State of the Cinema A. Historical Perspective a. 1990 1995 i. Ramping up of runs front loading and rental shifts ii.

i. Breakdown of clearances b. 1995 2002 i. Megaplex effects ii. Bankruptcy and re-organizations c. 2002 2013 Demographic Perspective Challenge from other entertainment options Windows and distribution patterns Information availability and box office patterns Advent of 3D and effects Digital Distribution effects Films as a social event Reprise, demographic shifts forcing environmental changes Marked recession effects Conclusions, where are we headed

B. C. D. E. F. G. H. I. J. K.

History An examination of the industry today requires a brief recap of the history of the theatrical market place over the last two decades. The time periods are best broken down into the following segments, 1990 through 1995, 1995 through 2002, and 2003 through 2012. Each period carries with it a signature series of events that shaped the landscape today. 1990 1995, Multiplexes multiply Building on the expansions of the 1980s the early half of the 90s is characterized by the rapid expansion of the multiplex cinema. 1990 began a rapid expansion of screens. To some extent this was brought on by rapid real estate development, developers desire for an anchor to their malls and centers, and lack of opposition from the film companies. The practice of clearing other theatres (restricting other theatres within a predetermined geographic radius from playing a film concurrently) was in the process of breaking down. Partly driven by studio desire to collect money faster and partly driven by real estate developer pressure, it was inevitable that clearance radius shrinkage would occur. Additionally more screens were being built in any given location to take advantage of what was the multiplex effect. If a theatre owner structured his seating capacity correctly when building a new

theatre, he could more efficiently manage his capacity utilization of seating inventory. This allows for a film that is declining to play off in smaller and smaller auditoriums as it declined in gross, saving capacity for the new opening films. As the landscape was populated with more and more theatre venues, distributors started taking more and more locations on opening week, making it considerably more convenient for the costumer to see a film early in release and not face weeks of sold out auditoriums. Even so when a high demand film was released, costumers now had multiple alternative choices in the more numerously screened theatres. While average numbers of first week runs on a wide release in the 80s might have been 1000, that number grew to over 200 by 1995. Domestic screen growth went from about 23000 in 1990 to about 27000 in 1995 a 17% increase. 1995 2002 The Dawn of the Megaplex, The Nightmare of Insolvency In 1995 the cinema space was revolutionized by the introduction of The Grand 25 in the Dallas area. The first full stadium seated theatre in the US was an instant hit and wreaked havoc with other theatres in the Dallas market. The race was now on to retool theatre complex inventories. AMCs approach was to build out as quickly as possible a portfolio of these hugely popular new designs to lock in lucrative territories while at the same time divesting of older underperforming assets. Other large circuits, in particular Regal, Cinemark, United Artists, Carmike were left behind the curve in development. When they did ramp up construction of the new format, they still retained numerous locations that were now underperformers or outright obsolete due to the new competition. With huge investments in new properties, the financial foundation of exhibition was now on shaky footing. In order to maintain market share, significant leverage was undertaken to build out the new complexes. Unfortunately this meant that a lot more borrowing was producing results that were not substantially better than before. Admissions grew from 1.21 in 1995 to 1.38 in 2000 about 14%, and at the same time borrowing had increased dramatically. As it turns out the increase in attendance was not entirely fueled by the new inventory of theatres. A close examination of demographic trends sheds light on why this is true. It has long been the case that the most frequently attending movie going cohort is from 12 24 years of age with 16 24 year olds leading the charge. The percentage of population in that demographic slice had a 20 year peak in the first couple years of 2000 2010. To make matters worse, alternative entertainment forms for that age group were also encroaching on their frequency of movie attendance. Attendance peaked in 2002 with approximately 1.57 billion admissions in North America according to National Association of Theatre Owner statistics. While this was a good number relative to the previous decade, theatre owners were substantially over leveraged due to new construction and acquisition borrowing costs. Numerous bankruptcy proceedings came as a result. Included among them were Carmike, Regal, United Artists, and Edwards theatres. AMC was trading at historic lows and Cinemark was on the brink. Both

Cinemark and AMC managed to avoid insolvency through recapitalization via Venture capital funds. Regal, United Artists, and Edwards were acquired by Phillip Anschutz in 2002 through a debt purchase of all three chains. Numerous smaller circuits filed for Chapter 11 bankruptcy and restructured. The result was an industry that had deleveraged to a significant extent (though notably not AMC), but facing a challenging demographic trend. 2002 2008 The deleveraged companies continued to build, more selectively, bigger and bigger complexes. The number of theatre locations had declined from a high of 6550 in 2000 to 5561 in 2009 while screen counts had gone from 35597 in 2000 to 38605 in 2009. Thus average screen counts per theatre went from At the same time that this increase in average screen count (5.4 to 6.9) was occurring, other issues came into play affecting theatres. Current Issues The increased run count of wide release films came with a hidden downside. As run counts went up (More than 4300 different theatres opened Marvels The Avengers 5/4/2012). The average length of run for any given film plummeted. Now, 90% of a films box office comes within 4 weeks of opening whereas it was approximately 6 weeks in 2000. The result was that studios no longer felt compelled to hold back the ancillary release of a film (DVD, Video On Demand etc.) nearly as long. In 2000 the average window to DVD was approximately 170 days. Now it is about 120. This clearly puts some pressure on theatres. Given the shorter waiting periods and the move to concurrent VOD and DVD release, customers have moved toward not going to first-run releases for non -high demand films. Recapping, we have identified three issues have led to some erosion at the margins of attendance, demographic shift, alternative entertainment hitting frequent movie going cohorts, and window to DVD reduction. Added to that list would be the recession. We speculate that as a recession prolongs, spending declines in order of the magnitude of the item being purchased. As movies are still, in spite of continued ticket price inflation, a very low cost per hour of entertainment option. The depth and length of the recession and the very sluggish recovery has likely trickled down even to low cost options. Out of home viewing while fairly affordable will suffer when as individuals become more selective in where they spend money, bringing us back to alternatives. Netflix and video on demand are even more affordable options for seeing a film. The expansion of home viewing, despite that the venue is decidedly less conducive to optimal immersion, lower demand film will suffer at the cinema as viewers opt to delay and watch on video if you are truly cost conscious.

So even as population continues to grow in North America attendance has plateaued and looks to be declining. However we do see some light. Cautious confidence in the economy seems to be permeating the continent. 2012 is currently about 17% ahead of 2011 in both revenue and attendance. Ticket prices were flat 2010 to 2011 and show little signs of increasing much this year. We believe that some of this increase is reflective of more interest in out of home entertainment as recession patterns reverse. People move more toward a better experience when they feel they can afford it. We have seen substantial over performance in films this year versus last as measured by early statistical tracking surveys relative to opening grosses. Film offerings in 2012 show promise of strong results to come. Marvels The Avengers opened to record numbers the weekend of 5/4/2012 and could very well challenge the elusive 500 million domestic box office barrier. The summer product looks to deliver results on par or perhaps a bit better than the record set in 2011. Given that ticket prices have not advanced substantially, we should come out of the third quarter ahead of 2011 with comps for the fourth quarter fairly easy. The business is cyclical and heavily depends on what is offered so we are not forecasting a long term trend, but as we have mentioned above there are some encouraging signs. Challenges Digital Conversion The cinema business on the theatres side does face some significant challenges. Some of these will hit smaller exhibitors much harder, and some will strike across the board. Studios and distribution companies are phasing out film and are moving to deliver entertainment digitally. Those circuits that have substantially completed conversion to the digital format are well placed to survive. Those that have been delaying are conceivably facing extinction. Small town exhibition may become a thing of the past unless the cost of digital projection equipment does not come down. We do not mention 3D here. While it has in the past been a primary reason to convert to digital, it is now simply and adjunct to the conversion. It being the motivator for conversion to digital systems has been supplanted by the move away from film. Conceivably a reduction in the resolution standard and in a compromise with studios could assuage that issue, but it isnt looking likely at the moment. Those theatres that cannot afford a $70K, projection conversion may be forced to close. The issue may hit more than small town exhibitors. Marginal exhibitors in larger cities could also be forced out. In a way this may actually improve the lot for the AMCs, Regals, Cinemarks, and Carmikes of the world. The closure of these marginal and somewhat cannibalistic runs would help the survivors pick up more attendance. While it is a gain only at the margins it will help.

Digitization also carries with it the promise of delivery of alternative content. Still nascent there is opportunity out there if the right deals could be struck, especially with sports that could reduce the unused capacity of theatre auditoriums. Cinedigm and National Cinema Media via Fathom Entertainment are the leaders in the area. Windows Studios have seen a significant decline in DVD sell through revenue as companies like Netflix provide a model to the consumer that has great economies. Netfilxs rental model has eaten into DVD sales in a devastating way over the past 5 years, and streaming of films and television will eventually supplant the DVD as the viewing medium. This is a manifestation of the studios losing control of a distribution channel. The proposed answer is to shorten the window to DVD or Video on Demand release. As we mentioned before this could potentially be a negative to theatre operation as consumers choose more often to wait a shorter period to see a film at home. It is as yet unclear what effect this would actually have. Noted above the window is now about 120 days or so but 90% of the revenue at theatres comes in within four weeks. Efforts to test a high price point and a short window met with fierce resistance from theatre owners and the results these tests were not published by the studios. Our sources indicate that the net result was negligible at the $30 price point tried. Conceivably a reduced price point for a shortened window that was perhaps as low as $20 per download might erode theatre returns, but the conundrum for studios is that theatres are adamantly against it and might well choose to abandon a film in theatrical release altogether. This is a looming issue that has no clear answer yet. Looking Ahead New theatre models are being tested. Dine-In Theatres of various formats have had some significant success in bringing in a crowd that is less enamored the megaplex. Adults who are more oriented to relaxation, good food, and a less adolescent environment have accepted these venues nicely. They are however not a replacement for the big theatre model but an alternative. That alternative could be something significant though as the bulk of the population in North America is now over 45. Providing them with a comfortable and more sophisticated viewing environment has merit. Aside from the Dine-In concept, there have been attempts to upgrade the traditional theatre. AMC has at least two theatre conversions that have shown huge growth after a renovation that included reseating with reclining plush chairs, upgrades of the concession area, and the addition of alcohol sales. These concepts are still being tested but are needed to focus on the largest demographic groups. The social environment is important to the boomer generation. It is necessary to deliver an upgraded experience to entice them out of the house.

Movie going is a social experience. Cinema is best experienced in a crowd as opposed to in front of a flat screen. The immersion experience in a theatre without the distractions that are ever present in a home environment is far superior. The test for theatres for the next 10 to 15 years will be to offer an experience that focuses on broader segments of the population. Perhaps it is the megaplex environment for some, the dine-in for others and the upgraded environment for others. The traditional theatre will not become extinct but to realize growth in the industry it is paramount to draw out those consumers who have abandoned the theatre because of the homogenized and nonvalue oriented experience they perceive traditional theatre going to be.