its stadium seating facilities comply with the ADA and that the DOJ has failed to provide proper notice and comment, as required by the APA, before establishing new standards for compliance. The Company is unable to predict the outcome of this litigation.
In March 1999, the DOJ filed suit in the United States District Court, Northern District of Ohio, Eastern Division, against the Company alleging violations of the ADA relating to patrons using wheelchairs. The Company will vigorously defend against this suit. The Company is unable to predict the outcome of this litigation.
Oregon Litigation
On February 3, 2000, Barbara Cornilles, Edwin Cornilles, Dorothy Johnson, Damara Paris, Stephen Purvis, George Scheler, Susan Teague, and Jackie Woltring filed suit in The United States District Court for the District of Oregon against the Company, Regal Cinemas, Inc., Century Theatres, Inc., and Carmike Cinemas, Inc. alleging certain violations of the ADA relating to accessibility of movie theatres for deaf patrons. The Company has filed an answer denying the allegations. Although the Company is unable to predict the outcome of this litigation management believes the Company's potential liability with respect to such proceeding is not material in the aggregate to the Company's financial position, results of operations and cash flows.
From time to time, the Company is involved in various other legal proceedings arising from the ordinary course of its business operations, such as personal injury claims, employment matters and contractual disputes. The Company believes its potential liability with respect to proceedings currently pending is not material in the aggregate to the Company's consolidated financial position, results of operations and cash flows.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders.
There have not been any matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise.
PART II
Item 5:
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for the Company's Common Stock. As of March 30, 2000, there were 15 holders of record of the Company's Common Stock. The Company has not paid dividends on its Common Stock and does not expect to pay dividends on its Common Stock in the foreseeable future. The Subordinated Notes Indentures and the Credit Facility contain restrictions on the Company's ability to pay dividends on its Common Stock.
Item 6:
Item 6: Selected Financial Data.
The following tables set forth selected consolidated financial data for the Company for the periods and at the dates indicated for each of the five most recent fiscal years ended December 31, 1999. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Company's Consolidated Financial Statements, including the notes thereto, included elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
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(1) On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Subsequently, the Company has recorded asset impairment charges of $2.4 million, $2.2 million, $9.9 million and $3.7 million in 1996, 1997, 1998 and 1999, respectively, pursuant to Statement of Financial Accounting Standards No. 121 (FASB 121). The asset impairment losses recorded in 1996 and 1997 have been reclassified from depreciation and amortization in these statements to coincide with the 1998 and 1999 presentation.
(2) In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," requiring that gains and losses on sale of assets be recorded as a component of operating income. As a result, the Company has reclassified (gains) losses of $(4.9) million, $(11.0) million, $(0.2) million, $(2.3) million and $2.4 million in 1995, 1996, 1997, 1998 and 1999, respectively, from other income and expense to be included as a component of operating income.
(3) Includes amortization of debt issue cost and debt discount and excludes capitalized interest of $0.6 million, $1.7 million, $3.9 million, $2.2 million, $4.4 million and $4.3 million in 1995, 1996, 1997, 1998 and 1999, respectively.
(4) In 1996, an extraordinary loss of $9.0 million (net of related tax benefit) was recognized in connection with the premium paid and the write-off of the unamortized debt issue costs associated with the Senior Notes repurchased.
(5) Revenues less theatre operating costs (which is not a measure of financial performance under generally accepted accounting principles) ("GAAP"). Theatre level cash flow is a financial measure commonly used in the Company's industry and should not be construed as an alternative to cash flow from operations (as determined in accordance with GAAP) as an indicator of operating performance or as a measure of liquidity.
(6) Represents net income before depreciation and amortization, interest expense, changes in deferred lease expense, accrued and unpaid compensation expense relating to any stock appreciation and stock option plans, equity in income (loss) of affiliates, gain (loss) of affiliates, gain (loss) on sale of assets, minority interests, provision for income taxes and extraordinary items. EBITDA is a financial measure commonly used in the Company's industry and should not be construed as an alternative to cash flows from operating activities (as determined in accordance with GAAP), as an indicator of operating performance or as a measure of liquidity. Other definitions of EBITDA may not be comparable with this calculation.
(7) For the purpose of calculating the ratio of earnings to fixed charges, (i) earnings consist of income (loss) before income taxes and extraordinary items plus fixed charges excluding capitalized interest and (ii) fixed charges consist of interest expense, capitalized interest, amortization of debt issue and debt discount and the portion of rental expense which is deemed to be representative of the interest factor.
(8) The data as of period end 1995, 1996, 1997, 1998 and 1999 exclude four theatres (54 screens), five theatres (64 screens), five theatres (64 screens), one theatre (10 screens), and one theatre (10 screens) respectively, operated by the Company pursuant to management agreements.
(9) The data as of period end 1995, 1996, 1997, 1998 and 1999 excludes three theatres (25 screens), four theatres (37 screens), eleven theatres (94 screens), 16 theatres (132 screens), and one theatre (12 screens) respectively, operated through affiliates of the Company in Canada, Chile, Argentina, Peru, El Salvador, Costa Rica and Japan.
Item 7:
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
The following is an analysis of the financial condition and results of operations of the Company. This analysis should be read in conjunction with the Company's Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this report.
The Company's revenues are generated primarily from box office receipts and concession sales. The Company's revenues are affected by changes in attendance and average admission and concession revenues per patron. Attendance is primarily affected by the commercial appeal of the films released during the period or year reported. Since the Company's formation, attendance has grown principally from the development and acquisition of theatres. The Company has generally experienced increases in average admission and concession revenues per patron from ticket and concession price increases as well as the development of theatres in markets that can support higher ticket and concession prices. Additional revenues related to theatre operations are generated by screen advertising, pay phones, ATM charges, and electronic video games installed in video arcades located in some of the Company's theatres.
Film rentals and advertising, concession supplies and salaries and wages vary directly with changes in revenues. These expenses have historically represented approximately 70% of all theatre operating expenses and approximately 50% of revenues. Film rental costs are based on a percentage of admissions revenues as determined by film license agreements. Advertising cost is primarily fixed at the theatre level as daily movie directories placed in newspapers represent the largest component of advertising costs. The monthly cost of these ads is based on the size of the directory. However, advertising costs have remained relatively constant when expressed as a percentage of revenues as screen growth results in the addition of new or larger directory ads which help drive revenues. The Company purchases concession supplies to replace units sold. Although salaries and wages include a fixed component of cost (i.e., the minimum staffing cost to operate a theatre facility during non-peak periods), salaries and wages move in relation to revenues as theatre staffing is adjusted to handle attendance volume.
Conversely, facility lease expense is primarily a fixed cost at the theatre level as the Company's facility leases generally require a fixed monthly minimum rent payment. Facility lease expense as a percentage of revenues is also affected by the number of leased versus fee owned facilities. As a result of the two sale leaseback transactions which occurred in the first and fourth quarters of 1998, the addition of a larger proportion of leased theatre properties has resulted in an increase in facility lease expense as a percentage of revenues in 1998 and 1999.
Utilities and other costs include certain costs that are fixed such as property taxes, certain costs which are variable such as liability insurance, and certain costs that possess both fixed and variable components such as utilities, repairs and maintenance and security services.
The results of operations of acquired theatres are included in the Company's Consolidated Financial Statements from their date of acquisition. Fiscal years ended December 31, 1997, 1998 and 1999 are not directly comparable due to the effects of new theatre openings, acquired theatres and the impact of the debt service associated with certain financings undertaken. Theatre closings have had no significant effect on the operations of the Company.
RESULTS OF OPERATIONS
Set forth below is a summary of operating revenues and expenses, certain income statement items expressed as a percentage of revenues, average screen count and revenues per average screen count for the three most recent fiscal years ended December 31.
(1) All costs are expressed as a percentage of total revenues, except film rentals and advertising, which are expressed as a percentage of admissions revenues, and concession supplies, which are expressed as a percentage of concessions revenues.
(2) On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Subsequently, the Company has recorded asset impairment charges of $2.2 million, $9.9 million and $3.7 million in 1997, 1998, and 1999, respectively, pursuant to Statement of Financial Accounting Standards No. 121 (FASB 121). The asset impairment losses recorded in 1997 has been reclassified from depreciation and amortization in these statements to coincide with the 1998 and 1999 presentation.
(3) In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," requiring that gains and losses on sale of assets be recorded as a component of operating income. As a result, the Company has reclassified gains of $0.2 million and $2.3 million in 1997 and 1998, respectively, from other income and expense to be included as a component of operating income and recorded a loss on sale of assets of $2.4 million in 1999.
(4) Includes amortization of debt issue cost and debt discount and excludes capitalized interest of $2.2 million, $4.4 million and $4.3 million in 1997, 1998 and 1999, respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Revenues. Revenues in 1999 increased to $712.6 million from $571.2 million, a 24.8% increase. The increase in revenues is primarily attributable to a 18.4% increase in attendance as the result of the first full year of operations of 585 screens opened in 1998 and the net addition of 528 screens in 1999. Revenues were also positively affected by an increase in admission and concession revenues per patron of 3.5%. Revenues per average screen decreased 4.5% to $290,412 for 1999 from $303,991 for 1998. However, substantially all of the decrease in revenues per average screen resulted from the devaluation of the Brazilian and Ecuadorian currencies in 1999.
Cost of Operations. Cost of operations, as a percentage of revenues, increased to 77.7% in 1999 from 75.8% in 1998. The increase as a percentage of revenues resulted from an increase in concession supplies as a percentage of concession revenues to 17.3% in 1999 from 15.8% in 1998 as a result of the greater number of international theatres in operation, an increase in facility lease expense as a percentage of revenues to 12.6% in 1999 from 10.7% in 1998 and an increase in utilities and other expense as a percentage of revenues to 13.5% in 1999 from 13.1% in 1998 which was partially offset by a decrease in film rentals and advertising expense as a percentage of admission revenues to 53.6% in 1999 from 54.3% in 1998 and a decrease in salaries and wages expense as a percentage of revenues to 11.6% in 1999 from 12.1% in 1998.
General and Administrative Expenses. General and administrative expenses, as a percentage of revenues, decreased to 4.9% in 1999 from 5.8% in 1998. The decrease is primarily attributable to the 24.8% increase in revenues resulting from screen additions and increases in admissions and concessions per patron. The absolute level of general and administrative expenses increased to $34.8 million for 1999 from $32.9 million for 1998. The increase in general and administrative expenses is attributed to costs (primarily salaries and wages) associated with the Company's expansion program.
Depreciation and Amortization. Depreciation and amortization increased $16.1 million in 1999 to $53.3 million from $37.2 million in 1998, an increase of 43.3%. The increase is a result of the net addition of $219.5 million in theatre property and equipment during 1999, a 24.7% increase over 1998. The difference in the percentage increase in depreciation and amortization compared to the increase in theatre property and equipment is a result of the timing of when the additions were placed in service during the period.
Asset Impairment Loss. The Company recorded asset impairment charges of $3.7 million in 1999 and $9.9 million in 1998 pursuant to Statement of Financial Standards No. 121 (FASB 121). In accordance with FASB 121, the Company wrote down the assets of certain theatres to their fair value.
(Gain) Loss on Sale of Assets. The Company recorded a loss on sale of assets of $2.4 million in 1999 and a gain on sale of assets of $2.3 million in 1998.
Interest Expense. Interest costs incurred, including amortization of debt issue cost and debt discount, increased 35.4% to $64.2 million (including the capitalization of $4.3 million of interest to properties under construction) from $47.4 million in 1998 (including the capitalization of $4.4 million of interest to properties under construction). The increase in interest costs incurred during 1999 was due principally to an increase in average debt outstanding resulting from borrowings under the Company's Credit Facility.
Income Taxes. Income taxes decreased to $3.7 million in 1999 compared to $11.5 million in 1998, a 68% decrease resulting primarily from the decrease in income before income taxes, extraordinary items and cumulative effect of an accounting change to $7.7 million in 1999 from $22.5 million in 1998. The Company's effective rate for 1999 decreased to 48.1% from 51.0% in 1998. The effective rates reflect a reduction in overall foreign losses which are fully reserved and a reduction in other permanent differences, primarily goodwill.
Net Income Before Extraordinary Items and Cumulative Effect of an Accounting Change. Net income before extraordinary items and cumulative effect of an accounting change of $4.0 million for 1999 and $11.0 million for 1998 included the losses of foreign subsidiary operations of $8.8 million (net of minority interest) and $3.0 million (net of minority interest), respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenues. Revenues in 1998 increased to $571.2 million from $434.6 million, a 31.4% increase. The increase in revenues is primarily attributable to a 29.3% increase in attendance as the result of the first full year of operations of 181 screens opened in 1997 and the net addition of 585 screens in 1998. Revenues were also positively affected by an increase in admission and concession revenues per patron of 1.3%. Revenues per average screen increased 6.5% to $303,991 for 1998 from $285,357 for 1997.
Cost of Operations. Cost of operations, as a percentage of revenues, increased to 75.8% in 1998 from 74.2% in 1997. The increase as a percentage of revenues resulted from an increase in concession supplies as a percentage of concession revenues to 15.8% in 1998 from 15.1% in 1997 and an increase in facility leases as a percentage of revenues to 10.7% in 1998 from 8.9% in 1997 partially as a result of the two sale leaseback transactions which occurred in the first and fourth quarters of 1998. These increases were partially offset by a decrease in salaries and wages as a percentage of revenues to 12.1% in 1998 from 12.9% in 1997.
General and Administrative Expenses. General and administrative expenses, as a percentage of revenues, decreased to 5.8% in 1998 from 6.4% in 1997. The decrease is primarily attributable to the 31.4% increase in revenues from screen additions and increases in admissions and concessions per patron. The absolute level of general and administrative expenses increased to $32.9 million for 1998 from $27.6 million for 1997. The increase in general and administrative expenses is attributed to costs (primarily salaries and wages) associated with the Company's expansion program.
Depreciation and Amortization. Depreciation and amortization increased $11.8 million in 1998 to $37.2 million from $25.4 million in 1997, an increase of 46.5%. The increase is a result of the net addition of $244.0 million in theatre property and equipment during 1998, a 37.9% increase over 1997. The difference in the percentage increase in depreciation and amortization compared to the increase in theatre property and equipment is a result of the timing of when the additions were placed in service during the period.
Asset Impairment Loss. The Company recorded asset impairment charges of $9.9 million in 1998 and $2.2 million in 1997 pursuant to Statement of Financial Accounting Standards No. 121 (FASB 121). In accordance with FASB 121, the Company wrote down the assets of certain theatres to their fair value.
(Gain) Loss on Sale of Assets. The Company recorded a gain on sale of assets of $2.3 million in 1998 and $0.2 million in 1997.
Interest Expense. Interest costs incurred, including amortization of debt issue cost and debt discount, increased 33.1% to $47.4 million (including the capitalization of $4.4 million of interest to properties under construction) from $35.6 million in 1997 (including the capitalization of $2.2 million of interest to properties under construction). The increase in interest costs incurred during 1998 was due principally to an increase in average debt outstanding resulting from borrowings under the Company's Credit Facility and the issuance of the additional Senior Subordinated Indenture in the first quarter of 1998.
Income Taxes. Income taxes increased to $11.5 million in 1998 compared to $10.7 million in 1997, a 7.5% increase. The Company's effective tax rate for 1998 increased to 51.0% from 41.5% in 1997. The Company's income taxes and effective tax rates for 1998 increased over 1997 due to certain foreign subsidiaries generating income for the first time, resulting in the calculation of a foreign tax liability with the excess undistributed earnings being taxed at United States rates plus local foreign country withholding rates.
Net Income Before Extraordinary Items and Cumulative Effect of an Accounting Change. Net income before extraordinary items and cumulative effect of an accounting change of $11.0 million for 1998 and $15.0 million for 1997 included the losses of foreign subsidiary operations of $3.0 million (net of minority interest) and $2.3 million (net of minority interest), respectively.
INFLATION AND FOREIGN CURRENCY
The vast majority of the equipment and certain operating supplies and construction interior finish items that the Company's international subsidiaries use in their operations are imported from the U.S., whereas, principally all the revenues and operating expenses of the Company's international subsidiaries are transacted in the country's local currency.
Currency fluctuations result in the Company's reporting exchange gain or losses or cumulative unrealized translation adjustments relating to its international subsidiaries depending on the inflationary environment of the country in which the Company operates. Generally accepted accounting principles require that the U.S. dollar be used as the functional currency for the Company's subsidiaries that operate in highly inflationary economies.
In 1998, two of the countries where the Company operates (Mexico and Ecuador) were deemed highly inflationary. In 1999, the economy of Mexico reverted back to a non-highly inflationary status in which the peso again became the functional currency of Cinemark de Mexico, S.A. de C.V. resulting in certain assets, liabilities and equity accounts being restated at the current exchange rate. Thus, changes in the peso have been recorded in the accumulated other comprehensive loss account as a reduction to shareholders' equity during 1999. Ecuador continues to operate in a highly inflationary economy, and thus the Company recorded an exchange gain of $0.1 million in 1999 related to the Ecuadorian sucre currency fluctuations.
In 1999, the remaining countries where the Company operates were not deemed highly inflationary. Thus, any fluctuation in the currency results in the Company recording a cumulative foreign currency translation adjustment to the accumulated other comprehensive loss account.
In January 1999, the Brazilian government allowed the Brazilian currency (the "Real") to float against the U.S. dollar instead of maintaining a pre-established trading ban. In connection with this decision, the Real devalued significantly against the U.S. dollar to 1.8 Reais to the U.S. dollar as of December 31, 1999. As a result, Cinemark Brasil S.A. recorded a cumulative unrealized currency translation adjustment to the accumulated other comprehensive loss account as a reduction to shareholders' equity of $11.0 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, primarily through box office receipts and the sale of concession items. Because its revenues are received in cash prior to the payment of related expenses, the Company has an operating "float" and, as a result, historically has not required traditional working capital financing. Primarily due to the lack of significant inventory and accounts receivable, the Company has typically operated with a negative working capital position for its ongoing theatre operations. The major film distributors generally release during the summer and holiday seasons those films which they anticipate will be the most successful. Consequently, the Company typically generates higher revenues during such periods. The Company's cash flow from operations was $97.5 million in 1999 compared to $64.1 million in 1998 and $61.6 million in 1997.
The Company's theatres are typically equipped with modern projection and sound equipment, with approximately 86% of the screens operated by the Company having been built during the 1990's. The Company's investing activities have been principally in connection with new theatre openings and acquisitions of existing theatres and theatre circuits and have amounted to $227.6 million, $248.1 million and $229.3 million in 1999, 1998 and 1997, respectively. New theatre openings and acquisitions historically have been financed with internally generated cash and by debt financing, including borrowings under the Company's bank line of credit. Cash flow from financing activities amounted to $114.1 million, $178.0 million and $185.4 million in 1999, 1998 and 1997, respectively. During 1999, the Company opened 19 theatres (333 megaplex screens and 2 IMAX(R)3D screens) in the U.S. and Canada. In addition, in the U.S., as of March 30, 2000, the Company opened 3 theatres (52 screens) and has approximately 6 theatres (88 megaplex screens and 3 IMAX(R)3D screens) scheduled to open by the end of 2000. All of these theatres will be megaplexes which may cost in excess of $15 million per theatre. The Company currently estimates that its capital expenditures for the development of these approximately 143 screens in the U.S. in 2000 will be approximately $75 million. As of March 30, 2000, the Company had expended approximately $20 million toward the development of these screens. The Company plans to fund capital expenditures for its development from cash flow from operations, borrowings under the Credit Facility and sale leaseback transactions. At the end of 1999, the Company owned approximately $350 million of real estate and improvements resulting from the development of megaplex facilities over the last several years. The Company plans to enter into sale and leaseback transactions relating to certain of these facilities provided that the Company can secure favorable terms. Actual expenditures for theatre development and acquisitions during 2000 are subject to change based upon the availability of attractive opportunities for expansion of the Company's theatre circuit.
On August 15, 1996, the Company issued $200 million principal amount of Series B Senior Subordinated Notes which bear interest at a rate of 9-5/8% per annum (the "Series B Notes"), payable semi-annually on February 1 and August 1 of each year. The Series B Notes were issued at 99.553% of the principal face amount (a discount of $4.47 per $1,000 principal amount). The net proceeds to the Company from the issuance of the Series B Notes (net of discount, fees and expenses) were approximately $193.2 million. The proceeds from the Series B Notes were used to repurchase the Company's $125 million aggregate principal amount 12% Senior Notes due 2002 (the "Senior Notes"). Excess proceeds were utilized to reduce borrowings under the Company's Credit Facility and for general corporate purposes.
On June 26, 1997, the Company issued $75 million principal amount of Series D Notes due 2008 which bear interest at a rate of 9-5/8% per annum (the "Series D Notes"), payable semi-annually on February 1 and August 1 of each year. The Series D Notes were issued at 103% of the principal face amount. The net proceeds to the Company from the issuance of the Series D Notes (net of fees and expenses) were approximately $77.1 million. The proceeds of the Series D Notes were applied to reduce the Company's indebtedness under the Credit Facility.
In January 1998, the Company issued $105 million aggregate principal amount of 8-1/2% Series A Senior Subordinated Notes due 2008 (the "Series A Notes") pursuant to Rule 144A (the "Offering"). The net proceeds of the Offering were used by the Company to reduce the Company's indebtedness under the then existing credit facility. The Company exchanged the Series A Notes on March 17, 1998 for 8-1/2% Series B Senior Subordinated Notes (the "8-1/2% Series B Notes") which have been registered under the Securities Act of 1933, as amended.
In February 1998, the Company replaced its existing credit facility with a reducing, revolving credit agreement ("Credit Facility") through a group of banks for which Bank of America National Trust and Savings Association acts as Administrative Agent. The Credit Facility provides for loans to the Company of up to $350.0 million in the aggregate. The Credit Facility is a reducing, revolving credit facility; therefore, at the end of each quarter during the calendar year 2001, 2002, 2003, 2004 and 2005, the aggregate commitment is reduced in the amount of $8,750,000, $11,812,500, $13,125,000, $12,031,000 and $6,562,500, respectively. The Company is required to prepay all loans outstanding in excess of the aggregate commitment as reduced pursuant to the terms of the Credit Facility. Borrowings under the Credit Facility are secured by a pledge of a majority of the issued and outstanding capital stock of the Company. Pursuant to the terms of the Credit Facility, funds borrowed currently bear interest at a rate per annum equal to the Offshore Rate (as defined in the Credit Facility) or the Base Rate (as defined in the Credit Facility, as the case may be), plus the Applicable Margin (as defined in the Credit Facility). As of March 30, 2000, the Company had borrowed $325 million under the Credit Facility with the average interest rate on such borrowings being 8.1% per annum.
In February 1998, the Company completed a sale leaseback transaction (the "Sale Leaseback") pursuant to which the Company sold the land, buildings and site improvements of 12 theatre properties to special purpose entities for an aggregate purchase price equal to approximately $131.5 million. Simultaneously with the sale, the Company entered into operating leases for such properties for a base term equal to approximately 20 years at a fixed aggregate monthly rental payment of $1.1 million or $13.4 million annually.
In October 1998, the Company completed a second sale leaseback transaction (the "Second Sale Leaseback") pursuant to which the Company sold the land, building and site improvements of one theatre property to a special purpose entity for an aggregate purchase price equal to approximately $13.9 million. Simultaneously with the sale, the Company entered into an operating lease for the property for a base term equal to approximately 20 years at a fixed monthly rental payment of $119,000 or $1.4 million annually.
In December 1999, the Company completed a third sale leaseback transaction (the "Third Sale Leaseback") pursuant to which the Company sold the land, building and site improvements of its corporate office property to a special purpose entity for an aggregate purchase price equal to approximately $20.3 million. Simultaneously with the sale, the Company entered into an operating lease for approximately 60% of the property for a base term equal to 10 years at a fixed monthly rental payment of $114,000 or $1.4 million annually for the first seven years and $123,000 or $1.5 million annually for the final three years.
In February 2000, the Company repurchased 159 shares of its Class B common stock as treasury stock from an employee of the Company at $1,674 per share and repurchased 34 shares of its Class B common stock as treasury stock from a former employee of the Company at $1,000 per share.
In 1992, the Company formed Cinemark International to develop and acquire theatres in international markets. As of March 30, 2000, Cinemark International, through its affiliates, operated 69 theatres (606 screens) principally in Latin America. The following table summarizes the Company's and Cinemark International's holdings in each international market, the number of theatres and screens in such market as of March 30, 2000 and the number of theatres and screens under construction in 2000.
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1. In the first quarter of 1999, Cinemark International assigned its interests in Peru to the Company. The Company has designated this operating company as a Restricted Subsidiary (as such term is defined in the Company's debt agreements).
2. In the fourth quarter of 1999, Cinemark International assigned all of its interests in all of the companies located in Argentina to a subsidiary of the Company. The Company has designated these operating companies Restricted Subsidiaries (as such term is defined in the Company's debt agreements).
The Company, through Cinemark International and its affiliates, plans to invest up to an additional $100 million in international ventures, over the next three years. The Company anticipates that investments in excess of Cinemark International's available cash will be funded by the Company or by debt or equity financing to be provided by third parties directly to Cinemark International or its subsidiaries.
In August 1998, the Company formed Cinemark Investments Corporation for the purpose of financing its Brazilian operations by investing in foreign fixed rate notes issued by Cinemark Brasil S.A., an indirect
Brazilian subsidiary of the Company. In September 1998, Cinemark Investments Corporation executed a credit agreement with Bank of America that provides Cinemark Investments Corporation up to $20 million in the aggregate under a revolving line of credit facility (the "Cinemark Investments Credit Agreement"). The Cinemark Investments Credit Agreement is secured by an assignment of certain fixed rate notes issued by Cinemark Brasil S.A. to Cinemark Investments Corporation and an unconditional guaranty by the Company. Pursuant to the terms of the Cinemark Investments Credit Agreement, funds borrowed bear interest at a rate per annum equal to the Offshore Rate or the Base Rate (both defined in the Cinemark Investments Credit Agreement) as the case may be. As of March 30, 2000, Cinemark Investments Corporation had borrowed $20 million under the Cinemark Investments Credit Agreement, the proceeds of which were used to purchase fixed rate notes issued by Cinemark Brasil S.A. bearing interest at 13.25%. The effective interest rate on such borrowings as of March 30, 2000 is 8.4% per annum.
In September 1998, Cinemark International incorporated Cinemark Theatres U.K. Ltd., an English company, to develop state-of-the-art multiplex theatres in the United Kingdom. Cinemark Theatres U.K. Ltd. is a wholly-owned subsidiary of Cinemark International. Cinemark Theatres U.K. Ltd. expects to begin construction on 1 theatre (10 screens) in 2000.
In September 1998, Cinemark International entered into a joint venture agreement with Core Pacific Ltd. to develop state-of-the-art multiplex theatres in Taiwan, Republic of China. The joint venture will conduct its business through Cinemark-Core Pacific Ltd. which is 50.5% owned by Cinemark International and 49.5% owned by Core Pacific Ltd. Cinemark-Core Pacific Ltd. expects to begin construction on one theatre (10 screens) during 2000.
In November 1998, Cinemark Mexico executed a credit agreement with Bank of America National Trust and Savings Association for itself and as Administrative Agent (the "Cinemark Mexico Credit Agreement"). The Cinemark Mexico Credit Agreement is a revolving credit facility and provides for a loan to Cinemark Mexico of up to $30 million in the aggregate. The Cinemark Mexico Credit Agreement is secured by a pledge of 65% of the stock of Cinemark de Mexico S.A. de C.V. and an unconditional guaranty by the Company. Pursuant to the terms of the Cinemark Mexico Credit Agreement, funds borrowed bear interest at a rate per annum equal to the Offshore Rate (as defined in the Cinemark Mexico Credit Agreement) or the Base Rate (as defined in the Cinemark Mexico Credit Agreement), as the case may be, plus the Applicable Margin (as defined in the Cinemark Mexico Credit Agreement). Cinemark Mexico borrowed $30 million under the Cinemark Mexico Credit Agreement, the proceeds of which were used to repay an intercompany loan of Cinemark Mexico from Cinemark International. Cinemark International used the proceeds of such repayment to repay all outstanding indebtedness under its then existing credit facility with Bank of America National Trust and Savings. The effective interest rate on such borrowings as of March 30, 2000 is 7.6% per annum.
In December 1998, Cinemark International entered into a joint venture agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. to develop state-of-the-art multiplex theatres in Colombia. The joint venture will conduct its business through Cinemark Colombia S.A. which is owned 50.1% by Cinemark International, and the remaining 49.9% is collectively owned by Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. Cinemark Colombia S.A. currently operates one theatre (10 screens) and plans to open one theatre (6 screens) in 2000.
In September 1999, Cinemark International acquired all of the shares of its Argentine joint venture partner, Prodecine S.A., which held the remaining 50% of the shares of Cinemark Argentina S.A. Cinemark International paid $2.8 million in cash and delivered the following promissory notes bearing interest at the rate of 10% per annum: (a) totaling US$2.5 million due January 2000, (b) totaling US$2.5 million due April 2000, (c) totaling A$2.5 million pesos due July 2000, (c) totaling A$3.5 million pesos due October 2000. The 100% interests in Prodecine S.A., Cinemark Investments Argentina, S.A. and Cinemark Argentina, S.A. held by Cinemark International were transferred to one of the Company's subsidiaries in December 1999.
In December 1999, the shareholders of Cinemark Brasil agreed to increase the capital of Cinemark Brasil in the aggregate amount of $9,000,000. Cinemark International, through Cinemark Enpreendimentos e Participacoes, Ltda., funded US$2,686,000 in December 1999 and will fund an additional $3,283,500 in April 2000. The remaining amounts will be funded by the other shareholders.
Year 2000 Compliance
The Company recognized that the arrival of the Year 2000 posed a unique worldwide challenge to the ability of all systems to recognize the date change from December 31, 1999 to January 1, 2000, and like other companies, spent a considerable amount of time in 1999 updating its computer applications and business processes to ensure their continued functionality in the Year 2000 and beyond.
Prior to January 1, 2000, the necessary modifications to the day-to-day operating and reporting systems for all theatres and the U.S. and various international corporate offices were successfully completed to ensure compliance in the Year 2000 and beyond. The costs to modify these existing systems to ensure Year 2000 compliance were less than $100,000.
In addition, the Company purchased a new Year 2000 compliant financial reporting and distribution system that was successfully made operational on January 4, 1999. The decision to purchase this new system at a cost of more than $1 million was made by management in order to effectively handle the increasing financial reporting and analysis needs of the Company in the years to come as the Company continues at its rapid growth rate.
New Accounting Pronouncements
On January 1, 1999 the Company adopted Statement of Position (SOP) 98-5 requiring start-up activities and organization costs to be expenses as incurred. The Company's practice had been to capitalize organization costs associated with the organization of new entitles as well as costs associated with forming international joint ventures as deferred charges and to amortize them over the anticipated life of the respective entity or venture. The adoption of this new accounting pronouncement resulted in the aggregate write-off of the unamortized organization costs of $3,386,207 on January 1, 1999. This charge was recorded as a cumulative effect of a change in accounting principle as a one-time non-cash charge to income of $2,968,637 (net of tax) in the first quarter of 1999.
For years beginning after 1998, the Company adopted the exception allowed under Accounting Principles Board (APB) Opinion No. 23 for undistributed earnings of foreign subsidiaries located in Mexico, Peru, Argentina and Honduras. Deferred U.S. federal income taxes are not provided on the undistributed earnings of these foreign subsidiaries as management plans to reinvest these earnings in those countries. In the fourth quarter of 1999, the Company adopted the exception on prior undistributed earnings of these subsidiaries since management plans to reinvest the prior earnings in those countries as well. The Deferred U.S. federal income taxes provided on these prior undistributed earnings is $2,167,642. The cumulative amount of prior and current undistributed earnings of these foreign subsidiaries on which the Company does not recognize income taxes is $13,366,767.
In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," requiring that gains and losses on sale of assets be recorded as a component of operating income. The Company's practice had been to classify these gains and losses as other income and expense. As a result of the new accounting pronouncement, the Company has reclassified gains of $189,352 and $2,266,320 and losses of $2,419,511 from other income and expense to be included as a component of operating income in 1997, 1998 and 1999, respectively.
Other Issues
The Company intends that this report be governed by the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995 (the "PSLR Act") with respect to statements that may be deemed to be forward-looking statements under the PSLR Act. Such forward-looking statements may include, but are not limited to, the Company and any of its subsidiaries' long-term theatre strategy. Actual results could differ materially from those indicated by such forward-looking statements due to a number of factors.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.
The Company has limited exposure to financial market risks, including changes in interest rates and other relevant market prices. The Company does not have any derivative financial instruments in place as of December 31, 1999.
An increase or decrease in interest rates would affect interest costs relating to the Company's variable rate credit facilities. The Company and/or its subsidiaries are currently parties to such variable rate credit facilities. At December 31, 1999, there was an aggregate of approximately $386 million of variable rate debt outstanding under these facilities. The Company has no interest rate swaps or other hedging facilities relating to these credit
facilities. These facilities represent approximately 50% of the Company's outstanding long-term debt. Changes in interest rate do not have a direct impact on interest expense relating to the remaining fixed rate debt facilities.
The table below provides information about the Company's fixed rate and variable rate long-term debt agreements at December 31, 1999:
The Company is exposed to market risk arising from changes in foreign currency exchange rates as a result of its international operations. See Item 7 - - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Inflation and Foreign Currency," which information is incorporated herein by reference.
Item 8:
Item 8: Financial Statements and Supplementary Data.
The financial statements and supplementary data are listed on the Index at. Such financial statements and supplementary data are included herein beginning on page.
Item 9:
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10:
Item 10: Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are:
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* Member Audit Committee
+ Member Compensation Committee
(1) Effective mid-April, 2000, Jeffrey J. Stedman will resign as Senior Vice President, Treasurer, Chief Financial Officer and Assistant Secretary of the Company.
The Shareholders' Agreement (as defined herein) contains a voting agreement pursuant to which Mr. Mitchell agreed to vote his share of common stock of the Company to elect designees of Cypress Advisors L.P. ("CALP") to the Board of Directors of the Company. As of March 30, 2000, CALP had the right to designate two board members. Additionally, the Shareholders' Agreement provides that the Company must obtain the written consent of CALP for certain corporate acts.
The directors of the Company are elected each year by the shareholders to serve for a one-year term and until their successors are elected and qualified. Directors of the Company are reimbursed for expenses actually incurred for each Board meeting which they attend. In addition, Directors who are not employees of the Company receive a fee of $1,000 for each meeting of the Board of Directors attended by such person. The executive officers of the Company are elected by the Board of Directors to serve at the discretion of the Board.
The following is a brief description of the business experience of the directors and executive officers of the Company for at least the past five years. All compensation of directors and officers is paid by the Company.
Lee Roy Mitchell has served as Chairman of the Board since March 1996 and as Chief Executive Officer and a Director of the Company since its inception in 1987. Mr. Mitchell was Vice Chairman of the Board of Directors from March 1993 to March 1996 and was President of the Company from its inception in 1987 until March 1993. From 1985 to 1987, Mr. Mitchell served as President and Chief Executive Officer of a predecessor corporation. Mr. Mitchell has served on the Board of Directors of the National Association of Theatre Owners since 1991. Mr. Mitchell has been engaged in the motion picture exhibition business for more than 36 years.
Tandy Mitchell has served as Vice Chairman of the Board since March 1996, as a Director of the Company since April 1992, as Executive Vice President of the Company since October 1989 and as Secretary of the Company since its inception in 1987. Mrs. Mitchell was General Manager of the theatre division of a predecessor corporation from 1985 to 1987. From 1978 to 1985, Mrs. Mitchell was employed by Southwest Cinemas Corporation, most recently as director of operations. Mrs. Mitchell is the wife of Lee Roy Mitchell.
Alan W. Stock has served as President of the Company since March 1993, as a Director of the Company since April 1992 and as Chief Operating Officer of the Company since March 1992. Mr. Stock was Senior Vice President of the Company from October 1989 to March 1993. Mr. Stock was General Manager of the Company from its inception in 1987 to March 1992. Mr. Stock was employed by the theatre division of a predecessor corporation from January 1986 to December 1987 as Director of Operations. From 1981 to 1985, he was employed by Consolidated Theaters, most recently as District Manager.
Jeffrey J. Stedman has served as a Director of the Company since March 1996, as Senior Vice President since July 1997 and as Vice President, Treasurer and Chief Financial Officer of the Company since April 1993. From December 1989 to April 1993, Mr. Stedman was Director of Finance of the Company. Prior to joining the Company in December 1989, Mr. Stedman was a Manager in the tax department of Deloitte & Touche LLP where he was employed from December 1984 to December 1989. Mr. Stedman is a certified public accountant.
Robert F. Carmony has served as Senior Vice President-Director of Operations since July 1997, as Vice President-Director of Operations since March 1996 and has served as Director of Operations of the Company since June 1988. Prior to joining the Company, Mr. Carmony was owner of O.C. Enterprises, a software development firm, from 1986 to 1988. Prior to forming his own software company, Mr. Carmony worked for Plitt-Cineplex Odeon theatres from 1985 to 1986. He worked as a Systems Analyst for Electronic Data Systems (EDS) from 1984 to 1985.
Margaret E. Richards has served as a Vice President and Assistant Secretary of the Company since October 1989 and as Vice President-Real Estate since March 1994. Ms. Richards has been Director of Leasing of the Company since its inception in 1987 and was employed by the theatre division of a predecessor corporation in its real estate section from August 1986 to December 1987.
Jerry Brand has served as Vice President-Film Licensing since March 1996. Mr. Brand has over 27 years of experience in the theatre industry, beginning his career with Paramount Pictures in 1968. Prior to joining the Company, Mr. Brand served as Senior Vice President and Head Film Buyer with Cobb Theatres where he was employed from 1983 to March 1996.
Walter Hebert has served as Vice President-Purchasing of the Company since July 1997 and was the Director of Purchasing from October 1996 until July 1997. Mr. Hebert was the President of 2 Day Video, Inc., a 21-store video chain that was a subsidiary of the Company, from December 1995 until October 1996. Prior to joining the Company, Mr. Hebert worked for Dillards Department Stores from 1973 to 1993, serving as a Divisional Merchandise Manager in the Arkansas Division from 1981 until 1993.
Don Harton has served as Vice President-Construction since July 1997. From August 1996 to July 1997, Mr. Harton was Director of Construction of the Company. Prior to joining the Company in August 1996, Mr. Harton was an architect with Urban Architecture, where he was employed from October 1983 until July 1996.
Randy Hester has served as Vice President-Marketing since July 1997. From January 1989 to July 1997, Mr. Hester was Director of Corporate Development of the Company. Prior to joining the Company in January 1989, Mr. Hester was Chief Financial Officer of Presidio Theatres in Austin, Texas, where he was employed from 1986 to 1989.
Philip Wood has served as Vice President since July 1997. From February 1988 to July 1997 Mr. Wood was MIS Director of the Company. Prior to joining the Company in February 1988, Mr. Wood was a systems organizer with Electronic Data Systems where he was employed from 1986 to 1988.
Michael Cavalier has served as Vice President-General Counsel of the Company since July 1999. From July 1997 to July 1999, Mr. Cavalier was General Counsel of the Company and from July 1993 to July 1997 was Associate General Counsel of the Company. Prior to joining the Company in July 1993, Mr. Cavalier was an associate attorney at the Dallas office of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
W. Bryce Anderson has served as a Director of the Company since June 1992. Mr. Anderson has been Chairman of the Board of Directors of Ennis Steel Industries, Inc., a steel fabricator, since 1980 and Chairman of the Board of Directors of Reflex Glass Bead Co., Inc., a manufacturer of glass beads, since September 1990. Mr. Anderson was Chairman of the Board of Centerline Industries, Inc., an industrial paint manufacturer, from January 1989 to December 1992. From 1976 to 1989, Mr. Anderson was Chairman of the Board of Directors and Chief Executive Officer of Ennis Paint Manufacturing, Inc., an industrial paint manufacturer.
Heriberto Guerra, Jr. has served as a Director of the Company since December 1993. Mr. Guerra has been Managing Director-Corporate Development for Southwestern Bell Telephone since 1995. From September 1985 to January 1987, he was Area Manager-Marketing Operations for Southwestern Bell, and from 1987 to 1995, he was Executive Director-Government Relations for Southwestern Bell. Prior to that, he served in an owner or manager capacity for various hotel, restaurant and movie theatre businesses in Texas. Mr. Guerra is also a director of Cinemark Mexico (USA), Inc. and Play by Play Toys and Novelties.
James A. Stern was elected Director of the Company in March 1996. Mr. Stern has been Chairman of The Cypress Group L.L.C. ("Cypress Group") since its formation in April 1994. Prior to joining Cypress Group, Mr. Stern spent his entire career with Lehman Brothers, an investment banking firm, most recently as head of the Merchant Banking Group. He served as head of Lehman's High Yield and Primary Capital Markets Groups, and was co-head of Investment Banking. In addition, Mr. Stern was a member of the firm's Operating Committee. Mr. Stern also serves on the board of directors of Amtrol, Inc., Franks Nursery & Crafts, Inc., WESCO International, Inc. and Lear Corporation.
James L. Singleton was elected Director of the Company in March 1996. Mr. Singleton has been Vice Chairman of Cypress since its formation in April 1994. Prior to joining Cypress Group, Mr. Singleton was a Managing Director with Lehman Brothers, Inc., an investment banking firm. Mr. Singleton also serves on the board of directors of Genesis Health Ventures, Inc., William Scorsman, Inc., WESCO International, Inc., ClubCorp, Inc., Danka Business Systems PLC and Thebault Company.
Denny Rydberg was elected Director of the Company in July 1997. Mr. Rydberg has been President of Young Life since July 1993. Prior to joining Young Life, Mr. Rydberg was Director of University Ministries at University Presbyterian Church, Vice President of Youth Specialties and Director of Operations for Inspirational Films.
Item 11:
Item 11: Executive Compensation
SUMMARY COMPENSATION TABLE
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(A) Amounts shown include cash and non-cash compensation earned and received by executive officers as well as amounts earned but deferred at the election of those officers.
(B) Represents $98,844 of life insurance premiums paid by the Company for the benefit of Mr. Mitchell, a $1,950 annual contribution to the Company's 401(k) savings plan and $17,246 representing the value of the use of a Company vehicle for one year.
(C) Represents $98,844 of life insurance premiums paid by the Company for the benefit of Mr. Mitchell, a $1,950 annual contribution to the Company's 401(k) savings plan and $20,000 representing the value of the use of a Company vehicle for one year.
(D) Represents the Company's annual contribution to the Company's 401(k) savings plan.
(E) Bonuses were earned in 1998, but were paid in February 1999.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no Options/SAR grants to the named Executive Officers for fiscal year ended December 31, 1999
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
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(A) The Company has the right to call the shares issuable upon exercise of the options for terminating employees. The call price increases over the five year vesting period of the options.
401(k) PENSION PLAN
The Company sponsors a defined contribution savings plan (the "401(k) Plan") whereby certain employees of the Company or its subsidiaries may (under current administrative rules) elect to contribute, in whole percentages between 1% and 15% of such employee's compensation, provided no employee's elective contribution shall exceed the amount permitted under Section 402(g) of the Internal Revenue Code of 1986, as
amended ($10,000 in 1999). A discretionary matching contribution is made by the Company annually ($1.0 million in the aggregate in 1999) to individual accounts. The Company's matching contribution is subject to vesting and forfeiture. The Company's contributions vest to individual accounts at the rate of twenty percent (20%) per year beginning two years from the date of employment. After an employee has worked for seven years, employees have full and immediate vesting rights to all of the Company's matching contributions. The Company's contributions to the accounts of the named Executive Officers are included in the Summary Compensation Table.
EMPLOYMENT AGREEMENTS
Mr. and Mrs. Mitchell each have an employment agreement with the Company which contains the terms described below.
Lee Roy Mitchell's 1999 base salary was $392,162 and will increase thereafter at the rate of 10% per year. In addition, Mr. Mitchell (i) is entitled to receive an annual bonus, subject to approval by the Board of Directors, which together with base salary may not exceed $2 million, which bonus was $0.00 for the year ended December 31, 1999, (ii) is reimbursed for expenses incurred by him in connection with his duties, and (iii) receives the use of an automobile of his choice to be replaced at his election every three years, a club membership of his choice, a whole life insurance policy in the amount of $3.3 million insuring his life during the period of his employment and any other benefits generally available to the executives of the Company. The maximum base salary and bonus which Mr. Mitchell is entitled to receive for any calendar year is limited to $2 million and the payment of any bonus requires board approval. The employment agreement terminates on the earlier of (i) Mr. Mitchell's death or permanent disability (except with respect to amounts payable as described in the following sentence) or (ii) December 31, 2001. In the event of Mr. Mitchell's permanent disability, he will be entitled to receive $10,000 per month for a period of 60 months.
Tandy Mitchell's 1999 base salary was $175,384 and will increase thereafter at the rate of 10% per year. In addition, Mrs. Mitchell (i) is reimbursed for expenses incurred by her in connection with her duties and (ii) receives the use of an automobile of her choice to be replaced at her election every three years, a whole life insurance policy in the amount of $1.0 million insuring her life during the period of her employment and any other benefits generally available to the executives of the Company. The employment agreement terminates on the earlier of (i) Mrs. Mitchell's death or permanent disability or (ii) December 31, 2001.
The employment agreements of Mr. and Mrs. Mitchell provide that their employment may be terminated by the unanimous decision of the Board of Directors of the Company (other than the terminated party) for cause if the terminated party is convicted of a felony and incarcerated or willfully refuses to perform any of the duties required under the employment agreement for a period of 60 days after notice from the Board of Directors.
The employment of Mr. and Mrs. Mitchell will be deemed to be constructively terminated if, among other things, there is a change of control (as defined in Item 6(c) under Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended) of the Company, a merger or consolidation of the Company, a sale of all or substantially all of the assets of the Company, or if certain changes related to their respective status or compensation by the Company occur. In the event of termination of employment by the Company without cause, Mr. and Mrs. Mitchell will be entitled to receive the amounts that would otherwise be paid under their respective employment agreements for the remaining term of such agreements.
The employment agreements of Mr. and Mrs. Mitchell further provide that they will be indemnified against certain liabilities that may arise by reason of their status or service as executive officers of the Company. The employment agreements of Mr. and Mrs. Mitchell do not prohibit their engaging in activities competitive with those of the Company, including the acquisition of theatres (subject to fiduciary duties to the Company imposed
by applicable law or contractual obligation imposed upon Mr. Mitchell by the Shareholders' Agreement). See "Certain Transactions--Cypress Investment."
STOCK OPTIONS
Employee Stock Option Plan
The Company has established a Nonqualified Stock Option Plan (the "Plan") under which the Chief Executive Officer of the Company, in his sole discretion, may grant employees of the Company options to purchase up to an aggregate of 10,685 shares of the Company's Class B Common Stock. The Chief Executive Officer of the Company has the ability to set the exercise price and the term (of up to ten years) of the options. All options vest at the rate of one-fifth of the total options granted per year generally beginning one year from the date of grant, subject to acceleration by the Chief Executive Officer of the Company. An employee's options are forfeited if the employee is terminated for cause. Upon termination of an employee's employment with the Company and provided that no public market exists for any class of common stock of the Company at such time, the Company has the option to repurchase any shares of capital stock of the Company that were acquired by the employee pursuant to the Plan at a specified formula price based on theatre cash flow.
During 1999, there were no options granted, exercised or forfeited under the Plan. As of March 30, 2000, there were outstanding under the Plan options to purchase 6,838 shares of the Company's Class B Common Stock.
Independent Director Stock Options
The Company has granted the unaffiliated directors of the Company options to purchase up to an aggregate of 900 shares of the Company's Class B Common Stock at an exercise price of $833.34 per share (the "Director Plan"). Effective April 15, 1995, the Company amended the Director Options to reduce the aggregate number of shares of common stock issuable pursuant to the Director Options from 900 to 600 and to reduce the exercise price of the Director Options from $833.34 per share to $1.00 per share. The Director Options vested on June 1, 1997. The options expire ten years from the date of grant. In December 1998, the Company granted an unaffiliated director of the Company options to purchase 200 shares of the Company's Class B Common Stock at an exercise price of $1.00 per share. The options vest five years from the date of grant and expire ten years from the date of grant. A director's options are forfeited if the director resigns or is removed from the Board of Directors of the Company.
During 1999, there were no options granted, exercised or forfeited under the Director Plan. As of March 30, 2000, there were outstanding options to purchase 800 shares of the Company's Class B Common Stock issued to directors of the Company.
Long Term Incentive Plan
In November 1998, the Board approved a Long Term Incentive Plan (the "1998 Plan") under which the Compensation Committee, in its sole discretion, may grant employees incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards performance units, performance shares or phantom stock up to an aggregate of 9,794 shares of the Company's Class B Common Stock. The Compensation Committee has the discretion to set the exercise price and the term (up to ten years) of the options. All awards under the 1998 Plan vest at the rate of one-fifth of the total award per year beginning one year from the date of grant, subject to acceleration by the Compensation Committee. An employee's award under the 1998 Plan is forfeited if the employee is terminated for cause. Upon termination of the employee's employment with the Company, the Company has the option to repurchase the award at the fair market value of the shares of Class B Common Stock vested under such award provided that no public market exists for any class of common stock of the Company.
In January 1999, the Company granted options to purchase 40 shares with an exercise price of $1,674. The Company believes that the market value of a share of Class B Common Stock on the date of grant exceeded the option price by approximately $426. As a result, the Company accrued $17,040 for unearned compensation and will amortize the non-cash expense at a rate of $3,408 per year during the five year vesting period for the options granted. In September and December 1999, 75 and 50 long term incentive plan options were forfeited, respectively. During 1999, there were no options exercised under the 1998 Plan. As of March 30, 2000, there were outstanding under the 1998 Plan options to purchase 5,365 shares of the Company's Class B Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In January 1995, the Board of Directors established a Compensation Committee of the Board to study senior management compensation and make recommendations to the Board of Directors as a whole relating to said compensation. Messrs. Stock, Anderson, Guerra and Singleton currently serve as members of the Compensation Committee, with Mr. Stock being the only member who is an officer or employee of the Company or any of its subsidiaries.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management.
The following table and the accompanying footnotes set forth, as of March 30, 2000, the beneficial ownership of the Company's Common Stock by (i) each person who is known to the Company to own beneficially more than 5% of either class of its outstanding Common Stock, (ii) each director and named executive officer, and (iii) all officers and directors as a group:
* Less than 1%.
(1) Unless otherwise indicated, the Company believes the beneficial owner has both sole voting and investment powers over such shares.
(2) As of March 30, 2000, 1,500 shares of Class A Common Stock and 184,817 shares of Class B Common Stock were issued and outstanding. Includes 7,865 shares of Class B Common Stock issuable upon the exercise of options that may be exercised within 60 days of the date of this Report.
(3) Does not include 15,937 shares of Class B Common Stock held in trust for the benefit of certain of Mr. Mitchell's grandchildren and 33,500 shares of Class B Common Stock owned for the benefit of Mr. Mitchell's descendants as to which Mr. Mitchell disclaims beneficial ownership. Mr. Mitchell is the co-trustee of such trusts.
(4) Excludes any shares owned by Mr. Mitchell that Mrs. Mitchell may be deemed to own as a result of community property laws.
(5) Includes 1,877 shares of Class B Common Stock issuable upon the exercise of options that may be exercised within 60 days of the date of this Report.
(6) Includes 485 shares of Class B Common Stock issuable upon the exercise of options that may be exercised within 60 days of the date of this Report.
(7) Includes 444 shares of Class B Common Stock issuable upon the exercise of options that may be exercised within 60 days of the date of this Report.
(8) Includes 140 shares of the Class B Common Stock issuable upon the exercise of options that may be exercised within 60 days of the date of this Report.
(9) Includes 591 shares of Class B Common Stock issuable upon the exercise of options that may be exercised within 60 days of the date of this Report. Does not include 15,937 shares of Class B Common Stock held in trust for the benefit of certain of Mr. Mitchell's grandchildren and 33,500 shares of Class B Common Stock owned for the benefit of Mr. Mitchell's descendants, as to which Mr. Mitchell disclaims beneficial ownership. Mr. Mitchell is the co-trustee of such trusts.
COMMON STOCK
The rights of the holders of Class A and Class B common stock are identical except for voting and conversion rights. Each share of Class A Common Stock is entitled to one vote on all matters submitted to a vote of the Company's shareholders. Class B Common Stock is non-voting. Subject to contractual limitations regarding conversion of Class B Common Stock into Class A Common Stock contained in the Shareholders' Agreement and
in Stock Transfer Restriction Agreements between the Company and certain former employees, each share of Class B Common Stock is convertible at any time, at the option of and without cost to the shareholder, into the same number of shares of Class A Common Stock upon surrender to the Company of the certificate or certificates evidencing the Class B Common Stock to be converted, together with a written notice of the election of such shareholder to convert such shares into Class A Common Stock. Holders of Class A and Class B Common Stock are entitled to receive pro rata per share such dividends as the Board of Directors may from time to time declare out of funds of the Company legally available for the payment of dividends. Upon liquidation, dissolution or winding-up of the Company, the holders of Class A and Class B Common Stock are entitled to share ratably in all assets available for distribution after payment in full of creditors. In a merger, consolidation or other business combination, the consideration to be received per share by holders of Class A and Class B Common Stock must be identical, except that in any such transaction in which shares of common stock are distributed, such shares may differ to the extent that voting rights differ among existing classes of Common Stock. See "Certain Transactions-- Cypress Investment."
Item 13:
Item 13: Certain Relationships and Related Transactions.
Laredo Joint Venture
The Company manages one theatre (12 screens) for Laredo Theatre, Ltd. ("Laredo"). Lone Star Theatres, Inc. owns 25% of the limited partnership interests in Laredo. Cinemark International is the sole general partner and owns the remaining limited partnership interests. Lone Star Theatres, Inc. is owned 100% by Mr. David Roberts, who is Mr. Mitchell's son-in-law. The Company recorded $148,323 of management fee revenues from Laredo in 1999.
Cinemark Partners II
The Company manages one theatre (17 screens, including an Imax screen) for Cinemark Partners II, Ltd. ("Cinemark Partners II"). Cinemark Partners I, Inc., a wholly owned subsidiary of the Company, is the sole general partner of Cinemark
Partners II. Cinemark Partners I, Inc. owns 1% of the limited partnership interests in Cinemark Partners II and the Company owns 50% of the limited partnership interests in Cinemark Partners II. On January 5, 1998, the Company purchased approximately 31% of the limited partnership interests in Cinemark Partners II for $3.1 million from the existing partners. Prior to such acquisition, Mr. Mitchell owned 10.1% of the limited partnership interests in Cinemark Partners II. Additionally, the Company purchased an additional 77.1 units for an aggregate purchase price of $3.7 million. After consummating such transactions, the Company owns approximately 51% of Cinemark Partners II. The Company recorded $269,098 of management fee revenues from Cinemark Partners II in 1999.
Cinemark Alberta
The Company manages one discount theatre (12 screens) for Cinemark Alberta. Cinemark Holdings Canada, Inc., a wholly owned subsidiary of Cinemark International, runs 50% of Cinemark Alberta. The Company recorded $81,794 of management fee revenues from Cinemark Alberta in 1999.
In August 1999, Cinemark Alberta, Inc. sold a twelve screen theatre for $6.0 million (CAN). The proceeds were used to pay off its entire debt obligation with a Canadian bank. The remaining proceeds were distributed to the Shareholders.
STARPLEX CINEMAS, INC.
On June 21, 1994, the Company executed a ground lease on property located in Lewisville, Texas. The Company constructed and equipped an eight screen multiplex theatre. The Company leases the theatre and the equipment to Starplex Cinemas, Inc. ("Starplex"). The Company has recorded only $450,000 of rental income since the inception of this lease as the theatre is performing below expectations and Starplex is delinquent in making its required rent payments. Starplex Cinemas, Inc. is 100% owned by Mr. Mitchell's brother.
SHAREHOLDERS' AGREEMENT
The Company entered into the Shareholders' Agreement dated March 12, 1996 with Mr. Mitchell, his affiliates and Cypress (the "Shareholders' Agreement"). Among other things, the Shareholders' Agreement provides that, subject to certain conditions, the Company must obtain (with certain exceptions) the consent of CALP for certain corporate acts including, but not limited to, amendments to the Articles of Incorporation of the Company, approval of annual budgets under certain circumstances, asset dispositions or acquisitions in excess of specified amounts, merger or consolidation of the Company, incurrence of indebtedness over specified amounts, certain stock redemptions or dividends, transactions with affiliates over specified amounts, certain management changes or new compensation plans, financing theatres through limited partnerships, settlements of litigation over specified amounts and issuance of common stock under certain conditions. The Shareholders' Agreement also provides that Cypress may not convert its Class B Common Stock to Class A Common Stock unless certain events occur such as a Change of Control (as defined in the Shareholders' Agreement) or the consummation of a public offering of the Company's common stock. The above-described provisions terminate on the earlier of (i) the public owning 25% or more of the common stock of the Company, (ii) the merger of the Company with and into any publicly traded company or (iii) ten years after the date of the Shareholders' Agreement. The Shareholders' Agreement also contains a voting agreement pursuant to which Mr. Mitchell agrees to vote his shares of common stock to elect certain designees of CALP to the Board of Directors of the Company.
Mr. Mitchell also agreed that in the event any corporate opportunity is presented to Mr. Mitchell or any of his affiliates to acquire or enter into any business transaction involving the motion picture exhibition business that would be significant to the Company, he would submit such opportunity to the Board of Directors of the Company before taking any action.
The Shareholders' Agreement further provides that the shareholders agree to form a new corporation as the parent corporation of the Company and to contribute their respective shares for like shares of this new corporation. The Company is currently pursuing plans to create such a holding company.
INDEMNIFICATION OF DIRECTORS
The Company has adopted provisions in its Articles of Incorporation and Bylaws which provide for indemnification of its officers and directors to the maximum extent permitted under the Texas Business Corporation Act. In addition, the Company has entered into separate indemnification agreements with each of its directors which requires the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors to the maximum extent permitted under the Texas Business Corporation Act. The Company has obtained an insurance policy providing for indemnification of officers and directors of the Company and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions.
PART IV
Item 14:
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. The financial statements listed in the accompanying Index beginning on are filed as a part of this report.
2. The financial statement schedules and related data listed in the accompanying Index beginning on S-1 are filed as a part of this report.
3. The exhibits listed in the accompanying Index beginning on E-1 are filed as a part of this report, which exhibits are bound separately.
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed during the last quarter of the period covered by this Report:
1. None.
(c) Exhibits.
See the accompanying Index beginning on page E-1, which exhibits are bound separately.
(d) Financial Statement Schedules.
See the accompanying Index beginning on page.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2000 CINEMARK USA, INC.
BY: /s/ Alan W. Stock ---------------------------- Alan W. Stock, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants which Have Not Registered Securities Pursuant to Section 12 of the Act.
No annual report or proxy material has been sent to the Company's shareholders. An annual report and proxy material may be sent to the Company's shareholders subsequent to the filing of this Form 10-K. The Company shall furnish to the Securities and Exchange Commission copies of any annual report or proxy material that is sent to the Company's shareholders.
CINEMARK USA, INC. AND SUBSIDIARIES
(ITEMS 8 AND 14 OF FORM 10-K) AND SUPPLEMENTAL SCHEDULES
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Cinemark USA, Inc. and Subsidiaries Plano, TX
We have audited the accompanying consolidated balance sheets of Cinemark USA, Inc. and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of income, shareholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a consolidated subsidiary in Brazil as of December 31, 1998, and for the year then ended, which statements reflect total assets constituting 7% of consolidated total assets as of December 31, 1998, and total revenues constituting 5% of consolidated total revenues for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this subsidiary audited by other auditors, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 and the report of the other auditors for 1998 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors for 1998, such consolidated financial statements present fairly, in all material respects, the financial position of Cinemark USA, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 1999 the Company changed its method of accounting for start-up activities and organizational costs to conform with AICPA Statement of Position 98-5.
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedules of certain consolidating information listed in the index on page are presented for the purpose of additional analysis of the basic consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual companies, and are not a required part of the basic consolidated financial statements. These schedules are the responsibility of the Company's management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic consolidated financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas February 29, 2000
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999
- --------------------------------------------------------------------------------
(Continued)
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999 ========================================================================
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1997, 1998 AND 1999 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
See notes to consolidated financial statements.
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 - --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION (Note 4)
See notes to consolidated financial statements.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Cinemark USA, Inc. with its subsidiaries (the Company) is a world leader in the motion picture exhibition industry that owns or leases and operates motion picture theatres in 32 states, Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia. The Company operates 2,708 screens in 254 theatres and manages an additional three theatres (23 screens) at December 31, 1999.
Principles of Consolidation - The consolidated financial statements include the accounts of Cinemark USA, Inc. and its subsidiaries. Majority-owned subsidiaries are consolidated while those subsidiaries of which the Company owns between 20% and 50% are accounted for as affiliates under the equity method. The results of these subsidiaries and affiliates are included in the financial statements effective with their formation or from their dates of acquisition. Significant intercompany balances and transactions are eliminated in the consolidation. Certain reclassifications have been made to December 31, 1997 and 1998 amounts to conform with the 1999 presentation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Inventories - Concessions and theatre supply inventories are stated at the lower of cost (first-in, first-out method) or market.
Theatre Properties and Equipment - Theatre properties and equipment are stated at cost less accumulated depreciation and amortization. Property additions include $2,152,816, $4,397,643 and $4,312,499 of interest incurred during the development and construction of theatres capitalized in 1997, 1998 and 1999, respectively. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: buildings - 18 to 40 years, theatre furniture and equipment - 5 to 15 years. Leasehold interests and improvements are amortized using the straight-line method over the lesser of the lease period or the estimated useful lives of the leasehold improvements. The Company determined that impairment charges of $2,213,696, $9,950,088 and $3,720,390 were required for certain theatres in 1997, 1998 and 1999, respectively. The impairment charges were recognized in the third quarter of 1997, the fourth quarter of 1998 and the third and fourth quarters of 1999, respectively. For purposes of determining the impairment amount, fair value of operating theatres was determined based on discounted cash flows.
Goodwill - The excess of cost over the fair values of the net assets of theatre businesses acquired, less accumulated amortization ($1,466,882 and $2,789,751 at December 31, 1998 and 1999, respectively) is recorded as Goodwill. For financial reporting purposes, these amounts are being amortized primarily over 10 to 20 years, which approximate the remaining lease terms of the businesses acquired.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Deferred Charges and Other Assets - Primarily consist of foreign advanced rents, construction advances and other deposits, equipment to be placed in service, debt issue costs and other intangible assets. Foreign advanced rents represent advance payments of long-term leases which are expensed to facility lease expense generally over 10 to 20 years as leased facilities are utilized. Debt issue costs are amortized using the straight-line method over the primary financing terms ended September 2001 to July 2008. Other intangible assets are amortized over the respective lives of the trademarks, noncompete agreements or other intangible asset agreements.
Revenue Recognition - Revenues are recognized when admissions and concessions sales are received and screen advertising is shown at the theatres. Film rental costs are accrued based on the applicable box office receipts and estimates of the final settlement pursuant to the film licenses.
Statement of Cash Flows - For purposes of reporting cash flows, cash and cash equivalents consist of operating funds held in financial institutions, petty cash held by the theatres and highly liquid investments with remaining maturities of three months or less when purchased.
Fair Values of Financial Instruments - In accordance with Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments." Fair values of financial instruments are estimated by the Company using available market information and other valuation methods. The estimated fair value amounts for specific groups of financial instruments are presented in Note 8. Values are based on available market quotes or estimates using a discounted cash flow approach based on the interest rates currently available for similar debt. The fair value of financial instruments for which estimated fair value amounts are not specifically presented is estimated to approximate the related recorded value.
Start-Up Activities And Organization Costs - On January 1, 1999 the Company adopted Statement of Position (SOP) 98-5 requiring start-up activities and organization costs to be expensed as incurred. The Company's practice had been to capitalize organization costs associated with the organization of new entities as well as costs associated with forming international joint ventures as deferred charges and to amortize them over the anticipated life of the respective entity or venture. The adoption of this new accounting pronouncement resulted in the aggregate write-off of the unamortized organization costs of $3,386,207 on January 1, 1999. This charge was recorded as a cumulative effect of a change in accounting principle as a one-time non cash charge to income of $2,968,637 (net of tax) in the first quarter of 1999 as follows:
(Gain) Loss on Sale of Assets - In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101, "Revenue recognition in Financial Statements", requiring that gains and losses on sale of assets be recorded as a component of operating income. The Company's practice had been to classify these gains and losses as other income and expense. As a result of the new accounting pronouncement, the Company has reclassified gains of $189,352 and $2,266,320 and losses of $2,419,511 from other income and expense to be included as a component of operating income in 1997, 1998 and 1999, respectively.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. EARNINGS PER SHARE
Earnings Per Share are computed using the weighted average number of shares of Class A and Class B common stock outstanding during each period. The following table sets forth the computation of basic and diluted earnings per share:
For additional disclosures regarding the Company's stock option plans see Note 12.
3. FOREIGN CURRENCY TRANSLATION
The accumulated other comprehensive loss in shareholders' equity of $17,196,698 and $31,230,379 at December 31, 1998 and 1999, respectively, primarily relates to the unrealized adjustments from translating the financial statements of Cinemark Brasil, S.A., Cinemark de Mexico, S.A. de C.V. and Cinemark Chile, S.A. into U.S. dollars.
Prior to 1997, the functional currency of Cinemark de Mexico, S.A. de C.V., was the peso. In 1997 and 1998 the Company was required to utilize the U.S. dollar as the functional currency of Cinemark de Mexico, S.A. de C.V., for U.S. reporting purposes due to the highly inflationary economy of Mexico. Thus, devaluations in the peso during 1997 and 1998 that affected the Company's investment were charged to exchange gain or loss rather than to the accumulated other comprehensive loss account as a reduction of shareholders' equity. An exchange gain (loss) of ($96,514) and $567,206 was recognized in 1997 and 1998, respectively, and is included in other income (expense). In 1999, the economy of Mexico reverted back to a non-highly inflationary status in which the peso again became the functional currency of Cinemark de Mexico, S.A. de C.V. resulting in certain assets, liabilities and equity accounts being restated at the current exchange rate. Thus, changes in the peso have been recorded in the accumulated other comprehensive loss account as a reduction of shareholders' equity during 1999. At December 31, 1999, the total assets of Cinemark de Mexico, S.A. de C.V., were approximately U.S.$70 million.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Prior to 1998, the functional currency of Cinemark del Ecuador S.A. was the sucre. In 1998 and 1999, the Company was required to utilize the U.S. dollar as the functional currency of Cinemark del Ecuador S.A. for U.S. reporting purposes due to the highly inflationary economy of Ecuador. Thus, devaluations in the sucre during 1998 and 1999 that affected the Company's investment were charged to exchange gain (loss) rather than to the accumulated other comprehensive loss account as a reduction of shareholders' equity. An exchange gain of $223,028 and $74,078 was recognized in 1998 and 1999, respectively, and is included in other income (expense). At December 31, 1999, the total assets of Cinemark del Ecuador S.A. were approximately U.S.$5 million.
In January 1998, the economy of Brazil became non-highly inflationary and the functional currency of Cinemark Brasil, S.A. changed from the U.S. dollar to the Real. Accordingly, assets and liabilities of Cinemark Brasil, S.A. are translated to U.S. dollars at year-end exchange rates (consistent with all other non-highly inflationary consolidated foreign subsidiaries). Income and expense items are translated at the average rates prevailing during the year. As a result of the devaluation of the Real during 1998 and 1999, the Company recorded a cumulative foreign currency translation adjustment to the accumulated other comprehensive loss account resulting in a reduction of shareholder's equity of $4.4 million and $11.0 million in 1998 and 1999, respectively. At December 31, 1999, the total assets of Cinemark Brasil, S.A. were approximately U.S.$65 million.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated statement of cash flows:
In December 1998, the Company acquired an additional 45% equity interest in its Chilean operating Company (Cinemark Chile, S.A.) for $7.625 million. As a result of the additional equity interest acquired, Cinemark Chile, S.A. was consolidated with the Company's operations effective January 1, 1999. The assets and liabilities of this former equity interest that are included in the consolidation as of January 1, 1999 are as follows:
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Company's Central American operating entities (Cinemark Nicaragua y Cia. Ltda., Cinemark Costa Rica, S.R.L., Cinemark El Salvador, S.A. de C.V. and Cinemark Honduras, S.R.L.) were consolidated with the Company's operations effective January 1, 1999. The assets and liabilities of these former equity interests that are included in the consolidation as of January 1, 1999 are as follows:
5. ACQUISITIONS AND INVESTMENTS IN SUBSIDIARIES
Cinemark USA, Inc. has made the following direct investments in its subsidiaries in 1997, 1998 and 1999, respectively.
Approximately $3.3 million of goodwill was recorded in 1998 as part of the investment in the Peruvian subsidiary as the additional 50% ownership interest was acquired from the Cinemark International, L.L.C. joint venture partners at a cost in excess of the fair value of the net assets acquired. The Peruvian subsidiary was jointly owned by Cinemark International, L.L.C. and Cinemark USA, Inc. at December 31, 1998. The 50% interest held by Cinemark International, L.L.C. was transferred to Cinemark USA, Inc. in January 1999.
Approximately $3.6 million of goodwill was recorded in 1999 as part of the investment in the Chilean subsidiary as an additional 45% ownership interest was acquired from the Cinemark USA, Inc. joint venture partners at a cost in excess of the fair value of the net assets acquired. This acquisition increased the Company's ownership interest from 50% to 95% resulting in the Chilean subsidiary being consolidated and the related goodwill being recorded effective January 1, 1999. Subsequent 1999 capital contributions have further increased the Company's ownership interest to 98%.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Cinemark International, L.L.C. (a wholly owned subsidiary of Cinemark USA, Inc.) has made the following direct investments in its subsidiaries in 1997, 1998 and 1999, respectively.
Approximately $4.9 million of goodwill was recorded in conjunction with two separate acquisitions from the Cinemark International, L.L.C. Argentine joint venture partners at a cost in excess of the fair value of the net assets acquired that effectively increased the Company's ownership interest from 25% to 50% in December 1998 and then to 100% in September 1999. The 100% interest held in this Argentine subsidiary by Cinemark International, L.L.C. was transferred to Cinemark USA, Inc. in September 1999.
Cinemark International, L.L.C. also contributed $0.2 million to Cinemark Core-Pacific, Ltd. (its 50.5% owned Taiwanese subsidiary) in 1999.
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company has the following investments in and advances to affiliates at December 31:
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Company's Chilean operating Company (Cinemark Chile, S.A.) and Central American operating entities (Cinemark Nicaragua y Cia, Ltda., Cinemark Costa Rica, S.R.L., Cinemark El Salvador, S.A. de C.V. and Cinemark Honduras, S.R.L.) were consolidated with the Company's operations effective January 1, 1999.
7. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31 consist of the following:
8. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Senior Subordinated Notes - In August 1996, the Company issued $200 million principal amount of Series B Senior Subordinated Notes due 2008 (the "1996 Subordinated Notes"). The 1996 Subordinated Notes bear interest at the rate of 9 5/8% per annum, payable semi-annually on February 1 and August 1 of each year. The 1996 Subordinated Notes require the Company to restrict the payment of dividends, payment of subordinated debt prior to maturity and issuance of preferred stock and other indebtedness; and contain other restrictive covenants. The 1996 Subordinated Notes are redeemable at the option of the Company, beginning August 2001, ranging in redemption price from 104.8% in 2001 to 100% in 2003 and thereafter. Any outstanding Subordinated Notes are due August 1, 2008. The 1996 Subordinated Notes were issued at 99.553% of the principal face amount (a discount of $4.47 per $1,000 principal amount) for an aggregate discount of $894,000. The net proceeds to the Company from the issuance of the Subordinated Notes (net of discount, fees and expenses) were approximately $193.2 million.
The Company utilized the proceeds from the $200 million issuance of Senior Subordinated Notes, to repurchase $123,370,000 of Senior Notes at $1,098.33 per $1,000.00 principal amount. An extraordinary loss of $9.0 million, net of related tax benefit, was recognized in connection with the premium paid and the write-off of the unamortized debt issue costs ($2,463,560) associated with the repurchased Senior Notes. In June 1997, the Company redeemed the remaining $1,630,000 of Senior Notes at a premium of $1,060 per $1,000 principal amount, resulting in an extraordinary loss of $53,789, net of related tax benefit.
In June 1997, the Company issued $75 million principal amount of Series D Senior Subordinated Notes due 2008 ("1997 Subordinated Notes"). The 1997 Subordinated Notes are substantially identical in all material respects to the 1996 Subordinated Notes, including rate of interest. The 1997 Subordinated Notes were issued at 103.0% of the principal face amount (a premium of $30.00 per $1,000 principal amount). The net proceeds to the Company from the issuance of the Subordinated Notes (net of fees and expenses) were approximately $77.1 million. The proceeds from the Subordinated Notes were used to reduce the Company's indebtedness under the then Credit Facility.
In January 1998, the Company issued $105 million principal amount of Series A Senior Subordinated Notes due 2008 ("1998 Subordinated Notes"). The 1998 Subordinated Notes are substantially identical in all material respects to the 1996 and 1997 Subordinated Notes, except for a lower 8-1/2% interest rate. The 1998 Subordinated Notes were issued at 99.0% of the principal face amount (a discount of $10.00 per $1,000 principal amount) for an aggregate discount of $1,050,000. The net proceeds to the Company from the issuance of the Subordinated Notes (net of discount, fees and expenses) were approximately $103.8 million. The proceeds from the Subordinated Notes were used to reduce the Company's indebtedness under the then Credit Facility. The Company exchanged the 1998 Subordinated Notes in March 1998 for 8 1/2% Series B Senior Subordinated Notes which are substantially identical in all material respects to the 1998 Subordinated Notes.
Reducing, Revolving Credit Facility - In February 1998, the Company replaced its existing credit facility with a reducing, revolving credit agreement (the "Credit Facility") through a group of banks for which Bank of America National Trust and Savings Association acts as Administrative Agent. The Credit Facility provides for loans to the Company of up to $350 million in the aggregate.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Credit Facility is a reducing revolving credit facility, with commitments automatically reduced each calendar quarter by $8,750,000, $11,812,500, $13,125,000, $12,031,000 and $6,562,500 in calendar year 2001, 2002, 2003, 2004 and 2005, respectively. The Company is required to prepay all loans outstanding in excess of the aggregate commitment as reduced pursuant to the terms of the Credit Facility. Borrowings are secured by a pledge of a majority of the issued and outstanding capital stock of the Company, and the credit agreement requires that the Company maintains certain financial ratios; restricts the payment of dividends, payment of subordinated debt prior to maturity and issuance of preferred stock and other indebtedness; and other restrictive covenants. Pursuant to the terms of the Credit Facility, funds borrowed bear interest at a rate per annum equal to the Offshore Rate (as defined in the Credit Facility) or the Base Rate (as defined in the Credit Facility, as the case may be), plus the Applicable Margin (as defined in the Credit Facility). As of December 31, 1999, the Company had borrowed $298 million under the Credit Facility. The effective interest rate on such borrowings as of December 31, 1999 is 8.1% per annum.
Revolving Credit Facility, Cinemark Mexico (USA) - In November 1998, Cinemark Mexico (USA), Inc. ("Cinemark Mexico") executed a credit agreement with a bank for itself and as Administrative Agent (the "Cinemark Mexico Credit Agreement"). The Cinemark Mexico Credit Agreement is a revolving credit facility and provides for a loan to Cinemark Mexico of up to $30 million in the aggregate. The Cinemark Mexico Credit Agreement is secured by a pledge of 65% of the stock of Cinemark de Mexico, S.A. de C.V. and an unconditional guaranty of the Company. Pursuant to the terms of the Cinemark Mexico Credit Agreement, funds borrowed bear interest at a rate per annum equal to the Offshore Rate (as defined in the Cinemark Mexico Credit Agreement) or the Base Rate (as defined in the Cinemark Mexico Credit Agreement), as the case may be, plus the Applicable Margin (as defined in the Cinemark Mexico Credit Agreement). As of December 31, 1999, Cinemark Mexico had borrowed $30 million under the Cinemark Mexico Credit Agreement, the proceeds of which were used to repay an intercompany loan of Cinemark Mexico from Cinemark International, L.L.C. Cinemark International, L.L.C. used the proceeds of such repayment to repay the outstanding indebtedness under its then existing credit facility. The effective interest rate on such borrowings as of December 31, 1999 is 7.6% per annum.
Revolving Credit Facility, Cinemark Investments Corporation - In September 1998, Cinemark Investments Corporation executed a credit agreement with a bank that provides Cinemark Investments Corporation up to $20 million in the aggregate under a revolving line of credit facility (the "Cinemark Investments Credit Agreement"). The Cinemark Investments Credit Agreement is secured by an assignment of certain fixed rate notes issued by Cinemark Brasil, S.A. to Cinemark Investments Corporation and an unconditional guaranty by the Company. Pursuant to the terms of the Cinemark Investments Credit Agreement, funds borrowed bear interest at a rate per annum equal to the Offshore Rate or the Base Rate (both defined in the Cinemark Investments Credit Agreement) as the case may be. As of December 31, 1999, Cinemark Investments Corporation had borrowed $20 million under the Cinemark Investments Credit Agreement, the proceeds of which were used to finance construction of theatre properties built by Cinemark Brasil, S.A. The effective interest rate on such borrowings as of December 31, 1999 is 8.4% per annum.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Cinemark Chile, S.A. Senior Notes payable with Bank - Cinemark Chile, S.A. became a consolidated subsidiary of the company effective January 1, 1999. Prior to that date, Cinemark Chile, S.A. had executed four senior note payable agreements with a bank for the U.S.$ equivalent of U.S. $6.0 million, U.S. $3.0 million, U.S. $4.5 million and U.S. $3.5 million in December 1997, July 1998, November 1998 and December 1998, respectively. These notes were each in Chilean pesos, adjusted for inflation, at the respective borrowing dates. Interest is assessed for three notes at the 90-day TAB rate and for one note at the 180-day TAB rate (Chile's Central Bank interbank rate) plus 1.5%, adjusted for inflation, and is paid quarterly for three of the notes and semi-annually for the fourth note. The term on all four notes is five years with a two year grace period on principal. All four notes are guaranteed by the Company for approximately 50% of the aggregate facility or $8.05 million in total. The remaining guarantee is by Conate, the former joint venture partners of Cinemark Chile, S.A. This Conate guarantee is to be released and replaced by a 100% pledge on equipment at a later date. At December 31, 1999, $16.9 million had been borrowed and remained outstanding on these four notes payable plus accrued interest of $0.2 million. The effective interest rates on the four notes range from approximately 7.25% to 7.70% per annum.
Cinemark International, L.L.C. Note Payable with Argentine Partners - In September 1999, Cinemark International, L.L.C. executed a note payable agreement with its Argentine Partners as part of the acquisition of the remaining 50% ownership interest maintained by the joint venture partners. The $11 million note payable calls for quarterly principal payments of $2.5 million in U.S.$, $2.5 million in U.S.$, $2.5 million in Argentine pesos and $3.5 million in Argentine pesos in January 2000, April 2000, July 2000 and October 2000,respectively, plus accrued interest at a rate of 10% per annum. At December 31, 1999, the entire $11 million note plus accrued interest remained outstanding.
Long-term debt at December 31, 1999, matures as follows: $21,420,579 in 2000; $7,427,836 in 2001; $6,781,050 in 2002; $5,628,526 in 2003; $2,229,576 in 2004 and $734,925,511 thereafter.
The estimated fair value of the Company's long-term debt of $778.4 million at December 31, 1999, was approximately $833 million. Such amounts do not include prepayment penalties which would be incurred upon the early extinguishment of certain debt issues.
Debt Issue Costs - Debt issue costs of $7,667,147 and $8,042,147, net of accumulated amortization of $1,665,278 and $2,498,618 related to the Subordinated Notes, the Credit Facility, the Cinemark Mexico Credit Agreement and the Cinemark Investments Credit Agreement, are included in deferred charges at December 31, 1998 and 1999, respectively. The 1997 period includes extraordinary losses recognized in connection with the write-off of debt issue costs relating to the Company's prior bank lines of credit, repurchase of Senior Notes and repurchase of New Mexican Notes.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
9. INCOME TAXES
Income tax expense below includes benefits from the extraordinary losses on early extinguishment of debt in 1997 of $256,768 and cumulative effect of a change in accounting principle in 1999 of $417,570 and consists of the following:
A reconciliation between income tax expense and taxes computed by applying the applicable statutory federal income tax rate to income before income taxes follows:
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Deferred income taxes are provided under the liability method for temporary differences between revenue and expenses that are recognized for tax return and financial reporting purposes. The tax effects of significant temporary differences and carryforwards comprising the net long-term deferred income tax liability at December 31, 1998 and 1999, consist of the following:
The Company's AMT credit carryforward may be carried forward indefinitely. The foreign net operating losses will expire beginning in 2002, however, some losses may be carried forward indefinitely.
Beginning January 1, 1999, management plans to reinvest the undistributed earnings of its foreign subsidiaries located in Mexico, Peru, Argentina and Honduras. As a result, for years beginning after 1998, deferred U.S. federal income taxes are not provided on the undistributed earnings of these foreign subsidiaries in accordance with Accounting Principles Board (APB) Opinion No. 23.
In the 4th quarter of 1999, the Company expanded its plans to reinvest undistributed earnings of these foreign subsidiaries to include undistributed earnings of prior years as well. The deferred U.S. federal income taxes provided on these prior undistributed earnings was $2,167,642, which was accounted for as a reduction of 1999 tax expense in accordance with APB Opinion No. 23.
The cumulative amount of prior and current undistributed earnings of these foreign subsidiaries on which the Company does not recognize income taxes is $13,366,767.
10. COMMITMENTS AND CONTINGENCIES
Leases - The Company conducts a significant part of its theatre operations in leased premises under noncancelable operating leases with terms of 5 to 30 years. In addition to the minimum annual lease payment, most of these leases provide for contingent rentals based on operating results and require the payment of taxes, insurance and other costs applicable to the property. Generally, these leases include renewal options for various periods at stipulated rates. Some leases also provide for escalating rent payments throughout the lease term. Deferred lease expenses of $14,578,747 and $16,188,800 at
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1998 and 1999, respectively, have been provided to account for lease expenses on a straight-line basis, where lease payments are not made on such basis. Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled $39,190,388, $61,713,480 and $89,931,024, respectively.
In February 1998, the Company completed a sale leaseback transaction with affiliates of Primus Capital L.L.C. (the "Sale Leaseback"). Pursuant to the Sale Leaseback, the Company sold the land, buildings and site improvements of twelve theatre properties to special purpose entities formed by Primus Capital L.L.C. for an aggregate purchase price equal to approximately $131.5 million resulting in a preliminary gain on disposal of the properties of $6.38 million, which was adjusted in 1999 to $3.79 million. In October 1998, the Company completed a second sale leaseback transaction with affiliates of Primus Capital L.L.C. (the "Second Sale Leaseback"). Pursuant to the Second Sale Leaseback, the Company sold the land, building and site improvements of one theatre property to a special purpose entity for an aggregate purchase price equal to approximately $13.9 million resulting in a gain on disposal of the property of $0.7 million. In December 1999, the Company completed a third sale leaseback transaction (the "Third Sale Leaseback") pursuant to which the Company sold the land, building and site improvements of its corporate office for an aggregate purchase price equal to approximately $20.3 million resulting in a gain on disposal of the property of $1.47 million. The Company deferred the entire gain from all three sale leaseback transactions and is recognizing them evenly over the lives of the leases (ranging from 10 to 20 years). As of December 31, 1999, $490,378 of the deferred gain has been recognized leaving an aggregate deferred gain of $5,470,381. Future minimum payments under these leases are due as follows: $16,175,438 in 2000, $16,175,438 in 2001, $16,175,438 in 2002, $16,175,438 in 2003, $16,175,438 in 2004 and $217,925,690 thereafter.
Future minimum payments under noncancelable capital leases and operating leases (including leases under the aforementioned sale leaseback transactions) with initial or remaining terms in excess of one year at December 31, 1999, are due as follows:
Employment Agreements - As of December 31, 1999, the Company has employment agreements with certain principal officers and a shareholder providing for total minimum future annual payments as follows:
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
These employment agreements terminate on the earlier of death, permanent disability or December 31, 2001.
Retirement Savings Plan - The Company has a 401(k) profit sharing plan for the benefit of all employees and makes contributions as determined annually by the Board of Directors. Contributions of $744,913, $828,890 and $982,213 were recorded in 1997, 1998 and 1999, respectively.
Letters of Credit and Collateral - At December 31, 1998, the Company had outstanding letters of credit of $2,053,512 in connection with uniform purchases, property and liability insurance coverage and certain lease matters. Certificates of deposit of $2,053,512 were pledged as collateral on the letters of credit. At December 31, 1999, the Company has outstanding letters of credit of $1,240,508 in connection with property and liability insurance coverage, sales tax and environmental matters.
Litigation and Litigation Settlements - The Company currently is a defendant in certain litigation proceedings alleging certain violations of the Americans with Disabilities Act of 1990 relating to the accessibility of certain theatre seating to patrons using wheelchairs. In August 1998, the judge presiding over one of these cases granted plaintiffs motion for summary judgement ruling the Company's stadium theatre design is in violation of the ADA. The Company is appealing this ruling. Although the Company cannot predict the outcome of the appeal or the outcome of the other cases, management believes that the Company's potential liability with respect to such proceedings is not material in the aggregate to the Company's financial position, results of operations and cash flows.
From time to time, the Company is involved in other legal proceedings arising from the ordinary course of its business operations, such as personal injury claims, employment matters and contractual disputes. The Company also believes that its potential liability with respect to other proceedings currently pending is not material in the aggregate to the Company's consolidated financial position, results of operations and cash flows.
11. MINORITY INTERESTS IN SUBSIDIARIES
Common Shareholders' Equity - Minority ownership interests in subsidiaries of the Company are as follows at December 31:
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
In December 1998, Cinemark International, L.L.C. entered into a joint venture agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. to develop state-of-the-art multiplexes in Colombia. The joint venture, which is 50.1% owned by Cinemark International, L.L.C. became consolidated effective January 1, 1999.
In September 1999, Cinemark International, L.L.C. acquired all of the shares of its Argentine joint venture partner, Prodecine, S.A., which held the remaining 50% of the shares of Cinemark Argentina, S.A.
12. CAPITAL STOCK
Common and Preferred Stocks - Class A Common shareholders have exclusive voting rights. Class B common shareholders have no voting rights except upon any proposed amendments to the articles of incorporation. However, they may convert at their option to Class A common stock. In the event of any liquidation, the Class A and Class B shareholders will be entitled to their pro rata share of assets remaining after any preferred shareholders have received their preferential amounts based on their respective shares held. The Company repurchased 2,246 shares of Class B common stock as treasury stock in 1997.
The Company has 1,000,000 shares of preferred stock, $1.00 par value, authorized with none issued or outstanding. The rights and preferences of preferred stock will be determined by the board of directors at the time of issuance.
Employee Stock Option Plan - Under terms of the Company's stock option plan, nonqualified options to purchase up to 10,685 shares of the Company's Class B common stock may be granted to key employees. All options vest and are exercisable over a period of five years from the date of grant and expire ten years from the date of grant. A summary of the Company's Employee Stock Option Plan activity and related information for the years ended December 31, 1997, 1998 and 1999 is as follows:
The weighted average remaining contractual life of the 7,121 options outstanding at December 31, 1999 is three years.
The Company believes that the market value of a share of Class B Common Stock on the date of grant for the 260 shares granted in May and June 1997 exceeded the option price by approximately
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
$1,791. As a result, the Company accrued $465,743 for unearned compensation and has been amortizing this noncash expense at a rate of $93,149 per year during the five year vesting period for the options granted. The Company believes that the market value of a share of Class B Common Stock on the date of grant for the 470 shares granted in January 1998 exceeded the option price by approximately $1,800. As a result, the Company accrued $846,000 for unearned compensation and has been amortizing this noncash expense at a rate of $169,200 per year during the five year vesting period for the options granted. The Company repurchased options to purchase 454 shares of Class B Common Stock held by a retiring employee in July 1998. The aggregate purchase price for such options was approximately $817,000 which is included in salaries and wages expense.
Independent Director Stock Options - In 1993, the Company granted the unaffiliated directors of the Company options to purchase up to an aggregate of 900 shares of the Company's Class B Common Stock at an exercise price of $833.34 per share (the "Director Options"). In 1995, the Company amended the Director Options to reduce the aggregate number of shares of Common Stock issuable pursuant to the Director Options from 900 to 600 shares and to reduce the exercise price of the Director Options from $833.34 per share to $1.00 per share. The options vested on June 1, 1997 and expire ten years from the date of grant. A director's options are forfeited if the director resigns or is removed from the Board of Directors of the Company.
A summary of the Company's Independent Directors Stock Option Plan activity and related information for the years ended December 31, 1997, 1998 and 1999 is as follows:
The weighted average remaining contractual life of the 800 options outstanding at December 31, 1999 is five years.
The Company believes that the market value of a share of Class B Common Stock on the date of grant for the 200 shares granted in December 1998 exceeded the option price by approximately $2,099. As a result, the Company accrued $419,800 for unearned compensation and has been amortizing this noncash expense at a rate of $83,960 per year during the five year vesting period for the options granted.
Long Term Incentive Plan - In November 1998, the Board approved a Long Term Incentive Plan (the "1998 Plan") under which the Compensation Committee of the Board of Directors, in its sole discretion, may grant employees incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards performance units, performance shares or phantom stock up to an aggregate of 9,794 shares of the Company's Class B Common Stock. The Compensation Committee has the
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
discretion to set the exercise price and the term (up to ten years) of the options. All awards under the 1998 Plan vest at the rate of one-fifth of the total award per year beginning one year from the date of grant, subject to acceleration by the Compensation Committee. An employee's award under the 1998 Plan is forfeited if the employee is terminated for cause. Upon termination of the employee's employment with the Company, the Company has the option to repurchase the award at the fair market value of the shares of Class B Common Stock vested under such award provided that no public market exists for any class of common stock of the Company.
A summary of the Company's Long-Term Incentive Stock Option Plan activity and related information for the years ended December 31, 1998 and 1999 is as follows:
The weighted average remaining contractual life of the 5,365 options outstanding at December 31, 1999 is nine years.
The Company believes that the market value of a share of Class B Common Stock on the date of grant for the 5,450 shares granted in December 1998 exceeded the option price by approximately $426. As a result, the Company accrued $2,321,700 for unearned compensation and has been amortizing the noncash expense at a rate of $464,340 per year during the five year vesting period for the options granted. The Company believes that the market value of a share of Class B Common Stock on the date of grant for the 40 options granted in January 1999 exceeded the option price by approximately $426. As a result, the Company accrued $17,040 for unearned compensation and has been amortizing this non-cash expense at a rate of $3,408 per year during the five year vesting period for the options granted. The long term incentive options expire ten years from the date of grant.
The excess of the estimated fair market value of the stock at the dates of the grant over the exercise price of the various options are accounted for as additional paid-in capital and as unearned compensation, which is amortized to operations over the vesting period. As a result of the above grants, unearned compensation of $1,073,296, $3,587,500 and $17,040 was recorded in 1997, 1998 and 1999, respectively. Compensation expense under these stock option plans was $1,898,836, $851,375 and $1,049,176 in 1997, 1998 and 1999, respectively.
The Company applies APB Opinion 25 and related interpretations in accounting for the Company's stock option plans, as described below. Had compensation costs for the Company's stock option plans been determined based on the fair value at the date of grant for awards under the plans consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, utilizing the Black-Scholes option pricing model, the effect on income and earnings per share would not have changed from the amounts presented in the financial statements. The results are substantially the same pursuant to SFAS No. 123 as a result of the value of the underlying stock at the date of grant being significantly higher than the exercise price of the options.
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
13. OTHER RELATED PARTY TRANSACTIONS
In addition to transactions discussed in other notes to the financial statements, the following transactions with related companies are included in the Company's financial statements:
In 1997, the majority shareholder and certain employees of the Company owned a minority portion of Cinemark Partners II, Ltd.
The Company leases a theatre facility to a relative of the Company's majority shareholder.
14. REPORTING SEGMENTS
The Company operates in a single industry as a motion picture exhibitor. The Company is a multinational corporation with consolidated operations in the United States, Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia. Revenues and long-lived assets in the United States and other countries for the years ended December 31 are as follows:
CINEMARK USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE A CONSOLIDATING BALANCE SHEET INFORMATION DECEMBER 31, 1999 - --------------------------------------------------------------------------------
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes.
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CINEMARK USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE B CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes.
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CINEMARK USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE C CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION YEAR ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes.
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EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
CINEMARK USA, INC.
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
EXHIBIT INDEX
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