1301 First Avenue
Carmike Cinemas builds in markets with population ranges from 50,000 to 250,000, where we view our capital expenditures as investments for the long-term. As always, the mission of Carmike Cinemas is to continue our focus on secondary markets, and to be the sole or leading exhibitor in those markets. Michael W. Patrick, President and CEO, notes 'Carmike is in Manhattan, in fact we have cornered the market in Manhattan; Manhattan, Kansas that is.'
Carmike Cinemas, Inc. is one of the largest movie theater chains in the United States, with 2,850 screens in 36 states. Carmike's theaters are located mainly in smaller cities, where they are frequently the only movie venues in town. By operating primarily in these secondary markets, Carmike has avoided, in large part, the rugged competition for city and suburban viewers engaged in by most other big movie exhibitors. Nearly all of the company's theaters are multi-screen facilities, and their highest concentration is in the South and the Midwest, although expansion has been taking place in just about every part of the country. Declining revenues caused by industrywide overbuilding, as well as a weak season for films, caused the company financial problems in the summer of 2000. That August, Carmike filed for Chapter 11 bankruptcy protection.
Carmike's swift rise to prominence among movie exhibitors was the work of the Patrick family, a clan with a history in the theater business. Company chairman Carl Patrick, Sr., was an executive with Martin Theaters, a Columbus, Georgia-based chain owned by another family. In 1969 Martin was purchased by Atlanta tycoon J.B. Fuqua, and it became part of Fuqua Industries. Although Patrick initially wanted his two sons, Michael and Carl, Jr., to stay away from the movie theater industry, Michael had other ideas.
While still a student at Georgia State University, Michael Patrick worked at the Rialto Theater in Atlanta, taking tickets and making popcorn. Shortly after that he accepted a job with Martin. Eventually, Carl, Sr., became president of Fuqua Industries, while Michael worked his way up to head of the company's movie theater division. When Fuqua decided to shed the division in 1982, the father and son team took hold of the theater chain in a leveraged management buyout. They then named the new company Carmike, a combination of the first names of brothers Carl, Jr. (who became a director, but remained uninvolved in company operations) and Michael.
With Carl, Sr., as chairman and chief executive, and Michael running the company's operations as president, Carmike embarked on a program of expansion at a time when many theater chains were holding back, fearful that movie-going was giving way to home video and cable television. In 1983 Carmike acquired Video Independent Theatres, Inc., adding 85 screens to the 265-screen base with which it had emerged from the Martin buyout. The company grew by building new theaters as well, adding 27 screens in 1982 and 18 in 1983 through its own construction projects. Carmike's strategy was clear from the outset. Patrick sought out smaller cities that he believed were underserved by movie theaters. Upon finding a good candidate, he then either purchased and expanded the existing theater or built a new multi-screen facility, often adjacent to the local mall. Using this method, Carmike expanded quickly throughout the South.
Carmike's management has credited a great deal of the company's success to I.Q. Zero, its unique computer system. Early on, Patrick realized that the small markets in which he was operating would not allow him much slack in controlling operating costs. To address this problem, he commissioned some Columbus, Georgia, friends to create a hardware and software package that would allow Carmike management to monitor the expenses and revenue of each Carmike theater to the most minute detail. The result was I.Q. Zero, a system unlike any other that exists in the industry. At the end of each business day, I.Q. Zero sends box office, concessions, and other types of information to company headquarters in Columbus. Using I.Q. Zero, the company can access sales figures for a particular size of a particular brand of candy at one theater in Tennessee with the touch of a button. I.Q. Zero is also capable of alerting theater managers when their sales per person ratio has fallen below acceptable levels as determined by top management. By providing this kind of information, I.Q. Zero has helped Carmike keep a tight rein on costs by substituting technology for management personnel wherever possible.
IPO and Continuing Growth in the Mid-1980s
The company's growth spurt continued unchecked through the middle of the 1980s. Although no existing theater chains were acquired in 1984 or 1985, Carmike built 55 new screens of its own during those two years. The year 1986 was an especially eventful one for Carmike. That year, the company acquired Essantee Theatres, Inc., adding 209 screens to its growing empire. In addition, 54 new screens were constructed. The Patricks took Carmike public in October 1986, with an initial over-the-counter stock offering, although the Patrick family retained about three-fourths of the company's voting stock. In the mid-1990s, the family held roughly 59 percent of the company's stock.
The company also met with some challenges in 1986. Like many of its competitors, Carmike split markets to keep the upper hand in negotiations with movie studios for the rights to show new pictures. When this practice was ultimately deemed illegal, Carmike ended up paying a $325,000 fine for an antitrust violation. In spite of the scrutiny of regulators, Carmike carried on with its strategy of finding smaller-sized cities in which it could have a virtual monopoly on first-run movies; the company was able to attain that status in some 60 percent of the markets in which it operated. The other key element in Carmike's approach was to show movies with the broadest possible appeal, carefully avoiding anything that could be construed as an art film.
By 1987 Carmike was earning $3 million on revenue of $84 million. The company continued to add screens by the dozen, and by 1988 the chain consisted of 670 screens in 216 movie theaters in 135 cities, still mostly located in the South, where it had already become the biggest movie exhibitor in the region. Nationally, Carmike was fifth largest in terms of number of screens by this time. While the four theater chains that remained larger--General Cinema, United Artists Theatre Circuit, Cineplex Odeon, and AMC Entertainment--continued to butt heads with each other over the movie-going dollars generated by America's major population centers, Carmike sailed along by itself, opening multi-screen complexes in smaller markets, of which there seemed to be an endless supply.
Carmike brought another existing chain, the 116-screen Consolidated Theaters, Inc., into the fold in 1989, while adding another 35 screens of its own construction. Patrick also took his first vacation since launching the company. The company continued to prosper, with revenues approaching the $100 million mark, by bringing Hollywood's biggest, most mainstream movies into the sleepy towns of Middle America. Because it maintained monopoly or near-monopoly positions in most of its markets, Carmike was able to negotiate better rates from movie distributors than could many of its competitors. Patrick was in a position, according to the Wall Street Journal's Anita Sharpe, to tell Hollywood, 'Either you play Carmike Cinemas or Blockbuster Video.' The company found savings in other areas as well. Its small town costs for constructing new theaters ran less than half of what such projects cost in prime suburban locations. In addition, although ticket prices were lower at Carmike Cinemas than in big market theaters, Carmike's high-tech systems allowed it to expand the chain without adding large numbers of home office employees.
More Than 1,000 Screens by the Mid-1990s
As the 1990s began, Carmike's approach still ran contrary to that of its major competitors: although they were trying to become 'leaner and meaner,' Carmike was still looking for new turf. Consequently, the 154 existing screens the company acquired in 1990 came from two of its biggest rivals, Cineplex Odeon and United Artists. On top of that, 24 new screens were constructed. With nearly 1,000 total screens in about 175 different markets, Carmike was established as a major force in the movie theater industry. Meanwhile, Hollywood studios were emphasizing the kinds of films that Carmike's customers favored&mdashtion movies featuring big-name stars. The Rambo-type movies went over especially well at the many Carmike theaters located near military facilities.
Over the next couple of years, Carmike picked up additional screens cast off by the likes of American Multi Cinema (AMC). Its biggest single leap in size came in 1991 with the addition of 353 screens in the form of a joint venture with Excellence Theaters. Carmike bought out its partners in that project two years later. By 1992 the company was operating 1,400 movie screens, twice the number it had in its possession only three years earlier, and posting revenues of $172 million. After buying out its joint venture partners in the Eastwynn Theatres chain (formerly called Excellence) in 1993, Carmike was probably the third largest movie chain in the country, trailing only United Artists and AMC. The company also absorbed Manos Enterprises, a chain with 80 movie screens. That year, the company's revenue jumped to $242 million. As the chain continued to expand, Patrick and his team found ways to wring even more savings out of the I.Q. Zero system. The system took over yet more tasks formerly performed by humans, allowing management to reduce corporate overhead costs to a mere 2.5 percent of operating revenues, down from the four percent level the company had maintained for several years.
By the middle of 1993, Carmike had established a presence in 23 states in the South, Southwest, and Midwest. The company's 388 theaters contained a total of 1,560 screens. Again in 1994, Carmike picked up screens from other chains, built theaters of its own, and had a record year in just about every category. During 1994 the company acquired 178 screens from Cinema World, bought another 48 screens from General Cinema, and built five new complexes holding 43 screens. Carmike also added 15 new screens to complexes already in operation. Part of the financing for all of this growth came from a public offering of $58 million worth of newly issued common stock, after which the Patricks still held the majority of voting interest in the company.
Buoyed by its five new acquisitions between the beginning of 1994 and the middle of 1995, Carmike narrowed the size gap between itself and industry leader United Artists considerably. By July 1995, the company had 2,223 screens in its empire, less than 100 screens fewer than the number operated by United Artists, and by the end of the year it had added enough more to take the number one position for itself. Many movie industry analysts considered Carmike the best-managed theater chain in the country during the early 1990s. The company's ability to churn out profits year after year while its competitors struggled to streamline and stem their losses seemed to support this opinion.
Meanwhile, Carmike's success in getting Middle America to come to the movies made Patrick something of a guru among Hollywood executives. Top managers at entertainment companies such as Disney, Twentieth Century Fox, and Time Warner frequently turned to Patrick for projections about how certain films would do at the box office. Mogul Ted Turner consulted Patrick before his Turner Broadcasting System bought production companies New Line Cinema and Castle Rock Entertainment. By knowing the tastes of his small-town audience, Patrick was occasionally even able to make hits out of movies that were poorly received in big cities.
Expansion in the Mid-1990s and Bankruptcy in 2000
Carmike's expansion continued in 1996, and the following year it entered into a joint venture with Wal-Mart Stores, Inc. to create what were dubbed 'family entertainment centers.' These combined a movie multiplex with a skating rink, a video arcade, and a restaurant, and occupied structures left vacant by closed Wal-Mart stores. The new complexes were given the name 'The Hollywood Connection.' Carmike had originated the concept at a site in its home base of Columbus, Georgia, and the first jointly owned facility was opened in late 1997 in Goshen, Indiana. Three others were slated for Valparaiso, Indiana; Dekalb, Illinois; and Salt Lake City, Utah, with the latter to be solely owned by Carmike.
The company's position as leader in its industry was drawing notice, and competitors began building theaters in the smaller markets that were its stronghold. The entire movie exhibition business was on a building binge, with the new trend toward stadium seating, larger screens, and digital sound systems upping the ante for new theaters. In many prime markets, cinema chains built all-new 'megaplexes' to replace their multiplexes. Some of the latter were converted to second-run discount houses, while others were closed. With new theaters impinging on Carmike's territory, some of the company's older sites began to lose audience share, and it was forced to further ramp up construction to replace these outdated multiplexes.
In July of 1998 Carmike reached an agreement with the U.S. Justice Department to make its 516 theaters barrier free in accordance with the Americans With Disabilities Act. The ruling had come after a Des Moines, Iowa woman lodged a complaint about accessibility at Carmike's three theaters in that city. Earlier, the company had settled a lawsuit by an obese woman who could not fit in the standard seats at a Nashville Carmike Theater and had been refused permission to bring in her own chair.
Also during 1998, Carmike competitors Regal Cinemas and Act III merged to create the largest theater chain in the United States, while Loews Cineplex Entertainment's merger with Cineplex Odeon pushed it into the number two slot. Near the end of the year, Carmike received an infusion of capital from Goldman Sachs, which invested $55 million to buy 16 percent of the company. It also was borrowing heavily from lenders, money that would be used to build the more than 300 additional screens that were planned for 1999.
The aggressive building campaigns of theater chains were supportable so long as Hollywood kept pumping out hits. But the 2000 movie season was not a strong one, with no massive blockbuster to perk up ticket sales industrywide as Titanic and Star Wars had once done. There was also an unanticipated effect of the chains' recent overbuilding, and the resultant wider availability of new films to audiences. Because film distributors took a higher percentage of the gross receipts during a movie's opening weeks, exhibitors found that their profits were declining even for the big hits, which could more easily be viewed by the bulk of the audience before they could take their cut.
Carmike had now posted two consecutive years of annual losses, and the added strain of weak summer ticket sales caused problems in managing its massive debt load. As a result, the company filed for bankruptcy protection on August 8, 2000. Observers noted that Carmike was in much better shape than several other cinema chains that had recently filed for bankruptcy, and in fact the company listed nearly $200 million more in assets than it did liabilities. It had previously announced cutbacks in expansion, with only 88 new screens planned for the year.
The future for Carmike, and the motion picture exhibition business in general, had clouded over in the late 1990s. The industry had reached a point of market saturation that was causing a shakeout of major proportions. Further hurdles, such as the expected conversion to digital projection systems from film and the shortened theatrical lifespan of new releases, might cause further bloodletting. Carmike's track record was a good one, however, and its experienced management team appeared capable of bringing the company back to health.
Principal Subsidiaries: Wooden Nickel Pub, Inc.; Eastwynn Theatres, Inc.; Military Services, Inc. (80%).
Principal Competitors: AMC Entertainment, Inc.; Century Theatres LP; Cinemark USA, Inc.; GC Companies, Inc.; Loews Cineplex Entertainment Corp.; National Amusements, Inc.; Regal Cinemas, Inc.; United Artists Theatre Circuit, Inc.