Back to GetFilings.com
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 September 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 November 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 September 30, 2002 (unaudited)
and December 31, 2001 4
Condensed Consolidated Statements of Income
(unaudited) for the three and nine month
periods ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash
Flows (unaudited) for the nine month
periods ended September 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 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 28
Item 4. Controls and Procedures 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
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
September 30, December 31,
2002 2001
(Unaudited)
------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 52,793,163 $ 50,199,223
Inventories 3,141,157 3,322,032
Accounts receivable 10,055,299 11,049,648
Income tax receivable 2,071,067 1,438,794
Prepaid expenses and other 3,847,830 3,246,829
------------------------------------
Total current assets 71,908,516 69,256,526
THEATRE PROPERTIES AND EQUIPMENT 1,150,867,720 1,201,334,337
Less accumulated depreciation and amortization (364,361,409) (334,927,920)
------------------------------------
Theatre properties and equipment - net 786,506,311 866,406,417
OTHER ASSETS
Goodwill - net 10,505,022 15,124,954
Investments in and advances to affiliates 4,173,168 4,447,003
Deferred tax asset - 3,716,206
Deferred charges and other - net 31,458,175 37,592,644
------------------------------------
Total other assets 46,136,365 60,880,807
------------------------------------
TOTAL $ 904,551,192 $ 996,543,750
====================================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 48,079,072 $ 21,853,742
Accounts payable and accrued expenses 81,358,854 117,501,526
------------------------------------
Total current liabilities 129,437,926 139,355,268
LONG-TERM LIABILITIES
Senior credit agreements 304,258,896 378,914,750
Senior subordinated notes 380,166,294 380,187,674
Deferred lease expenses 24,336,190 22,832,388
Deferred gain on sale leasebacks 4,464,100 4,738,540
Deferred income taxes 8,832,208 -
Deferred revenues and other long-term liabilities 5,875,302 9,824,212
------------------------------------
Total long-term liabilities 727,932,990 796,497,564
COMMITMENTS AND CONTINGENCIES (see Note 10) - -
MINORITY INTERESTS IN SUBSIDIARIES 24,867,705 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 11,700,561 15,097,709
Unearned compensation - stock options - (4,226,004)
Retained earnings 75,932,600 44,696,299
Treasury stock, 57,245 Class B shares at cost (24,232,890) (24,232,890)
Accumulated other comprehensive loss (90,631,142) (55,541,300)
------------------------------------
Total shareholder's equity 22,312,571 25,337,256
------------------------------------
TOTAL $ 904,551,192 $ 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
--------------------------------- ---------------------------------
REVENUES
Admissions $ 147,393,762 $ 155,650,014 $ 455,200,470 $ 413,493,159
Concession 72,456,441 72,910,728 221,827,261 192,456,710
Other 12,536,251 11,459,823 35,510,166 32,499,627
--------------------------------- ---------------------------------
Total 232,386,454 240,020,565 712,537,897 638,449,496
COSTS AND EXPENSES
Cost of operations:
Film rentals and advertising 77,488,441 83,852,286 244,106,792 220,838,403
Concession supplies 13,318,849 12,986,228 39,076,003 33,489,939
Salaries and wages 25,305,699 24,316,891 73,833,703 68,173,189
Facility leases 29,153,620 28,883,312 87,429,023 85,807,545
Utilities and other 25,215,186 26,120,153 78,344,938 76,825,525
--------------------------------- ---------------------------------
Total cost of operations 170,481,795 176,158,870 522,790,459 485,134,601
General and administrative expenses 9,717,217 10,355,585 32,175,796 30,545,793
Depreciation and amortization 16,574,582 21,822,417 50,587,100 55,507,230
Asset impairment loss - - 781,776 450,000
(Gain) loss on sale of assets and other (86,891) 2,653,400 726,033 4,484,486
--------------------------------- ---------------------------------
Total costs and expenses 196,686,703 210,990,272 607,061,164 576,122,110
OPERATING INCOME 35,699,751 29,030,293 105,476,733 62,327,386
OTHER INCOME (EXPENSE)
Interest expense (13,423,014) (16,885,200) (42,229,814) (53,997,718)
Amortization of debt issue cost and debt discount (634,795) (641,276) (1,904,385) (1,927,533)
Interest income 721,070 444,469 1,719,125 1,163,659
Foreign currency exchange loss (3,864,034) (1,961,853) (6,185,798) (4,493,223)
Equity in income (loss) of affiliates 340,079 (947,479) 553,087 (2,404,043)
Minority interests in loss of subsidiaries 741,351 289,780 5,625 985,549
--------------------------------- ---------------------------------
Total (16,119,343) (19,701,559) (48,042,160) (60,673,309)
--------------------------------- ---------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 19,580,408 9,328,734 57,434,573 1,654,077
Income taxes 9,244,432 3,760,764 22,808,493 1,075,150
--------------------------------- ---------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE 10,335,976 5,567,970 34,626,080 578,927
Cumulative effect of a change in accounting principle, net
of income tax benefit of $0. - - (3,389,779) -
--------------------------------- ---------------------------------
NET INCOME $ 10,335,976 $ 5,567,970 $ 31,236,301 $ 578,927
================================= =================================
EARNINGS PER SHARE:
Basic:
Income before accounting change $ 56.13 $ 31.10 $ 188.03 $ 3.23
Cumulative effect of an accounting change - - (18.40) -
--------------------------------- ---------------------------------
Net income $ 56.13 $ 31.10 $ 169.63 $ 3.23
================================= =================================
Diluted:
Income before accounting change $ 56.13 $ 29.22 $ 188.03 $ 3.04
Cumulative effect of an accounting change - - (18.40) -
--------------------------------- ---------------------------------
Net income $ 56.13 $ 29.22 $ 169.63 $ 3.04
================================= =================================
See Notes to Condensed Consolidated Financial Statements
5
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---------------------------------
OPERATING ACTIVITIES
Net income $ 31,236,301 $ 578,927
Noncash items in net income:
Depreciation 50,012,000 53,359,102
Amortization of goodwill and other assets 575,099 2,148,128
Amortization of foreign advanced rents 1,384,512 1,625,899
Amortized compensation - stock options 828,856 500,988
Amortization of debt issue costs 1,699,759 1,722,908
Amortization of gain on sale leasebacks (274,440) (274,441)
Amortization of debt discount and premium (21,380) (21,381)
Amortization of deferred revenues (3,639,678) (7,106,122)
Loss on impairment of assets 781,776 450,000
Loss on sale of assets and other 726,033 4,484,486
Deferred lease expenses 1,503,802 1,767,857
Deferred income tax expenses 12,548,414 (1,550,331)
Equity in (income) loss of affiliates (553,087) 2,404,043
Minority interests in loss of subsidiaries (5,625) (985,549)
Cumulative effect of an accounting change 3,389,779 -
Changes in assets and liabilities:
Inventories 180,875 531,782
Accounts receivable 994,349 (1,221,829)
Prepaid expenses and other (601,001) (220,557)
Other assets 3,146,854 683,434
Advances with affiliates 232,582 (43,023)
Accounts payable and accrued expenses (22,654,323) (34,233,316)
Other long-term liabilities (309,232) 1,471,733
Income tax receivable/payable (632,273) 806,731
---------------------------------
Net cash provided by operating activities 80,549,952 26,879,469
INVESTING ACTIVITIES
Additions to theatre properties and equipment (17,144,549) (19,188,088)
Sale of theatre properties and equipment 1,725,279 4,582,715
Investment in affiliates - (379,373)
Dividends/capital returned from affiliates 594,340 -
---------------------------------
Net cash used for investing activities (14,824,930) (14,984,746)
FINANCING ACTIVITIES
Increase in long-term debt 44,745,196 78,582,285
Decrease in long-term debt (90,984,320) (83,200,400)
Increase in minority investment in subsidiaries 421,855 5,429,373
Decrease in minority investment in subsidiaries (10,902,187) (6,615,054)
---------------------------------
Net cash used for financing activities (56,719,456) (5,803,796)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (6,411,626) (1,028,058)
---------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,593,940 5,062,869
CASH AND CASH EQUIVALENTS:
Beginning of period 50,199,223 19,839,994
---------------------------------
End of period $ 52,793,163 $ 24,902,863
=================================
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 3,014 screens in 278
theatres and manages an additional 9 theatres (71 screens) at September 30,
2002.
The condensed consolidated financial statements have been prepared by
the Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("U.S.") for interim financial
information and the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures typically
included in an Annual Report have been condensed or omitted for this Quarterly
Report. 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 present fairly
in all material respects the financial position, results of operations and cash
flows 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.
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 nine month periods ended September 30, 2002 are not necessarily
indicative of the results to be achieved for the full year. Certain
reclassifications have been made to the 2001 financial statements to conform to
the 2002 presentation.
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.
7
2. Earnings Per Share
Earnings per share is computed on the basis of the weighted average
number of shares of Class A and Class B common stock outstanding during each
period. The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Income before cumulative effect of an accounting change $10,335,976 $5,567,970 $34,626,080 $578,927
=========== ========== =========== ========
Basic:
Weighted average common shares outstanding 184,148 179,037 184,148 179,037
======= ======= ======= =======
Income before cumulative effect of an accounting
change per common share $56.13 $31.10 $188.03 $3.23
====== ====== ======= =====
Diluted:
Weighted average common shares outstanding 184,148 179,037 184,148 179,037
Common equivalent shares for stock options - 11,546 - 11,683
------- ------- ------- -------
Weighted average common and common equivalent shares
outstanding 184,148 190,583 184,148 190,720
======= ======= ======= =======
Income before cumulative effect of an accounting
change per common and common equivalent share $56.13 $29.22 $188.03 $3.04
====== ====== ======= =====
Basic income per share is computed by dividing the income by the
weighted average number of shares of common stock of all classes outstanding
during the period. Diluted income per share is computed by dividing the income
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 per share if their effect is
antidilutive. No options to purchase shares of common stock have been excluded
from the diluted income per share calculation for the three or nine month
periods ended September 30, 2001 as a result of antidilution.
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 nine month periods ended September 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $10,335,976 $5,567,970 $31,236,301 $578,927
Foreign currency translation adjustment (8,492,818) (7,485,039) (35,089,842) (9,446,678)
------------ ------------ ------------ -----------
Comprehensive income (loss) $1,843,158 $(1,917,069) $(3,853,541) $(8,867,751)
============ ============ ============ ============
8
4. Foreign Currency Translation
The accumulated other comprehensive loss in shareholder's equity of
$90,631,142 and $55,541,300 at September 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 September 30, 2002, the floating
rate was 3.7 pesos to the U.S. dollar. As a result, the effect of translating
the September 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 $14.3 million at September 30, 2002.
Income and expense accounts from January through September 2002 were converted
into U.S. dollars at the prevailing average floating rate for each of those nine
months.
On September 30, 2002, the exchange rate for the Brazilian real was 3.9
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 September 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 $10.7 million at September 30, 2002.
On September 30, 2002, the exchange rate for the Mexican peso was 10.2
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 September 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 $8.1 million at September 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:
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
Cash paid for interest $50,173,593 $64,255,676
Cash paid for income taxes (net of refunds) 10,966,070 1,868,063
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 nine months ended September 30 are as follows:
Nine Months Ended
September 30,
-------------
Revenues 2002 2001
-------- ---- ----
U.S. and Canada $546,110,817 $478,471,719
Mexico 66,448,495 58,005,152
Brazil 52,516,519 47,607,208
Other foreign countries 48,170,534 55,103,127
Eliminations (708,468) (737,710)
------------- -------------
Total $712,537,897 $638,449,496
============= =============
Long-lived assets in the United States and Canada, Mexico, Brazil and
other foreign countries as of September 30 are as follows:
September 30,
-------------
Long-Lived Assets 2002 2001
----------------- ---- ----
U.S. and Canada $640,253,838 $700,986,943
Mexico 66,636,219 74,790,946
Brazil 35,601,579 51,593,936
Other foreign countries 44,014,675 70,656,059
------------ ------------
Total $786,506,311 $898,027,884
============ ============
7. Accounting for Derivative Instruments and Hedging Activities
The Company's condensed consolidated balance sheets as of September 30,
2002 and December 31, 2001 include an interest rate cap agreement recorded at
its fair value of $0.2 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 nine month periods ended
September 30, 2002 and 2001, a loss of $0.9 million and $1.3 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 nine month period ended September 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 nine month period ended September 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 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 September 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 $(941,667) $8,058,333
Non-compete fee 72,403 (72,403) -
------ -------- ------
$9,072,403 $(1,014,070) $8,058,333
========== ============ ==========
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 nine month period ended September 30, 2002 $575,099
========
11
Aggregate amortization expense for the nine month period ended September
30, 2002 consists of $382,528 of amortization of other intangible assets and
$192,571 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 $507,528
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 impact on net income and earnings per share related to the adoption
of this accounting pronouncement is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $10,335,976 $5,567,970 $31,236,301 $578,927
Add back: Cumulative effect of an accounting change - - 3,389,779 -
Add back: Goodwill amortization - 633,126 - 1,351,217
Add back: Other intangible asset amortization - 8,382 - 25,146
----------- ---------- ----------- ----------
Adjusted net income $10,335,976 $6,209,478 $34,626,080 $1,955,290
=========== ========== =========== ==========
Basic earnings per share:
Reported net income $56.13 $31.10 $169.63 $3.23
Add back: Cumulative effect of an accounting change - - 18.40 -
Add back: Goodwill amortization - 3.53 - 7.55
Add back: Other intangible asset amortization - .05 - .14
------ ------ ------- ------
Adjusted net income $56.13 $34.68 $188.03 $10.92
====== ====== ======= ======
Diluted earnings per share:
Reported net income $56.13 $29.22 $169.63 $3.04
Add back: Cumulative effect of an accounting change - - 18.40 -
Add back: Goodwill amortization - 3.32 - 7.08
Add back: Other intangible asset amortization - .04 - .13
------ ------ ------- ------
Adjusted net income $56.13 $32.58 $188.03 $10.25
====== ====== ======= ======
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 establishes accounting standards
for recognition and measurement of the fair value of obligations associated with
the retirement of long-lived assets when there is a legal obligation to incur
such costs. Under SFAS No. 143, the costs of retiring an asset will be recorded
as a liability when the retirement obligation arises and will be amortized to
expense over the life of the asset. SFAS No. 143 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.
12
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. The Company is currently considering the
impact, if any, that this statement will have on the condensed consolidated
financial statements.
In September 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.
13
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.
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.
In April 2002, the Malthouse Development Company Limited, as landlord,
filed a lawsuit in the High Court of Justice, Chancery Division, in England,
against Cinemark Theatres UK Limited and Cinemark International L.L.C., as
tenant and guarantor of tenant's obligations, respectively, under that certain
lease for the construction and operation of a movie theatre in Banbury, England.
The lease had been previously terminated for cause by the tenant, and the
landlord is suing for damages of the U.S. dollar equivalent of approximately
$1.5 million based on improper termination. An answer to the complaint has been
filed, denying the allegations and vigorously defending the suit. Although the
Queen's counsel advising the Company has provided a positive overview on the law
and facts of the case, the Company is unable to predict the outcome of this
litigation or the range of potential loss, however, the Company believes based
on the opinion of its barristers and Queen's counsel, its potential liability
with respect to such proceeding is not material in the aggregate to its
financial position, results of operations and cash flows. Accordingly, the
Company has not established a reserve for loss in connection with this
proceeding.
In May 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.
14
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 proposed
initial 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)
15
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. 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:
16
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 period 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.
17
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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Admissions 63.4% 64.8% 63.9% 64.8%
Concession 31.2 30.4 31.1 30.1
Other 5.4 4.8 5.0 5.1
--- --- --- ---
Total revenues 100.0 100.0 100.0 100.0
Cost of operations 73.3 73.4 73.4 76.0
General and administrative expenses 4.2 4.3 4.5 4.8
Depreciation and amortization 7.1 9.1 7.1 8.7
Asset impairment loss - - 0.1 0.1
(Gain) loss on sale of assets and other - 1.1 0.1 0.6
---- ---- ---- ----
Total costs and expenses 84.6 87.9 85.2 90.2
---- ---- ---- ----
Operating income 15.4 12.1 14.8 9.8
Interest expense 5.8 7.0 5.9 8.5
Income taxes 4.0 1.6 3.2 0.2
Income before cumulative effect of an accounting change 4.4 2.3 4.9 0.1
Net income 4.4 2.3 4.4 0.1
Third quarter ended September 30, 2002 and 2001
Revenues
Revenues for the third quarter ended September 30, 2002 decreased to
$232.4 million from $240.0 million for the third quarter ended September 30,
2001, a 3.2% decrease. The decrease in revenues for the third quarter is
primarily related to the impact from the devaluation in foreign currencies in
Argentina, Mexico and Brazil which exceeded the revenue increase resulting from
the 2.3% increase in attendance. Revenues per screen decreased 4.9% to $77,026
in the third quarter of 2002 from $80,965 in the third quarter of 2001.
Cost of Operations
Cost of operations, as a percentage of revenues, decreased to 73.3% in
the third quarter of 2002 from 73.4% in the third quarter of 2001. The decrease
resulted from a reduction in film rentals and advertising as a percentage of
admissions revenues to 52.6% in the third quarter of 2002 from 53.9% in the
third quarter of 2001 as a result of weaker film product in the third quarter of
2002, partially offset by an increase in concession supplies as a percentage of
concession revenues to 18.4% in the third quarter of 2002 from 17.8% in the
third quarter of 2001, an increase in salaries and wages as a percentage of
revenues to 10.9% in the third quarter of 2002 from 10.1% in the third quarter
of 2001 and an increase in facility lease expense as a percentage of revenues to
12.5% in the third quarter of 2002 from 12.0% in the third quarter of 2001.
18
General and Administrative Expenses
General and administrative expenses decreased to $9.7 million in the
third quarter of 2002 from $10.4 million in the third quarter of 2001. General
and administrative expenses, as a percentage of revenues, decreased to 4.2% for
the third quarter of 2002 from 4.3% for the third quarter of 2001.
On May 16, 2002, Cinemark, Inc. was formed as the Delaware holding
company of Cinemark USA, Inc. In 2002, Cinemark, Inc. incurred approximately
$2.7 million of legal, accounting and other professional fees and costs
associated with its proposed initial public offering which was subsequently
postponed due to unfavorable market conditions. Cinemark, Inc.'s S-1 remains
filed with the Securities and Exchange Commission; therefore these legal,
accounting and other professional fees and costs associated with the proposed
initial public offering have not been expensed. In the event Cinemark, Inc.
consummates the proposed initial public offering in 2002, these professional
fees and costs will be capitalized. In the event the proposed initial public
offering is not consummated by the end of 2002, these professional fees and
costs will be expensed in the fourth quarter of 2002 as general and
administrative expenses.
Depreciation and Amortization
Depreciation and amortization decreased to $16.6 million in the third
quarter of 2002 from $21.8 million in the third quarter of 2001. Depreciation
and amortization as a percentage of revenues decreased to 7.1% for the third
quarter of 2002 from 9.1% for the third quarter of 2001. The decrease is
partially related to the January 1, 2002 adoption of Statement of Financial
Accounting Standards (SFAS) No. 142 which required that goodwill and other
intangible assets with indefinite useful lives no longer be amortized. The
decrease is also related to a reduction in the depreciable basis of properties
and equipment resulting from the devaluation in foreign currencies (primarily in
Argentina, Mexico, and Brazil) and the decline in new construction.
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 19.4% in the third quarter of 2002 to $14.1 million from
$17.5 million in the third quarter of 2001. The decrease was principally due to
a decrease in the average debt outstanding and the average interest rates under
the Company's variable rate debt agreements.
Foreign Currency Exchange Loss
A foreign currency exchange loss of $3.9 million was recorded for the
third quarter of 2002 as compared to a foreign currency exchange loss of $2.0
million for the third quarter of 2001. The increase is primarily related to the
translation of Cinemark Brasil S.A.'s debt denominated in other than local
currency given the devaluation of the real in the third quarter of 2002.
Income Taxes
Income tax expense of $9.2 million was recorded for the third quarter of
2002 as compared to income tax expense of $3.8 million for the third quarter of
2001. The Company's effective tax rate for the third quarter of 2002 was 47.2%
as compared to 40.3% for the third quarter of 2001.
19
Income Before Cumulative Effect of an Accounting Change
The Company realized income before cumulative effect of an accounting
change of $10.3 million for the third quarter of 2002 in comparison with income
before cumulative effect of an accounting change of $5.6 million for the third
quarter of 2001. The increase in income in the third quarter of 2002 is
primarily related to the decrease in interest expense and depreciation and
amortization.
Net Income
The Company realized net income of $10.3 million for the third quarter
of 2002 in comparison with net income of $5.6 million for the third quarter of
2001. The increase in income in the third quarter of 2002 is primarily related
to the decrease in interest expense and depreciation and amortization.
Nine month periods ended September 30, 2002 and 2001
Revenues
Revenues for the nine month period ended September 30, 2002 ("the 2002
period") increased to $712.5 million from $638.4 million for the nine month
period ended September 30, 2001 ("the 2001 period"), an 11.6% increase. The
increase in revenues for the 2002 period is primarily related to the 13.5%
increase in attendance. Revenues per screen increased 9.2% to $236,566 in the
2002 period from $216,629 in the 2001 period.
Cost of Operations
Cost of operations, as a percentage of revenues, decreased to 73.4% in
the 2002 period from 76.0% in the 2001 period. The decrease is primarily related
to the 11.6% 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 12.3% in the 2002 period
from 13.4% in the 2001 period, a decrease in utilities and other costs as a
percentage of revenues to 11.0% in the 2002 period from 12.0% in the 2001 period
and a decrease in salaries and wages as a percentage of revenues to 10.4% in the
2002 period from 10.7% in the 2001 period, partially offset by an increase in
film rentals and advertising as a percentage of admissions revenues to 53.6% in
the 2002 period from 53.4% in the 2001 period and an increase in concession
supplies as a percentage of concession revenues to 17.6% in the 2002 period from
17.4% in the 2001 period.
General and Administrative Expenses
General and administrative expenses increased to $32.2 million in the
2002 period from $30.5 million in the 2001 period. The increase is primarily
related to increased professional fees. General and administrative expenses, as
a percentage of revenues, decreased to 4.5% for the 2002 period from 4.8% for
the 2001 period primarily as a result of the 11.6% increase in revenues.
On May 16, 2002, Cinemark, Inc. was formed as the Delaware holding
company of Cinemark USA, Inc. In 2002, Cinemark, Inc. incurred approximately
$2.7 million of legal, accounting and other professional fees and costs
associated with its proposed initial public offering which was subsequently
postponed due to unfavorable market conditions. Cinemark, Inc.'s S-1 remains
filed with the Securities and Exchange Commission; therefore these legal,
accounting and other professional fees and costs associated with the proposed
initial public offering have not been expensed. In the event Cinemark, Inc.
consummates the proposed initial public offering in 2002, these professional
fees and costs will be capitalized. In the event the proposed initial public
offering is not consummated by the end of 2002, these professional fees and
costs will be expensed in the fourth quarter of 2002 as general and
administrative expenses.
20
Depreciation and Amortization
Depreciation and amortization decreased to $50.6 million in the 2002
period from $55.5 million in the 2001 period. Depreciation and amortization as a
percentage of revenues decreased to 7.1% in the 2002 period from 8.7% in the
2001 period. The decrease is partially related to the January 1, 2002 adoption
of Statement of Financial Accounting Standards (SFAS) No. 142 which required
that goodwill and other intangible assets with indefinite useful lives no longer
be amortized. The decrease is also related to a reduction in the depreciable
basis of properties and equipment resulting from the devaluation in foreign
currencies (primarily in Argentina, Mexico, and Brazil) and the decline in new
construction.
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 property 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.
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 21.1% in the 2002 period to $44.1 million from $55.9 million
in the 2001 period. The decrease in interest costs incurred for the 2002 period
was principally due to a decrease in the Company's average debt outstanding and
the average interest rates on the Company's variable rate debt agreements.
Foreign Currency Exchange Loss
A foreign currency exchange loss of $6.2 million was recorded for the
2002 period as compared to a foreign currency exchange loss of $4.5 million for
the 2001 period. The increase is primarily related to the translation of
Cinemark Brasil S.A.'s debt denominated in other than local currency given the
devaluation of the real during the 2002 period.
Income Taxes
Income tax expense of $22.8 million was recorded for the 2002 period as
compared to income tax expense of $1.1 million in the 2001 period. The Company's
effective tax rate for the 2002 period was 39.7% as compared to 65.0% for the
2001 period.
Income Before Cumulative Effect of an Accounting Change
The Company realized income before cumulative effect of an accounting
change of $34.6 million for the 2002 period in comparison with income before
cumulative effect of an accounting change of $0.6 million for the 2001 period.
The increase in income in the 2002 period is primarily related to the 11.6%
increase in revenues and the decrease in interest expense and depreciation and
amortization.
Net Income
The Company realized net income of $31.2 million for the 2002 period in
comparison with net income of $0.6 million for the 2001 period. The increase in
income in the 2002 period is primarily related to the 11.6% increase in revenues
and the decrease in interest expense and depreciation and amortization.
21
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.
The Company continues to expand its U.S. theatre circuit. As of
September 30, 2002, the Company has opened two new theatres (16 screens) and
closed one theatre (12 screens) in the U.S. 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 four new theatres (50 screens) and a five
screen expansion to an existing theatre scheduled to open in the U.S. after
2002. As of September 30, 2002, the Company estimates that the remaining capital
expenditures for the development of its remaining theatre and expansion
commitments (55 screens) in the U.S. will be approximately $15 million. Actual
expenditures for continued theatre development and acquisitions are subject to
change based upon the availability of attractive opportunities for expansion of
the Company's U.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 theatre circuit.
As of September 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 September 30, 2002, Cinemark International, through its
subsidiaries, has three new theatres (24 screens) and a pair of two screen
expansions to existing theatres under construction and scheduled to open in
international markets by the end of 2002. Cinemark International and its
subsidiaries have signed commitments for four new theatres (27 screens)
scheduled to open in international markets after 2002. As of September 30, 2002,
the Company estimates that the remaining capital expenditures for the
development of its remaining international theatre commitments (55 screens) will
be approximately $20 million. Actual expenditures for continued theatre
development and acquisitions 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 September 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 September 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:
22
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......................... $732.5 $48.1 $255.5 $48.2 $380.7
Capital lease obligations.............. 0.3 0.2 0.1 - -
Operating lease obligations............ 1,558.2 101.9 168.1 208.5 1,079.7
As of September 30, 2002, the Company was in full compliance with all
agreements governing its outstanding debt.
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.
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.
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 September 30, 2002, the
aggregate commitment available to the Company is $275.6 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 September 30, 2002, $225 million is outstanding under
the credit facility and the effective interest rate on such borrowings is 2.9%
per annum.
23
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 September 30, 2002, $24.5
million is outstanding under the Cinemark Mexico Credit Agreement and the
effective interest rate on such borrowing is 4.3% per annum.
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
three year term loan from Lehman Brothers Bank, FSB (the "Cinema Properties
Facility"), which originally matured on December 31, 2003. In 2002, the Cinema
Properties facility was amended, which among other things, extended the maturity
date one year to December 31, 2004 and eliminated the lender's discretionary
right to require Cinema Properties, Inc. to make $1.5 million principal payments
in the third and fourth quarters of 2002. Cinema Properties, Inc. has the
unilateral ability to further 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. All principal outstanding matures on
December 31, 2004. 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 September 30, 2002, $77 million is
outstanding under the Cinema Properties Facility and the effective interest rate
on such borrowing is 7.6% per annum.
24
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$2.8 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$1.4 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$116,000 executed in December 1999 with a term of 3 years (with a nine
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$4.1 million with a term of 360 to 365 days
and accruing interest at an average rate of 9.5% per annum; and
(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 nine 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 September 30,
2002, an aggregate of $9.8 million was outstanding and the average effective
interest rate on such borrowings is approximately 12.3% 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 the approximate 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 (U.S. dollar equivalent) and in November in the
aggregate amount of $6.0 million (U.S. 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 may elect 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.
25
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 90 day TAB Banking rate (360 day TAB Banking rate with respect
to one of the four banks) as published by the Association of Banks and Financial
Institutions Act plus 2%. As of September 30, 2002, $8.3 million is outstanding
under this agreement and the effective interest rate on such borrowing is 5.1%
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.
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 establishes accounting standards
for recognition and measurement of the fair value of obligations associated with
the retirement of long-lived assets when there is a legal obligation to incur
such costs. Under SFAS No. 143, the costs of retiring an asset will be recorded
as a liability when the retirement obligation arises and will be amortized to
expense over the life of the asset. SFAS No. 143 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. The Company is currently considering the
impact, if any, that this statement will have on the condensed consolidated
financial statements.
26
In September 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.
27
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 September 30, 2002, there was an aggregate of approximately $352 million of
variable rate debt outstanding under these facilities. These facilities
represent approximately 48% 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 September 30, 2002
------------------------
Sept 30, Sept 30, Sept 30, Sept 30, Sept 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 $399.3
Average interest rate 9.3%
Variable rate $48.0 $87.5 $167.9 $46.3 $1.9 $0.5 $352.1 $354.8
Average interest rate 4.3%
Total debt $48.1 $87.5 $168.0 $46.3 $1.9 $380.7 $732.5 $754.1
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 September 30, 2002 and December 31, 2001,
the interest rate cap agreement is recorded at its fair value of $0.2 million
and $1.1 million, respectively. The Company does not have any additional
derivative financial instruments in place as of September 30, 2002 that would
have a material effect on the Company's financial position, results of
operations and cash flows.
28
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 September 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.
Item 4. Controls and Procedures
The Company has established a system of controls and other procedures
designed to ensure that information required to be disclosed in its periodic
reports filed under the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. These
disclosure controls and procedures have been evaluated under the direction of
the Company's Chief Executive Officer and Chief Financial Officer within the
last 90 days. Based on such evaluations, the Chief Executive Officer and Chief
Financial Officer have concluded that the disclosure controls and procedures are
effective in alerting them in a timely basis to material information relating to
the Company and its consolidated subsidiaries required to be included in the
Company's reports filed or submitted under the Exchange Act.
There have been no significant changes in the Company's system of
internal controls or in other factors that could significantly affect internal
controls subsequent to the evaluation by the Chief Executive Officer and Chief
Financial Officer.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report filed March
27, 2002 on Form 10-K and the amended Annual Report filed June 28, 2002 on Form
10-K/A for the fiscal year ended December 31, 2001. Reference is also made to
Note 10 of the accompanying Notes to Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q.
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
There have not been any matters submitted to a vote of security holders
during the third quarter through the solicitation of proxies or otherwise.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Certifications under Exchange Act Rules 13a-14 or 15d-14
Certification of the Chief Executive Officer of
Cinemark USA, Inc.
Certification of the Chief Financial Officer of
Cinemark USA, Inc.
b) Supplemental schedules specified by the Senior Subordinated Notes
Indenture:
Condensed Consolidating Balance Sheets
(unaudited) as of September 30, 2002
Condensed Consolidating Statements of
Income (unaudited) for the nine months
ended September 30, 2002
Condensed Consolidating Statements of
Cash Flows (unaudited) for the nine months
ended September 30, 2002
30
c) Exhibits
*99.1 Certification of the Chief Executive Officer of
Cinemark USA, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*99.2 Certification of the Chief Financial Officer of
Cinemark USA, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
d) Reports on Form 8-K
No reports have been filed by Registrant during the
quarter for which this report is filed.
31
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: November 14, 2002 /s/Alan W. Stock
----------------
Alan W. Stock
President
/s/Robert Copple
----------------
Robert Copple
Chief Financial Officer
32
CERTIFICATION UNDER
EXCHANGE ACT RULES 13a-14 OR 15d-14
CERTIFICATION
I, Lee Roy Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cinemark USA,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
33
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002.
CINEMARK USA, INC.
By: /s/ Lee Roy Mitchell
-----------------------
Lee Roy Mitchell
Chief Executive Officer
34
CERTIFICATION UNDER
EXCHANGE ACT RULES 13a-14 OR 15d-14
CERTIFICATION
I, Robert Copple, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cinemark USA,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
35
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002.
CINEMARK USA, INC.
By: /s/ Robert Copple
-----------------------
Robert Copple
Chief Financial Officer
36
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2002
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
-------------- -------------- -------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,230,783 $ 36,562,380 $ - $ 52,793,163
Inventories 2,637,069 504,088 - 3,141,157
Accounts receivable 5,582,187 5,673,309 (1,200,197) 10,055,299
Income tax receivable (126,937) 2,198,004 - 2,071,067
Prepaid expenses and other 3,285,105 937,725 (375,000) 3,847,830
------------------------------------------------------------------
Total current assets 27,608,207 45,875,506 (1,575,197) 71,908,516
THEATRE PROPERTIES AND EQUIPMENT 948,890,711 201,977,009 - 1,150,867,720
Less accumulated depreciation and amortization (318,257,297) (46,104,112) - (364,361,409)
------------------------------------------------------------------
Theatre properties and equipment - net 630,633,414 155,872,897 - 786,506,311
OTHER ASSETS
Goodwill - net 7,939,202 2,565,820 - 10,505,022
Investments in and advances to affiliates 169,257,531 2,243,228 (167,327,591) 4,173,168
Deferred charges and other - net 24,711,759 6,746,416 - 31,458,175
------------------------------------------------------------------
Total other assets 201,908,492 11,555,464 (167,327,591) 46,136,365
------------------------------------------------------------------
TOTAL $ 860,150,113 $ 213,303,867 $(168,902,788) $ 904,551,192
==================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 39,740,871 $ 8,338,201 $ - $ 48,079,072
Current income taxes payable (44,411) 44,411 - -
Accounts payable and accrued expenses 66,571,879 15,859,150 (1,072,175) 81,358,854
------------------------------------------------------------------
Total current liabilities 106,268,339 24,241,762 (1,072,175) 129,437,926
LONG-TERM LIABILITIES
Senior credit agreements 214,971,119 89,287,777 - 304,258,896
Senior subordinated debt 380,166,294 - - 380,166,294
Deferred lease expenses 23,913,357 422,833 - 24,336,190
Deferred gain on sale leasebacks 4,464,100 - - 4,464,100
Deferred income taxes 8,155,384 676,824 - 8,832,208
Deferred revenues and other long-term liabilities 4,712,134 1,538,168 (375,000) 5,875,302
------------------------------------------------------------------
Total long-term liabilities 636,382,388 91,925,602 (375,000) 727,932,990
COMMITMENTS AND CONTINGENCIES - - - -
MINORITY INTERESTS IN SUBSIDIARIES 8,097,795 16,769,910 - 24,867,705
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 11,700,561 152,497,613 (152,497,613) 11,700,561
Retained earnings 121,419,021 (45,486,421) - 75,932,600
Treasury stock, 57,245 Class B shares at cost (24,232,890) - - (24,232,890)
Accumulated other comprehensive loss (49,028,543) (41,602,599) - (90,631,142)
------------------------------------------------------------------
Total shareholder's equity 109,401,591 80,366,593 (167,455,613) 22,312,571
------------------------------------------------------------------
TOTAL $ 860,150,113 $ 213,303,867 $(168,902,788) $ 904,551,192
==================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes
37
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
-------------- -------------- -------------- ---------------
REVENUES $ 585,669,831 $ 136,338,056 $ (9,469,990) $ 712,537,897
COSTS AND EXPENSES
Cost of operations 427,584,520 104,675,929 (9,469,990) 522,790,459
General and administrative expenses 26,119,191 6,056,605 - 32,175,796
Depreciation and amortization 39,332,438 11,254,662 - 50,587,100
Asset impairment loss 558,398 223,378 - 781,776
Loss on sale of assets and other 519,085 206,948 - 726,033
------------------------------------------------------------------
Total costs and expenses 494,113,632 122,417,522 (9,469,990) 607,061,164
OPERATING INCOME 91,556,199 13,920,534 - 105,476,733
OTHER INCOME (EXPENSE)
Interest expense (34,862,689) (7,367,125) - (42,229,814)
Amortization of debt issue cost and debt discount (768,357) (1,136,028) - (1,904,385)
Interest income 566,361 1,152,764 - 1,719,125
Foreign currency exchange gain (loss) 66,016 (6,251,814) - (6,185,798)
Equity in income of affiliates 163,585 389,502 - 553,087
Minority interests in (income) loss of subsidiaries (1,251,045) 1,256,670 - 5,625
------------------------------------------------------------------
Total (36,086,129) (11,956,031) - (48,042,160)
------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 55,470,070 1,964,503 - 57,434,573
Income taxes 22,805,894 2,599 - 22,808,493
------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE 32,664,176 1,961,904 - 34,626,080
Cumulative effect of a change in accounting principle,
net of income tax benefit of $0. (3,389,779) - - (3,389,779)
------------------------------------------------------------------
NET INCOME $ 29,274,397 $ 1,961,904 $ - $ 31,236,301
==================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes
38
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
-------------- -------------- -------------- ---------------
OPERATING ACTIVITIES
Net income $ 29,274,397 $ 1,961,904 $ - $ 31,236,301
Noncash items in net income:
Depreciation 38,922,711 11,089,289 - 50,012,000
Amortization of other assets 409,726 165,373 - 575,099
Amortization of foreign advanced rents 844,836 539,676 - 1,384,512
Amortized compensation - stock options 828,856 - - 828,856
Amortization of debt issue costs 563,731 1,136,028 - 1,699,759
Amortization of gain on sale leasebacks (274,440) - - (274,440)
Amortization of debt discount and premium (21,380) - - (21,380)
Amortization of deferred revenues (3,639,678) - - (3,639,678)
Loss on impairment of assets 558,398 223,378 - 781,776
Loss on sale of assets and other 519,085 206,948 - 726,033
Deferred lease expenses 1,526,932 (23,130) - 1,503,802
Deferred income tax expenses 11,871,590 676,824 - 12,548,414
Equity in income of affiliates (163,585) (389,502) - (553,087)
Minority interests in income (loss) of subsidiaries 1,251,045 (1,256,670) - (5,625)
Cumulative effect of an accounting change 3,389,779 - - 3,389,779
Changes in assets and liabilities:
Inventories (16,117) 196,992 - 180,875
Accounts receivable (237,075) 1,231,424 - 994,349
Prepaid expenses and other (734,123) 133,122 - (601,001)
Other assets (1,629,967) 4,776,821 - 3,146,854
Advances with affiliates (1,302,353) 1,534,935 - 232,582
Accounts payable and accrued expenses (30,443,663) 7,789,340 - (22,654,323)
Other long-term liabilities 669,463 (978,695) - (309,232)
Income tax receivable/payable (647,954) 15,681 - (632,273)
------------------------------------------------------------------
Net cash provided by operating activities 51,520,214 29,029,738 - 80,549,952
INVESTING ACTIVITIES
Additions to theatre properties and equipment (13,804,772) (3,339,777) - (17,144,549)
Sale of theatre properties and equipment 1,718,508 6,771 - 1,725,279
Dividends/capital returned from affiliates - 594,340 - 594,340
------------------------------------------------------------------
Net cash used for investing activities (12,086,264) (2,738,666) - (14,824,930)
FINANCING ACTIVITIES
Increase in long-term debt 42,514,736 2,230,460 - 44,745,196
Decrease in long-term debt (81,832,191) (9,152,129) - (90,984,320)
Increase in minority investment in subsidiaries - 421,855 - 421,855
Decrease in minority investment in subsidiaries (791,634) (10,110,553) - (10,902,187)
------------------------------------------------------------------
Net cash used for financing activities (40,109,089) (16,610,367) - (56,719,456)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (2,280,534) (4,131,092) - (6,411,626)
------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,955,673) 5,549,613 - 2,593,940
CASH AND CASH EQUIVALENTS:
Beginning of period 19,186,456 31,012,767 - 50,199,223
------------------------------------------------------------------
End of period $ 16,230,783 $ 36,562,380 $ - $ 52,793,163
==================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes
39
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, 18 U.S.C. ss. 1350, and accompanies the quarterly report on Form 10-Q
(the "Form 10-Q") for the quarter ended September 30, 2002 of Cinemark USA, Inc.
(the "Registrant").
I, Lee Roy Mitchell, the Chief Executive Officer of the Registrant, 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, results of operations
and cash flows of the Registrant.
Dated: November 14, 2002.
/s/ Lee Roy Mitchell
-----------------------
Lee Roy Mitchell
Chief Executive Officer
Subscribed and sworn to before me
this 14th day of November, 2002.
/s/ Keri Chorba
- ---------------------
Name: Keri Chorba
Title: Notary Public
My commission expires: 1/28/03
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, 18 U.S.C. ss. 1350, and accompanies the quarterly report on Form 10-Q
(the "Form 10-Q") for the quarter ended September 30, 2002 of Cinemark USA, Inc.
(the "Registrant").
I, Robert Copple, the Chief Financial Officer of the Registrant, 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, results of operations
and cash flows of the Registrant.
Dated: November 14, 2002.
/s/ Robert Copple
-----------------------
Robert Copple
Chief Financial Officer
Subscribed and sworn to before me
this 14th day of November, 2002.
/s/ Keri Chorba
- ---------------------
Name: Keri Chorba
Title: Notary Public
My commission expires: 1/28/03