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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File Nos. 33-47040; 333-11895; 333-45417
CINEMARK USA, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2206284
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3900 Dallas Parkway
Suite 500
Plano, Texas 75093
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 665-1000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
As of August 14, 2002, 1,500 shares of Class A common stock and 182,648
shares of Class B common stock were outstanding.
CINEMARK USA, INC. AND SUBSIDIARIES
Index
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2002 (unaudited)
and December 31, 2001 4
Condensed Consolidated Statements of Income
(unaudited) for the three and six month
periods ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash
Flows (unaudited) for the six month
periods ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 30
2
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking statements" based
on the Company's current expectations, assumptions, estimates and projections
about the Company's and its subsidiaries' business and industry. The Company
intends that this quarterly 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. They include statements relating to:
o future revenues, expenses and profitability;
o the future development and expected growth of the Company's business;
o projected capital expenditures;
o attendance at movies generally, or in any of the markets in which the
Company operates, the number or diversity of popular movies released or
the Company's ability to successfully license and exhibit popular
films;
o competition from other exhibitors; and
o determinations in lawsuits in which the Company is a defendant.
You can identify forward-looking statements by the use of words such as "may,"
"should," "will," "could," "estimates," "predicts," "potential," "continue,"
"anticipates," "believes," "plans," "expects," "future" and "intends" and
similar expressions which are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond the Company's
control and difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
In evaluating these forward-looking statements, you should carefully consider
the risks and uncertainties described in this report. These forward-looking
statements reflect the Company's view only as of the date of this report. Actual
results could differ materially from those indicated by such forward-looking
statements due to a number of factors. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this cautionary statement. The Company undertakes
no current obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
(Unaudited)
-------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 68,496,496 $ 50,199,223
Inventories 3,660,457 3,322,032
Accounts receivable 10,502,896 11,049,648
Income tax receivable 2,354,238 1,438,794
Prepaid expenses and other 3,932,522 3,246,829
-------------------------------------
Total current assets 88,946,609 69,256,526
THEATRE PROPERTIES AND EQUIPMENT 1,169,848,838 1,201,334,337
Less accumulated depreciation and amortization (355,879,347) (334,927,920)
-------------------------------------
Theatre properties and equipment - net 813,969,491 866,406,417
OTHER ASSETS
Goodwill - net 10,788,356 15,124,954
Investments in and advances to affiliates 2,763,002 4,447,003
Deferred tax asset - 3,716,206
Deferred charges and other - net 29,578,318 37,592,644
-------------------------------------
Total other assets 43,129,676 60,880,807
-------------------------------------
TOTAL $ 946,045,776 $ 996,543,750
=====================================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 38,640,121 $ 21,853,742
Accounts payable and accrued expenses 112,220,658 117,501,526
-------------------------------------
Total current liabilities 150,860,779 139,355,268
LONG-TERM LIABILITIES
Senior credit agreements 323,176,086 378,914,750
Senior subordinated notes 380,173,421 380,187,674
Deferred lease expenses 23,740,792 22,832,388
Deferred gain on sale leasebacks 4,555,580 4,738,540
Deferred income taxes 5,018,483 -
Deferred revenues and other long-term liabilities 7,227,932 9,824,212
-------------------------------------
Total long-term liabilities 743,892,294 796,497,564
COMMITMENTS AND CONTINGENCIES (see Note 10) - -
MINORITY INTERESTS IN SUBSIDIARIES 31,097,586 35,353,662
SHAREHOLDER'S EQUITY (As restated at December 31, 2001, see Note 11)
Class A Common stock, $.01 par value: 10,000,000 shares
authorized, 1,500 shares issued and outstanding 15 15
Class B Common stock, no par value: 1,000,000 shares
authorized, 239,893 shares issued and outstanding 49,543,427 49,543,427
Additional paid-in-capital 11,426,265 15,097,709
Unearned compensation - stock options - (4,226,004)
Retained earnings 65,596,624 44,696,299
Treasury stock, 57,245 Class B shares at cost (24,232,890) (24,232,890)
Accumulated other comprehensive loss (82,138,324) (55,541,300)
-------------------------------------
Total shareholder's equity 20,195,117 25,337,256
-------------------------------------
TOTAL $ 946,045,776 $ 996,543,750
=====================================
See Notes to Condensed Consolidated Financial Statements
4
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------------------------ ------------------------------
REVENUES
Admissions $161,395,144 $130,004,407 $307,806,708 $257,843,145
Concession 80,084,602 61,702,235 149,370,820 119,545,982
Other 11,969,591 10,652,217 22,973,915 21,039,804
------------------------------ ------------------------------
Total 253,449,337 202,358,859 480,151,443 398,428,931
COSTS AND EXPENSES
Cost of operations:
Film rentals and advertising 87,770,920 68,490,322 162,733,412 133,798,745
Concession supplies 13,775,334 10,230,831 25,757,154 20,503,711
Salaries and wages 25,977,570 22,377,694 48,528,004 43,856,298
Facility leases 29,125,793 28,132,827 58,275,403 56,924,233
Utilities and other 28,406,815 27,205,026 57,014,691 53,892,744
------------------------------ ------------------------------
Total cost of operations 185,056,432 156,436,700 352,308,664 308,975,731
General and administrative expenses 11,815,562 10,347,268 22,458,579 20,190,208
Depreciation and amortization 16,845,737 17,076,249 34,012,518 33,684,813
Asset impairment loss 223,378 - 781,776 450,000
Loss on sale of assets and other 273,732 1,720,172 812,924 1,831,086
------------------------------ ------------------------------
Total costs and expenses 214,214,841 185,580,389 410,374,461 365,131,838
OPERATING INCOME 39,234,496 16,778,470 69,776,982 33,297,093
OTHER INCOME (EXPENSE)
Interest expense (14,066,488) (17,850,288) (28,806,800) (37,112,518)
Amortization of debt issue cost and debt discount (634,795) (643,129) (1,269,590) (1,286,257)
Interest income 514,716 349,546 998,055 719,190
Foreign currency exchange loss (2,100,767) (1,379,241) (2,321,764) (2,531,370)
Equity in income (loss) of affiliates 96,267 (1,418,886) 213,008 (1,456,564)
Minority interests in (income) loss of subsidiaries 140,745 575,879 (735,726) 695,769
------------------------------ ------------------------------
Total (16,050,322) (20,366,119) (31,922,817) (40,971,750)
------------------------------ ------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 23,184,174 (3,587,649) 37,854,165 (7,674,657)
Income taxes (benefit) 9,124,792 (1,261,124) 13,564,061 (2,685,614)
------------------------------ ------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE 14,059,382 (2,326,525) 24,290,104 (4,989,043)
Cumulative effect of a change in accounting principle, net
of income tax benefit of $0. - - (3,389,779) -
------------------------------ ------------------------------
NET INCOME (LOSS) $ 14,059,382 $ (2,326,525) $ 20,900,325 $ (4,989,043)
============================== ==============================
EARNINGS (LOSS) PER SHARE:
Basic:
Income (loss) before accounting change $ 76.35 $ (12.99) $ 131.91 $ (27.87)
Cumulative effect of an accounting change - - (18.41) -
------------------------------ ------------------------------
Net income (loss) $ 76.35 $ (12.99) $ 113.50 $ (27.87)
============================== ==============================
Diluted:
Income (loss) before accounting change $ 76.35 $ (12.99) $ 131.91 $ (27.87)
Cumulative effect of an accounting change - - (18.41) -
------------------------------ ------------------------------
Net income (loss) $ 76.35 $ (12.99) $ 113.50 $ (27.87)
============================== ==============================
See Notes to Condensed Consolidated Financial Statements
5
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2002 2001
-------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 20,900,325 $ (4,989,043)
Noncash items in net income (loss):
Depreciation 33,623,952 32,364,610
Amortization of goodwill and other assets 388,566 1,320,203
Amortization of foreign advanced rents 942,739 1,143,028
Amortized compensation - stock options 554,559 388,742
Amortization of debt issue costs 1,182,340 1,199,007
Amortization of gain on sale leasebacks (182,960) (182,961)
Amortization of debt discount and premium (14,253) (14,254)
Amortization of deferred revenues (2,403,953) (5,780,397)
Loss on impairment of assets 781,776 450,000
Loss on sale of assets and other 812,924 1,831,086
Deferred lease expenses 908,404 1,108,562
Deferred income tax expenses 8,734,689 (3,203,579)
Equity in (income) loss of affiliates (213,008) 1,456,564
Minority interests in income (loss) of subsidiaries 735,726 (695,769)
Cumulative effect of an accounting change 3,389,779 -
Changes in assets and liabilities:
Inventories (338,425) 182,627
Accounts receivable 546,752 (1,749,443)
Prepaid expenses and other (685,693) (179,589)
Other assets 5,889,103 (39,509)
Advances with affiliates 1,302,669 (135,091)
Accounts payable and accrued expenses (615,285) (13,497,568)
Other long-term liabilities (192,327) (433,283)
Income tax receivable/payable (915,444) (1,558,932)
-------------------------------
Net cash provided by operating activities 75,132,955 8,985,011
INVESTING ACTIVITIES
Additions to theatre properties and equipment (12,191,593) (14,022,555)
Sale of theatre properties and equipment 1,514,477 3,942,537
Investment in affiliates - (379,373)
Dividends/capital returned from affiliates 594,340 -
-------------------------------
Net cash used for investing activities (10,082,776) (10,459,391)
FINANCING ACTIVITIES
Increase in long-term debt 19,115,888 40,806,562
Decrease in long-term debt (57,257,124) (27,990,167)
Increase in minority investment in subsidiaries 421,855 429,373
Decrease in minority investment in subsidiaries (5,413,657) (3,665,005)
-------------------------------
Net cash provided by (used for) financing activities (43,133,038) 9,580,763
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (3,619,868) (92,850)
-------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 18,297,273 8,013,533
CASH AND CASH EQUIVALENTS:
Beginning of period 50,199,223 19,839,994
-------------------------------
End of period $ 68,496,496 $ 27,853,527
===============================
SUPPLEMENTAL INFORMATION (see Note 5)
See Notes to Condensed Consolidated Financial Statements
6
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Basis of Presentation
Cinemark USA, Inc. and its subsidiaries (the "Company") is one of the
leaders in the motion picture exhibition industry and owns or leases and
operates motion picture theatres in 33 states, Canada, Mexico, Argentina,
Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica,
Colombia and the United Kingdom. The Company operates 3,026 screens in 279
theatres and manages an additional 7 theatres (58 screens) at June 30, 2002.
The condensed consolidated financial statements have been prepared by
the Company, without audit, according to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these interim
financial statements reflect all adjustments (which, except for the cumulative
effect of an accounting change, include only normal recurring adjustments)
necessary to state fairly the financial position and results of operations as of
and for the periods indicated. The condensed consolidated financial statements
include the accounts of Cinemark USA, Inc. and its subsidiaries. Majority-owned
subsidiaries that the Company controls are consolidated while those subsidiaries
of which the Company owns between 20% and 50% and does not control are accounted
for as affiliates under the equity method. 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 consolidation. Certain reclassifications have
been made to June 30, 2001 and December 31, 2001 amounts to conform to the June
30, 2002 presentation.
These financial statements should be read in conjunction with the
audited annual financial statements and the notes thereto for the year ended
December 31, 2001, included in the Annual Report filed March 27, 2002 on Form
10-K and the amended Annual Report filed June 28, 2002 on Form 10-K/A by the
Company under the Securities Exchange Act of 1934. Operating results for the
three and six month periods ended June 30, 2002 are not necessarily indicative
of the results to be achieved for the full year.
On May 16, 2002, Cinemark, Inc. was formed as the Delaware holding
company of Cinemark USA, Inc. Under a share exchange agreement, dated May 17,
2002, and after giving effect to a reverse stock split, each outstanding share,
and each outstanding option to purchase shares of the Company were exchanged for
shares, and options to purchase shares, respectively, of common stock of
Cinemark, Inc. As a result, weighted average common shares outstanding for the
three and six month periods ended June 30, 2002 do not include options to
purchase shares of Cinemark, Inc.'s common stock.
7
2. Earnings (Loss) Per Share
Earnings (loss) 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
(loss) per share:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Income (loss) before cumulative effect of an accounting
change $14,059,382 $(2,326,525) $24,290,104 $(4,989,043)
=========== ============ =========== ============
Basic:
Weighted average common shares outstanding 184,148 179,037 184,148 179,037
======= ======= ======= =======
Income (loss) before cumulative effect of an accounting
change per common share $76.35 $(12.99) $131.91 $(27.87)
====== ======== ======= ========
Diluted:
Weighted average common shares outstanding 184,148 179,037 184,148 179,037
Common equivalent shares for stock options - - - -
------- ------- ------- -------
Weighted average common and common equivalent shares
outstanding 184,148 179,037 184,148 179,037
======= ======= ======= =======
Income (loss) before cumulative effect of an accounting
change per common and common equivalent share $76.35 $(12.99) $131.91 $(27.87)
====== ======== ======= ========
Basic income (loss) per share is computed by dividing the income (loss)
by the weighted average number of shares of common stock of all classes
outstanding during the period. Diluted income (loss) per share is computed by
dividing the income (loss) by the weighted average number of shares of common
stock and potential issuable common stock using the treasury stock method. The
dilutive effect of the options to purchase common stock is excluded from the
computation of diluted income (loss) per share if their effect is antidilutive.
Options to purchase 11,752 shares of common stock have been excluded from the
diluted income (loss) per share calculation for the three and six month periods
ended June 30, 2001, as their effect would have been antidilutive.
On May 16, 2002, Cinemark, Inc. was formed as the Delaware holding
company of Cinemark USA, Inc. Under a share exchange agreement, dated May 17,
2002, and after giving effect to a reverse stock split, each outstanding share,
and each outstanding option to purchase shares of the Company were exchanged for
shares, and options to purchase shares, respectively, of common stock of
Cinemark, Inc. As a result, weighted average common shares outstanding for the
three and six month periods ended June 30, 2002 do not include options to
purchase shares of Cinemark, Inc.'s common stock.
3. Comprehensive Income (Loss)
Statement of Financial Accounting Standards (SFAS) No. 130 establishes
standards for reporting and display of comprehensive income (loss) and its
components in the financial statements. The following components are reflected
in the Company's comprehensive income (loss):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $14,059,382 $(2,326,525) $20,900,325 $(4,989,043)
Foreign currency translation adjustment (16,666,510) 1,101,744 (26,597,024) (1,961,639)
------------ ------------ ------------ ------------
Comprehensive loss $(2,607,128) $(1,224,781) $(5,696,699) $(6,950,682)
============ ============ ============ ============
8
4. Foreign Currency Translation
The accumulated other comprehensive loss in shareholder's equity of
$82,138,324 and $55,541,300 at June 30, 2002 and December 31, 2001,
respectively, primarily relates to the unrealized adjustments from translating
the financial statements of Cinemark Argentina, S.A., Cinemark Brasil S.A. and
Cinemark de Mexico, S.A. de C.V. into U.S. dollars.
For the majority of 2001, the country of Argentina utilized the peso as
its functional currency with it pegged at a rate of 1.0 peso to the U.S. dollar.
As a result of economic turmoil which began in December 2001, the Argentine
government announced several restrictions on currency conversions and transfers
of funds abroad in early January 2002. The Argentine government ended the
peso-dollar parity regime and established a dual exchange rate system, with a
"commercial rate" and a "market rate". The commercial rate of 1.4 pesos to the
U.S. dollar was to be utilized to settle all exports and certain essential
imports. The market rate traded for the first time on January 11, 2002 and
closed at a rate of 1.7 pesos to the U.S. dollar. As a result, the effect of
translating the December 31, 2001 peso balances for assets and liabilities into
U.S. dollars at the first known free-floating market rate as of January 11, 2002
(1.7 pesos to the U.S. dollar) is reflected as a cumulative foreign currency
translation adjustment to the accumulated other comprehensive loss account as a
reduction of shareholder's equity in the amount of $19.1 million at December 31,
2001. Income and expense accounts from January through November 2001 were
converted into U.S. dollars at the exchange rate of 1.0 peso to the U.S. dollar
and income and expense accounts in December 2001 were converted into U.S.
dollars at the rate of 1.7 pesos to the U.S. dollar. On January 14, 2002, the
Argentine government unified the commercial rate and the market rate into one
floating rate which is presently in use. At June 30, 2002, the floating rate was
3.8 pesos to the U.S. dollar. As a result, the effect of translating the June
30, 2002 peso balances for assets and liabilities into U.S. dollars is reflected
as a cumulative foreign currency translation adjustment to the accumulated other
comprehensive loss account as an additional reduction of shareholder's equity in
the amount of $14.4 million at June 30, 2002. Income and expense accounts from
January through June 2002 were converted into U.S. dollars at the prevailing
average floating rate for each of those six months.
On June 30, 2002, the exchange rate for the Brazilian real was 2.8 reais
to the U.S. dollar (the exchange rate was 2.3 reais to the U.S. dollar at
December 31, 2001). As a result, the effect of translating the June 30, 2002
real balances for assets and liabilities into U.S. dollars is reflected as a
cumulative foreign currency translation adjustment to the accumulated other
comprehensive loss account as an additional reduction of shareholder's equity in
the amount of $5.1 million at June 30, 2002.
On June 30, 2002, the exchange rate for the Mexican peso was 10.0 pesos
to the U.S. dollar (the exchange rate was 9.2 pesos to the U.S. dollar at
December 31, 2001). As a result, the effect of translating the June 30, 2002
peso balances for assets and liabilities into U.S. dollars is reflected as a
cumulative foreign currency translation adjustment to the accumulated other
comprehensive loss account as an additional reduction of shareholder's equity in
the amount of $6.2 million at June 30, 2002.
In 2001 and 2002, all foreign countries where the Company has
operations, including Argentina, Brazil and Mexico, were deemed non-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 as an increase or reduction to
shareholder's equity.
5. Supplemental Cash Flow Information
The following is provided as supplemental information to the condensed
consolidated statements of cash flows:
Six Months Ended
June 30,
--------
2002 2001
---- ----
Cash paid for interest $27,793,836 $38,602,949
Cash paid for income taxes (net of refunds) 5,782,379 1,903,256
9
6. Financial Information About Geographic Areas
The Company operates in a single business segment 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, Colombia and the
United Kingdom. Revenues in the United States and Canada, Mexico, Brazil and
other foreign countries for the six months ended June 30 are as follows:
Six Months Ended
June 30,
--------
Revenues 2002 2001
-------- ---- ----
U.S. and Canada $369,019,438 $297,529,212
Mexico 43,590,520 34,858,256
Brazil 36,471,520 31,310,175
Other foreign countries 31,537,451 35,179,100
Eliminations (467,486) (447,812)
------------- -------------
Total $480,151,443 $398,428,931
============= =============
Long-lived assets in the United States and Canada, Mexico, Brazil and
other foreign countries as of June 30 are as follows:
June 30,
--------
Long-Lived Assets 2002 2001
----------------- ---- ----
U.S. and Canada $649,037,519 $715,195,578
Mexico 69,694,926 76,282,484
Brazil 50,206,129 58,682,074
Other foreign countries 45,030,917 73,540,117
------------ ------------
Total $813,969,491 $923,700,253
============ ============
7. Accounting for Derivative Instruments and Hedging Activities
The Company's condensed consolidated balance sheets as of June 30, 2002
and December 31, 2001 include an interest rate cap agreement recorded at its
fair value of $0.4 million and $1.1 million, respectively. This derivative asset
is recorded as a component of deferred charges and other on the Company's
condensed consolidated balance sheets. For the six month periods ended June 30,
2002 and 2001, a loss of $0.7 million and $0.6 million, respectively, has been
recorded as a component of interest expense in the condensed consolidated
statements of income to recognize the decrease in the fair value of the
derivative asset.
8. Accounting for Amortization of Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets".
This statement requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually.
The Company's goodwill at December 31, 2001 was as follows:
Gross Carrying Accumulated Net Goodwill
Goodwill Amount Amortization Amount
-------- ------ ------------ ------
U.S. operations $9,313,165 $(4,004,427) $5,308,738
Argentina operations 5,162,418 (893,308) 4,269,110
Chile operations 3,663,883 (732,777) 2,931,106
Peru operations 3,270,000 (654,000) 2,616,000
----------- ------------ -----------
$21,409,466 $(6,284,512) $15,124,954
=========== ============ ===========
10
The adoption of this accounting pronouncement resulted in the aggregate
write down of goodwill to fair value as a cumulative effect of a change in
accounting principle on January 1, 2002 as follows:
U.S. operations $ 27,226
Argentina operations 3,298,385
----------
$3,325,611
==========
The Company has recorded an additional impairment of goodwill in the
amount of $558,398 in the six month period ended June 30, 2002 (recorded as a
component of asset impairment loss in the condensed consolidated statements of
income). The additional impairment of goodwill relates to further write-downs of
goodwill to fair value associated with the Company's Argentina operations which
continue to be impacted by the economic turmoil in the country. Fair value for
this goodwill reporting unit was estimated based on a multiple of estimated cash
flows for each of the individual Argentina properties. No additional goodwill
was acquired in the six month period ended June 30, 2002.
The Company's other intangible assets (included in deferred charges and
other on the Company's condensed consolidated balance sheets) at December 31,
2001 were as follows:
Gross Carrying Accumulated Net Intangible
Other Intangible Assets Amount Amortization Asset Amount
----------------------- ------ ------------ ------------
Capitalized licensing fees $9,000,000 $(566,666) $8,433,334
Trademarks 147,919 (83,751) 64,168
Non-compete fee 72,403 (64,876) 7,527
Other intangible assets 169,116 (152,953) 16,163
---------- ---------- ----------
$9,389,438 $(868,246) $8,521,192
========== ========== ==========
The adoption of this accounting pronouncement resulted in the aggregate
write down of other intangible assets with indefinite useful lives to fair value
as a cumulative effect of a change in accounting principle on January 1, 2002 as
follows:
Trademarks $64,168
-------
$64,168
=======
The Company's capitalized licensing fees and non-compete fee have
definite useful lives and thus are continuing to be amortized over their
remaining useful lives. The Company's other intangible assets have indefinite
useful lives remaining but were not written down on January 1, 2002 since they
are presently recorded at or below their fair value.
The Company's other intangible assets at June 30, 2002 are as follows:
Gross Carrying Accumulated Net Intangible
Other Intangible Assets Amount Amortization Asset Amount
------------------------ ------ ------------ ------------
Amortized Intangible Assets:
Capitalized licensing fees $9,000,000 $(816,666) $8,183,334
Non-compete fee 72,403 (71,329) 1,074
------ -------- -----
$9,072,403 $(887,995) $8,184,408
========== ========== ==========
Unamortized Intangible Assets:
Trademarks $147,919 $(147,919) $ -
Other intangible assets 169,116 (152,953) 16,163
------- --------- ------
$317,035 $(300,872) $16,163
======== ========== =======
Aggregate Amortization Expense:
For the six month period ended June 30, 2002 $388,566
========
11
Aggregate amortization expense for the six month period ended June 30,
2002 consists of $256,453 of amortization of other intangible assets and
$132,113 of amortization of other assets (both of which are included in deferred
charges and other on the Company's condensed consolidated balance sheets).
Estimated Amortization Expense of Other Intangible Assets:
For the year ended December 31, 2002 $507,527
For the year ended December 31, 2003 500,000
For the year ended December 31, 2004 500,000
For the year ended December 31, 2005 500,000
For the year ended December 31, 2006 500,000
The Company's non-compete fee will be fully amortized by December 31,
2002.
The impact on net income (loss) and earnings (loss) per share related to
the adoption of this accounting pronouncement is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income (loss) $14,059,382 $(2,326,525) $20,900,325 $(4,989,043)
Add back: Cumulative effect of an accounting change - - 3,389,779 -
Add back: Goodwill amortization - 359,045 - 718,091
Add back: Other intangible asset amortization - 8,382 - 16,764
----------- ------------ ----------- ------------
Adjusted net income (loss) $14,059,382 $(1,959,098) $24,290,104 $(4,254,188)
=========== ============ =========== ============
Basic earnings (loss) per share:
Reported net income (loss) $76.35 $(12.99) $113.50 $(27.87)
Add back: Cumulative effect of an accounting change - - 18.41 -
Add back: Goodwill amortization - 2.01 - 4.02
Add back: Other intangible asset amortization - .04 - .09
------ -------- ------- --------
Adjusted net income (loss) $76.35 $(10.94) $131.91 $(23.76)
====== ======== ======= ========
Diluted earnings (loss) per share:
Reported net income (loss) $76.35 $(12.99) $113.50 $(27.87)
Add back: Cumulative effect of an accounting change - - 18.41 -
Add back: Goodwill amortization - 2.01 - 4.02
Add back: Other intangible asset amortization - .04 - .09
------ -------- ------- --------
Adjusted net income (loss) $76.35 $(10.94) $131.91 $(23.76)
====== ======== ======= ========
9. New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations". This statement requires the establishment of a
liability for an asset retirement obligation. This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company is currently considering the impact, if any, that this statement will
have on the condensed consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
of Long-Lived Assets to be Disposed Of", and portions of APB No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", and amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements". This statement generally conforms, among other things,
impairment accounting for assets to be disposed of including those in
discontinued operations and eliminates the exception to consolidation for which
control is likely to be temporary. This statement became effective for the
Company on January 1, 2002. The adoption of this statement did not have a
material effect on the condensed consolidated financial statements.
12
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This statement requires, among
other things, that gains and losses on the early extinguishment of debt be
classified as extraordinary only if they meet the criteria for extraordinary
treatment set forth in Accounting Principles Board Opinion No. 30. The
provisions of this statement related to classification of gains and losses on
the early extinguishment of debt are effective for fiscal years beginning after
May 15, 2002. Upon adoption of SFAS No. 145, any gain or loss on early
extinguishment of debt would be classified as income from operations unless it
meets the criteria for extraordinary treatment set forth in Accounting
Principles Board Opinion No. 30.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
Statement requires recording costs associated with exit or disposal activities
at their fair values when a liability has been incurred. Under previous
guidance, certain exit costs were accrued upon management's commitment to an
exit plan, which is generally before an actual liability has been incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently considering the
impact, if any, that this statement will have on the condensed consolidated
financial statements.
10. Litigation and Litigation Settlements
The Company is currently a defendant in certain litigation proceedings
alleging certain violations of the Americans with Disabilities Act of 1990 (the
"ADA") relating to accessibility of movie theatres for handicapped and deaf
patrons.
In March 1999, the Department of Justice filed suit in the U.S. District
Court, Northern District of Ohio, Eastern Division, against the Company alleging
certain violations of the ADA relating to the Company's wheelchair seating
arrangements and seeking remedial action. An Order granting Summary Judgment to
the Company was issued in November 2001. The Department of Justice has filed a
Notice of Appeal with the Sixth Circuit Court of Appeals. If the Company loses
this litigation, the Company's financial position, results of operations and
cash flows may be materially and adversely affected. The Company is unable to
predict the outcome of this litigation or the range of potential loss, however,
management believes that based upon current precedent 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.
Accordingly, the Company has not established a reserve for loss in connection
with this proceeding.
In February 2000, Barbara Cornilles, Edwin Cornilles, Dorothy Johnson,
Damara Paris, Stephen Purvis, George Scheler, Susan Teague, and Jackie Woltring
filed suit in the U.S. 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. An Order granting Summary Judgment to the Company was
issued by a federal magistrate judge in December 2001 which was ratified by the
federal district judge in March 2002. In April 2002, the plaintiffs agreed not
to appeal the summary judgment ruling.
In August 2001, David Wittie, Rona Schnall, Ron Cranston, Jennifer
McPhail, Peggy Garaffa and ADAPT of Texas filed suit in the 201st Judicial
District Court of Travis County, Texas alleging certain violations of the Human
Resources Code, the Texas Architectural Barriers Act, the Texas Accessibility
Standards and the Deceptive Trade Practices Act relating to accessibility of
movie theatres for patrons using wheelchairs at two theatres located in the
Austin, Texas market. The plaintiffs are seeking remedial action and unspecified
damages. The Company has filed an answer denying the allegations and is
vigorously defending this suit. The Company is unable to predict the outcome of
this litigation or the range of potential loss, however, management believes
that based upon current precedent 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. Accordingly, the Company has not
established a reserve for loss in connection with this proceeding.
13
In July 2001, Sonia Rivera-Garcia and Valley Association for Independent
Living filed suit in the 93rd Judicial District Court of Hidalgo County, Texas
alleging certain violations of the Human Resources Code, the Texas Architectural
Barriers Act, the Texas Accessibility Standards and the Deceptive Trade
Practices Act relating to accessibility of movie theatres for patrons using
wheelchairs at one theatre in the Mission, Texas market. The plaintiffs are
seeking remedial action and unspecified damages. The Company has filed an answer
denying the allegations and is vigorously defending this suit. The Company is
unable to predict the outcome of this litigation or the range of potential loss,
however, management believes that based upon current precedent 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. Accordingly, the Company has not established a reserve for loss in
connection with this proceeding.
On May 23, 2002, Robert Todd on behalf of Robert Preston Todd, his minor
child and "all individuals who are deaf or are severely hearing impaired"
brought this case in the United States District Court for the Southern District
of Texas, Houston Division against several movie operators, including, AMC
Entertainment, Inc., Regal Entertainment, Inc., the Company, and Century
Theaters as well as eight movie production companies. The lawsuit alleges
violation of Title III of the ADA and the First Amendment to the Constitution of
the United States. Plaintiffs seek unspecified injunctive relief, unspecified
declaratory relief, unspecified monetary damages (both actual and punitive) and
unspecified attorneys' fees. The answer is not yet due. The Company plans to
deny any violation of law and to vigorously defend against all claims. The
Company is unable to predict the outcome of this litigation or the range of
potential loss, however, management believes that based upon current precedent
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. Accordingly, the Company has not established a
reserve for loss in connection with this proceeding.
From time to time, the Company is involved in other various legal
proceedings arising from the ordinary course of its business operations, such as
personal injury claims, employment matters and contractual disputes, most of
which are covered by insurance. The Company believes its potential liability
with respect to proceedings currently pending is not material in the aggregate
to the Company's financial position, results of operations and cash flows.
11. Restatement
Subsequent to the issuance of the Company's 2001 consolidated financial
statements, the Company's management determined that it should revise the fair
value of employee stock options granted during December 2001. This determination
was based in part on the timing between the original valuation and the proposed
initial public offering of common stock by the Company's parent, Cinemark, Inc.
The Company's management believed that on the date of grant the common stock had
a fair value of $330 per share. In connection with the parent Company's public
offering of common stock and Staff Accounting Bulletin Topic 4.D., the Company
revised this fair value to $2,519 per share. As a result, the 2001 financial
statements have been restated on the amended Annual Report filed June 28, 2002
on Form 10-K/A from amounts previously reported to record additional unearned
compensation of $3,338,225 as of December 31, 2001.
A summary of the significant effects of the restatement is as follows:
As of December 31, 2001
As Previously Reported As Restated
---------------------- -----------
Balance Sheet Data:
Additional paid-in-capital $11,759,484 $15,097,709
Unearned compensation - stock options (887,779) (4,226,004)
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 Condensed Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this report.
Overview
The Company's revenues are generated primarily from box office receipts,
concession sales and screen advertising sales. Revenues are recognized when
admissions and concession sales are received at the box office and screen
advertising is shown at the theatres. The Company's revenues are affected by
changes in attendance and average admissions and concession revenues per patron.
Attendance is primarily affected by the commercial appeal of the films released
during the period reported. Additional revenues related to theatre operations
are generated by pay phones, ATM machines 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 65% of all theatre operating expenses and
approximately 50% of revenues. Film rental costs are accrued based on the
applicable box office receipts and either the mutually agreed upon firm terms or
estimates of the final settlement depending on the film licensing arrangement.
Advertising cost, which is expensed as incurred, 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, among other things, the size of the directory and the frequency and size of
the newspaper's circulation. 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.
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.
Critical Accounting Policies
The Company prepares the condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America. As such, the Company is required to make certain estimates, judgments
and assumptions that the Company believes are reasonable based upon the
information available. These estimates, judgments and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. The significant accounting policies which the Company believes are
the most critical to aid in fully understanding and evaluating its reported
financial results include the following:
15
Revenue and Expense Recognition
Revenues are recognized when admissions and concession sales are
received at the box office and screen advertising is shown at the theatres. Film
rental costs are accrued based on the applicable box office receipts and either
the mutually agreed upon firm terms or estimates of the final settlement
depending on the film licensing arrangement. Estimates are made based on the
expected success of a film over the length of its run. The success of a film can
typically be determined a few weeks after a film is released when initial box
office performance of the film is known. Accordingly, final settlements
typically approximate estimates since box office receipts are known at the time
the estimate is made and the expected success of a film over the length of its
run can typically be estimated early in the film's run. The final film
settlement amount is negotiated at the conclusion of the film's run based upon
how a film actually performs. If actual settlements are higher than those
estimated, additional film rental costs are recorded at that time. Advertising
costs are expensed as incurred.
Deferred Revenues
Advances collected on long-term screen advertising and concession
contracts are recorded as deferred revenues. The advances collected on screen
advertising contracts are recognized as other revenues in the period earned
based primarily on the Company's attendance counts or screenings depending on
the agreements. The periods when the Company recognizes revenues may differ from
the period the advance was collected. The advances collected on concession
contracts are recognized as a reduction to concession supplies expense in the
period earned which may differ from the period the advance was collected.
Asset Impairment Loss
The Company reviews long-lived assets, including goodwill, for
impairment in conjunction with the preparation of the Company's quarterly
consolidated financial statements and whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. The Company considers actual theatre level cash flow, future years
budgeted theatre level cash flow, theatre property and equipment values,
goodwill values, competitive theatres in the marketplace, theatre operating cash
flows compared to annual long-term lease payments, the sharing of a market with
other Company theatres, the age of a recently built theatre and other factors in
its assessment of impairment of individual theatre assets. The impairment
evaluation is based on the estimated cash flows from theatres from continuing
use through the remainder of the theatre's useful life. The remainder of the
useful life correlates with the available remaining lease period for leased
properties and a period of twenty years for fee owned properties. If actual
future cash flows differ from those estimated in the Company's impairment
evaluation, additional impairment charges may be required in the future.
16
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items reflected in the Company's
condensed consolidated statements of income:
% of Revenues % of Revenues
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Admissions 63.7% 64.2% 64.1% 64.7%
Concession 31.6 30.5 31.1 30.0
Other 4.7 5.3 4.8 5.3
--- --- --- ---
Total revenues 100.0 100.0 100.0 100.0
Cost of operations 73.0 77.3 73.4 77.5
General and administrative expenses 4.7 5.1 4.7 5.1
Depreciation and amortization 6.6 8.4 7.0 8.4
Asset impairment loss 0.1 - 0.2 0.1
Loss on sale of assets and other 0.1 0.9 0.2 0.5
--- --- --- ---
Total cost of operations 84.5 91.7 85.5 91.6
---- ---- ---- ----
Operating income 15.5 8.3 14.5 8.4
Interest expense 5.6 8.8 6.0 9.3
Income taxes (benefit) 3.6 (0.6) 2.8 (0.7)
Income (loss) before cumulative effect of an accounting change 5.5 (1.1) 5.1 (1.3)
Net income (loss) 5.5 (1.1) 4.4 (1.3)
Second quarter ended June 30, 2002 and 2001
Revenues
Revenues for the second quarter ended June 30, 2002 increased to $253.4
million from $202.4 million for the second quarter ended June 30, 2001, a 25.2%
increase. The increase in revenues for the second quarter is primarily
attributable to a 26.4% increase in attendance and a 2.7% increase in concession
revenues per patron. Revenues per screen increased 22.3% to $83,924 in the
second quarter of 2002 from $68,596 in the second quarter of 2001.
Cost of Operations
Cost of operations, as a percentage of revenues, decreased to 73.0% in
the second quarter of 2002 from 77.3% in the second quarter of 2001. The
decrease as a percentage of revenues was primarily due to the 25.2% increase in
revenues and the Company's ability to effectively control its theatre operating
costs (some of which are of a fixed nature). The decrease as a percentage of
revenues resulted from a decrease in facility lease expense as a percentage of
revenues to 11.5% in the second quarter of 2002 from 13.9% in the second quarter
of 2001, a decrease in utilities and other expenses as a percentage of revenues
to 11.2 % in the second quarter of 2002 from 13.4% in the second quarter of 2001
and a decrease in salaries and wages as a percentage of revenues to 10.2% in the
second quarter of 2002 from 11.1% in the second quarter of 2001, partially
offset by an increase in film rentals and advertising as a percentage of
admissions revenues to 54.4% in the second quarter of 2002 from 52.7% in the
second quarter of 2001 as a result of the stronger film product and an increase
in concession supplies as a percentage of concession revenues to 17.2% in the
second quarter of 2002 from 16.6% in the second quarter of 2001.
17
General and Administrative Expenses
General and administrative expenses, as a percentage of revenues,
decreased to 4.7% for the second quarter of 2002 from 5.1% for the second
quarter of 2001 primarily related to the 25.2% increase in revenues. The
absolute level of general and administrative expenses increased to $11.8 million
in the second quarter of 2002 from $10.3 million in the second quarter of 2001.
The increase in the absolute level of general and administrative expenses is
primarily attributed to increased professional fees.
Depreciation and Amortization
Depreciation and amortization as a percentage of revenues decreased to
6.6% for the second quarter of 2002 from 8.4% for the second quarter of 2001.
The decrease is primarily related to the 25.2% increase in revenues. The
absolute level of depreciation and amortization decreased to $16.8 million in
the second quarter of 2002 from $17.1 million in the second quarter of 2001.
Asset Impairment Loss
The Company recorded asset impairment charges of $0.2 million in the
second quarter of 2002 pursuant to Statement of Financial Accounting Standards
(SFAS) No. 144 related to assets to be held and used. The asset impairment
charges recorded in the second quarter of 2002 related to the write-down to fair
value of one theatre associated with the Company's El Salvador operations.
Interest Expense
Interest costs incurred, including amortization of debt issue cost and
debt discount and the mark-to-market adjustment to the interest rate cap
agreement decreased 21.0% in the second quarter of 2002 to $14.7 million
(including capitalized interest to properties under construction) from $18.6
million (including capitalized interest) in the second quarter of 2001. The
decrease was due principally to a decrease in the average debt outstanding and
the average interest rates under the Company's variable rate debt agreements.
Income Taxes (Benefit)
Income tax expense of $9.1 million was recorded for the second quarter
of 2002 as compared to an income tax benefit of $1.3 million in the second
quarter of 2001. The Company's effective tax rate for the second quarter of 2002
was 39.4% as compared to 35.2% for the second quarter of 2001.
Income (Loss) Before Cumulative Effect of an Accounting Change
The Company realized income before cumulative effect of an accounting
change of $14.1 million for the second quarter of 2002 in comparison with a loss
before cumulative effect of an accounting change of $2.3 million for the second
quarter of 2001. The increase in income in the second quarter of 2002 is
primarily related to the 25.2% increase in revenues and the decrease in interest
expense.
Net Income (Loss)
The Company realized net income of $14.1 million for the second quarter
of 2002 in comparison with a net loss of $2.3 million for the second quarter of
2001. The increase in income in the second quarter of 2002 is primarily related
to the 25.2% increase in revenues and the decrease in interest expense.
18
Six month periods ended June 30, 2002 and 2001
Revenues
Revenues for the six month period ended June 30, 2002 ("the 2002
period") increased to $480.2 million from $398.4 million for the six month
period ended June 30, 2001 ("the 2001 period"), a 20.5% increase. The increase
in revenues for the 2002 period is primarily attributable to a 20.4% increase in
attendance and a 3.7% increase in concession revenues per patron. Revenues per
screen increased 17.6% to $159,458 in the 2002 period from $135,546 in the 2001
period.
Cost of Operations
Cost of operations, as a percentage of revenues, decreased to 73.4% in
the 2002 period from 77.5% in the 2001 period. The decrease as a percentage of
revenues was primarily due to the 20.5% increase in revenues and the Company's
ability to effectively control its theatre operating costs (some of which are of
a fixed nature). The decrease as a percentage of revenues primarily resulted
from a decrease in facility lease expense as a percentage of revenues to 12.1%
in the 2002 period from 14.3% in the 2001 period, a decrease in utilities and
other expenses as a percentage of revenues to 11.9% in the 2002 period from
13.5% in the 2001 period and a decrease in salaries and wages as a percentage of
revenues to 10.1% in the 2002 period from 11.0% in the 2001 period, partially
offset by an increase in film rentals and advertising as a percentage of
admissions revenues to 52.9% in the 2002 period from 51.9% in the 2001 period as
a result of the stronger film product.
General and Administrative Expenses
General and administrative expenses, as a percentage of revenues,
decreased to 4.7% for the 2002 period from 5.1% for the 2001 period primarily
related to the 20.5% increase in revenues. The absolute level of general and
administrative expenses increased to $22.5 million in the 2002 period from $20.2
million in the 2001 period. The increase in general and administrative expenses
is primarily attributed to increased professional fees.
Depreciation and Amortization
Depreciation and amortization as a percentage of revenues decreased to
7.0% in the 2002 period from 8.4% in the 2001 period. The decrease is primarily
related to the 20.5% increase in revenues. The absolute level of depreciation
and amortization increased to $34.0 million in the 2002 period from $33.7
million in the 2001 period.
Asset Impairment Loss
The Company wrote down the assets of certain properties to their fair
value which resulted in asset impairment charges of $0.8 million and $0.5
million in the 2002 and 2001 periods, respectively. The asset impairment charges
recorded in the 2002 period related to a $0.6 million write-down to fair value
of goodwill associated with the Company's Argentina operations and a $0.2
million write-down to fair value of one theatre associated with the Company's El
Salvador operations. The asset impairment charges of $0.5 million recorded in
the 2001 period related to the write-down to fair value of properties associated
with the Company's U.S. operations.
19
Interest Expense
Interest costs incurred, including amortization of debt issue cost and
debt discount and the mark-to-market adjustment to the interest rate cap
agreement decreased 21.8% in the 2002 period to $30.1 million (including
capitalized interest to properties under construction) from $38.5 million
(including capitalized interest) in the 2001 period. The decrease in interest
costs incurred for the 2002 period was due principally to a decrease in the
Company's average debt outstanding and the average interest rates on the
Company's variable rate debt agreements.
Income Taxes (Benefit)
Income tax expense of $13.6 million was recorded for the 2002 period as
compared to an income tax benefit of $2.7 million in the 2001 period. The
Company's effective tax rate for the 2002 period was 35.8% as compared to 35.0%
for the 2001 period.
Income (Loss) Before Cumulative Effect of an Accounting Change
The Company realized income before cumulative effect of an accounting
change of $24.3 million for the 2002 period in comparison with a loss before
cumulative effect of an accounting change of $5.0 million for the 2001 period.
The increase in income in the 2002 period is primarily related to the 20.5%
increase in revenues and the decrease in interest expense.
Net Income (Loss)
The Company realized net income of $20.9 million for the 2002 period in
comparison with a net loss of $5.0 million for the 2001 period. The increase in
income in the 2002 period is primarily related to the 20.5% increase in revenues
and the decrease in interest expense.
Liquidity and Capital Resources
Operating Activities
The Company's revenues are primarily collected in cash, through box
office receipts and the sale of concession supplies. The Company is expanding
the number of theatres that provide the patron a choice of using a credit card,
in place of cash, which the company converts to cash in approximately three to
four days. Because revenues are primarily 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 throughout the year.
Investing Activities
The Company's investing activities have been principally in connection
with the development and acquisition of additional theatres. New theatre
openings and acquisitions historically have been financed with internally
generated cash and by debt financing, including borrowings under the Company's
credit facility.
20
The Company continues to expand its U.S. theatre circuit. As of June 30,
2002, the Company has opened two new domestic theatres (16 screens) in 2002. The
Company has no signed commitments to open any new theatres in the U.S. during
the remainder of 2002. The Company has signed commitments for two new theatres
(31 screens) and a five screen expansion to an existing theatre scheduled to
open in the U.S. after 2002. As of June 30, 2002, the Company estimates that the
remaining capital expenditures for the development of its remaining theatre and
expansion commitments (36 screens) in the U.S. will be less than $5 million.
Actual expenditures for theatre development and acquisitions are subject to
change based upon the availability of attractive opportunities for expansion of
the Company's theatre circuit. The Company plans to fund capital expenditures
for its continued development from cash flow from operations, borrowings under
the Credit Facility, proceeds from sale leaseback transactions and/or sales of
excess real estate.
The Company also continues to expand its international operations. As of
June 30, 2002, Cinemark International, through its subsidiaries, has opened two
new theatres (18 screens) and closed two screens at an existing theatre in 2002.
As of June 30, 2002, Cinemark International, through its subsidiaries, has four
new theatres (32 screens) under construction and scheduled to open in
international markets by the end of 2002. Although Cinemark International and
its subsidiaries are reviewing sites, there are no signed commitments to build
any theatres in international markets beyond 2002. The Company estimates that
the remaining capital expenditures for the development of its remaining
international theatre commitments (32 screens) will be approximately $15
million. Actual expenditures for continued theatre development and acquisitions
during 2002 and thereafter are subject to change based upon the availability of
attractive opportunities for expansion of the Company's international theatre
circuit. 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.
As of June 30, 2002, the Company owned approximately $275 million of
real estate and improvements resulting from the development of multiplex
facilities over the last several years. Additionally, the Company and/or its
affiliates, may from time to time, subject to compliance with the Company's debt
instruments, purchase on the open market the Company's debt securities depending
upon the availability and prices of such securities.
Financing Activities
As of June 30, 2002, the Company's long-term debt obligations, capital
lease obligations and future minimum lease obligations under non-cancelable
operating leases for each period indicated are summarized as follows:
Payments Due by Period
(In millions)
Less Than 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
----------------------- ----- ------ ----- ----- -------
Long-term debt......................... $742.0 $38.6 $249.8 $72.3 $381.3
Capital lease obligations.............. 0.3 0.2 0.1 - -
Operating lease obligations............ 1,516.1 103.8 210.1 209.9 992.3
Senior Subordinated Notes
The Company has outstanding three issues of senior subordinated notes:
(1) $200 million in 9 5/8% Series B Senior Subordinated Notes due 2008; (2) $75
million in 9 5/8% Series D Senior Subordinated Notes due 2008; and (3) $105
million in 8 1/2% Series B Senior Subordinated Notes due 2008. Interest in each
issue is payable semi-annually on February 1 and August 1 of each year.
21
The indentures governing the senior subordinated notes contain covenants
that limit, among other things, dividends, transactions with affiliates,
investments, sale of assets, mergers, repurchases of the Company's capital
stock, liens and additional indebtedness. Upon a change of control, the Company
would be required to make an offer to repurchase the senior subordinated notes
at a price equal to 101% of the principal amount outstanding plus accrued and
unpaid interest through the date of repurchase. The indentures governing the
senior subordinated notes allow the Company to incur additional indebtedness if
it satisfies the coverage ratio specified in each indenture; both at the time of
incurrence and after giving effect to the incurrence of the additional
indebtedness, and in certain other circumstances.
The senior subordinated notes are general unsecured obligations
subordinated in right of payment to the credit agreement or other senior
indebtedness. Generally, if the Company is in default under the senior credit
facility and other senior indebtedness, it would not be allowed to make payments
on the senior subordinated notes until the defaults have been cured or waived.
If the Company fails to make any payments when due or within the applicable
grace period, it would be in default under the indentures governing the senior
subordinated notes. As of June 30, 2002, the Company was in full compliance with
all agreements governing our outstanding debt.
Cinemark USA Revolving Credit Facility
In February 1998, the Company entered into a reducing revolving credit
facility with a group of banks for which Bank of America, N.A. acts as
administrative agent. The credit facility provided for an initial commitment of
$350 million which is automatically reduced each quarter by 2.5%, 3.75%, 5.0%,
6.25% and 6.25% of the aggregate $350 million in 2001, 2002, 2003, 2004 and
2005, respectively, until maturity in 2006. As of June 30, 2002, the aggregate
commitment available to the Company is $288.8 million. Borrowings under the
credit facility are secured by a pledge of all of the stock of the Company and
guarantees by material subsidiaries. The credit facility requires the Company to
maintain certain financial ratios; restricts the payment of dividends, payment
of subordinated debt prior to maturity and issuance of preferred stock and other
indebtedness; and contains other restrictive covenants typical for agreements of
this type. Funds borrowed pursuant to the credit facility bear interest at a
rate per annum equal to the Offshore Rate or the Base Rate, as the case may be,
plus the Applicable Margin (as defined in the credit facility). As of June 30,
2002, $225 million is outstanding under the credit facility and the effective
interest rate on such borrowings is 3.6% per annum.
Cinemark Mexico Revolving Credit Facility
In November 1998, Cinemark Mexico (USA), Inc. executed a credit
agreement with Bank of America National Trust and Savings Association (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 Cinemark
Holdings Mexico S. de R.L. de C.V. and an unconditional guarantee 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 or the
Base Rate, as the case may be, plus the Applicable Margin (as defined in the
Cinemark Mexico Credit Agreement). Cinemark Mexico is required to make principal
payments of $1.5 million per quarter in 2002 with the remaining principal
outstanding of $23 million due in January 2003. As of June 30, 2002, $27.5
million is outstanding under the Cinemark Mexico Credit Agreement and the
effective interest rate on such borrowing is 4.9% per annum.
22
Sale and Leaseback
In December 1999, the Company sold the land, building and site
improvements of its corporate office property to a third party 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 ten years at a fixed
monthly rental payment of $114,000 or $1.4 million annually for the first seven
years and a fixed monthly rental payment of $123,000 or $1.5 million annually
for the final three years. The Company has two options to extend the office
lease; five years for the first option and ten years for the second option. The
fixed monthly rental during the first extension is $130,612 or $1.6 million
annually. The fixed monthly rental during the second extension is 95% of the
fair rental value.
Cinema Properties Term Loan
In December 2000, Cinema Properties, Inc., a wholly owned subsidiary
that is not subject to restrictions imposed by the credit facility or the
indenture governing the senior subordinated notes, borrowed $77 million on a
3-year term loan from Lehman Brothers Bank, FSB (the "Cinema Properties
Facility"), which matures on December 31, 2003. At the lender's discretion,
Cinema Properties, Inc. may be required to make principal payments of $1.5
million in the third and fourth quarters of 2002. Any remaining principal
outstanding matures on December 31, 2003. Cinema Properties, Inc. has the
unilateral ability to extend the maturity date two times for one year each by
paying extension fees of 1.5% and 3.0% of the outstanding borrowing,
respectively, if certain interest coverage ratios are met and no event of
default has occurred and is continuing. Funds borrowed pursuant to the Cinema
Properties Facility bear interest at a rate per annum equal to LIBOR plus 5.75%.
Borrowings are secured by, among other things, a mortgage placed on six of
Cinema Properties, Inc.'s theatres and certain equipment leases. The Cinema
Properties Facility requires Cinema Properties, Inc. to comply with certain
interest coverage ratios and contains other restrictive covenants typical for
agreements of this type. Cinema Properties, Inc. has a separate legal existence,
separate assets, separate creditors and separate financial statements. The
assets of Cinema Properties, Inc. are not available to satisfy the debts of any
of the Company's other consolidated entities. Cinema Properties, Inc. also
purchased from Lehman Brothers Derivative Products Inc. an Interest Rate Cap
Agreement with a notional amount equal to $77 million with a five year term and
a strike rate equal to the excess of three month LIBOR over the strike price of
6.58%. Three month LIBOR as of the date of closing was 6.58%. As of June 30,
2002, $77 million is outstanding under the Cinema Properties Facility and the
effective interest rate on such borrowing is 7.6% per annum.
Cinemark Brasil Notes Payable
Cinemark Brasil S.A. currently has five main types of funding sources
executed with local and international banks. These include:
(1) BNDES (Banco Nacional de Desenvolvimento Economico e Social (the
Brazilian National Development Bank)) credit line in the U.S. dollar
equivalent in Brazilian reais of US$3.9 million executed in October 1999
with a term of 5 years (with a nine month grace period) and accruing
interest at a BNDES basket rate, which is a multiple currency rate based on
the rate at which the bank borrows, plus a spread amounting to 14.5%;
(2) BNDES credit line in the U.S. dollar equivalent in Brazilian reais
of US$1.9 million executed in November 2001 with a term of 5 years (with a
one year grace period) and accruing interest at a BNDES basket rate plus a
spread amounting to 13.8%;
(3) BNDES credit lines, through FINAME (Fundo de Financiamento para
Aquisicao de Maquinas e Equipamentos Industriais (the Government Agency for
Equipment Financing)) in the U.S. dollar equivalent in Brazilian reais of
US$158,000 executed in December 1999 with a term of 3 years (with a six
month grace period) and accruing interest at a BNDES basket rate plus a
spread amounting to 13.0%;
(4) Import financing executed with several banks from April 2001 through
February 2002 in the amount of US$6.3 million with a term of 360 to 365 days
and accruing interest at an average rate of 7.9% per annum; and
23
(5) Project developer financing executed with two engineering companies
in September 2000 in the amount of US$1.8 million with a term of 5 years
(with a six month grace period) and accruing interest at a rate of TJLP+5%
(Taxa de Juros de Longo Prazo (a long term interest rate published by the
Brazilian government)).
These sources are secured by a variety of instruments, including comfort
letters from Cinemark International, promissory notes for up to 130% of the
value, a revenue reserve account and equipment collateral. As of June 30, 2002,
an aggregate of $12.8 million was outstanding and the average effective interest
rate on such borrowings is approximately 11.2% per annum.
Cinemark Brasil Equity Financing
During 2001, Cinemark Brasil S.A. received additional capital from its
Brazilian shareholders in an aggregate amount equal to approximately the U.S.
dollar equivalent in Brazilian reais of $11.0 million in exchange for shares of
common stock of Cinemark Brasil S.A. The contributions were made in July in the
aggregate amount of $5.0 million (US dollar equivalent) and in November in the
aggregate amount of $6.0 million (US dollar equivalent). The additional capital
will be used to fund development in Brazil and to reduce Cinemark Brasil S.A.'s
outstanding indebtedness. After giving effect to the additional issuance of
common stock, Cinemark International's ownership interest was diluted to
approximately 53%. As part of the additional capitalization, the Company agreed
to give its Brazilian partners an option to exchange shares they own in Cinemark
Brasil S.A. for shares of the class of the Company's common stock to be
registered in an initial public offering under the Securities Act occurring any
time prior to December 31, 2007. The Company has given notice to its Brazilian
partners that its parent company, Cinemark, Inc. may consummate an initial
public offering. Certain of the Company's Brazilian partners have elected to
exercise their exchange option. If Cinemark, Inc.'s initial public offering is
completed, the Brazilian partners which receive shares of Cinemark, Inc.
pursuant to the Exchange Option Agreement, will have piggy-back registration
rights in connection with Cinemark, Inc.'s future public offerings of its Class
A common stock.
Cinemark Chile Notes Payable
On March 26, 2002, Cinemark Chile S.A. entered into a Debt
Acknowledgement, Rescheduling and Joint Guarantee and Co-Debt Agreement with
Scotiabank Sud Americano and three local banks. Under this agreement, Cinemark
Chile S.A. borrowed the U.S. dollar equivalent of approximately $10.6 million in
Chilean pesos (adjusted for inflation pursuant to the Unidades de Fomento for
three of the four loans). Cinemark Chile S.A. is required to make 24 equal
quarterly installments of principal plus accrued and unpaid interest, commencing
March 27, 2002. The indebtedness is secured by a first priority commercial
pledge of the shares of Cinemark Chile S.A., a chattel mortgage over Cinemark
Chile's personal property and by guarantees issued by Cinemark International,
L.L.C. and Chile Films S.A., whose owners are shareholders of Cinemark Chile
S.A. The agreement requires Cinemark Chile S.A. to maintain certain financial
ratios and contains other restrictive covenants typical for agreements of this
type such as a limitation on dividends. Funds borrowed under this agreement bear
interest at the Banking Rate, 90 day TAB rate (360 day TAB rate with respect to
one of the four banks), as published by the Association of Banks and Financial
Institutions Act plus 2%. As of June 30, 2002, $9.3 million is outstanding under
this agreement and the effective interest rate on such borrowing is 4.3% per
annum.
Credit Ratings
In August 2002, Standard and Poor's rated the Company as stable. In
conjunction with this rating, the Company's corporate credit was assigned a B+
rating and its three series of senior subordinated notes due 2008 were assigned
a B- rating.
24
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations". This statement requires the establishment of a
liability for an asset retirement obligation. This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company is currently considering the impact, if any, that this statement will
have on the condensed consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
of Long-Lived Assets to be Disposed Of", and portions of APB No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", and amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements". This statement generally conforms, among other things,
impairment accounting for assets to be disposed of including those in
discontinued operations and eliminates the exception to consolidation for which
control is likely to be temporary. This statement became effective for the
Company on January 1, 2002. The adoption of this statement did not have a
material effect on the condensed consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This statement requires, among
other things, that gains and losses on the early extinguishment of debt be
classified as extraordinary only if they meet the criteria for extraordinary
treatment set forth in Accounting Principles Board Opinion No. 30. The
provisions of this statement related to classification of gains and losses on
the early extinguishment of debt are effective for fiscal years beginning after
May 15, 2002. Upon adoption of SFAS No. 145, any gain or loss on early
extinguishment of debt would be classified as income from operations unless it
meets the criteria for extraordinary treatment set forth in Accounting
Principles Board Opinion No. 30.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
Statement requires recording costs associated with exit or disposal activities
at their fair values when a liability has been incurred. Under previous
guidance, certain exit costs were accrued upon management's commitment to an
exit plan, which is generally before an actual liability has been incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently considering the
impact, if any, that this statement will have on the condensed consolidated
financial statements.
Seasonality
The Company's revenues have historically been seasonal, coinciding with
the timing of releases of motion pictures by the major distributors. Generally,
the most successful motion pictures have been released during the summer
extending from Memorial Day to Labor Day and during the holiday season extending
from Thanksgiving through year-end. The seasonality of the release of successful
films, however, has become less pronounced in recent years with the release of
major motion pictures occurring more evenly throughout the year. The timing of
such film releases can have a significant effect on the Company's results of
operations, and the results of one quarter are not necessarily indicative of
results for the next quarter or for the same period in the following year.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to financial market risks, including changes in
interest rates, foreign currency exchange rates and other relevant market
prices.
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 June 30, 2002, there was an aggregate of approximately $362 million of
variable rate debt outstanding under these facilities. These facilities
represent approximately 49% of the Company's outstanding long-term debt. Changes
in interest rates 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:
Expected Maturity Date
As of June 30, 2002
-------------------
June 30, June 30, June 30, June 30, June 30, Fair
(in millions) 2003 2004 2005 2006 2007 Thereafter Total Value
- ------------- ---- ---- ---- ---- ---- ---------- ----- -----
Long-term debt:
Fixed rate $ - $0.1 $ - $0.1 $ - $380.2 $380.4 $385.1
Average interest rate 9.3%
Variable rate $38.6 $158.1 $91.6 $70.0 $2.2 $1.1 $361.6 $358.2
Average interest rate 5.0%
Total debt $38.6 $158.2 $91.6 $70.1 $2.2 $381.3 $742.0 $743.3
Expected Maturity Date
As of December 31, 2001
-----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Fair
(in millions) 2002 2003 2004 2005 2006 Thereafter Total Value
- ------------- ---- ---- ---- ---- ---- ---------- ----- -----
Long-term debt:
Fixed rate $ - $0.1 $0.1 $0.1 $ - $380.2 $380.5 $395.3
Average interest rate 9.3%
Variable rate $21.8 $173.2 $91.3 $95.6 $18.3 $0.3 $400.5 $405.0
Average interest rate 5.5%
Total debt $21.8 $173.3 $91.4 $95.7 $18.3 $380.5 $781.0 $800.3
In December 2000, Cinema Properties, Inc., a wholly-owned subsidiary of
the Company, entered into the Cinema Properties Facility. Pursuant to the terms
of the Cinema Properties Facility, funds borrowed bear interest at a rate per
annum equal to LIBOR (as defined in the Cinema Properties Facility) plus 5.75%.
As part of the Cinema Properties Facility, in order to hedge against future
changes in interest rates, Cinema Properties, Inc. purchased from Lehman
Brothers Derivative Products Inc. an Interest Rate Cap Agreement with a notional
amount equal to $77 million with a five year term and a strike rate equal to the
excess of three month LIBOR over the strike price of 6.58%. Three month LIBOR as
of the date of closing was 6.58%. At June 30, 2002 and December 31, 2001, the
interest rate cap agreement is recorded at its fair value of $0.4 million and
$1.1 million, respectively. The Company does not have any additional derivative
financial instruments in place as of June 30, 2002 that would have a material
effect on the Company's financial position, results of operations and cash
flows.
26
The Company is also exposed to market risk arising from changes in
foreign currency exchange rates as a result of its international operations.
Generally accepted accounting principles in the U.S. require that the Company's
subsidiaries use the currency of the primary economic environment in which they
operate as their functional currency. If one of the Company's subsidiaries
operates in a highly inflationary economy, generally accepted accounting
principles in the U.S. require that the U.S. dollar be used as the functional
currency for the subsidiary. Currency fluctuations result in the Company
reporting exchange gains (losses) or foreign currency translation adjustments
relating to its international subsidiaries depending on the inflationary
environment of the country in which the Company operates. Based upon the
Company's equity ownership in its international subsidiaries as of June 30,
2002, holding everything else constant, a 10% immediate unfavorable change in
each of the foreign currency exchange rates to which the Company is exposed
would decrease the net fair value of the Company's investments in its
international subsidiaries by approximately $5 million.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report on Form 10-K
and the amended Annual Report on Form 10-K/A for the fiscal year ended December
31, 2001.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The shareholders of the Company signed a Written Consent of the
Shareholders in Lieu of a Special Meeting dated as of May 16, 2002, authorizing
the establishment of a holding company structure pursuant to which all of the
holders of shares of Class A common stock and Class B common stock of the
Company agreed to exchange their respective shares for shares of Class A common
stock and Class B common stock (for the class and amounts shown in the Share
Exchange Agreement) in Cinemark, Inc., a newly formed Delaware corporation and
to do all things necessary or appropriate to consummate the Share Exchange
Agreement.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Supplemental schedules specified by the Senior Subordinated
Notes Indenture:
Condensed Consolidating Balance Sheets
(unaudited) as of June 30, 2002
Condensed Consolidating Statements of
Income (unaudited) for the six months
ended June 30, 2002
Condensed Consolidating Statements of
Cash Flows (unaudited) for the six months
ended June 30, 2002
b) Exhibits
2. Share Exchange Agreement, dated as of May 17, 2002 by
and among Cinemark, Inc., Cinemark USA, Inc. and the
signatories thereto (incorporated by reference from
Exhibit 2 to Cinemark, Inc.'s Registration Statement
on Form S-1 (File No. 333-8618) filed June 28, 2002).
28
* 99.1 Certification of the Chief Executive Officer of
Cinemark USA, Inc.
* 99.2 Certification of the Chief Financial Officer of
Cinemark USA, Inc.
* filed herewith
c) Reports on Form 8-K
No reports have been filed by Registrant during the
quarter for which this report is filed.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
CINEMARK USA, INC.
Registrant
DATE: August 14, 2002 /s/Alan W. Stock
----------------
Alan W. Stock
President
/s/Robert Copple
----------------
Robert Copple
Chief Financial Officer
30
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2002
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
------------- ------------- -------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,889,970 $ 39,606,526 $ - $ 68,496,496
Inventories 2,992,146 668,311 - 3,660,457
Accounts receivable 6,940,707 4,739,716 (1,177,527) 10,502,896
Income tax receivable 147,885 2,206,353 - 2,354,238
Prepaid expenses and other 3,415,145 1,267,377 (750,000) 3,932,522
----------------------------------------------------------------
Total current assets 42,385,853 48,488,283 (1,927,527) 88,946,609
THEATRE PROPERTIES AND EQUIPMENT 946,287,339 223,561,499 - 1,169,848,838
Less accumulated depreciation and amortization (306,162,759) (49,716,588) - (355,879,347)
----------------------------------------------------------------
Theatre properties and equipment - net 640,124,580 173,844,911 - 813,969,491
OTHER ASSETS
Goodwill - net 8,031,279 2,757,077 - 10,788,356
Investments in and advances to affiliates 166,827,393 975,095 (165,039,486) 2,763,002
Deferred charges and other - net 22,621,471 6,956,847 - 29,578,318
----------------------------------------------------------------
Total other assets 197,480,143 10,689,019 (165,039,486) 43,129,676
----------------------------------------------------------------
TOTAL $879,990,576 $233,022,213 $(166,967,013) $ 946,045,776
================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 27,740,871 $ 10,899,250 $ - $ 38,640,121
Current income taxes payable (34,906) 34,906 - -
Accounts payable and accrued expenses 93,106,284 20,166,437 (1,052,063) 112,220,658
----------------------------------------------------------------
Total current liabilities 120,812,249 31,100,593 (1,052,063) 150,860,779
LONG-TERM LIABILITIES
Senior credit agreements 231,641,942 91,534,144 - 323,176,086
Senior subordinated debt 380,173,421 - - 380,173,421
Deferred lease expenses 23,310,249 430,543 - 23,740,792
Deferred gain on sale leasebacks 4,555,580 - - 4,555,580
Deferred income taxes 4,341,659 676,824 - 5,018,483
Deferred revenues and other long-term liabilities 6,307,720 1,670,212 (750,000) 7,227,932
----------------------------------------------------------------
Total long-term liabilities 650,330,571 94,311,723 (750,000) 743,892,294
COMMITMENTS AND CONTINGENCIES - - - -
MINORITY INTERESTS IN SUBSIDIARIES 7,898,373 23,199,213 - 31,097,586
SHAREHOLDER'S EQUITY
Class A Common stock, $.01 par value: 10,000,000 shares
authorized, 1,500 shares issued and outstanding 15 - - 15
Class B Common stock, no par value: 1,000,000 shares
authorized, 239,893 shares issued and outstanding 49,543,427 14,958,000 (14,958,000) 49,543,427
Additional paid-in-capital 11,385,602 150,247,613 (150,206,950) 11,426,265
Retained earnings 111,386,817 (45,790,193) - 65,596,624
Treasury stock, 57,245 Class B shares at cost (24,232,890) - - (24,232,890)
Accumulated other comprehensive loss (47,133,588) (35,004,736) - (82,138,324)
----------------------------------------------------------------
Total shareholder's equity 100,949,383 84,410,684 (165,164,950) 20,195,117
----------------------------------------------------------------
TOTAL $879,990,576 $233,022,213 $(166,967,013) $ 946,045,776
================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the
Indenture for the Senior Subordinated Notes
31
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
------------- ------------- -------------- ---------------
REVENUES $393,630,450 $ 92,943,937 $ (6,422,944) $ 480,151,443
COSTS AND EXPENSES
Cost of operations 287,109,390 71,622,218 (6,422,944) 352,308,664
General and administrative expenses 18,279,819 4,178,760 - 22,458,579
Depreciation and amortization 26,193,125 7,819,393 - 34,012,518
Asset impairment loss 558,398 223,378 - 781,776
Loss on sale of assets and other 606,928 205,996 - 812,924
----------------------------------------------------------------
Total costs and expenses 332,747,660 84,049,745 (6,422,944) 410,374,461
OPERATING INCOME 60,882,790 8,894,192 - 69,776,982
OTHER INCOME (EXPENSE)
Interest expense (23,591,187) (5,215,613) - (28,806,800)
Amortization of debt issue cost and debt discount (512,238) (757,352) - (1,269,590)
Interest income 318,896 679,159 - 998,055
Foreign currency exchange loss (7,637) (2,314,127) - (2,321,764)
Equity in income of affiliates 7,275 205,733 - 213,008
Minority interests in (income) loss of subsidiaries (888,558) 152,832 - (735,726)
----------------------------------------------------------------
Total (24,673,449) (7,249,368) - (31,922,817)
----------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 36,209,341 1,644,824 - 37,854,165
Income taxes (benefit) 13,577,369 (13,308) - 13,564,061
----------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE 22,631,972 1,658,132 - 24,290,104
Cumulative effect of a change in accounting principle,
net of income tax benefit of $0. (3,389,779) - - (3,389,779)
----------------------------------------------------------------
NET INCOME $ 19,242,193 $ 1,658,132 $ - $ 20,900,325
================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the
Indenture for the Senior Subordinated Notes
32
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
------------- ------------- -------------- ---------------
OPERATING ACTIVITIES
Net income $ 19,242,193 $ 1,658,132 $ - $ 20,900,325
Noncash items in net income:
Depreciation 25,915,302 7,708,650 - 33,623,952
Amortization of other assets 277,823 110,743 - 388,566
Amortization of foreign advanced rents 572,951 369,788 - 942,739
Amortized compensation - stock options 554,559 - - 554,559
Amortization of debt issue costs 424,988 757,352 - 1,182,340
Amortization of gain on sale leasebacks (182,960) - - (182,960)
Amortization of debt discount and premium (14,253) - - (14,253)
Amortization of deferred revenues (2,403,953) - - (2,403,953)
Loss on impairment of assets 558,398 223,378 - 781,776
Loss on sale of assets and other 606,928 205,996 - 812,924
Deferred lease expenses 923,824 (15,420) - 908,404
Deferred income tax expenses 8,773,179 (38,490) - 8,734,689
Equity in income of affiliates (7,275) (205,733) - (213,008)
Minority interests in income (loss) of subsidiaries 888,558 (152,832) - 735,726
Cumulative effect of an accounting change 3,389,779 - - 3,389,779
Changes in assets and liabilities:
Inventories (371,194) 32,769 - (338,425)
Accounts receivable (1,595,595) 2,142,347 - 546,752
Prepaid expenses and other (864,163) 178,470 - (685,693)
Other assets (4,235,368) 10,124,471 - 5,889,103
Advances with affiliates - 1,302,669 - 1,302,669
Accounts payable and accrued expenses 1,373,896 (1,989,181) - (615,285)
Other long-term liabilities 279,324 (471,651) - (192,327)
Income tax receivable/payable (775,384) (140,060) - (915,444)
----------------------------------------------------------------
Net cash provided by operating activities 53,331,557 21,801,398 - 75,132,955
INVESTING ACTIVITIES
Additions to theatre properties and equipment (8,410,730) (3,780,863) - (12,191,593)
Sale of theatre properties and equipment 1,506,227 8,250 - 1,514,477
Dividends/capital returned from affiliates - 594,340 - 594,340
----------------------------------------------------------------
Net cash used for investing activities (6,904,503) (3,178,273) - (10,082,776)
FINANCING ACTIVITIES
Increase in long-term debt 17,510,038 1,605,850 - 19,115,888
Decrease in long-term debt (52,156,670) (5,100,454) - (57,257,124)
Increase in minority investment in subsidiaries - 421,855 - 421,855
Decrease in minority investment in subsidiaries (628,569) (4,785,088) - (5,413,657)
----------------------------------------------------------------
Net cash used for financing activities (35,275,201) (7,857,837) - (43,133,038)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (1,448,339) (2,171,529) - (3,619,868)
----------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 9,703,514 8,593,759 - 18,297,273
CASH AND CASH EQUIVALENTS:
Beginning of period 19,186,456 31,012,767 - 50,199,223
----------------------------------------------------------------
End of period $ 28,889,970 $39,606,526 $ - $ 68,496,496
================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the
Indenture for the Senior Subordinated Notes
33
Exhibit 99.1
Certification of
Chief Executive Officer
of
Cinemark USA, Inc.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for
the quarter ended June 30, 2002 of Cinemark USA, Inc. (the "Issuer").
I, Lee Roy Mitchell, the Chief Executive Officer of Issuer certify that to the
best of my knowledge:
(i) the Form 10-Q fully complies with the requirements of section
13(a) or section 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of
operations of the Issuer.
Dated: August 12, 2002.
/s/Lee Roy Mitchell
------------------------
Name: Lee Roy Mitchell
------------------------
Subscribed and sworn to before me
this 12th day of August 2002.
------
/s/Keri Chorba
- ------------------------------
Name: Keri Chorba
------------------------
Title: Notary Public
My commission expires: 1/28/03
34
Exhibit 99.2
Certification of
Chief Financial Officer
of
Cinemark USA, Inc.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for
the quarter ended June 30, 2002 of Cinemark USA, Inc. (the "Issuer").
I, Robert Copple, the Chief Financial Officer of Issuer certify that to the best
of my knowledge:
(i) the Form 10-Q fully complies with the requirements of section
13(a) or section 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of
operations of the Issuer.
Dated: August 14, 2002.
/s/Robert Copple
------------------------
Name: Robert Copple
------------------------
Subscribed and sworn to before me
this 14th day of August 2002.
------
/s/Keri Chorba
- ------------------------------
Name: Keri Chorba
------------------------
Title: Notary Public
My commission expires: 1/28/03
35