Carmike Cinemas, Inc. (NASDAQ: CKEC) is a U.S. leader in digital cinema and 3D cinema deployments and one of the nation’s largest motion picture exhibitors. As of December 31, 2010, Carmike had 239 theatres and 2,236 screens in 36 states. Carmike’s digital cinema footprint reaches 2,103 screens, of which 596 are also equipped with 3D capability.
Carmike Cinemas, Inc. was founded in 1982 when Carl L. Patrick, Sr. acquired Martin Theatres from Fuqua Industries for $25 million. The theater name comes from a combination of Carl L. Patrick, Sr.'s two sons, Carl Jr. and Michael, hence Carmike.
Carmike’s focus for its theatre locations is small to mid-sized communities with populations of fewer than 100,000. They target these markets with the belief that they provide a number of operating benefits, including lower operating costs and fewer alternative forms of entertainment.
From time to time, Carmike converts weaker performing theatres to discount theatres for the exhibition of films that have previously been shown on a first-run basis. At December 31, 2010, they operated 18 theatres with 128 screens as discount theatres.
On January 20, 2009, Carmike's board of directors removed Michael Patrick as the company's chief executive due to struggles with earnings and the company's $1 a share stock price, down from $26 a share in January 2007. S. David Passman III was named temporary non-executive chairman until June of 2009 when he was appointed President and CEO. Michael Patrick, along with his father Carl Patrick, was one of the original founders of the company back in 1982.
The following table lists the current composition of Executive Officers at Carmike Cinemas (based on their Investor Relations website dated 2009 and their 2010 10-K SEC filing). Compensations are current as of 2010, unless noted otherwise.
S. David Passman III saw a 3% decrease in overall compensation from 2009 to 2010, despite an increase in base salary from $360,634 to $630,000. Fred Van Noy, Richard Hare, and Lee Champion all saw increases in their overall compensation from 2009 to 2010 at 13.6%, 16.4%, and .66%, respectively.
The board of directors for Carmike Cinemas consists of seven members, presided over by Roland C. Smith who has been on the Board since April of 2002. Board members S. David Passman III and Fred W. Van Noy are also act as key executive officers for the company. They have both served on the Board since 2003 and 2004, respectively. Jeffrey W. Berkman is the newest member of the Board, having joined in November of 2009.
Carmike Cinemas will host its 2011 first quarter results conference call and webcast on Tuesday, May 10, 2011 at 8:30 a.m. ET. However, there has been disappointing initial attendance results for the first quarter of 2011. There has been a 20% decrease in the industry box office through February compared with the previous year.
Carmike anticipates 2011 to be filled primarily with sequels than 3-D movies.
Carmike Cinemas experienced a difficult fourth quarter in 2010 due to severe weather conditions and a number of movies that turned out to be less than expectation. The same quarter in 2009, on the other hand set all time record box office results. Comparing the two quarters, therefore, results in decreased revenues and earnings for 4Q 2010. This result, however, is somewhat similar across the U.S. exhibition industry.
Several "per patron metrics" were up from the previous year's quarter. These include concessions and admissions per patron. The company attributes an increased spending by their patrons to this increase, particularly because of a higher ratio of premium tickets sold in 2010 versus 2009.
There was a reduction in theatre operating costs for 4Q 2010 versus 4Q 2009, despite significant increases in weather-related maintenance and utilities costs in December. Film exhibition costs, which include advertising, were down nearly 20% year over year, outpacing the reduction in admissions revenue. The reduction in cost reflects a weaker box office, more normalized film costs, and a continuing reduction in print advertising.
On January 7, 2010 Carmike Cinemas announced that that it was pursuing a refinancing of its senior secured term loan facility that matures in May 2012. The existing term loan facility had a balance of $250.8 million outstanding at December 31, 2009. The term loan facility is being launched with an interest rate of LIBOR plus 400 basis points, with a LIBOR floor of 2.0%. The potential refinancing is being led by J.P. Morgan Securities Inc., Citigroup Global Markets and Macquarie Capital (USA) as joint lead arrangers and joint bookrunners.
Carmike also announced plans to replace its $50 million revolving credit facility maturing in May 2010 with a new, $30 million revolving credit facility expected to bear interest at a rate of LIBOR plus 400 basis points, with a LIBOR floor of 2.0%, and to mature in January 2013. The existing revolving credit facility was undrawn as of December 31, 2009. Expected participants in the new revolving credit facility include JPMorgan Chase Bank, N.A., Citibank, N.A., and Macquarie Capital.
Carmike Cinemas Chief Financial Officer, Richard B. Hare, stated, "With the nearing expiration of our revolving line of credit and the potential for rising interest rates over the next two years, it made sense to address the revolver and term loan at this time. We believe the refinancing would provide Carmike with flexibility to fund our long-term growth and success.”
Carmike Cinemas does not currently pay a quarterly dividend on its common stock. In September of 2008, the Company's Board of Directors suspended dividend payments in light of challenging conditions in the credit markets and the overall economy. Going forward Carmike plans to allocate its capital primarily to reducing its overall debt levels.
In August of 2000, Carmike Cinemas filed for Chapter 11 bankruptcy after failing to make $9 million in interest payments to Wachovia Corp. The lender declared Carmike in default of its credit agreements because the company fell out of technical compliance with terms of its loans and, therefore, blocked the payment that was supposed to take place on August 1, 2000. Carmike's bankruptcy filing was later approved in 2002. The company was forced to close many theaters (mostly smaller single, twin, and triple theatres) in dead markets; some were renovated or relocated in areas with desirable market potential.
The motion picture exhibition industry is fragmented and highly competitive. In markets where Carmike Cinemas is not the sole exhibitor, they compete against regional and independent operators as well as the larger theatre circuit operators.
Their operations are subject to varying degrees of competition with respect to film licensing, attracting customers, obtaining new theatre sites or acquiring theatre circuits. In those areas where real estate is readily available, there are few barriers preventing competing companies from opening theatres near one of Carmike's existing theatres. Competitors have built or are planning to build theatres in certain areas in which Carmike operates, which has resulted and may continue to result in excess capacity in such areas which adversely affects attendance and pricing at their theatres in such areas. In 2010 competitors opened, announced plans or started construction on new theatres in markets where Carmike has 11 theatres with 125 screens, representing 6.4% of their total attendance for the year ended December 31, 2010.
The opening of large multiplexes and theatres with stadium seating by Carmike Cinemas and certain of their competitors has tended to, and is expected to continue to, draw audiences away from certain older and smaller theatres, including theatres operated by Carmike. Demographic changes and competitive pressures can also lead to a theatre location becoming impaired.
In addition to competition with other motion picture exhibitors, Carmike's theatres face competition from a number of alternative motion picture exhibition delivery systems, such as cable television, satellite and pay-per-view services and home video systems. The expansion of such delivery systems could have a material adverse effect upon their business and results of operations. The company must also compete for the public’s leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants.
Of the publicly traded companies Carmike Cinemas competes with, it is by far the smallest with a market cap of $96.92 million.
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Carmike Cinema's business depends to a substantial degree on the availability of suitable motion pictures for screening in their theatres and the appeal of such motion pictures to patrons in their specific theatre markets. Their results of operations will vary from period to period based upon the number and popularity of the motion pictures they show in their theatres. A disruption in the production of motion pictures by, or a reduction in the marketing efforts of, the major studios and/or independent producers, a lack of motion pictures, the poor performance of motion pictures in general or the failure of motion pictures to attract the patrons in their theatre markets will likely adversely affect their business and results of operations.
Carmike Cinema's has significant debt obligations. Their long-term debt obligations currently include:
The Company also has significant lease obligations totaling $642.5 million for terms over one year as of December 31, 2010.
These obligations have important consequences for Carmike Cinemas, including:
If they are unable to meet their lease and debt obligations, they could be forced to restructure or refinance their obligations, to seek additional equity financing or to sell assets, which they may not be able to do on satisfactory terms or at all. In particular, the current global financial crisis affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit and equity markets, which could affect Carmike's ability to refinance their existing obligations, obtain additional financing, or raise additional capital. As a result, they could default on their lease or debt obligations.
Carmike Cinema's ability to service their indebtedness and to fund potential acquisitions and capital expenditures for theatre construction, expansion or renovation requires a significant amount of cash, which depends on many factors beyond their control. Their ability to make scheduled payments of principal, to pay the interest on or to refinance their indebtedness is subject to general industry economic, financial, competitive, legislative, regulatory and other factors that are beyond their control, and may be limited because of their current leverage.
In addition, they may have difficulty obtaining financing for new development on terms that they find attractive. Traditional sources of financing new theatres through landlords may be unavailable.
The opening of large multiplexes by their competitors and the opening of newer theatres with stadium seating in certain of their markets have led them to reassess a number of their theatre locations to determine whether to renovate or to dispose of underperforming locations. Further advances in theatre design may also require them to make substantial capital expenditures in the future or to close older theatres that cannot be economically renovated in order to compete with new developments in theatre design.
Because of these obstacles, there is no guarantee that their business will generate sufficient cash flow from operations, that currently anticipated revenue growth will be realized or that future capital will be available for them to fund their capital expenditure needs.
Large multiplex theatres, which Carmike and some of their competitors built, have tended to and are expected to continue to draw audiences away from certain older theatres, including some of the Company's theatres. In addition, demographic changes and competitive pressures can lead to the impairment of a theatre. Over the last several years, Carmike and many of their competitors have closed a number of theatres. Carmike's competitors or smaller entrepreneurial developers may purchase or lease these abandoned buildings and reopen them as theatres in competition with the Company.
In those areas where real estate is readily available, there are few barriers preventing competing companies from opening theatres near one of their existing theatres. Competitors have built and are planning to build theatres in certain areas in which Vue operates. In the past, these developments have resulted and may continue to result in excess capacity in those areas, adversely affecting attendance and pricing at their theatres in those areas. Even where they are the only exhibitor in a film licensing zone (and therefore do not compete for films), they still may experience competition for patrons from theatres in neighboring zones. There have also been a number of consolidations in the film exhibition industry, and the impact of these consolidations could have an adverse effect on their business if greater size would give larger operators an advantage in negotiating licensing terms.
Carmike's theatres also compete with a number of other motion picture delivery systems including network, cable and satellite television, DVD’s, as well as video-on-demand, pay-per-view services and downloads via the Internet. While the impact of these alternative types of motion picture delivery systems on the motion picture exhibition industry is difficult to determine precisely, there is a risk that they could adversely affect attendance at motion pictures shown in theatres.
Their ability to attract patrons is also affected by (1) the DVD release window, which is the time between the release of a film for play in theatres and when the film is available on DVD for general public sale or rental and (2) the video-on-demand release window, which is the time between the release of a film for play in theatres and when the film is available on video-on-demand services for public viewing. Each of these release windows has been narrowing over the past several years. For example, the DVD and video-on-demand release windows currently average approximately four months. It is also possible that these release windows could shorten in the near future. If these release windows continue to shorten, it might impact Carmike's ability to attract patrons to their theatres. Future release windows may also shorten with the introduction of premium video-on-demand (―premium VOD‖). Premium VOD would allow movie studios to make movies available to customers at an increased price as soon as 30-60 days after release to the theatres. To date, few titles have been released through premium VOD. However, if movie studios increase the number of titles released with premium VOD, it might decrease Carmike's ability to draw patrons to their theatres.
Theatres also face competition from a variety of other forms of entertainment competing for the public’s leisure time and disposable income, including sporting events, concerts, live theatre and restaurants.
Carmike's revenues depend highly upon the timing of the motion picture releases by distributors. As a result, their business is seasonal, with a disproportionate amount of revenues generated during the summer months and year-end holiday season. While motion picture distributors have begun to release major motion pictures more evenly throughout the year, the most marketable motion pictures are usually released during the summer months and the year-end holiday season, and Carmike usually generates more revenue and cash flows during those periods than in other periods during the year. As a result, the timing of motion picture releases affects their results of operations, which may vary significantly from quarter to quarter and year to year. If they do not adequately manage their theatre costs of operations, it could significantly affect their cash flow and potential for future growth.
Carmike Cinemas has invested a significant amount of resources into becoming a leading motion picture exhibitor in 3-D. Other exhibitors, which have experienced delays in upgrading their screens to digital and 3-D capability, continue to upgrade their screens with digital and 3-D capability. Therefore, Carmike has a limited window to maintain their position as a leader in digital and 3-D screen count. This may adversely affect their ability to generate additional revenue from the digital and 3-D movie experience in the future.
Carmike's business depends on consumers voluntarily spending discretionary funds on leisure activities. Movie theatre attendance and concessions sales may be affected by prolonged negative trends in the general economy that adversely affect consumer spending. Their customers may have less money for discretionary purchases because of negative economic conditions such as job losses, foreclosures, bankruptcies, sharply falling home prices, reduced availability of credit and other matters, resulting in a decrease in consumer spending or causing consumers to shift their spending to alternative forms of entertainment. This may affect the demand for movies or severely impact the motion picture production industry such that the Company's business and operations could be adversely affected.
Carmike purchases a substantial amount of their concession supplies, except for beverage supplies, as well as janitorial supplies from Showtime Concession, and Carmike is by far its largest customer. In return for their concession supplies, Carmike pays Showtime Concession at contractual prices that are based on the type of concession supplied. Their current agreement with Showtime Concession will expire on December 31, 2012. If this relationship were disrupted, Carmike could be forced to negotiate a number of substitute arrangements with alternative vendors which are likely to be, in the aggregate, less favorable to them than the current arrangement.
They purchase most of their beverage supplies from The Coca-Cola Company. Their current agreement with The Coca-Cola Company expires on December 31, 2013. Under the agreement, The Coca-Cola Company may raise beverage supply costs up to 10% annually through the term of the agreement. Carmike's margins on concessions revenue may decline to the extent that they are unable to pass on increases in their concession costs to their customers in a rate at or near the rate of cost increases.
Carmike plans to continue to expand their operations through the development of new theatres and the expansion of existing theatres. However, they anticipate their development activities in 2011 will be limited to two theatres. Developing new theatres requires a significant amount of time and resources and poses a number of risks. Construction of new theatres may result in cost overruns, delays or unanticipated expenses related to zoning or tax laws. Contractors may have difficulty in obtaining financing for construction. Desirable sites for new theatres may be unavailable or expensive, and the markets in which new theatres are located may deteriorate over time. Additionally, the market potential of new theatre sites cannot be precisely determined, and their theatres may face competition in new markets from unexpected sources. Newly constructed theatres may not perform up to their expectations.
They face significant competition for potential theatre locations and for opportunities to acquire existing theatres and theatre circuits. Consequently, they may be unable to add to their theatre circuit on terms they consider acceptable.