Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

¨	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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer x

Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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 — 12,828,890 shares outstanding as of November 3, 2008.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4.	CONTROLS AND PROCEDURES	22
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	24
ITEM 1A.	RISK FACTORS	24
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	24
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	24
ITEM 5.	OTHER INFORMATION	24
ITEM 6.	EXHIBITS	25
EXHIBIT INDEX		25
SIGNATURES		26
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

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CARMIKE CINEMAS, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)


	September 30, 2008			December 31, 2007
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	7,825		$	21,975
Restricted cash		47			225
Accounts receivable		2,965			4,120
Inventories		2,346			1,668
Prepaid expenses		6,046			5,689

Total current assets		19,229			33,677

Property and equipment:
Land		55,458			56,522
Buildings and building improvements		317,254			317,186
Leasehold improvements		133,638			133,220
Assets under capital leases		70,687			70,195
Equipment		234,518			237,483
Construction in progress		772			511

Total property and equipment		812,327			815,117
Accumulated depreciation and amortization		(340,580	)		(317,804	)

Property and equipment, net of accumulated depreciation		471,747			497,313

Assets held for sale		6,374			8,398
Other assets		24,437			27,129
Intangible assets, net of accumulated amortization		1,426			1,528

Total assets	$	523,213		$	568,045


Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	15,916		$	28,190
Dividends payable		—			2,244
Accrued expenses		30,475			33,905
Current maturities of long-term debt, capital leases and long-term financing obligations		4,667			4,648

Total current liabilities		51,058			68,987

Long-term liabilities:
Long-term debt, less current maturities		281,323			298,465
Capital leases and long-term financing obligations, less current maturities		118,276			118,600
Other		13,043			12,983

Total long-term liabilities		412,642			430,048

Commitments and contingencies (Note 6)

Stockholders’ equity:
Preferred Stock, $1.00 par value per share: 1,000,000 shares authorized, no shares issued		—			—
Common Stock, $0.03 par value per share: 20,000,000 shares authorized, 13,230,872 shares issued and 12,828,890 shares outstanding at September 30, 2008, and 13,222,872 shares issued and 12,822,367 shares outstanding at December 31, 2007		394			394
Treasury stock, 401,982 and 400,505 shares at cost, at September 30, 2008 and December 31, 2007		(10,938	)		(10,925	)
Paid-in capital		285,059			287,788
Accumulated deficit		(215,002	)		(208,247	)

Total stockholders’ equity		59,513			69,010

Total liabilities and stockholders’ equity	$	523,213		$	568,045

The accompanying notes are an integral part of these condensed consolidated financial statements

CARMIKE CINEMAS, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(Unaudited)						(Unaudited)
Revenues:
Admissions	$	81,051		$	87,056		$	236,148		$	241,542
Concessions and other		41,829			45,649			121,427			127,260

Total operating revenues		122,880			132,705			357,575			368,802

Operating costs and expenses:
Film exhibition costs		45,732			48,033			131,444			133,163
Concession costs		4,771			4,841			13,356			13,427
Other theatre operating costs		49,417			50,683			146,016			145,469
General and administrative expenses		4,579			5,338			14,869			16,731
Depreciation and amortization		9,981			9,759			28,420			29,746
Loss (gain) on sale of property and equipment		(1,303	)		138			(770	)		(1,254	)

Total operating costs and expenses		113,177			118,792			333,335			337,282

Operating income		9,703			13,913			24,240			31,520

Interest expense, net		9,769			11,814			30,975			35,479
Gain on sale of investments		(226	)		(22	)		(226	)		(1,700	)

Income (loss) from continuing operations before income tax		160			2,121			(6,509	)		(2,259	)
Income tax expense (Note 3)		136			53			92			56,066

Income (loss) from continuing operations		24			2,068			(6,601	)		(58,325	)
Loss from discontinued operations, net of tax (Note 5)		(227	)		(88	)		(154	)		(272	)

Net income (loss) available for common stockholders	$	(203	)	$	1,980		$	(6,755	)	$	(58,597	)

Weighted average shares outstanding:
Basic		12,667			12,650			12,660			12,588
Diluted		12,667			12,650			12,660			12,588

Net income (loss) per common share—Basic:
Income (loss) from continuing operations	$	.00		$	.16		$	(.52	)	$	(4.63	)
Loss from discontinued operations, net of tax		(.02	)		(.01	)		(.01	)		(.02	)

	$	(.02	)	$	.15		$	(.53	)	$	(4.65	)

Net income (loss) per common share—Diluted:
Income (loss) from continuing operations	$	.00		$	.16		$	(.52	)	$	(4.63	)
Loss from discontinued operations, net of tax		(.02	)		(.01	)		(.01	)		(.02	)

	$	(.02	)	$	.15		$	(.53	)	$	(4.65	)

Dividends declared per share	$	—		$	.175		$	.350		$	.525

The accompanying notes are an integral part of these condensed consolidated financial statements.

CARMIKE CINEMAS, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,
	2008			2007
				(Unaudited)
Cash flows from operating activities:
Net loss	$	(6,755	)	$	(58,597	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		28,505			30,055
Amortization of debt issuance costs		1,693			1,607
Deferred income taxes		—			55,903
Stock-based compensation		1,759			2,055
Other		1,168			819
Gain on sale of investments		(226	)		(1,700	)
Gain on sale of property and equipment		(1,549	)		(1,963	)
Changes in operating assets and liabilities:
Accounts receivable and inventories		817			(639	)
Prepaid expenses and other assets		(1,112	)		822
Accounts payable		(11,561	)		(9,091	)
Accrued expenses and other liabilities		(3,343	)		(1,799	)

Net cash provided by operating activities		9,396			17,472


Cash flows from investing activities:
Purchases of property and equipment		(6,961	)		(16,360	)
Release of restricted cash		178			344
Proceeds from sale of investments		2,700			1,700
Proceeds from sale of property and equipment		6,162			5,185

Net cash provided by (used in) investing activities		2,079			(9,131	)


Cash flows from financing activities:
Debt activities:
Repayments of long-term debt		(17,296	)		(2,423	)
Repayments of capital lease and long-term financing obligations		(1,584	)		(985	)
Proceeds from long-term financing arrangements		—			239
Issuance of common stock		—			1,198
Debt issuance costs		—			(69	)
Purchase of treasury stock		(13	)		(2,667	)
Dividends paid		(6,732	)		(6,629	)

Net cash used in financing activities		(25,625	)		(11,336	)

Decrease in cash and cash equivalents		(14,150	)		(2,995	)
Cash and cash equivalents at beginning of period		21,975			26,016

Cash and cash equivalents at end of period	$	7,825		$	23,021


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	29,298		$	33,714
Income taxes	$	—		$	—

Non-cash investing and financing activities:
Assets acquired through capital lease obligations	$	491		$	—
Dividends declared not yet paid at end of period	$	—		$	2,244
Non-cash proceeds from sale of property	$	750		$	—
Non-cash purchase of property and equipment	$	442		$	1,509

The accompanying notes are an integral part of these condensed consolidated financial statements

CARMIKE CINEMAS, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2008 and 2007

(in thousands except share and per share data)

NOTE 1—BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Carmike Cinemas, Inc. (referred to as “we”, “us”, “our”, and the “Company”) has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. 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, 2008, and the results of operations for the three and nine month periods ended September 30, 2008 and 2007 and cash flows for the nine month periods ended September 30, 2008 and 2007. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These condensed 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, 2007 (“2007 Form 10-K”). That report includes a summary of our critical accounting policies. There have been no material changes in our accounting policies during the first nine months of 2008. The financial statements include the accounts of the Company’s wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.

Accounting Estimates

In the preparation of financial statements in conformity with GAAP, management must make certain estimates, judgments and assumptions. These estimates, judgments and assumptions are made when accounting for items and matters such as, but not limited to, depreciation, amortization, asset valuations, impairment assessments, lease classification, stock-based compensation, employee benefits, income taxes, reserves and other provisions and contingencies. These estimates are based on the information available when recorded. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. The Company bases its estimates on historical experience, forecasted performance and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company also assesses potential losses in relation to threatened or pending legal matters. If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are recognized in the period they are realized.

Discontinued Operations

The results of operations for theatres that have been disposed of or classified as held for sale are eliminated from the Company’s continuing operations and classified as discontinued operations for each period presented within the Company’s condensed consolidated statements of operations. Theatres are reported as discontinued operations when the Company no longer has continuing involvement in the theatre operations and the cash flows have been eliminated, which generally occurs when the Company no longer has operations in a given market. See Note 5 – Discontinued Operations.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company reviews the carrying value of long-lived assets for potential impairment. This review is performed on a quarterly basis or when events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Such events include, but are not limited to, the entrance of new competition into the market, decisions to close a theatre, or a significant decrease in the operating performance of the long-lived asset. For those assets that are identified as potentially being impaired, if the undiscounted future cash flows from such assets are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the asset’s fair value. The fair value of the assets is primarily estimated using the discounted future cash flow of the assets with consideration of other valuation techniques.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair values, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value; accordingly, it does not expand the use of fair value in any new circumstances. Fair value under SFAS 157 is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those

assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data; for example, a reporting entity’s own data. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. FASB Staff Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”), states that SFAS 157 does not apply under SFAS No. 13, “Accounting for Leases” (“SFAS 13”), and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13. With respect to financial assets and liabilities, SFAS 157 was effective for fiscal years beginning after November 15, 2007. For nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequent basis, FASB Staff Position No. FAS 157-2 (“FSP 157-2”) permits companies to adopt the provisions of SFAS 157 for fiscal years beginning after November 15, 2008. We adopted SFAS 157 as of January 1, 2008 for financial assets and liabilities, and elected to defer our adoption of SFAS 157 for nonfinancial assets and liabilities as permitted by FSP 157-2. There was no impact to our consolidated financial statements as a result of our adoption of SFAS 157. The impact of adopting SFAS 157 for nonfinancial assets and liabilities on January 1, 2009 is still under consideration by the Company.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which requires the acquirer in a business combination to measure all assets acquired and liabilities assumed at their acquisition date fair value. SFAS 141(R) applies whenever an acquirer obtains control of one or more businesses. The new standard also requires the following in a business combination:

•

acquisition related costs, such as legal and due diligence costs, be expensed as incurred;

•

acquirer shares issued as consideration be recorded at fair value as of the acquisition date;

•

contingent consideration arrangements be included in the purchase price allocation at their acquisition date fair value;

•

with certain exceptions, pre-acquisition contingencies be recorded at fair value;

•

negative goodwill be recognized as income rather than as a pro rata reduction of the value allocated to particular assets;

•

restructuring plans be recorded in purchase accounting only if the requirements in FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), are met as of the acquisition date; and

•

adjustments to deferred income taxes, after the purchase accounting allocation period, will be included in income rather than as an adjustment to goodwill.

SFAS 141(R) requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS No. 159 allows entities to choose to measure many financial assets and financial liabilities at fair value and report unrealized gains and losses on items for which the fair value option has been elected through earnings. SFAS 159 was effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 on January 1, 2008 did not have an impact on the Company’s results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The new standard is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

NOTE 2—DEBT

Debt consisted of the following on the dates indicated:


	September 30, 2008			December 31, 2007
Term loan	$	161,631		$	162,884
Delayed-draw term loan		122,617			138,660

		284,248			301,544
Current maturities		(2,925	)		(3,079	)

	$	281,323		$	298,465

In 2005, the Company 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 $405,000.

The senior secured credit facilities consist of:

•

a $170,000 seven year term loan facility:

•

a $185,000 seven year delayed-draw term loan facility; and

•

a $50,000 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 $125,000.

The interest rate for the Company’s senior secured credit agreement under its outstanding revolving and term loans, as amended, is set to a margin above the London interbank offered rate (“LIBOR”) or base rate, as the case may be, based on the Company’s consolidated leverage ratio as defined in the credit agreement, with the margin ranging from 3.00% to 3.50% for loans based on LIBOR and 2.00% to 2.50% for loans based on the base rate. At September 30, 2008, the average interest rate was 6.38%. The final maturity date of the revolving credit facility is May 19, 2010, and the final maturity date of the term loans is May 19, 2012.

The credit agreement requires that mandatory prepayments be made from (1) 100% of the net cash proceeds from certain asset sales and dispositions, other than a sales-leaseback transaction, and issuances of certain debt, (2) 85% of the net cash proceeds from sales-leaseback transactions, (3) various percentages (ranging from 0% to 75% depending on the Company’s consolidated leverage ratio) of excess cash flow as defined in the credit agreement, and (4) 50% of the net cash proceeds from the issuance of certain equity and capital contributions.

Debt Covenants

The senior secured credit facilities contain covenants which, among other things, restrict the Company’s ability, and that of its restricted subsidiaries, to:

•

pay dividends or make any other restricted payments to parties other than to the Company;

•

incur additional indebtedness;

•

create liens on their assets;

•

make certain investments;

•

sell or otherwise dispose of their assets;

•

consolidate, merge or otherwise transfer all or any substantial part of their assets; and

•

enter into transactions with the Company’s affiliates.

The senior secured credit facilities also contain financial covenants that require the Company to maintain specified ratios of funded debt to adjusted EBITDA, as defined, and adjusted EBITDA to interest expense.

The senior secured credit agreement places certain restrictions on the Company’s ability to make capital expenditures. In addition to the dollar limitation described below, the Company may not make any capital expenditure if 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.

The Company has from time to time amended the senior secured credit agreement, and the most recent amendments included, among other items:

•

amending the Company’s consolidated leverage ratio such that from and after October 17, 2007 the ratio may not exceed 4.75 to 1.00 as of the last day of any quarter for the four-quarter period then ending;

•

amending the Company’s consolidated interest coverage ratio such that from and after October 17, 2007 the ratio may not be less than 1.65 to 1.00 as of the last day of any quarter for the four-quarter period then ending;

•

limiting the aggregate capital expenditures that the Company may make, or commit to make, to $30,000 for any fiscal year, provided that up to $10,000 of unused capital expenditures in a fiscal year may be carried over to the succeeding fiscal year; and

•

permitting sale-leaseback transactions of up to an aggregate of $175,000.

Debt Covenant Compliance

As of September 30, 2008, the Company was in compliance with all of the financial covenants in its senior secured credit agreement. While the Company currently believes that it will remain in compliance with these financial covenants as of December 31, 2008 based on current projections, it is possible that the Company may not comply with some or all of its financial covenants as of December 31, 2008 or in the future. In order to avoid such non-compliance, the Company has the ability to reduce, postpone or cancel certain identified discretionary spending in the quarter ending December 31, 2008. The Company could also seek waivers or amendments to the senior secured credit agreement in order to avoid non-compliance. However, the Company can provide no assurance that it will successfully obtain such waivers or amendments from its lenders. If the Company is unable to comply with some or all of the financial or non-financial covenants and if it fails to obtain future waivers or amendments to the senior secured credit agreement, the administrative agent may, and if requested by the lenders holding a certain minimum percentage of the commitments shall, terminate the Company’s revolving credit facility 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.

Other events of default under the senior secured credit facilities include:

•

the Company’s 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 the Company or its subsidiaries on the payment of principal of any indebtedness (as defined in the credit agreement) in an aggregate amount greater than $5,000.

The senior secured credit facilities are guaranteed by each of the Company’s subsidiaries and secured by a perfected first priority security interest in substantially all of its present and future assets.

NOTE 3—INCOME TAXES

Net Operating Loss Carryforward

At September 30, 2008, the Company had federal and state operating loss carryforwards, before consideration of the limitations described below, of $116,871 to offset the Company’s future taxable income, as compared to $110,221 at December 31, 2007. The federal and state operating loss carryforwards begin to expire in the year 2020. In addition, the Company’s alternative minimum tax credit carryforward has an indefinite carryforward life.

The Company believes that an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, occurred during 2007. The ownership change will subject the Company’s net operating loss carryforwards to an annual limitation, which may significantly restrict its ability to use them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of our stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The date of ownership change and the occurrence of more than one ownership change can significantly impact the amount of the annual limitation. The Company is currently analyzing the information to determine the amount of such limitation. To further refine its estimate of the limitation, the Company must determine whether or not it had a net unrealized built-in gain or loss (“NUBIG” or “NUBIL”) at the date of the ownership change. Generally, a NUBIG or NUBIL is determined based on the difference between the fair market value of the assets and their tax basis. If the computed NUBIG or NUBIL is below a de minimis threshold, the amount of the NUBIG or NUBIL is considered to be zero. Otherwise, certain deductions recognized during the five-year period beginning on the date of ownership change would be subject to limitation when a NUBIL is present. Conversely, the Section 382 limitation would be increased by certain income recognized during this five-year period. The Company is currently evaluating whether or not a NUBIG or NUBIL exists.

Valuation Allowance

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and net operating loss and tax credit carryforwards. At September 30, 2008 and December 31, 2007, the Company’s consolidated net deferred tax assets were $79,232 and $76,625, respectively, before the effects of any valuation allowance. In accordance with SFAS No. 109 “Accounting for Income Taxes” (“SFAS 109”), the Company regularly assesses whether it is more likely than not that its deferred tax asset balances will be recovered from future taxable income, taking into account such factors as earnings history, carryback and carryforward periods, and tax planning strategies. When sufficient evidence exists that indicates that recovery is uncertain, a valuation allowance is established against the deferred tax assets, increasing the Company’s income tax expense in the period that such conclusion is made.

A significant factor in the Company’s assessment of the recoverability of its deferred tax asset is its history of cumulative losses during the current and two prior periods. During the second quarter of 2007, the Company concluded that the recoverability of the deferred tax assets was uncertain based upon cumulative losses in the current period and the preceding two years and recorded a valuation allowance to fully reserve its deferred tax assets. The Company has not recognized any income tax benefits since that time. The Company expects that it will not recognize income tax benefits until a determination is made that a valuation allowance for all or some portion of the deferred tax assets is no longer required.

Income Tax Uncertainties

The Company adopted the provisions of the FASB’s Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, as amended” (“FIN 48”) on January 1, 2007, with no impact on beginning retained earnings. As of the date of adoption, the Company had liabilities for unrecognized tax benefits aggregating $3,326. The adoption of FIN 48 required the Company to reclassify certain amounts related to uncertain tax positions. As a result, the Company increased its deferred tax assets by $1,486, and increased liabilities for FIN 48 by $1,486 on the adoption date. During the nine months ended September 30, 2008, there was a release of $113 to the Company’s FIN 48 liability due to the lapse of the statute of limitations.

As of September 30, 2008, there are no tax positions the disallowance of which would affect the Company’s annual effective income tax rate.

The Company files consolidated and separate income tax returns in the United States federal jurisdiction and in many state jurisdictions. The Company is no longer subject to United States federal income tax examinations for years before 2000 and is no longer subject to state and local income tax examinations by tax authorities for years before 1998.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within its income tax expense. Due to its net operating loss carryforward position, the Company recognized no interest and penalties during the three and nine months ended September 30, 2008 and 2007, respectively.

NOTE 4—EQUITY BASED COMPENSATION

The Company’s total stock-based compensation expense was approximately $455 and $757 for the three months ended September 30, 2008 and 2007, respectively, and $1,759 and $2,055 for the nine months ended September 30, 2008 and 2007, respectively. These amounts were recorded in general and administrative expenses. As of September 30, 2008, the Company had approximately $1,956 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s plans. This cost is expected to be recognized as stock-based compensation expense over a weighted-average period of approximately one year. This expected cost does not include the impact of any future stock-based compensation awards.

Options – Service Condition Vesting

The Company currently uses the Black-Scholes option pricing model to determine the fair value of its time vesting stock options for which vesting is dependent only on employees providing future service.

The following table sets forth the summary of option activity for stock options with service vesting conditions as of September 30, 2008:


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2008	188,334		$	30.39	5.76	—
Exercised	—			—	—	—
Forfeited	(23,334	)	$	35.63	—	—

Outstanding at September 30, 2008	165,000		$	29.65	4.98	—

Exercisable at September 30, 2008	165,000		$	29.65	4.98	—

Options – Market Condition Vesting

On April 13, 2007, the Compensation and Nominating Committee approved (pursuant to the 2004 Incentive Stock Plan) the grant of an aggregate of 260,000 stock options, at an exercise price equal to $25.95 per share, to a group of eight senior executives. The April 13, 2007 stock option grants are aligned with market performance, as one-third of these stock options each will vest when the Company achieves an increase in the trading price of its common stock (over the $25.95 exercise price) equal to 25%, 30% and 35%, respectively. The Company determined the aggregate grant date fair value of these stock options to be approximately $1,430. The fair value of these options was estimated on the date of grant using a Monte Carlo simulation model and compensation expense is not subsequently adjusted for the number of shares that are ultimately vested.

The following table sets forth information about the weighted-average fair value of such options granted and the weighted-average assumptions used for such grants:


	2007
Fair value of options on grant date	$	5.50
Risk-free interest rate		4.70	%
Expected dividend yield		2.70	%
Expected volatility		34	%

The following table sets forth the summary of option activity for the Company’s stock options with market condition vesting for the nine months ended September 30, 2008:


	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at January 1, 2008	260,000	$	25.95	9.29	—
Granted	—		—	—	—

Outstanding at September 30, 2008	260,000	$	25.95	8.54	—

Exercisable at September 30, 2008	—		—	—	—

Expected to vest at September 30, 2008	—		—	—	—

Restricted Stock

The following table sets forth the summary of activity for restricted stock grants under the Company’s 2002 Stock Plan and 2004 Incentive Stock Plan for the nine months ended September 30, 2008:


	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2008	169,834		$	25.70
Granted	12,500		$	8.19
Vested	(19,166	)	$	24.75
Forfeited	(2,500	)	$	25.95

Nonvested at September 30, 2008	160,668		$	24.45

NOTE 5—DISCONTINUED OPERATIONS

Theatres are generally considered for closure due to an expiring lease term, underperformance, or the opportunity to better deploy invested capital. During the three months ended September 30, 2008 and 2007, the Company closed five and four theatres, respectively, and for the nine months ended September 30, 2008 and 2007, the Company closed ten and fourteen theatres, respectively. The Company reported the results of these operations, including gains or losses on disposal, as discontinued operations in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). The operations and cash flow of these theatres have been eliminated from the Company’s operations, and the Company will not have any continuing involvement in their operations.

In accordance with SFAS 144, all prior year activity included in the accompanying condensed consolidated statements of operations has been reclassified to separately show the results of operations from discontinued operations through the respective date of the theatre closings. Assets and liabilities associated with the discontinued operations have not been segregated in the accompanying condensed consolidated balance sheets as they are not material.

The following table provides information regarding discontinued operations for the periods presented.


($ in thousands)	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
Revenue from discontinued operations	$	261		$	2,569		$	1,739		$	7,217
Operating loss	$	(363	)	$	(136	)	$	(1,025	)	$	(1,144	)
Income tax benefit	$	136		$	51		$	385		$	429
Gain (loss) on disposal before income taxes	$	0		$	(5	)	$	779		$	709
Income tax (expense) benefit for gain on disposal	$	0		$	2		$	(293	)	$	(266	)
(Loss) from discontinued operations	$	(227	)	$	(88	)	$	(154	)	$	(272	)

NOTE 6—COMMITMENTS AND CONTINGENCIES

Contingencies

The Company, in the normal course of business, is involved in routine litigation and legal proceedings, such as personal injury claims, employment matters, contractual disputes and claims alleging Americans with Disabilities Act violations. Currently, there is no pending litigation or proceedings that the Company believes will have a material adverse effect, either individually or in the aggregate, on its business or financial position, results of operations or cash flow.

Employment Agreement

The Company is party to an employment agreement with its chief executive officer which is currently in effect until January 31, 2012 and requires annual payments aggregating approximately $850.

NOTE 7—NET INCOME (LOSS) PER SHARE

Net income (loss) per share is presented in conformity with SFAS No. 128, “Earnings Per Share” (“SFAS 128”). In accordance with SFAS 128, basic net income (loss) per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed using the weighted average number of common shares and common stock equivalents outstanding. All common stock equivalents aggregating 586,501 and 601,710 for the three and nine months ended September 30, 2008, respectively, and 630,334 and 520,792 for the three and nine months ended September 30, 2007, respectively, were excluded from the calculation of diluted loss per share for all such periods given their anti-dilutive effect.

NOTE 8— SALE OF INTEREST IN SOUTHBRIDGE PARTNERSHIP

On August 29, 2008, the Company sold an equity method investment in the Southbridge V Partnership for $2,700,000 (the “Southbridge Transaction”). As a result of the Southbridge Transaction, the Company recorded a gain of $225,976 in its results of operations for the three and nine months ended September 30, 2008.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are one of the largest motion picture exhibitors in the United States and as of September 30, 2008 we owned, operated or had an interest in 250 theatres with 2,276 screens located in 36 states. We target small to mid-size non-urban markets with the belief that they provide a number of operating benefits, including lower operating costs and fewer alternative forms of entertainment.

As of September 30, 2008, we had 231 theatres with 2,147 screens on a digital-based platform, including 194 theatres with 430 screens equipped for 3-D. We believe our leading-edge technologies allow us not only greater flexibility in showing feature films, but also provide us with the capability to explore revenue-enhancing alternative content programming. Digital film content can be easily moved to and from auditoriums in our theatres to maximize attendance. The superior quality of digital cinema and our 3-D capability could provide a competitive advantage to us in markets where we compete for film and patrons.

Our business depends to a substantial degree on the availability of suitable motion pictures for screening in our theatres and the appeal of such motion pictures to patrons in our specific theatre markets. Our results of operations vary from period to period based upon the number and popularity of the films we show in our theatres. A disruption in the production of motion pictures, a lack of motion pictures, or the failure of motion pictures to attract the patrons in our theatre markets will likely adversely affect our business and results of operations.

Our revenue also varies significantly depending upon the timing of the film releases by distributors. While motion picture distributors have begun to release major motion pictures more evenly throughout the year, the most marketable films are usually released during the summer months and the year-end holiday season, and we usually earn more during those periods than in other periods during the year. As a result, the timing of such releases affects our results of operations, which may vary significantly from quarter to quarter and year to year.

We compete with other motion picture exhibitors and a number of other film delivery methods, including DVDs and video cassettes, as well as video-on-demand, pay-per view services and downloads via the Internet. We also compete for the public’s leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants. A prolonged economic downturn could materially affect our business by reducing amounts consumers spend on entertainment including attending movies and purchasing concessions. Any reduction in consumer confidence or disposable income in general may affect the demand for movies or severely impact the motion picture production industry such that our business and operations could be adversely affected.

The ultimate performance of our film product any time during the calendar year will have a dramatic impact on our cash needs. In addition, the seasonal nature of the exhibition industry and positioning of film product makes our needs for cash vary significantly from quarter to quarter. Generally, our liquidity needs are funded by operating cash flow, available funds under our credit agreement and short term float. Our ability to generate this cash will depend largely on future operations.

In light of the continuing challenging conditions in the credit markets and the wider economy, we continue to incur operating losses and focus on operating performance improvements, including managing our operating costs, implementing pricing initiatives and closing underperforming theatres. We also intend to allocate our available capital primarily to reducing our overall leverage. To this end, during the three and nine months ended September 30, 2008, we made voluntary pre-payments to reduce bank debt of $10 million and $15 million, respectively, and in September 2008 we announced our decision to suspend our quarterly dividend. In addition, we continue to sell surplus property in order to deleverage our balance sheet.

For a summary of risks and uncertainties relevant to our business, please see “Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Comparison of Three and Nine Months Ended September 30, 2008 and September 30, 2007

Revenues. We collect substantially all of our revenues from the sale of admission tickets and concessions. The table below provides a comparative summary of the operating data for this revenue generation.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Average theatres		254		274		258		280
Average screens		2,295		2,387		2,318		2,412
Average attendance per screen		5,678		6,417		16,306		17,588
Average admission per patron	$	6.23	$	5.79	$	6.28	$	5.80
Average concessions and other sales per patron	$	3.22	$	3.04	$	3.23	$	3.06
Total attendance (in thousands)		13,029		15,314		37,795		42,430
Total revenues (in thousands)	$	122,880	$	132,705	$	357,575	$	368,802

Total revenue decreased approximately 7% to $122.9 million for the three months ended September 30, 2008 compared to $132.7 million for the three months ended September 30, 2007, due to the closure of underperforming theatres and a decrease in the average attendance per screen offset by an increase in average admissions per patron and concessions and other sales per patron. Total revenues decreased approximately 3% to $357.6 million for the nine months ended September 30, 2008 compared to $368.8 million for the nine months ended September 30, 2007, due to the closure of underperforming theatres and a decrease in the average attendance per screen offset by an increase in average admissions per patron and concessions and other sales per patron.

Admissions revenue decreased approximately 7% to $81.1 million for the three months ended September 30, 2008 from $87.1 million for the same period in 2007, due to a decrease in our average attendance per screen offset by an increase in average admissions per patron. Admissions revenue decreased approximately 2% to $236.1 million for the nine months ended September 30, 2008 from $241.5 million for the same period in 2007, due to a decrease in our average attendance per screen offset by an increase in average admissions per patron.

Concessions and other revenue decreased approximately 8% to $41.8 million for the three months ended September 30, 2008 compared to $45.6 million for the same period in 2007, due to a decrease in attendance offset by an increase in our average concessions and other sales per patron. Concessions and other revenue decreased approximately 5% to $121.4 million for the nine months ended September 30, 2008 compared to $127.3 million for the same period in 2007, due to a decrease in attendance offset by an increase in our average concessions and other sales per patron.

We operated 250 theatres with 2,276 screens at September 30, 2008 compared to 270 theatres with 2,369 screens at September 30, 2007.

Operating costs and expenses. The table below summarizes operating expense data for the periods presented.


	Three Months Ended September 30,						% Change
($’s in thousands)	2008			2007			% Change
Film exhibition costs	$	45,732		$	48,033		(5	)%
Concession costs	$	4,771		$	4,841		(1	)%
Other theatre operating costs	$	49,417		$	50,683		(2	)%
General and administrative expenses	$	4,579		$	5,338		(14	)%
Depreciation and amortization	$	9,981		$	9,759		2	%
Loss (gain) on sale of property and equipment	$	(1,303	)	$	138		(1,044	)%

	Nine Months Ended September 30,						% Change
($’s in thousands)	2008			2007			% Change
Film exhibition costs	$	131,444		$	133,163		(1	)%
Concession costs	$	13,356		$	13,427		(1	)%
Other theatre operating costs	$	146,016		$	145,469		—
General and administrative expenses	$	14,869		$	16,731		(11	)%
Depreciation and amortization	$	28,420		$	29,746		(4	)%
Gain on sale of property and equipment	$	(770	)	$	(1,254	)	(39	)%

Film exhibition costs. Film exhibition costs fluctuate in direct relation to the increases and decreases in admissions revenue and the mix of aggregate and term film deals. Film exhibition costs for the three months ended September 30, 2008 decreased to $45.7 million as compared to $48.0 million for the three months ended September 30, 2007 due to a decrease in admissions revenue primarily as a result of a decrease in attendance. As a percentage of admissions revenue, film exhibition costs for the three months ended September 30, 2008 were 56% as compared to 55% for the three months ended September 30, 2007 primarily as a result of a higher percentage of revenues generated by top tier films. Film exhibition costs for the nine months ended September 30, 2008

decreased to $131.4 million as compared to $133.2 million for the nine months ended September 30, 2007 due to a decrease in admissions revenue primarily as a result of a decrease in attendance. As a percentage of admissions revenue, film exhibition costs for the nine months ended September 30, 2008 were 56% as compared to 55% for the nine months ended September 30, 2007 primarily as a result of a higher percentage of revenues generated by top tier films.

Concessions costs. Concessions costs fluctuate with changes in concessions revenue and product sales mix and changes in our cost of goods sold. Concession costs equaled approximately $4.8 million for the three months ended September 30, 2008 and 2007 due to an increase in average concessions and other sales per patron offset by higher product costs. As a percentage of concessions and other revenues, concession costs were 11% for the three months ended September 30, 2008 and 2007. Concession costs equaled $13.4 million for the nine months ended September 30, 2008 and September 30, 2007 due to an increase in average concessions and other sales per patron offset by higher product costs. As a percentage of concessions and other revenues, concession costs were 11% for the nine months ended September 30, 2008 and 2007. Our focus continues to be a limited concessions offering of high margin products; such as soft drinks, popcorn and individually packaged candy, to maximize our profit potential.

Other theatre operating costs. Other theatre operating costs for the three months ended September 30, 2008 decreased to $49.4 million as compared to $50.7 million for the three months ended September 30, 2007. The decrease in our other theatre operating costs is primarily the result of decreased personnel costs and occupancy costs. Other theatre operating costs for the nine months ended September 30, 2008 increased to $146.0 million as compared to $145.5 million for the nine months ended September 30, 2007 due to increased maintenance costs which were offset by decreased personnel costs and occupancy costs.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2008 decreased to $4.6 million as compared to $5.3 million for the three months ended September 30, 2007. General and administrative expenses for the nine months ended September 30, 2008 decreased to $14.9 million as compared to $16.7 million for the nine months ended September 30, 2007. The decrease in our general and administrative expenses is due to reductions in our salaries and wages expense, incentive compensation and legal and professional fees.

Depreciation and amortization. Depreciation and amortization expenses for the three months ended September 30, 2008 increased approximately 2% as compared to the three months ended September 30, 2007. The increase in depreciation and amortization expenses resulted from $200,000 of additional depreciation expense on assets that were reclassified from assets held for sale into depreciable property and equipment. Depreciation and amortization expenses for the nine months ended September 30, 2008 decreased approximately 4% as compared to the nine months ended September 30, 2007. The decrease in depreciation and amortization expenses resulted from a combination of a lower balance of property and equipment due to theatre closures, asset sales and other property and equipment disposals, as well as a portion of our long-lived assets becoming fully depreciated.

Net loss (gain) on sales of property and equipment. We recognized a gain of $1.3 million on the sales of property and equipment for the three months ended September 30, 2008, as compared to a loss of $138,000 for the three months ended September 30, 2007. We recognized a gain of $770,000 on the sales of property and equipment for the nine months ended September 30, 2008, as compared to a gain of $1.3 million for the nine months ended September 30, 2007.

Operating Income. Operating income for the three months ended September 30, 2008 decreased 30% to $9.7 million as compared to $13.9 million for the three months ended September 30, 2007. As a percentage of revenues, operating income for the three months ended September 30, 2008 was 8% as compared to 10% for the three months ended September 30, 2007. Operating income for the nine months ended September 30, 2008 decreased 23% to $24.2 million as compared to $31.5 million for the nine months ended September 30, 2007. As a percentage of revenues, operating income for the nine months ended September 30, 2008 was 7% as compared to 9% for the nine months ended September 30, 2007. These fluctuations are the result of the factors described above.

Interest expense, net. Interest expense, net for the three months ended September 30, 2008 decreased 17% to $9.8 million from $11.8 million for the three months ended September 30, 2007. Interest expense, net for the nine months ended September 30, 2008 decreased 13% to $31.0 million from $35.5 million for the nine months ended September 30, 2007. The decrease is primarily related to a combination of lower average outstanding debt and a reduction in interest rates. Interest income, included in interest expense, net, was $78,000 and $213,000 for the three and nine months ended September 30, 2008, respectively, as compared to $365,000 and $632,000 for the same periods in 2007.

Income tax. During the first nine months of 2007 and 2008 we did not recognize any tax benefit. At September 30, 2008 and December 31, 2007, our consolidated net deferred tax assets were $79.2 million and $76.6 million, respectively, before the effects of any valuation allowance. We regularly assess whether it is more likely than not that our deferred tax asset balance will be recovered from future taxable income, taking into account such factors as our earnings history, carryback and carryforward periods, and tax planning strategies. When sufficient evidence exists that indicates that recovery is uncertain, a valuation allowance is established against the deferred tax asset, increasing our income tax expense in the period that such conclusion is made.

A significant factor in our assessment of the recoverability of the deferred tax asset is our history of cumulative losses during the current and two prior periods. During the second quarter of 2007, we concluded that the recoverability of the deferred tax assets was uncertain based upon cumulative losses in the current period and the preceding two years and determined that a valuation allowance was necessary to fully reserve our deferred tax assets. We have not recognized any income tax benefits since that time. We expect that we will not recognize income tax benefits until a determination is made that a valuation allowance for all or some portion of the deferred tax assets is no longer required.

Income (loss) from discontinued operations, net of tax. We generally consider theatres for closure due to an expiring lease term, underperformance, or the opportunity to better deploy invested capital. During the three months ended September 30, 2008 and 2007, we closed five and four theatres, respectively, and for the nine months ended September 30, 2008 and 2007, we closed ten and 14 theatres, respectively, and reported the results of these operations, including gains or losses in disposal, as discontinued operations. The operations and cash flow of these theatres have been eliminated from the Company’s operations, and the Company will not have any continuing involvement in their operations.

The accompanying condensed consolidated statements of operations separately show the results of operations from discontinued operations through the respective dates of the theatre closings. Assets and liabilities associated with the discontinued operations have not been segregated from assets and liabilities from continuing operations as they are not material. We recorded a loss from discontinued operations, net of tax expenses, for the three months ended September 30, 2008 of $227,000 as compared to a loss of $88,000 for the three months ended September 30, 2007. The results from discontinued operations do not include a loss on disposal of assets, net of tax expense, for the three months ended September 30, 2008 as compared to a loss of $5,000 for the three months ended September 30, 2007. We recorded a loss from discontinued operations, net of tax for the nine months ended September 30, 2008 of $154,000 as compared to a loss of $272,000 for the nine months ended September 30, 2007. The results from discontinued operations include a gain on disposal of assets, net of tax expenses, of $487,000 and $443,000 for the nine months ended September 30, 2008 and September 30, 2007, respectively.

Liquidity and Capital Resources

General

Our revenues are collected in cash and credit card payments. Because we receive our revenues in cash prior to the payment of related expenses, we have an operating “float” which partially finances our operations. We had a working capital deficit of $31.8 million as of September 30, 2008 compared to working capital deficit of $35.3 million at December 31, 2007.

At September 30, 2008, we had available borrowing capacity of $50 million under our revolving credit facility and approximately $7.8 million in cash and cash equivalents on hand. The material terms of our revolving credit facility (including limitations on our ability to freely use all the available borrowing capacity) are described below in “Credit Agreement and Covenant Compliance.”

Net cash provided by operating activities was $9.4 million for the nine months ended September 30, 2008 compared to $17.5 million for the nine months ended September 30, 2007. This decrease in our cash provided by operating activities was due primarily to a reduction in accounts payable and accrued expenses as compared to the prior period. Net cash provided by investing activities was $2.1 million for the nine months ended September 30, 2008, compared to net cash used in investing activities of $9.1 million for the nine months ended September 30, 2007. The increase in our net cash provided by investing activities is primarily due to a decrease in cash used for the purchases of property and equipment. Capital expenditures were $7.0 million for the nine months ended September 30, 2008 and $16.4 million for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, net cash used in financing activities was $25.6 million compared to $11.3 million for the nine months ended September 30, 2007. Our financing activities include $6.7 million and $6.6 million of dividends paid during the nine months ended September 30, 2008 and 2007, respectively. The increase in our net cash used in financing activities for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 is primarily due to $15 million of unscheduled prepayments of long-term debt and an increase in repayments of capital lease and long-term financing obligations.

Our liquidity needs are funded by operating cash flow and availability under our credit agreement. The exhibition industry is seasonal with the studios normally releasing their premiere film product during the holiday season and summer months. This seasonal positioning of film product makes our needs for cash vary significantly from quarter to quarter. Additionally, the ultimate performance of the films any time during the calendar year will have a dramatic impact on our cash needs.

We from time to time close older theatres or do not renew the leases, and the expenses associated with exiting these closed theatres typically relate to costs associated with removing owned equipment for redeployment in other locations and are not material to our operations. In 2008, we plan to close 19 of our underperforming theatres as a part of our operating performance improvement plan, of which seven and fourteen were closed during the three and nine months ended September 30, 2008, respectively.

We plan to make a total of approximately $13 million in capital expenditures for calendar year 2008. Pursuant to the eighth amendment to our senior secured credit agreement, the aggregate capital expenditures that we may make, or commit to make for any fiscal year is limited to $30 million, provided that up to $10 million of the unused capital expenditures in a fiscal year may be carried over to the succeeding fiscal year.

In September 2008, the Company’s Board of Directors announced the decision to suspend the Company’s quarterly dividend in light of the continuing challenging conditions in the credit markets and the wider economy. At this time, the Company announced its plans to allocate its capital primarily to reducing its overall leverage. The cash dividend of $0.175 per share, paid on August 1, 2008 to shareholders of record at the close of business on July 1, 2008, was the last dividend declared by the Board of Directors prior to this decision. The payment of future dividends is subject to the Board of Directors’ discretion and dependent on many considerations, including limitations imposed by covenants in our credit facilities, operating results, capital requirements, strategic considerations and other factors. We do not anticipate paying cash dividends in the foreseeable future.

Net Operating Loss Carryforward

As of September 30, 2008, after generating approximately $6.7 million of operating loss carryforwards for the nine months ended September 30, 2008, we had approximately $116.9 million of federal and state operating loss carryforwards with which to offset our future taxable income, before consideration of the limitations described in Note 3-Income Taxes. The federal and state net operating loss carryforwards will begin to expire in the year 2020.

We believe that an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, occurred during 2007. The ownership change will subject our net operating loss carryforwards to an annual limitation, which may significantly restrict our ability to use them to offset our taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of our stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The date of ownership change and the occurrence of more than one ownership change can significantly impact the amount of the annual limitation. We are currently analyzing the information to determine the amount of such limitation. To further refine its estimate of the limitation, the Company must determine whether or not it had a net unrealized built-in gain or loss (“NUBIG” or “NUBIL”) at the date of the ownership change. Generally, a NUBIG or NUBIL is determined based on the difference between the fair market value of the assets and their tax basis. If the computed NUBIG or NUBIL is below a de minimis threshold, the amount of the NUBIG or NUBIL is considered to be zero. Otherwise, certain deductions recognized during the five-year period beginning on the date of ownership change would be subject to limitation when a NUBIL is present. Conversely, the Section 382 limitation would be increased by certain income recognized during this five-year period. The Company is currently evaluating whether or not a NUBIG or NUBIL exists.

Credit Agreement and Covenant Compliance

In 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 million.

The senior secured credit facilities consist of:

•

a $170 million seven year term loan facility;

•

a $185 million seven year delayed-draw term loan facility; and

•

a $50 million five year revolving credit facility available for general corporate purposes.

As of September 30, 2008, we had the following amounts outstanding under each of the facilities described above:

•

$161.6 million was outstanding under our $170 million term loan facility;

•

$122.6 million was outstanding under our $185 million delayed-draw term loan facility; and

•

no amounts were outstanding under our $50 million revolving credit facility.

The interest rate for our senior secured credit agreement under the outstanding revolving and term loans, as amended, is set to a margin above the London interbank offered rate (“LIBOR”) or base rate, as the case may be, based on the Company’s corporate consolidated leverage ratio as defined in the credit agreement, with the margin ranging from 3.0% to 3.5% for loans based on LIBOR and 2.0% to 2.5% for loans based on the base rate. As of September 30, 2008 and 2007, the average interest rate was 6.38% and 8.86%, respectively. The final maturity date of the revolving credit facility is May 19, 2010, and the final maturity date of the term loans is May 19, 2012.

The credit agreement requires that mandatory prepayments be made from (1) 100% of the net cash proceeds from certain asset sales and dispositions, other than a sales-leaseback transaction, and issuances of certain debt, (2) 85% of the net cash proceeds from sales-leaseback transactions, (3) various percentages (ranging from 0% to 75% depending on our consolidated leverage ratio) of excess cash flow as defined in the credit agreement, and (4) 50% of the net cash proceeds from the issuance of certain equity and capital contributions.

Debt Covenants

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 to parties other than us;

•

incur additional indebtedness;

•

create liens on our assets;

•

make certain investments;

•

sell or otherwise dispose of our assets;

•

consolidate, merge or otherwise transfer all or any substantial part of our assets; and

•

enter into transactions with our affiliates.

The senior secured credit facilities also contain financial covenants that require us to maintain specified ratios of funded debt to adjusted EBITDA and adjusted EBITDA to interest expense. The terms governing each of these ratios are defined in the credit agreement.

The senior secured credit agreement places certain restrictions on our ability to make capital expenditures. In addition to the dollar limitation described below, we may not make any capital expenditure if 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.

We have from time to time amended the senior secured credit agreement and the most recent amendments included, among other items:

•

amending our consolidated leverage ratio such that from and after October 17, 2007 the ratio may not exceed 4.75 to 1.00 as of the last day of any quarter for the four-quarter period then ending;

•

amending our consolidated interest coverage ratio such that from and after October 17, 2007 the ratio may not be less than 1.65 to 1.00 as of the last day of any quarter for the four-quarter period then ending;

•

limiting the aggregate capital expenditures that we may make, or commit to make, to $30 million for any fiscal year, provided, that up to $10 million of unused capital expenditures in a fiscal year may be carried over to the succeeding fiscal year; and

•

permitting sale-leaseback transactions of up to an aggregate of $175 million.

Debt Service

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. Our 2007 and 2008 operating results have been significantly lower than expectations, principally due to declines in box office attendance. Based upon our current level of operations, and our 2008 business plan, we believe that cash flow from operations, available cash and available borrowings under our credit agreement will be adequate to meet our liquidity needs for

the next 12 months. However, the possibility exists that, if our operating performance is worse than expected or we are unable to make our debt repayments, we could come into default under our debt instruments, causing the agents or trustees to accelerate maturity and declare all payments immediately due and payable.

The following are some factors that could affect our ability to generate sufficient cash from operations:

•

further substantial declines in box office attendance, as a result of a continued general economic downturn, competition and a lack of consumers’ acceptance of the movie products in our markets;

•

inability to achieve targeted admissions and concessions price increases, due to competition in our markets.

The occurrence of these conditions could require us to seek additional funds from external sources or to refinance all or a portion of our existing indebtedness in order to meet our liquidity requirements. 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. If we have insufficient cash flow to fund our liquidity needs and are unable to refinance our indebtedness or raise additional capital, we could come into default under our debt instruments as described above. In addition, we may be unable to pursue growth opportunities in new and existing markets and to fund our capital expenditure needs.

Debt Covenant Compliance

Other events of default under the senior secured credit facilities include:

•

our failure to pay principal on the loans when due and payable, or our 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.

Contractual Obligations

We did not have any material changes to our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

Impact of Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair values, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value; accordingly, it does not expand the use of fair value in any new circumstances. Fair value under SFAS 157 is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data; for example, a reporting entity’s own data. Under the standard, fair value measurements would be separately disclosed by level within the fair value

hierarchy. FASB Staff Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”), states that SFAS 157 does not apply under SFAS No. 13, “Accounting for Leases” (“SFAS 13”), and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13. With respect to financial assets and liabilities, SFAS 157 was effective for fiscal years beginning after November 15, 2007. For nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequent basis, FASB Staff Position No. FAS 157-2 (“FSP 157-2”) permits companies to adopt the provisions of SFAS 157 for fiscal years beginning after November 15, 2008. We adopted SFAS 157 as of January 1, 2008 for financial assets and liabilities, and elected to defer our adoption of SFAS 157 for nonfinancial assets and liabilities as permitted by FSP 157-2. There was no impact to our consolidated financial statements as a result of our adoption of SFAS 157. The impact of adopting SFAS 157 for nonfinancial assets and liabilities on January 1, 2009 is still under consideration by the Company.

•

acquisition related costs, such as legal and due diligence costs, be expensed as incurred;

•

acquirer shares issued as consideration be recorded at fair value as of the acquisition date;

•

contingent consideration arrangements be included in the purchase price allocation at their acquisition date fair value;

•

with certain exceptions, pre-acquisition contingencies be recorded at fair value;

•

negative goodwill be recognized as income rather than as a pro rata reduction of the value allocated to particular assets;

•

adjustments to deferred income taxes, after the purchase accounting allocation period, will be included in income rather than as an adjustment to goodwill.

SFAS 141(R) requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to choose to measure many financial assets and financial liabilities at fair value and report unrealized gains and losses on items for which the fair value option has been elected through earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 at January 1, 2008 did not have an impact on our results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The new standard is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The adoption of SFAS No. 162 is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

Forward-Looking Information

Certain items in this report are considered forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “plan,” “estimate,” “expect,” “project,” “anticipate,” “intend,” “believe” and other words and terms of similar meaning in connection with discussion of future operating or financial performance. These statements include, among others, statements regarding our future operating results, our strategies, sources of liquidity, debt covenant compliance, the availability of film product, our capital expenditures, digital cinema implementation and the opening and closing of theatres (including our operating performance improvement plan). These statements are based on the current expectations, estimates or projections of management and do not guarantee future performance. The forward-looking statements also involve risks and uncertainties, which could cause actual outcomes and results to differ materially from what is expressed or forecasted in these statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results and future trends may differ materially depending on a variety of factors, including:

•

general economic conditions in our regional and national markets;

•

our ability to comply with covenants contained in our senior credit agreement;

•

our ability to operate at expected levels of cash flow;

•

financial market conditions including, but not limited to, changes in interest rates and the availability and cost of capital;

•

our ability to meet our contractual obligations, including all outstanding financing commitments;

•

the availability of suitable motion pictures for exhibition in our markets;

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competition in our markets;

•

competition with other forms of entertainment;

•

identified weaknesses in internal control over our financial reporting;

•

the effect of leverage on our financial condition;

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prices and availability of operating supplies;

•

impact of continued cost control procedures on operating results;

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the impact of asset impairments;

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the impact of terrorist acts;

•

changes in tax laws, regulations and rates;

•

financial, legal, tax, regulatory, legislative or accounting changes or actions that may affect the overall performance of our business; and

•

other factors, including the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007, under the caption “Risk Factors”.

Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in Carmike’s other SEC reports, accessible on the SEC’s website at www.sec.gov and the Company’s website at www.carmike.com.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided under “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’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 in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and the 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 SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, these officers have concluded that, in light of the material weakness described below, as of September 30, 2008, our disclosure controls and procedures were not effective.

As a result of these control deficiencies, management performed additional procedures to ensure that our condensed consolidated financial statements are prepared in accordance with GAAP. Accordingly, we believe that the financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows.

Material Weakness in Internal Control Over Financial Reporting

A material weakness is a control deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

As of December 31, 2007, we identified the following material weakness in our internal control over financial reporting, which continued to exist as of September 30, 2008:

We did not maintain effective internal control over financial reporting with respect to the application of GAAP as it relates to unusual and non-routine events or transactions such as long-lived asset impairment and GAAP disclosures; had inadequate processes to identify changes in GAAP and the business practices that may affect the method or processes of recording transactions; and had ineffective controls over critical spreadsheets used in the preparation of accounting and financial information.

These deficiencies have not been fully remediated. Accordingly, management has determined that these control deficiencies continue to constitute a material weakness at September 30, 2008.

Plan of Remediation for Identified Material Weakness

Management has prepared an action plan for all identified deficiencies at December 31, 2007, including assigning responsibility and due dates. The status of this plan is being monitored by management and reviewed by the Audit Committee periodically. In addition, the 2008 performance goals for certain members of senior management include the remediation of such deficiencies and the maintenance of effective internal control.

With respect to the identified material weakness, we continue to refine our internal controls, processes and procedures to timely and properly monitor, evaluate and record unusual and non-routine transactions in accordance with GAAP. We realigned responsibilities within our accounting and finance departments. We have hired additional resources to focus on research and the application of GAAP and supplement this with assistance from outside advisors for the evaluation of unusual and non-routine transactions. We will continue to focus on continuing education for our current accounting and finance staff.

Additionally, the number of spreadsheets has been reduced due to the implementation of new accounting and fixed asset systems, and we have implemented additional reviews of significant spreadsheets by personnel other than the preparer. Additionally, we use the available software security to protect complex calculations in our significant spreadsheets to effectively control the integrity and data used in preparation and analysis of accounting and financial information.

Changes in Internal Control Over Financial Reporting

We continue to work on our efforts to improve internal control over financial reporting, including the remediation of the material weakness listed above. There were no changes to our internal control over financial reporting during the quarter ended September 30, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

For information relating to the Company’s legal proceedings, see Note 6, Commitments and Contingencies under Part I, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A.

RISK FACTORS

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. See also “Forward-Looking Statements,” included in Part I, Item 2 of this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Listing of exhibits


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 3.1 to Carmike’s Form 8-K filed November 13, 2007 and incorporated herein by reference).

11		Computation of per share earnings (provided in Note 7 of the notes to condensed consolidated financial statements included in this report under the caption “Net Income (Loss) 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		Certificate 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		Certificate 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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CARMIKE CINEMAS, INC.

Date: November 10, 2008	By:	/s/ Michael W. Patrick
		Michael W. Patrick
		President and Chief Executive Officer
		Chairman of the Board of Directors
		(Principal Executive Officer)

Date: November 10, 2008	By:	/s/ Richard B. Hare
		Richard B. Hare
		Senior Vice President—Finance, Treasurer and
		Chief Financial Officer
		(Principal Financial Officer)

Date: November 10, 2008	By:	/s/ Jeffrey A. Cole
		Jeffrey A. Cole
		Assistant Vice President—Controller
		(Principal Accounting Officer)

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