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Carmike Cinemas 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
CARMIKE CINEMAS, INC.
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-14993
CARMIKE CINEMAS, INC.
(Exact Name of Registrant as Specified in Its Charter)
     
DELAWARE   58-1469127
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     
1301 First Avenue, Columbus, Georgia   31901-2109
(Address of Principal Executive Offices)   (Zip Code)
(706) 576-3400
(Registrant’s Telephone Number, Including Area Code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o
Indicate the number of shares outstanding of the issuer’s common stock, as of the latest practicable date.
Common Stock, par value $0.03 per share — 12,744,372 shares outstanding as of October 30, 2006.
 
 

 


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 EX-31.1 SECTION 302 CERTIFICATION OF CEO
 EX-31.2 SECTION 302 CERTIFICATION OF CFO
 EX-32.1 SECTION 906 CERTIFICATION OF CEO
 EX-32.2 SECTION 906 CERTIFICATION OF CFO

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EXPLANATORY NOTE
     During May of 2006, we determined that it was necessary to restate our previously issued consolidated financial statements for the years ended December 31, 2004 and 2003 because of certain misstatements in those financial statements. Accordingly, we have restated our previously issued consolidated financial statements for the years ended December 31, 2004 and 2003 and the condensed consolidated financial statements for the quarters ended March 31, 2005, June 30, 2005 and 2004 and September 30, 2005 and 2004. The misstatements in our previously issued financial statements are principally attributable to certain errors in accounting for lease transactions and other matters as described in Note 1 of the notes to our condensed consolidated financial statements included herein.
     The restatement adjustments increased previously reported accumulated deficit as of January 1, 2005 by $11.6 million, decreased previously reported net income by $0.3 million for the three months ended September 30, 2005, and increased net loss by $0.3 million for the nine months ended September 30, 2005. The restatement does not affect our audited consolidated financial statements for the year ended December 31, 2005 filed on Form 10-K, but it does affect our previously filed quarterly reports on Form 10-Q/A for the quarters ended March 31, 2005 and June 30, 2005 and on Form 10-Q for the quarter ended September 30, 2005. As a result, we filed Forms 10-Q/A on August 4, 2006 for the quarters ended June 30, 2005 and September 30, 2005 to restate the three-month and year-to-date results in those quarters. On August 21, 2006, we filed our Form 10-Q for the quarter ended March 31, 2006, which included the restated results for the quarter ended March 31, 2005. On August 25, 2006, we filed our Form 10-Q for the quarter ended June 30, 2006, which included the restated results for the quarter and six months ended June 30, 2005.

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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands, except for share data)
                 
    September 30,     December 31,  
    2006     2005  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 16,198     $ 23,609  
Restricted cash
    2,258       3,602  
Accounts and notes receivable
    3,174       2,056  
Inventories
    1,645       1,802  
Deferred tax asset
    6,029       6,029  
Prepaid expenses
    5,902       6,287  
 
           
Total current assets
    35,206       43,385  
 
               
Investment in and advances to partnerships
    3,881       3,763  
Deferred income tax asset
    47,621       42,344  
Assets held for sale
    5,429       5,434  
Other
    33,195       32,702  
 
               
Property and equipment, net of accumulated depreciation
    549,390       569,947  
Goodwill
    38,460       38,460  
Intangible assets, net of accumulated amortization
    1,749       2,082  
 
           
Total assets
  $ 714,931     $ 738,117  
 
           
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 13,575     $ 23,516  
Accrued expenses
    38,084       42,443  
Dividends payable
          2,154  
Current maturities of long-term debt, capital lease obligations and long-term financing obligations
    3,231       2,435  
 
           
Total current liabilities
    54,890       70,548  
Long-term liabilities:
               
Long-term debt, less current maturities
    317,351       313,774  
Capital lease obligations and long-term financing obligations, less current maturities
    117,847       115,809  
Other
    8,214       5,269  
 
           
Total long-term liabilities
    443,412       434,852  
 
               
Stockholders’ Equity
               
Preferred Stock, $1.00 par value, authorized 1,000,000 shares, none outstanding as of September 30, 2006 and December 31, 2005 respectively
           
Common Stock, $0.03 par value, authorized 20,000,000 shares, 12,729,372 shares issued and 12,448,408 shares outstanding as of September 30, 2006 and 12,455,622 shares issued and 12,309,002 shares outstanding as of December 31, 2005
    382       374  
Paid-in capital
    297,896       297,256  
Treasury stock, 280,964 and 146,620 shares at cost at September 30, 2006 and December 31, 2005, respectively.
    (8,258 )     (5,210 )
Accumulated deficit
    (73,391 )     (59,703 )
 
           
Total stockholder’s equity
    216,629       232,717  
 
           
Total liabilities and stockholders’ equity
  $ 714,931     $ 738,117  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands, except per share data)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
            2005             2005  
    2006     (restated)     2006     (restated)  
Revenues
                               
Admissions
  $ 85,542     $ 77,247     $ 242,980     $ 223,079  
Concessions and other
    45,122       39,656       129,757       114,829  
 
                       
 
    130,664       116,903       372,737       337,908  
 
                               
Costs and Expenses
                               
Film exhibition costs
    47,553       41,038       132,660       123,341  
Concession costs
    4,338       3,734       13,679       11,777  
Other theatre operating costs
    51,981       46,567       152,077       137,875  
General and administrative expenses
    7,442       3,401       22,975       11,742  
Depreciation and amortization
    10,043       10,082       30,811       28,112  
(Gain) loss on sales of property and equipment, net
    303       (72 )     (134 )     (498 )
 
                       
 
    121,660       104,750       352,068       312,349  
 
                       
Operating income
    9,004       12,153       20,669       25,559  
Other expenses
                               
Interest expense
    12,563       9,383       34,823       25,450  
Loss on extinguishment of debt
                4,811       5,795  
 
                       
Income (loss) before reorganization costs and income taxes
    (3,559 )     2,770       (18,965 )     (5,686 )
Reorganization benefit
                      (2,388 )
 
                       
Income (loss) before income taxes
    (3,559 )     2,770       (18,965 )     (3,298 )
Income tax expense (benefit)
    (2,566 )     1,728       (5,276 )     (2,285 )
 
                       
Net income (loss) available for common stockholders
  $ (993 )   $ 1,042     $ (13,689 )   $ (1,013 )
 
                       
Weighted average shares outstanding:
                               
Basic
    12,402       12,212       12,381       12,188  
Diluted
    12,402       12,690       12,381       12,188  
Net income (loss) per common share:
                               
Basic
  $ (0.08 )   $ 0.09     $ (1.11 )   $ (0.08 )
Diluted
  $ (0.08 )   $ 0.08     $ (1.11 )   $ (0.08 )
Dividends declared per common share
        $ 0.18     $ 0.18     $ 0.53  
The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CARMIKE CINEMAS, INC. and SUBSIDIARIES
(in thousands)
                 
    Nine Months Ended  
    September 30  
            2005  
    2006     (restated)  
Operating Activities
               
Net loss
  $ (13,689 )   $ (1,013 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    30,811       28,112  
Amortization of debt issuance costs
    1,975       1,670  
Deferred income taxes
    (5,276 )     (108 )
Stock-based compensation
    3,047       2,051  
Reorganization items
          (2,388 )
Non-cash loss on extinguishment of debt
    4,811       3,820  
Gain on sales of property and equipment, net
    (134 )     (498 )
Changes in operating assets and liabilities:
               
Accounts and notes receivable and inventories
    (961 )     220  
Prepaid expenses
    267       (13,009 )
Accounts payable
    (9,941 )     (9,709 )
Accrued expenses, other liabilities and other assets
    (3,160 )     (154 )
 
           
Net cash provided by operating activities
    7,750       8,994  
Investing Activities
               
Purchases of property and equipment
    (20,140 )     (78,547 )
Acquisition of GKC Theatres’ stock
          (61,596 )
Release of other restricted cash
    1,344        
Proceeds from sales of property and equipment
    2,096       1,937  
 
           
Net cash used in investing activities
    (16,700 )     (138,206 )
Financing Activities
               
Additional borrowings
    156,000       175,000  
Repayments of long-term debt
    (151,644 )     (104,740 )
Repayments of liabilities subject to compromise
          (958 )
Repayments of capital leases and long-term financing obligations
    (894 )     (2,087 )
Proceeds from long-term financing obligations
    8,461       16,997  
Debt issuance costs
    (3,006 )      
Purchase of treasury stock
    (3,048 )     (5,210 )
Dividends paid
    (4,330 )     (6,436 )
 
           
Net cash provided by financing activities
    1,539       72,566  
 
           
Decrease in cash and cash equivalents
    (7,411 )     (56,646 )
Cash and cash equivalents at beginning of period
    23,609       56,944  
 
           
Cash and cash equivalents at end of period
  $ 16,198     $ 298  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CARMIKE CINEMAS, INC. and SUBSIDIARIES
For the Three and Nine months Ended September 30, 2006 and 2005
NOTE 1 — RESTATEMENTS
     The Carmike Cinemas, Inc. consolidated financial statements for the three and nine months ended September 30, 2005 and 2006 incorporated herein include a restatement of the Company’s financial statements for three and nine months ended September 30, 2005, which is referenced below.
     During the second quarter of 2006, we determined that it was necessary to restate our previously issued financial statements for each of the years ended December 31, 2004 and 2003, the quarter ended March 31, 2005, and each of the quarters ended June 30 and September 30, 2005 and 2004 to correct for errors in the financial statements related to our failure to properly account for certain lease related transactions. The following errors in the application of generally accepted accounting principles to lease transactions have been corrected:
    Where separation of the ground lease and building lease elements of a theatre lease was required pursuant to the provisions of Statement of Financial Standards (“SFAS”) No. 13, Accounting for Leases (“SFAS 13”), as amended, we had utilized a pro rata method to fragment leases into building and land elements. The land lease should have been determined by applying an appropriate incremental borrowing rate to the fair value of the land with the remaining lease payments being applied to the lease of the building.
 
    For purposes of determining whether the lease is a capital lease because the present value of the minimum lease payments exceeds 90% of the fair value of the leased property, we used an incorrect incremental borrowing rate. Similarly, to the extent the lease was determined to be a capital lease, the same incorrect rate was utilized to record the capital lease obligation.
 
    For certain leases, we incorrectly utilized a period exceeding the term of the lease for purposes of amortizing leasehold improvements or capital lease assets. Adjustments were recorded to reflect the amounts computed using the correct lease term.
 
    We did not correctly re-assess lease classification upon modification of the terms of certain leases. Accordingly, in some cases, the classification of the leases may have been incorrectly recorded in the financial statements and/or amounts related to the capital leases were not correctly adjusted for such modification.
 
    We did not correctly account for certain build-to-suit arrangements in which, for financial reporting purposes, we were considered the owner of these assets during the construction period. Upon completion of the construction projects, we determined that we were unable to meet the requirements for sale-leaseback treatment under SFAS No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate: Sales-Type Leases of Real Estate; Definition of the Lease Term; and Initial Direct Costs of Direct Financing Leases (“SFAS 98”); accordingly, project costs funded by the landlord should have been recorded as financing obligations.
 
    We incorrectly capitalized interest on payments we made for construction of lessor-owned assets under lease arrangements in which we were not considered the owner of the project for financial reporting purposes. Additionally, for one build-to-suit construction project, we utilized an incorrect interest rate for purposes of capitalizing interest, and incorrectly capitalized interest over periods in which construction activity had been deferred for reasons other than normal construction delays.
 
    We included contingent payments under lease arrangements classified as capital leases or financing obligations as rent expense, rather than interest expense.
 
    We did not revise deferred rental liability calculations to reflect modifications of the terms on certain of our operating leases.
 
    We incorrectly reported the cost of our contribution to lessor assets through the funding of project costs as leasehold improvements, rather than as building costs, assets under capital lease or prepaid rent, as appropriate under each arrangement.

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     In addition, we did not ensure the completeness and accuracy of supporting schedules and underlying data for routine journal entries and journal entries recorded as part of our period-end closing and consolidation process. As a result, during 2005, we incorrectly recorded journal entries regarding directors’ fees, discount ticket and other revenue, capitalized interest, and accrued expenses. These errors impact the quarterly results of operations presented in this Form 10-Q for 2005.
     The financial statements, notes thereto and related disclosures contained in this Quarterly Report on this Form 10-Q for the three and nine months ended September 30, 2005 have been restated to adjust for the errors noted above. These restatements reflect an $11.6 million increase to accumulated deficit at January 1, 2005 as well as adjustments to deferred tax assets, net property plant and equipment, capital leases, financing obligations, other assets, deferred expenses and accrued expenses. Adjustments were also made to reflect the tax effect of the restatement adjustments.
     In addition, we revised our presentation of dividends declared totaling $2.2 million and $6.5 million for the three and nine months ended September 30, 2005, respectively, to present the charge as a reduction of paid-in capital, rather than an increase in accumulated deficit.
     The effect of the restatements on earnings per common share was as follows:
                 
    Three Months Ended   Nine Months Ended
    September 30, 2005   September 30, 2005
Basic
    (0.03 )     (0.10 )
Diluted
    (0.02 )     (0.10 )
     A summary of the significant effects of the restatements is found below and on the following pages:

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Income Statement effects:
                 
    For the three months ended
    September 30, 2005
    As Previously    
    Reported (1)   As Restated
Consolidated Statements of Operations
               
Concessions and other
  $ 39,610     $ 39,656  
Total revenue
    116,857       116,903  
Other theatre operating costs
    47,195       46,567  
General and administrative expenses
    3,726       3,401  
Depreciation and amortization
    9,822       10,082  
Operating income
    11,414       12,153  
Interest expense
    7,739       9,383  
Income tax expense
    2,354       1,728  
Net income available for common stockholders
    1,321       1,042  
Income per common share: Basic
    0.11       0.09  
Income per common share: Diluted
    0.10       0.08  
                 
    For the nine months ended
    September 30, 2005
    As Previously    
    Reported (1)   As Restated
Consolidated Statements of Operations
               
Admissions revenue
  $ 223,596     $ 223,079  
Concessions and other
    114,713       114,829  
Total revenue
    338,309       337,908  
Other theatre operating costs
    139,441       137,875  
General and administrative expenses
    14,333       11,742  
Depreciation and amortization
    27,819       28,112  
Operating income
    22,097       25,559  
Interest expense
    21,097       25,450  
Income tax expense (benefit)
    (1,664 )     (2,285 )
Net income (loss) available for common stockholders
    (743 )     (1,013 )
Income (loss) per common share: Basic
    (0.06 )     (0.08 )
Income (loss) per common share: Diluted
    (0.06 )     (0.08 )
Statement of Cash Flows effects:
                 
    For the nine months ended
    September 30, 2005
    As Previously    
    Reported (1)   As Restated
Consolidated Statements of Cash Flows
               
Net cash provided by operating activities
  $ 1,875     $ 8,994  
Net cash used in investing activities
  $ (119,009 )     (138,206 )
Net cash provided by financing activities
  $ 60,190       72,566  
 
(1) As previously reported on form 10-Q filed November 9, 2005.

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NOTE 2 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
     Basis of Presentation. We have prepared the accompanying unaudited Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. This information reflects all adjustments which in the opinion of management are necessary for a fair presentation of the statement of financial position as of September 30, 2006, and the results of operations for the three and nine month periods ending September 30, 2006 and 2005 and the cash flows for the nine month periods ending September 30, 2006 and 2005. Except for the restatement adjustments described in Note 1, all adjustments made have been of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. We believe that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2005 (“2005 Form 10-K”). That report includes a summary of our critical accounting policies. There have been no material changes in our accounting policies during fiscal 2006, except for the adoption of statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123 (R)”) as noted in “Stock-Based Compensation” below. We have revised our presentation of certain items within the investing activities section of the consolidated statement of cash flows for the nine months ended September 30, 2005.
     Proceedings under Chapter 11. On August 8, 2000, we and our subsidiaries, Eastwynn Theatres, Inc., Wooden Nickel Pub, Inc. and Military Services, Inc. filed voluntary petitions for relief under Chapter 11 (the “Chapter 11 Cases”) of the United States Bankruptcy Code. In connection with the Chapter 11 Cases, we were required to report in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, (“SOP 90-7”). SOP 90-7 requires, among other things, (1) pre-petition liabilities that are subject to compromise be segregated in our consolidated balance sheet as liabilities subject to compromise and (2) the identification of all transactions and events that are directly associated with our reorganization in the Consolidated Statements of Operations. We emerged from the Chapter 11 Cases pursuant to our plan of reorganization effective on January 31, 2002. On February 11, 2005, we filed a motion seeking an order entering a final decree closing the bankruptcy cases. On March 15, 2005, the United States Bankruptcy Court of the District of Delaware entered a final decree closing the bankruptcy cases.
     Reorganization benefit (expense) for the three and nine month periods ended September 30, 2005 is as follows (in thousands):
                 
    Three months ended     Nine months ended  
    September 30, 2005     September 30, 2005  
Change in estimate for general unsecured claims
          (391 )
Settlement of accrued professional fees
          (1,997 )
 
           
 
  $     $ (2,388 )
 
           
     Use of Estimates. The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.
     Stock-Based Compensation. On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), which requires the measurement and recognition of compensation expense for all stock-based compensation payments and supersedes the current accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123(R) is effective for all annual periods beginning after June 15, 2005. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) relating to the adoption of SFAS 123(R).
     Beginning with the first quarter of fiscal 2006, we adopted SFAS 123(R) using the modified prospective method of adoption. See Note 7 for a description of our stock plans and related disclosures and the related impact of adopting SFAS 123(R). We currently use the Black-Scholes option pricing model to determine the fair value of our stock options. The determination of the fair value of the awards on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. All stock option awards are amortized based on their graded vesting over the requisite service period of the awards. We also issue restricted stock awards to certain key employees. Generally, the restricted stock vests over a one to three year period, thus we recognize compensation expense over the one to three year period equal to the grant date value of the shares awarded to the employee.

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     Prior to the adoption of SFAS 123(R), we applied the intrinsic value-based method of accounting prescribed by APB 25 and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for our fixed plan options and provided the required pro forma disclosures prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, as amended (“SFAS 123”). Under APB 25, compensation was recognized over the grant’s vesting period only if the current market price of the underlying stock on the date of grant exceeds the exercise price.
     The following table summarizes the key assumptions in determining the fair value of the options granted during the nine months ended September 30, 2005 using the Black-Scholes option pricing model together with a description of the assumptions used to calculate the fair value:
         
    Nine Months
    Ended
    September 30, 2005
Expected term (years)
    9.0  
Risk-free interest rate
    4.40 %
Expected dividend yield
    2.76 %
Expected volatility
    0.40  
     Had compensation cost for the three and nine months ended September 30, 2005, respectively, been determined consistent with SFAS 123 utilizing the assumptions detailed above, the Company’s pro forma net income (loss) and pro forma basic and diluted earnings (loss) per share would have decreased to the following amounts (in thousands, except share data):
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2005     September 30, 2005  
    (restated)     (restated)  
Net income (loss) available for common stock:
               
As reported
  $ 1,042     $ (1,013 )
Plus: expense recorded on deferred stock compensation, net of related tax effects
    503       2,187  
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (1,154 )     (3,485 )
 
           
Pro forma — for SFAS 123
  $ 391     $ (2,311 )
 
           
Basic net earnings per common share:
               
As reported
  $ 0.08     $ (0.16 )
Pro forma — for SFAS 123
  $ 0.03     $ (0.19 )
Diluted net earnings per common share:
               
As reported
  $ 0.08     $ (0.16 )
Pro forma — for SFAS 123
  $ 0.03     $ (0.19 )
NOTE 3 ASSETS HELD FOR SALE
     The Company has $5.4 million in surplus long-term real estate assets held for sale as of September 30, 2006. The carrying values of these assets are reviewed periodically as to relative market conditions and are adjusted in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. No impairment was deemed necessary on the assets in the third quarter of 2006. Disposition of these assets is contingent on current market conditions and we cannot be assured that they will be sold at a value equal to or greater than the current carrying value.
NOTE 4 ACQUISITION OF GKC THEATRES
     On May 19, 2005, the Company acquired 100% of the stock of George G. Kerasotes Corporation (“GKC Theatres”) for a net purchase price of $61.6 million, adjusted for working capital of $3.9 million. The GKC Theatres acquisition upholds our traditional focus by taking advantage of opportunistic small market acquisitions. The consolidated financial statements for and as of the nine month period ended September 30, 2005 include the assets and liabilities and the operating results for the period from acquisition date through September 30, 2005. Pursuant to SFAS 141, Business Combinations (“SFAS 141”), the Company applied purchase accounting to the transaction, resulting in recognition of additional property and equipment of $54.1 million. We recognized additional goodwill and other intangibles of approximately $17.5 million from the transaction. None of the goodwill recognized is deductible for

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tax purposes. GKC Theatres operated 30 theatres with 263 screens in Illinois, Indiana, Michigan and Wisconsin.
     Actual cash paid at closing was $58.4 million. As stipulated, in the purchase agreement, the remainder of the purchase price was set aside in an escrow account. The $3.2 million has been classified as restricted cash in our consolidated balance sheet. The current escrow amount of $1.0 million was settled during and remitted to the GKC Theatres stockholders in the first quarter of 2006 while the remaining escrow amount of $2.3 million is expected to be settled on or before May 2007, subject to certain outstanding claims.
Pro Forma Results of Operations
     The following pro forma results of operations for the nine months ended September 30, 2005 assumes the GKC Theatres acquisition occurred at the beginning of the fiscal year January 1, 2005 and reflects the full results of operations for the nine month periods presented. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combinations been in effect on the dates indicated, or which may occur in the future.
(in thousands except per share amounts):
         
    Nine Months Ended  
    September 30, 2005  
    (restated)  
Revenues
  $ 372,060  
Operating income
    26,410  
Net income (loss) available for common stockholders
  $ (950 )
Net income (loss) available per common share:
       
Basic
  $ (0.08 )
Diluted
  $ (0.08 )
NOTE 5 — DEBT
Debt consisted of the following (in thousands):
                 
    September 30,     December 31,  
    2006     2005  
Term loan
  $ 164,972       166,225  
Delayed draw term loan
    155,610        
7.500% senior subordinated notes
          150,000  
 
           
 
    320,582       316,225  
Current maturities
    (3,231 )     (2,451 )
 
           
 
  $ 317,351     $ 313,774  
 
           
Senior Secured Credit Facilities
     On May 19, 2005, we entered into a credit agreement with Bear, Stearns & Co. Inc., as sole lead arranger and sole book runner, Wells Fargo Foothill, Inc., as documentation agent, and Bear Stearns Corporate Lending Inc., as administrative agent. The credit agreement provides for senior secured credit facilities in the aggregate principal amount of $405.0 million.
     The senior secured credit facilities consist of:
    a $170.0 million seven year term loan facility;
 
    a $185.0 million seven year delayed-draw term loan facility, with a twenty-four month commitment available to finance permitted acquisitions and related fees and expenses; and
 
    a $50.0 million five year revolving credit facility available for general corporate purposes.
     In addition, the credit agreement provides for future increases (subject to certain conditions and requirements) to the revolving credit and term loan facilities in an aggregate principal amount of up to $125.0 million.

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     On June 6, 2006, we drew down $156 million of the $185 million delayed-draw term loan to repurchase our outstanding $150 million of 7.50% senior subordinated notes due 2014 and to repay related fees and expenses. At this time, the portion of the delayed-draw term loan commitment which was not used for this repurchase was cancelled.
     As described in the fourth and fifth amendments to our senior secured credit agreement, the interest rate for borrowings under our outstanding revolving and term loans is set to a margin above the London interbank offered rate (“Libor”) or base rate, as the case may be, based on our corporate credit ratings from Moody’s Investors Service, Inc. and Standard & Poor’s Rating Services in effect from time to time, with the margin ranging from 2.50% to 3.50% for loans based on Libor and 1.50% to 2.50% for loans based on the base rate. These amendments also temporarily increased the margin described above by 0.50% per annum until such time as our audited financial statements for the year ended December 31, 2005 and our unaudited financial statements for the quarter ended March 31, 2006 were delivered to the lenders. In addition, this 0.50% per annum increase remained in effect until we were able to deliver our unaudited financial statements for the quarter ended June 30, 2006 on August 25, 2006.
     In addition, pursuant to the fifth amendment, on October 25, 2006, we entered into and will maintain hedging agreements that cap the interest rate on $150 million aggregate principal amount of our outstanding term loans at 9.25% through June 8, 2008. The final maturity date of the term loan facility and delayed-draw term loan facility is May 19, 2012.
     The interest rate for borrowings under the revolving credit facility for the initial six-month period was set from time to time at our option (subject to certain conditions set forth in the credit agreement) at either: (1) a specified base rate plus 1.25% or (2) the Eurodollar Base Rate divided by the difference between one and the Eurocurrency Reserve Requirements plus 2.25%. Thereafter, the applicable rates of interest under the revolving credit facility are based on our consolidated leverage ratio, with the margins applicable to base rate loans ranging from 0.50% to 1.25%, and the margins applicable to Eurodollar Loans (as defined in the credit agreement) ranging from 1.50% to 2.25%. The rate at June 6, 2006 was 10.25%; on June 8, 2006, we converted the rate to a 90-day LIBOR-based rate, which was 8.52%. At September 30, 2006, the rate was 8.6%. The final maturity date of the revolving credit facility is May 19, 2010.
     If we repay the term loans prior to June 2, 2007, we will be subject to a 1% prepayment fee for optional and most mandatory prepayments, unless the prepayment results from a change of control transaction or the issuance by us of subordinated debt of up to $150 million. The credit agreement requires that mandatory prepayments be made from (1) 100% of the net cash proceeds from certain asset sales and dispositions and issuances of certain debt, (2) various percentages (ranging from 75% to 0% depending on our consolidated leverage ratio) of excess cash flow as defined in the credit agreement, and (3) 50% of the net cash proceeds from the issuance of certain equity and capital contributions.
     The senior secured credit facilities contain covenants which, among other things, restrict our ability, and that of our restricted subsidiaries, to:
    pay dividends or make any other restricted payments;
 
    incur additional indebtedness;
 
    create liens on our assets;
 
    make certain investments;
 
    sell or otherwise dispose of assets;
 
    consolidate, merge or otherwise transfer all or any substantial part of our assets;
 
    enter into transactions with our affiliates; and
 
    engage in any sale-leaseback, synthetic lease or similar transaction involving any of our assets.
     The senior secured credit facilities also contain financial covenants that require us to maintain specified ratios of debt to EBITDA (the consolidated leverage ratio) and EBITDA to interest expense (the consolidated interest coverage ratio). The terms governing each of these ratios were amended in the sixth amendment to our senior secured credit agreement, effective September 28, 2006.

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     The sixth amendment:
    amended the consolidated leverage ratio such that as of the last day of any period of four consecutive fiscal quarters this ratio may not exceed: (a) 4.35 to 1.00 for any four quarter period ended December 31, 2005 through March 31, 2006; (b) 5.00 to 1.00 for the four quarter period ended June 30, 2006; (c) 4.75 to 1.00 for any four quarter period ending September 30, 2006 through December 31, 2007; and (d) 4.50 to 1.00 for any four quarter period ending March 31, 2008 or thereafter; and
 
    amended the consolidated interest coverage ratio such that for any period of four consecutive fiscal quarters this ratio may not be less than: (a) 2.00 to 1.00 for the four quarter period ending prior to September 30, 2006; (b) 1.75 to 1.00 for any four quarter period ending during the period beginning on September 30, 2006 and ending on December 31, 2007; and (c) 2.00 to 1.00 thereafter.
     The sixth amendment also amended the calculation of EBITDA for purposes of the consolidated leverage ratio and the consolidated interest coverage ratio. The sixth amendment allows the Company to exclude from the calculation of EBITDA up to $7.7 million of legal, accounting and consulting expenses and transaction fees incurred by the Company between December 31, 2005 and December 31, 2006 related to the Company’s prior accounting restatements and credit facility amendments. The Company may also exclude from the calculation of EBITDA up to $2.3 million of other unusual and nonrecurring expenses incurred by the Company prior to March 31, 2007 related to the accounting restatements (to the extent such expenses are reasonably acceptable to the administrative agent).
     Generally, the senior secured credit facilities do not place restrictions on our ability to make capital expenditures. However, we may not make, or commit to make, any capital expenditure if (a) any default or event of default under the credit agreement has occurred and is continuing or would result, or if such default or event of default would occur as a result of a breach of certain financial covenants contained in the credit agreement on a pro forma basis after giving effect to the capital expenditure; or (b) such capital expenditure would result in the aggregate amount of capital expenditures being made by the Company for any consecutive 12-month period ending during the period from September 30, 2006 to December 31, 2007 to exceed $30 million. The sixth amendment amended the definition of “capital expenditures” to exclude from this definition any portion of expenditures that are made with proceeds from long term financing obligations incurred by the Company.
     Our failure to comply with any of these covenants, including compliance with the financial ratios, is an event of default under the senior secured credit facilities, in which case, the administrative agent may, and if requested by the lenders holding a certain minimum percentage of the commitments shall, terminate the revolving credit facility and the delayed-draw term loan commitments with respect to additional advances and may declare all or any portion of the obligations under the revolving credit facility and the term loan facilities due and payable. As of September 30, 2006, we were in compliance with all of the financial covenants. Other events of default under the senior secured credit facilities include:
    our failure to pay principal on the loans when due and payable, or its failure to pay interest on the loans or to pay certain fees and expenses (subject to applicable grace periods);
 
    the occurrence of a change of control (as defined in the credit agreement); or
 
    a breach or default by us or our subsidiaries on the payment of principal of any Indebtedness (as defined in the credit agreement) in an aggregate amount greater than $5.0 million.
     The senior secured credit facilities are guaranteed by each of our subsidiaries and secured by a perfected first priority security interest in substantially all of our present and future assets.
     Event of Default
     We had not submitted audited financial statements for the year ended December 31, 2005 by the 65th day following the end of the previous fiscal year nor had we submitted unaudited financial statements for the three month period ended March 31, 2006 by the 40th day following the end of such three month period as required by the financial covenants under our senior secured credit facility.
     On April 3, 2006, we obtained a waiver for the covenant regarding delivery of our audited financial statements for the year ended December 31, 2005 by entering into a second amendment to the credit agreement with Bear, Stearns & Co. Inc., and the other lending parties. This second amendment, which had an effective date of March 28, 2006, extended the date by which we were to submit

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audited financial statements for the year ended December 31, 2005 to the lenders to May 15, 2006. On May 9, 2006, we obtained a second waiver for delivery of such audited financial statements by entering into a third amendment to the credit agreement with Bear, Stearns & Co. Inc. and the other lending parties extending the delivery date to June 30, 2006. The third amendment also included a waiver regarding the delivery of the unaudited financial statements for the three month period ended March 31, 2006, extending the delivery date of such unaudited financial statements to June 30, 2006.
     Effective June 2, 2006, we entered into a fourth amendment to our senior secured credit agreement with the lending parties thereunder, which included an extension of the deadline for the delivery of our audited financial statements for the year ended December 31, 2005 and unaudited financial statements for the three month period ended March 31, 2006 until July 27, 2006.
     Effective July 27, 2006, we entered into a fifth amendment to our senior secured credit agreement, which included (i) an extension of the deadline for the delivery of our audited financial statements for the year ended December 31, 2005 until September 30, 2006; (ii) an extension of the deadline for delivery of our unaudited financial statements for the quarter ended March 31, 2006 until September 30, 2006; and (iii) an extension of the deadline for delivery of our unaudited financial statements for the quarters ended June 30, 2006 and September 30, 2006 until December 31, 2006.
     We filed our audited financial statements for the year ended December 31, 2005 on Form 10-K on August 4, 2006. In addition, we filed our unaudited financial statements for the quarter ended March 31, 2006 on Form 10-Q on August 21, 2006, our unaudited financial statements for the quarter ended June 30, 2006 on Form 10-Q on August 25, 2006 and our amended Form 10-Q/As for the quarters ended June 30, 2005 and September 30, 2005 on August 4, 2006.
     The amendments provided for waivers of certain defaults under the credit agreement, including the default resulting from our 7.50% senior subordinated notes being accelerated. In addition, the fourth amendment permitted our existing undrawn $185 million delayed-draw term loan commitment to be used to repay or repurchase our outstanding $150 million of 7.50% senior subordinated notes and to pay related fees and expenses upon the acceleration of such notes. On June 6, 2006, we drew down $156 million on this delayed-draw term loan to repay our outstanding 7.50% senior subordinated notes, all accrued and unpaid interest thereon and certain other fees and expenses related thereto. These notes are no longer outstanding and the related indenture is no longer in effect. The undrawn portion of the delayed-draw term loan terminated upon the funding of such $156 million. The delayed-draw term loan has a maturity date of May 19, 2012. See “7.50% Senior Subordinated Notes” below.
7.50% Senior Subordinated Notes
     On February 4, 2004, we completed an offering of $150.0 million in aggregate principal amount of 7.50% senior subordinated notes due February 15, 2014 to institutional investors. Accordingly, unamortized debt issuance cost of $4.8 million was written off and charged to loss on extinguishment of debt. As discussed further below, on June 6, 2006, we drew down $156 million on our delayed-draw term loan to repay our outstanding 7.50% senior subordinated notes, all accrued and unpaid interest thereon and certain other fees and expenses related thereto.
     Event of Default
     On April 3, 2006, the trustee for the 7.50% senior subordinated notes notified us that we were in violation of the covenant requiring us to file our 2005 Form 10-K with the SEC within the time frame specified by the SEC’s rules and regulations, thereby triggering a default under the note indenture. The notice further stated that if this default continued for an additional sixty days then an event of default under the note indenture would occur. We did not file our 2005 Form 10-K on or before June 2, 2006 and did not receive the requisite consents to obtain a waiver of the default under the note indenture. Consequently, the default was not cured during the 60-day cure period and therefore constituted an event of default under the note indenture which entitled the trustee under the notes and/or the holders of at least 25% in aggregate principal amount of the outstanding notes to declare all of the notes immediately due and payable. On June 2, 2006, we received notice from the holders of over 25% in aggregate principal amount of the notes that such holders had accelerated the notes. As a consequence, on June 4, 2006, $150 million in aggregate principal amount of the notes (representing all of the outstanding notes) plus accrued and unpaid interest thereon became immediately due and payable. As permitted under the fourth amendment to our senior secured credit agreement with the lending parties thereunder, we borrowed $156 million under our existing delayed-draw term loan commitment and repaid all of the outstanding notes on June 6, 2006. The notes are no longer outstanding and the indenture governing the notes is no longer in effect.
     NOTE 6 — INCOME TAXES
     At September 30, 2006, the Company had deferred tax assets of approximately $53.6 million. The income tax benefit of $2.6

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million for the three months ended September 30, 2006, reflects a combined federal and state tax rate of 72.1%. The income tax benefit of $5.3 million for the nine months ended September 30, 2006, reflects a combined federal and state tax rate of 27.8% The effective tax rate has increased from 62.4% for the three months ended September 30, 2005 and decreased from 69.3% for the nine months ended September 30, 2005 due to the relationship of nondeductible items, principally related to executive compensation, to estimated annual pre-tax book income.
NOTE 7 — STOCK PLANS
Stock Options
     Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for directors, officers and employees in the form of incentive and non-qualified stock options and restricted stock. These plans are described in more detail below. The Board of Directors (as delegated to the Compensation and Nominating Committee) has the sole authority to determine who receives such grants, the type, size and timing of such grants, and to specify the terms of any non-competition agreements relating to the grants.
General Stock Option Information
     On May 31, 2002, the Board of Directors adopted the Carmike Cinemas, Inc. Non-Employee Directors Long-Term Stock Incentive Plan (the “Directors Incentive Plan”), which was approved by the stockholders on August 14, 2002. There were a total of 75,000 shares reserved under the Directors Incentive Plan. On August 14, 2002, directors Alan J. Hirschfield and Roland C. Smith each received fully vested options to purchase 5,000 shares of our common stock at an exercise price of $19.95 per share. In addition, on June 2, 2003, our director, S. David Passman III, received fully vested options to purchase 5,000 shares of our common stock at an exercise price of $21.40 per share, and on April 1, 2004, our director, Patricia A. Wilson, received fully vested options to purchase 5,000 shares of our common stock at an exercise price of $37.46 per share. These grants of 20,000 shares in the aggregate during 2002, 2003 and 2004 represent the only stock options outstanding under the Directors Incentive Plan prior the plan being superseded on May 21, 2004, the effective date of the Carmike Cinemas, Inc. 2004 Incentive Stock Plan (the “2004 Incentive Stock Plan”). On November 10, 2005, our former director, James J. Gaffney, received fully vested options to purchase 5,000 shares of our common stock at an exercise price of $22.05 per share pursuant to the 2004 Incentive Stock Plan. On October 20, 2006, Kevin D. Katari, a new director elected to the Board of Directors on the same date, received fully vested options to purchase 5,000 shares of our common stock at an exercise price of $20.58 per share pursuant to the 2004 Incentive Stock Plan.
     On July 19, 2002, the Board of Directors adopted the Carmike Cinemas, Inc. Employee and Consultant Long-Term Stock Incentive Plan (the “Employee Incentive Plan”), which was approved by the stockholders on August 14, 2002. There were a total of 500,000 shares reserved under the Employee Incentive Plan. We granted an aggregate of 150,000 options pursuant to this plan on March 7, 2003 to three members of senior management. The exercise price for the 150,000 stock options is $21.79 per share, and 75,000 options vested on December 31, 2005 and 75,000 options vest on December 31, 2006. On December 18, 2003, we granted an aggregate of 180,000 options to six members of management. The exercise price for the 180,000 options is $35.63, and they vest ratably over three years beginning December 31, 2005 through December 31, 2007. These grants of 330,000 shares in the aggregate during 2003 represent the only stock options granted under the Employee Incentive Plan prior to the plan being superseded on May 21, 2004, the effective date of the 2004 Incentive Stock Plan.
     The following table sets forth the summary of option activity under our stock option plans for the nine months ended September 30, 2006:
                         
            Weighted     Weighted  
    Number     Average     Average  
    of Shares     Exercise Price     Fair Value  
Balance, December 31, 2005
    335,000     $ 28.58     $ 16.50  
Granted
                 
Exercised
                 
Settled (1)
    (25,000 )   $ 21.79       12.82  
Forfeited (1)
    (60,000 )   $ 29.86       17.30  
Expired
                 
 
                 
Balance, September 30, 2006
    250,000     $ 28.95     $ 16.67  
 
                 

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(1)   In the nine months ended September 30, 2006, we recorded a $104,000 charge related to the Release and Consulting Agreement entered into with our former Chief Financial Officer (“CFO”) which provided that the former CFO shall be paid the cash equivalent for 25,000 vested stock options granted under Carmike’s 2002 Stock Plan based on the difference between the strike price of $21.79 and the then-market price of $25.36 on December 31, 2005, the date at which the options vested. All of the former CFO’s remaining options were forfeited without regard to vesting.
     Information regarding stock options outstanding at September 30, 2006 is summarized below:
                                 
    Options Outstanding     Options Exercisable  
    Number of     Weighted Average Remaining             Weighted Average  
Prices   Shares     Contractual Life (Years)     Number of Shares     Fair Value  
$19.95
    10,000       5.88       10,000     $ 11.59  
$21.40
    5,000       6.68       5,000     $ 12.42  
$21.79
    100,000       6.44       50,000     $ 12.82  
$22.05
    5,000       9.12       5,000     $ 11.66  
$35.63
    125,000       7.22       41,668     $ 20.49  
$37.46
    5,000       7.51       5,000     $ 17.54  
 
                           
Totals
    250,000       6.89       116,668     $ 15.59  
 
                       
     There was no aggregate intrinsic value for options outstanding and exercisable as of September 30, 2006 as all outstanding options were not in-the-money. As of September 30, 2006 there was approximately $372,000 in unrecognized compensation costs related to non-vested stock options that is expected to be recognized over a weighted average period of approximately 0.6 years.
Stock Plans
     Upon emergence from Chapter 11, the Company’s Board of Directors approved a new management incentive plan, the Carmike Cinemas, Inc. 2002 Stock Plan (the “2002 Stock Plan”). The Board of Directors approved the grant of 780,000 shares under the 2002 Stock Plan to Michael W. Patrick, the Company’s Chief Executive Officer. Pursuant to the terms of Mr. Patrick’s employment agreement dated January 31, 2002 these shares are delivered in three equal installments on January 31, 2005, 2006 and 2007 unless, prior to the delivery of any such installment, Mr. Patrick’s employment is terminated for Cause (as defined in his employment agreement) or he has violated certain covenants set forth in such employment agreement. In May 2002, the Company’s Stock Option Committee (which administered the 2002 Stock Plan prior to August 2002) approved grants of the remaining 220,000 shares to a group of seven other members of senior management. These shares were earned over a three year period, commencing with the year ended December 31, 2002, with the shares being earned as the executive achieved specific performance goals set for the executive during each of these years. In some instances the executive earned partial amounts of his or her stock grant based on graded levels of performance. Shares earned each year vest and are receivable approximately two years after the calendar year in which they were earned, provided, with certain exceptions, the executive remains an employee of the Company.
     Of the 220,000 shares granted to members of senior management, 204,360 shares were earned as of September 30, 2006, subject only to vesting requirements and 15,640 shares have been forfeited.
     On March 31, 2004, the Board of Directors adopted the 2004 Incentive Stock Plan, which was approved by the stockholders on May 21, 2004. The 2004 Incentive Stock Plan replaced the Employee Incentive Plan and the Directors Incentive Plan. The Compensation and Nominating Committee (or similar committee) may grant stock options, stock grants, stock units, and stock appreciation rights under the 2004 Incentive Stock Plan to certain eligible employees and to outside directors. There are 830,000 shares of common stock reserved for issuance pursuant to grants made under the 2004 Incentive Stock Plan in addition to the 225,000 unissued shares that were previously authorized for issuance under the Employee Incentive Plan and the Directors Incentive Plan and the number of shares of stock subject to grants under the Employee Incentive Plan and the Directors Incentive Plan which may be forfeited or expire on or after the effective date of the 2004 Incentive Stock Plan. No further grants may be made under the Employee Incentive Plan or Directors Incentive Plan.
     On May 19, 2005, our non-employee directors received annual equity compensation consisting of 250 restricted shares each (an aggregate of 1,500 restricted shares of common stock, of which 250 were later forfeited by a former director) pursuant to the 2004 Incentive Stock Plan, which vested on May 19, 2006. Effective as of the 2006 annual meeting of stockholders (which was held on October 20, 2006), each of our non-employee directors will receive an annual grant of 2,500 restricted shares of common stock (pursuant to the 2004 Incentive Stock Plan) at each annual meeting of stockholders which will vest in full at the next annual meeting of stockholders; therefore, on October 20, 2006, an aggregate of 15,000 restricted shares of common stock were issued to the Company’s non-employee directors.

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     On March 27, 2006, 7,500 restricted shares were granted pursuant to the 2004 Incentive Stock Plan to our new Chief Financial Officer, Richard B. Hare. The 7,500 restricted shares will vest ratably over a three year period, commencing with the period ended March 27, 2007, if Mr. Hare remains an employee on such date. In addition, on August 30, 2006, 5,000 restricted shares were granted to Mr. Hare pursuant to the 2004 Incentive Stock Plan. The 5,000 restricted shares will vest ratably over a three year period, commencing with the period ended August 30, 2007, if Mr. Hare remains an employee on such date.
     We delivered 324,110 shares to management on January 31, 2006 and 367,250 shares to management on January 31, 2005 in conjunction with the 2002 Stock Plan. In order to satisfy the federal and state withholding requirements on these shares, we retained 134,344 and 146,620 of these shares respectively in treasury and remitted the corresponding tax withholding in cash on behalf of the stock recipients.
     The following table summarizes the activity in the 2002 Stock Plan since January 1, 2006 and its status at September 30, 2006:
                                 
    Status at September 30, 2006
    Grants and   Shares Earned   Shares Earned   Shares
    Forfeitures (1)   Pending Vesting   and Awarded   Forfeited
Balance at January 1, 2006:
    984,360       628,110       356,250       37,770  
Grants and forfeitures in 2006:
                               
Shares granted to senior management
    12,500       12,500                  
 
                               
Total grants, net of forfeitures
    996,860       640,610       356,250       37,770  
 
                               
 
(1)   There were no forfeitures in 2006.
     As of September 30, 2006 there was approximately $1.4 million of total unrecognized compensation costs related to non-vested share grants under the Plans. The costs are expected to be recognized over a weighted average period of approximately 0.5 years.
     We adopted SFAS 123(R) in the first quarter of fiscal 2006 using the modified prospective method under which prior periods are not revised for comparative purposes. Prior to fiscal year 2006, we accounted for our stock-based compensation plans under APB 25. The following table outlines the costs incurred for the three and nine months ended September 30, 2006 and 2005 related to stock-based employee compensation costs included in our consolidated Statement of Operations:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
            2005             2005  
    2006     (restated)     2006     (restated)  
Costs related to stock options
  $ 163,000     $     $ 490,000     $  
Costs related to stock grants
                               
Service vesting grants
    804,000       804,000       2,412,000       2,412,000  
Performance vesting grants
    49,000       (379,000 )     145,000       (361,000 )
 
                       
Total stock compensation costs
  $ 1,016,000     $ 425,000     $ 3,047,000     $ 2,051,000  
 
                       
NOTE 8 — EARNINGS PER SHARE
     Earnings per share is presented in conformity with Statement of Financial Accounting Standards No. 128, Earnings Per Share (“SFAS 128”), for all periods presented. In accordance with SFAS 128, basic net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock equivalents for each period. Due to losses in all periods presented, there were no dilutive shares.
     Earnings per share calculations contain dilutive adjustments for shares under the various stock plans discussed in Note 7 of the notes to our interim condensed consolidated financial statements. The following table reflects the effects of those plans on the earnings per share (in thousands, except for share data):

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    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
            2005             2005  
    2006     (restated)     2006     (restated)  
Outstanding shares
    12,435       12,309       12,421       12,287  
Less restricted stock issued
    (33 )     (97 )     (40 )     (99 )
 
                       
Basic shares outstanding
    12,402       12,212       12,381       12,188  
Dilutive shares:
                               
Restricted stock awards
          456              
Stock options
          22              
 
                       
 
    12,402       12,690       12,381       12,188  
 
                       
Earnings per share:
                               
Basic
  $ (0.08 )   $ 0.09     $ (1.11 )   $ (0.08 )
 
                       
Diluted
  $ (0.08 )   $ 0.08     $ (1.11 )   $ (0.08 )
 
                       
     Anti-dilutive restricted stock grants and options totaled 224,082 for the three months ended September 30, 2006 and 193,594 and 442,458 for the nine months ended September 30, 2006 and 2005, respectively.
     On October 5, 2006, the Company’s Board of Directors declared a dividend of $0.35 per share. The dividend will be paid on November 3, 2006 to stockholders of record as of October 16, 2006. The aggregate amount of this dividend is approximately $4.5 million.
NOTE 9 — LEGAL PROCEEDINGS
     From time to time, we are involved in routine litigation and legal proceedings in the ordinary course of our business, such as personal injury claims, employment matters, contractual disputes and claims alleging Americans with Disabilities Act violations. Currently, we do not have any pending litigation or proceedings that we believe will have a material adverse effect, either individually or in the aggregate, upon us.
NOTE 10 — IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
FIN 48
     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of Statement of Financial Accounting Standards 109 (“FIN 48”). FIN 48 is effective January 1, 2007 and would require us to record any change in net assets that results from the application of FIN 48 as an adjustment to retained earnings.
     FIN 48 is applicable to all uncertain positions for taxes accounted for under SFAS 109, and is not intended to be applied by analogy to other taxes, such as sales taxes, value-add taxes, or property taxes. The scope of FIN 48 includes any position taken (or expected to be taken) on a tax return, including the decision to exclude from the return certain income or transactions. FIN 48 makes clear that its guidance also applies to positions such as (1) excluding income streams that might be deemed taxable by the taxing authorities, (2) asserting that a particular equity restructuring (e.g., a spin-off transaction) is tax-free when that position might be uncertain, or (3) the decision to not file a tax return in a particular jurisdiction for which such a return might be required.
     FIN 48 requires that we make qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on an aggregated basis. We are still in the process of assessing the impact that the adoption of FIN 48 may have on our consolidated results of operations, cash flows or financial position.
FSP 13-1
     In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, Accounting for Rental Costs Incurred during a Construction Period. FSP 13-1 clarifies there is no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period. Accordingly, we are no longer able to capitalize rental costs during the construction period and began expensing them as pre-opening expense prior to the theatre opening date. This FSP was effective for the first reporting period beginning after December 15, 2005, which is our first quarter in 2006 and had no effect on our financial statements for the three and nine month periods ended September 30, 2006.
FSP 123(R)-6
     In October 2006, the FASB issued FSP 123(R)-6, Technical Corrections of FASB Statement No. 123(R) (“FSP 123(R)-6”). FSP 123(R)-6 addresses certain technical corrections to SFAS 123(R), including an amendment to the definition of “short-term

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inducement” to exclude an offer to settle an award. The provisions of FSP 123(R)-6 are effective for the Company’s fourth quarter and the Company is currently evaluating the impact of this standard.
FAS 154
     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”), which requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. We are not currently contemplating an accounting change which would be impacted by SFAS 154.
FAS 157
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which enhances existing guidance for measuring assets and liabilities using fair value. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are evaluating the impact of SFAS 157 on our consolidated financial condition and results of operations.
SAB 108
     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006, and will be effective for the Company beginning December 31, 2006. We are currently assessing the provisions and evaluating the financial statement impact of SAB 108 on our consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESTATEMENT
     The Carmike Cinemas, Inc. consolidated financial statements for the three and nine months ended September 30, 2005 and 2006 and incorporated herein include a restatement of the Company’s financial statements for three and nine months ended September 30, 2005, and is referenced below.
     During the second quarter of 2006, we determined that it was necessary to restate our previously issued financial statements for each of the years ended December 31, 2004 and 2003, and each of the quarters ended March 31, June 30 and September 30, 2005 to correct for errors in the financial statements related to our failure to properly account for certain lease related transactions. The following errors in the application of generally accepted accounting principles to lease transactions have been corrected:
    Where separation of the ground lease and building lease elements of a theatre lease was required pursuant to the provisions of Statement of Financial Standards (“SFAS”) No. 13, Accounting for Leases (“SFAS 13”), as amended, we had utilized a pro rata method to fragment leases into building and land elements. The land lease should have been determined by applying an appropriate incremental borrowing rate to the fair value of the land with the remaining lease payments being applied to the lease of the building.
 
    For purposes of determining whether the lease is a capital lease because the present value of the minimum lease payments exceeds 90% of the fair value of the leased property, we used an incorrect incremental borrowing rate. Similarly, to the extent the lease was determined to be a capital lease, the same incorrect rate was utilized to record the capital lease obligation.
 
    For certain leases, we incorrectly utilized a period exceeding the term of the lease for purposes of amortizing leasehold improvements or capital lease assets. Adjustments were recorded to reflect the amounts computed using the correct lease term.
 
    We did not correctly re-assess lease classification upon modification of the terms of certain leases. Accordingly, in some cases, the classification of the leases may have been incorrectly recorded in the financial statements and/or amounts related to the capital leases were not correctly adjusted for such modification.
 
    We did not correctly account for certain build-to-suit arrangements in which, for financial reporting purposes, we were considered the owner of these assets during the construction period. Upon completion of the construction projects, we determined that we were unable to meet the requirements for sale-leaseback treatment under SFAS No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate: Sales-Type Leases of Real Estate; Definition of the Lease Term; and Initial Direct Costs of Direct Financing Leases (“SFAS 98”); accordingly, project costs funded by the landlord should have been recorded as financing obligations.
 
    We incorrectly capitalized interest on payments we made for construction of lessor-owned assets under lease arrangements in which we were not considered the owner of the project for financial reporting purposes. Additionally, for one build-to-suit construction project, we utilized an incorrect interest rate for purposes of capitalizing interest, and incorrectly capitalized interest over periods in which construction activity had been deferred for reasons other than normal construction delays.
 
    We included contingent payments under lease arrangements classified as capital leases or financing obligations as rent expense, rather than interest expense.
 
    We did not revise deferred rental liability calculations to reflect modifications of the terms on certain of our operating leases.
 
    We incorrectly reported the cost of our contribution to lessor assets through the funding of project costs as leasehold improvements, rather than as building costs, assets under capital lease or prepaid rent, as appropriate under each arrangement.

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     In addition, we did not ensure the completeness and accuracy of supporting schedules and underlying data for routine journal entries and journal entries recorded as part of our period-end closing and consolidation process. As a result, during 2005, we incorrectly recorded journal entries regarding directors fees, discount ticket and other revenue, capitalized interest, and accrued expenses. These errors impact the quarterly results of operations presented in this Form 10-Q.
     The financial statements, notes thereto and related disclosures contained in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2005 have been restated to adjust for the errors noted above. These restatements reflect a $11.6 million increase to accumulated deficit at January 1, 2005 as well as adjustments to net property plant and equipment, capital leases, financing obligations, other assets, deferred expenses and accrued expenses.
     The effect of the restatements on earnings per common share was as follows:
                 
    Three Months Ended   Nine Months Ended
    September 30, 2005   September 30, 2005
Basic
    (0.03 )     (0.10 )
Diluted
    (0.02 )     (0.10 )
GKC THEATRES ACQUISITION
     On May 19, 2005, the Company acquired 100% of the stock of George G. Kerasotes Corporation (“GKC Theatres”) for a net purchase price of $61.6 million. The Company’s consolidated financial statements for and as of the three and nine month periods ended September 30, 2005, include the assets and liabilities and the operating results of GKC Theatres beginning with the acquisition date. With the GKC Theatres acquisition, we added 30 theatres with 263 screens in Illinois, Indiana, Michigan and Wisconsin.
RESULTS OF OPERATIONS
     Comparison of Three and Nine Months Ended September 30, 2006 and 2005
     Revenues.
     The Company collects substantially all of its revenues from the sales of admission tickets and concessions. The table below provides a comparative summary of the operating data for this revenue generation.
                                 
    For the three months ended   For the nine months ended
    Sept. 30, 2006   Sept. 30, 2005   Sept. 30, 2006   Sept. 30, 2005
Average theatres
    293       309       296       295  
Average screens
    2,453       2,470       2,463       2,329  
Average attendance per screen
    6,462       5,887       18,462       18,190  
Average admission price
  $ 5.40     $ 5.32     $ 5.34     $ 5.31  
Average concession sales per patron
  $ 2.85     $ 2.73     $ 2.85     $ 2.73  
Total attendance (in thousands)
    15,851       14,530       45,461       42,091  
Total revenues (in thousands) (restated)
  $ 130,664     $ 116,903     $ 372,737     $ 337,908  
     Total revenues for the three months ended September 30, 2006 compared to the three months ended September 30, 2005 increased 11.8%. This increase is due to a 9.1% increase in total attendance and increases in average admission and concession prices. Total revenues for the nine months ended September 30, 2006 increased 10.3%. This increase is due to an 8.0% increase in total attendance and increases in average admission and concession prices. The increase in attendance was driven by the better box office performance of many films during the three and nine months ended September 30, 2006. We operated 291 theatres with 2,450 screens as of September 30, 2006 compared to 307 theatres with 2,469 screens as of September 30, 2005.

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     The table below shows the activity of theatre openings, closures and acquisitions for the three months ended September 30, 2006.
                         
                    Average Screens/  
    Theatres     Screens     Theatre  
Total at June 30, 2006
    295       2,455       8.3  
Opens/reopens
    1       12       12.0  
Closures
    (5 )     (17 )     3.4  
 
                 
Total at September 30, 2006
    291       2,450       8.4  
 
                   
     The closures shown above were the result of normal lease expirations. The Company incurred no additional liability due to these closures.
     The following table sets forth the percentage of total revenues represented by certain items reflected in our consolidated statement of operations for the periods indicated:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
            2005             2005  
    2006     (restated)     2006     (restated)  
Revenues:
                               
Admissions
    65.5 %     66.1 %     65.2 %     66.0 %
Concession & Other
    34.5       33.9       34.8       34.0  
 
                       
Total Revenue
    100.0       100.0       100.0       100.0  
Cost and expenses:
                               
Film exhibition costs (1)(2)
    55.6 %     53.1 %     54.6 %     55.3 %
Concession costs (2)
    9.6       9.4       10.5       10.3  
Other theatre operating costs
    39.8       39.8       40.8       40.8  
General and administrative
    5.7       2.9       6.2       3.5  
Depreciation and amortization
    7.7       8.6       8.3       8.3  
(Gain) loss on sales of property and equipment , net
    0.0       (0.1 )     (0.0 )     (0.1 )
 
                       
Total costs and expenses
    93.1       89.6       94.5       92.4  
 
                       
Operating income
    6.9       10.4       5.5       7.6  
Interest expense
    9.6       8.0       9.3       7.5  
 
                       
Loss on extinguishment of debt
    0.0       0.0       1.3       1.7  
 
                       
Income (loss) before reorganization costs and income taxes
    (2.7 )     2.4       (5.1 )     (1.7 )
Reorganization expense (benefit)
    0.0       0.0       0.0       (0.7 )
 
                       
Net income (loss) before income taxes
    (2.7 )     2.4       (5.1 )     (1.0 )
 
                       
Income tax expense (benefit)
    (2.0 )     1.5       (1.4 )     (0.7 )
 
                       
Net income (loss) available for common stockholders
    (0.8 )%     0.9 %     (3.7 )%     (0.3 )%
 
                       
 
(1)   Film exhibition costs include advertising expenses net of co-op reimbursements.
 
(2)   All costs are expressed as a percentage of total revenues, except film exhibition costs, which are expressed as a percentage of admission revenues, and concession costs, which are expressed as a percentage of concession and other revenues.
     The table below summarizes operating expense data for the periods presented.
                                                 
    For the three months ended   For the nine months ended
            Sept. 30,   % variance           Sept. 30,   % variance
    Sept. 30,   2005   favorable/   Sept. 30,   2005   favorable/
(in thousands)   2006   (restated)   (unfavorable)   2006   (restated)   (unfavorable)
Film exhibition costs
  $ 47,553     $ 41,038       (15.9 )%   $ 132,660     $ 123,341       (7.6 )%
Concession costs
  $ 4,338     $ 3,734       (16.2 )%   $ 13,679     $ 11,777       (16.2 )%
Other theatre operating costs
  $ 51,981     $ 46,567       (11.6 )%   $ 152,077     $ 137,875       (10.3 )%
General and administrative expenses
  $ 7,442     $ 3,401       (118.8 )%   $ 22,975     $ 11,742       (95.7 )%
Depreciation and amortization
  $ 10,043     $ 10,082       .4 %   $ 30,811     $ 28,112       (9.6 )%
(Gain) loss on sales of property and equipment, net
  $ 303     $ (72 )     (520.8 )%   $ (134 )   $ (498 )     (73.1 )%

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     Film Exhibition Costs. Film exhibition costs generally fluctuate in direct relation to the increases and decreases in admissions revenue. Film exhibition costs for the three months ended September 30, 2006 increased 15.9% to $47.6 million from $41.0 million for the three months ended September 30, 2005 due to an increase in admissions revenues of $8.3 million. The increase in film exhibition costs on a percentage basis for the three months ended September 30, 2006, as compared to the three months ended September 30, 2005, was due to an increase in per-film rental rates. As a percentage of admissions revenue, film exhibition costs were 55.6% for the three months ended September 30, 2006 as compared to 53.1% for the three months ended September 30, 2005.
     Film exhibition costs for the nine months ended September 30, 2006 increased 7.6% to $132.7 million from $123.3 million for the nine months ended September 30, 2005 due to the increase in admission revenues of $19.9 million. As a percentage of admissions revenue, film exhibition costs were 54.6% for the nine months ended September 30, 2006 as compared to 55.3% for the nine months ended September 30, 2005.
     Concession Costs. Concession costs fluctuate with the changes in concessions revenue. As a percentage of concessions and other revenues, concession costs increased to 9.6% of concession and other revenue for the three months ended September 30, 2006, as compared to 9.4% of concession and other revenue for the three months ended September 30, 2005. Concession costs, as a percentage of concessions and other revenues for the nine months ended September 30, 2006, were 10.5% as compared to 10.3% for the nine months ended September 30, 2005. We continue to focus on limited, high margin product offerings such as popcorn and soft drinks to keep our concession costs low.
     Other Theatre Operating Costs. Other theatre operating costs for the three months ended September 30, 2006 increased 11.6 % compared to the three months ended September 30, 2005 and increased 10.3% for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The increase was the result of increased travel, training, point of sales conversion costs and supplies relating to the GKC Theatres acquisition as well as increases in professional fees, rents related to new theatre openings, repairs and replacements.
     General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2006 increased 118.8% compared to the three months ended September 30, 2005. General and administrative expenses for the nine months ended September 30, 2006 increased 95.7% compared to the nine months ended September 30, 2005. The increase is due to an increase in professional fees and costs associated with our restatements and an increase in deferred compensation expense associated with stock options and stock grants.
     Depreciation and Amortization. Depreciation and amortization for the three months ended September 30, 2006 increased 0.4% compared to the three months ended September 30, 2005. This reflects an increase in assets placed in service due to completed construction projects. Depreciation and amortization for the nine months ended September 30, 2006 increased 9.6% compared to the nine months ended September 30, 2005. This reflects an increase in assets placed in service due to completed construction projects and depreciation on the fixed assets of GKC Theatres.
     Operating Income. Operating income for the three months ended September 30, 2006 was $9.0 million compared to $12.2 million for the three months ended September 30, 2005. As a percentage of revenues, operating income for the three months ended September 30, 2006 was 6.9% compared to 10.4% for the three months ended September 30, 2005. The decrease in operating income as a percentage of revenue is primarily due to higher general and administrative expenses, as discussed above.
     Operating income for the nine months ended September 30, 2006 was $20.7 million compared to $25.6 million for the nine months ended September 30, 2005. As a percentage of revenues, operating income for the nine months ended September 30, 2006 was 5.5% compared to 7.6% for the nine months ended September 30, 2005. The decrease in operating income as a percentage of revenue is primarily due to higher general and administrative expenses, as discussed above.
     Interest expense. Interest expense for the three months ended September 30, 2006 increased 33.9% to $12.6 million from $9.4 million for the three months ended September 30, 2005. The increase is related to higher indebtedness related to the GKC Theatres acquisition obtained through a refinancing of the Company’s senior secured credit facility that closed on May 19, 2005, which is described under “Liquidity and Capital Resources — Credit Facilities.” Interest expense for the nine months ended September 30, 2006 increased 36.8% compared to the nine months ended September 30, 2005 due to the reasons discussed above.
     Loss on extinguishment of debt. The $4.8 million loss on extinguishment of debt for the nine months ended September 30, 2006 relates to our repayment of the 7.50% Senior Subordinated Notes in the amount of $150 million on June 6, 2006. The $5.8 million

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loss on extinguishment of debt for the nine months ended September 30, 2005 relates to our retirement of our $100 million term loan then outstanding and also included a $2.0 million pre-payment premium.
     Income tax expense. The Company recognized an income tax benefit of $2.6 million and $5.3 million, respectively, for the three and nine months ended September 30, 2006, representing a combined federal and state tax rate of 72.1% and 27.8%, respectively, compared to an income tax expense of $1.7 million and an income tax benefit of $2.3 million, respectively, for the three and nine months ended September 30, 2005, representing a combined federal and state tax rate of 62.4% and 69.3%, respectively. The effective tax rate increased during the three-month period due to the relationship of nondeductible items, principally related to executive compensation, to estimated annual pre-tax book income. The effective tax rate has decreased during the nine-month period due to the relationship of nondeductible items, principally related to executive compensation, to estimated annual pre-tax book loss.
LIQUIDITY AND CAPITAL RESOURCES
     The Company’s revenues are collected in cash and credit card payments. Because we receive our revenue in cash prior to the payment of related expenses, we have an operating “float” which partially finances our operations. Our current liabilities exceeded our current assets by $19.7 million as of September 30, 2006, as compared to December 31, 2005 when our current liabilities exceeded our current assets by $27.1 million. The working capital deficit is related to continued losses during the first nine months of 2006 and increased uses of cash for debt service. The deficit will be funded through cash on hand, anticipated operating cash flows and the ability to draw from our revolving credit agreement. At September 30, 2006, we had $320.6 million outstanding under our senior secured credit facility in addition to available borrowing capacity of $50 million under our revolving credit facility.
     During the three months and nine months ended September 30, 2006, we made capital expenditures of approximately $8.6 million and $20.1 million, respectively. Our total budgeted capital expenditures for 2006 are $25.3 million, which we anticipate will be funded by using operating cash flows, available cash from our new revolving credit facility and landlord-funded new construction and theatre remodeling, when available. We expect that substantially all of these capital expenditures will continue to consist of new theatre construction and theatre remodeling. Our capital expenditures for any new theatre generally precede the opening of the new theatre by several months. In addition, when we rebuild or remodel an existing theatre, the theatre must be closed, which results in lost revenue until the theatre is reopened. Therefore, capital expenditures for new theatre construction, rebuilds and remodeling in a given quarter may not result in revenues from the new theatre or theatres for several quarters.
     Net cash provided by operating activities was $7.8 million for the nine months ended September 30, 2006 compared to net cash provided by operating activities of $9.0 million for the nine months ended September 30, 2005. This change is principally due to higher after tax losses and a reduction in cash used for working capital items.
     The Company delivered 260,000 shares to management on January 31, 2006 in conjunction with the 2002 Stock Plan. In order to satisfy the federal and state withholding requirements on these shares, we retained 134,344 of these shares in the treasury and remitted the corresponding tax withholding in cash ($3.0 million) on behalf of the stock recipients. In addition, the Company delivered an additional 13,750 shares in the three months ended September 30, 2006 in connection with 2002 Stock Plan. No cash proceeds were received in connection with these shares.
     Net cash used in investing activities was $16.7 million for the nine months ended September 30, 2006 compared to $138.2 million for the nine months ended September 30, 2005. This decreased use of cash is related to our decreased capital expenditures program. In addition, in the nine months ended September 30, 2005, we purchased GKC Theatres for $65.5 million. As of September 30, 2006, the Company had under construction projects that will result in 10 screens at one new theatre. There were no projects under construction as of September 30, 2006 involving the expansion of existing theatres or remodeled theatres.
     For the nine months ended September 30, 2006, net cash provided by financing activities was $1.5 million compared to net cash provided by financing activities of $72.6 million for the nine months ended September 30, 2005. The decrease for the nine months ended September 30, 2006 is due to fewer borrowings in 2006 as compared to borrowings in 2005 to fund the GKC acquisition.
     On October 5, 2006, our Board of Directors declared a quarterly dividend of $0.35 per share. This dividend amount includes our customary quarterly dividend of $0.175 per share, for the third quarter of 2006, as well as an additional $0.175 per share that normally would have been declared for the second quarter. The dividend will be paid on November 3, 2006 to stockholders of record as of October 16, 2006. The aggregate amount of this dividend is approximately $4.5 million.
     Our liquidity needs are funded by operating cash flow, sales of surplus assets, availability under new credit agreements and short term float. The exhibition industry is very seasonal with the studios normally releasing their premiere film product during the holiday

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season and summer months. This seasonal positioning of film product makes our needs for cash vary significantly from period to period. Additionally, the ultimate performance of the film product at any time during the calendar year will have the most dramatic impact on our cash needs.
     Our ability to service our indebtedness will require a significant amount of cash. Our ability to generate this cash will depend largely on future operations. Based upon our current level of operations, we believe that cash flow from operations, available cash, sales of surplus assets and borrowings under our credit agreement will be adequate to meet our liquidity needs. However, the possibility exists that, if our liquidity needs are not met and we are unable to service our indebtedness, we could come into technical default under our debt instruments, causing the agents or trustees for those instruments to declare all payments due immediately or, in the case of our senior debt, to issue a payment blockage to any junior debt.
     We cannot make assurances that our business will continue to generate significant cash flow to fund our liquidity needs. We are dependent to a large degree on the public’s acceptance of the films released by the studios. We are also subject to a high degree of competition and low barriers of entry into our industry. In the future, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot make assurances that we will be able to refinance any of our indebtedness or raise additional capital through other means, on commercially reasonable terms or at all.
     As of September 30, 2006, we did not have any off-balance sheet financing transactions.
Credit Facilities
     On May 19, 2005, we entered into a credit agreement with Bear, Stearns & Co. Inc., as sole lead arranger and sole book runner, Wells Fargo Foothill, Inc., as documentation agent, and Bear Stearns Corporate Lending Inc., as administrative agent. The credit agreement provides for senior secured credit facilities in the aggregate principal amount of $405.0 million.
     The senior secured credit facilities consist of:
    a $170.0 million seven year term loan facility used to finance the transactions described below;
 
    a $185.0 million seven year delayed-draw term loan facility, with a twenty-four month commitment available to finance permitted acquisitions and related fees and expenses; and
 
    a $50.0 million five year revolving credit facility available for general corporate purposes.
     In addition, the credit agreement provides for future increases (subject to certain conditions and requirements) to the revolving credit and term loan facilities in an aggregate principal amount of up to $125.0 million.
     On June 6, 2006, we drew down $156 million of the $185 million delayed-draw term loan to repurchase our outstanding $150 million of 7.50% senior subordinated notes due 2014 and to repay related fees and expenses. At this time, the portion of the delayed-draw term loan commitment which was not used for this repurchase was cancelled.
     As described in the fourth and fifth amendments to our senior secured credit agreement, the interest rate for borrowings under our outstanding revolving and term loans is set to a margin above the London interbank offered rate (“Libor”) or base rate, as the case may be, based on our corporate credit ratings from Moody’s Investors Service, Inc. and Standard & Poor’s Rating Services in effect from time to time, with the margin ranging from 2.50% to 3.50% for loans based on Libor and 1.50% to 2.50% for loans based on the base rate. These amendments also temporarily increased the margin described above by 0.50% per annum until such time as our audited financial statements for the year ended December 31, 2005 and our unaudited financial statements for the quarter ended March 31, 2006 were delivered to the lenders. In addition, this 0.50% per annum increase remained in effect until we were able to deliver our unaudited financial statements for the quarter ended June 30, 2006 on August 25, 2006.
     In addition, pursuant to the fifth amendment, on October 25, 2006, we entered into and will maintain hedging agreements that cap the interest rate on $150 million aggregate principal amount of our outstanding term loans at 9.25% through June 8, 2008. The final maturity date of the term loan facility and delayed-draw term loan facility is May 19, 2012.
     The interest rate for borrowings under the revolving credit facility for the initial six-month period was set from time to time at our option (subject to certain conditions set forth in the credit agreement) at either: (1) a specified base rate plus 1.25% or (2) the Eurodollar Base Rate divided by the difference between one and the Eurocurrency Reserve Requirements plus 2.25%. Thereafter, the

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applicable rates of interest under the revolving credit facility are based on our consolidated leverage ratio, with the margins applicable to base rate loans ranging from 0.50% to 1.25%, and the margins applicable to Eurodollar Loans (as defined in the credit agreement) ranging from 1.50% to 2.25%. The rate at June 6, 2006 was 10.25%; on June 8, 2006, we converted the rate to a 90-day LIBOR-based rate, which was 8.52%. At September 30, 2006, the rate was 8.6%. The final maturity date of the revolving credit facility is May 19, 2010.
     If we repay the term loans prior to June 2, 2007, we will be subject to a 1% prepayment fee for optional and most mandatory prepayments, unless the prepayment results from a change of control transaction or the issuance by us of subordinated debt of up to $150 million. The credit agreement requires that mandatory prepayments be made from (1) 100% of the net cash proceeds from certain asset sales and dispositions and issuances of certain debt, (2) various percentages (ranging from 75% to 0% depending on our consolidated leverage ratio) of excess cash flow as defined in the credit agreement, and (3) 50% of the net cash proceeds from the issuance of certain equity and capital contributions.
     The senior secured credit facilities contain covenants which, among other things, restrict our ability, and that of our restricted subsidiaries, to:
    pay dividends or make any other restricted payments;
 
    incur additional indebtedness;
 
    create liens on our assets;
 
    make certain investments;
 
    sell or otherwise dispose of assets;
 
    consolidate, merge or otherwise transfer all or any substantial part of our assets;
 
    enter into transactions with our affiliates; and
 
    engage in any sale-leaseback, synthetic lease or similar transaction involving any of our assets.
     The senior secured credit facilities also contain financial covenants that require us to maintain specified ratios of debt to EBITDA (the consolidated leverage ratio) and EBITDA to interest expense (the consolidated interest coverage ratio). The terms governing each of these ratios were amended in the sixth amendment to our senior secured credit agreement, effective September 28, 2006.
     The sixth amendment:
    amended the consolidated leverage ratio such that as of the last day of any period of four consecutive fiscal quarters this ratio may not exceed: (a) 4.35 to 1.00 for any four quarter period ended December 31, 2005 through March 31, 2006; (b) 5.00 to 1.00 for the four quarter period ended June 30, 2006; (c) 4.75 to 1.00 for any four quarter period ending September 30, 2006 through December 31, 2007; and (d) 4.50 to 1.00 for any four quarter period ending March 31, 2008 or thereafter; and
 
    amended the consolidated interest coverage ratio such that for any period of four consecutive fiscal quarters this ratio may not be less than: (a) 2.00 to 1.00 for the four quarter period ending prior to September 30, 2006; (b) 1.75 to 1.00 for any four quarter period ending during the period beginning on September 30, 2006 and ending on December 31, 2007; and (c) 2.00 to 1.00 thereafter.
     The sixth amendment also amended the calculation of EBITDA for purposes of the consolidated leverage ratio and the consolidated interest coverage ratio. The sixth amendment allows the Company to exclude from the calculation of EBITDA up to $7.7 million of legal, accounting and consulting expenses and transaction fees incurred by the Company between December 31, 2005 and December 31, 2006 related to the Company’s prior accounting restatements and credit facility amendments. The Company may also exclude from the calculation of EBITDA up to $2.3 million of other unusual and nonrecurring expenses incurred by the Company prior to March 31, 2007 related to the accounting restatements (to the extent such expenses are reasonably acceptable to the administrative agent).

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     Generally, the senior secured credit facilities do not place restrictions on our ability to make capital expenditures. However, we may not make, or commit to make, any capital expenditure if (a) any default or event of default under the credit agreement has occurred and is continuing or would result, or if such default or event of default would occur as a result of a breach of certain financial covenants contained in the credit agreement on a pro forma basis after giving effect to the capital expenditure; or (b) such capital expenditure would result in the aggregate amount of capital expenditures being made by the Company for any consecutive 12-month period ending during the period from September 30, 2006 to December 31, 2007 to exceed $30 million. The sixth amendment amended the definition of “capital expenditures” to exclude from this definition any portion of expenditures that are made with proceeds from long term financing obligations incurred by the Company.
     Our failure to comply with any of these covenants, including compliance with the financial ratios, is an event of default under the senior secured credit facilities, in which case, the administrative agent may, and if requested by the lenders holding a certain minimum percentage of the commitments shall, terminate the revolving credit facility and the delayed-draw term loan commitments with respect to additional advances and may declare all or any portion of the obligations under the revolving credit facility and the term loan facilities due and payable. As of September 30, 2006, we were in compliance with all of the financial covenants. Other events of default under the senior secured credit facilities include:
    our failure to pay principal on the loans when due and payable, or its failure to pay interest on the loans or to pay certain fees and expenses (subject to applicable grace periods);
 
    the occurrence of a change of control (as defined in the credit agreement); or
 
    a breach or default by us or our subsidiaries on the payment of principal of any Indebtedness (as defined in the credit agreement) in an aggregate amount greater than $5.0 million.
     The senior secured credit facilities are guaranteed by each of our subsidiaries and secured by a perfected first priority security interest in substantially all of our present and future assets.
     Event of Default
     We had not submitted audited financial statements for the year ended December 31, 2005 by the 65th day following the end of the previous fiscal year nor had we submitted unaudited financial statements for the three month period ended March 31, 2006 by the 40th day following the end of such three month period as required by the financial covenants under our senior secured credit facility.
     On April 3, 2006, we obtained a waiver for the covenant regarding delivery of our audited financial statements for the year ended December 31, 2005 by entering into a second amendment to the credit agreement with Bear, Stearns & Co. Inc., and the other lending parties. This second amendment, which had an effective date of March 28, 2006, extended the date by which we were to submit audited financial statements for the year ended December 31, 2005 to the lenders to May 15, 2006. On May 9, 2006, we obtained a second waiver for delivery of such audited financial statements by entering into a third amendment to the credit agreement with Bear, Stearns & Co. Inc. and the other lending parties extending the delivery date to June 30, 2006. The third amendment also included a waiver regarding the delivery of the unaudited financial statements for the three month period ended March 31, 2006, extending the delivery date of such unaudited financial statements to June 30, 2006.
     Effective June 2, 2006, we entered into a fourth amendment to our senior secured credit agreement with the lending parties thereunder, which included an extension of the deadline for the delivery of our audited financial statements for the year ended December 31, 2005 and unaudited financial statements for the three month period ended March 31, 2006 until July 27, 2006.
     Effective July 27, 2006, we entered into a fifth amendment to our senior secured credit agreement, which included (i) an extension of the deadline for the delivery of our audited financial statements for the year ended December 31, 2005 until September 30, 2006; (ii) an extension of the deadline for delivery of our unaudited financial statements for the quarter ended March 31, 2006 until September 30, 2006; and (iii) an extension of the deadline for delivery of our unaudited financial statements for the quarters ended June 30, 2006 and September 30, 2006 until December 31, 2006.
     We filed our audited financial statements for the year ended December 31, 2005 on Form 10-K on August 4, 2006. In addition, we filed our unaudited financial statements for the quarter ended March 31, 2006 on Form 10-Q on August 21, 2006, our unaudited financial statements for the quarter ended June 30, 2006 on Form 10-Q on August 25, 2006 and our amended Form 10-Q/As for the quarters ended June 30, 2005 and September 30, 2005 on August 4, 2006.

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     The amendments provided for waivers of certain defaults under the credit agreement, including the default resulting from our 7.50% senior subordinated notes being accelerated. In addition, the fourth amendment permitted our existing undrawn $185 million delayed-draw term loan commitment to be used to repay or repurchase our outstanding $150 million of 7.50% senior subordinated notes and to pay related fees and expenses upon the acceleration of such notes. On June 6, 2006, we drew down $156 million on this delayed-draw term loan to repay our outstanding 7.50% senior subordinated notes, all accrued and unpaid interest thereon and certain other fees and expenses related thereto. These notes are no longer outstanding and the related indenture is no longer in effect. The undrawn portion of the delayed-draw term loan terminated upon the funding of such $156 million. The delayed-draw term loan has a maturity date of May 19, 2012. See “7.50% Senior Subordinated Notes” below.
7.50% Senior Subordinated Notes
     On February 4, 2004, we completed an offering of $150.0 million in aggregate principal amount of 7.50% senior subordinated notes due February 15, 2014 to institutional investors. As discussed further below, on June 6, 2006, we drew down $156 million on our delayed-draw term loan to repay our outstanding senior subordinated notes, all accrued and unpaid interest thereon and certain other fees and expenses related thereto. The notes are no longer outstanding and the indenture governing the notes is no longer in effect.
     Event of Default
     On April 3, 2006, the trustee for the 7.50% senior subordinated notes notified us that we were in violation of the covenant requiring us to file our 2005 Form 10-K with the SEC within the time frame specified by the SEC’s rules and regulations, thereby triggering a default under the note indenture. The notice further stated that if this default continued for an additional sixty days then an event of default under the note indenture would occur. We did not file our 2005 Form 10-K on or before June 2, 2006 and did not receive the requisite consents to obtain a waiver of the default under the note indenture. Consequently, the default was not cured during the 60-day cure period and therefore constituted an event of default under the note indenture which entitled the trustee under the notes and/or the holders of at least 25% in aggregate principal amount of the outstanding notes to declare all of the notes immediately due and payable. On June 2, 2006, we received notice from the holders of over 25% in aggregate principal amount of the notes that such holders had accelerated the notes. As a consequence, on June 4, 2006, $150 million in aggregate principal amount of the notes (representing all of the outstanding notes) plus accrued and unpaid interest thereon became immediately due and payable. As permitted under the fourth amendment to our senior secured credit agreement with the lending parties thereunder, we borrowed $156 million under our existing delayed-draw term loan commitment and repaid all of the outstanding notes on June 6, 2006. The notes are no longer outstanding and the indenture governing the notes is no longer in effect.
Contractual Obligations
     We did not have any material changes to our contractual obligations from those disclosed in our Form 10-Q for the quarter ended June 30, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
FIN 48
     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of Statement of Financial Accounting Standards 109 (“FIN 48”). FIN 48 is effective January 1, 2007 and would require us to record any change in net assets that results from the application of FIN 48 as an adjustment to retained earnings.
     FIN 48 is applicable to all uncertain positions for taxes accounted for under SFAS 109, and is not intended to be applied by analogy to other taxes, such as sales taxes, value-add taxes, or property taxes. The scope of FIN 48 includes any position taken (or expected to be taken) on a tax return, including the decision to exclude from the return certain income or transactions. FIN 48 makes clear that its guidance also applies to positions such as (1) excluding income streams that might be deemed taxable by the taxing authorities, (2) asserting that a particular equity restructuring (e.g., a spin-off transaction) is tax-free when that position might be uncertain, or (3) the decision to not file a tax return in a particular jurisdiction for which such a return might be required.
     FIN 48 requires that we make qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll- forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax

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benefits on an aggregated basis. We are still in the process of assessing the impact that the adoption of FIN 48 may have on our consolidated results of operations, cash flows or financial position.
FSP 13-1
     In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, Accounting for Rental Costs Incurred during a Construction Period. FSP 13-1 clarifies there is no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period. Accordingly, we are no longer able to capitalize rental costs during the construction period and began expensing them as pre-opening expense prior to the theatre opening date. This FSP was effective for the first reporting period beginning after December 15, 2005, which is our first quarter in 2006 and had no effect on our financial statements for the three and nine month periods ended September 30, 2006.
FAS 154
     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”), which requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. We are not currently contemplating an accounting change which would be impacted by SFAS 154.
FAS 157
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which enhances existing guidance for measuring assets and liabilities using fair value. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are evaluating the impact of SFAS 157 on our consolidated financial condition and results of operations.
SAB 108
     In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006, and will be effective for the Company beginning December 31, 2006. We are currently assessing the provisions and evaluating the financial statement impact of SAB 108 on our consolidated financial statements.
SEASONALITY
     Typically, movie studios release films with the highest expected revenues during the summer and the holiday period between Thanksgiving and Christmas, causing seasonal fluctuations in revenues. However, movie studios are increasingly introducing more popular film titles throughout the year. In addition, in years where Christmas falls on a weekend day, our revenues are typically lower because our patrons generally have shorter holiday periods away from work or school.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
     This quarterly report contains forward-looking statements within the meaning of the federal securities laws. In addition, we, or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the SEC or in connection with oral statements made to the press, potential investors or others. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words, “believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,” “should,” “will,” or similar expressions. These statements include, among others, statements regarding our strategies, sources of liquidity, the availability of film product and the opening or closing of theatres during 2005 and 2006.

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     Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on beliefs and assumptions of our management, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding expected pricing levels, competitive conditions and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
    our ability to comply with covenants contained in our senior secured credit agreement;
 
    our ability to operate at expected levels of cash flow;
 
    the availability of suitable motion pictures for exhibition in our markets;
 
    competition in our markets;
 
    competition with other forms of entertainment;
 
    identified material weaknesses in internal over financial reporting;
 
    the effect of our leverage on our financial condition; and
 
    other factors, including the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, under the caption “Risk Factors.”
     We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     We are exposed to various market risks. We have floating rate debt instruments and, therefore, are subject to the market risk related to changes in interest rates. Interest paid on our debt is largely subject to changes in interest rates in the market. Our revolving credit facility and our seven-year term loan credit facility are based on a structure that is priced over an index or LIBOR rate option. An increase of 1% in interest rates would increase the interest expense on our $165.0 million term loan by approximately $1.6 million on an annual basis. An increase of 1% in interest rates would increase the interest expense on our $155.6 million delayed-draw term loan by approximately $1.6 million on an annual basis. If our $50 million revolving credit agreement was fully drawn a 1% increase in interest rates would increase interest expense by $500,000 on an annual basis. In addition, on October 25, 2006, we entered into and will maintain hedging agreements that cap the interest rate on $150 million aggregate principal amount of our outstanding term loans at 9.25% through June 8, 2008.
     The Company has 32 theatre leases that have increases contingent on changes in the Consumer Price Index (“CPI”). A 1.0% change in the CPI would increase rent expense by $2.3 million over the remaining lives of these leases, which management does not believe would have a material impact on the Company’s consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports we file or submit under the Exchange Act is accumulated and communicated to our Company’s management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
     As required by Securities and Exchange Commission rules, we have evaluated the effectiveness of the design and operation of our

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disclosure controls and procedures as of the end of the period covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that, in light of the material weaknesses described below, as of September 30, 2006, the Company’s disclosure controls and procedures were not effective.
     As a result of these control deficiencies, management performed additional procedures to ensure that the Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, the Company believes that the financial statements included in the Company’s quarterly report on this Form 10-Q fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles.
Material Weaknesses in Internal Control Over Financial Reporting
     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of September 30, 2006, the Company had the following material weaknesses in its internal control over financial reporting:
  1.   We did not maintain a sufficient complement of personnel with appropriate skills, training and Company-specific experience in the selection, application and implementation of generally accepted accounting principles commensurate with our financial reporting requirements. This control deficiency contributed to the material weaknesses described below. Additionally, this control deficiency could result in a misstatement of accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness and contributed to the following material weaknesses.
 
  2.   We did not maintain effective control over the recording and processing of journal entries in our financial reporting process. Specifically, effective controls were not designed and in place to ensure the completeness and accuracy of supporting schedules and underlying data for routine journal entries and journal entries recorded as part of our period-end closing and consolidation process related to all significant accounts and disclosures. This control deficiency resulted in the restatement of our interim consolidated financial statements for the first three quarters of 2005 and audit adjustments to our 2005 annual consolidated financial statements to correct errors related to the recording of directors fees, discount ticket revenue, capitalized interest, deferred taxes and compensation expense primarily affecting accounts payable, general and administrative expense, admissions revenue, deferred income, interest expense, property, plant and equipment, accrued expenses and paid-in capital. Additionally, this control deficiency could result in a misstatement of the aforementioned accounts and disclosures which would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
  3.   We did not maintain effective controls over the accounting for leases. Specifically, our controls over our selection, application and monitoring of our accounting policies related to the effect of lessee involvement in asset construction, lease modifications, amortization of leasehold improvements, and deferred rent were not effective to ensure the accurate accounting for leases entered into. This control deficiency resulted in the restatement of our 2004 and 2003 annual consolidated financial statements and our interim consolidated financial statements for the first three quarters of 2005 and all 2004 quarters and audit adjustments to the 2005 consolidated financial statements to correct errors related to lease accounting primarily affecting property, plant and equipment, financing obligations, deferred rent, rent expense, interest expense and depreciation expense. Additionally, this control deficiency could result in a misstatement of the aforementioned accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
  4.   We did not maintain effective controls over the completeness and accuracy of income taxes. Specifically, we did not maintain effective controls over the preparation and review of income taxes payable, deferred income tax assets and liabilities and the related income tax provision. This control deficiency also resulted in the restatement, discussed in Note 18 to the consolidated financial statements, of the Company’s consolidated financial statements, reported in its Form 10-K/A Amendment No. 2 for the years ended December 31, 2003 and 2004 and its consolidated financial statements for the quarters ended March 31 and June 30, 2005, as well as adjustments to the Company’s consolidated financial statements for the quarter

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      ended September 30, 2005. This control deficiency could result in a misstatement of income taxes payable, deferred income tax assets and liabilities and the related income tax provision that would result in a material misstatement of the Company’s annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
Plan of Remediation for Identified Material Weaknesses
     As of the end of the period covered by this quarterly report, the Company had not fully implemented the remediation described below. Accordingly, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were not effective at the end of the third quarter of 2006.
     Subsequent to December 31, 2005, we made the following changes in our internal control over financial reporting in an effort to remediate the material weaknesses discussed above:
    Engaged outside consultants (other than our independent registered public accountants) to review and assist management in accounting for lease transactions and the reporting thereof in the Company’s financial statements and to assist in the preparation of the Company’s financial statements;
 
    Revised processes, procedures and documentation standards relating to accounting for lease transactions; and
 
    Hired new personnel in the accounting and finance areas, including a new Chief Financial Officer, a new Controller, and a new Assistant Controller.
     Although we believe the steps taken to date have improved the design effectiveness of our internal control over financial reporting, we have not completed our documentation and testing of the corrective processes and procedures relating thereto. Accordingly, we currently expect to have material weaknesses in our internal control over financial reporting as of December 31, 2006.
     In addition to the foregoing, the Company’s planned remediation measures in connection with the material weaknesses described above include the following:
  1.   We will require continuing education during 2006 for the accounting and finance staff to ensure compliance with current and emerging financial reporting and compliance practices pertaining to lease transactions;
 
  2.   We will require continuing education during 2006 for our tax manager and staff to ensure compliance with current and emerging tax reporting and compliance practices;
 
  3.   We will take the steps necessary to appropriately staff the accounting and finance departments; and
 
  4.   We will retain an outside consulting firm to perform detailed account analyses and reconciliations designed to assist the accounting staff in the preparation of the Company’s financial statements.
     We, along with our Audit Committee, will consider additional items, or will alter the planned steps, identified above, in an attempt to remediate these material weaknesses identified herein.
Changes in Internal Control Over Financial Reporting
     There were no changes to our internal control over financial reporting during the third quarter ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
     From time to time, we are involved in routine litigation and legal proceedings in the ordinary course of our business, such as personal injury claims, employment matters, contractual disputes and claims alleging Americans with Disabilities Act violations. Currently, we do not have any pending litigation or proceedings that we believe will have a material adverse effect, either individually or in the aggregate, upon us.
ITEM 1A. RISK FACTORS.
     There have been no material changes to our risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
     None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
     Information regarding defaults upon our senior securities is contained in Note 5 of the notes to our condensed consolidated financial statements included herein and under the heading “Credit Facilities” contained in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, we have previously disclosed information regarding defaults upon our senior securities pursuant to Item 2.04 of the Company’s Form 8-K filed with the SEC on June 5, 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
     Our annual meeting of stockholders was held on October 20, 2006. At the meeting, the stockholders voted on the election of eight directors.
     Proposal One: The results of the voting for eight directors were as follows:
                 
Director   For   Vote Withheld
Michael W. Patrick
    11,766,285       150,609  
Alan J. Hirschfield
    11,673,255       243,639  
Kevin D. Katari
    11,796,105       120,789  
S. David Passman III
    10,699,792       1,217,102  
Carl L. Patrick, Jr.
    10,734,130       1,182,764  
Roland C. Smith
    10,732,283       1,184,611  
Fred W. Van Noy
    10,707,612       1,209,282  
Patricia A. Wilson
    10,699,787       1,217,107  
ITEM 5. OTHER INFORMATION.
     None.
ITEM 6. EXHIBITS.
     Listing of Exhibits

34


Table of Contents

     
Exhibit    
Number   Description
3.1
  Amended and Restated Certificate of Incorporation of Carmike Cinemas, Inc. (filed as Exhibit 3.1 to Carmike’s Amendment to Form 8-A filed January 31, 2002 and incorporated herein by reference).
 
   
3.2
  Amended and Restated By-Laws of Carmike Cinemas, Inc. (filed as Exhibit 3.2 to Carmike’s Amendment to Form 8-A filed January 31, 2002 and incorporated herein by reference).
 
   
3.3
  Amendment No. 1 to the Amended and Restated By-Laws of Carmike Cinemas, Inc. (filed as Exhibit 3.2 to Carmike’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference).
 
   
10.1
  2006 Base Salaries for Named Executive Officers (filed as Exhibit 10.1 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.2
  2006 Cash Bonus Targets for Named Executive Officers (filed as Exhibit 10.2 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.3
  2005 Cash Bonuses for Named Executive Officers (filed as Exhibit 10.3 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.4
  2005 Deferred Compensation Amounts for Named Executive Officers (filed as Exhibit 10.4 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.5
  Fifth Amendment, dated as of July 27, 2006, to the Credit Agreement, dated as of May 19, 2005, by and among Carmike Cinemas, Inc., the several banks and other financial institutions party thereto, Wells Fargo Foothill, Inc. and Bear Stearns Corporate Lending Inc. and First Amendment, dated as of July 27, 2006, to Guarantee and Collateral Agreement, dated as of May 19, 2005, made by Carmike Cinemas, Inc. and certain of its subsidiaries in favor of Bear Stearns Corporate Lending Inc. (filed as Exhibit 10.37 to Carmike’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).
 
   
10.6
  Sixth Amendment, dated as of September 28, 2006, to the Credit Agreement, dated as of May 19, 2005, by and among Carmike Cinemas, Inc., the several banks and other financial institutions party thereto, Wells Fargo Foothill, Inc. and Bear Stearns Corporate Lending Inc. (filed as Exhibit 10.1 to Carmike’s Current Report on Form 8-K filed October 4, 2006 and incorporated herein by reference).
 
   
11
  Computation of per share earnings (provided in Note 8 of the notes to our interim condensed consolidated financial statements included in this report under the caption “Earnings Per Share”).
 
   
31.1
  Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

35


Table of Contents

SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CARMIKE CINEMAS, INC.
 
 
Date: November 9, 2006  By:   /s/ Michael W. Patrick    
    Michael W. Patrick   
    President, Chief Executive Officer and
Chairman of the Board of Directors
(Duly Authorized Officer) 
 
 
     
Date: November 9, 2006  By:   /s/ Richard B. Hare    
    Richard B. Hare   
    Senior Vice President — Finance,
Treasurer and Chief Financial Officer
(Principal Financial Officer) 
 
 
     
Date: November 9, 2006  By:   /s/ Jeffrey A. Cole    
    Jeffrey A. Cole   
    Assistant Vice President — Controller and
Chief Accounting Officer
(Principal Accounting Officer) 
 

36


Table of Contents

         
Exhibit Index
     
Exhibit    
Number   Description
3.1
  Amended and Restated Certificate of Incorporation of Carmike Cinemas, Inc. (filed as Exhibit 3.1 to Carmike’s Amendment to Form 8-A filed January 31, 2002 and incorporated herein by reference).
 
   
3.2
  Amended and Restated By-Laws of Carmike Cinemas, Inc. (filed as Exhibit 3.2 to Carmike’s Amendment to Form 8-A filed January 31, 2002 and incorporated herein by reference).
 
   
3.3
  Amendment No. 1 to the Amended and Restated By-Laws of Carmike Cinemas, Inc. (filed as Exhibit 3.2 to Carmike’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference).
 
   
10.1
  2006 Base Salaries for Named Executive Officers (filed as Exhibit 10.1 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.2
  2006 Cash Bonus Targets for Named Executive Officers (filed as Exhibit 10.2 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.3
  2005 Cash Bonuses for Named Executive Officers (filed as Exhibit 10.3 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.4
  2005 Deferred Compensation Amounts for Named Executive Officers (filed as Exhibit 10.4 to Carmike’s Current Report on Form 8-K filed August 21, 2006 and incorporated herein by reference).
 
   
10.5
  Fifth Amendment, dated as of July 27, 2006, to the Credit Agreement, dated as of May 19, 2005, by and among Carmike Cinemas, Inc., the several banks and other financial institutions party thereto, Wells Fargo Foothill, Inc. and Bear Stearns Corporate Lending Inc. and First Amendment, dated as of July 27, 2006, to Guarantee and Collateral Agreement, dated as of May 19, 2005, made by Carmike Cinemas, Inc. and certain of its subsidiaries in favor of Bear Stearns Corporate Lending Inc. (filed as Exhibit 10.37 to Carmike’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).
 
   
10.6
  Sixth Amendment, dated as of September 28, 2006, to the Credit Agreement, dated as of May 19, 2005, by and among Carmike Cinemas, Inc., the several banks and other financial institutions party thereto, Wells Fargo Foothill, Inc. and Bear Stearns Corporate Lending Inc. (filed as Exhibit 10.1 to Carmike’s Current Report on Form 8-K filed October 4, 2006 and incorporated herein by reference).
 
   
11
  Computation of per share earnings (provided in Note 8 of our notes to our condensed consolidated financial statements included in this report under the caption “Earnings Per Share”).
 
   
31.1
  Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

37

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