SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2000
Commission file number 1-14099
Loews Cineplex Entertainment Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3386485
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
711 Fifth Avenue
New York, New York 10022
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(Address of Principal (Zip Code)
Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 833-6200
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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
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Common Stock outstanding (including non-voting common stock) - 58,622,646 shares
at May 31, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
May 31, February 29,
2000 2000
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 42,126 $ 31,735
Accounts receivable 13,760 17,288
Inventories 4,638 5,148
Prepaid expenses and other current assets 5,404 6,057
----------- ------------
TOTAL CURRENT ASSETS 65,928 60,228
PROPERTY, EQUIPMENT AND LEASEHOLDS, NET 1,237,104 1,218,334
OTHER ASSETS
Investments in and advances to partnerships 80,829 75,932
Goodwill, net 490,027 493,390
Other intangible assets, net 22,084 22,704
Deferred charges and other assets 35,255 36,801
----------- ------------
TOTAL ASSETS $ 1,931,227 $ 1,907,389
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 221,112 $ 201,077
Deferred revenue 6,845 8,625
Current maturities of long-term debt and other obligations 1,314 1,409
Current portion of capital leases 2,843 2,740
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TOTAL CURRENT LIABILITIES 232,114 213,851
LONG-TERM DEBT AND OTHER OBLIGATIONS 870,543 839,029
LONG-TERM CAPITAL LEASE OBLIGATIONS 58,401 59,217
ACCRUED PENSION AND POST RETIREMENT OBLIGATIONS 8,275 8,325
OTHER LIABILITIES 179,186 168,165
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TOTAL LIABILITIES 1,348,519 1,288,587
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COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Common stock ($.01 par value, 300,000,000 shares authorized; 58,538,646
shares issued and outstanding at May 31, 2000 and at February 29, 2000) 586 586
Common stock-Class B non-voting ($.01 par value, 10,000,000 shares authorized;
84,000 shares issued and outstanding at May 31, 2000 and at February 29,
2000) 1 1
Accumulated other comprehensive income (4,788) (167)
Additional paid-in capital 671,707 671,707
Retained deficit (84,798) (53,325)
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TOTAL STOCKHOLDERS' EQUITY 582,708 618,802
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,931,227 $ 1,907,389
=========== ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
For the Three Months Ended
---------------------------------
May 31, May 31,
2000 1999
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REVENUES
Box Office $ 143,546 $ 141,373
Concession 54,425 53,185
Other 7,299 7,226
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205,270 201,784
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EXPENSES
Theatre operations and other expenses 162,385 161,120
Cost of concessions 8,639 7,605
General and administrative 12,634 12,135
Depreciation and amortization 30,586 26,079
Loss on sale/disposal of theatres 110 -
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214,354 206,939
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LOSS FROM OPERATIONS (9,084) (5,155)
INTEREST EXPENSE 21,607 16,065
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LOSS BEFORE INCOME TAXES (30,691) (21,220)
INCOME TAX EXPENSE 782 659
----------- -----------
NET LOSS $ (31,473) $ (21,879)
=========== ===========
Weighted Average Shares Outstanding - basic and diluted 58,622,646 58,622,646
Net Loss per Share - basic and diluted $ (.54) $ (.37)
=========== ===========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
For the Three Months Ended
----------------------------
May 31, May 31,
2000 1999
-------- --------
OPERATING ACTIVITIES
Net loss $(31,473) $(21,879)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 30,586 26,079
Loss on sale/disposal of theatres 110 -
Equity earnings from long-term investments, net of distributions
received 1,831 357
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,528 4,235
Increase/(decrease) in accounts payable and accrued expenses 21,815 (2,146)
Increase/(decrease) in other operating assets and liabilities, net 4,367 (9,972)
-------- --------
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 30,764 (3,326)
-------- --------
INVESTING ACTIVITIES
Investments in and advances to partnerships, net (6,728) (1,046)
Capital expenditures (52,940) (34,401)
Merger related costs - (1,051)
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NET CASH USED IN INVESTING ACTIVITIES (59,668) (36,498)
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FINANCING ACTIVITIES
Proceeds from Senior Revolving Credit Facility, net of repayments and deferred
financing fees 32,000 37,500
Proceeds from sale of interest rate swaps 8,650 -
Repayment of long-term debt (1,355) (930)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 39,295 36,570
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INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 10,391 (3,254)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,735 48,174
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,126 $ 44,920
======== ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
- -----------------------------------------------
Loews Cineplex Entertainment Corporation ("LCP" or the "Company"), formerly LTM
Holdings, Inc., is a major motion picture theatre exhibition company with
operations in North America and Europe. The Company conducts business under the
Loews Theatres, Sony Theatres, Cineplex Odeon Theatres, Star Theatres, Magic
Johnson Theatres and Yelmo Cineplex Theatres marquees. On May 14, 1998, pursuant
to the Amended and Restated Master Agreement (the "Master Agreement") dated
September 30, 1997, LTM Holdings, Inc. and Cineplex Odeon Corporation ("Cineplex
Odeon"), another motion picture exhibitor with operations in the U.S. and
Canada, combined (the "Combination").
The Combination has been accounted for under the purchase method of accounting
and, accordingly, the cost to acquire Cineplex Odeon has been allocated to the
assets acquired and liabilities assumed of Cineplex Odeon based on their
respective fair values, with the excess purchase price allocated to goodwill.
The Company arranged for an independent valuation and other studies required to
determine the fair value of the assets acquired and liabilities assumed. These
valuations and studies were completed during the first quarter of fiscal year
2000.
As of May 31, 2000, LCP owns, or has interests in, and operates 2,967 screens at
385 theatres in 22 states and the District of Columbia, six Canadian provinces,
Spain, Hungary, Turkey and Austria. The Company's principal markets include New
York and the metropolitan area, Boston, Chicago, Baltimore, Dallas, Houston,
Detroit, Los Angeles, Seattle and Washington D.C. in the U.S.; Toronto, Montreal
and Vancouver in Canada; and Madrid, Spain. The Company holds a 50% partnership
interest in each of the Yelmo Cineplex de Espana ("Yelmo"), Loeks-Star Theatres
("LST") and Magic Johnson Theatres ("MJT") partnerships. Yelmo, LST and MJT hold
interests in and operate 30 locations, comprising a total of 347 screens.
Screens and locations for the partnerships are included in the Company amounts
referred to above. The Company also holds a 50% interest in a joint venture in
Italy with plans to develop multiplexes over the next five years.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information; therefore, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended February 29, 2000.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
On June 23, 1999, the Financial Accounting Standards Board decided to defer the
effective date of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activity". As a result of
this deferral, SFAS No. 133 will be effective for all of the Company's fiscal
quarters beginning March 1, 2001. This statement standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that the Company recognize those items as assets
or liabilities in the statement of financial position and
5
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED
- -------------------------------------------------
measure them at fair value. The Company expects to adopt this standard when
required and does not believe that it will have a significant impact on its
operating results or financial position.
On June 26, 2000, the Securities and Exchange Commission ("SEC") decided to
defer the effective date of Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". As a result of this deferral, SAB No. 101
will be effective for all of the Company's fiscal quarters beginning December 1,
2000, requiring retroactive application to the beginning of the Company's 2001
fiscal year with restatement, if necessary, of all quarters for the current
fiscal year. SAB No. 101 expresses the views of the SEC staff in applying GAAP
to certain revenue recognition issues. The Company is currently evaluating the
impact, if any, of SAB No. 101 on its financial position and its results of
operations.
NOTE 3 - COMPREHENSIVE INCOME
- -----------------------------
The following components are reflected in the Company's comprehensive income:
Three Months Ended
May 31, May 31,
2000 1999
-------- --------
Net loss $(31,473) $(21,879)
Other comprehensive income (4,621) 2,494
-------- --------
Comprehensive income $(36,094) $(19,385)
======== ========
The following is a reconciliation of the Company's accumulated other
comprehensive income:
Three Months Ended
May 31, 2000
------------------
Accumulated other comprehensive
income as of March 1, 2000 $ (167)
Other comprehensive income for the
three months ended May 31, 2000:
Foreign currency translation
adjustment, net of income tax
benefit of $2,952 (3,943)
Unrealized loss on marketable
securities, net of income tax
benefit of $507 (678)
-------
Accumulated other comprehensive
income as of May 31, 2000 $(4,788)
=======
6
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 4 - SEGMENT AND GEOGRAPHIC DATA
- ------------------------------------
The Company is engaged in one line of business, motion picture exhibition. The
following table presents summarized financial information about the Company by
geographic area. There were no material amounts of sales among geographic areas.
UNITED INT'L/
STATES CANADA OTHER CONSOLIDATED
---------- -------- ------- -------------
Three Months Ended
May 31, 2000
Total revenue $ 168,143 $ 36,119 $ 1,008 $ 205,270
Loss from operations $ (3,499) $ (4,129) $(1,456) $ (9,084)
Total assets $1,498,048 $373,045 $60,134 $ 1,931,227
Three Months Ended
May 31, 1999
Total revenue $ 158,527 $ 42,776 $ 481 $ 201,784
Loss from operations $ (1,825) $ (2,317) $(1,013) $ (5,155)
NOTE 5 - LONG-TERM DEBT AND OTHER OBLIGATIONS
- ----------------------------------------------
In August 1998, the Company entered into interest rate swap agreements for a
period of four years to hedge a portion of the Senior Revolving Credit Facility
variable interest rate risk. On May 26, 2000, the Company monetized the value of
these contracts and sold these swaps for $8.65 million. The Company believes
that it maximized the value of these contracts as a result of this sale. As the
Company had accounted for these swaps as interest rate hedges, the gain realized
from the sale has been deferred and will be amortized as a credit to interest
expense over the remaining original term of these swaps (August 2002). The
current portion of this gain is included in Accounts Payable and Accrued
Expenses and the long-term portion of this gain is included in Other
Liabilities.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Commitments
The Company has entered into commitments for the future development and
construction of theatre properties aggregating approximately $361.9 million
(including letters of credit of approximately $18.1 million) anticipated to be
funded over the next three year period. The Company has also guaranteed an
additional $34.8 million related to obligations under lease agreements entered
into by MJT. The Company is of the opinion that MJT will be able to perform
under its respective obligations and that no payment will be required and no
losses will be incurred under these guarantees.
7
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES, CONTINUED
- --------------------------------------------------
ADA Litigation
The Department of Justice, in coordination with the New York City Commission on
Human Rights, is currently investigating the Company's theatres in New York
City with respect to its compliance with the Americans with Disabilities Act
("ADA") and the New York City Human Rights Law. The Department of Justice has
alleged that its investigation has identified numerous violations of the ADA.
The Company has opposed, and will continue to vigorously oppose, the allegations
and claims of the Department of Justice with respect to the compliance of these
theatres under the ADA. However, the Company cannot guarantee that the
remediation costs relating to the ADA will not be material.
Environmental Litigation
One of the Company's leased drive-in theatres and one formerly leased drive-in
theatre, both in the State of Illinois, are located on properties on which
certain third parties disposed of, or may have disposed of, substantial
quantities of construction debris, auto shredder residue and other debris. Such
material may contain hazardous substances. One of these properties is the
subject of an action, filed in August 1998 in the Circuit Court of Cook County,
Illinois by the Illinois Attorney General's office seeking civil penalties and
various forms of equitable relief, including the removal of all wastes allegedly
present at the property, soil and ground water testing and remediation, if
necessary. The Company's range of probable liability with respect to this action
cannot be reasonably estimated at this time due to several unknown factors,
including the scope of contamination at the theatre property, the likelihood of
any particular remedial action being required, the allocation of liability, if
any, to other responsible parties, and the ability of such parties to satisfy
their share of such liability. The Company will continue to evaluate future
information and developments with respect to conditions at the theatre property
and will periodically reassess any liability accordingly. Based on the
foregoing, there can be no assurance that the Company's liability, if any, in
connection with this action will not be material.
OTHER
Other than the lawsuits noted above, the Company is a defendant in various
lawsuits arising in the ordinary course of business and is involved in certain
environmental matters. From time to time the Company is involved in disputes
with landlords, contractors and other third parties. It is the opinion of
management that any liability to the Company which may arise as a result of
these matters will not have a material adverse effect on its operating results
or financial position.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion of the Loews Cineplex Entertainment Corporation ("we",
"us" and "our") financial condition and operating results should be read in
conjunction with our unaudited consolidated financial statements for the three
month periods ended May 31, 2000 and 1999.
This discussion incorporates operating results of partnerships in which we have
an interest to the extent of our equity share as required by the equity method
of accounting, except as otherwise noted.
Results of Operations
Three Months Ended May 31, 2000 Compared to Three Months Ended May 31, 1999
Operating Revenues are generated primarily from box office revenues, concession
sales and other ancillary revenues. Operating revenues of approximately $205.3
million for the three months ended May 31, 2000 were $3.5 million higher than
the three months ended May 31, 1999. Box office revenues for the three months
ended May 31, 2000 of approximately $143.5 million were $2.2 million higher, and
concession revenues of approximately $54.4 million were $1.2 million higher in
comparison to the three months ended May 31, 1999. These increases in operating
revenues were due primarily to additional revenue from new theatre openings and
improvements in admission and concession revenues per patron. These increases in
revenues, which aggregated $24.7 million, were partially offset by other
reductions in operating revenues, which aggregated $21.2 million, including the
impact of theatres that were disposed of and a decline in attendance levels
primarily at some of our older theatres.
Operating Costs of approximately $171.0 million for the three months ended May
31, 2000 were approximately $2.3 million higher than the three months ended May
31, 1999. This increase is due primarily to the aforementioned increase in
operating revenues and incremental occupancy costs associated with new theatre
openings. These increases, which aggregated $21.0 million, were partially offset
by lower costs attributable to the impact of theatres that were disposed of,
reductions in variable costs commensurate with attendance declines primarily at
some of our older locations and lower film rent terms aggregating $18.7 million.
The lower film rent terms experienced in the current year (impact of
approximately $2.4 million) were favorable in comparison to the film rent terms
experienced in the comparable period of the prior year associated with the
strong performance of Star Wars - Episode I: The Phantom Menace.
General and Administrative Costs of approximately $12.6 million for the three
months ended May 31, 2000 were approximately $500 thousand higher than the three
months ended May 31, 1999, due primarily to normal inflationary increases.
Depreciation and Amortization Costs of approximately $30.6 million for the three
months ended May 31, 2000 were $4.5 million higher than the three months ended
May 31, 1999, due primarily to the incremental depreciation related to
investments in new theatres which commenced operations partially offset by the
effect of theatre dispositions.
Loss on Sale/Disposal of Theatres of approximately $100 thousand for the three
months ended May 31, 2000 was $100 thousand higher than the three months ended
May 31, 1999, due primarily to the timing, nature and characteristics of theatre
dispositions. During the three months ended May 31, 2000, we disposed of 5
theatre locations comprising 27 screens, which primarily were older, obsolete
theatres which generated marginal or negative cash flows. We will continue to
aggressively dispose of theatres that are underperforming or non-strategic. See
the Liquidity and Capital Resources section for additional information.
9
Interest Expense of approximately $21.6 million for the three months ended May
31, 2000 was approximately $5.5 million higher than the three months ended May
31, 1999, due primarily to the impact of additional borrowings under our Senior
Revolving Credit Facility, which were utilized primarily to fund investments in
new theatres and joint ventures and our working capital needs, coupled with the
impact of an increase in the variable borrowing rate relating to our Senior
Revolving Credit Facility. See the Liquidity and Capital Resources section for
additional information.
Attributable EBITDA of $24.1 million for the three months ended May 31, 2000
increased $1.3 million, or 5.8%, in comparison to the three months ended May 31,
1999, due primarily to new theatre openings, higher admission and concession
revenue per patron and lower film rent terms as previously discussed. These
increases were partially offset by other decreases in Attributable EBITDA
including the impact due to the aforementioned lower attendance levels
experienced primarily at some of our older locations and the impact of theatres
that were disposed of. Attributable EBITDA (earnings before interest, taxes,
depreciation and amortization, loss on asset disposal or sales, and equity
earnings included in EBITDA plus EBITDA from partnerships, net of partners'
share) is a measure that management uses to evaluate our financial performance.
Attributable EBITDA measures the amount of cash that we have available for
investment or other uses and is used by us as a measure of performance.
Attributable EBITDA is primarily a management tool and only one measure of
financial performance to be considered by the investment community. Attributable
EBITDA is not an alternative to measuring operating results or cash flow under
U.S. GAAP. In addition, the Attributable EBITDA measure presented herein may not
be comparable to similarly titled measures reported by other companies.
Liquidity and Capital Resources
We have experienced improved operating results as a result of investments in
theatres (including new builds and reconfigurations of existing theatres) and
the closing of obsolete, unprofitable or uncompetitive theatres. We expect to
increase revenues and cash flows as a result of the reconfiguration of the
circuit and from the additional future investment in North American and
international exhibition. In addition, we continue to realize cost savings and
operational efficiencies as a result of the combination with Cineplex Odeon
Corporation ("Cineplex Odeon"), hereinafter referred to as the "Combination".
We are continually seeking other potential revenue opportunities in addition to
box office and concession revenues. For example, in May 2000, due to our broad
demographic audience, we were able to complete a long-term deal to advertise on
our U.S. screens, estimated to be worth over time in excess of $60 million. Upon
signing this contract, we received $5 million as a non-refundable signing bonus
which we have recorded as deferred revenue and are currently amortizing over the
life of the contract. Additionally, we earn revenues based upon attendance
levels and a contractual rate per patron. This new source of revenue represents
our first foray into on-screen advertising with rolling stock in our U.S.
theatres. We are considering other forms of in-theatre promotional opportunities
as well.
We continue to close or dispose of certain overlapping theatre locations and
underperforming theatres, including older, obsolete theatres which contribute
only marginally to cash flow or operate at a cash flow loss. Contractual
obligations relating primarily to unfavorable lease terms or contractual buyouts
for certain theatres have been provided for as part of the cost of the merger
transaction.
At May 31, 2000, we had capital spending commitments aggregating approximately
$361.9 million that we anticipate funding over the next three year period for
the future development and construction of 34 theatre properties comprising
approximately 517 screens. At May 31, 2000, our debt balance included
approximately $133.5 million of capital spending on theatre projects in various
stages of development including theatres which opened during the last six
months. We expect these capital commitments and working capital requirements to
be funded by free cash flow (recurring annual earnings before depreciation,
amortization and non-cash charges such as loss on sale/disposals of theatres)
generated from operations, from our Senior Revolving Credit Facility and by
alternative sources of financing such as sale-leaseback transactions, developer
financed transactions and international lines of credit. On June 14, 2000,
Moody's Investor Services, a ratings agency, downgraded
10
our credit rating together with the credit ratings of three other major
exhibitors. This action has contributed to additional tightening in credit
opportunities for us. Generally, potential lenders and investors have expressed
concern with the state of the industry given the industry's costly build out
program and its effect on industry liquidity and company credit. Nonetheless, we
continue to pursue alternative financing structures including sale-leaseback
deals, developer financed deals (i.e., build-to-suit transactions) and potential
equity transactions to monetize existing assets and finance new theatre
construction costs. Also see "Factors That May Affect Future Performance".
Additionally, our joint venture in Spain is negotiating a revolving credit
facility with a group of banks in the amount of Euros 100 million which it
expects to have in place by the second or third quarter of fiscal year 2001. The
proceeds of this facility will be used to fund new theatre construction activity
and operations in Spain.
In connection with the Combination, we entered into a $1 Billion Senior
Revolving Credit Facility with Bankers Trust Company, as administrative agent.
The Senior Revolving Credit Facility, together with an $84.5 million equity
contribution provided by Universal Studios, Inc. ("Universal"), replaced the
Sony Corporation of America ("SCA") Credit Facility and Cineplex Odeon's
existing credit facility, funded cash paid to Sony Pictures Entertainment Inc.
("SPE") and/or its affiliates upon closing of the Combination, and provides
ongoing financing to us to fund working capital requirements and theatre
expansion in North America and internationally. This Senior Revolving Credit
Facility is comprised of two tranches, a $750 million senior secured revolving
credit facility, secured by substantially all of our assets and the assets of
our domestic subsidiaries, and a $250 million uncommitted facility. The Senior
Revolving Credit Facility bears interest at a rate of either the current prime
rate as offered by Bankers Trust Company or an Adjusted Eurodollar rate (as
defined in the credit agreement) plus an applicable margin based on our Leverage
Ratio (as defined in the credit agreement). On February 24, 2000, our bank group
agreed to a first amendment of the Senior Revolving Credit Facility. Under terms
of the first amendment, the banks agreed to modify the Maximum Consolidated
Leverage Ratio, the Maximum Total Leverage Ratio and the Minimum Debt Service
Coverage Ratio, as defined in the agreement, for a period of 18 months. These
ratios basically address our ability to access funds under the credit facility
as it relates to the Leverage Ratios and Debt Service Ratio. Our borrowings
under the Senior Revolving Credit Facility at May 31, 2000 totaled $562 million.
Although our Senior Revolving Credit Facility has a term through August 2003, we
will seek to commence negotiations with our Senior Revolving Credit Facility
bank group during the next 9 - 15 months, or sooner if necessary, to either
extend the terms of the existing agreement or negotiate a new facility subject
to prevailing market conditions. There can, of course, be no assurance that we
will be able to do so successfully. Among other things, a continued industry
downturn, a decline in the expected returns from our new build program, our
inability to successfully dispose of underperforming theatres, significant
changes in the credit markets, or continued pressure by the rating agencies
may adversely affect our ability to renegotiate our Senior Revolving Credit
Facility on satisfactory terms. In addition, these same risk factors could
impede our ability to comply with the covenant requirements, as currently
amended, which would also adversely effect our ability to renegotiate our
facility. If we cannot so refinance our Senior Revolving Credit Facility, we
would have to seek additional capital through other sources, including asset
securitizations or equity offerings. Equity offerings could be potentially
dilutive to our existing shareholders. In addition, if we are unable to obtain
favorable financings at the levels we seek, we would have to significantly
reduce our capital spending plans, which will have a negative impact on our
growth and performance. Finally, pending the renegotiation of our Senior
Revolving Credit Facility, unsatisfactory operating performance in the near term
may require that we seek further relaxation of certain covenants or
implementation of other capital raising transactions (such as asset sale-
leasebacks) to fund our capital investment plans. Any inability to successfully
negotiate interim adjustments to our covenants or otherwise implement
alternative capital transactions would have a material adverse effect on our
performance and may result in a deferral or reduction of our new build plans.
We continue to believe that the single most important component of our business
plan is our commitment to build state-of-the-art, high impact theatres. Our
growth plan is predicated upon moderate expansion. New theatre investments in
North America and internationally are evaluated in detail prior to commitment
11
with emphasis placed upon the quality and longevity of the cash flow
contribution and return on investment. Our new build strategy will continue to
require significant amounts of capital which we anticipate funding through a
combination of cash flow from operations and from financing activities. See
"Factors That May Affect Future Performance".
In August 1998, we entered into interest rate swap agreements for a period of
four years to hedge a portion of the Senior Revolving Credit Facility variable
interest rate risk. On May 26, 2000, we monetized the value of these contracts
and sold these swaps for $8.65 million. We believe that we maximized the value
of these contracts as a result of this sale. As we had accounted for these swaps
as interest rate hedges, we have deferred the gain realized from the sale which
will be amortized as a credit to interest expense over the remaining original
term of these swaps (August 2002).
Since the Combination, we pursued the sale of certain theatres in New York City
and Chicago that were subject to approval by the Department of Justice ("DOJ"),
in accordance with the terms of an agreement reached to permit the merger of
Loews Theatres with Cineplex Odeon. As a result, during the fourth quarter of
fiscal 1999, we sold to Cablevision Systems Corporation 33 screens in 12
theatres in New York City, in accordance with the DOJ order, and an additional
14 screens in 4 theatres in the suburban New York area.
Under the agreement with the DOJ, we were required to sell 49 screens at 11
theatre locations in Chicago. On April 7, 1999, we completed the sale of 30
screens at 8 theatre locations in Chicago to a third-party. This transaction was
not significant to our operating results or financial position. A portion of
these proceeds was utilized to pay down the Senior Revolving Credit Facility.
Additionally, under the agreement with the DOJ, we are required to sell the
remaining 19 screens at 3 theatre locations in Chicago. No sale of these
locations has occurred and, pursuant to the original agreement with the DOJ, a
trustee has been appointed to effect the sale of these locations.
12
Properties
At May 31, 2000, Loews Cineplex, including Star, Magic Johnson and Yelmo
Cineplex theatres, operated or had interests in 2,967 screens in 385 theatres,
of which 35 theatres were owned by us, 346 theatres were leased and 4 theatres
were operated by us under management arrangements. Our leases are entered into
on a long-term basis. The lease terms generally range from 20 to 40 years and
contain various renewal options, generally in intervals of 5 to 10 years.
Theatre leases provide for the payment of a fixed annual rent and, sometimes, a
percentage of box office receipts or total theatre revenue. The following tables
show the locations of our screens in operation at May 31, 2000, including our
partnerships' theatres.
United States Canada
State Screens Locations Province Screens Locations
- ------------------------------------------------------- -----------------------------------------------------
Arizona 33 4 Alberta 125 16
California 80 9 British Columbia 67 11
Connecticut 40 4 Manitoba 13 3
District of Columbia 30 9 Ontario 379 54
Florida 27 2 Quebec 211 31
Georgia 12 1 Saskatchewan 27 4
Idaho 20 4 ---------- -----------
Illinois 320 45 Total 822 119
Indiana 51 5 ========== ===========
Kentucky 9 2
Maryland 127 18
Massachusetts 93 10 International
Michigan 156 10
Minnesota 15 3 Country Screens Locations
New Hampshire 12 2 -----------------------------------------------------
New Jersey 206 20 Austria 8 1
New York 282 41 Hungary 6 1
Ohio 32 2 Spain 140 16
Pennsylvania 49 3 Turkey 5 1
Texas 169 18 ---------- -----------
Utah 62 11 Total 159 19
Virginia 41 6 ========== ===========
Washington 120 18
---------- -----------
Total 1,986 247
========== ===========
13
Theatre Portfolio Changes
The following table indicates the number of theatre locations and screens and
the changes to our theatre circuit portfolio (including screens and locations
relating to all our joint ventures) for the three month period ended May 31,
2000:
Three Months Ended
May 31, 2000
------------
North
America Int'l Total
------- ----- -----
Locations
- ---------
Beginning Balance 367 18 385
New builds 4 - 4
J.V. Investments - International - 1 1
Dispositions (5) - (5)
---- --- -----
Ending Balance 366 19 385
==== === =====
Screens
- -------
Beginning Balance 2,777 149 2,926
New builds/Expansions 58 - 58
J.V. Investments - International - 10 10
Dispositions (27) - (27)
----- --- -----
Ending Balance 2,808 159 2,967
===== === =====
During the three month period ended May 31, 2000, we opened four theatre
locations aggregating 58 screens; in the United States, we opened the Waterfront
22 in Pennsylvania, the Fairlane 21 in Michigan and the Citywalk/Universal
IMAX(R) in California; in Canada, we opened the St. Foy 14 in Quebec.
During the first quarter of fiscal year 2001, we further developed the existing
circuit in Spain called Yelmo Cineplex de Espana. This joint venture opened one
theatre aggregating 10 screens during the three month period ended May 31, 2000:
the Rivas theatre in Madrid.
Additionally, during the three month period ended May 31, 2000, we disposed of
or closed 5 theatre locations comprising 27 screens. We continue to review our
theatre portfolio, exploring ways to accelerate the disposition of our older,
obsolete theatres.
14
New Accounting Pronouncements
On June 23, 1999, the Financial Accounting Standards Board decided to defer the
effective date of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activity". As a result of
this deferral, SFAS No. 133 will be effective for all of our fiscal quarters
beginning March 1, 2001. This statement standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that we recognize those items as assets or
liabilities in our statement of financial position and measure them at fair
value. We expect to adopt this standard when required and do not believe that it
will have a significant impact on our operating results or financial position.
On June 26, 2000, the Securities and Exchange Commission decided to defer the
effective date of Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". As a result of this deferral, SAB No. 101
will be effective for all of our fiscal quarters beginning December 1, 2000,
requiring retroactive application to the beginning of our 2001 fiscal year with
restatement, if necessary, of all quarters for the current fiscal year. SAB No.
101 expresses the views of the SEC staff in applying generally accepted
accounting principles to certain revenue recognition issues. We are currently
evaluating the impact, if any, of SAB No. 101 on our financial position and
results of operations.
Effect of Inflation and Foreign Currency
Inflation and foreign currency fluctuations have not had a material effect on
our operations.
Cautionary Notice Regarding Forward Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements included in this
Form 10-Q, other than statements of historical facts, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may constitute forward-looking
statements. Although we believe that the expectations reflected in such forward-
looking statements are reasonable, we cannot be assured that such expectations
will prove to be correct. Important factors that could cause actual results to
differ materially from our expectations are disclosed in the following section
("Factors That May Affect Future Performance"). All forward-looking statements
are expressly qualified in their entirety by these cautionary statements.
Factors That May Affect Future Performance
In addition to other factors and matters discussed elsewhere herein, factors
that, in our view, could cause actual results to differ materially from those
discussed in forward-looking statements include: (1) the effect of economic
conditions on a national, regional or international basis; (2) competitive
pressures in the motion picture exhibition industry; (3) the financial resources
of, and films available to, us and our competition; (4) changes in laws and
regulations, including changes in accounting standards; (5) our high debt
levels, which may reduce our operating flexibility, may impair our ability to
obtain financing and may make us more vulnerable in a downturn; (6) our ability
to execute successfully our foreign expansion plans; (7) the interests of our
two major shareholders, SPE and Universal, each of which produces and
distributes motion pictures; and (8) opportunities that may be presented to and
pursued by us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have exposure to various market risks, including interest rate risk and
foreign currency exchange rate risk. See additional disclosures in our Annual
Report on Form 10-K for the fiscal year ended February 29, 2000.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
On June 22, 2000, we held our annual meeting of stockholders. At the
meeting, our stockholders (1) approved the re-election of all 16
members of our board of directors (George A. Cohon, 54,946,766 votes
for and 288,815 votes withheld; Nora Ephron, 54,943,789 votes for and
291,792 votes withheld; Mel Harris, 54,947,382 votes for and 288,199
votes withheld; Andrew Hauptman, 54,946,788 votes for and 288,793
votes withheld; Ronald N. Jacobi, 54,947,551 votes for and 288,030
votes withheld; Allen Karp, 54,943,359 votes for and 292,222 votes
withheld; Kenneth Lemberger, 54,945,330 votes for and 290,251 votes
withheld; Ron Meyer, 54,945,025 votes for and 290,556 votes withheld;
Yuki Nozoe, 54,947,582 votes for and 287,999 votes withheld; Karen
Randall, 54,947,137 votes for and 288,444 votes withheld; Lawrence J.
Ruisi, 54,946,115 votes for and 289,466 votes withheld; Hellene
Runtagh, 54,945,280 votes for and 290,301 votes withheld; Bedi A.
Singh, 54,947,847 votes for and 287,734 votes withheld; Howard
Stringer, 54,945,199 votes for and 290,382 votes withheld; William A.
Sutman, 54,946,473 votes for and 289,108 votes withheld; and Mortimer
B. Zuckerman, 54,946,967 votes for and 288,614 votes withheld), and
(2) ratified the appointment of PricewaterhouseCoopers LLP as our
independent public accountants for the current fiscal year (55,059,156
votes for, 145,439 votes against and 30,986 abstentions).
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
99 Supplemental Financial Information
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended May 31, 2000.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
Date: July 5, 2000
By: /s/ John J. Walker
------------------
John J. Walker, Senior Vice President
and Chief Financial Officer
By: /s/ Joseph Sparacio
-------------------
Joseph Sparacio, Vice President Finance
and Controller
17