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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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
Securities Registered pursuant to Section 12(b) of the Act:
NONE
(TITLE OF CLASS)
Securities Registered pursuant to Section 12(g) of the Act:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X] [ ________ ]
As of March 30, 2000, 1,500 shares of Class A Common Stock and 184,817
shares of Class B Common Stock (including options to acquire 7,865 shares of
Class B Common Stock exercisable within 60 days of such date) were outstanding.
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INDEX
Page
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PART I..........................................................................................................1
Item 1: Business.........................................................................................1
(a) General Development of Business.............................................................1
(b) Financial Information About Industry Segments...............................................2
(c) Narrative Description of Business...........................................................2
Item 2: Properties.......................................................................................12
Item 3: Legal Proceedings................................................................................13
Item 4: Submission of Matters to a Vote of Security Holders..............................................14
PART II.........................................................................................................14
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters............................14
Item 6: Selected Financial Data..........................................................................14
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation.............18
Item 7A: Quantitative and Qualitative Disclosures About Market Risk ......................................27
Item 8: Financial Statements and Supplementary Data......................................................28
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............28
PART III........................................................................................................28
Item 10: Directors and Executive Officers of the Registrant...............................................28
Item 11: Executive Compensation.......................................................................... 32
Item 12: Security Ownership of Certain Beneficial Owners and Management.................................. 36
Item 13: Certain Relationships and Related Transactions.................................................. 39
PART IV........................................................................................................ 41
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 41
(a) Documents filed as part of this Report..................................................... 41
(b) Reports on Form 8-K........................................................................ 41
(c) Exhibits................................................................................... 41
(d) Financial Statement Schedules.............................................................. 42
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PART I
Item 1: Business.
(a) General Development of Business.
CONTINUED EXPANSION
The Company is a world leader in the motion picture exhibition industry in
terms of the number of screens in operation. At March 30, 2000, the Company
operated 2,760 screens in 257 theatres located in 32 states, Canada, Mexico,
Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa
Rica and Colombia, consisting of 2,444 screens in 217 "first run" theatres and
316 screens in 40 "discount" theatres. Of the Company's 2,760 screens, 2,384 (or
86%) were built by the Company during the 1990's, and, as a result, the Company
believes it operates one of the most modern theatre circuits in the industry.
All of the Company's theatres are multiplex facilities with approximately 95% of
the Company's screens located in theatres of six or more screens. The Company
believes that its ratio of screens to theatres (10.7 to 1 at March 30, 2000) is
the second highest of the ten largest theatre circuits in the U.S. and is more
than 50% higher than the industry average. From its fiscal year ended December
31, 1992 through the fiscal year ended December 31, 1999, the Company has
increased consolidated revenues approximately 266% from $194.7 million to $712.6
million and has increased EBITDA (as defined herein) approximately 306% from
$32.1 million to $130.2 million.
INTERNET STRATEGIES
enowshowing.com
In December 1999, the Company was the first major U.S. movie theatre
company to sell movie tickets in real time over the Internet. The Company began
testing its own ticketing system in five theatres in the Dallas area. As of
March 30, 2000, tickets may be purchased over the Internet for fourteen
theatres operated by the Company. Customers may access showtimes and ticketing
options at a new site named enowshowing.com developed by the Company and a
technology partner. Management believes that internet ticketing will
significantly improve customer satisfaction, as customers who purchase tickets
over the Internet will be able to bypass the box office and pick tickets up at
remote kiosks or at dedicated box office windows. In February 2000, the Company
expanded its internet technology by becoming the first U.S. movie theatre
company to develop wireless technology to access the Company's showtimes via
the enowshowing.com web site by all Palm Pilot(TM) devices, including the new
Palm VII. The Company is also in the final stages of completing technology that
will permit customers to purchase tickets over the Internet using these
wireless devices.
Theatre Entertainment Services
In March 2000, the Company and five other major theatre companies formed a
company to launch the leading Internet movie portal. The new company will
provide a comprehensive offering of remote ticketing services, showtimes,
reviews and movie trailers for the movie-going public via the Internet,
telephone and wireless devices. The venture intends to begin selling tickets
over the Internet and telephone by the summer of 2000.
The Company entered into an Exclusive Ticketing Distribution Agreement and
Advertising Agreement in exchange for stock in the new company. Additionally,
the Company has committed to invest additional funds in the new company for
additional shares of the new company.
The Company maintains its principal executive offices at 3900 Dallas
Parkway, Suite 500, Plano, Texas 75093. Its telephone number at such address is
(972) 665-1000. The Company's website is located at www.cinemark.com.
FOREIGN DEVELOPMENTS
In 1999, the Company opened, through its subsidiaries, 16 theatres (125
screens) outside of the U.S. and Canada. At March 30, 2000, the Company operated
69 theatres (606 screens) in Mexico, Argentina, Brazil, Chile, Ecuador, Peru,
Honduras, El Salvador, Nicaragua, Costa Rica and Colombia. Additionally, the
Company opened one first run theatre (12 screens) in Vancouver, Canada through a
subsidiary in 1999 and continues to operate one discount theatre (12 screens)
through an affiliate in Alberta, Canada. All of the theatres operated outside of
the United States (other than the one discount theatre in Alberta, Canada) are
"first run" theatres which the Company believes are among the most modern in the
international market. The Company's ratio of screens to theatres in these
international markets is 8.8 to 1 at March 30, 2000.
In September 1999, Cinemark International, through its wholly owned
subsidiary Cinemark Germany GmbH, executed a lease agreement for a movie theatre
in Herne, Germany. The theatre (13 screens) is scheduled to open in December
2000.
In September 1999, Cinemark International acquired all of the shares of its
Argentine joint venture partner, Prodecine S.A., which owned 50% of the shares
of Cinemark Argentina S.A. Cinemark International paid $2.8 million in cash and
delivered the following promissory notes bearing interest at the rate of 10% per
annum: (a) US$2.5 million due January 2000, (b) US$2.5 million due April 2000,
(c) A$2.5 million pesos due July 2000, (d) A$3.5 million pesos due October 2000.
The shares of Prodecine S.A., Cinemark Investments Argentina, S.A. and Cinemark
Argentina, S.A. owned by Cinemark International were transferred to one of the
Company's subsidiaries in December 1999.
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(b) Financial Information About Industry Segments.
The Company is a unitary business as described above and as a result does
not break out its business into industry segments.
(c) Narrative Description of Business.
GENERAL
THE COMPANY
The Company is a world leader in the motion picture exhibition industry in
terms of the number of screens in operation. In 1999, the Company opened an
aggregate of 35 theatres (458 screens and 2 IMAX(R)3D screens) in the United
States and internationally. At March 30, 2000, the Company operated 2,760
screens
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in 257 theatres located in 32 states, Canada, Mexico, Argentina, Brazil, Chile,
Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and Colombia,
consisting of 2,444 screens in 217 "first run" theatres and 316 screens in 40
"discount" theatres. Of the Company's 2,760 screens, 2,384 (or 86%) were built
by the Company during the 1990's, and, as a result, the Company believes it
operates one of the most modern theatre circuits in the industry. All of the
Company's theatres are multiplex facilities with approximately 95% of the
Company's screens located in theatres of six or more screens. The Company
believes that its ratio of screens to theatres (10.7 to 1 at March 30, 1999) is
the second highest of the ten largest theatre circuits in the U.S. and is more
than 50% higher than the industry average. The Company is an industry leader in
new theatre construction and operation and, according to industry sources, has
constructed more screens than any other exhibitor during the 1990's. The Company
believes the attractiveness, comfort and viewing experience provided by its
modern facilities result in the Company's theatres more often being the
preferred destination for moviegoers in its markets. From its fiscal year ended
December 31, 1992 through the fiscal year ended December 31, 1999, the Company
has increased consolidated revenues approximately 266% from $194.7 million to
$712.6 million and has increased EBITDA (as defined herein) approximately 306%
from $32.1 million to $130.2 million.
The Company's management experience and financial flexibility permit it to
introduce larger multiplex theatre facilities into areas previously served by
smaller theatres, thereby capturing moviegoers who seek more attractive
surroundings, wider variety of films, better customer service, shorter lines,
more convenient parking and a greater choice of seating to view popular movies.
The Company's larger multiplex facilities increase per screen revenues and
operating margins and enhance its operating efficiencies. Such theatres enable
the Company to present films appealing to several segments of the moviegoing
public while serving patrons from common support facilities (such as box office,
concession areas, rest rooms and lobby). In addition, larger multiplex
facilities provide the Company with greater flexibility in staffing, movie
scheduling and equipment utilization while reducing congestion throughout the
theatre. Larger multiplex facilities also provide increased flexibility in
determining the length of time a film will run. The Company can lengthen the run
of a film by switching it to a smaller auditorium after peak demand has subsided
and has the potential to generate higher profits as film license agreements
typically provide for a lower film rent to be paid later in a film's run.
OVERVIEW OF THE THEATRE INDUSTRY
U.S. box office sales of approximately $7.5 billion in 1999 was the seventh
consecutive record year for the industry. Additionally, overall attendance has
achieved record levels in three of the last four years. The Company believes the
primary reason for the record years is the increased investment in production
and marketing of films as well as the substantial construction of new
multiplexes throughout America. The following table represents the results of a
survey by the National Association of Theatre Owners outlining the historical
trends in U.S. theatre attendance, average ticket prices and box office sales
for the last ten years.
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U.S. Box
Attendance Average Office Sales
Year (Millions) Ticket Price (Millions)
1990 1,189 $4.225 $5.022
1991 1,141 $4.211 $4.803
1992 1,173 $4.152 $4.871
1993 1,244 $4.143 $5.154
1994 1,292 $4.178 $5.386
1995 1,263 $4.351 $5.494
1996 1,339 $4.416 $5.912
1997 1,388 $4.587 $6.366
1998 1,481 $4.690 $6.949
1999 1,460 $5.080 $7.450
Theatrical exhibition is the primary distribution channel for new motion
picture releases. The Company believes the successful theatrical release of a
movie abroad and in "downstream" distribution channels, such as home video and
pay-per-view, network and syndicated television, is largely dependent on its
successful theatrical release in the U.S. The Company further believes the
emergence of new motion picture distribution channels has not adversely affected
attendance at theatres as these distribution channels do not provide an
experience comparable to the out-of-home experience of viewing a movie in a
theatre. The Company believes the public will continue to recognize the
advantages of viewing a movie on a large screen with superior audio and visual
quality, while enjoying a variety of concessions and sharing the experience with
a large audience.
The Company believes that as a result of increased revenues from the
successful release of films in both movie theatres and other distribution
channels, major film production companies have increased and will continue to
increase the number of films being produced. Film producers have increased their
revenues from these distribution channels by approximately 259% from 1985 to
$21.2 billion in 1997. The increased revenue potential from film distribution in
recent years can be attributed to increased demand resulting from the domestic
and international growth of the movie theatre industry and the home video
industry, and the significantly increased channel capacity created by enhanced
cable and satellite-based transmission systems. Moreover, the Company believes
independent producers and distributors, such as Gramercy Pictures, Turner
Pictures (which includes New Line Cinemas and Castle Rock Entertainment) and
Dreamworks SKG, the highly-publicized partnership among Jeffrey Katzenberg,
Steven Spielberg and David Geffen, should help increase motion picture
production. Additionally, increased revenues permit major film production
companies to create "event" films such as Star Wars, Jurassic Park, Independence
Day, Titanic and Armageddon, which utilize the latest advances in computer
technology to enhance production quality and special effects. The Company
believes an increasing supply of quality feature films and "event" films
exhibited with advanced projection and stereo sound equipment such as Digital
Theatre Sound Systems, Dolby Digital Sound and Sony Dynamic Digital Sound will
enhance the moviegoing experience and will increase the theatre attendance of
exhibitors with modern multiplex theatres designed to exhibit such motion
pictures.
Increased international distribution is also producing important sources of
revenue for film distributors and growth opportunities for exhibitors. In 1998,
total international box office receipts were $6.8 billion, representing a 10.2%
compound annual growth rate since 1994. The Company believes many international
markets for theatrical exhibition have historically been underserved due to
antiquated and/or run-down theatres, and international markets will continue to
experience rapid growth as additional multiplex theatres are introduced.
In addition, the Company believes certain demographic trends favor the
theatre exhibition industry. Information obtained from the U.S. Bureau of Census
indicates the number of 12 to 20 year olds in the U.S., the largest moviegoing
segment of the population, is projected to grow an aggregate of 9.2% through the
year 2005. Furthermore, according to MPAA, the number of patrons over 40 years
old as a percentage of the total movie
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audience has more than doubled from approximately 14% in 1986 to approximately
33% in 1997. The Company believes film producers have recognized the importance
of this segment of the population and are producing an increased number of films
primarily targeted to this more mature audience.
BUSINESS STRATEGY
The Company intends to continue to grow through new theatre development by
applying the same techniques it has implemented since it was founded. The
Company believes it is unique among major theatre exhibitors in the development
and execution of the following domestic and international new build business
strategy:
Build in underserved markets. The Company has built modern multiplex
facilities in underserved mid-sized markets as well as megaplex entertainment
facilities in major metropolitan areas. In such markets the Company frequently
is the sole or leading exhibitor in terms of first run screens operated within a
film zone. The "megaplex" entertainment centers are located in major
metropolitan areas which are typically 50,000 square-feet or larger complexes
having 14 or more screens with screens up to 75 feet in the largest auditoriums
and also feature stadium seating, digital sound, restaurant and coffee bar and a
large video arcade. Approximately 60% of the Company's first run theatres have
stadium seating auditoriums. The Company believes it gains maximum access to
film product, and thereby realizes a competitive advantage, by locating its
modern multiplex theatres in new and existing film zones where little or no
competition for film product exists. The Company will continue to build modern
multiplex facilities in select markets.
Continue to maintain discount theatre niche. The Company intends to maintain
its discount theatre operations (admission of $1 to $2 per ticket) to serve
patrons who miss a film during its first run exhibition or who may not be able
to afford to attend first run theatres on a frequent basis. The Company believes
its discount theatres allow it to serve these segments of the total moviegoing
population, increasing the number of potential customers beyond traditional
first run moviegoers. The Company's multiplex discount theatres offer many of
the same amenities as its first run theatres, including wall-to-wall screens,
comfortable seating with cupholder armrests, digital sound, multiple concession
stands and a video game room. The Company's discount theatres generally have
higher attendance, lower film costs and a greater proportion of concession
revenues than its first run theatres. As of March 30, 2000, approximately 11% of
the Company's screens were housed in discount theatres.
Develop modern American-style theatres in underserved international markets.
The Company intends to continue to develop multiplex theatres directly or
through joint venture arrangements with local partners in underserved
international markets. Most of the theatres (approximately 87%) built by the
Company internationally are modern stadium seating complexes. The Company's
activities to date in international markets have been primarily directed toward
Latin America, which the Company believes is severely underscreened. The Company
believes the same economic factors giving rise to the multiplex rescreening
trend in the U.S. are similarly applicable to international markets. The Company
believes it was the first U.S. circuit to open American-style modern multiplex
theatres in Mexico and Chile, and has begun developing multiplex theatres
directly or through joint venture arrangements with local partners in Argentina,
Brazil, Ecuador, Honduras, Peru, El Salvador, Nicaragua, Costa Rica, Colombia,
Taiwan, Germany and the United Kingdom.
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OPERATIONS
The Company's corporate office, which employed approximately 240 individuals
as of March 30, 2000, is responsible for theatre development and site selection,
lease negotiation, theatre design and construction, film licensing and
settlements, concession vendor negotiations and financial and accounting
activities. The Company's domestic theatre operations are divided into eight
geographic divisions, each of which is headed by a regional leader. The
Company's regional leaders have an average of 17 years experience in the movie
theatre industry and each is responsible for supervising approximately 12.5% of
the Company's theatre managers. Theatre managers are responsible for the
day-to-day operations of the Company's theatres including optimizing staffing,
developing innovative theatre promotions, preparing movie schedules, purchasing
concession inventory, maintaining a clean and functioning facility and training
theatre staff.
To maintain quality and consistency within the Company's theatres, the
Company conducts regular inspections of each theatre and operates a program
which involves unannounced visits by unidentified customers who report on the
quality of service, film presentation and cleanliness of the theatre and has
created an innovative training program to address significant training issues.
The training program, appropriately named "Mecca of Innovative Training or
"MIT", focuses on operational issues inherent in running multiplex theatres.
Training is held at the Company's training center in Dallas, Texas. Week long
courses are attended by up to twenty theatre managers focusing on maintaining
current established standards for uniformity and consistency in the Company's
operations as well as providing a brainstorming platform for participants to
increase future performance. The Company has developed three courses that both
its domestic and international managers attend as they advance with the Company.
Theatre Development
The Company continually evaluates existing and new markets for potential
theatre locations. The Company generally seeks to develop theatres in markets
that are underscreened as a result of changing demographic trends or that are
served by aging theatre facilities. Some of the factors the Company considers in
determining whether to develop a theatre in a particular location are the
market's population and average household income, the proximity to retail
corridors, convenient roadway access, the proximity to competing theatres and
the effect on the Company's existing theatres in the market, if any.
The Company has traditionally designed its multiplex theatres with bright
colors, neon, tile and marble and state-of-the-art technology, to create a
festive and memorable experience for the customer. In 1998, the Company
commenced a new branding campaign featuring a new Cinemark logo and theatre
design. New art deco graphic treatments and colors have been applied to the
Cinemark name and theatres. Richly hued reds and gold have replaced the
traditional bright colors; reminiscent of the golden age of Hollywood.
Additionally, the Company has designed several prototype theatres, each of which
can be adapted to suit the size requirements of a particular location and the
availability of parking and to respond to competitive factors or specific area
demographics. The Company believes the fully designed prototypes result in
significant construction and operating cost savings. More importantly, the
Company believes construction and operation of high quality theatres provides
significant competitive advantages as theatre patrons, and therefore film
distributors, seek clean, conveniently located, modern facilities with
state-of-the-art equipment.
The Company's theatres typically contain auditoriums consisting of 100 to
400 seats each and feature wall-to-wall screens, high back rocking chairs with
cupholder armrests, digital sound, multiple concession stands and video game
rooms. The Company's megaplex facilities typically will exceed 50,000 square
feet, feature 14 or more screens with 75 foot screens in the largest
auditoriums, stadium seating, digital sound, a pizzeria, a coffee bar and a
large video arcade room. The Company believes stadium style auditoriums with
digital sound provide an entertainment experience which is superior to that
available at a conventional theatre. Jurassic Park, released in the summer of
1993, was the first major motion picture to utilize digital sound. The majority
of the films produced
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in 1997, 1998 and 1999 had digital soundtracks available as an alternative to
the standard stereo soundtrack. More than 90% of the Company's first run
theatres have one or more auditoriums with digital sound capabilities, and the
Company is continuing to add digital sound capabilities.
Film Licensing
Films are typically licensed from film distributors owned by major film
production companies and from independent film distributors that distribute
films for smaller production companies. For first run films, film distributors
typically establish geographic zones and offer each available film to all
theatres in a zone. The size of a film zone is generally determined by the
population density, demographics and box office potential of a particular market
or region, and can range from a radius of three to five miles in major
metropolitan and suburban areas to up to 15 miles in small towns. The Company
currently operates theatres in approximately 137 first run film zones. Each
film, regardless of the distributor, is generally licensed to only one theatre
in each zone. New film releases are licensed at the discretion of the film
distributors on an allocation or previewed bid basis. In film zones where the
Company has little or no competition, the Company selects those pictures it
believes will be most successful. In film zones where the Company faces
competition, the Company usually licenses films on an allocation basis. Under an
allocation process, a particular distributor will rotate films among exhibitors,
typically providing movies to competing exhibitors solely based on the order of
their release. For second run films, film distributors establish availability on
a market-by-market basis after the completion of exhibition at first run
theatres and permit each theatre within a market to exhibit such films without
regard to film zones.
The Company licenses films through its booking office located at the
Company's corporate headquarters in Plano, Texas. All of the major motion
picture studios and distributors also maintain offices in the Dallas, Texas
metropolitan area. The Company's film bookers have significant experience in the
theatre industry and have developed long-standing relationships with the film
distributors. Each film booker is responsible for a geographic region and
maintains relationships with representatives of each of the major motion picture
studios and distributors having responsibility for their respective geographic
regions. The Company licenses films from all of the major distributors and is
not dependent on any one studio for motion picture product.
Prior to negotiating for a film license, the Company's booking personnel
evaluate the prospects for the film. The criteria considered for each film
include cast, director, plot, performance of similar films, estimated film
rental costs, expected MPAA rating and the outlook for other upcoming films.
Successful licensing depends upon knowledge of the tastes of local residents.
A film license typically specifies a rental fee to be paid to the
distributor based on the higher result of either a gross receipts formula or a
theatre admissions revenue sharing formula. Under a gross receipts formula, the
distributor receives a specified percentage of box office receipts with the
percentage generally declining over the term of the run. First run film rental
percentages usually begin at 70% of box office receipts and gradually decline to
as low as 30% over a period of four to seven weeks. Second run film rental
percentages typically begin at 35% of box office receipts and often decline to
30% after the first week. Under the theatre admissions revenue sharing formula
(commonly known as the "90/10" clause), the distributor receives a specified
percentage (i.e., 90%) of the excess of box office receipts over a negotiated
reimbursement for theatre expenses. In general, most distributors follow an
industry practice of adjusting or renegotiating the terms of a film license
subsequent to exhibition based upon the film's success.
Concessions
Concession sales are the Company's second largest revenue source,
representing approximately 31% of total revenues for 1999. The Company has
devoted considerable management effort to increasing concession sales and
improving
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the operating income margins from concession sales. These efforts include
implementation of the following strategies:
o Optimization of product mix. The Company's primary concession products are
various sizes of popcorn, soft drinks, candy and hot dogs, all of which the
Company sells at each of its theatres; however, different varieties and brands
of candy and soft drinks are offered at theatres based on preferences in that
particular geographic region. The Company has also implemented "combo-meals,"
and "movie meals" for children and senior citizens, both of which offer a
pre-selected assortment of concession products.
o Introduction of new products. The Company continues to introduce new
concession products designed to attract additional concession purchases. New
offerings have recently included bottled water, bulk candy, frozen yogurt and
ice cream. Additionally, the Company has introduced pizza, pastries and
specialty coffee in many of its megaplexes.
o Staff training. Employees are continually trained in "cross-selling" and
"upselling" techniques. This training occurs through situational role-playing
conducted at the Company's "Customer Service University" as well as continual
on-the-job training. Individual theatre managers receive a portion of their
compensation based on concession sales at their theatres and are therefore
motivated to maximize concession purchases.
o Theatre design. Newer theatres are designed to include at least two to
three concession stands, with each stand having multiple service stations to
make it easier to serve larger numbers of customers rapidly. Strategic placement
of large concession stands within theatres heightens their visibility, aids in
reducing the length of concession lines and improves traffic flow around the
concession stands.
o Cost control. The Company negotiates prices for its concession supplies
directly with concession vendors on a bulk rate basis and distributes its
concession supplies through a national concession contract distributor. The
concession distributor provides inventory and distribution services to the
theatres, which place volume orders directly with the concession distributor.
The concession distributor is paid a fee for such service equal to a percentage
of the Company's concession supply purchases. The Company believes utilization
of a concession distributor is more cost effective than establishing a
concession warehousing network owned by the Company.
Marketing
In order to attract customers, the Company relies principally upon newspaper
display advertisements (substantially paid for by film distributors) and
newspaper directory film schedules (generally paid for by the exhibitor) to
inform its patrons of film titles and show times. The Company has also developed
an internet web page to inform patrons of film titles and show times of all of
its domestic theatres and a majority of its international theatres. Radio and
television advertising spots (generally paid for by film distributors) are used
to promote certain motion pictures and special events. The Company also exhibits
previews in its theatres of coming attractions and films presently playing on
the other screens which it operates in the same theatre or market.
Theatre Management
Each theatre is managed by one theatre manager and a number of assistant
managers. A typical ten screen movie theatre has approximately 40 employees and
two to three assistant managers, while a 16-screen megaplex has approximately
200 employees, including eight assistant managers. The theatre manager is paid a
salary and a commission based upon concession sales. A theatre manager can
increase the profitability of the theatre and his/her own compensation by
ensuring that the staff is properly trained to encourage patrons to "trade up"
in size or purchase additional concession items. The goal of a theatre manager
is to operate a theatre in the most efficient and profitable manner in order to
be promoted from managing a smaller theatre to managing a megaplex.
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The Company believes strongly in customer service and it promotes this
through employee empowerment. Each theatre employee is authorized to deal with
all customer needs and complaints in a variety of ways, including offering free
tickets or free concession items, if necessary. Prior to peak seasons, the
Company teaches its employees customer service at its Customer Service
University training program. The Customer Service University is an active
training program consisting of role-playing exercises as well as typical
classroom instruction.
Management Information Systems
The Company has developed its own point of sale ("POS") management
information system to further enhance its ability to maximize revenues, control
costs and efficiently manage the Company's theatre circuit. The POS information
system provides corporate management with a detailed daily admission and
concession revenue report by the start of business the following morning. This
information allows management to make real-time adjustments to movie schedules,
prolong runs or increase the number of screens on which successful movies are
being played and substitute films when gross receipts cease to meet expected
goals. Real-time seating and box office information is available to box office
personnel, making it possible for theatre management to avoid overselling a
particular film and providing faster and more accurate response to customer
inquiries regarding showings and available seating. The POS information system
also tracks concession sales and provides weekly in-theatre inventory reports,
leading to better inventory management and control.
The Company also developed a "Next Generation" version of its current POS
system based upon a Windows platform. This enhanced system has multiple language
capabilities, unlimited ticket pricing options, and the ability to process
credit cards. The Windows platform permits the addition of barcode scanners,
pole displays, touch screens, credit card readers and other equipment specific
to individual country requirements. Cinemark successfully deployed this system
during 1999 in approximately 13% of its domestic theatres and plans to roll out
this enhanced system to its top 75 domestic theatres during 2000.
enowshowing.com
In December 1999, the Company was the first major U.S. movie theatre
company to sell movie tickets in real time over the Internet The Company began
testing its own Internet ticketing system in five theatres in the Dallas area.
As of March 30, 2000, tickets may be purchased over the Internet for fourteen
theatres operated by the Company. Customers can access showtimes and ticketing
options at a new site named enowshowing.com developed by the Company and a
technology partner. Management believes that internet ticketing will
significantly improve customer satisfaction, as customers who purchase tickets
over the Internet will be able to bypass the box office and pick up tickets at
remote kiosks or at dedicated box office windows. In February 2000, the Company
expanded its internet technology by becoming the first U.S. movie theatre
company to develop wireless technology to access the Company's showtimes via the
enowshowing.com web site by all Palm Pilot(TM) devices, including the new Palm
VII. The Company is also in the final stages of completing technology that will
permit customers to purchase tickets over the Internet using these wireless
devices.
INTERNATIONAL
The motion picture exhibition business has become increasingly global and
rising box office receipts from international markets indicate some
international markets are poised for rapid growth. The Company believes its
experience in developing and operating multiplex theatres both domestically and
internationally provides it with a significant advantage in continuing to
develop multiplex facilities in international markets. The Company's strategy in
these markets is to form partnerships or joint ventures with local operators,
sharing risk and obtaining valuable market insight.
Due to the enormous potential of the international markets, Cinemark
International is introducing state-of-the-art multiplex theatres to
"under-screened" international markets. As of March 30, 2000, the Company,
through its subsidiaries, operates 69 first-run theatres (606 screens) in
Mexico, Argentina, Brazil, Chile, Ecuador, Peru, Honduras, El Salvador,
Nicaragua, Costa Rica and Colombia, with an aggregate of 18 theatres (160
screens) scheduled to open during the remainder of 2000. Additionally, the
Company, through a subsidiary, opened one first run theatre (12 screens) in
Vancouver, Canada, and through an affiliate continues to operate one discount
theatre (12 screens) in Alberta, Canada.
Mexico
The Company, through its subsidiary Cinemark Mexico (USA), Inc. ("Cinemark
Mexico"), is developing state-of-the-art multiplex theatres comparable to
theatres developed by the Company in the U.S. Cinemark Mexico's operations are
conducted through its subsidiary Cinemark de Mexico, S.A. de C.V.. Cinemark
Mexico currently operates 20 theatres (192 screens) and plans to open four
theatres (39 screens) during 2000. The Company manages all of Cinemark Mexico's
theatres pursuant to a management agreement. Cinemark Mexico's theatres are
staffed primarily with Mexican nationals who report to the Company's regional
and corporate office personnel. The Company provides all corporate operating
functions, including film booking and accounting.
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Chile
In November 1992, Cinemark International entered into a joint venture
agreement with Conate, S.A., a Chilean movie theatre operator ("Conate"), to
develop state-of-the-art multiplex theatres in Chile. The joint venture provides
for the development of multiplex theatres and the licensing of the Company's
technology, trademark and name. The joint venture conducts its business through
Cinemark Chile S.A. As of March 30, 2000, the Company indirectly owns
approximately 98% of Cinemark Chile, S.A. Cinemark Chile, based in Santiago,
Chile, currently operates eleven theatres (89 screens) and plans to open two
theatres (10 screens) in 2000.
Argentina
In December 1995, Cinemark International entered into a joint venture
agreement with D'Alimenti S.A., an Argentinean corporation ("DASA"), and
Prodecine S.A., an Argentinean corporation ("Prodecine"), to develop
state-of-the-art multiplex theatres in Argentina. The joint venture agreement
also provides for the licensing of the Company's technology, trademark and name.
The joint venture's business is conducted through Cinemark Argentina, S.A.,
which is owned by Cinemark Investments Argentina S.A. and Prodecine (which
acquired DASA's interest in the joint venture). In September 1999, Cinemark
International acquired all of the shares of its Argentine joint venture partner,
Prodecine S.A., which held the remaining 50% of the shares of Cinemark Argentina
S.A. Cinemark International paid $2.8 million in cash and delivered the
following promissory notes bearing interest at the rate of 10% per annum: (a)
totaling US$2.5 million due January 2000, (b) totaling US$2.5 million due April
2000, (c) totaling A$2.5 million pesos due July 2000, (d) totaling A$3.5 million
pesos due October 2000. In December 1999, the 100% interests in Prodecine S.A.,
Cinemark Investments Argentina, S.A., and Cinemark Argentina, S.A. held by
Cinemark International were transferred to one of the Company's subsidiaries.
In December 1997, the Company formed a wholly-owned Argentine
subsidiary, Cinemark Rio de la Plata Associates S.R.L. ("Cinemark Associates")
to develop multiplex theatres in Argentina outside of Cinemark Argentina. The
Company consolidated Cinemark Argentina and Cinemark Associates in 1999.
In November 1998, Cinemark International acquired 50% of Cinemark
Investments Argentina S.A. from Chilean individuals who acquired such interests
from Conate. After giving effect to this transaction, Cinemark International
owned 100% of Cinemark Investments Argentina S.A.
The Company, through Cinemark Argentina and Cinemark Associates',
currently operates seven theatres (59 screens) in the aggregate and plans to
open two theatres (20 screens) in 2000.
Brazil
In 1996, Cinemark LTDA was organized as an indirect subsidiary of Cinemark
International. In November 1997, Cinemark International, through a wholly-owned
subsidiary, entered into a joint venture agreement with Brazilian strategic
partners and converted Cinemark LTDA to a Brazilian corporation, Cinemark Brasil
S.A., which is approximately 60% indirectly owned by Cinemark International and
approximately 40% owned by Brazilian strategic partners. Cinemark Brasil S.A.
currently operates 19 theatres (174 screens) and plans to open six theatres (56
screens) in 2000.
Ecuador
In September 1996, Cinemark International entered into a joint venture
agreement with The Wright Group, a group of prominent Ecuadorian individuals and
companies, to develop state-of-the-art multiplex theatres in Ecuador. The joint
venture agreement provides for the licensing of the Company's technology,
trademark and name. The joint venture conducts its business through Cinemark del
Ecuador, S.A. ("Cinemark Ecuador") which is 60% owned by Cinemark International
and 40% owned by The Wright Group. Cinemark Ecuador currently operates two
theatres (16 screens).
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Peru
In December 1996, Cinemark International and Conate entered into a joint
venture agreement to develop state-of-the-art multiplex theatres in Peru. The
joint venture provides for the licensing of the Company's technology, trademark
and name. The joint venture conducts its business through Cinemark del Peru,
S.A. In January 1999, Cinemark International completed a distribution to the
Company of the capital stock it owns in Cinemark del Peru S.A. After giving
effect to these transactions, the Company presently owns 100% of Cinemark del
Peru, S.A. Cinemark del Peru, S.A. currently operates two theatres (21 screens).
Central America
In January 1997, Cinemark International entered into a joint venture
agreement with Cines de Centroamerica to develop state-of-the-art multiplex
theatres throughout Central America. The joint venture conducts its business
through Cinemark Equity Holdings Corporation which is 50.1% owned by Cinemark
International. The joint venture provides for the licensing of the Company's
technology, trademarks and name and currently operates seven theatres (45
screens) in four Central American countries (Honduras, El Salvador, Nicaragua
and Costa Rica). The Central American joint venture plans to open two theatres
(16 screens) in 2000.
Canada
Cinemark International, through its wholly owned subsidiary Cinemark
Holdings Canada, Inc., owns a 50% interest in Cinemark Theatres Alberta, Inc.
("Cinemark Alberta") which currently operates one discount theatre (12 screens)
managed by the Company pursuant to a management agreement. In August 1999,
Cinemark Alberta sold one theatre (12 screens) in Alberta, Canada.
The Company, through its wholly owned subsidiary Cinemark Theatres Canada,
also opened one first run theatre (12 screens) in Vancouver, Canada in 1999.
Taiwan
In September 1998, Cinemark International entered into a joint venture
agreement with Core Pacific Ltd. to develop state-of-the-art multiplex theatres
in Taiwan, Republic of China. The joint venture will conduct its business
through Cinemark-Core Pacific Ltd. which is 50.1% owned by Cinemark
International and 49.9% owned by Core Pacific Ltd. Cinemark-Core Pacific Ltd.
expects to begin construction on one theatre (13 screens) during 2000.
Colombia
In December 1998, Cinemark International entered into a joint venture
agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. to
develop state-of-the-art multiplex theatres in Colombia. The joint venture will
conduct its business through Cinemark Colombia S.A. which is owned 50.1% by
Cinemark International, and the remaining 49.9% is collectively owned by Casa
Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. The Colombia joint
venture currently operates one theatre (10 screens). The Colombian joint venture
plans to open one theatre (6 screens) in 2000.
United Kingdom
In September 1998, Cinemark International incorporated Cinemark Theatres
U.K. Ltd., an English company, to develop state-of-the-art multiplex theatres in
the United Kingdom. Cinemark Theatres U.K. Ltd. is a wholly-owned subsidiary of
Cinemark International. Cinemark Theatres U.K. Ltd. expects to begin
construction on one theatre (10 screens) in 2000.
Germany
In August 1999, Cinemark International incorporated Cinemark GmbH, a German
company, to develop state-of-the-art multiplex theatres in Germany. Cinemark
Germany GmbH is a wholly-owned subsidiary of Cinemark International. Cinemark
Germany GmbH expects to open one theatre (13 screens) in 2000.
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COMPETITION
The Company is the fifth largest motion picture exhibitor in North America
in terms of the number of screens in operation. The Company competes against
both local and national exhibitors, some of which may have substantially greater
financial resources than the Company.
In film zones where the Company has little or no direct competition
(approximately 73% of the Company's theatres), the Company selects those
pictures it believes will be most successful in its markets from among those
offered to it by distributors. Where the Company faces competition, it usually
licenses films based on an allocation process. The Company currently operates in
approximately 137 first run film zones in the U.S. The Company believes no
individual film zone is material to the Company. See "-- Operations -- Film
Licensing." The Company believes the principal competitive factors with respect
to film licensing include capacity and location of an exhibitor's theatre,
theatre comfort, quality of projection and sound equipment, level of customer
service and licensing terms. The competition for customers is dependent upon
factors such as the availability of popular films, the location of theatres, the
comfort and quality of theatres and ticket prices. The Company believes its
admission prices at its first run and discount theatres are competitive with
admission prices of respective competing theatres.
The Company's theatres face competition from a number of other motion
picture exhibition delivery systems, such as network, syndicated and pay
television, pay-per-view and home video systems. The impact of such delivery
systems on the motion picture exhibition industry is difficult to determine, and
there can be no assurance existing or future alternative delivery systems will
not have an adverse impact on attendance. The Company's theatres also face
competition from other forms of entertainment competing for the public's leisure
time and disposable income.
EMPLOYEES
As of March 30, 2000, the Company had approximately 8,000 employees in the
U.S., approximately 15% of whom are full time employees in the U.S. and 85% of
whom are part time employees. The Company is a party to collective bargaining
agreements with eight unions of which approximately 21 employees are members.
The Company's international operations typically utilize union labor. The
Company considers its relations with its employees to be satisfactory.
REGULATION
The Company is subject to various general regulations applicable to its
operations including the Americans with Disabilities Act (the "ADA"). The
Company has established a program to review and evaluate the Company's existing
theatres and its specifications for new theatres and to make any changes to such
theatres and specifications required by the ADA. The Company develops new
theatres to be accessible to the disabled and believes it is in substantial
compliance where readily achievable with current regulations relating to
accommodating the disabled.
Item 2: Properties.
Of the 2,154 screens operated by the Company in the U.S. and Canada at March
30, 2000, 30 theatres (459 screens) were owned and 158 theatres (1,695 screens)
are leased pursuant to building leases. The Company's leases are generally
entered into on a long term basis with terms (including options) generally
ranging from 20 to 40 years. Approximately 5% of the Company's theatre leases
(covering 40 screens) have remaining terms (including optional renewal periods)
of less than five years and approximately 80% of the Company's theatre leases
(covering 1,473 screens) have remaining optional terms (including optional
renewal periods) of more than 15 years. Rent is typically calculated as a
percentage of box office receipts or total theatre revenues, subject to an
annual minimum. The Company leases an office building in Plano, Texas for its
corporate office.
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See note 10 of the Company's Notes to the Consolidated Financial Statements for
information with respect to the Company's lease commitments.
As of March 30, 2000, the Company operated 69 theatres (606 screens) outside
of the U.S. and Canada. All of the 69 theatres operated outside of the U.S. are
leased pursuant to ground or building leases. The leases generally provide for
contingent rental based upon operating results (some of which are subject to an
annual minimum). Generally, these leases will include renewal options for
various periods at stipulated rates. The Company attempts to obtain lease terms
that provide for build-to-suit construction obligations of the landlord. No
foreign leases have remaining terms of less than five years, and approximately
89% of the Company's foreign leases (541 screens) have remaining terms
(including optional renewal periods) of more than 15 years.
The Company periodically reviews the profitability of each of its theatres,
particularly those whose lease terms are about to expire, to determine whether
to continue its operations. The Company closed eight theatres (47 screens) in
1999, generally as a result of unfavorable or unavailable lease renewals or
individual theatre performance. The closings of these theatres did not have a
material effect on the Company's results of operations or financial position.
The Company also sold three theatres (23 screens) in 1999.
Item 3: Legal Proceedings.
Austin Litigation
On July 25, 1997, David Witte, Rona Schnall and Laura Brown filed suit in
District Court No. 345 of Travis County, Texas against the Company alleging
certain violations of the ADA relating to the accessibility of a certain theatre
to patrons using wheelchairs. The Company and the plaintiffs have settled this
case and the suit was dismissed with prejudice.
El Paso Litigation
On December 10, 1997, Jose G. Lara, E.J. Lozano, Alfredo Juarez, G. Tim
Hervey, Earl L. Harbeck, Volar Center for Independent Living, Luis Enrique Chew,
Desert Adapt and Myra Murillo (the "Lara Case") filed suit in the United States
District Court, Western District of Texas, El Paso Division, against the Company
alleging certain violations of the Americans with Disabilities Act of 1990 (the
"ADA"). In August 1998, the judge presiding over the case granted plaintiffs
motion for summary judgment ruling that the Company's stadium theatre design is
in violation of the ADA. The Company is appealing this ruling. Although the
Company cannot predict the outcome of the appeal, management believes the
Company's potential liability with respect to such proceeding is not material in
the aggregate to the Company's financial position, results of operation and cash
flows.
In addition to the Lara Case, disabled persons have filed suits in Federal
court in Austin, Houston, Beaumont and Mission, Texas alleging certain
violations of the ADA identical to those contained in the Lara Case. The Company
has filed an answer denying the allegations and claims contained in each of the
suits. Although the Company cannot predict the outcome of such litigation,
management believes the Company's potential liability with respect to such
proceeding is not material in the aggregate to the Company's financial position,
results of operation and cash flows. The Federal courts in Mission, Houston,
Beaumont, and Austin have granted stays in their respective cases pending the
outcome of the appeal in the Lara Case. A motion to stay the proceedings in
Beaumont is pending.
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DOJ Litigation
In January 1999, the Company filed suit in the United States District Court,
Northern District of Texas, Dallas Division, against the Department of Justice
("DOJ") alleging that the DOJ, through its Amicus Curiae brief filed in the Lara
Case failed to abide by the requirements of the Administrative Procedures Act
(the "APA") in promulgating a new rule of law governing wheelchair accessibility
in movie theatres. The Company is seeking a declaratory judgment declaring,
among other things, the seating configurations within its stadium seating
facilities comply with the ADA and that the DOJ has failed to provide proper
notice and comment, as required by the APA, before establishing new standards
for compliance. The Company is unable to predict the outcome of this litigation.
In March 1999, the DOJ filed suit in the United States District Court,
Northern District of Ohio, Eastern Division, against the Company alleging
violations of the ADA relating to patrons using wheelchairs. The Company will
vigorously defend against this suit. The Company is unable to predict the
outcome of this litigation.
Oregon Litigation
On February 3, 2000, Barbara Cornilles, Edwin Cornilles, Dorothy Johnson,
Damara Paris, Stephen Purvis, George Scheler, Susan Teague, and Jackie Woltring
filed suit in The United States District Court for the District of Oregon
against the Company, Regal Cinemas, Inc., Century Theatres, Inc., and Carmike
Cinemas, Inc. alleging certain violations of the ADA relating to accessibility
of movie theatres for deaf patrons. The Company has filed an answer denying the
allegations. Although the Company is unable to predict the outcome of this
litigation management believes the Company's potential liability with respect to
such proceeding is not material in the aggregate to the Company's financial
position, results of operations and cash flows.
From time to time, the Company is involved in various other legal
proceedings arising from the ordinary course of its business operations, such as
personal injury claims, employment matters and contractual disputes. The Company
believes its potential liability with respect to proceedings currently pending
is not material in the aggregate to the Company's consolidated financial
position, results of operations and cash flows.
Item 4: Submission of Matters to a Vote of Security Holders.
There have not been any matters submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder
Matters.
There is no established public trading market for the Company's Common
Stock. As of March 30, 2000, there were 15 holders of record of the Company's
Common Stock. The Company has not paid dividends on its Common Stock and does
not expect to pay dividends on its Common Stock in the foreseeable future. The
Subordinated Notes Indentures and the Credit Facility contain restrictions on
the Company's ability to pay dividends on its Common Stock.
Item 6: Selected Financial Data.
The following tables set forth selected consolidated financial data for the
Company for the periods and at the dates indicated for each of the five most
recent fiscal years ended December 31, 1999. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of
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Operations and the Company's Consolidated Financial Statements, including the
notes thereto, included elsewhere in this report.
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Year Ended December 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(In thousands, except theatres, per share, screen and ratio data)
INCOME STATEMENT DATA (CONSOLIDATED):
Revenues $ 298,559 $ 341,731 $ 434,598 $ 571,219 $ 712,604
Theatre operating costs 227,719 262,138 322,462 433,259 553,482
General and administrative expenses 19,555 23,486 27,598 32,947 34,833
Depreciation and amortization 15,925 19,417 25,373 37,197 53,269
Asset impairment loss (1) -- 2,382 2,214 9,950 3,720
(Gain) loss on sale of assets(2) (4,852) (10,998) (189) (2,266) 2,420
Operating income(2) 40,213 45,306 57,140 60,131 64,881
Interest expense(3) 19,374 20,376 33,487 43,014 59,867
Income before extraordinary items and
cumulative effect of an accounting
change 13,155 14,616 15,019 11,009 4,004
Net income(4) 13,155 5,230 14,705 11,009 1,035
Diluted earnings per share:
Before extraordinary items and
cumulative effect of an accounting
change 80.32 79.93 80.45 59.01 20.88
Net income 80.32 28.60 78.77 59.01 5.40
Shares outstanding 154 180 178 178 178
OTHER FINANCIAL DATA (CONSOLIDATED):
Cash flow from (used for)
Operations $ 36,090 $ 58,754 $ 61,577 $ 64,077 $ 97,516
Investing activities (80,268) (177,423) (229,302) (248,143) (227,583)
Financing activities 32,031 119,690 185,424 178,000 114,052
Theatre level cash flow(5) 70,840 79,593 112,136 137,960 159,122
EBITDA(6) 55,708 62,579 88,485 110,275 130,214
Ratio of earnings to fixed charges(7) 1.69x 1.65x 1.49x 1.38x 1.06x
OPERATING DATA:
United States
Theatres operated (at period end)(8) 150 158 155 173 185
Screens operated (at period end)(8) 1,155 1,339 1,437 1,813 2,102
Total attendance 61,006 63,774 74,592 85,693 90,996
Outside United States
Theatres operated (at period end)(9) 9 11 18 38 69
Screens operated (at period end)(9) 92 114 187 367 606
Total attendance 4,210 8,675 11,668 20,875 39,938
BALANCE SHEET DATA (CONSOLIDATED):
Cash and temporary cash investments $ 13,925 $ 14,383 $ 32,120 $ 25,646 $ 8,872
Theatre properties and equipment-net 224,482 377,421 548,942 749,692 933,959
Total assets 267,747 432,905 661,597 882,673 1,041,861
Total long-term debt, including
current portion 198,145 297,206 463,501 631,649 778,413
Shareholders' equity 11,345 57,363 69,982 75,800 63,851
- -------------------
(1) On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." Subsequently, the Company has
recorded asset impairment charges of $2.4 million, $2.2 million, $9.9
million and $3.7 million in 1996, 1997, 1998 and 1999, respectively,
pursuant to Statement of Financial Accounting Standards No. 121 (FASB 121).
The asset impairment losses recorded in 1996 and 1997 have been reclassified
from depreciation and amortization in these statements to coincide with the
1998 and 1999 presentation.
(2) In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," requiring that gains and
losses on sale of assets be recorded as a component of operating income. As
a result, the Company has reclassified (gains) losses of $(4.9) million,
$(11.0) million, $(0.2) million, $(2.3) million and $2.4 million in 1995,
1996, 1997, 1998 and 1999, respectively, from other income and expense to be
included as a component of operating income.
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(3) Includes amortization of debt issue cost and debt discount and excludes
capitalized interest of $0.6 million, $1.7 million, $3.9 million, $2.2
million, $4.4 million and $4.3 million in 1995, 1996, 1997, 1998 and
1999, respectively.
(4) In 1996, an extraordinary loss of $9.0 million (net of related tax benefit)
was recognized in connection with the premium paid and the write-off of the
unamortized debt issue costs associated with the Senior Notes repurchased.
(5) Revenues less theatre operating costs (which is not a measure of financial
performance under generally accepted accounting principles) ("GAAP").
Theatre level cash flow is a financial measure commonly used in the
Company's industry and should not be construed as an alternative to cash
flow from operations (as determined in accordance with GAAP) as an indicator
of operating performance or as a measure of liquidity.
(6) Represents net income before depreciation and amortization, interest
expense, changes in deferred lease expense, accrued and unpaid compensation
expense relating to any stock appreciation and stock option plans, equity in
income (loss) of affiliates, gain (loss) of affiliates, gain (loss) on sale
of assets, minority interests, provision for income taxes and extraordinary
items. EBITDA is a financial measure commonly used in the Company's industry
and should not be construed as an alternative to cash flows from operating
activities (as determined in accordance with GAAP), as an indicator of
operating performance or as a measure of liquidity. Other definitions of
EBITDA may not be comparable with this calculation.
(7) For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income (loss) before income taxes and extraordinary
items plus fixed charges excluding capitalized interest and (ii) fixed
charges consist of interest expense, capitalized interest, amortization of
debt issue and debt discount and the portion of rental expense which is
deemed to be representative of the interest factor.
(8) The data as of period end 1995, 1996, 1997, 1998 and 1999 exclude four
theatres (54 screens), five theatres (64 screens), five theatres (64
screens), one theatre (10 screens), and one theatre (10 screens)
respectively, operated by the Company pursuant to management agreements.
(9) The data as of period end 1995, 1996, 1997, 1998 and 1999 excludes three
theatres (25 screens), four theatres (37 screens), eleven theatres (94
screens), 16 theatres (132 screens), and one theatre (12 screens)
respectively, operated through affiliates of the Company in Canada, Chile,
Argentina, Peru, El Salvador, Costa Rica and Japan.
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Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
The following is an analysis of the financial condition and results of
operations of the Company. This analysis should be read in conjunction with the
Company's Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this report.
The Company's revenues are generated primarily from box office receipts
and concession sales. The Company's revenues are affected by changes in
attendance and average admission and concession revenues per patron. Attendance
is primarily affected by the commercial appeal of the films released during the
period or year reported. Since the Company's formation, attendance has grown
principally from the development and acquisition of theatres. The Company has
generally experienced increases in average admission and concession revenues per
patron from ticket and concession price increases as well as the development of
theatres in markets that can support higher ticket and concession prices.
Additional revenues related to theatre operations are generated by screen
advertising, pay phones, ATM charges, and electronic video games installed in
video arcades located in some of the Company's theatres.
Film rentals and advertising, concession supplies and salaries and
wages vary directly with changes in revenues. These expenses have historically
represented approximately 70% of all theatre operating expenses and
approximately 50% of revenues. Film rental costs are based on a percentage of
admissions revenues as determined by film license agreements. Advertising cost
is primarily fixed at the theatre level as daily movie directories placed in
newspapers represent the largest component of advertising costs. The monthly
cost of these ads is based on the size of the directory. However, advertising
costs have remained relatively constant when expressed as a percentage of
revenues as screen growth results in the addition of new or larger directory ads
which help drive revenues. The Company purchases concession supplies to replace
units sold. Although salaries and wages include a fixed component of cost (i.e.,
the minimum staffing cost to operate a theatre facility during non-peak
periods), salaries and wages move in relation to revenues as theatre staffing is
adjusted to handle attendance volume.
Conversely, facility lease expense is primarily a fixed cost at the theatre
level as the Company's facility leases generally require a fixed monthly minimum
rent payment. Facility lease expense as a percentage of revenues is also
affected by the number of leased versus fee owned facilities. As a result of the
two sale leaseback transactions which occurred in the first and fourth quarters
of 1998, the addition of a larger proportion of leased theatre properties has
resulted in an increase in facility lease expense as a percentage of revenues in
1998 and 1999.
Utilities and other costs include certain costs that are fixed such as
property taxes, certain costs which are variable such as liability insurance,
and certain costs that possess both fixed and variable components such as
utilities, repairs and maintenance and security services.
The results of operations of acquired theatres are included in the Company's
Consolidated Financial Statements from their date of acquisition. Fiscal years
ended December 31, 1997, 1998 and 1999 are not directly comparable due to the
effects of new theatre openings, acquired theatres and the impact of the debt
service associated with certain financings undertaken. Theatre closings have had
no significant effect on the operations of the Company.
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RESULTS OF OPERATIONS
Set forth below is a summary of operating revenues and expenses, certain
income statement items expressed as a percentage of revenues, average screen
count and revenues per average screen count for the three most recent fiscal
years ended December 31.
1997 1998 1999
------ ------ ------
OPERATING DATA (In millions)
Revenues
Admissions $274.8 $363.2 $459.3
Concessions 149.2 192.1 221.1
Other 10.6 15.9 32.2
------ ------ ------
Total revenues $434.6 $571.2 $712.6
====== ====== ======
Cost of operations
Film rentals and advertising $148.7 $197.2 $246.4
Concession supplies 22.5 30.4 38.2
Salaries and wages 56.0 69.4 82.9
Facility leases 38.7 61.3 89.8
Utilities and other 56.6 75.0 96.2
------ ------ ------
Total cost of operations $322.5 $433.3 $553.5
====== ====== ======
OPERATING DATA AS A PERCENTAGE OF TOTAL REVENUES(1):
Revenues
Admissions
Concessions 63.2% 63.6% 64.5%
Other 34.4 33.6 31.0
Total revenues 2.4 2.8 4.5
------ ------ ------
100.0 100.0 100.0
Cost of operations
Film rentals and advertising(1) 54.1 54.3 53.6
Concession supplies(1) 15.1 15.8 17.3
Salaries and wages 12.9 12.1 11.6
Facility leases 8.9 10.7 12.6
Utilities and other 13.0 13.1 13.5
Total cost of operations 74.2 75.8 77.7
General and administrative expenses 6.4 5.8 4.9
Depreciation and amortization(2) 5.8 6.5 7.5
Asset impairment loss(2) 0.5 1.7 0.5
(Gain) loss on sale of assets(3) (0.1) (0.4) 0.3
Operating income(3) 13.1 10.5 9.1
Interest expense(4) 7.7 7.5 8.4
Net income before extraordinary items and cumulative
effect of an accounting change 5.9 3.9 0.6
Net income 3.4 1.9 0.1
Year Ended December 31,
----------------------------------
1997 1998 1999
-------- -------- --------
Average screen count (month end average) 1,523 1,879 2,454
======== ======== ========
Revenues per average screen count $285,357 $303,991 $290,412
======== ======== ========
(1) All costs are expressed as a percentage of total revenues, except film
rentals and advertising, which are expressed as a percentage of admissions
revenues, and concession supplies, which are expressed as a percentage of
concessions revenues.
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(2) On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." Subsequently, the Company has
recorded asset impairment charges of $2.2 million, $9.9 million and $3.7
million in 1997, 1998, and 1999, respectively, pursuant to Statement of
Financial Accounting Standards No. 121 (FASB 121). The asset impairment
losses recorded in 1997 has been reclassified from depreciation and
amortization in these statements to coincide with the 1998 and 1999
presentation.
(3) In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," requiring that gains and
losses on sale of assets be recorded as a component of operating income. As
a result, the Company has reclassified gains of $0.2 million and $2.3
million in 1997 and 1998, respectively, from other income and expense to be
included as a component of operating income and recorded a loss on sale of
assets of $2.4 million in 1999.
(4) Includes amortization of debt issue cost and debt discount and excludes
capitalized interest of $2.2 million, $4.4 million and $4.3 million in 1997,
1998 and 1999, respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Revenues. Revenues in 1999 increased to $712.6 million from $571.2 million,
a 24.8% increase. The increase in revenues is primarily attributable to a 18.4%
increase in attendance as the result of the first full year of operations of 585
screens opened in 1998 and the net addition of 528 screens in 1999. Revenues
were also positively affected by an increase in admission and concession
revenues per patron of 3.5%. Revenues per average screen decreased 4.5% to
$290,412 for 1999 from $303,991 for 1998. However, substantially all of the
decrease in revenues per average screen resulted from the devaluation of the
Brazilian and Ecuadorian currencies in 1999.
Cost of Operations. Cost of operations, as a percentage of revenues,
increased to 77.7% in 1999 from 75.8% in 1998. The increase as a percentage of
revenues resulted from an increase in concession supplies as a percentage of
concession revenues to 17.3% in 1999 from 15.8% in 1998 as a result of the
greater number of international theatres in operation, an increase in facility
lease expense as a percentage of revenues to 12.6% in 1999 from 10.7% in 1998
and an increase in utilities and other expense as a percentage of revenues to
13.5% in 1999 from 13.1% in 1998 which was partially offset by a decrease in
film rentals and advertising expense as a percentage of admission revenues to
53.6% in 1999 from 54.3% in 1998 and a decrease in salaries and wages expense as
a percentage of revenues to 11.6% in 1999 from 12.1% in 1998.
General and Administrative Expenses. General and administrative expenses, as
a percentage of revenues, decreased to 4.9% in 1999 from 5.8% in 1998. The
decrease is primarily attributable to the 24.8% increase in revenues resulting
from screen additions and increases in admissions and concessions per patron.
The absolute level of general and administrative expenses increased to $34.8
million for 1999 from $32.9 million for 1998. The increase in general and
administrative expenses is attributed to costs (primarily salaries and wages)
associated with the Company's expansion program.
Depreciation and Amortization. Depreciation and amortization increased $16.1
million in 1999 to $53.3 million from $37.2 million in 1998, an increase of
43.3%. The increase is a result of the net addition of $219.5 million in theatre
property and equipment during 1999, a 24.7% increase over 1998. The difference
in the percentage increase in depreciation and amortization compared to the
increase in theatre property and equipment is a result of the timing of when the
additions were placed in service during the period.
Asset Impairment Loss. The Company recorded asset impairment charges of $3.7
million in 1999 and $9.9 million in 1998 pursuant to Statement of Financial
Standards No. 121 (FASB 121). In accordance with FASB 121, the Company wrote
down the assets of certain theatres to their fair value.
(Gain) Loss on Sale of Assets. The Company recorded a loss on sale of assets
of $2.4 million in 1999 and a gain on sale of assets of $2.3 million in 1998.
Interest Expense. Interest costs incurred, including amortization of debt
issue cost and debt discount, increased 35.4% to $64.2 million (including the
capitalization of $4.3 million of interest to properties under construction)
from $47.4 million in 1998 (including the capitalization of $4.4 million of
interest to properties under construction). The increase in interest costs
incurred during 1999 was due principally to an increase in average debt
outstanding resulting from borrowings under the Company's Credit Facility.
Income Taxes. Income taxes decreased to $3.7 million in 1999 compared to
$11.5 million in 1998, a 68% decrease resulting primarily from the decrease in
income before income taxes, extraordinary items and cumulative effect of an
accounting change to $7.7 million in 1999 from $22.5 million in 1998. The
Company's effective rate for 1999 decreased to 48.1% from 51.0% in 1998. The
effective rates reflect a reduction in overall foreign losses which are fully
reserved and a reduction in other permanent differences, primarily goodwill.
Net Income Before Extraordinary Items and Cumulative Effect of an Accounting
Change. Net income before extraordinary items and cumulative effect of an
accounting change of $4.0 million for 1999 and $11.0 million for 1998 included
the losses of foreign subsidiary operations of $8.8 million (net of minority
interest) and $3.0 million (net of minority interest), respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenues. Revenues in 1998 increased to $571.2 million from $434.6 million,
a 31.4% increase. The increase in revenues is primarily attributable to a 29.3%
increase in attendance as the result of the first full year of operations of 181
screens opened in 1997 and the net addition of 585 screens in 1998. Revenues
were also positively affected by an increase in admission and concession
revenues per patron of 1.3%. Revenues per average screen increased 6.5% to
$303,991 for 1998 from $285,357 for 1997.
Cost of Operations. Cost of operations, as a percentage of revenues,
increased to 75.8% in 1998 from 74.2% in 1997. The increase as a percentage of
revenues resulted from an increase in concession supplies as a percentage of
concession revenues to 15.8% in 1998 from 15.1% in 1997 and an increase in
facility leases as a percentage of revenues to 10.7% in 1998 from 8.9% in 1997
partially as a result of the two sale leaseback transactions which occurred in
the first and fourth quarters of 1998. These increases were partially offset by
a decrease in salaries and wages as a percentage of revenues to 12.1% in 1998
from 12.9% in 1997.
General and Administrative Expenses. General and administrative expenses, as
a percentage of revenues, decreased to 5.8% in 1998 from 6.4% in 1997. The
decrease is primarily attributable to the 31.4% increase in revenues from screen
additions and increases in admissions and concessions per patron. The absolute
level of general and administrative expenses increased to $32.9 million for 1998
from $27.6 million for 1997. The increase in general and administrative expenses
is attributed to costs (primarily salaries and wages) associated with the
Company's expansion program.
Depreciation and Amortization. Depreciation and amortization increased $11.8
million in 1998 to $37.2 million from $25.4 million in 1997, an increase of
46.5%. The increase is a result of the net addition of $244.0 million in theatre
property and equipment during 1998, a 37.9% increase over 1997. The difference
in the percentage increase in depreciation and amortization compared to the
increase in theatre property and equipment is a result of the timing of when the
additions were placed in service during the period.
Asset Impairment Loss. The Company recorded asset impairment charges of $9.9
million in 1998 and $2.2 million in 1997 pursuant to Statement of Financial
Accounting Standards No. 121 (FASB 121). In accordance with FASB 121, the
Company wrote down the assets of certain theatres to their fair value.
(Gain) Loss on Sale of Assets. The Company recorded a gain on sale of assets
of $2.3 million in 1998 and $0.2 million in 1997.
Interest Expense. Interest costs incurred, including amortization of debt
issue cost and debt discount, increased 33.1% to $47.4 million (including the
capitalization of $4.4 million of interest to properties under construction)
from $35.6 million in 1997 (including the capitalization of $2.2 million of
interest to properties under construction). The increase in interest costs
incurred during 1998 was due principally to an increase in average debt
outstanding resulting from borrowings under the Company's Credit Facility and
the issuance of the additional Senior Subordinated Indenture in the first
quarter of 1998.
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23
Income Taxes. Income taxes increased to $11.5 million in 1998 compared to
$10.7 million in 1997, a 7.5% increase. The Company's effective tax rate for
1998 increased to 51.0% from 41.5% in 1997. The Company's income taxes and
effective tax rates for 1998 increased over 1997 due to certain foreign
subsidiaries generating income for the first time, resulting in the calculation
of a foreign tax liability with the excess undistributed earnings being taxed at
United States rates plus local foreign country withholding rates.
21
24
Net Income Before Extraordinary Items and Cumulative Effect of an
Accounting Change. Net income before extraordinary items and cumulative effect
of an accounting change of $11.0 million for 1998 and $15.0 million for 1997
included the losses of foreign subsidiary operations of $3.0 million (net of
minority interest) and $2.3 million (net of minority interest), respectively.
INFLATION AND FOREIGN CURRENCY
The vast majority of the equipment and certain operating supplies and
construction interior finish items that the Company's international subsidiaries
use in their operations are imported from the U.S., whereas, principally all the
revenues and operating expenses of the Company's international subsidiaries are
transacted in the country's local currency.
Currency fluctuations result in the Company's reporting exchange gain
or losses or cumulative unrealized translation adjustments relating to its
international subsidiaries depending on the inflationary environment of the
country in which the Company operates. Generally accepted accounting principles
require that the U.S. dollar be used as the functional currency for the
Company's subsidiaries that operate in highly inflationary economies.
In 1998, two of the countries where the Company operates (Mexico and
Ecuador) were deemed highly inflationary. In 1999, the economy of Mexico
reverted back to a non-highly inflationary status in which the peso again became
the functional currency of Cinemark de Mexico, S.A. de C.V. resulting in certain
assets, liabilities and equity accounts being restated at the current exchange
rate. Thus, changes in the peso have been recorded in the accumulated other
comprehensive loss account as a reduction to shareholders' equity during 1999.
Ecuador continues to operate in a highly inflationary economy, and thus the
Company recorded an exchange gain of $0.1 million in 1999 related to the
Ecuadorian sucre currency fluctuations.
In 1999, the remaining countries where the Company operates were not
deemed highly inflationary. Thus, any fluctuation in the currency results in the
Company recording a cumulative foreign currency translation adjustment to the
accumulated other comprehensive loss account.
In January 1999, the Brazilian government allowed the Brazilian
currency (the "Real") to float against the U.S. dollar instead of maintaining a
pre-established trading ban. In connection with this decision, the Real devalued
significantly against the U.S. dollar to 1.8 Reais to the U.S. dollar as of
December 31, 1999. As a result, Cinemark Brasil S.A. recorded a cumulative
unrealized currency translation adjustment to the accumulated other
comprehensive loss account as a reduction to shareholders' equity of $11.0
million in 1999.
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25
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, primarily through box
office receipts and the sale of concession items. Because its revenues are
received in cash prior to the payment of related expenses, the Company has an
operating "float" and, as a result, historically has not required traditional
working capital financing. Primarily due to the lack of significant inventory
and accounts receivable, the Company has typically operated with a negative
working capital position for its ongoing theatre operations. The major film
distributors generally release during the summer and holiday seasons those films
which they anticipate will be the most successful. Consequently, the Company
typically generates higher revenues during such periods. The Company's cash flow
from operations was $97.5 million in 1999 compared to $64.1 million in 1998 and
$61.6 million in 1997.
The Company's theatres are typically equipped with modern projection
and sound equipment, with approximately 86% of the screens operated by the
Company having been built during the 1990's. The Company's investing activities
have been principally in connection with new theatre openings and acquisitions
of existing theatres and theatre circuits and have amounted to $227.6 million,
$248.1 million and $229.3 million in 1999, 1998 and 1997, respectively. New
theatre openings and acquisitions historically have been financed with
internally generated cash and by debt financing, including borrowings under the
Company's bank line of credit. Cash flow from financing activities amounted to
$114.1 million, $178.0 million and $185.4 million in 1999, 1998 and 1997,
respectively. During 1999, the Company opened 19 theatres (333 megaplex screens
and 2 IMAX(R)3D screens) in the U.S. and Canada. In addition, in the U.S., as of
March 30, 2000, the Company opened 3 theatres (52 screens) and has approximately
6 theatres (88 megaplex screens and 3 IMAX(R)3D screens) scheduled to open by
the end of 2000. All of these theatres will be megaplexes which may cost in
excess of $15 million per theatre. The Company currently estimates that its
capital expenditures for the development of these approximately 143 screens in
the U.S. in 2000 will be approximately $75 million. As of March 30, 2000, the
Company had expended approximately $20 million toward the development of these
screens. The Company plans to fund capital expenditures for its development from
cash flow from operations, borrowings under the Credit Facility and sale
leaseback transactions. At the end of 1999, the Company owned approximately
$350 million of real estate and improvements resulting from the development of
megaplex facilities over the last several years. The Company plans to enter into
sale and leaseback transactions relating to certain of these facilities provided
that the Company can secure favorable terms. Actual expenditures for theatre
development and acquisitions during 2000 are subject to change based upon the
availability of attractive opportunities for expansion of the Company's theatre
circuit.
On August 15, 1996, the Company issued $200 million principal amount of
Series B Senior Subordinated Notes which bear interest at a rate of 9-5/8% per
annum (the "Series B Notes"), payable semi-annually on February 1 and August 1
of each year. The Series B Notes were issued at 99.553% of the principal face
amount (a discount of $4.47 per $1,000 principal amount). The net proceeds to
the Company from the issuance of the Series B Notes (net of discount, fees and
expenses) were approximately $193.2 million. The proceeds from the Series B
Notes were used to repurchase the Company's $125 million aggregate principal
amount 12% Senior Notes due 2002 (the "Senior Notes"). Excess proceeds were
utilized to reduce borrowings under the Company's Credit Facility and for
general corporate purposes.
On June 26, 1997, the Company issued $75 million principal amount of
Series D Notes due 2008 which bear interest at a rate of 9-5/8% per annum (the
"Series D Notes"), payable semi-annually on February 1 and August 1 of each
year. The Series D Notes were issued at 103% of the principal face amount. The
net proceeds to the Company from the issuance of the Series D Notes (net of fees
and expenses) were approximately $77.1 million. The proceeds of the Series D
Notes were applied to reduce the Company's indebtedness under the Credit
Facility.
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26
In January 1998, the Company issued $105 million aggregate principal
amount of 8-1/2% Series A Senior Subordinated Notes due 2008 (the "Series A
Notes") pursuant to Rule 144A (the "Offering"). The net proceeds of the Offering
were used by the Company to reduce the Company's indebtedness under the then
existing credit facility. The Company exchanged the Series A Notes on March 17,
1998 for 8-1/2% Series B Senior Subordinated Notes (the "8-1/2% Series B Notes")
which have been registered under the Securities Act of 1933, as amended.
In February 1998, the Company replaced its existing credit facility
with a reducing, revolving credit agreement ("Credit Facility") through a group
of banks for which Bank of America National Trust and Savings Association acts
as Administrative Agent. The Credit Facility provides for loans to the Company
of up to $350.0 million in the aggregate. The Credit Facility is a reducing,
revolving credit facility; therefore, at the end of each quarter during the
calendar year 2001, 2002, 2003, 2004 and 2005, the aggregate commitment is
reduced in the amount of $8,750,000, $11,812,500, $13,125,000, $12,031,000 and
$6,562,500, respectively. The Company is required to prepay all loans
outstanding in excess of the aggregate commitment as reduced pursuant to the
terms of the Credit Facility. Borrowings under the Credit Facility are secured
by a pledge of a majority of the issued and outstanding capital stock of the
Company. Pursuant to the terms of the Credit Facility, funds borrowed currently
bear interest at a rate per annum equal to the Offshore Rate (as defined in the
Credit Facility) or the Base Rate (as defined in the Credit Facility, as the
case may be), plus the Applicable Margin (as defined in the Credit Facility). As
of March 30, 2000, the Company had borrowed $325 million under the Credit
Facility with the average interest rate on such borrowings being 8.1% per annum.
In February 1998, the Company completed a sale leaseback transaction
(the "Sale Leaseback") pursuant to which the Company sold the land, buildings
and site improvements of 12 theatre properties to special purpose entities for
an aggregate purchase price equal to approximately $131.5 million.
Simultaneously with the sale, the Company entered into operating leases for such
properties for a base term equal to approximately 20 years at a fixed aggregate
monthly rental payment of $1.1 million or $13.4 million annually.
In October 1998, the Company completed a second sale leaseback
transaction (the "Second Sale Leaseback") pursuant to which the Company sold the
land, building and site improvements of one theatre property to a special
purpose entity for an aggregate purchase price equal to approximately $13.9
million. Simultaneously with the sale, the Company entered into an operating
lease for the property for a base term equal to approximately 20 years at a
fixed monthly rental payment of $119,000 or $1.4 million annually.
In December 1999, the Company completed a third sale leaseback
transaction (the "Third Sale Leaseback") pursuant to which the Company sold the
land, building and site improvements of its corporate office property to a
special purpose entity for an aggregate purchase price equal to approximately
$20.3 million. Simultaneously with the sale, the Company entered into an
operating lease for approximately 60% of the property for a base term equal to
10 years at a fixed monthly rental payment of $114,000 or $1.4 million annually
for the first seven years and $123,000 or $1.5 million annually for the final
three years.
In February 2000, the Company repurchased 159 shares of its Class B
common stock as treasury stock from an employee of the Company at $1,674 per
share and repurchased 34 shares of its Class B common stock as treasury stock
from a former employee of the Company at $1,000 per share.
In 1992, the Company formed Cinemark International to develop and
acquire theatres in international markets. As of March 30, 2000, Cinemark
International, through its affiliates, operated 69 theatres (606 screens)
principally in Latin America. The following table summarizes the Company's and
Cinemark International's holdings in each international market, the number of
theatres and screens in such market as of March 30, 2000 and the number of
theatres and screens under construction in 2000.
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27
Year of Operating Planned Openings thru 2000
Country Formation Ownership% Theatres/Screens Theatres/Screens
- ------- --------- ---------- ---------------- ----------------
Mexico 1992 95% 20 theatres (192 screens) 4 theatres (39 screens)
Chile 1992 98% 11 theatres (89 screens) 2 theatres (10 screens)
Argentina(2) 1995 100% 7 theatres (59 screens) 2 theatres (20 screens)
Brazil 1996 60% 19 theatres (174 screens) 6 theatres (56 screens)
Ecuador 1996 60% 2 theatres (16 screens)
Peru(1) 1996 100% 2 theatres (21 screens)
Central America 1997 50% 7 theatres (45 screens) 2 theatres (16 screens)
Colombia 1998 51% 1 theatre (10 screens) 1 theatre (6 screens)
United Kingdom 1998 100% N/A N/A
Taiwan 1998 51% N/A N/A
Germany 1999 100% N/A 1 theatre (13 screens)
Total 69 theatres (606 screens) 18 theatres (160 screens)
- -------------------
1. In the first quarter of 1999, Cinemark International assigned its
interests in Peru to the Company. The Company has designated this
operating company as a Restricted Subsidiary (as such term is defined
in the Company's debt agreements).
2. In the fourth quarter of 1999, Cinemark International assigned all of
its interests in all of the companies located in Argentina to a
subsidiary of the Company. The Company has designated these operating
companies Restricted Subsidiaries (as such term is defined in the
Company's debt agreements).
The Company, through Cinemark International and its affiliates, plans
to invest up to an additional $100 million in international ventures, over the
next three years. The Company anticipates that investments in excess of Cinemark
International's available cash will be funded by the Company or by debt or
equity financing to be provided by third parties directly to Cinemark
International or its subsidiaries.
In August 1998, the Company formed Cinemark Investments Corporation for
the purpose of financing its Brazilian operations by investing in foreign fixed
rate notes issued by Cinemark Brasil S.A., an indirect
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28
Brazilian subsidiary of the Company. In September 1998, Cinemark Investments
Corporation executed a credit agreement with Bank of America that provides
Cinemark Investments Corporation up to $20 million in the aggregate under a
revolving line of credit facility (the "Cinemark Investments Credit Agreement").
The Cinemark Investments Credit Agreement is secured by an assignment of certain
fixed rate notes issued by Cinemark Brasil S.A. to Cinemark Investments
Corporation and an unconditional guaranty by the Company. Pursuant to the terms
of the Cinemark Investments Credit Agreement, funds borrowed bear interest at a
rate per annum equal to the Offshore Rate or the Base Rate (both defined in the
Cinemark Investments Credit Agreement) as the case may be. As of March 30, 2000,
Cinemark Investments Corporation had borrowed $20 million under the Cinemark
Investments Credit Agreement, the proceeds of which were used to purchase fixed
rate notes issued by Cinemark Brasil S.A. bearing interest at 13.25%. The
effective interest rate on such borrowings as of March 30, 2000 is 8.4% per
annum.
In September 1998, Cinemark International incorporated Cinemark Theatres
U.K. Ltd., an English company, to develop state-of-the-art multiplex theatres in
the United Kingdom. Cinemark Theatres U.K. Ltd. is a wholly-owned subsidiary of
Cinemark International. Cinemark Theatres U.K. Ltd. expects to begin
construction on 1 theatre (10 screens) in 2000.
In September 1998, Cinemark International entered into a joint venture
agreement with Core Pacific Ltd. to develop state-of-the-art multiplex theatres
in Taiwan, Republic of China. The joint venture will conduct its business
through Cinemark-Core Pacific Ltd. which is 50.5% owned by Cinemark
International and 49.5% owned by Core Pacific Ltd. Cinemark-Core Pacific Ltd.
expects to begin construction on one theatre (10 screens) during 2000.
In November 1998, Cinemark Mexico executed a credit agreement with Bank of
America National Trust and Savings Association for itself and as Administrative
Agent (the "Cinemark Mexico Credit Agreement"). The Cinemark Mexico Credit
Agreement is a revolving credit facility and provides for a loan to Cinemark
Mexico of up to $30 million in the aggregate. The Cinemark Mexico Credit
Agreement is secured by a pledge of 65% of the stock of Cinemark de Mexico S.A.
de C.V. and an unconditional guaranty by the Company. Pursuant to the terms of
the Cinemark Mexico Credit Agreement, funds borrowed bear interest at a rate per
annum equal to the Offshore Rate (as defined in the Cinemark Mexico Credit
Agreement) or the Base Rate (as defined in the Cinemark Mexico Credit
Agreement), as the case may be, plus the Applicable Margin (as defined in the
Cinemark Mexico Credit Agreement). Cinemark Mexico borrowed $30 million under
the Cinemark Mexico Credit Agreement, the proceeds of which were used to repay
an intercompany loan of Cinemark Mexico from Cinemark International. Cinemark
International used the proceeds of such repayment to repay all outstanding
indebtedness under its then existing credit facility with Bank of America
National Trust and Savings. The effective interest rate on such borrowings as of
March 30, 2000 is 7.6% per annum.
In December 1998, Cinemark International entered into a joint venture
agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. to
develop state-of-the-art multiplex theatres in Colombia. The joint venture will
conduct its business through Cinemark Colombia S.A. which is owned 50.1% by
Cinemark International, and the remaining 49.9% is collectively owned by Casa
Editorial El Tiempo S.A., Tempora S.A. and Prodiscos S.A. Cinemark Colombia S.A.
currently operates one theatre (10 screens) and plans to open one theatre (6
screens) in 2000.
In September 1999, Cinemark International acquired all of the shares of its
Argentine joint venture partner, Prodecine S.A., which held the remaining 50% of
the shares of Cinemark Argentina S.A. Cinemark International paid $2.8 million
in cash and delivered the following promissory notes bearing interest at the
rate of 10% per annum: (a) totaling US$2.5 million due January 2000, (b)
totaling US$2.5 million due April 2000, (c) totaling A$2.5 million pesos due
July 2000, (c) totaling A$3.5 million pesos due October 2000. The 100% interests
in Prodecine S.A., Cinemark Investments Argentina, S.A. and Cinemark Argentina,
S.A. held by Cinemark International were transferred to one of the Company's
subsidiaries in December 1999.
In December 1999, the shareholders of Cinemark Brasil agreed to increase
the capital of Cinemark Brasil in the aggregate amount of $9,000,000. Cinemark
International, through Cinemark Enpreendimentos e Participacoes, Ltda., funded
US$2,686,000 in December 1999 and will fund an additional $3,283,500 in April
2000. The remaining amounts will be funded by the other shareholders.
Year 2000 Compliance
The Company recognized that the arrival of the Year 2000 posed a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000, and like other companies, spent a
considerable amount of time in 1999 updating its computer applications and
business processes to ensure their continued functionality in the Year 2000 and
beyond.
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29
Prior to January 1, 2000, the necessary modifications to the day-to-day
operating and reporting systems for all theatres and the U.S. and various
international corporate offices were successfully completed to ensure compliance
in the Year 2000 and beyond. The costs to modify these existing systems to
ensure Year 2000 compliance were less than $100,000.
In addition, the Company purchased a new Year 2000 compliant financial
reporting and distribution system that was successfully made operational on
January 4, 1999. The decision to purchase this new system at a cost of more than
$1 million was made by management in order to effectively handle the increasing
financial reporting and analysis needs of the Company in the years to come as
the Company continues at its rapid growth rate.
New Accounting Pronouncements
On January 1, 1999 the Company adopted Statement of Position (SOP) 98-5
requiring start-up activities and organization costs to be expenses as incurred.
The Company's practice had been to capitalize organization costs associated with
the organization of new entitles as well as costs associated with forming
international joint ventures as deferred charges and to amortize them over the
anticipated life of the respective entity or venture. The adoption of this new
accounting pronouncement resulted in the aggregate write-off of the unamortized
organization costs of $3,386,207 on January 1, 1999. This charge was recorded as
a cumulative effect of a change in accounting principle as a one-time non-cash
charge to income of $2,968,637 (net of tax) in the first quarter of 1999.
For years beginning after 1998, the Company adopted the exception
allowed under Accounting Principles Board (APB) Opinion No. 23 for undistributed
earnings of foreign subsidiaries located in Mexico, Peru, Argentina and
Honduras. Deferred U.S. federal income taxes are not provided on the
undistributed earnings of these foreign subsidiaries as management plans to
reinvest these earnings in those countries. In the fourth quarter of 1999, the
Company adopted the exception on prior undistributed earnings of these
subsidiaries since management plans to reinvest the prior earnings in those
countries as well. The Deferred U.S. federal income taxes provided on these
prior undistributed earnings is $2,167,642. The cumulative amount of prior and
current undistributed earnings of these foreign subsidiaries on which the
Company does not recognize income taxes is $13,366,767.
In 1999, the Company adopted Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," requiring that gains and losses
on sale of assets be recorded as a component of operating income. The Company's
practice had been to classify these gains and losses as other income and
expense. As a result of the new accounting pronouncement, the Company has
reclassified gains of $189,352 and $2,266,320 and losses of $2,419,511 from
other income and expense to be included as a component of operating income in
1997, 1998 and 1999, respectively.
Other Issues
The Company intends that this report be governed by the "safe harbor"
provision of the Private Securities Litigation Reform Act of 1995 (the "PSLR
Act") with respect to statements that may be deemed to be forward-looking
statements under the PSLR Act. Such forward-looking statements may include, but
are not limited to, the Company and any of its subsidiaries' long-term theatre
strategy. Actual results could differ materially from those indicated by such
forward-looking statements due to a number of factors.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.
The Company has limited exposure to financial market risks, including
changes in interest rates and other relevant market prices. The Company does not
have any derivative financial instruments in place as of December 31, 1999.
An increase or decrease in interest rates would affect interest costs
relating to the Company's variable rate credit facilities. The Company and/or
its subsidiaries are currently parties to such variable rate credit facilities.
At December 31, 1999, there was an aggregate of approximately $386 million of
variable rate debt outstanding under these facilities. The Company has no
interest rate swaps or other hedging facilities relating to these credit
27
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facilities. These facilities represent approximately 50% of the Company's
outstanding long-term debt. Changes in interest rate do not have a direct impact
on interest expense relating to the remaining fixed rate debt facilities.
The table below provides information about the Company's fixed rate and
variable rate long-term debt agreements at December 31, 1999:
1999 1999
(in millions) Carrying Fair Market
Amount Value
---------- ----------
Long-term debt:
Fixed Rate $ 392 $ 439
Variable Rate $ 386 $ 394
---------- ----------
$ 778 $ 833
========== ==========
The Company is exposed to market risk arising from changes in foreign
currency exchange rates as a result of its international operations. See Item 7
- - "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Inflation and Foreign Currency," which
information is incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data.
The financial statements and supplementary data are listed on the Index
at F-1. Such financial statements and supplementary data are included herein
beginning on page F-3.
Item 9: Changes in and Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10: Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are:
NAME AGE POSITION
---- --- --------
Lee Roy Mitchell* 63 Chairman of the Board; Chief Executive Officer; Director
Tandy Mitchell 49 Vice Chairman of the Board; Executive Vice President;
Secretary; Director
Alan W. Stock+ 39 President; Chief Operating Officer; Director
Jeffrey J. Stedman(1) 37 Senior Vice President; Treasurer; Chief Financial Officer; Assistant
Secretary; Director
Rob Carmony 42 Senior Vice President-Director of Operations
Margaret E. Richards 41 Vice President-Real Estate; Assistant Secretary
Jerry Brand 54 Vice President-Film Licensing
Walter Hebert 54 Vice President-Purchasing
Don Harton 42 Vice President-Construction
Randy Hester 47 Vice President-Marketing
Philip Wood 36 Vice President
Michael Cavalier 33 Vice President - General Counsel
W. Bryce Anderson*+ 57 Director
Heriberto Guerra, Jr.+ 50 Director
James A. Stern 49 Director
James L. Singleton+ 44 Director
Denny Rydberg 55 Director
- --------------------------
* Member Audit Committee
+ Member Compensation Committee
(1) Effective mid-April, 2000, Jeffrey J. Stedman will resign as Senior
Vice President, Treasurer, Chief Financial Officer and Assistant
Secretary of the Company.
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The Shareholders' Agreement (as defined herein) contains a voting agreement
pursuant to which Mr. Mitchell agreed to vote his share of common stock of the
Company to elect designees of Cypress Advisors L.P. ("CALP") to the Board of
Directors of the Company. As of March 30, 2000, CALP had the right to designate
two board members. Additionally, the Shareholders' Agreement provides that the
Company must obtain the written consent of CALP for certain corporate acts.
The directors of the Company are elected each year by the shareholders to
serve for a one-year term and until their successors are elected and qualified.
Directors of the Company are reimbursed for expenses actually incurred for each
Board meeting which they attend. In addition, Directors who are not employees of
the Company receive a fee of $1,000 for each meeting of the Board of Directors
attended by such person. The executive officers of the Company are elected by
the Board of Directors to serve at the discretion of the Board.
The following is a brief description of the business experience of the
directors and executive officers of the Company for at least the past five
years. All compensation of directors and officers is paid by the Company.
Lee Roy Mitchell has served as Chairman of the Board since March 1996 and
as Chief Executive Officer and a Director of the Company since its inception in
1987. Mr. Mitchell was Vice Chairman of the Board of Directors from March 1993
to March 1996 and was President of the Company from its inception in 1987 until
March 1993. From 1985 to 1987, Mr. Mitchell served as President and Chief
Executive Officer of a predecessor corporation. Mr. Mitchell has served on the
Board of Directors of the National Association of Theatre Owners since 1991. Mr.
Mitchell has been engaged in the motion picture exhibition business for more
than 36 years.
Tandy Mitchell has served as Vice Chairman of the Board since March 1996,
as a Director of the Company since April 1992, as Executive Vice President of
the Company since October 1989 and as Secretary of the Company since its
inception in 1987. Mrs. Mitchell was General Manager of the theatre division of
a predecessor corporation from 1985 to 1987. From 1978 to 1985, Mrs. Mitchell
was employed by Southwest Cinemas Corporation, most recently as director of
operations. Mrs. Mitchell is the wife of Lee Roy Mitchell.
Alan W. Stock has served as President of the Company since March 1993, as a
Director of the Company since April 1992 and as Chief Operating Officer of the
Company since March 1992. Mr. Stock was Senior Vice President of the Company
from October 1989 to March 1993. Mr. Stock was General Manager of the Company
from its inception in 1987 to March 1992. Mr. Stock was employed by the theatre
division of a predecessor corporation from January 1986 to December 1987 as
Director of Operations. From 1981 to 1985, he was employed by Consolidated
Theaters, most recently as District Manager.
Jeffrey J. Stedman has served as a Director of the Company since March
1996, as Senior Vice President since July 1997 and as Vice President, Treasurer
and Chief Financial Officer of the Company since April 1993. From December 1989
to April 1993, Mr. Stedman was Director of Finance of the Company. Prior to
joining the Company in December 1989, Mr. Stedman was a Manager in the tax
department of Deloitte & Touche LLP where he was employed from December 1984 to
December 1989. Mr. Stedman is a certified public accountant.
Robert F. Carmony has served as Senior Vice President-Director of
Operations since July 1997, as Vice President-Director of Operations since March
1996 and has served as Director of Operations of the Company since June 1988.
Prior to joining the Company, Mr. Carmony was owner of O.C. Enterprises, a
software development firm, from 1986 to 1988. Prior to forming his own software
company, Mr. Carmony worked for Plitt-Cineplex Odeon theatres from 1985 to 1986.
He worked as a Systems Analyst for Electronic Data Systems (EDS) from 1984 to
1985.
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32
Margaret E. Richards has served as a Vice President and Assistant Secretary
of the Company since October 1989 and as Vice President-Real Estate since March
1994. Ms. Richards has been Director of Leasing of the Company since its
inception in 1987 and was employed by the theatre division of a predecessor
corporation in its real estate section from August 1986 to December 1987.
Jerry Brand has served as Vice President-Film Licensing since March 1996.
Mr. Brand has over 27 years of experience in the theatre industry, beginning his
career with Paramount Pictures in 1968. Prior to joining the Company, Mr. Brand
served as Senior Vice President and Head Film Buyer with Cobb Theatres where he
was employed from 1983 to March 1996.
Walter Hebert has served as Vice President-Purchasing of the Company since
July 1997 and was the Director of Purchasing from October 1996 until July 1997.
Mr. Hebert was the President of 2 Day Video, Inc., a 21-store video chain that
was a subsidiary of the Company, from December 1995 until October 1996. Prior to
joining the Company, Mr. Hebert worked for Dillards Department Stores from 1973
to 1993, serving as a Divisional Merchandise Manager in the Arkansas Division
from 1981 until 1993.
Don Harton has served as Vice President-Construction since July 1997. From
August 1996 to July 1997, Mr. Harton was Director of Construction of the
Company. Prior to joining the Company in August 1996, Mr. Harton was an
architect with Urban Architecture, where he was employed from October 1983 until
July 1996.
Randy Hester has served as Vice President-Marketing since July 1997. From
January 1989 to July 1997, Mr. Hester was Director of Corporate Development of
the Company. Prior to joining the Company in January 1989, Mr. Hester was Chief
Financial Officer of Presidio Theatres in Austin, Texas, where he was employed
from 1986 to 1989.
Philip Wood has served as Vice President since July 1997. From February
1988 to July 1997 Mr. Wood was MIS Director of the Company. Prior to joining the
Company in February 1988, Mr. Wood was a systems organizer with Electronic Data
Systems where he was employed from 1986 to 1988.
Michael Cavalier has served as Vice President-General Counsel of the
Company since July 1999. From July 1997 to July 1999, Mr. Cavalier was General
Counsel of the Company and from July 1993 to July 1997 was Associate General
Counsel of the Company. Prior to joining the Company in July 1993, Mr. Cavalier
was an associate attorney at the Dallas office of Akin, Gump, Strauss, Hauer &
Feld, L.L.P.
W. Bryce Anderson has served as a Director of the Company since June 1992.
Mr. Anderson has been Chairman of the Board of Directors of Ennis Steel
Industries, Inc., a steel fabricator, since 1980 and Chairman of the Board of
Directors of Reflex Glass Bead Co., Inc., a manufacturer of glass beads, since
September 1990. Mr. Anderson was Chairman of the Board of Centerline Industries,
Inc., an industrial paint manufacturer, from January 1989 to December 1992. From
1976 to 1989, Mr. Anderson was Chairman of the Board of Directors and Chief
Executive Officer of Ennis Paint Manufacturing, Inc., an industrial paint
manufacturer.
Heriberto Guerra, Jr. has served as a Director of the Company since
December 1993. Mr. Guerra has been Managing Director-Corporate Development for
Southwestern Bell Telephone since 1995. From September 1985 to January 1987, he
was Area Manager-Marketing Operations for Southwestern Bell, and from 1987 to
1995, he was Executive Director-Government Relations for Southwestern Bell.
Prior to that, he served in an owner or manager capacity for various hotel,
restaurant and movie theatre businesses in Texas. Mr. Guerra is also a director
of Cinemark Mexico (USA), Inc. and Play by Play Toys and Novelties.
James A. Stern was elected Director of the Company in March 1996. Mr. Stern
has been Chairman of The Cypress Group L.L.C. ("Cypress Group") since its
formation in April 1994. Prior to joining Cypress Group, Mr. Stern spent his
entire career with Lehman Brothers, an investment banking firm, most recently as
head of the Merchant Banking Group. He served as head of Lehman's High Yield and
Primary Capital Markets Groups, and was co-head of Investment Banking. In
addition, Mr. Stern was a member of the firm's Operating Committee. Mr. Stern
also serves on the board of directors of Amtrol, Inc., Franks Nursery & Crafts,
Inc., WESCO International, Inc. and Lear Corporation.
James L. Singleton was elected Director of the Company in March 1996. Mr.
Singleton has been Vice Chairman of Cypress since its formation in April 1994.
Prior to joining Cypress Group, Mr. Singleton was a Managing Director with
Lehman Brothers, Inc., an investment banking firm. Mr. Singleton also serves on
the board of directors of Genesis Health Ventures, Inc., William Scorsman, Inc.,
WESCO International, Inc., ClubCorp, Inc., Danka Business Systems PLC and
Thebault Company.
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Denny Rydberg was elected Director of the Company in July 1997. Mr. Rydberg
has been President of Young Life since July 1993. Prior to joining Young Life,
Mr. Rydberg was Director of University Ministries at University Presbyterian
Church, Vice President of Youth Specialties and Director of Operations for
Inspirational Films.
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Item 11: Executive Compensation
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term
----------------------- Compensation
Awards
------------
Securities
Underlying All Other
Salary (A) Bonus Options/SARs Compensation
Name and Principal Position Year ($) ($) (#) ($)
--------------------------- ---- ---------- ----- ------------ ------------
Lee Roy Mitchell, Chairman of the Board 1999 392,162 -0- -- 118,040(B)
and Chief Executive Officer 1998 356,511 1,643,489 -- 118,040(B)
1997 324,101 1,675,910 -- 120,794(C)
Alan Stock, President and Chief Operating 1999 311,250 -0- -- 7,500(D)
Officer 1998 285,000 121,239(E) 300 7,500(D)
1997 252,484 75,000 -- 7,125(D)
Jeffrey J. Stedman, Senior Vice President, Treasurer 1999 222,400 -0- 7,500(D)
and Chief Financial Officer 1998 200,000 85,080(E) 300 7,500(D)
1997 175,000 57,500 -- 7,125(D)
Tim Warner, President - 1999 252,400 -0- -- 7,500(D)
Cinemark International (G) 1998 230,000 97,842(E) 300 7,500(D)
1997 200,000 60,000 200 7,125(D)
Jerry Brand, Vice President-Film Licensing(H) 1999 222,400 -0- -- 7,500(D)
1998 200,000 63,800(E) 150 7,500(D)
1997 187,250 $ 42,131 -- 7,125(D)
- ---------------------------
(A) Amounts shown include cash and non-cash compensation earned and
received by executive officers as well as amounts earned but deferred
at the election of those officers.
(B) Represents $98,844 of life insurance premiums paid by the Company for
the benefit of Mr. Mitchell, a $1,950 annual contribution to the
Company's 401(k) savings plan and $17,246 representing the value of the
use of a Company vehicle for one year.
(C) Represents $98,844 of life insurance premiums paid by the Company for
the benefit of Mr. Mitchell, a $1,950 annual contribution to the
Company's 401(k) savings plan and $20,000 representing the value of the
use of a Company vehicle for one year.
(D) Represents the Company's annual contribution to the Company's 401(k)
savings plan.
(E) Bonuses were earned in 1998, but were paid in February 1999.
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OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no Options/SAR grants to the named Executive Officers for fiscal
year ended December 31, 1999
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised In-The-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
---- ------------ ------------------ ------------- -------------
Lee Roy Mitchell -- -- -- --
Alan Stock -- -- 1877/240 (A)
Jeffrey J. Stedman -- -- 485/240 (A)
Tim Warner -- -- 444/456 (A)
Jerry Brand -- -- 140/210 (A)
- -------------------------------------------------
(A) The Company has the right to call the shares issuable upon exercise of
the options for terminating employees. The call price increases over
the five year vesting period of the options.
401(k) PENSION PLAN
The Company sponsors a defined contribution savings plan (the "401(k)
Plan") whereby certain employees of the Company or its subsidiaries may (under
current administrative rules) elect to contribute, in whole percentages between
1% and 15% of such employee's compensation, provided no employee's elective
contribution shall exceed the amount permitted under Section 402(g) of the
Internal Revenue Code of 1986, as
33
36
amended ($10,000 in 1999). A discretionary matching contribution is made by the
Company annually ($1.0 million in the aggregate in 1999) to individual accounts.
The Company's matching contribution is subject to vesting and forfeiture. The
Company's contributions vest to individual accounts at the rate of twenty
percent (20%) per year beginning two years from the date of employment. After an
employee has worked for seven years, employees have full and immediate vesting
rights to all of the Company's matching contributions. The Company's
contributions to the accounts of the named Executive Officers are included in
the Summary Compensation Table.
EMPLOYMENT AGREEMENTS
Mr. and Mrs. Mitchell each have an employment agreement with the Company
which contains the terms described below.
Lee Roy Mitchell's 1999 base salary was $392,162 and will increase
thereafter at the rate of 10% per year. In addition, Mr. Mitchell (i) is
entitled to receive an annual bonus, subject to approval by the Board of
Directors, which together with base salary may not exceed $2 million, which
bonus was $0.00 for the year ended December 31, 1999, (ii) is reimbursed for
expenses incurred by him in connection with his duties, and (iii) receives the
use of an automobile of his choice to be replaced at his election every three
years, a club membership of his choice, a whole life insurance policy in the
amount of $3.3 million insuring his life during the period of his employment and
any other benefits generally available to the executives of the Company. The
maximum base salary and bonus which Mr. Mitchell is entitled to receive for any
calendar year is limited to $2 million and the payment of any bonus requires
board approval. The employment agreement terminates on the earlier of (i) Mr.
Mitchell's death or permanent disability (except with respect to amounts payable
as described in the following sentence) or (ii) December 31, 2001. In the event
of Mr. Mitchell's permanent disability, he will be entitled to receive $10,000
per month for a period of 60 months.
Tandy Mitchell's 1999 base salary was $175,384 and will increase thereafter
at the rate of 10% per year. In addition, Mrs. Mitchell (i) is reimbursed for
expenses incurred by her in connection with her duties and (ii) receives the use
of an automobile of her choice to be replaced at her election every three years,
a whole life insurance policy in the amount of $1.0 million insuring her life
during the period of her employment and any other benefits generally available
to the executives of the Company. The employment agreement terminates on the
earlier of (i) Mrs. Mitchell's death or permanent disability or (ii) December
31, 2001.
The employment agreements of Mr. and Mrs. Mitchell provide that their
employment may be terminated by the unanimous decision of the Board of Directors
of the Company (other than the terminated party) for cause if the terminated
party is convicted of a felony and incarcerated or willfully refuses to perform
any of the duties required under the employment agreement for a period of 60
days after notice from the Board of Directors.
The employment of Mr. and Mrs. Mitchell will be deemed to be constructively
terminated if, among other things, there is a change of control (as defined in
Item 6(c) under Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended) of the Company, a merger or consolidation of the Company, a
sale of all or substantially all of the assets of the Company, or if certain
changes related to their respective status or compensation by the Company occur.
In the event of termination of employment by the Company without cause, Mr. and
Mrs. Mitchell will be entitled to receive the amounts that would otherwise be
paid under their respective employment agreements for the remaining term of such
agreements.
The employment agreements of Mr. and Mrs. Mitchell further provide that
they will be indemnified against certain liabilities that may arise by reason of
their status or service as executive officers of the Company. The employment
agreements of Mr. and Mrs. Mitchell do not prohibit their engaging in activities
competitive with those of the Company, including the acquisition of theatres
(subject to fiduciary duties to the Company imposed
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by applicable law or contractual obligation imposed upon Mr. Mitchell by the
Shareholders' Agreement). See "Certain Transactions--Cypress Investment."
STOCK OPTIONS
Employee Stock Option Plan
The Company has established a Nonqualified Stock Option Plan (the "Plan")
under which the Chief Executive Officer of the Company, in his sole discretion,
may grant employees of the Company options to purchase up to an aggregate of
10,685 shares of the Company's Class B Common Stock. The Chief Executive Officer
of the Company has the ability to set the exercise price and the term (of up to
ten years) of the options. All options vest at the rate of one-fifth of the
total options granted per year generally beginning one year from the date of
grant, subject to acceleration by the Chief Executive Officer of the Company. An
employee's options are forfeited if the employee is terminated for cause. Upon
termination of an employee's employment with the Company and provided that no
public market exists for any class of common stock of the Company at such time,
the Company has the option to repurchase any shares of capital stock of the
Company that were acquired by the employee pursuant to the Plan at a specified
formula price based on theatre cash flow.
During 1999, there were no options granted, exercised or forfeited under
the Plan. As of March 30, 2000, there were outstanding under the Plan options to
purchase 6,838 shares of the Company's Class B Common Stock.
Independent Director Stock Options
The Company has granted the unaffiliated directors of the Company options
to purchase up to an aggregate of 900 shares of the Company's Class B Common
Stock at an exercise price of $833.34 per share (the "Director Plan"). Effective
April 15, 1995, the Company amended the Director Options to reduce the aggregate
number of shares of common stock issuable pursuant to the Director Options from
900 to 600 and to reduce the exercise price of the Director Options from $833.34
per share to $1.00 per share. The Director Options vested on June 1, 1997. The
options expire ten years from the date of grant. In December 1998, the Company
granted an unaffiliated director of the Company options to purchase 200 shares
of the Company's Class B Common Stock at an exercise price of $1.00 per share.
The options vest five years from the date of grant and expire ten years from the
date of grant. A director's options are forfeited if the director resigns or is
removed from the Board of Directors of the Company.
During 1999, there were no options granted, exercised or forfeited under
the Director Plan. As of March 30, 2000, there were outstanding options to
purchase 800 shares of the Company's Class B Common Stock issued to directors of
the Company.
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Long Term Incentive Plan
In November 1998, the Board approved a Long Term Incentive Plan (the "1998
Plan") under which the Compensation Committee, in its sole discretion, may grant
employees incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock awards performance units, performance
shares or phantom stock up to an aggregate of 9,794 shares of the Company's
Class B Common Stock. The Compensation Committee has the discretion to set the
exercise price and the term (up to ten years) of the options. All awards under
the 1998 Plan vest at the rate of one-fifth of the total award per year
beginning one year from the date of grant, subject to acceleration by the
Compensation Committee. An employee's award under the 1998 Plan is forfeited if
the employee is terminated for cause. Upon termination of the employee's
employment with the Company, the Company has the option to repurchase the award
at the fair market value of the shares of Class B Common Stock vested under such
award provided that no public market exists for any class of common stock of the
Company.
In January 1999, the Company granted options to purchase 40 shares with an
exercise price of $1,674. The Company believes that the market value of a share
of Class B Common Stock on the date of grant exceeded the option price by
approximately $426. As a result, the Company accrued $17,040 for unearned
compensation and will amortize the non-cash expense at a rate of $3,408 per year
during the five year vesting period for the options granted. In September and
December 1999, 75 and 50 long term incentive plan options were forfeited,
respectively. During 1999, there were no options exercised under the 1998 Plan.
As of March 30, 2000, there were outstanding under the 1998 Plan options to
purchase 5,365 shares of the Company's Class B Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In January 1995, the Board of Directors established a Compensation
Committee of the Board to study senior management compensation and make
recommendations to the Board of Directors as a whole relating to said
compensation. Messrs. Stock, Anderson, Guerra and Singleton currently serve as
members of the Compensation Committee, with Mr. Stock being the only member who
is an officer or employee of the Company or any of its subsidiaries.
Item 12: Security Ownership of Certain Beneficial Owners and Management.
The following table and the accompanying footnotes set forth, as of March
30, 2000, the beneficial ownership of the Company's Common Stock by (i) each
person who is known to the Company to own beneficially more than 5% of either
class of its outstanding Common Stock, (ii) each director and named executive
officer, and (iii) all officers and directors as a group:
Combined
Names and Number of Percent of Percent
Addresses(1) Title of Class Shares (2) Class of Classes
- --------- -------------- ---------- ---------- ----------
Lee Roy Mitchell(3) Class A Common 1,500 100.0%
3900 Dallas Parkway Stock 24.5%
Suite 500 44,187 23.9%
Plano, TX 75093 Class B Common
Stock
CGI Equities, Ltd. Class A Common -- --
3900 Dallas Parkway Stock 18.0%
Suite 500 33,500 18.1%
Plano, TX 75093 Class B Common
Stock
Cypress Merchant Class A Common -- --
Banking Partners, L.P. Stock 42.1%
65 East 55th St. 78,469 42.5%
New York, NY 10022 Class B Common
Stock
Cypress Pictures Ltd. Class A Common -- --
c/o W.S. Walker Co. Stock 2.2%
Second Floor 4,079 2.2%
Caledonian House Class B Common
Mary St., P.O. Box Stock
265
George Town, Grand
Cayman
Cayman Islands
The Mitchell Special Class A Common -- --
Trust Stock 7.9%
3900 Dallas Parkway 14,667 7.9%
Suite 500 Class B Common
Plano, TX 75093 Stock
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Combined
Names and Number of Percent of Percent
Addresses(1) Title of Class Shares(2) Class of Classes
- ------------ -------------- ---------- ---------- ----------
Tandy Mitchell(4) Class A Common -- --
Stock --
-- --
Class B Common
Stock
Alan W. Stock(5) Class A Common -- --
Stock
1,877 * *
Class B Common
Stock
Jeffrey J. Stedman(6) Class A Common -- --
Stock
485 * *
Class B Common
Stock
Tim Warner(7) Class A Common - --
Stock
444 * *
Class B Common
Stock
Jerry Brand (8) Class A Common -- --
Stock
140 * *
Class B Common
Stock
W. Bryce Anderson Class A Common -- --
Stock --
200 --
Class B Common
Stock
Heriberto Guerra, Jr. Class A Common -- --
Stock --
200 --
Class B Common
Stock
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40
Combined
Names and Number of Percent of Percent
Addresses(1) Title of Class Shares(2) Class of Classes
- ------------ -------------- ---------- ---------- ----------
James A. Stern Class A Common -- --
Stock --
-- --
Class B Common
Stock
James L. Singleton Class A Common -- --
Stock --
-- --
Class B Common
Stock
Denny Rydberg Class A Common -- --
Stock --
-- --
Class B Common
Stock
Directors and Officers Class A Common 1,500 100.0%
as a Group (15 Stock 27%
persons) (9) 48,778 26.4%
Class B Common
Stock
* Less than 1%.
(1) Unless otherwise indicated, the Company believes the beneficial owner has
both sole voting and investment powers over such shares.
(2) As of March 30, 2000, 1,500 shares of Class A Common Stock and 184,817
shares of Class B Common Stock were issued and outstanding. Includes 7,865
shares of Class B Common Stock issuable upon the exercise of options that
may be exercised within 60 days of the date of this Report.
(3) Does not include 15,937 shares of Class B Common Stock held in trust for
the benefit of certain of Mr. Mitchell's grandchildren and 33,500 shares of
Class B Common Stock owned for the benefit of Mr. Mitchell's descendants as
to which Mr. Mitchell disclaims beneficial ownership. Mr. Mitchell is the
co-trustee of such trusts.
(4) Excludes any shares owned by Mr. Mitchell that Mrs. Mitchell may be deemed
to own as a result of community property laws.
(5) Includes 1,877 shares of Class B Common Stock issuable upon the exercise of
options that may be exercised within 60 days of the date of this Report.
(6) Includes 485 shares of Class B Common Stock issuable upon the exercise of
options that may be exercised within 60 days of the date of this Report.
(7) Includes 444 shares of Class B Common Stock issuable upon the exercise of
options that may be exercised within 60 days of the date of this Report.
(8) Includes 140 shares of the Class B Common Stock issuable upon the exercise
of options that may be exercised within 60 days of the date of this Report.
(9) Includes 591 shares of Class B Common Stock issuable upon the exercise of
options that may be exercised within 60 days of the date of this Report.
Does not include 15,937 shares of Class B Common Stock held in trust for
the benefit of certain of Mr. Mitchell's grandchildren and 33,500 shares of
Class B Common Stock owned for the benefit of Mr. Mitchell's descendants,
as to which Mr. Mitchell disclaims beneficial ownership. Mr. Mitchell is
the co-trustee of such trusts.
COMMON STOCK
The rights of the holders of Class A and Class B common stock are identical
except for voting and conversion rights. Each share of Class A Common Stock is
entitled to one vote on all matters submitted to a vote of the Company's
shareholders. Class B Common Stock is non-voting. Subject to contractual
limitations regarding conversion of Class B Common Stock into Class A Common
Stock contained in the Shareholders' Agreement and
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in Stock Transfer Restriction Agreements between the Company and certain former
employees, each share of Class B Common Stock is convertible at any time, at the
option of and without cost to the shareholder, into the same number of shares of
Class A Common Stock upon surrender to the Company of the certificate or
certificates evidencing the Class B Common Stock to be converted, together with
a written notice of the election of such shareholder to convert such shares into
Class A Common Stock. Holders of Class A and Class B Common Stock are entitled
to receive pro rata per share such dividends as the Board of Directors may from
time to time declare out of funds of the Company legally available for the
payment of dividends. Upon liquidation, dissolution or winding-up of the
Company, the holders of Class A and Class B Common Stock are entitled to share
ratably in all assets available for distribution after payment in full of
creditors. In a merger, consolidation or other business combination, the
consideration to be received per share by holders of Class A and Class B Common
Stock must be identical, except that in any such transaction in which shares of
common stock are distributed, such shares may differ to the extent that voting
rights differ among existing classes of Common Stock. See "Certain
Transactions-- Cypress Investment."
Item 13: Certain Relationships and Related Transactions.
Laredo Joint Venture
The Company manages one theatre (12 screens) for Laredo Theatre, Ltd.
("Laredo"). Lone Star Theatres, Inc. owns 25% of the limited partnership
interests in Laredo. Cinemark International is the sole general partner and owns
the remaining limited partnership interests. Lone Star Theatres, Inc. is owned
100% by Mr. David Roberts, who is Mr. Mitchell's son-in-law. The Company
recorded $148,323 of management fee revenues from Laredo in 1999.
Cinemark Partners II
The Company manages one theatre (17 screens, including an Imax screen) for
Cinemark Partners II, Ltd. ("Cinemark Partners II"). Cinemark Partners I, Inc.,
a wholly owned subsidiary of the Company, is the sole general partner of
Cinemark
39
42
Partners II. Cinemark Partners I, Inc. owns 1% of the limited partnership
interests in Cinemark Partners II and the Company owns 50% of the limited
partnership interests in Cinemark Partners II. On January 5, 1998, the Company
purchased approximately 31% of the limited partnership interests in Cinemark
Partners II for $3.1 million from the existing partners. Prior to such
acquisition, Mr. Mitchell owned 10.1% of the limited partnership interests in
Cinemark Partners II. Additionally, the Company purchased an additional 77.1
units for an aggregate purchase price of $3.7 million. After consummating such
transactions, the Company owns approximately 51% of Cinemark Partners II. The
Company recorded $269,098 of management fee revenues from Cinemark Partners II
in 1999.
Cinemark Alberta
The Company manages one discount theatre (12 screens) for Cinemark Alberta.
Cinemark Holdings Canada, Inc., a wholly owned subsidiary of Cinemark
International, runs 50% of Cinemark Alberta. The Company recorded $81,794 of
management fee revenues from Cinemark Alberta in 1999.
In August 1999, Cinemark Alberta, Inc. sold a twelve screen theatre for
$6.0 million (CAN). The proceeds were used to pay off its entire debt obligation
with a Canadian bank. The remaining proceeds were distributed to the
Shareholders.
STARPLEX CINEMAS, INC.
On June 21, 1994, the Company executed a ground lease on property located
in Lewisville, Texas. The Company constructed and equipped an eight screen
multiplex theatre. The Company leases the theatre and the equipment to Starplex
Cinemas, Inc. ("Starplex"). The Company has recorded only $450,000 of rental
income since the inception of this lease as the theatre is performing below
expectations and Starplex is delinquent in making its required rent payments.
Starplex Cinemas, Inc. is 100% owned by Mr. Mitchell's brother.
SHAREHOLDERS' AGREEMENT
The Company entered into the Shareholders' Agreement dated March 12,
1996 with Mr. Mitchell, his affiliates and Cypress (the "Shareholders'
Agreement"). Among other things, the Shareholders' Agreement provides that,
subject to certain conditions, the Company must obtain (with certain exceptions)
the consent of CALP for certain corporate acts including, but not limited to,
amendments to the Articles of Incorporation of the Company, approval of annual
budgets under certain circumstances, asset dispositions or acquisitions in
excess of specified amounts, merger or consolidation of the Company, incurrence
of indebtedness over specified amounts, certain stock redemptions or dividends,
transactions with affiliates over specified amounts, certain management changes
or new compensation plans, financing theatres through limited partnerships,
settlements of litigation over specified amounts and issuance of common stock
under certain conditions. The Shareholders' Agreement also provides that Cypress
may not convert its Class B Common Stock to Class A Common Stock unless certain
events occur such as a Change of Control (as defined in the Shareholders'
Agreement) or the consummation of a public offering of the Company's common
stock. The above-described provisions terminate on the earlier of (i) the public
owning 25% or more of the common stock of the Company, (ii) the merger of the
Company with and into any publicly traded company or (iii) ten years after the
date of the Shareholders' Agreement. The Shareholders' Agreement also contains a
voting agreement pursuant to which Mr. Mitchell agrees to vote his shares of
common stock to elect certain designees of CALP to the Board of Directors of the
Company.
40
43
Mr. Mitchell also agreed that in the event any corporate opportunity is
presented to Mr. Mitchell or any of his affiliates to acquire or enter into any
business transaction involving the motion picture exhibition business that would
be significant to the Company, he would submit such opportunity to the Board of
Directors of the Company before taking any action.
The Shareholders' Agreement further provides that the shareholders agree to
form a new corporation as the parent corporation of the Company and to
contribute their respective shares for like shares of this new corporation. The
Company is currently pursuing plans to create such a holding company.
INDEMNIFICATION OF DIRECTORS
The Company has adopted provisions in its Articles of Incorporation and
Bylaws which provide for indemnification of its officers and directors to the
maximum extent permitted under the Texas Business Corporation Act. In addition,
the Company has entered into separate indemnification agreements with each of
its directors which requires the Company, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors to the maximum extent permitted under the Texas Business
Corporation Act. The Company has obtained an insurance policy providing for
indemnification of officers and directors of the Company and certain other
persons against liabilities and expenses incurred by any of them in certain
stated proceedings and under certain stated conditions.
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. The financial statements listed in the accompanying Index beginning on
F-1 are filed as a part of this report.
2. The financial statement schedules and related data listed in the
accompanying Index beginning on S-1 are filed as a part of this report.
3. The exhibits listed in the accompanying Index beginning on E-1 are filed
as a part of this report, which exhibits are bound separately.
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed during the last quarter
of the period covered by this Report:
1. None.
(c) Exhibits.
See the accompanying Index beginning on page E-1, which exhibits are bound
separately.
41
44
(d) Financial Statement Schedules.
See the accompanying Index beginning on page F-1.
42
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2000 CINEMARK USA, INC.
BY: /s/ Alan W. Stock
----------------------------
Alan W. Stock, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Lee Roy Mitchell Chairman of the Board of Directors March 30, 2000
------------------------------------ and Chief Executive Officer
Lee Roy Mitchell
/s/ Tandy Mitchell Director March 30, 2000
Tandy Mitchell
/s/ Alan W. Stock Director March 30, 2000
------------------------------------
Alan W. Stock
/s/ Jeffrey J. Stedman Director; Senior Vice President and March 30, 2000
------------------------------------ Treasurer (Chief Financial and
Jeffrey J. Stedman Accounting Officer)
/s/ W. Bryce Anderson Director March 30, 2000
------------------------------------
W. Bryce Anderson
/s/ Heriberto Guerra Director March 30, 2000
------------------------------------
Heriberto Guerra
/s/ James A. Stern Director March 30, 2000
------------------------------------
James A. Stern
/s/ James L. Singleton Director March 30, 2000
------------------------------------
James L. Singleton
/s/ Denny Rydberg Director March 30, 2000
------------------------------------
Denny Rydberg
43
46
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report or proxy material has been sent to the Company's
shareholders. An annual report and proxy material may be sent to the Company's
shareholders subsequent to the filing of this Form 10-K. The Company shall
furnish to the Securities and Exchange Commission copies of any annual report or
proxy material that is sent to the Company's shareholders.
44
47
CINEMARK USA, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(ITEMS 8 AND 14 OF FORM 10-K) AND SUPPLEMENTAL SCHEDULES
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT OF DELOITTE & TOUCHE LLP ........................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets, December 31, 1998 and 1999 ....................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999 ........................................................... F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the
Years Ended December 31, 1997, 1998 and 1999 ............................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 ........................................................... F-7
Notes to Consolidated Financial Statements .................................................... F-8
SUPPLEMENTAL SCHEDULES REQUIRED BY THE INDENTURES
FOR THE SENIOR SUBORDINATED NOTES:
Schedule
A. Consolidating Balance Sheet Information, December 31, 1999 ............................ S-1
B. Consolidating Statement of Operations Information for the Year Ended
December 31, 1999 ..................................................................... S-2
C. Consolidating Statement of Cash Flows Information for the Year Ended
December 31, 1999 ..................................................................... S-3
F-1
48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cinemark USA, Inc. and Subsidiaries
Plano, TX
We have audited the accompanying consolidated balance sheets of Cinemark USA,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity and comprehensive income
(loss), and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of a
consolidated subsidiary in Brazil as of December 31, 1998, and for the year then
ended, which statements reflect total assets constituting 7% of consolidated
total assets as of December 31, 1998, and total revenues constituting 5% of
consolidated total revenues for the year then ended. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for this subsidiary
audited by other auditors, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors for 1998 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors for
1998, such consolidated financial statements present fairly, in all material
respects, the financial position of Cinemark USA, Inc. and subsidiaries as of
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for start-up activities and
organizational costs to conform with AICPA Statement of Position 98-5.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental schedules
of certain consolidating information listed in the index on page F-1 are
presented for the purpose of additional analysis of the basic consolidated
financial statements rather than to present the financial position, results of
operations and cash flows of the individual companies, and are not a required
part of the basic consolidated financial statements. These schedules are the
responsibility of the Company's management. Such schedules have been subjected
to the auditing procedures applied in our audits of the basic consolidated
financial statements and, in our opinion, are fairly stated in all material
respects when considered in relation to the basic consolidated financial
statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 29, 2000
F-2
49
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
- --------------------------------------------------------------------------------
ASSETS 1998 1999
CURRENT ASSETS
Cash and cash equivalents $ 25,645,868 $ 8,872,157
Inventories 3,591,705 4,734,520
Co-op advertising and other receivables 12,414,288 12,067,471
Income tax receivable 3,032,642 2,036,146
Prepaid expenses and other 2,457,952 7,508,722
-------------- --------------
Total current assets 47,142,455 35,219,016
THEATRE PROPERTIES AND EQUIPMENT
Land 63,150,938 74,539,782
Buildings 230,092,564 287,010,013
Leasehold interests and improvements 128,781,996 298,888,849
Theatre furniture and equipment 412,986,435 406,899,420
Theatres under construction 53,230,545 40,448,244
-------------- --------------
Total 888,242,478 1,107,786,308
Less accumulated depreciation and amortization 138,550,648 173,827,249
-------------- --------------
Theatre properties and equipment - net 749,691,830 933,959,059
OTHER ASSETS
Certificates of deposit (Note 10) 4,056,096 --
Investments in and advances to affiliates (Notes 5 and 6) 29,811,533 2,289,553
Goodwill - net (Note 5) 13,495,195 18,619,715
Deferred charges and other - net (Notes 7 and 8) 38,475,525 51,773,896
-------------- --------------
Total other assets 85,838,349 72,683,164
-------------- --------------
TOTAL $ 882,672,634 $1,041,861,239
============== ==============
(Continued)
F-3
50
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
CURRENT LIABILITIES
Current portion of long-term debt (Note 8) $ 337,895 $ 21,420,579
Accounts payable 28,295,844 53,086,805
Accrued film rentals 18,811,968 19,274,690
Accrued interest 17,147,519 17,956,313
Accrued payroll 6,814,731 5,946,610
Accrued property taxes and other liabilities 23,655,754 33,773,669
--------------- ---------------
Total current liabilities 95,063,711 151,458,666
LONG-TERM LIABILITIES
Long-term debt,less current portion (Note 8) 631,310,726 756,992,498
Deferred lease expenses (Note 10) 14,578,747 16,188,800
Deferred gain on sale leaseback (Note 10) 6,803,542 5,470,381
Deferred income taxes(Note 9) 16,114,342 18,088,004
--------------- ---------------
Total long-term liabilities 668,807,357 796,739,684
COMMITMENTS AND CONTINGENCIES (Note 10)
MINORITY INTERESTS IN SUBSIDIARIES (Note 11) 43,001,950 29,812,343
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 and outstanding 49,537,607 49,537,607
Additional paid-in-capital 13,773,691 13,733,221
Unearned compensation - stock options (4,221,326) (3,131,680)
Retained earnings 58,105,217 59,140,652
Treasury stock, 57,211 Class B shares at cost (24,198,890) (24,198,890)
Accumulated other comprehensive loss (17,196,698) (31,230,379)
--------------- ---------------
Total shareholders' equity 75,799,616 63,850,546
--------------- ---------------
TOTAL $ 882,672,634 $ 1,041,861,239
=============== ===============
See notes to consolidated financial statements. (Concluded)
F-4
51
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
1997 1998 1999
REVENUES
Admissions $ 274,800,669 $ 363,206,268 $ 459,334,408
Concessions 149,243,137 192,104,307 221,083,945
Other (Note 13) 10,554,519 15,908,337 32,185,843
------------- ------------- -------------
Total 434,598,325 571,218,912 712,604,196
COSTS AND EXPENSES
Cost of operations
Film rentals and advertising 148,674,251 197,218,829 246,393,817
Concession supplies 22,472,659 30,377,832 38,180,316
Salaries and wages 56,003,650 69,375,351 82,870,409
Facility leases (Note 13) 38,735,067 61,281,370 89,808,343
Utilities and other 56,576,786 75,005,283 96,228,905
------------- ------------- -------------
Total cost of operations 322,462,413 433,258,665 553,481,790
General and administrative expenses 27,598,119 32,947,380 34,833,403
Depreciation and amortization 25,372,823 37,197,161 53,268,575
Asset impairment loss 2,213,696 9,950,088 3,720,390
(Gain) loss on sale of assets (189,352) (2,266,320) 2,419,511
------------- ------------- -------------
Total 377,457,699 511,086,974 647,723,669
OPERATING INCOME 57,140,626 60,131,938 64,880,527
OTHER INCOME (EXPENSE)
Interest expense (32,703,303) (42,083,479) (58,836,739)
Amortization of debt issue cost and discount (783,972) (930,101) (1,030,339)
Interest income 1,171,516 2,818,246 1,980,743
Foreign currency exchange gain (loss) (Note 3) (436,124) 790,234 (186,077)
Equity in income (loss) of affiliates (Note 6) 954,847 (190,330) 241,218
Minority interests in loss of subsidiaries (Note 11) 346,423 1,940,476 662,456
------------- ------------- -------------
Total (31,450,613) (37,654,954) (57,168,738)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 25,690,013 22,476,984 7,711,789
INCOME TAXES (Note 9) 10,671,089 11,468,455 3,707,717
------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 15,018,924 11,088,529 4,004,072
Extraordinary loss on early extinguishment of debt, net of income tax
benefit of $256,768 (Note 8) (313,827) -- --
Cumulative effect of a change in accounting principle, net of income tax
benefit of $417,570 (Note 1) -- -- (2,968,637)
------------- ------------- -------------
NET INCOME $ 14,705,097 $ 11,008,529 $ 1,035,435
============= ============= =============
EARNINGS PER SHARE (Note 2)
Income before extraordinary items and accounting change $ 84.13 $ 61.73 $ 22.45
Extraordinary items (1.76) -- --
Cumulative effect of a change in accounting principle -- -- (16.64)
------------- ------------- -------------
Net income $ 82.37 $ 61.73 $ 5.81
============= ============= =============
EARNINGS PER SHARE (ASSUMING DILUTION)
Income before extraordinary items and accounting change $ 80.45 $ 59.01 $ 20.88
Extraordinary items (1.68) -- --
Cumulative effect of a change in accounting principle -- -- (15.48)
------------- ------------- -------------
Net income $ 78.77 $ 59.01 5.40
============= ============= =============
See notes to consolidated financial statements.
F-5
52
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Class A Class B
Common Stock Common Stock
------------------ ----------------------- Additional Unearned
Shares Shares Paid-in Compensation
Issued Amount Issued Amount Capital Stock Options
BALANCE January 1, 1997 1,500 $ 15 233,176 $ 49,536,710 $ 9,182,880 $ (2,434,717)
Net income
Unearned compensation from stock options granted 1,073,296 (1,073,296)
Unearned compensation from stock options forfeited (74,386) 61,988
Amortization of unearned compensation 1,911,234
Stock options exercised, including tax benefit 837 837 20,092
Foreign currency translation adjustment
Purchase of treasury stock, 2,246 Class B shares,
at cost
----- ----- ------- ------------ ------------ ------------
BALANCE December 31, 1997 1,500 $ 15 234,013 $ 49,537,547 $ 10,201,882 $ (1,534,791)
Net income
Unearned compensation from stock options granted 3,587,500 (3,587,500)
Unearned compensation from stock options forfeited (49,590) 37,193
Amortization of unearned compensation 863,772
Stock options exercised, including tax benefit 60 60 33,899
Foreign currency translation adjustment
----- ----- ------- ------------ ------------ ------------
BALANCE December 31, 1998 1,500 $ 15 234,073 $ 49,537,607 $ 13,773,691 $ (4,221,326)
Net income
Unearned compensation from stock options granted 17,040 (17,040)
Unearned compensation from stock options forfeited (57,510) 52,718
Amortization of unearned compensation 1,053,968
Stock options exercised, including tax benefit
Foreign currency translation adjustment
----- ----- ------- ------------ ------------ ------------
BALANCE December 31, 1999 1,500 $ 15 234,073 $ 49,537,607 $ 13,733,221 $ (3,131,680)
===== ===== ======= ============ ============ ============
Accumulated
Other
Retained Treasury Comprehensive Comprehensive
Earnings Stock Income (Loss) Total Income (loss)
BALANCE January 1, 1997 $ 32,391,591 $(20,184,416) $(11,129,451) $ 57,362,612
Net income 14,705,097 14,705,097 $ 14,705,097
Unearned compensation from stock options granted --
Unearned compensation from stock options forfeited (12,398)
Amortization of unearned compensation 1,911,234
Stock options exercised, including tax benefit (737) 20,192
Foreign currency translation adjustment 8,876 8,876 8,876
Purchase of treasury stock, 2,246 Class B shares, --
at cost (4,013,737) (4,013,737)
------------ ------------ ------------ ------------ ------------
BALANCE December 31, 1997 $ 47,096,688 $(24,198,890) $(11,120,575) $ 69,981,876 $ 14,713,973
============
Net income 11,008,529 11,008,529 11,008,529
Unearned compensation from stock options granted --
Unearned compensation from stock options forfeited (12,397)
Amortization of unearned compensation 863,772
Stock options exercised, including tax benefit 33,959
Foreign currency translation adjustment (6,076,123) (6,076,123) (6,076,123)
------------ ------------ ------------ ------------ ------------
BALANCE December 31, 1998 $ 58,105,217 $(24,198,890) $(17,196,698) $ 75,799,616 $ 4,932,406
============
Net income 1,035,435 1,035,435 1,035,435
Unearned compensation from stock options granted --
Unearned compensation from stock options forfeited (4,792)
Amortization of unearned compensation 1,053,968
Stock options exercised, including tax benefit --
Foreign currency translation adjustment (14,033,681) (14,033,681) (14,033,681)
------------ ------------ ------------ ------------ ------------
BALANCE December 31, 1999 $ 59,140,652 $(24,198,890) $(31,230,379) $ 63,850,546 $(12,998,246)
============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-6
53
CINEMARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
1997 1998 1999
OPERATING ACTIVITIES
Net Income $ 14,705,097 $ 11,008,529 $ 1,035,435
Loss on early extinguishment of debt 607,033 -- --
Noncash items in net income:
Depreciation 24,241,903 35,798,680 51,960,793
Amortization - intangibles and other assets 2,573,587 2,162,415 2,163,621
Loss on impairment of assets 2,213,696 9,950,088 3,720,390
Amortization of gain on sale leaseback - (271,458) (218,920)
Deferred lease expenses 1,484,001 1,341,476 1,610,053
Deferred income tax expenses 5,010,420 5,177,313 1,973,662
Debt issued for accrued interest 2,850,100 -- --
Amortization of debt discount and premium (27,004) (36,840) (28,508)
Amortized compensation - stock options 1,898,836 851,375 1,049,176
(Gain) loss on sale of assets (189,352) (2,266,320) 2,419,511
Equity in (income) loss of affiliates (954,847) 190,330 (241,218)
Minority interests in loss of subsidiaries (346,423) (1,940,476) (662,456)
Cumulative effect of an accounting change -- -- 3,386,207
Cash provided by (used for) operating working
capital:
Inventories (937,908) (1,357,474) (1,142,815)
Co-op advertising and other receivables (4,506,650) 723,824 346,817
Prepaid expenses and other (5,476,834) (15,563,272) (5,050,770)
Accounts payable 2,551,682 912,926 24,790,961
Accrued liabilities 15,879,612 17,396,088 9,407,069
Income tax receivable/payable -- -- 996,496
--------------- --------------- ----------------
Net cash provided by operating activities: 61,576,949 64,077,204 97,515,504
INVESTING ACTIVITIES:
Additions to theatre properties and equipment (200,272,497) (387,905,629) (248,370,598)
Sale of theatre properties and equipment 1,737,632 152,215,795 23,867,262
Decrease (increase) in certificates of deposit -- (2,184,259) 4,056,096
Decrease (increase) in investments in and
advances to affiliates (27,124,560) 4,127,536 9,150,762
Increase in other assets (3,643,028) (14,396,545) (16,286,354)
--------------- --------------- ----------------
Net cash used for investing activities (229,302,453) (248,143,102) (227,582,832)
FINANCING ACTIVITIES:
Issuance of Senior Subordinated Notes 77,250,000 103,950,000 --
Retirement of Senior Subordinated Notes (28,561,000) -- --
Retirement of Senior Notes (1,630,000) -- --
Increase in long-term debt 194,065,000 315,888,000 180,750,458
Reductions of long-term debt (77,648,980) (259,691,753) (51,676,027)
Decrease in theatre development advance (396,095) (390,562) --
Minority investment in subsidiaries, net 26,338,402 18,209,865 (15,022,151)
Common stock issued for options exercised 20,192 33,959 --
Purchase of treasury stock (4,013,737) -- --
--------------- --------------- ----------------
Net cash provided by financing activities 185,423,782 177,999,509 114,052,280
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 8,876 (76,123) (758,663)
--------------- --------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,707,154 (6,142,512) (16,773,711)
CASH AND CASH EQUIVALENTS:
Beginning of period 14,081,226 31,788,380 25,645,868
--------------- --------------- ----------------
End of period $ 31,788,380 $ 25,645,868 $ 8,872,157
=============== =============== ================
SUPPLEMENTAL INFORMATION (Note 4)
See notes to consolidated financial statements.
F-7
54
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Cinemark USA, Inc. with its subsidiaries (the Company) is a
world leader in the motion picture exhibition industry that owns or leases and
operates motion picture theatres in 32 states, Canada, Mexico, Argentina,
Brazil, Chile, Ecuador, Peru, Honduras, El Salvador, Nicaragua, Costa Rica and
Colombia. The Company operates 2,708 screens in 254 theatres and manages an
additional three theatres (23 screens) at December 31, 1999.
Principles of Consolidation - The consolidated financial statements include
the accounts of Cinemark USA, Inc. and its subsidiaries. Majority-owned
subsidiaries are consolidated while those subsidiaries of which the Company owns
between 20% and 50% are accounted for as affiliates under the equity method. The
results of these subsidiaries and affiliates are included in the financial
statements effective with their formation or from their dates of acquisition.
Significant intercompany balances and transactions are eliminated in the
consolidation. Certain reclassifications have been made to December 31, 1997 and
1998 amounts to conform with the 1999 presentation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Inventories - Concessions and theatre supply inventories are stated at the
lower of cost (first-in, first-out method) or market.
Theatre Properties and Equipment - Theatre properties and equipment are
stated at cost less accumulated depreciation and amortization. Property
additions include $2,152,816, $4,397,643 and $4,312,499 of interest incurred
during the development and construction of theatres capitalized in 1997, 1998
and 1999, respectively. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets as follows: buildings - 18 to 40
years, theatre furniture and equipment - 5 to 15 years. Leasehold interests and
improvements are amortized using the straight-line method over the lesser of the
lease period or the estimated useful lives of the leasehold improvements. The
Company determined that impairment charges of $2,213,696, $9,950,088 and
$3,720,390 were required for certain theatres in 1997, 1998 and 1999,
respectively. The impairment charges were recognized in the third quarter of
1997, the fourth quarter of 1998 and the third and fourth quarters of 1999,
respectively. For purposes of determining the impairment amount, fair value of
operating theatres was determined based on discounted cash flows.
Goodwill - The excess of cost over the fair values of the net assets of
theatre businesses acquired, less accumulated amortization ($1,466,882 and
$2,789,751 at December 31, 1998 and 1999, respectively) is recorded as Goodwill.
For financial reporting purposes, these amounts are being amortized primarily
over 10 to 20 years, which approximate the remaining lease terms of the
businesses acquired.
F-8
55
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Deferred Charges and Other Assets - Primarily consist of foreign advanced
rents, construction advances and other deposits, equipment to be placed in
service, debt issue costs and other intangible assets. Foreign advanced rents
represent advance payments of long-term leases which are expensed to facility
lease expense generally over 10 to 20 years as leased facilities are utilized.
Debt issue costs are amortized using the straight-line method over the primary
financing terms ended September 2001 to July 2008. Other intangible assets are
amortized over the respective lives of the trademarks, noncompete agreements or
other intangible asset agreements.
Revenue Recognition - Revenues are recognized when admissions and
concessions sales are received and screen advertising is shown at the theatres.
Film rental costs are accrued based on the applicable box office receipts and
estimates of the final settlement pursuant to the film licenses.
Statement of Cash Flows - For purposes of reporting cash flows, cash and
cash equivalents consist of operating funds held in financial institutions,
petty cash held by the theatres and highly liquid investments with remaining
maturities of three months or less when purchased.
Fair Values of Financial Instruments - In accordance with Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments." Fair values of financial instruments are estimated by
the Company using available market information and other valuation methods. The
estimated fair value amounts for specific groups of financial instruments are
presented in Note 8. Values are based on available market quotes or estimates
using a discounted cash flow approach based on the interest rates currently
available for similar debt. The fair value of financial instruments for which
estimated fair value amounts are not specifically presented is estimated to
approximate the related recorded value.
Start-Up Activities And Organization Costs - On January 1, 1999 the Company
adopted Statement of Position (SOP) 98-5 requiring start-up activities and
organization costs to be expensed as incurred. The Company's practice had been
to capitalize organization costs associated with the organization of new
entities as well as costs associated with forming international joint ventures
as deferred charges and to amortize them over the anticipated life of the
respective entity or venture. The adoption of this new accounting pronouncement
resulted in the aggregate write-off of the unamortized organization costs of
$3,386,207 on January 1, 1999. This charge was recorded as a cumulative effect
of a change in accounting principle as a one-time non cash charge to income of
$2,968,637 (net of tax) in the first quarter of 1999 as follows:
United States $ 152,966
Mexico --
Brazil 552,488
Other Foreign Countries 2,263,183
----------
$2,968,637
==========
(Gain) Loss on Sale of Assets - In 1999, the Company adopted Staff
Accounting Bulletin (SAB) No. 101, "Revenue recognition in Financial
Statements", requiring that gains and losses on sale of assets be recorded as a
component of operating income. The Company's practice had been to classify these
gains and losses as other income and expense. As a result of the new accounting
pronouncement, the Company has reclassified gains of $189,352 and $2,266,320 and
losses of $2,419,511 from other income and expense to be included as a component
of operating income in 1997, 1998 and 1999, respectively.
F-9
56
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
2. EARNINGS PER SHARE
Earnings Per Share are computed using the weighted average number of shares
of Class A and Class B common stock outstanding during each period. The
following table sets forth the computation of basic and diluted earnings per
share:
1997 1998 1999
-------- -------- --------
Income before extraordinary items and cumulative effect of an
accounting change (in thousands) $ 15,019 $ 11,009 $ 4,004
======== ======== ========
Basic:
Weighted average common shares outstanding 178,524 178,325 178,362
======== ======== ========
Earnings per common share $ 84.13 $ 61.73 $ 22.45
======== ======== ========
Diluted:
Weighted average common shares outstanding 178,524 178,325 178,362
Common equivalent shares for stock options 8,167 8,213 13,391
-------- -------- --------
Weighted average shares outstanding 186,691 186,538 191,753
======== ======== ========
Earnings per common and common equivalent share $ 80.45 $ 59.01 $ 20.88
======== ======== ========
For additional disclosures regarding the Company's stock option plans see
Note 12.
3. FOREIGN CURRENCY TRANSLATION
The accumulated other comprehensive loss in shareholders' equity of
$17,196,698 and $31,230,379 at December 31, 1998 and 1999, respectively,
primarily relates to the unrealized adjustments from translating the financial
statements of Cinemark Brasil, S.A., Cinemark de Mexico, S.A. de C.V. and
Cinemark Chile, S.A. into U.S. dollars.
Prior to 1997, the functional currency of Cinemark de Mexico, S.A. de C.V.,
was the peso. In 1997 and 1998 the Company was required to utilize the U.S.
dollar as the functional currency of Cinemark de Mexico, S.A. de C.V., for U.S.
reporting purposes due to the highly inflationary economy of Mexico. Thus,
devaluations in the peso during 1997 and 1998 that affected the Company's
investment were charged to exchange gain or loss rather than to the accumulated
other comprehensive loss account as a reduction of shareholders' equity. An
exchange gain (loss) of ($96,514) and $567,206 was recognized in 1997 and 1998,
respectively, and is included in other income (expense). In 1999, the economy of
Mexico reverted back to a non-highly inflationary status in which the peso again
became the functional currency of Cinemark de Mexico, S.A. de C.V. resulting in
certain assets, liabilities and equity accounts being restated at the current
exchange rate. Thus, changes in the peso have been recorded in the accumulated
other comprehensive loss account as a reduction of shareholders' equity during
1999. At December 31, 1999, the total assets of Cinemark de Mexico, S.A. de
C.V., were approximately U.S.$70 million.
F-10
57
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Prior to 1998, the functional currency of Cinemark del Ecuador S.A. was the
sucre. In 1998 and 1999, the Company was required to utilize the U.S. dollar as
the functional currency of Cinemark del Ecuador S.A. for U.S. reporting purposes
due to the highly inflationary economy of Ecuador. Thus, devaluations in the
sucre during 1998 and 1999 that affected the Company's investment were charged
to exchange gain (loss) rather than to the accumulated other comprehensive loss
account as a reduction of shareholders' equity. An exchange gain of $223,028 and
$74,078 was recognized in 1998 and 1999, respectively, and is included in other
income (expense). At December 31, 1999, the total assets of Cinemark del Ecuador
S.A. were approximately U.S.$5 million.
In January 1998, the economy of Brazil became non-highly inflationary and
the functional currency of Cinemark Brasil, S.A. changed from the U.S. dollar to
the Real. Accordingly, assets and liabilities of Cinemark Brasil, S.A. are
translated to U.S. dollars at year-end exchange rates (consistent with all other
non-highly inflationary consolidated foreign subsidiaries). Income and expense
items are translated at the average rates prevailing during the year. As a
result of the devaluation of the Real during 1998 and 1999, the Company recorded
a cumulative foreign currency translation adjustment to the accumulated other
comprehensive loss account resulting in a reduction of shareholder's equity of
$4.4 million and $11.0 million in 1998 and 1999, respectively. At December 31,
1999, the total assets of Cinemark Brasil, S.A. were approximately U.S.$65
million.
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statement of cash flows:
1997 1998 1999
----------- ----------- -----------
Interest paid $27,721,091 $41,556,819 $61,253,543
=========== =========== ===========
Income taxes paid (net of refunds) $10,978,902 $ 7,715,397 $ 3,170,041
=========== =========== ===========
Noncash investing and financing activities:
Issued note payable in acquisition of Prodecine, S.A $11,000,000
In December 1998, the Company acquired an additional 45% equity interest in
its Chilean operating Company (Cinemark Chile, S.A.) for $7.625 million. As a
result of the additional equity interest acquired, Cinemark Chile, S.A. was
consolidated with the Company's operations effective January 1, 1999. The assets
and liabilities of this former equity interest that are included in the
consolidation as of January 1, 1999 are as follows:
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
============
F-11
58
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Company's Central American operating entities (Cinemark Nicaragua y
Cia. Ltda., Cinemark Costa Rica, S.R.L., Cinemark El Salvador, S.A. de C.V. and
Cinemark Honduras, S.R.L.) were consolidated with the Company's operations
effective January 1, 1999. The assets and liabilities of these former equity
interests that are included in the consolidation as of January 1, 1999 are as
follows:
Theatre properties and equipment, net $ 5,000,000
Minority interest (2,495,000)
-----------
Investment in affiliate $ 2,505,000
===========
5. ACQUISITIONS AND INVESTMENTS IN SUBSIDIARIES
Cinemark USA, Inc. has made the following direct investments in its
subsidiaries in 1997, 1998 and 1999, respectively.
(in millions) Partners II Laredo Argentine Peruvian Mexican Chilean Canadian
Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary
January 1, 1997 Capital contributed $ -- $ 0.6 $ -- $ -- $ -- $ -- $ --
1997 Capital contribution -- 0.4 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
December 31, 1997 Capital contributed $ -- $ 1.0 $ -- $ -- $ -- $ -- $ --
1998 Capital contribution 5.5 -- 13.1 1.5 -- -- 14.2
1998 Ownership transfer from
Cinemark International, L.L.C -- -- -- -- $ 21.0 -- --
------ ------ ------ ------ ------ ------ ------
December 31, 1998 Capital contributed $ 5.5 $ 1.0 $ 13.1 $ 1.5 $ 21.0 $ -- $ 14.2
1999 Capital contribution -- -- 0.7 0.5 -- 18.5 --
1999 Ownership transfer from
Cinemark International, L.L.C -- -- 21.3 1.5 -- -- --
------ ------ ------ ------ ------ ------ ------
December 31, 1999 Capital contributed $ 5.5 $ 1.0 $ 35.1 $ 3.5 $ 21.0 $ 18.5 $ 14.2
====== ====== ====== ====== ====== ====== ======
Ownership % as of December 31, 1999 51% 75% 100% 100% 95.6% 98.0% 100%
Approximately $3.3 million of goodwill was recorded in 1998 as part of the
investment in the Peruvian subsidiary as the additional 50% ownership interest
was acquired from the Cinemark International, L.L.C. joint venture partners at a
cost in excess of the fair value of the net assets acquired. The Peruvian
subsidiary was jointly owned by Cinemark International, L.L.C. and Cinemark USA,
Inc. at December 31, 1998. The 50% interest held by Cinemark International,
L.L.C. was transferred to Cinemark USA, Inc. in January 1999.
Approximately $3.6 million of goodwill was recorded in 1999 as part of the
investment in the Chilean subsidiary as an additional 45% ownership interest was
acquired from the Cinemark USA, Inc. joint venture partners at a cost in excess
of the fair value of the net assets acquired. This acquisition increased the
Company's ownership interest from 50% to 95% resulting in the Chilean subsidiary
being consolidated and the related goodwill being recorded effective January 1,
1999. Subsequent 1999 capital contributions have further increased the Company's
ownership interest to 98%.
F-12
59
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Cinemark International, L.L.C. (a wholly owned subsidiary of Cinemark USA,
Inc.) has made the following direct investments in its subsidiaries in 1997,
1998 and 1999, respectively.
(in millions) Central
Mexican Brazilian Argentine Peruvian Ecuador American Colombian
Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary
January 1, 1997 Capital contributed $21.0 $ 1.2 $ 0.6 $ 0.1 $ -- $ -- $ --
1997 Capital contribution -- 24.8 3.9 1.4 1.3 --
----- ----- ----- ----- ----- ----- -----
December 31, 1997 Capital contributed $21.0 $26.0 $ 4.5 $ 1.5 $ 1.3
1998 Capital contribution -- -- 5.5 -- 0.8 --
1998 Ownership transfer to
Cinemark USA, Inc. (21.0) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
December 31, 1998 Capital contributed $0.0 $26.0 $10.0 $ 1.5 $ 2.1
1999 Capital contribution -- 8.7 11.3 -- 0.3 3.5 2.1
1999 Ownership transfer to
Cinemark USA, Inc. (21.3) (1.5)
----- ----- ----- ----- ----- ----- -----
December 31, 1999 Capital contributed $ 0.0 $34.7 $ 0 $ 0 $ 2.4 $ 3.5 $ 2.1
===== ===== ===== ===== ===== ===== =====
Ownership % as of December 31, 1999 0% 60% 0% 0% 60% 50.1% 51%
Approximately $4.9 million of goodwill was recorded in conjunction with two
separate acquisitions from the Cinemark International, L.L.C. Argentine joint
venture partners at a cost in excess of the fair value of the net assets
acquired that effectively increased the Company's ownership interest from 25% to
50% in December 1998 and then to 100% in September 1999. The 100% interest held
in this Argentine subsidiary by Cinemark International, L.L.C. was transferred
to Cinemark USA, Inc. in September 1999.
Cinemark International, L.L.C. also contributed $0.2 million to Cinemark
Core-Pacific, Ltd. (its 50.5% owned Taiwanese subsidiary) in 1999.
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company has the following investments in and advances to affiliates at
December 31:
1998 1999
------------ -----------
Entertainment Amusements Theatres- investment, at equity $ 1,044,635 $ 1,150,825
Brainerd Ltd. - investment, at equity 403,350 449,964
Cinemark Theatres Alberta, Inc. - investment, at equity 1,290,483 405,807
Cinemark Chile, S.A 18,591,757 --
Central American affiliates 8,218,695 --
Other 262,613 282,957
------------ -----------
Total $ 29,811,533 $ 2,289,553
============ ===========
F-13
60
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Company's Chilean operating Company (Cinemark Chile, S.A.) and Central
American operating entities (Cinemark Nicaragua y Cia, Ltda., Cinemark Costa
Rica, S.R.L., Cinemark El Salvador, S.A. de C.V. and Cinemark Honduras, S.R.L.)
were consolidated with the Company's operations effective January 1, 1999.
7. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31 consist of the following:
1998 1999
----------- -----------
Debt issue costs $ 7,667,147 $ 8,042,147
Intangible assets 240,522 322,438
----------- -----------
Total 7,907,669 8,364,585
Less accumulated amortization 1,703,191 2,609,482
----------- -----------
Net 6,204,478 5,755,103
Construction advances and other deposits 10,890,921 14,190,976
Foreign advanced rents 17,131,487 22,686,370
Equipment to be placed in service 2,218,488 1,577,506
Other 2,030,151 7,563,941
----------- -----------
Total $38,475,525 $51,773,896
=========== ===========
8. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
1998 1999
------------ ------------
Series B Senior Subordinated Notes due 2008,
discussed below $199,286,042 $199,360,542
Series D Senior Subordinated Notes due 2008,
discussed below 76,945,489 76,742,481
Series B Senior Subordinated Notes due 2008,
discussed below 104,041,667 104,141,667
Cinemark USA, Inc. Revolving credit line
of $350,000,000, discussed below 191,000,000 298,000,000
Cinemark Mexico (USA), Revolving credit line
of $30,000,000, discussed below 30,000,000 30,000,000
Cinemark Investments Corporation, Revolving credit line
of $20,000,000, discussed below 20,000,000 20,000,000
Cinemark Chile, S.A. Senior Notes Payable with Bank, -- 17,114,870
discussed below
Cinemark International, L.L.C. Note Payable with Argentine -- 11,330,000
Partners, discussed below
Other long-term debt 10,375,423 21,723,518
------------ ------------
Total long-term debt 631,648,621 778,413,078
Less current portion 337,895 21,420,579
------------ ------------
Long-term debt, less current portion $631,310,726 $756,992,499
============ ============
F-14
61
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Senior Subordinated Notes - In August 1996, the Company issued $200 million
principal amount of Series B Senior Subordinated Notes due 2008 (the "1996
Subordinated Notes"). The 1996 Subordinated Notes bear interest at the rate of
9 5/8% per annum, payable semi-annually on February 1 and August 1 of each year.
The 1996 Subordinated Notes require the Company to restrict the payment of
dividends, payment of subordinated debt prior to maturity and issuance of
preferred stock and other indebtedness; and contain other restrictive covenants.
The 1996 Subordinated Notes are redeemable at the option of the Company,
beginning August 2001, ranging in redemption price from 104.8% in 2001 to 100%
in 2003 and thereafter. Any outstanding Subordinated Notes are due August 1,
2008. The 1996 Subordinated Notes were issued at 99.553% of the principal face
amount (a discount of $4.47 per $1,000 principal amount) for an aggregate
discount of $894,000. The net proceeds to the Company from the issuance of the
Subordinated Notes (net of discount, fees and expenses) were approximately
$193.2 million.
The Company utilized the proceeds from the $200 million issuance of Senior
Subordinated Notes, to repurchase $123,370,000 of Senior Notes at $1,098.33 per
$1,000.00 principal amount. An extraordinary loss of $9.0 million, net of
related tax benefit, was recognized in connection with the premium paid and the
write-off of the unamortized debt issue costs ($2,463,560) associated with the
repurchased Senior Notes. In June 1997, the Company redeemed the remaining
$1,630,000 of Senior Notes at a premium of $1,060 per $1,000 principal amount,
resulting in an extraordinary loss of $53,789, net of related tax benefit.
In June 1997, the Company issued $75 million principal amount of Series D
Senior Subordinated Notes due 2008 ("1997 Subordinated Notes"). The 1997
Subordinated Notes are substantially identical in all material respects to the
1996 Subordinated Notes, including rate of interest. The 1997 Subordinated Notes
were issued at 103.0% of the principal face amount (a premium of $30.00 per
$1,000 principal amount). The net proceeds to the Company from the issuance of
the Subordinated Notes (net of fees and expenses) were approximately $77.1
million. The proceeds from the Subordinated Notes were used to reduce the
Company's indebtedness under the then Credit Facility.
In January 1998, the Company issued $105 million principal amount of Series
A Senior Subordinated Notes due 2008 ("1998 Subordinated Notes"). The 1998
Subordinated Notes are substantially identical in all material respects to the
1996 and 1997 Subordinated Notes, except for a lower 8-1/2% interest rate. The
1998 Subordinated Notes were issued at 99.0% of the principal face amount (a
discount of $10.00 per $1,000 principal amount) for an aggregate discount of
$1,050,000. The net proceeds to the Company from the issuance of the
Subordinated Notes (net of discount, fees and expenses) were approximately
$103.8 million. The proceeds from the Subordinated Notes were used to reduce the
Company's indebtedness under the then Credit Facility. The Company exchanged the
1998 Subordinated Notes in March 1998 for 8 1/2% Series B Senior Subordinated
Notes which are substantially identical in all material respects to the 1998
Subordinated Notes.
Reducing, Revolving Credit Facility - In February 1998, the Company
replaced its existing credit facility with a reducing, revolving credit
agreement (the "Credit Facility") through a group of banks for which Bank of
America National Trust and Savings Association acts as Administrative Agent. The
Credit Facility provides for loans to the Company of up to $350 million in the
aggregate.
F-15
62
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Credit Facility is a reducing revolving credit facility, with
commitments automatically reduced each calendar quarter by $8,750,000,
$11,812,500, $13,125,000, $12,031,000 and $6,562,500 in calendar year 2001,
2002, 2003, 2004 and 2005, respectively. The Company is required to prepay all
loans outstanding in excess of the aggregate commitment as reduced pursuant to
the terms of the Credit Facility. Borrowings are secured by a pledge of a
majority of the issued and outstanding capital stock of the Company, and the
credit agreement requires that the Company maintains certain financial ratios;
restricts the payment of dividends, payment of subordinated debt prior to
maturity and issuance of preferred stock and other indebtedness; and other
restrictive covenants. Pursuant to the terms of the Credit Facility, funds
borrowed bear interest at a rate per annum equal to the Offshore Rate (as
defined in the Credit Facility) or the Base Rate (as defined in the Credit
Facility, as the case may be), plus the Applicable Margin (as defined in the
Credit Facility). As of December 31, 1999, the Company had borrowed $298 million
under the Credit Facility. The effective interest rate on such borrowings as of
December 31, 1999 is 8.1% per annum.
Revolving Credit Facility, Cinemark Mexico (USA) - In November 1998,
Cinemark Mexico (USA), Inc. ("Cinemark Mexico") executed a credit agreement with
a bank for itself and as Administrative Agent (the "Cinemark Mexico Credit
Agreement"). The Cinemark Mexico Credit Agreement is a revolving credit facility
and provides for a loan to Cinemark Mexico of up to $30 million in the
aggregate. The Cinemark Mexico Credit Agreement is secured by a pledge of 65% of
the stock of Cinemark de Mexico, S.A. de C.V. and an unconditional guaranty of
the Company. Pursuant to the terms of the Cinemark Mexico Credit Agreement,
funds borrowed bear interest at a rate per annum equal to the Offshore Rate (as
defined in the Cinemark Mexico Credit Agreement) or the Base Rate (as defined in
the Cinemark Mexico Credit Agreement), as the case may be, plus the Applicable
Margin (as defined in the Cinemark Mexico Credit Agreement). As of December 31,
1999, Cinemark Mexico had borrowed $30 million under the Cinemark Mexico Credit
Agreement, the proceeds of which were used to repay an intercompany loan of
Cinemark Mexico from Cinemark International, L.L.C. Cinemark International,
L.L.C. used the proceeds of such repayment to repay the outstanding indebtedness
under its then existing credit facility. The effective interest rate on such
borrowings as of December 31, 1999 is 7.6% per annum.
Revolving Credit Facility, Cinemark Investments Corporation - In September
1998, Cinemark Investments Corporation executed a credit agreement with a bank
that provides Cinemark Investments Corporation up to $20 million in the
aggregate under a revolving line of credit facility (the "Cinemark Investments
Credit Agreement"). The Cinemark Investments Credit Agreement is secured by an
assignment of certain fixed rate notes issued by Cinemark Brasil, S.A. to
Cinemark Investments Corporation and an unconditional guaranty by the Company.
Pursuant to the terms of the Cinemark Investments Credit Agreement, funds
borrowed bear interest at a rate per annum equal to the Offshore Rate or the
Base Rate (both defined in the Cinemark Investments Credit Agreement) as the
case may be. As of December 31, 1999, Cinemark Investments Corporation had
borrowed $20 million under the Cinemark Investments Credit Agreement, the
proceeds of which were used to finance construction of theatre properties built
by Cinemark Brasil, S.A. The effective interest rate on such borrowings as of
December 31, 1999 is 8.4% per annum.
F-16
63
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Cinemark Chile, S.A. Senior Notes payable with Bank - Cinemark Chile, S.A.
became a consolidated subsidiary of the company effective January 1, 1999. Prior
to that date, Cinemark Chile, S.A. had executed four senior note payable
agreements with a bank for the U.S.$ equivalent of U.S. $6.0 million, U.S. $3.0
million, U.S. $4.5 million and U.S. $3.5 million in December 1997, July 1998,
November 1998 and December 1998, respectively. These notes were each in Chilean
pesos, adjusted for inflation, at the respective borrowing dates. Interest is
assessed for three notes at the 90-day TAB rate and for one note at the 180-day
TAB rate (Chile's Central Bank interbank rate) plus 1.5%, adjusted for
inflation, and is paid quarterly for three of the notes and semi-annually for
the fourth note. The term on all four notes is five years with a two year grace
period on principal. All four notes are guaranteed by the Company for
approximately 50% of the aggregate facility or $8.05 million in total. The
remaining guarantee is by Conate, the former joint venture partners of Cinemark
Chile, S.A. This Conate guarantee is to be released and replaced by a 100%
pledge on equipment at a later date. At December 31, 1999, $16.9 million had
been borrowed and remained outstanding on these four notes payable plus accrued
interest of $0.2 million. The effective interest rates on the four notes range
from approximately 7.25% to 7.70% per annum.
Cinemark International, L.L.C. Note Payable with Argentine Partners - In
September 1999, Cinemark International, L.L.C. executed a note payable agreement
with its Argentine Partners as part of the acquisition of the remaining 50%
ownership interest maintained by the joint venture partners. The $11 million
note payable calls for quarterly principal payments of $2.5 million in U.S.$,
$2.5 million in U.S.$, $2.5 million in Argentine pesos and $3.5 million in
Argentine pesos in January 2000, April 2000, July 2000 and October
2000,respectively, plus accrued interest at a rate of 10% per annum. At December
31, 1999, the entire $11 million note plus accrued interest remained
outstanding.
Long-term debt at December 31, 1999, matures as follows: $21,420,579 in
2000; $7,427,836 in 2001; $6,781,050 in 2002; $5,628,526 in 2003; $2,229,576 in
2004 and $734,925,511 thereafter.
The estimated fair value of the Company's long-term debt of $778.4 million
at December 31, 1999, was approximately $833 million. Such amounts do not
include prepayment penalties which would be incurred upon the early
extinguishment of certain debt issues.
Debt Issue Costs - Debt issue costs of $7,667,147 and $8,042,147, net of
accumulated amortization of $1,665,278 and $2,498,618 related to the
Subordinated Notes, the Credit Facility, the Cinemark Mexico Credit Agreement
and the Cinemark Investments Credit Agreement, are included in deferred charges
at December 31, 1998 and 1999, respectively. The 1997 period includes
extraordinary losses recognized in connection with the write-off of debt issue
costs relating to the Company's prior bank lines of credit, repurchase of Senior
Notes and repurchase of New Mexican Notes.
F-17
64
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
9. INCOME TAXES
Income tax expense below includes benefits from the extraordinary losses on
early extinguishment of debt in 1997 of $256,768 and cumulative effect of a
change in accounting principle in 1999 of $417,570 and consists of the
following:
1997 1998 1999
----------- ----------- -----------
Income before income taxes, extraordinary items
and cumulative effect of an accounting change:
United States $24,531,038 $22,182,145 $ 1,650,202
Foreign 1,158,975 294,839 6,061,587
----------- ----------- -----------
Total 25,690,013 22,476,984 7,711,789
=========== =========== ===========
Current:
Federal $ 3,451,118 $ 4,310,000 (1,173,611)
Foreign income taxes 1,081,501 969,688 2,274,967
State 871,282 1,011,454 215,129
----------- ----------- -----------
Total current expense 5,403,901 6,291,142 1,316,485
Deferred:
Temporary differences
Federal 4,418,329 4,221,438 (1,314,858)
Foreign 656,442 3,586,790
State 592,091 299,433 (298,270)
----------- ----------- -----------
Total deferred expense 5,010,420 5,177,313 1,973,662
----------- ----------- -----------
Income tax expense $10,414,321 $11,468,455 $ 3,290,147
=========== =========== ===========
A reconciliation between income tax expense and taxes computed by applying
the applicable statutory federal income tax rate to income before income taxes
follows:
1997 1998 1999
------------ ------------ ------------
Computed normal tax expense $ 8,851,079 $ 7,866,944 $ 2,699,126
Goodwill amortization, not deductible for tax purposes 209,907 108,052 353,069
Foreign inflation adjustments - Depreciation,
exchange gain/loss, interest (517,815) (796,699)
State and local income taxes, net of federal income tax
benefit 773,078 947,428 89,940
Federal tax on undistributed foreign earnings 1,686,078
Foreign withholding tax on undistributed foreign
earnings 242,347
Adoption of APB23 on prior undistributed earnings (2,167,642)
Foreign subsidiaries losses (recognized)/not
recognized for tax purposes (374,232) 460,463 1,858,930
Foreign tax rate differential 469,054 37,235 1,356,415
Foreign tax on equity earnings 236,759 9,805
Federal tax on undistributed foreign equity earnings 231,217 33,243
Jobs tax credits (59,728) (29,635) (56,569)
Other - net 545,163 199,382 (89,471)
------------ ------------ ------------
$ 10,414,321 $ 11,468,455 $ 3,290,147
============ ============ ============
F-18
65
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Deferred income taxes are provided under the liability method for temporary
differences between revenue and expenses that are recognized for tax return and
financial reporting purposes. The tax effects of significant temporary
differences and carryforwards comprising the net long-term deferred income tax
liability at December 31, 1998 and 1999, consist of the following:
1998 1999
------------ ------------
Deferred liabilities:
Accelerated tax depreciation $ 28,056,276 $ 36,367,161
Basis difference of assets acquired 86,997 84,835
Tax on foreign subsidiary undistributed earnings 2,159,642 199,859
FAS 52 Adjustment 2,803,678
Other 3,100,967 2,300,691
------------ ------------
Total 33,403,882 41,756,224
------------ ------------
Deferred assets:
Deferred lease expense 5,335,385 4,672,756
Section 263(a) inventory adjustment 2,121,718 2,692,344
Amortization of unearned compensation 1,956,570 2,317,507
Self-insurance accruals 643,040 647,973
Asset Impairment loss 5,048,751 6,346,305
Sale/Leaseback gain 1,446,181 3,162,499
Tax operating loss carryforward for foreign subsidiaries 3,137,927 5,852,118
Valuation allowance - net operating loss carryforward (3,137,927) (4,863,297)
AMT credit carryforward 951,871
Other expenses, not currently deductible for tax purposes 737,895 1,888,144
------------ ------------
Total 17,289,540 23,668,220
------------ ------------
Net long-term deferred income tax liability $ 16,114,342 $ 18,088,004
============ ============
The Company's AMT credit carryforward may be carried forward indefinitely.
The foreign net operating losses will expire beginning in 2002, however, some
losses may be carried forward indefinitely.
Beginning January 1, 1999, management plans to reinvest the undistributed
earnings of its foreign subsidiaries located in Mexico, Peru, Argentina and
Honduras. As a result, for years beginning after 1998, deferred U.S. federal
income taxes are not provided on the undistributed earnings of these foreign
subsidiaries in accordance with Accounting Principles Board (APB) Opinion No.
23.
In the 4th quarter of 1999, the Company expanded its plans to reinvest
undistributed earnings of these foreign subsidiaries to include undistributed
earnings of prior years as well. The deferred U.S. federal income taxes provided
on these prior undistributed earnings was $2,167,642, which was accounted for as
a reduction of 1999 tax expense in accordance with APB Opinion No. 23.
The cumulative amount of prior and current undistributed earnings of these
foreign subsidiaries on which the Company does not recognize income taxes is
$13,366,767.
10. COMMITMENTS AND CONTINGENCIES
Leases - The Company conducts a significant part of its theatre operations
in leased premises under noncancelable operating leases with terms of 5 to 30
years. In addition to the minimum annual lease payment, most of these leases
provide for contingent rentals based on operating results and require the
payment of taxes, insurance and other costs applicable to the property.
Generally, these leases include renewal options for various periods at
stipulated rates. Some leases also provide for escalating rent payments
throughout the lease term. Deferred lease expenses of $14,578,747 and
$16,188,800 at
F-19
66
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1998 and 1999, respectively, have been provided to account for
lease expenses on a straight-line basis, where lease payments are not made on
such basis. Rent expense for the years ended December 31, 1997, 1998 and 1999
totaled $39,190,388, $61,713,480 and $89,931,024, respectively.
In February 1998, the Company completed a sale leaseback transaction with
affiliates of Primus Capital L.L.C. (the "Sale Leaseback"). Pursuant to the Sale
Leaseback, the Company sold the land, buildings and site improvements of twelve
theatre properties to special purpose entities formed by Primus Capital L.L.C.
for an aggregate purchase price equal to approximately $131.5 million resulting
in a preliminary gain on disposal of the properties of $6.38 million, which was
adjusted in 1999 to $3.79 million. In October 1998, the Company completed a
second sale leaseback transaction with affiliates of Primus Capital L.L.C. (the
"Second Sale Leaseback"). Pursuant to the Second Sale Leaseback, the Company
sold the land, building and site improvements of one theatre property to a
special purpose entity for an aggregate purchase price equal to approximately
$13.9 million resulting in a gain on disposal of the property of $0.7 million.
In December 1999, the Company completed a third sale leaseback transaction (the
"Third Sale Leaseback") pursuant to which the Company sold the land, building
and site improvements of its corporate office for an aggregate purchase price
equal to approximately $20.3 million resulting in a gain on disposal of the
property of $1.47 million. The Company deferred the entire gain from all three
sale leaseback transactions and is recognizing them evenly over the lives of the
leases (ranging from 10 to 20 years). As of December 31, 1999, $490,378 of the
deferred gain has been recognized leaving an aggregate deferred gain of
$5,470,381. Future minimum payments under these leases are due as follows:
$16,175,438 in 2000, $16,175,438 in 2001, $16,175,438 in 2002, $16,175,438 in
2003, $16,175,438 in 2004 and $217,925,690 thereafter.
Future minimum payments under noncancelable capital leases and operating
leases (including leases under the aforementioned sale leaseback transactions)
with initial or remaining terms in excess of one year at December 31, 1999,
are due as follows:
Capital Operating
Leases Leases Totals
-------------- -------------- --------------
2000 .......... $ 247,431 $ 77,182,384 $ 77,429,815
2001 .......... 247,431 80,465,451 80,712,882
2002 .......... 247,431 80,302,607 80,550,038
2003 .......... 247,431 79,992,504 80,239,935
2004 .......... -- 79,728,697 79,728,697
Thereafter .... -- 989,928,267 989,928,267
-------------- -------------- --------------
Total ......... $ 989,724 $1,387,599,910 $1,388,589,634
============== ============== ==============
Employment Agreements - As of December 31, 1999, the Company has employment
agreements with certain principal officers and a shareholder providing for total
minimum future annual payments as follows:
2000 ................. 624,301
2001 ................. 686,731
----------
Total ................ $1,311,032
==========
F-20
67
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
These employment agreements terminate on the earlier of death, permanent
disability or December 31, 2001.
Retirement Savings Plan - The Company has a 401(k) profit sharing plan for
the benefit of all employees and makes contributions as determined annually by
the Board of Directors. Contributions of $744,913, $828,890 and $982,213 were
recorded in 1997, 1998 and 1999, respectively.
Letters of Credit and Collateral - At December 31, 1998, the Company had
outstanding letters of credit of $2,053,512 in connection with uniform
purchases, property and liability insurance coverage and certain lease matters.
Certificates of deposit of $2,053,512 were pledged as collateral on the letters
of credit. At December 31, 1999, the Company has outstanding letters of credit
of $1,240,508 in connection with property and liability insurance coverage,
sales tax and environmental matters.
Litigation and Litigation Settlements - The Company currently is a
defendant in certain litigation proceedings alleging certain violations of the
Americans with Disabilities Act of 1990 relating to the accessibility of certain
theatre seating to patrons using wheelchairs. In August 1998, the judge
presiding over one of these cases granted plaintiffs motion for summary
judgement ruling the Company's stadium theatre design is in violation of the
ADA. The Company is appealing this ruling. Although the Company cannot predict
the outcome of the appeal or the outcome of the other cases, management believes
that the Company's potential liability with respect to such proceedings is not
material in the aggregate to the Company's financial position, results of
operations and cash flows.
From time to time, the Company is involved in other legal proceedings
arising from the ordinary course of its business operations, such as personal
injury claims, employment matters and contractual disputes. The Company also
believes that its potential liability with respect to other proceedings
currently pending is not material in the aggregate to the Company's consolidated
financial position, results of operations and cash flows.
11. MINORITY INTERESTS IN SUBSIDIARIES
Common Shareholders' Equity - Minority ownership interests in subsidiaries
of the Company are as follows at December 31:
1998 1999
----------- -----------
Laredo Theatres, Ltd. - 25% interest (owned by a
relative of the majority shareholder) $ 512,831 $ 341,296
Cinemark Brasil, S.A. - 40% interest 22,938,600 18,073,974
Cinemark del Ecuador, S.A. - 40% interest 1,025,358 798,613
Cinemark Partners II - 49% interest 5,608,436 5,323,835
Cinemark Argentina, S.A. - 50% interest in 1998 10,428,570 558,894
Cinemark Colombia S.A. - 49% interest -- 2,009,627
Cinemark Equity Holdings Corp. (Central America) -
49.9% interest 2,153,319 2,421,219
Others - 4.4% interest in Mexico, 2% interest in Chile
and 49.5% interest in Taiwan 334,836 284,885
----------- -----------
Total $43,001,950 $29,812,343
=========== ===========
F-21
68
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
In December 1998, Cinemark International, L.L.C. entered into a joint
venture agreement with Casa Editorial El Tiempo S.A., Tempora S.A. and Prodiscos
S.A. to develop state-of-the-art multiplexes in Colombia. The joint venture,
which is 50.1% owned by Cinemark International, L.L.C. became consolidated
effective January 1, 1999.
In September 1999, Cinemark International, L.L.C. acquired all of the
shares of its Argentine joint venture partner, Prodecine, S.A., which held the
remaining 50% of the shares of Cinemark Argentina, S.A.
12. CAPITAL STOCK
Common and Preferred Stocks - Class A Common shareholders have exclusive
voting rights. Class B common shareholders have no voting rights except upon any
proposed amendments to the articles of incorporation. However, they may convert
at their option to Class A common stock. In the event of any liquidation, the
Class A and Class B shareholders will be entitled to their pro rata share of
assets remaining after any preferred shareholders have received their
preferential amounts based on their respective shares held. The Company
repurchased 2,246 shares of Class B common stock as treasury stock in 1997.
The Company has 1,000,000 shares of preferred stock, $1.00 par value,
authorized with none issued or outstanding. The rights and preferences of
preferred stock will be determined by the board of directors at the time of
issuance.
Employee Stock Option Plan - Under terms of the Company's stock option
plan, nonqualified options to purchase up to 10,685 shares of the Company's
Class B common stock may be granted to key employees. All options vest and are
exercisable over a period of five years from the date of grant and expire ten
years from the date of grant. A summary of the Company's Employee Stock Option
Plan activity and related information for the years ended December 31, 1997,
1998 and 1999 is as follows:
1997 1998 1999
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at January 1 7,842 $ 1 7,165 $ 1 7,121 $ 1
Granted 260 $ 1 470 $ 1 -- --
Forfeited (100) $ 1 (40) $ 1 -- --
Reissued -- -- 40 $ 1 -- --
Exercised (837) $ 1 (60) $ 1 -- --
Repurchased (454) $ 1 -- --
------ ------ ------ ------ ------ ------
Outstanding at December 31 7,165 $ 1 7,121 $ 1 7,121 $ 1
====== ====== ====== ====== ====== ======
Options exerciseable at December 31 6.148 $ 1 6,449 $ 1 6.449 $ 1
====== ====== ====== ====== ====== ======
The weighted average remaining contractual life of the 7,121 options
outstanding at December 31, 1999 is three years.
The Company believes that the market value of a share of Class B Common
Stock on the date of grant for the 260 shares granted in May and June 1997
exceeded the option price by approximately
F-22
69
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
$1,791. As a result, the Company accrued $465,743 for unearned compensation and
has been amortizing this noncash expense at a rate of $93,149 per year during
the five year vesting period for the options granted. The Company believes that
the market value of a share of Class B Common Stock on the date of grant for the
470 shares granted in January 1998 exceeded the option price by approximately
$1,800. As a result, the Company accrued $846,000 for unearned compensation and
has been amortizing this noncash expense at a rate of $169,200 per year during
the five year vesting period for the options granted. The Company repurchased
options to purchase 454 shares of Class B Common Stock held by a retiring
employee in July 1998. The aggregate purchase price for such options was
approximately $817,000 which is included in salaries and wages expense.
Independent Director Stock Options - In 1993, the Company granted the
unaffiliated directors of the Company options to purchase up to an aggregate of
900 shares of the Company's Class B Common Stock at an exercise price of $833.34
per share (the "Director Options"). In 1995, the Company amended the Director
Options to reduce the aggregate number of shares of Common Stock issuable
pursuant to the Director Options from 900 to 600 shares and to reduce the
exercise price of the Director Options from $833.34 per share to $1.00 per
share. The options vested on June 1, 1997 and expire ten years from the date of
grant. A director's options are forfeited if the director resigns or is removed
from the Board of Directors of the Company.
A summary of the Company's Independent Directors Stock Option Plan activity
and related information for the years ended December 31, 1997, 1998 and 1999 is
as follows:
1997 1998 1999
--------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at January 1 600 $ 1 600 $ 1 800 $ 1
Granted -- -- 200 $ 1 -- --
Forfeited -- -- -- -- -- --
Exercised -- -- -- -- -- --
--- --- --- --- --- ---
Outstanding at December 31 600 $ 1 800 $ 1 800 $ 1
=== === === === === ===
Options exerciseable at December 31 600 $ 1 600 $ 1 600 $ 1
=== === === === === ===
The weighted average remaining contractual life of the 800 options
outstanding at December 31, 1999 is five years.
The Company believes that the market value of a share of Class B Common
Stock on the date of grant for the 200 shares granted in December 1998 exceeded
the option price by approximately $2,099. As a result, the Company accrued
$419,800 for unearned compensation and has been amortizing this noncash expense
at a rate of $83,960 per year during the five year vesting period for the
options granted.
Long Term Incentive Plan - In November 1998, the Board approved a Long Term
Incentive Plan (the "1998 Plan") under which the Compensation Committee of the
Board of Directors, in its sole discretion, may grant employees incentive stock
options, non-qualified stock options, stock appreciation rights, restricted
stock awards performance units, performance shares or phantom stock up to an
aggregate of 9,794 shares of the Company's Class B Common Stock. The
Compensation Committee has the
F-23
70
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
discretion to set the exercise price and the term (up to ten years) of the
options. All awards under the 1998 Plan vest at the rate of one-fifth of the
total award per year beginning one year from the date of grant, subject to
acceleration by the Compensation Committee. An employee's award under the 1998
Plan is forfeited if the employee is terminated for cause. Upon termination of
the employee's employment with the Company, the Company has the option to
repurchase the award at the fair market value of the shares of Class B Common
Stock vested under such award provided that no public market exists for any
class of common stock of the Company.
A summary of the Company's Long-Term Incentive Stock Option Plan activity
and related information for the years ended December 31, 1998 and 1999 is as
follows:
1998 1999
-------------------------------- ----------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at January 1 -- $ 5,450 $ 1,674
Granted 5,450 $ 1,674 40 $ 1,674
Forfeited -- -- (125) 1,674
Exercised -- --
------- ------- ------- -------
Outstanding at December 31 5,450 $ 1,674 5,365 $ 1,674
======= ======= ======= =======
Options exerciseable at December 31 -- -- 816 $ 1,674
======= ======= ======= =======
The weighted average remaining contractual life of the 5,365 options
outstanding at December 31, 1999 is nine years.
The Company believes that the market value of a share of Class B Common
Stock on the date of grant for the 5,450 shares granted in December 1998
exceeded the option price by approximately $426. As a result, the Company
accrued $2,321,700 for unearned compensation and has been amortizing the noncash
expense at a rate of $464,340 per year during the five year vesting period for
the options granted. The Company believes that the market value of a share of
Class B Common Stock on the date of grant for the 40 options granted in January
1999 exceeded the option price by approximately $426. As a result, the Company
accrued $17,040 for unearned compensation and has been amortizing this non-cash
expense at a rate of $3,408 per year during the five year vesting period for the
options granted. The long term incentive options expire ten years from the date
of grant.
The excess of the estimated fair market value of the stock at the dates of
the grant over the exercise price of the various options are accounted for as
additional paid-in capital and as unearned compensation, which is amortized to
operations over the vesting period. As a result of the above grants, unearned
compensation of $1,073,296, $3,587,500 and $17,040 was recorded in 1997, 1998
and 1999, respectively. Compensation expense under these stock option plans was
$1,898,836, $851,375 and $1,049,176 in 1997, 1998 and 1999, respectively.
The Company applies APB Opinion 25 and related interpretations in
accounting for the Company's stock option plans, as described below. Had
compensation costs for the Company's stock option plans been determined based on
the fair value at the date of grant for awards under the plans consistent with
the method of Statement of Financial Accounting Standards (SFAS) No. 123,
utilizing the Black-Scholes option pricing model, the effect on income and
earnings per share would not have changed from the amounts presented in the
financial statements. The results are substantially the same pursuant to SFAS
No. 123 as a result of the value of the underlying stock at the date of grant
being significantly higher than the exercise price of the options.
F-24
71
CINEMARK USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
13. OTHER RELATED PARTY TRANSACTIONS
In addition to transactions discussed in other notes to the financial
statements, the following transactions with related companies are included in
the Company's financial statements:
1997 1998 1999
---------- ---------- ----------
Facility lease expense - theatre and equipment leases with
shareholder affiliates $ 293,504 $ 272,135 $ 295,171
Video game machine income - a subsidiary of an affiliate 1,961,032 2,529,156 5,992,984
Management fees for property and theatre management 501,974 148,263 81,794
In 1997, the majority shareholder and certain employees of the Company
owned a minority portion of Cinemark Partners II, Ltd.
The Company leases a theatre facility to a relative of the Company's
majority shareholder.
14. REPORTING SEGMENTS
The Company operates in a single industry as a motion picture exhibitor.
The Company is a multinational corporation with consolidated operations in the
United States, Canada, Mexico, Argentina, Brazil, Chile, Ecuador, Peru,
Honduras, El Salvador, Nicaragua, Costa Rica and Colombia. Revenues and
long-lived assets in the United States and other countries for the years ended
December 31 are as follows:
Other Foreign
United States Mexico Brazil Countries Eliminations Consolidated
------------- ------------- ------------- ------------- ------------- -------------
1999
Total revenues $ 558,365,105 $ 56,123,717 $ 39,971,020 $ 60,818,648 $ (2,674,294) $ 712,604,196
============= ============= ============= ============= ============= =============
Long-lived assets, net
$ 729,392,467 $ 61,202,181 $ 60,792,003 $ 82,572,408 -- $ 933,959,059
============= ============= ============= ============= ============= =============
1998
Total revenues $ 492,061,342 $ 45,338,437 $ 30,034,637 $ 7,045,885 $ (3,261,389) $ 571,218,912
============= ============= ============= ============= ============= =============
Long-lived assets, net
$ 595,193,682 $ 49,446,248 $ 63,636,903 $ 41,414,997 -- $ 749,691,830
============= ============= ============= ============= ============= =============
1997
Total revenues $ 398,599,698 $ 34,669,056 $ 2,238,796 $ 812,499 $ (1,721,724) $ 434,598,325
============= ============= ============= ============= ============= =============
F-25
72
CINEMARK USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE A
CONSOLIDATING BALANCE SHEET INFORMATION
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RESTRICTED UNRESTRICTED
ASSETS GROUP GROUP ELIMINATIONS CONSOLIDATED
CURRENT ASSETS
Cash and cash equivalents $ 2,510,366 $ 6,361,791 $ 8,872,157
Inventories 3,432,106 1,302,414 4,734,520
Co-op advertising and other receivables (22,300,489) 34,609,782 (241,822) 12,067,471
Income tax receivable 2,036,146 -- 2,036,146
Prepaid expenses and other 7,360,140 148,582 -- 7,508,722
------------- ------------- -------------- ---------------
Total current assets (6,961,731) 42,422,569 (241,822) 35,219,016
THEATRE PROPERTIES AND EQUIPMENT (net): 832,101,545 101,857,514 933,959,059
OTHER ASSETS
Certificates of deposit (Note 10) -- -- --
Investments in and advances to affiliates (Notes 5 and 6) 112,268,778 550,624 (110,529,849) 2,289,553
Goodwill - net (Note 5) 10,535,007 8,084,708 18,619,715
Deferred charges and other - net (Notes 7 and 8) 45,495,183 6,278,713 51,773,896
------------- ------------- -------------- ---------------
Total other assets 168,298,968 14,914,045 (110,529,849) 72,683,164
------------- ------------- -------------- ---------------
TOTAL $ 993,438,782 $ 159,194,128 $ (110,771,671) $ 1,041,861,239
============= ============= ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 8) $ 601,318 $ 20,819,261 $ 21,420,579
Accounts payable 47,167,407 5,919,398 53,086,805
Accrued film rentals 17,407,688 1,867,002 19,274,690
Accrued interest 17,553,547 402,766 17,956,313
Accrued payroll 5,297,200 649,410 5,946,610
Accrued property taxes and other liabilities 31,565,909 2,437,887 (230,127) 33,773,669
------------- ------------- -------------- ---------------
Total current liabilities 119,593,069 32,095,724 (230,127) 151,458,666
LONG-TERM LIABILITIES
Long-term debt, less current portion (Note 8) 715,570,401 41,422,098 -- 756,992,499
Deferred lease expenses (Note 10) 15,896,963 291,837 16,188,800
Deferred gain on sale leaseback (Note 10) 5,470,381 -- 5,470,381
Deferred income taxes (Note 9) 18,081,253 6,751 -- 18,088,004
------------- ------------- -------------- ---------------
Total long-term liabilities 755,018,998 41,720,686 -- 796,739,684
COMMITMENTS AND CONTINGENCIES (Note 10) --
MINORITY INTERESTS IN SUBSIDIARIES (Note 11) 6,176,050 23,636,293 29,812,343
SHAREHOLDERS' EQUITY
Common Stock 49,537,622 10,901,000 (10,901,000) 49,537,622
Additional paid-in-capital 13,733,221 99,640,544 (99,640,544) 13,733,221
Unearned compensation - stock options (3,131,680) (3,131,680)
Retained earnings (deficit) 89,262,518 (7,631,069) (22,490,797) 59,140,652
Treasury stock (24,198,890) -- (24,198,890)
Distributions -- (22,490,797) 22,490,797 --
Accumulated other comprehensive loss (12,552,126) (18,678,253) (31,230,379)
------------- ------------- -------------- ---------------
Total shareholders' equity 112,650,665 61,741,425 (110,541,544) 63,850,546
------------- ------------- -------------- ---------------
TOTAL $ 993,438,782 $ 159,194,128 $ (110,771,671) $ 1,041,861,239
============= ============= ============== ===============
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture
for the Senior Subordinated Notes.
S-1
73
CINEMARK USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE B
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RESTRICTED UNRESTRICTED
GROUP GROUP ELIMINATIONS CONSOLIDATED
REVENUES $ 640,268,661 $ 73,020,062 $ (684,527) $ 712,604,196
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of operations 493,065,878 61,100,439 (684,527) 553,481,790
General and administrative expenses 27,999,566 6,833,837 34,833,403
Depreciation and amortization 43,461,340 9,807,235 53,268,575
Asset impairment loss 3,720,390 3,720,390
(Gain) loss on sale of assets 2,791,147 (371,636) 2,419,511
------------- ------------- ------------- -------------
Total 571,038,321 77,369,875 (684,527) 647,723,669
OPERATING INCOME (LOSS) 69,230,340 (4,349,813) -- 64,880,527
OTHER INCOME (EXPENSE)
Interest expense (54,647,890) (4,188,849) -- (58,836,739)
Amortization of debt issue cost and discount (939,714) (90,625) (1,030,339)
Interest income 1,208,224 772,519 -- 1,980,743
Foreign currency exchange gain (loss) (Note 3) 69,218 (255,295) -- (186,077)
Equity in income of affiliates (Note 6) 152,887 88,331 241,218
Dividend income 22,490,797 -- (22,490,797) --
Minority interests in (income) loss of subsidiaries (Note 11) (1,696,374) 2,358,830 662,456
------------- ------------- ------------- -------------
Total (33,362,852) (1,315,089) (22,490,797) (57,168,738)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE 35,867,488 (5,664,902) (22,490,797) 7,711,789
INCOME TAXES (Note 9) 3,705,032 2,685 -- 3,707,717
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT 32,162,456 (5,667,587) (22,490,797) 4,004,072
OF AN ACCOUNTING CHANGE
Cumulative effect of a change in accounting principle (Note 1) (842,846) (2,125,791) (2,968,637)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 31,319,610 $ (7,793,378) $ (22,490,797) $ 1,035,435
============= ============= ============= =============
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture
for the Senior Subordinated Notes.
S-2
74
CINEMARK USA, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE C
CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RESTRICTED UNRESTRICTED
GROUP GROUP ELIMINATIONS CONSOLIDATED
OPERATING ACTIVITIES:
Net Income (loss) $ 31,319,610 $ (7,793,378) $ (22,490,797) $ 1,035,435
Noncash items in net income:
Depreciation 42,857,423 9,103,370 51,960,793
Amortization - intangibles and other assets 1,369,131 794,490 2,163,621
Loss on impairment of assets 3,720,390 3,720,390
Amortization of gain on sale leaseback (218,920) -- -- (218,920)
Deferred lease expenses 1,435,793 174,260 1,610,053
Deferred income tax expenses 2,385,916 (412,254) 1,973,662
Amortization of debt discount and premium (28,508) (28,508)
Amortized compensation - stock options 1,049,176 -- -- 1,049,176
(Gain) loss on sale of assets 2,791,147 (371,636) -- 2,419,511
Equity in income of affiliates (152,887) (88,331) -- (241,218)
Minority interests in income (loss) of subsidiaries 1,696,374 (2,358,830) -- (662,456)
Cumulative effect of an accounting change 500,857 2,885,350 3,386,207
Cash provided by operating working capital 19,577,481 9,770,277 -- 29,347,758
------------- ------------- ------------- -------------
Net cash provided by operating activities 108,302,983 11,703,318 (22,490,797) 97,515,504
INVESTING ACTIVITIES
Additions to theatre properties and equipment (222,736,847) (25,633,751) (248,370,598)
Sale of theatre properties and equipment 23,133,267 733,995 23,867,262
Decrease in certificates of deposit 3,710,111 345,985 -- 4,056,096
Decrease (increase) in other assets, investments in and
advances to affiliates (31,856,915) 2,230,526 22,490,797 (7,135,592)
------------- ------------- ------------- -------------
Net cash used for investing activities (227,750,384) (22,323,245) 22,490,797 (227,582,832)
FINANCING ACTIVITIES
Increase in long-term debt 153,527,286 27,223,172 180,750,458
Reductions of long-term debt (46,837,897) (4,838,130) (51,676,027)
Minority investment in subsidiaries, net (2,133,427) (12,888,724) (15,022,151)
------------- ------------- ------------- -------------
Net cash provided by financing activities 104,555,962 9,496,318 -- 114,052,280
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 75,888 (834,551) (758,663)
------------- ------------- ------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (14,815,551) (1,958,160) -- (16,773,711)
CASH AND CASH EQUIVALENTS:
Beginning of period 17,325,917 8,319,951 25,645,868
------------- ------------- ------------- -------------
End of period $ 2,510,366 $ 6,361,791 $ -- $ 8,872,157
============= ============= ============= =============
Note: "Restricted Group" and "Unrestricted Group" are defined in the Indenture
for the Senior Subordinated Notes.
S-3
75
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
CINEMARK USA, INC.
FOR FISCAL YEAR ENDED
DECEMBER 31, 1999
76
EXHIBIT INDEX
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
3.1(a) Amended and Restated Articles of Incorporation of the Company filed Exhibit 3.1(a) to the
with the Texas Secretary of State on June 3, 1992 Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993
3.1(b) Articles of Merger filed with the Texas Secretary of State on June 27, Exhibit 3.1(b) to the
1988 merging Gulf Drive-In Theatres, Inc. and Cinemark of Louisiana, Company's Registration
Inc. into the Company Statement (file 33-
47040) on Form S-1
filed on April 9, 1992
3.1(c) Articles of Merger filed with the Texas Secretary of State dated Exhibit 3.1(d) to the
October 27, 1989 merging Premiere Cinemas Corp. into the Company Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992
3.1(d) Articles of Merger filed with the Texas Secretary of State dated Exhibit 3.1(e) to the
October 27, 1989 merging Tri-State Entertainment Incorporated into Company's Registration
the Company Statement (file 33-
47040) on Form S-1
filed on April 9, 1992
3.1(e) Articles of Merger filed with the Texas Secretary of State on December Exhibit 3.1(f) to the
27, 1990 merging Cinema 4, Inc. into the Company Company's
Registration Statement
(file 33-47040) on form
S-1 filed on April 9,
1992
3.1(f) Articles of Merger filed with the Texas Secretary of State on December Exhibit 3.1(f) to the
27, 1990 merging Cinema 4, Inc. into the Company Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993
3.2(a) Bylaws of the Company, as amended Exhibit 3.2 to the
Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992
E-2
77
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
3.2(b) Amendment to Bylaws of the Company dated March 12, 1996 Exhibit 3.2(b) to the
Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 26, 1997
10.1(a) Indenture for Series B Notes, with form of Series B Note attached. Exhibit 4.1 to the
Company's Registration
Statement (file 33-
41895) on Form S-4
filed September 13,
1996
10.1(b) Indenture dated June 26, 1997 between the Company and U.S. Trust Exhibit 4.1 to the
Company of Texas, N.A. governing the Notes, with a form of Series Company's Registration
C Note attached Statement (file 333-
32949) on Form S-4
filed August 6, 1997
10.2 Indenture dated January 14, 1998 between the Company and U.S. Exhibit 4.1 to the
Trust Company of Texas, N.A. governing the Notes, with a form of Company's Registration
Series A Note attached Statement (file 333-
45417) on Form S-4
filed February 2, 1998
10.3(a) Management Agreement between the Company and Cinemark II, Inc. Exhibit 10.6(c) to the
("Cinemark II") dated as of June 10, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
10.3(b) Management Agreement, dated as of July 28, 1993, between the Exhibit 10.7 to
Company and Cinemark Mexico (USA). Cinemark Mexico
(USA)'s Registration
Statement (file 33-
72114) on Form S-4
filed on November 24,
1994.
10.3(c) Management Agreement, dated as of September 10, 1992, between the Exhibit 10.8 to
Company and Cinemark de Mexico. Cinemark Mexico
(USA)'s Registration
Statement (file 33-
72114) on Form S-4
filed on November 24,
1994.
E-3
78
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.3(d) Management Agreement dated December 10, 1993 between Laredo Exhibit 10.14(b) to the
Joint Venture and the Company. Company's Annual Report
(file 33-47040) on form
10-K filed March 31,
1994.
10.3(e) Management Agreement dated September 1, 1994 between Cinemark Exhibit 10.4(i) to the
Partners II, Ltd. and the Company. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 29, 1995.
10.4(a) Employment Agreement dated as of October 17, 1991 between the Exhibit 10.11(a) to the
Company and Lee Roy Mitchell. Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992.
10.4(b) First Amendment to Employment Agreement dated as of April 7, 1992 Exhibit 10.11(b) to the
between the Company and Lee Roy Mitchell. Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992.
10.4(c) Employment Agreement dated as of October 17, 1991 between the Exhibit 10.11(c) to the
Company and Tandy Mitchell. Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992.
10.4(d) First Amendment to Employment Agreement dated as of April 7, 1992 Exhibit 10.11(d) to the
between the Company and Tandy Mitchell. Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992.
10.4(e) Second Amendment to Employment Agreement between the Company Exhibit 10.11(e) to the
and Lee Roy Mitchell dated as of June 10, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
E-4
79
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.5(a) 1991 Nonqualified Stock Option Plan of Cinemark USA, Inc. Exhibit 10.14 to the
Company's Registration
Statement (file 33-
47040) on Form S-1
filed on April 9, 1992.
10.5(b) Cinemark Mexico Nonqualified Stock Option Plan. Exhibit 10.9 to
Cinemark Mexico
(USA)'s Registration
Statement (file 33-
72114) on Form S-4
filed on November 24,
1994.
10.6(a) License Agreement dated December 10, 1993 between Laredo Joint Exhibit 10.14(c) to the
Venture and the Company. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1994
10.6(b) License Agreement dated September 1, 1994 between Cinemark Exhibit 10.10(c) to the
Partners II, Ltd. and the Company. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 29, 1995.
10.7(a) Tax Sharing Agreement between the Company and Cinemark II dated Exhibit 10.22 to the
as of June 10, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
10.7(b) Tax Sharing Agreement dated as of July 28, 1993, between the Exhibit 10.10 to
Company and Cinemark Mexico (USA). Cinemark Mexico
(USA)'s Registration
Statement (33-72114) on
Form S-4 filed on
November 24, 1994.
10.8(a) Indemnification Agreement between the Company and Lee Roy Exhibit 10.23(a) to the
Mitchell dated as of July 13, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
E-5
80
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.8(b) Indemnification Agreement between the Company and Tandy Mitchell Exhibit 10.23(b) to the
dated as of July 13, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
10.8(c) Indemnification Agreement between the Company and Alan W. Stock Exhibit 10.23(d) to the
dated as of July 13, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
10.8(d) Indemnification Agreement between the Company and W. Bryce Exhibit 10.23(f) to the
Anderson dated as of July 13, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
10.8(e) Indemnification Agreement between the Company and Sheldon I. Stein Exhibit 10.23(g) to the
dated as of July 13, 1992. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
10.8(f) Indemnification Agreement between the Company and Heriberto Exhibit 10.13(f) to the
Guerra dated as of December 3, 1993 Company's Registration
Statement (file 333-
11895) on Form S-4
filed September 13,
1996
10.9(a) Second Amended and Restated Credit Agreement dated as of February Exhibit 10.9(a) to the
12, 1998 among the Banks and the Agent. Company's Annual
Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(b) Pledge Agreement dated as of February 12, 1998 executed by the Exhibit 10.9(b) to the
pledgors listed on the signature page thereto for the benefit of the Company's Annual
Agent and the Banks. Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
E-6
81
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.9(c) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(c) to the
principal amount of $50,000,000 payable to the order of Bank of Company's Annual
America National Trust and Savings Association Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(d) Note of the Company dated as of February 12, 1998n in the original Exhibit 10.9(d) to the
principal amount of $50,000,000 payable to the order of NationsBank Company's Annual
of Texas, N.A. Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(e) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(e) to the
principal amount of $30,000,000 payable to the order of BankBoston, Company's Annual
N.A. Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(f) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(f) to the
principal amount of $30,000,000 payable to the order of Fleet Bank, Company's Annual
N.A. Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(g) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(g) to the
principal amount of $15,000,000 payable to the order of The Fuji Company's Annual
Bank, Limited Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(h) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(h) to the
principal amount of $15,000,000 payable to the order of Bank of Company's Annual
New York Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
E-7
82
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.9(i) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(i) to the
principal amount of $30,000,000 payable to the order of CIBC, Inc. Company's Annual
Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(j) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(j) to the
principal amount of $30,000,000 payable to the order of Bank of Nova Company's Annual
Scotia Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(k) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(k) to the
principal amount of $25,000,000 payable to the order of Comerica Company's Annual
Bank-Texas Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(l) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(l) to the
principal amount of $15,000,000 payable to the order of First Company's Annual
Hawaiian Bank Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(m) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(m) to the
principal amount of $15,000,000 payable to the order of Bank of Company's Annual
Montreal Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(n) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(n) to the
principal amount of $15,000,000 payable to the order of PNC Bank Company's Annual
Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
E-8
83
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.9(o) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(o) to the
principal amount of $15,000,000 payable to the order of Sumitoto Company's Annual
Bank, Limited Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(p) Note of the Company dated as of February 12, 1998 in the original Exhibit 10.9(p) to the
principal amount of $15,000,000 payable to the order of Union Bank Company's Annual
of California, N.A. Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(q) First Amendment to Second Amended and Restated Credit Agreement Exhibit 10.9(q) to the
dated as of February 12, 1998 among the Banks and the Agent Company's Annual
Report (file 333-45417,
333-11895 and 33-
47040) on Form 10K
filed March 27, 1998
10.9(r) Second Amendment to Second Amended and Restated Credit Exhibit 10.9(r) to the
Agreement dated as of February 12, 1998 among the Banks and the Company's Annual
Agent Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.9(s) Intercompany Subordination Agreement dated November 16, 1998 Exhibit 10.9(s) to the
Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.9(t) Third Amendment to Second Amended and Restated Credit Agreement Exhibit 10.9(t) to the
dated as of February 12, 1998 among the Banks and the Agent Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.10(a) Letter Agreements with directors of the Company regarding stock Exhibit 10.15 to the
options. Company's Annual
Report (file 33-47040)
on Form 10-K filed
March 31, 1993.
E-9
84
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.10(b) Letter Agreements with directors of the Company amending stock Exhibit 10.15(c) to the
options Company's Registration
Statement (file 333-
11895) on Form S-4
filed September 13,
1996
10.10(c) Letter Agreement with directors of the Company regarding stock Exhibit 10.10(c) to the
options Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.11(a) Credit Agreement dated November 16, 1998 between Cinemark Exhibit 10.11(a) to the
Mexico (USA), Inc., Bank of America National Trust and Savings Company's Annual
Association, as Administrative Agent, and the Financial Institutions Report (file 33-47040)
party thereto on Form 10K filed
March 31, 1999
10.11(b) Guaranty of Cinemark Mexico (USA) by Cinemark USA, Inc. Exhibit 10.11(b) to the
Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.11(c) Intercompany Subordination Agreement dated November 16, 1998 Exhibit 10.11(c) to the
Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.12 Senior Secured Credit Agreement dated December 4, 1995 among Exhibit 10.18 to the
Cinemark II, Cinemark Mexico (USA) and Cinemark de Mexico Company's Annual
Report (file 33-47040)
on Form 10-K filed
April 1, 1996
10.13(a) Credit Agreement dated September 11, 1998 between Cinemark Exhibit 10.13(a) to the
Investments Corporation, Bank of America National Trust and Savings Company's Annual
Association, as Administrative Agent, NationsBank, N.A., as Report (file 33-47040)
Syndication Agent, and the other financial institutions party thereto on Form 10K filed
March 31, 1999
10.13(b) Cinemark Investments Corporation FRN Pledge Agreement dated Exhibit 10.13(b) to the
September 11, 1998 Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
E-10
85
PAGE NUMBER OR
EXHIBIT INCORPORATION BY
NUMBER DESCRIPTION REFERENCE TO
- ------ ----------- ------------
10.13(c) Guaranty of Cinemark Investments Corporation by Cinemark USA Exhibit 10.13(c) to the
Company's Annual
Report (file 33-47040)
on Form 10K filed
March 31, 1999
10.14 Shareholders' Agreement dated March 12, 1996 among the Company, Exhibit 10.19(b) to the
Mr. Mitchell, Cypress Merchant Banking Partners L.P., Cypress Company's Annual
Pictures Ltd. and Mr. Mitchell and Mr. Don Hart as Co-Trustees of Report (file 33-47040)
certain trusts signatory thereto on Form 10-K filed
April 1, 1996
12 Calculation of Earnings to Fixed Charges. Page
------
21 Subsidiaries of the Registrant Page
------
27 Financial Data Schedule (for SEC use only) Page
------
E-11