UNITED STATES
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 March 31, 1999
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
Securities Registered pursuant to Section 12(b) of the Act:
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 ____
The Registrant became subject to the filing requirements of the
Securities Exchange Act of 1934 on June 10, 1992.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
As of May 15, 1999, 1,500 shares of Class A Common Stock and 183,733
shares of Class B Common Stock (including options to acquire 6,871 shares of
Class B Common Stock exercisable within 60 days of such date) were outstanding
CINEMARK USA, INC. AND SUBSIDIARIES
Index
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 1999 (unaudited)
and December 31, 1998 3
Condensed Consolidated Statements of Income
(unaudited) for the three month
periods ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash
Flows (unaudited) for the three month
periods ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,546,398 $ 25,645,868
Inventories 3,430,642 3,591,705
Co-op advertising and other receivables 17,982,596 12,414,288
Income tax receivable 5,571,503 3,032,642
Prepaid expenses and other 1,949,821 2,457,952
--------------------------------
Total current assets 47,480,960 47,142,455
THEATRE PROPERTIES AND EQUIPMENT 952,282,377 889,053,977
Less accumulated depreciation and amortization (152,557,798) (138,550,648)
--------------------------------
Theatre properties and equipment - net 799,724,579 750,503,329
OTHER ASSETS:
Certificates of deposit 2,221,838 4,056,096
Investments in and advances to affiliates 3,496,790 29,811,533
Goodwill - net 16,796,600 13,495,195
Deferred charges and other - net 45,341,218 37,664,026
------------------------------
Total other assets 67,856,446 85,026,850
---------------------------------
TOTAL $915,061,985 $ 882,672,634
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,084,197 $ 337,895
Accounts payable and accrued expenses 64,673,828 95,298,457
--------------------------------
Total current liabilities 66,758,025 95,636,352
LONG-TERM LIABILITIES:
Senior credit agreements 326,471,352 251,037,528
Senior subordinated notes 380,266,070 380,273,198
Deferred lease expenses 14,430,115 14,006,106
Deferred gain on sale leaseback 6,715,104 6,803,542
Deferred income taxes 20,712,510 16,114,342
---------------------------------
Total long-term liabilities 748,595,151 668,234,716
MINORITY INTERESTS IN SUBSIDIARIES 37,128,202 43,001,950
SHAREHOLDERS' 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, 234,073 shares issued 49,537,607 49,537,607
Additional paid-in-capital 13,790,731 13,773,691
Unearned compensation - stock options (3,884,498) (4,221,326)
Retained earnings 54,966,284 58,105,217
Treasury stock, 57,211 Class B shares at cost (24,198,890) (24,198,890)
Accumulated other comprehensive income (27,630,642) (17,196,698)
--------------------------------
Total shareholders' equity 62,580,607 75,799,616
---------------------------------
TOTAL $915,061,985 $ 882,672,634
=================================
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1999 1998
REVENUES
Admissions $ 95,216,424 $ 78,306,293
Concessions 46,777,297 42,545,553
Other 7,274,306 3,370,197
-------------------------------
Total 149,268,027 124,222,043
COSTS AND EXPENSES:
Cost of operations
Film rentals and advertising 49,201,117 40,476,354
Concession supplies 7,494,034 6,572,624
Salaries and wages 19,337,983 14,713,094
Facility leases 20,572,916 12,541,150
Utilities and other 21,660,535 16,213,640
-------------------------------
Total 118,266,585 90,516,862
General and administrative expenses 7,993,500 7,080,937
Depreciation and amortization 11,332,785 7,698,423
-------------------------------
Total 137,592,870 105,296,222
OPERATING INCOME 11,675,157 18,925,821
OTHER INCOME (EXPENSE)
Interest expense (13,121,263) (7,725,738)
Amortization of debt issue cost (199,554) (165,328)
Amortization of bond discount (43,625) (35,292)
Interest income 579,563 1,218,477
Gain on sale of assets and other 66,906 442,158
Foreign currency exchange gain (loss) 76,234 (279,734)
Equity in income of affiliates 55,859 215,137
Minority interests in subsidiaries 730,402 (351,243)
--------------------------------
Total (11,855,478) (6,681,563)
--------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE (180,321) 12,244,258
Income taxes (benefit) (10,025) 5,103,150
-------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (170,296) 7,141,108
Cumulative effect of a change in an accounting principle - net of tax
benefit of $417,570 (2,968,637) -
-------------------------------
NET INCOME (LOSS) $ (3,138,933) $ 7,141,108
===============================
EARNINGS PER SHARE:
Basic:
Income (loss) before cumulative effect of an accounting change $ (0.95) $ 40.05
Cumulative effect of an accounting change (16.65) -
-------------------------------
Net Income (loss) $ (17.60) $ 40.05
===============================
Diluted:
Income (loss) before cumulative effect of an accounting change $ (0.95) $ 38.28
Cumulative effect of an accounting change (16.65) -
-------------------------------
Net Income (loss) $ (17.60) $ 38.28
===============================
COMMON SHARES OUTSTANDING:
Basic:
Weighted average common shares outstanding 178,362 178,302
===============================
Diluted:
Weighted average common shares outstanding 178,362 178,302
Common equivalent shares for stock options - 8,235
-------------------------------
Weighted average shares outstanding 178,362 186,537
===============================
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1999 1998
OPERATING ACTIVITIES:
Net Income (loss) $ (3,138,933) $ 7,141,108
Noncash items in net income:
Depreciation 11,005,899 7,414,717
Amortization - goodwill and other assets 526,440 449,034
Amortization of gain on sale leaseback (88,438) -
Deferred lease expenses 424,009 349,391
Amortization of prepaid leases 182,994 100,704
Deferred income tax expense 4,598,168 536,174
Amortization of debt discount and premium (7,128) (15,460)
Amortized compensation - stock options 356,138 221,022
Gain on sale of assets (66,906) (442,158)
Equity in income of affiliates (55,859) (215,137)
Minority interests in income (loss) of subsidiaries (730,402) 351,243
Cumulative effect of an accounting change 3,386,207 -
Cash provided by (used for) operating working capital:
Inventories 161,063 (1,035,477)
Co-op advertising and other receivables (5,568,308) 6,167,369
Prepaid expenses and other 325,137 6,996,992
Accounts payable and accrued expenses (30,624,629) (13,643,687)
Income tax receivable/payable (2,538,861) 2,632,709
----------------------------------
Net cash provided by (used for) operating activities (21,853,409) 17,008,544
INVESTING ACTIVITIES:
Additions to Theatre properties and equipment (38,876,156) (105,192,681)
Sale of Theatre properties and equipment 66,906 131,485,148
Decrease in certificates of deposit 1,834,258 -
Decrease in investments in and advances to affiliates 8,240,602 4,224,135
Increase in deferred charges and other (7,900,973) (8,248,689)
----------------------------------
Net cash provided by (used for) investing activities (36,635,363) 22,267,913
FINANCING ACTIVITIES:
Issuance of Senior Subordinated Notes - 103,950,000
Decrease in long-term debt (14,217,969) (191,176,414)
Increase in long-term debt 73,679,561 78,716,477
Investment in partnership - (2,536,553)
Minority investment in subsidiaries, net (7,638,346) 293,523
----------------------------------
Net cash provided by (used for) financing activities 51,823,246 (10,752,967)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (433,944) (931,901)
----------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,099,470) 27,591,589
CASH AND CASH EQUIVALENTS:
Beginning of period 25,645,868 31,788,380
----------------------------------
End of period $ 18,546,398 $ 59,379,969
==================================
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, according to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, these
interim financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to state fairly the financial position and
results of operations as of and for the periods indicated.
These financial statements should be read in conjunction with the
audited annual financial statements and the notes thereto for the year ended
December 31, 1998 included in the Annual Report filed on Form 10-K by the
Company under the Securities Exchange Act of 1934 on March 30, 1999.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results to be achieved for the full year.
2 Foreign Currency Translation
The accumulated other comprehensive income in shareholders' equity of
$27,630,642 and $17,196,698 at March 31, 1999 and December 31, 1998,
respectively, primarily relates to the unrealized adjustments from translating
the financial statements of Cinemark Brasil, S.A. and Cinemark de Mexico.
In 1998 the Company was required to utilize the U.S. dollar as the
functional currency of Cinemark de Mexico for U.S. reporting purposes instead of
the peso due to the highly inflationary economy of Mexico. Thus, devaluations in
the peso during the first quarter of 1998 that affected the Company's investment
were charged to exchange gain or loss rather than to the accumulated other
comprehensive income account.
In 1999, the economy of Mexico reverted back to a non highly
inflationary status resulting in the peso again being the functional currency of
Cinemark de Mexico. Thus, devalutions in the peso have been charged to the
accumulated other comprehensive income account during the first quarter of 1999.
In addition, the Company recorded an adjustment to restate certain assets,
liabilities and equity accounts to their original values reflected in a non
highly inflationary environment as follows:
Increase in theatre properties and equipment, net $ 7,119,403
Increase in prepaids 752,129
Increase in deferred income taxes (2,803,680)
Decrease in accumulated other comprehensive income $(5,067,852)
3. FAS 130 - Comprehensive Income
Beginning in 1998, the Company adopted SFAS 130 "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. The following components are reflected in the Company's
comprehensive income:
Three Months Ended
March 31,
1999 1998
Net income (loss) $(3,138,933) $7,141,108
Foreign currency translation adjustment (10,433,944) (931,901)
===================== ================
Comprehensive income (loss) $(13,572,877) $6,209,207
===================== ================
6
4. Income Taxes
Beginning January 1, 1999, management plans to reinvest the
undistributed earnings of its foreign subsidiaries located in Mexico, Peru and
Argentina. For years beginning after 1998, the Company adopted the exception
allowed under APB Opinion #23 for these foreign subsidiaries. As a result,
deferred U.S. federal income taxes are not provided on the undistributed
earnings of these foreign subsidiaries. The cumulative amount of undistributed
earnings on which the Company has not recognized income taxes is $1.2 million.
5. Accounting for Start-up Activities and Organization Costs
On January 1, 1999 the Company adopted Statement of Position (SOP) 98-5
requiring start-up activities and organization costs to be expensed as incurred.
The Company's practice had been to capitalize organization costs associated with
the organization of new entities as well as costs associated with forming
international joint ventures as deferred charges and to amortize them over the
anticipated life of the respective entity or venture. The adoption of this new
accounting pronouncement resulted in the aggregate write-off of the unamortized
organization costs of $3,386,207 on January 1, 1999. This charge was recorded as
a cumulative effect of a change in accounting principle as a one-time non cash
charge to income of $2,968,637 (net of tax) in the first quarter of 1999 as
follows:
United States $152,966
Mexico -
Brazil 552,488
Other Foreign Countries 2,263,183
-----------
$2,968,637
===========
6. Supplemental Cash Flow Information
The following is provided as supplemental information to the
consolidated statement of cash flows:
Three Months Ended March 31,
1999 1998
Cash paid for interest $22,171,834 $16,758,977
Cash paid for income taxes 288,267 10,845
In December 1998, the Company acquired an additional 45% equity interest
in it's Chilean operating Company for $7.625 million. As a result of the
additional equity interest acquired, Chile was consolidated with the Company's
operations effective January 1, 1999. The assets and liabilities of this former
equity interest that are included in the consolidation as of January 1, 1999 are
as follows:
Theatre properties and equipment, net $26,350,993
Goodwill 3,621,050
Net other assets 3,371,491
Long-term debt (17,718,534)
------------
Investment in affiliate $15,625,000
============
The Company's Central American operating entities (Nicaragua, Costa
Rica, El Salvador and Honduras) were consolidated with the Company's operations
effective January 1, 1999. The assets and liabilities of these former equity
interests that are included in the consolidation as of January 1, 1999 are as
follows:
Theatre properties and equipment, net $5,000,000
Minority interest (2,495,000)
-----------
Investment in affiliate $2,505,000
===========
7
7. Reporting Segments
The Company operates in a single industry as a motion picture exhibitor.
The Company is a multinational corporation with consolidated operations in the
United States, Mexico, Canada, Argentina, Brazil, Central America, Chile,
Ecuador and Peru. Revenues and long-lived assets in the United States and other
countries for the three months ended March 31 are as follows:
Other Foreign
United States Mexico Brazil Countries Eliminations Consolidated
1999
Total revenues $115,512,653 $12,087,078 $9,225,861 $13,268,360 $(825,925) $149,268,027
=============== =============== =============== ================ ============== ==================
Long-lived assets,
net 624,436,974 54,486,748 45,893,367 74,907,490 - 799,724,579
=============== =============== =============== ================ ============== ==================
1998
Total revenues $107,087,437 $11,027,665 $5,576,364 $1,079,355 $(548,778) $124,222,043
=============== =============== =============== ================ ============== ==================
Long-lived assets,
net 451,874,689 34,041,300 42,957,041 4,635,733 - 533,508,763
=============== =============== =============== ================ ============== ==================
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
The following table presents certain income statement items as a
percentage of revenues.
% of Revenues
Three Months Ended
March 31,
1999 1998
----------------------
Revenues:
Admissions 63.8 63.0
Concessions 31.3 34.3
Other 4.9 2.7
----- -----
Total revenues 100.0 100.0
Cost of operations 79.2 72.9
General and administrative expenses 5.4 5.7
Depreciation and amortization 7.6 6.2
Operating income 7.8 15.2
Interest expense 9.0 6.4
Income (loss) before income taxes and
cumulative effect of an accounting change (0.1) 9.9
Income (loss) before cumulative effect
of an accounting change (0.1) 5.8
Net income (loss) (2.1) 5.8
Revenues
Revenues for the quarter ended March 31, 1999 increased to $149.3
million from $124.2 million for the quarter ended March 31, 1998, a 20.2%
increase. The increase in revenues for the first quarter is primarily
attributable to an 18.7% increase in attendance as the result of the net
addition of 560 screens since the first quarter of 1998. Revenues per average
screen decreased 13.1% to $64,419 for the first quarter of 1999 from $74,112 for
the first quarter of 1998.
Cost of Operations
Cost of operations, as a percentage of revenues, increased to 79.2% in
the first quarter of 1999 from 72.9% in the first quarter of 1998. The increase
as a percentage of revenues resulted from an increase in facility lease expense
as a percentage of revenues to 13.8% in 1999 from 10.1% in 1998 partially as a
result of the two sale leaseback transactions which occurred in the first and
fourth quarters of 1998, an increase in concession supplies as a percentage of
concession revenues to 16.0% in 1999 from 15.4% in 1998 as a result of the
greater number of international theatres in operation, an increase in salaries
and wages as a percentage of revenues to 13.0% in 1999 from 11.8% in 1998 and an
increase in utilities and other expenses as a percentage of revenues to 14.5% in
1999 from 13.1% in 1998.
General and Administrative Expenses
General and administrative expenses, as a percentage of revenues,
declined to 5.4% in the first quarter of 1999 as compared to 5.7% in the first
quarter of 1998 as a result of the expanding base of theatre operations.
9
The absolute level of general and administrative expenses increased to $8.0
million in the first quarter of 1999 from $7.1 million in the first quarter of
1998. The increase in general and administrative expenses is attributed to costs
(primarily salaries and wages) associated with the Company's expansion program.
Depreciation and Amortization
Depreciation and amortization increased 46.8% to $11.3 million in the
first quarter of 1999 from $7.7 million in the first quarter of 1998. The
increase is a result of the net addition of $315.2 million in theatre property
and equipment since the first quarter of 1998, a 49.5% increase. The difference
in the percentage increase in depreciation and amortization compared to the
increase in theatre property and equipment is a result of the timing of when the
additions were placed in service during the period.
Interest Expense
Interest costs incurred, including amortization of debt issue cost and
debt discount, increased 60.4% during the first quarter of 1999 to $14.6 million
(including capitalized interest to properties under construction) from $9.1
million (including capitalized interest). The increase in interest costs
incurred for the first quarter of 1999 was due principally to an increase in
average debt outstanding resulting from borrowings under the Company's Credit
Facility.
Income Taxes
An income tax benefit of $10,025 was recorded for the first quarter of
1999 as compared to $5.1 million expense in the first quarter of 1998. The
Company's effective rate for the first quarter of 1999 was 5.6% compared to
41.7% in the first quarter of 1998. The net decrease is due to the tax benefits
of the loss and the adoption of APB Opinion #23 being offset by the local
foreign country income taxes and losses in certain foreign countries which are
subject to a valuation allowance.
Cumulative Effect of a Change in an Accounting Principle
The Company recorded a cumulative effect of a change in accounting
principle of $2.9 million (net of tax) in the first quarter of 1999 resulting
from the write off of the unamortized start-up activities and organization costs
due to the adoption of Statement of Position (SOP) 98-5.
Net Income (Loss)
The Company realized a net loss of $(3.1) million for the first quarter
of 1999 as compared to net income of $7.1 million for the first quarter of 1998.
10
Liquidity and Capital Resources
The Company's revenues are collected in cash, primarily through box
office receipts and the sale of concession items. Because its revenues are
received in cash prior to the payment of related expenses, the Company has an
operating "float" and, as a result, historically has not required traditional
working capital financing.
The Company's theatres are typically equipped with modern projection and
sound equipment, with approximately 81% of the screens operated by the Company
having been built in the 1990's. The Company's investing activities have been
principally in connection with new theatre openings and acquisitions of existing
theatres and theatre circuits. As of May 12, 1999, the Company has opened 6
theatres (95 screens) and has 12 theatres (222 screens) under construction or
scheduled to open in the United States by the end of 1999. Certain of these
theatres will be megaplexes which may cost in excess of $15 million per theatre.
The Company also plans to open approximately 250 screens in the U.S. in 2000.
The Company currently estimates that its capital expenditures for the
development of these approximately 560 screens in the U.S. in 1999 and 2000 will
be approximately $290 million. As of May 12, 1999, the Company had expended
approximately $115 million toward the development of these screens. The Company
plans to fund capital expenditures for its development from cash flow from
operations, sale leaseback transactions, and borrowings under the Credit
Facility. Actual expenditures for theatre development and acquisitions during
1999 and 2000 are subject to change based upon the availability of attractive
opportunities for expansion of the Company's theatre circuit.
On August 1996, the Company issued $200 million principal amount of
Series B Senior Subordinated Notes which bear interest at a rate of 9 5/8% per
annum (the Series B Notes"), payable semi-annually on February 1 and August 1 of
each year. The Series B Notes were issued at 99.553% of the principal face
amount (a discount of $4.47 per $1,000 principal amount). The net proceeds to
the Company from the issuance of the Series B Notes (net of discount, fees and
expenses) were approximately $193.2 million. The proceeds from the Series B
Notes were used to repurchase 98.7% of the the Company's $125 million aggregate
principal amount 12% Senior Notes due 2002 (the "Senior Notes") pursuant to a
tender offer which expired on August 15, 1996. The Senior Notes were purchased
at a premium of $1,098.33 (including a consent fee of $25) per $1,000 principal
amount, plus accrued and unpaid interest up to the date of repurchase. Excess
proceeds were utilitized to reduce the borrowings under the Company's Credit
Facility and for general corporate purposes. On June 2, 1997 the Company
redeemed the remaining outstanding Senior Notes ($1.6 million). The Senior Notes
were redeemed at a premium of $1,060 per $1,000 principal amount, plus accrued
and unpaid interest up to the date of redemption.
On June 1997, the Company issued $75 million principal amount of Series
D Notes due 2008 which bear interest at a rate of 9 5/8% per annum (the "Series
D Notes"), payable semi-annually on February 1 and August 1 of each year. The
Series D Notes were issued at 103% of the principal face amount. The net
proceeds to the Company from the issuance of the Series D Notes (net of fees and
expenses ) were approximately $77.1 million. The proceeds of the Series D Notes
were applied to reduce the Company's indebtedness under the Credit Facility.
In January 1998, the Company issued $105 million aggregate principal
amount of 8 1/2% Series A Senior Subordinated Notes due 2008 (the "Series A
Notes") pursuant to Rule 144A (the "Offering"). The net proceeds of the Offering
were used by the Company to reduce the Company's indebtedness under the the
Credit Facility. The Company exchanged the Series A Notes on March 17, 1998 for
8 1/2% Series B Senior Subordinated Notes (the "8 1/2% Series B Notes") which
have been registered under the Securities Act of 1933, as amended.
In February 1998, the Company replaced its existing credit facility with
a reducing, revolving credit agreement (the "Credit Facility") through a group
of banks for which Bank of America National Trust and Savings Association acts
as Administrative Agent. The Credit Facility provides for loans to the Company
of up to $350 million in the aggregate.
11
The Credit Facility is a reducing revolving credit facility, with
commitments automatically reduced each calendar quarter by $8,750,000,
$11,812,500, $13,125,000, $12,031,000 and $6,562,500 in calendar year 2001,
2002, 2003, 2004 and 2005, respectively. The Company is required to prepay all
loans outstanding in excess of the aggregate commitment as reduced pursuant to
the terms of the Credit Facility. Borrowings are secured by a pledge of a
majority of the issued and outstanding capital stock of the Company, and the
credit agreement requires that the Company maintains certain financial ratios;
restricts the payment of dividends, payment of subordinated debt prior to
maturity and issuance of preferred stock and other indebtedness; and other
restrictive covenants. Pursuant to the terms of the Credit Facility, funds
borrowed bear interest at a rate per annum equal to the Offshore Rate (as
defined in the Credit Facility) or the Base Rate (as defined in the Credit
Facility, as the case may be), plus the Applicable Margin (as defined in the
Credit Facility). As of May 12, 1999, the Company had borrowed $268.5 million
under the Credit Facility. The effective interest rate on such borrowings as of
May 12, 1999 is 6.6% per annum.
In February 1998, the Company completed a sale leaseback transaction
(the "Sale Leaseback") pursuant to which the Company sold the land, buildings
and site improvements of 12 theatre properties to special purpose entities for
an aggregate purchase price equal to approximately $131.5 million.
Simultaneously with the sale, the Company entered into operating leases for such
properties for a base term equal to approximately 20 years at a fixed aggregate
monthly rental payment of $1.1 million or $13.4 million annually.
In October 1998, the Company completed another sale leaseback
transaction (the "Second Sale Leaseback") pursuant to which the Company sold the
land, buildings and site improvements of one theatre property to a special
purpose entity for an aggregate purchase price equal to approximately $13.9
million. Simultaneously with the sale, the Company entered into an operating
lease for the property for a base term equal to approximately 20 years at a
fixed monthly rental payment of $119,000 or $1.4 annually.
In 1992, the Company formed Cinemark International to develop and
acquire theatres in international markets. As of May 12, 1999, Cinemark
International, through its affiliates, operated 56 theatres (504 screens)
principally in Latin America. The following table summarizes the Company's and
Cinemark International's holdings in each international market, the number of
theatres and screens in such market as of May 12, 1999 and the number of
theatres and screens under construction in 1999.
Year of Operating 1999 Planned Openings
Country Formation Ownership % Theatres/Screens Theatres/Screens
Mexico 1992 95% 18 theatres (177 screens) 3 theatres (26 screens)
Chile 1992 98% 10 theatres (83 screens) 1 theatre (6 screens)
Argentina 1995 50% 5 theatres (44 screens) 1 theatre (10 screens)
Argentina 1997 100% 2 theatres (15 screens) 2 theatres (20 screens)
Brazil 1996 60% 13 theatres (126 screens) 4 theatres (40 screens)
Ecuador 1996 60% 2 theatres (16 screens) existing theatre (3 screens)
Peru 1996 100% 1 theatre (12 screens) 2 theatres (17 screens)
Central America 1997 50% 5 theatres (31 screens) 2 theatres (14 screens)
Colombia 1998 50% N/A N/A
Taiwan 1998 50% N/A N/A
United Kingdom 1998 100% N/A N/A
Total 56 theatres (504 screens) 15 theatres (136 screens)
The Company, through Cinemark International and its affiliates, plans to
invest up to an additional $100 million in international ventures, principally
in Latin America, over the next three years. The Company anticipates that
investments in excess of Cinemark International's available cash will be funded
by the Company or by debt or equity financing to be provided by third parties
directly to Cinemark International or its subsidiaries.
In August 1998, the Company formed Cinemark Investments
Corporation for the purpose of financing its Brazilian operations by
investing in foreign fixed rate notes issued by Cinemark Brasil S.A., an
indirect Brazilian subsidiary of the Company. In September 1998, Cinemark
12
Investments Corporation executed a credit agreement with Bank of America that
provides Cinemark Investments Corporation up to $20 million in the aggregate
under a revolving line of credit facility (the Cinemark Investments Credit
Agreement). The Cinemark Investments Credit Agreement is secured by an
assignment of certain fixed rate notes issued by Cinemark Brasil S.A. to
Cinemark Investments Corporation and an unconditional guaranty by the Company.
Pursuant to the terms of the Cinemark Investments Credit Agreement, funds
borrowed bear interest at a rate per annum equal to the Offshore Rate or the
Base Rate (both defined in the Cinemark Investments Credit Agreement) as the
case may be. As of May 12, 1999, Cinemark Investments Corporation had borrowed
$20 million under the Cinemark Investments Credit Agreement, the proceeds of
which were used to purchase fixed rate notes issued by Cinemark Brasil S.A.
bearing interest at 13.25%. The effective interest rate on such borrowings as of
May 12, 1999 is 7.1% per annum.
In September 1998, the Company incorporated Cinemark Theatres U.K.
Ltd., an English company, to develop state-of-the-art multiplex theatres in the
United Kingdom. Cinemark Theatres U.K. Ltd. is a wholly-owned subsidiary of
the Company. Cinemark Theatres U.K. Ltd. expects to begin construction on one
theatre (10 screens) in 1999.
In September 1998, Cinemark International entered into a joint venture
agreement with Core Pacific Ltd. to develop state-of-the-art multiplex theatres
in Taiwan, Republic of China. The joint venture will conduct its business
through Cinemark-Core Pacific Ltd. which is 50.1% owned by Cinemark
International and 49.9% owned by Core Pacific Ltd. Cinemark-Core Pacific Ltd.
expects to begin construction on four theatres (32 screens) during 2000.
In November 1998, Cinemark Mexico executed a credit agreement with Bank
of America National Trust and Savings Association for itself and as
Administrative Agent (the Cinemark Mexico Credit Agreement). The Cinemark Mexico
Credit Agreement is a revolving credit facility and provides for a loan to
Cinemark Mexico of up to $30 million in the aggregate. The Cinemark Mexico
Credit Agreement is secured by a pledge of 65% of the stock of Cinemark de
Mexico S.A. de C.V. and an unconditional guaranty by the Company. Pursuant to
the terms of the Cinemark Mexico Credit Agreement, funds borrowed bear interest
at a rate per annum equal to the Offshore Rate (as defined in the Cinemark
Mexico Credit Agreement) or the Base Rate (as defined in the Cinemark Mexico
Credit Agreement), as the case may be, plus the Applicable Margin (as defined in
the Cinemark Mexico Credit Agreement). Cinemark Mexico borrowed $30 million
under the Cinemark Mexico Credit Agreement, the proceeds of which were used to
repay an intercompany loan of Cinemark Mexico from Cinemark International.
Cinemark International used the proceeds of such repayment to repay all
outstanding indebtedness under its then existing credit facility. The effective
interest rate on such borrowings as of May 12, 1999 is 6.2% per annum.
In December 1998, Cinemark International entered into a joint venture
agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A.
to develop state-of-the-art multiplex theatres in Colombia. The joint venture
will conduct its business through Cinemark Colombia S.A. which is owned 50.1%
by Cinemark International, and the remaining 49.9% is collectively owned by
Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. Cinemark
Colombia S.A. expects to begin contruction on one theatre (10 screens) during
1999.
Year 2000 Compliance
The Company recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000, and like other companies, has been
assessing and updating its computer applications and business processes to
ensure their continued functionality.
The Year 2000 compliance effort is underway across the Company and is
following a process of assessment, modification and testing. At the present
time, the necessary modifications to the day-to-day operating and reporting
systems for all theatres have been successfully completed to ensure Year 2000
compliance. With respect to the financial reporting and operational databases
associated with the U.S. corporate office and the various international
corporate offices, the necessary modifications to ensure Year 2000 compliance
are expected to be completed by August 31, 1999. The costs to modify the
existing systems to ensure Year 2000 compliance are expected to be less than
$100,000 at the completion of the project.
13
Since the core business of the Company centers around the collection of
cash at the theatre box office, an unanticipated Year 2000 computer failure
should not have an adverse impact on the Company's ability to continue with
day-to-day operations. The impact from a system failure from a practical
standpoint should only affect the financial reporting and operational analysis
that is presently performed at the corporate office.
In the most reasonably likely worst case scenario, the Company could
return to a manual system of recording daily admissions revenues from a
day-to-day operating standpoint.
The Company operates a large number of geographically dispersed theatres
and has a large supplier base and believes that this will mitigate any adverse
impact. The Company has initiated formal communications with its significant
suppliers, customers and critical business partners to determine the extent to
which the Company may be vulnerable in the event that those parties fail to
properly remediate their own Year 2000 issues. The Company has taken steps to
monitor the progress made by those parties and intends to test critical system
interfaces as the Year 2000 approaches. The Company will develop appropriate
contingency plans in the event that a significant exposure is identified
relative to the dependencies on third-party systems. While the Company is not
presently aware of any such significant exposure, there can be no guarantee that
the systems of third-parties on which the Company relies will be converted in a
timely manner or that a failure to properly convert by another company would not
have a material adverse effect on the Company.
The Company is in the process of formulating its contingency plan for
the Year 2000 compliance issue and anticipates to complete its plan during the
second quarter of 1999.
The Company also purchased a new Year 2000 compliant financial reporting
and distribution system that was made operational on January 4, 1999. The
decision to purchase this new system at a cost of more than $1 million was made
by management in order to effectively handle the increasing financial reporting
and analysis needs of the Company in the years to come as the Company continues
at its rapid growth rate.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has limited exposure to financial market risks, including
changes in interest rates and other relevant market prices. The Company does not
have any derivative financial instruments in place as of March 31, 1999.
An increase or decrease in interest rates would affect interest costs
relating to the Company's variable rate credit facilities. The Company and/or
its subsidiaries are currently parties to three such credit facilities. At March
31, 1999, there was an aggregate of approximately $300 million of variable rate
debt outstanding under these facilities. The facilities are priced with a
variable rate based on LIBOR or a base rate, plus, in each case, an applicable
margin. The Company has no interest rate swaps or other hedging facilities
relating to these credit facilities. These facilities represent approximately
42% of the Company's outstanding long-term debt. Changes in interest rate do not
have a direct impact on interest expense relating to the remaining fixed rate
debt facilities.
The Company is also exposed to market risk arising from changes in
foreign currency exchange rates as a result of its international operations.
Currency fluctuations result in the Company's reporting exchange gain or losses
or cumulative unrealized translation adjustments relating to its international
subsidiaries depending on the inflationary environment of the country in which
the Company operates.
15
PART II. Other Information
Item 1. Legal Proceedings
The Company currently is a defendant in certain litigation proceedings
alleging certain violations of the Americans with Disabilities Act of 1990
relating to the accessibility of certain theatre seating to patrons using
wheelchairs. In August 1998, the judge presiding over one of these cases granted
plaintiffs motion for summary judgement ruling the Company's stadium theatre
design is in violation of the ADA. The Company is appealing this ruling.
Although the Company cannot predict the outcome of the appeal or the outcome of
the other cases, management believes that the Company's potential liability with
respect to such proceedings is not material in the aggregate to the Company's
financial position, results of operations and cash flows.
Reference is also made to Item 3 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
Item 2. Change 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 first quarter of 1999 through the solicitation of proxies or
otherwise.
Item 5. Other Information
The Company intends that this report be governed by the "safe harbor"
provision of the Private Securities Litigation Reform Act of 1995 (the "PSLR
Act") with respect to statements that may be deemed to be forward-looking
statements under the PSLR Act. Such forward-looking statements may include, but
are not limited to, the Company and any of its subsidiaries' long-term theater
strategy. Actual results could differ materially from those indicated by such
forward-looking statements due to a number of factors.
Item 6. Exhibits and Reports on Form 8-K
a) Supplemental schedules specified by the Senior Notes indenture:
Condensed Consolidating Balance Sheet
(unaudited) as of March 31, 1999
Condensed Consolidating Statement of
Income (unaudited) for the three months
ended March 31, 1999
Condensed Consolidating Statement of Cash Flow (unaudited)
for the three months ended March 31, 1999
b) Reports on Form 8-K
No reports have been filed by Registrant during the quarter
for which this report is filed.
16
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
---------- ------------- ------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,648,154 $10,898,244 $ - $ 18,546,398
Inventories 2,735,778 694,864 - 3,430,642
Co-op advertising and other receivables (15,310,764) 33,865,185 (571,825) 17,982,596
Tax receivable 5,571,503 - - 5,571,503
Prepaid expenses and other 1,835,407 114,414 - 1,949,821
-----------------------------------------------------------------
Total current assets 2,480,078 45,572,707 (571,825) 47,480,960
-----------------------------------------------------------------
THEATRE PROPERTIES AND EQUIPMENT 842,674,435 109,607,942 - 952,282,377
Less accumulated depreciation and amortization (142,223,138) (10,334,660) - (152,557,798)
-----------------------------------------------------------------
Theatre properties and equipment - net 700,451,297 99,273,282 - 799,724,579
OTHER ASSETS:
Certificates of deposit 1,875,853 345,985 - 2,221,838
Investments in and advances to affiliates 109,357,103 3,081,368 (108,941,681) 3,496,790
Goodwill - net 10,896,638 5,899,962 - 16,796,600
Deferred charges and other - net 27,576,727 38,252,164 (20,487,673) 45,341,218
-----------------------------------------------------------------
Total other assets 149,706,321 47,579,479 (129,429,354) 67,856,446
-----------------------------------------------------------------
TOTAL $852,637,696 $ 192,425,468 $(130,001,179) $ 915,061,985
=================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 276,718 $ 1,807,479 $ - 2,084,197
Accounts payable and accrued expenses 56,187,118 8,899,336 (412,626) 64,673,828
-----------------------------------------------------------------
Total current liabilities 56,463,836 10,706,815 (412,626) 66,758,025
LONG-TERM LIABILITIES:
Senior credit agreements 287,270,708 59,688,317 (20,487,673) 326,471,352
Senior subordinated debt 380,266,070 - - 380,266,070
Deferred lease expenses 14,268,973 161,142 - 14,430,115
Deferred gain on sale leaseback 6,715,104 - - 6,715,104
Deferred income taxes 20,491,788 220,722 - 20,712,510
-----------------------------------------------------------------
Total long-term liabilities 709,012,643 60,070,181 (20,487,673) 748,595,151
MINORITY INTERESTS IN SUBSIDIARIES 6,108,521 31,019,681 - 37,128,202
SHAREHOLDERS' 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, 234,073 shares issued 49,537,607 9,501,000 (9,501,000) 49,537,607
Additional paid-in-capital 13,790,731 99,599,880 (99,599,880) 13,790,731
Unearned compensation - stock options (3,884,498) - - (3,884,498)
Retained earnings 58,144,225 (3,177,941) - 54,966,284
Treasury stock, 57,211 Class B shares at cost (24,198,890) - - (24,198,890)
Other accumulated comprehensive income (12,336,494) (15,294,148) - (27,630,642)
------------------------------------------------------------------
Total shareholders' equity 81,052,696 90,628,791 (109,100,880) 62,580,607
------------------------------------------------------------------
TOTAL $852,637,696 $ 192,425,468 $(130,001,179) $ 915,061,985
==================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes.
17
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
---------- ------------ ------------ ------------
REVENUES:
Admissions $80,341,387 $14,875,037 $ - $95,216,424
Concessions 42,301,989 4,475,308 - 46,777,297
Other 6,486,937 920,799 (133,430) 7,274,306
----------------------------------------------------------------
Total 129,130,313 20,271,144 (133,430) 149,268,027
COSTS AND EXPENSES:
Cost of operations
Film rentals and advertising 41,960,991 7,240,126 - 49,201,117
Concession supplies 6,008,647 1,485,387 - 7,494,034
Salaries and wages 17,001,857 2,336,126 - 19,337,983
Facility leases 17,515,069 3,057,847 - 20,572,916
Utilities and other 19,125,781 2,668,184 (133,430) 21,660,535
----------------------------------------------------------------
Total 101,612,345 16,787,670 (133,430) 118,266,585
General and administrative expenses 6,147,297 1,846,203 - 7,993,500
Depreciation and amortization 9,163,044 2,169,741 - 11,332,785
----------------------------------------------------------------
Total 116,922,686 20,803,614 (133,430) 137,592,870
OPERATING INCOME 12,207,627 (532,470) - 11,675,157
OTHER INCOME (EXPENSE)
Interest expense (12,172,279) (1,578,359) 629,375 (13,121,263)
Amortization of debt issue cost (175,596) (23,958) - (199,554)
Amortization of bond discount (43,625) - - (43,625)
Interest income 412,183 796,755 (629,375) 579,563
Gain on sale of assets and other 54,322 12,584 - 66,906
Foreign currency exchange gain (loss) 94,070 (17,836) - 76,234
Equity in income of affiliates 22,613 33,246 - 55,859
Minority interests in subsidiaries (120,307) 850,709 - 730,402
----------------------------------------------------------------
Total (11,928,619) 73,141 - (11,855,478)
----------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 279,008 (459,329) - (180,321)
Income taxes (benefit) (488,462) 478,437 - (10,025)
----------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF AN ACCOUNTING CHANGE 767,470 (937,766) - (170,296)
Cumulative effect of a change in accounting principle
- net of tax benefit (500,857) (2,467,780) - (2,968,637)
----------------------------------------------------------------
NET INCOME (LOSS) $ 266,613 $ (3,405,546) $ - $ (3,138,933)
================================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes
18
CINEMARK USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Restricted Unrestricted
Group Group Eliminations TOTAL
---------- ------------- ------------ -------------
OPERATING ACTIVITIES:
Net Income (loss) $ 266,613 $ (3,405,546) $ - $ (3,138,933)
Noncash items in net income:
Depreciation 8,938,423 2,067,476 - 11,005,899
Amortization - goodwill and other assets 400,217 126,223 - 526,440
Amortization of gain on sale leaseback (88,438) - - (88,438)
Deferred lease expenses 262,867 161,142 - 424,009
Amortization of prepaid leases 85,286 97,708 182,994
Deferred income tax expense 4,586,332 11,836 - 4,598,168
Amortization of debt discount and premium (7,128) - - (7,128)
Amortized compensation - stock options 356,138 - - 356,138
Gain on sale of assets (54,322) (12,584) - (66,906)
Equity in income of affiliates (22,613) (33,246) - (55,859)
Minority interests in income (loss) of subsidiaries 120,307 (850,709) - (730,402)
Cumulative effect of an accounting change 500,857 2,885,350 - 3,386,207
Cash provided by (used for) operating working capital:
Inventories 361,057 (199,994) - 161,063
Co-op advertising and other receivables (208,616) (5,931,517) 571,825 (5,568,308)
Prepaid expenses and other 400,000 (74,863) - 325,137
Accounts payable and accrued expenses (32,542,097) 2,330,094 (412,626) (30,624,629)
Income tax receivable/payable (2,538,861) - - (2,538,861)
---------------------------------------------------------------
Net cash used for operating activities (19,183,978) (2,828,630) 159,199 (21,853,409)
INVESTING ACTIVITIES:
Additions to Theatre properties and equipment (37,718,064) (1,158,092) - (38,876,156)
Sale of Theatre properties and equipment 54,322 12,584 - 66,906
Decrease in certificates of deposit 369,001 1,465,257 - 1,834,258
Decrease (increase) in other assets, investments in
and advances to affiliates (10,801,849) 11,300,677 (159,199) 339,629
--------------------------------------------------------------
Net cash provided by (used for) investing activities (48,096,590) 11,620,426 (159,199) (36,635,363)
FINANCING ACTIVITIES:
Decrease in long-term debt (14,134,874) (83,095) - (14,217,969)
Increase in long-term debt 72,597,441 1,082,120 - 73,679,561
Investment in partnership - - - -
Minority investment in subsidiaries, net (624,889) (7,013,457) - (7,638,346)
---------------------------------------------------------------
Net cash provided by (used for) financing activities 57,837,678 (6,014,432) - 51,823,246
EFFECT OF EXCHANGE RATE CHANGES ON CASH (234,873) (199,071) - (433,944)
---------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,677,763) 2,578,293 - (7,099,470)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,325,917 8,319,951 - 25,645,868
--------------------------------------------------------------
End of period $ 7,648,154 $10,898,244 $ - $18,546,398
==============================================================
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture for the Senior Subordinated Notes.
19
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: May 15, 1999
/Jeffrey J. Stedman/
Jeffrey J. Stedman
Senior Vice President and
Chief Financial Officer
20