1
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 Quarter Ended July 31, 2000
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Commission File Number 12360
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GC COMPANIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3200876
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 Boylston Street, Chestnut Hill, MA 02467
(Address of principal executive offices) (Zip Code)
(617) 278-5600
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(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 [ ]
As of September 8, 2000, there were outstanding 7,830,921 shares of the issuer's
common stock, $.01 par value.
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GC COMPANIES, INC.
INDEX
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PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of 1
July 31, 2000 and October 31, 1999
Condensed Consolidated Statements of Operations for 2
the Three and Nine Months Ended July 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for 3
the Nine Months Ended July 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market 19
Risk
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit 27.1 Financial Data Schedule 22
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GC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31,
2000 October 31,
(Unaudited) 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 17,986 $ 11,106
Marketable equity securities 32,999 102,956
Receivable due from financing institution -- 15,522
Other current assets 9,530 5,123
Income tax receivable 2,194 8,666
Deferred income taxes 1,714 --
-----------------------------
Total current assets 64,423 143,373
Property and equipment, net 143,931 109,353
Portfolio investments 73,755 54,657
Investment in international theatre affiliates 39,941 58,815
Other assets 10,322 4,641
Deferred income taxes 4,330 4,768
-----------------------------
$ 336,702 $ 375,607
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 589 $ 587
Current portion of revolving credit facility 44,600 --
Trade payables 44,057 34,325
Liability for early lease terminations 6,793 15,477
Other current liabilities 67,114 81,740
Deferred income taxes -- 16,732
-----------------------------
Total current liabilities 163,153 148,861
Long-term liabilities:
Capital lease obligations 552 990
Other long-term liabilities 37,549 34,575
Revolving credit facility -- 13,000
-----------------------------
Total long-term liabilities 38,101 48,565
Minority interest 2,859 1,722
Commitments and contingencies
Shareholders' equity:
Common stock 78 78
Additional paid-in capital 141,046 140,166
Accumulated other comprehensive income 3,591 32,353
Unearned compensation (1,289) (2,280)
Retained earnings (deficit) (10,837) 6,142
-----------------------------
Total shareholders' equity 132,589 176,459
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$ 336,702 $ 375,607
=============================
See Notes to Condensed Consolidated Financial Statements
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GC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except for per share amounts)
For The Three Months For The Nine Months
Ended July 31, Ended July 31,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Admissions $ 72,179 $ 76,255 $ 189,293 $ 194,383
Concessions 32,603 35,278 84,458 88,626
Other 3,849 3,549 12,056 10,687
---------------------------------------------------------------------
108,631 115,082 285,807 293,696
Costs and expenses:
Film rentals 39,802 43,435 98,968 102,443
Concessions 6,017 6,621 15,379 16,376
Theatre operations and administrative expenses 58,990 59,218 168,790 170,996
Depreciation and amortization 5,218 3,956 13,807 11,975
(Gain) loss on disposition of theatre assets (31) 111 (334) (2,021)
(Gain) loss on impairment and restructuring (54) 186 (3,484) 686
Corporate expenses 929 1,465 2,365 4,585
---------------------------------------------------------------------
Operating (loss) earnings (2,240) 90 (9,684) (11,344)
Equity losses in theatre affiliates (1,775) (1,017) (3,163) (3,156)
Investment (loss) income, net (10,344) 8,079 (6,816) 19,808
Interest expense (1,430) (678) (2,904) (1,723)
(Loss) gain on disposition of non-operating assets (1,005) (162) (1,055) 221
---------------------------------------------------------------------
(Loss) earnings before income taxes (16,794) 6,312 (23,622) 3,806
Income tax benefit (expense) 6,717 (2,524) 9,449 (1,522)
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(Loss) earnings before cumulative effect of
accounting change (10,077) 3,788 (14,173) 2,284
Cumulative effect of accounting change, net of tax -- -- (2,806) --
---------------------------------------------------------------------
Net (loss) earnings $ (10,077) $ 3,788 $ (16,979) $ 2,284
=====================================================================
Earnings (loss) per share:
Basic:
(Loss) earnings before cumulative effect of
accounting change $ (1.30) $ 0.49 $ (1.83) $ 0.30
Cumulative effect of accounting change -- -- (0.36) --
---------------------------------------------------------------------
Net (loss) earnings $ (1.30) $ 0.49 $ (2.19) $ 0.30
=====================================================================
Earnings (loss) per share:
Diluted:
(Loss) earnings before cumulative effect of
accounting change $ (1.30) $ 0.49 $ (1.83) $ 0.30
Cumulative effect of accounting change -- -- (0.36) --
---------------------------------------------------------------------
Net (loss) earnings $ (1.30) $ 0.49 $ (2.19) $ 0.30
=====================================================================
Weighted average shares outstanding:
Basic 7,757 7,719 7,748 7,714
=====================================================================
Diluted 7,757 7,739 7,748 7,731
=====================================================================
See Notes to Condensed Consolidated Financial Statements.
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GC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) For the Nine Months
Ended July 31,
-------------------
2000 1999
---- ----
Cash flows from operating activities:
Net (loss) earnings $(16,979) $ 2,284
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 13,807 11,975
Equity losses in theatre affiliates 3,163 3,156
Realized gain on marketable equity
securities and portfolio investments (5,487) (28,464)
Equity losses in marketable equity securities
and portfolio investments 326 474
Loss on impairment of portfolio investments 9,500 8,273
Cumulative effect of accounting change 2,806 --
Gain on disposition of assets, impairment and
restructuring (2,763) (1,556)
Other non-cash activities 2,629 5,847
Changes in assets and liabilities:
Liabilities for early lease terminations (7,071) (7,709)
Income tax receivable 6,910 12,618
Trade payables 9,732 5,109
Other current assets and liabilities (1,769) (16,971)
---------------------------
Net cash provided (used) by operations 14,804 (4,964)
---------------------------
Cash flows from investing activities:
Capital expenditures (55,355) (14,971)
Proceeds from the disposition of theatre assets 2,390 6,515
Proceeds from the liquidation of short-term
investments -- 12,989
Proceeds from sale of marketable equity securities 37,390 21,457
Proceeds from the sale of international investment 7,500 --
Purchase of portfolio investments (34,525) (15,554)
Advances from (to) international theatre affiliates 671 (5,213)
Other investing activities 968 (3,599)
---------------------------
Net cash (used) provided by investing activities (40,961) 1,624
---------------------------
Cash flows from financing activities:
Increase in revolving credit facility 31,600 11,225
Other financing activities 1,437 287
---------------------------
Net cash provided by financing activities 33,037 11,512
---------------------------
Net increase in cash and cash equivalents 6,880 8,172
Cash and cash equivalents at beginning of period 11,106 2,479
---------------------------
Cash and cash equivalents at end of period $ 17,986 $ 10,651
===========================
See Notes to Condensed Consolidated Financial Statements.
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GC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of GC Companies, Inc. (GCC or
the Company) are submitted in response to the requirements of Form 10-Q and
should be read in conjunction with the consolidated financial statements
included in the Company's Annual Report on Form 10-K. In the opinion of
management, these financial statements contain all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the results
for the interim periods presented. Certain prior year amounts have been
reclassified to conform to the current years' presentation. The Company's
theatre business is seasonal in nature, and the results of its investment
operation are subject to a high degree of volatility. Accordingly, the results
of operations for these periods historically have not been indicative of the
results for the full year.
2. OPERATIONS, FINANCING AND MANAGEMENT PLANS
Due to the Company's lower than expected results of operations and the
continuing decline in the value of the Company's marketable equity securities,
the Company received waivers as of July 31, 2000 of certain financial covenants
in its lease financing arrangements, its revolving credit facility and its
reimbursement agreement with Harcourt General, Inc. As a condition to obtaining
these waivers, the Company has agreed to certain restrictions, which limit
future capital expenditures and which prevent the Company from: (a) borrowing
additional funds under its revolving credit facility; (b) entering into any new
financial leasing transactions; (c) making any additional portfolio investments
other than certain identified investments; and (d) making any distributions from
the Company.
The Company also has requested certain amendments of its financial covenants
under its lease financing arrangements, its revolving credit facility and its
reimbursement agreement with Harcourt General to provide the Company with
additional flexibility to operate its business. If these amendments are not
obtained by October 31, 2000, the Company anticipates that it will not be in
compliance with certain covenants in these financing agreements for the quarter
ending October 31, 2000. Accordingly, as of July 31, 2000, all of the Company's
outstanding indebtedness under its revolving credit facility has been classified
as a current liability in its condensed consolidated balance sheet. There can be
no assurance that the Company will be successful in obtaining the amendments of
these agreements or as to the terms and conditions of such amendments.
Accordingly, the Company may need to refinance all or a portion of the Company's
indebtedness on or before maturity, and management can give no assurance that it
will be able to refinance its indebtedness on commercially reasonable terms or
at all.
Given the restrictions contained in its financing agreements, management
believes that in the near future (a) it is unlikely to enter into any new
domestic theatre lease commitments; (b) new investment activity will be limited
to $5.25 million of identified investments, and as a result, the Company is
continuing to reduce the cost of managing its portfolio investments; and (c) any
net proceeds received from the future sales of assets may be utilized in part to
prepay debt.
The Company's ability to make scheduled payments of principal, to pay the
interest on, or to refinance its indebtedness, or to fund ongoing capital
expenditures and projected working capital needs will depend on its future
performance and its ability to realize the value of its holdings in portfolio
investments and marketable equity securities. The Company has been experiencing
a decline in patronage and profitability, primarily due to the build-up of
megaplex theatres over the last several years and its inability to terminate
leases, which have or will have a negative operating cash flow, on economically
acceptable terms. These factors could continue to have an adverse impact on the
Company's future performance. Based upon the Company's current level of
operations, anticipated revenues and cash flow, the current market value of the
Company's marketable equity securities and the Company's ability to realize such
values, and assuming the Company is successful in obtaining the amendments of
its financing agreements, management believes that cash flow from operations,
available cash, proceeds from sales of portfolio investments and marketable
equity securities will be adequate to meet the Company's liquidity needs over
the next twelve months.
In light of the factors discussed above, the Company is actively considering all
of its strategic alternatives, including additional closings of nonprofitable
units, sales of certain of the Company's assets, or a potential restructuring,
recapitalization or bankruptcy reorganization of the Company.
3. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
As of July 31, 2000, information concerning marketable equity securities
and portfolio investments was as follows:
Change Change
Cumulative in Pre-tax in Pre-tax
(In thousands except percentages) Gross Pre-tax Unrealized Unrealized
Aggregate Unrealized Holding Holding
Accounting Percent of Carrying Holding Gains (Losses) Gains (Losses)
Investment Designation Ownership Value(a) Gains (Losses)(b) for the Quarter(b) Year to Date(b)
---------- ----------- ---------- --------- ----------------- ------------------ ---------------
MARKETABLE EQUITY SECURITIES
- ----------------------------
Global TeleSystems Available-for-sale(c) 1.7 $26,098 $4,742 $(18,614) $(47,398)
GrandVision Available-for-sale(c) 0.1 222 176 9 204
MotherNature.com Available-for-sale(c) 4.5 488 (12) (1,280) (9,417)
El Sitio Available-for-sale(c) 3.8 6,191 1,080 (9,374) 1,080
4
7
====================================================================================================================================
Total Marketable Equity Securities 32,999 5,986 (29,259) (55,531)
====================================================================================================================================
PORTFOLIO INVESTMENTS
- ---------------------
Fuelman Equity Method(d) 44.9 16,291 n/a n/a n/a
American Capital Access Equity Method(d) 23.8 33,939 n/a n/a n/a
Vanguard Cost Method(e) 15.0 8,000 n/a n/a n/a
VeloCom Cost Method(e) 3.9 15,525 n/a n/a n/a
====================================================================================================================================
Total Portfolio Investments 73,755 n/a n/a n/a
====================================================================================================================================
Total Investments $106,754 $5,986 $(29,259) $(55,531)
====================================================================================================================================
(a) Carrying values for public portfolio investments were determined based on
the share price of the securities traded on public markets on the last
business day of the period. The carrying values of the non-public portfolio
investments were determined under either the equity or cost method of
accounting.
(b) Pre-tax unrealized holding gains and losses apply only to marketable equity
securities.
(c) Unrealized gains or losses on securities classified as available-for-sale
securities are recorded in the consolidated balance sheets net of tax
within the caption "Accumulated other comprehensive income."
(d) These investments are in non-public companies and are accounted for on the
equity method because the Company has a greater than 20% equity interest in
each.
(e) These investments are in non-public companies and are accounted for on the
cost method.
During the first nine months of 2000, the Company invested an additional
$6.0 million in Fuelman bringing its total interest to 44.9% on a fully
diluted basis. On December 17, 1999, the Company invested $8.0 million in
Vanguard Modular Building Systems ("Vanguard"), a leading regional provider
of relocatable classrooms and other commercial modular space solutions.
During the first nine months of 2000, the Company invested $15.5 million as
part of an overall commitment of $20.7 million in VeloCom Inc., a
facilities-based voice, data and Internet provider in Brazil and Argentina.
The Company anticipates that an additional investment in VeloCom of
approximately $5.2 million will be made by the end of the fiscal year. On
May 19, 2000, the Company invested an additional $5.0 million in American
Capital Access Holdings, LLC ("ACA"), a financial guaranty insurance
company.
On December 9, 1999, El Sitio, Inc. completed an initial public offering
and is currently traded on the NASDAQ under the symbol "LCTO." The Company
currently owns 1,456,756 shares of El Sitio. In addition, on December 9,
1999, MotherNature.com completed an initial public offering and is
currently traded on the NASDAQ under the symbol "MTHR." The Company
currently owns 678,589 shares of MotherNature.com. As a result of these
public offerings, and in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company reclassified both these investments from
portfolio investments to marketable equity securities and records them at
their fair values. The holdings in El Sitio and MotherNature.com have been
designated as available-for-sale securities.
During the first quarter of 2000, the Company sold the remaining 532,702
shares of its investment in PrimaCom AG, a German cable television systems
operator, which is traded on the German Neuer Market, generating net
proceeds of $33.1 million and a realized pre- tax gain of $8.0 million. The
cumulative pre-tax gain recognized in the consolidated statement of
operations on these 532,702 shares to the date of sale over the Company's
original cost basis was $22.7 million. In addition, the Company sold 59,000
shares of its investment in GrandVision SA, an optical and photo retailer
that is publicly-traded on the French Exchange under the symbol "GPS,"
generating net proceeds of approximately $1.8 million and a realized loss
of $54,000.
During the second quarter, the Company sold 80,740 shares of GrandVision,
which generated net proceeds of approximately $2.5 million and a realized
gain of approximately $187,000.
Investment income (loss), consisted of the following:
Three Months Ended July 31, Nine Months Ended July 31,
============================================================================================================================
(In thousands) 2000 1999 2000 1999
============================================================================================================================
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Interest and dividend income $ 311 $ 22 $ 517 $ 93
Unrealized gain on marketable securities -- 7,991 -- 27,936
Realized gain (loss) on marketable equity securities (63) -- 5,450 526
Equity losses on portfolio investments (38) 66 (327) (474)
Management fee (1,054) -- (2,956) --
Loss on impairment of marketable equity
securities and portfolio investments (9,500) -- (9,500) (8,273)
----------------------------------------------------------------
Investment income (loss), net $(10,344) $ 8,079 $ (6,816) $ 19,808
================================================================
Included in investment income (loss) for the nine months ended July 31, 2000 and
1999 are charges of $2.7 million and $1.3 million, respectively, relating to
performance-based compensation earned by the Chief Investment Officer and
certain former employees based on certain investment events as defined in the
GCC Investments, Inc. Incentive Pool Plan.
During the third quarter, the Company determined that its investment in
MotherNature.com had become permanently impaired and recorded a pre-tax charge
of $9.5 million to the consolidated statement of operations. As a result of the
marketable security's designation as available-for-sale, previous declines in
MotherNature.com's market value had been reflected in the Company's consolidated
balance sheet within the shareholders' equity section under the caption
"Accumulated other comprehensive income."
In August, 1999, the Company established a new 99% owned subsidiary, GCC
Investments, LLC ("LLC"). A portion of the investment portfolio - specifically
the investments in El Sitio, MotherNature.com, ACA and Fuelman - was transferred
into this entity at its fair value which approximated its current carrying
amount. Subsequent investments in Fuelman, Vanguard and VeloCom Inc. have also
been made through this LLC. The remaining 1% interest was purchased, at fair
value, by Chestnut Hill Capital Partners, LLC ("CHCP"), which is owned by the
Company's Chief Investment Officer and investment professionals formerly
employed by the Company's investment subsidiary.
The LLC agreement specifies that profit sharing in the LLC will be between GCC
and CHCP in accordance with certain contractual agreements. The activity
relative to the minority interest includes the initial investment in the LLC by
CHCP of approximately $0.6 million and the investment in LLC by CHCP for the
investments purchased in the first nine months of 2000 of approximately $0.3
million.
CHCP also has a management agreement with GCC Investments, LLC which specifies
that CHCP is to be reimbursed for certain expenses according to a specific
formula. The amounts payable or paid for such expenses total $1.1 million during
the third quarter of 2000 and $3.0 million for the nine months ended July 31,
2000.
4. RECEIVABLE DUE FROM FINANCING INSTITUTION
At the end of the second quarter, the Company elected to reclassify the balance
in the receivable due from the financing institution at January 31, 2000 of $
31.0 million to property and equipment, net in the consolidated balance sheets.
5. IMPAIRMENT OF THEATRE ASSETS, EARLY TERMINATIONS AND RESTRUCTURE
The activity during the first three quarters of 2000 in the liability for early
lease terminations was as follows:
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9
Reserve Reserve for
for Lease Personnel
Termination Related Total
Costs Costs Reserve
------------------------------------------------
Balance at October 31, 1999 $ 13,930 $ 1,547 $ 15,477
Cash payments:
Lease buyouts (3,490) -- (3,490)
Rent and other payments (323) (182) (505)
----------------------------------------------
Balance at January 31, 2000 10,117 1,365 11,482
----------------------------------------------
Cash payments:
Lease buyouts (2,179) -- (2,179)
Rent and other payments (23) (334) (357)
Changes in estimate (1,765) -- (1,765)
----------------------------------------------
Balance at April 30, 2000 6,150 1,031 7,181
----------------------------------------------
Cash payments:
Lease buyouts -- -- --
Rent and other payments (182) (206) (388)
----------------------------------------------
Balance at July 31, 2000 $ 5,968 $ 825 $ 6,793
==============================================
During the first nine months of 2000, the Company executed the termination of
two theatre leases resulting in the payment of $5.2 million as well as the
buyout of several equipment leases resulting in the payment of approximately
$0.5 million. In addition, the Company made rent, severance and other payments
of $1.3 million during the first nine months of 2000 with respect to certain
impaired theatres.
The gain on impairment and restructuring of $3.5 million in the first nine
months of 2000 was primarily due to a reversal of an accrual for a lease buyout
of approximately $1.8 million, a settlement gain of $1.8 million recognized as a
result of the voluntary special retirement program offered by the Company in the
fourth quarter of 1999 and miscellaneous charges of $0.1 million. The settlement
gain was realized as a result of benefit payments made out of the Company's
pension plan under the special retirement program.
The Company's reserves established for its leases on properties it intends to
close reflect management's best estimate of the potential costs associated with
exiting these leases. Estimates are based on analysis of the facilities,
correspondence with the landlords, exploratory discussions with sublessees and
market conditions. The amounts the Company eventually spends could differ
materially from the amounts assumed in arriving at the original reserve.
6. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION
The Company has segmented its operations in a manner that reflects how its chief
operating decision maker reviews the results of the businesses that make up the
consolidated entity. The Company identified six reportable segments - four
segments within what the Company considers its domestic theatre operation (which
encompasses all theatres in the continental United States); one segment which
includes the Company's joint venture in South America and Mexico through the
first six months of this year; and the final segment which includes all of the
activity related to the investment portfolio business and corporate
administration. This identification of segments emanates from management's
recognition that (i) its domestic theatre locations are being operated in
different manners given
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10
their ultimate strategic importance to the Company; (ii) its international
operations are new theatre ventures in markets that are completely dissimilar to
the United States market; and (iii) its investing activity in a variety of
non-theatre related activities is wholly separate from theatre operations. The
four operating segments within the domestic operations are core markets, other
markets, impaired theatres and other expenses. The core segment represents those
markets management defined as its strategic area of operations and includes
theatres operating in the Northeast and Midwest. The other market segment
includes those theatres outside of the core markets that are profitable and
therefore are not defined as impaired. The impaired theatre segment includes all
theatres that have been identified as impaired units in accordance with the
analysis discussed in Note 4 of the Company's Annual Report. The other expenses
column includes the regional and home office administration expenses of the
domestic theatre operations.
The Company evaluates both domestic and international theatre performance and
allocates resources based on current and projected earnings before interest,
taxes, depreciation and amortization. Information concerning earnings (loss)
before income taxes has also been provided to aid in the reconciliation to the
consolidated totals. The international theatre segment has been reported in this
footnote as if it were a fully-consolidated subsidiary rather than under the
equity method as it has been reported in the consolidated financial statements
because the Company evaluates operations on this basis. The adjustment column is
utilized to return the international theatre segment to the equity method, as
the international joint venture is 50% owned, and to eliminate intercompany
balances.
THREE MONTHS - TOTAL COMPANY
----------------------------
(In thousands)
THREE MONTHS ENDED JULY 31, 2000: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $ 72,179 $ 10,388 -- $ 82,567 $ (10,388) $ 72,179
Concessions 32,603 2,748 -- 35,351 (2,748) 32,603
Other 3,849 700 -- 4,549 (700) 3,849
------------------------------------------------------------------------------------
Total revenues 108,631 13,836 -- 122,467 (13,836) 108,631
------------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 4,240 1,558 (1,347) 4,451 (1,558) 2,893
Net investment income (loss) 27 25 (10,371) (10,319) (25) (10,344)
Loss before income taxes (1,926) (2,373) (13,988) (18,287) 1,493 (16,794)
THREE MONTHS ENDED JULY 31, 1999: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $ 76,255 $ 10,557 -- $ 86,812 $ (10,557) $ 76,255
Concessions 35,278 3,392 -- 38,670 (3,392) 35,278
Other 3,549 691 -- 4,240 (691) 3,549
-----------------------------------------------------------------------------------
Total revenues 115,082 14,640 -- 129,722 (14,640) 115,082
-----------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 5,854 1,176 (1,511) 5,519 (1,176) 4,343
Net investment income -- 255 8,079 8,334 (255) 8,079
Earnings (loss) before income taxes 1,559 (2,105) 5,792 5,246 1,066 6,312
DOMESTIC THEATRES
-----------------
THREE MONTHS ENDED JULY 31, 2000: Core Other Impaired Other Total Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------------
Revenues:
Admissions $44,627 $15,987 $11,565 -- $72,179
Concessions 19,851 6,931 5,821 -- 32,603
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Other 2,045 1,027 777 -- 3,849
----------------------------------------------------------------------------------
Total revenues 66,523 23,945 18,163 -- 108,631
----------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 7,076 2,490 (889) (4,437) 4,240
Earnings (loss) before income taxes 3,033 1,546 (943) (5,562) (1,926)
THREE MONTHS ENDED JULY 31, 1999: Core Other Impaired Other Total Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------------
Revenues:
Admissions $ 44,725 $ 12,972 $ 18,558 -- $ 76,255
Concessions 20,159 6,545 8,574 -- 35,278
Other 1,676 623 1,250 -- 3,549
--------------------------------------------------------------------------------
Total revenues 66,560 20,140 28,382 -- 115,082
--------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 9,141 2,850 (634) (5,503) 5,854
Earnings (loss) before income taxes 6,038 1,913 (889) (5,503) 1,559
NINE MONTHS - TOTAL COMPANY
---------------------------
(In thousands)
NINE MONTHS ENDED JULY 31, 2000: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $ 189,293 $ 36,162 -- $ 225,455 $ (36,162) $ 189,293
Concessions 84,458 10,806 -- 95,264 (10,806) 84,458
Other 12,056 2,575 -- 14,631 (2,575) 12,056
------------------------------------------------------------------------------------
Total revenues 285,807 49,543 -- 335,350 (49,543) 285,807
------------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 3,488 8,815 (3,183) 9,120 (8,815) 305
Net investment income (loss) 84 50 (6,900) (6,766) (50) (6,816)
Earnings (loss) before income taxes (7,549) (3,682) (13,705) (24,936) 1,314 (23,622)
NINE MONTHS ENDED JULY 31, 1999: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $ 194,383 $ 28,328 -- $ 222,711 $ (28,328) $ 194,383
Concessions 88,626 8,992 -- 97,618 (8,992) 88,626
Other 10,687 1,629 -- 12,316 (1,629) 10,687
-----------------------------------------------------------------------------------
Total revenues 293,696 38,949 -- 332,645 (38,949) 293,696
-----------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 4,762 1,334 (5,466) 630 (1,334) (704)
Net investment income (loss) 38 (300) 19,770 19,508 300 19,808
Earnings (loss) before income taxes (5,804) (5,578) 12,879 1,497 2,309 3,806
DOMESTIC THEATRES
-----------------
9
12
NINE MONTHS ENDED JULY 31, 2000: Core Other Impaired Other Total Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------------
Revenues:
Admissions $ 116,259 $ 41,964 $ 31,070 -- $ 189,293
Concessions 51,443 18,092 14,923 -- 84,458
Other 6,324 3,651 2,081 -- 12,056
---------------------------------------------------------------------------------
Total revenues 174,026 63,707 48,074 -- 285,807
---------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 16,756 6,013 (5,561) (13,720) 3,488
Earnings (loss) before income taxes 10,206 3,483 (4,142) (17,096) (7,549)
NINE MONTHS ENDED JULY 31, 1999: Core Other Impaired Other Total Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------------
Revenues:
Admissions $ 110,439 $ 41,863 $ 42,081 -- $ 194,383
Concessions 49,255 19,694 19,677 -- 88,626
Other 5,144 2,559 2,984 -- 10,687
---------------------------------------------------------------------------------
Total revenues 164,838 64,116 64,742 -- 293,696
---------------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 20,253 5,723 (4,690) (16,524) 4,762
Earnings (loss) before income taxes 13,504 2,675 (5,459) (16,524) (5,804)
The Company's South American joint venture, Hoyts General Cinema South America
("HGCSA"), has entered into a $75 million debt financing arrangement with major
financial institutions to fund its operations in Argentina, which is secured by
the several guaranty of the joint venture's partners. Availability of this
financing beyond $50 million is subject to syndication to third-party financial
institutions. Under the several guaranty of the Argentina debt facility, the
Company is liable for 50% of the outstanding borrowings. At July 31, 2000, the
Company's portion of the outstanding borrowings under this facility that it
guarantees was approximately $10.0 million.
HGCSA has entered into a $22.5 million debt financing arrangement with financial
institutions to fund its operations in Chile, which is secured by the several
guaranty of the partners. The Company is liable for 50% of the outstanding
borrowings. At July 31, 2000, the Company's portion of the outstanding
borrowings under this facility, that it guarantees, was approximately $10.7
million, which was comprised of $8.7 million of outstanding borrowings and $2.0
million of outstanding guarantees. The Company has invested approximately $1.4
million in a certificate of deposit, which is held as collateral for a portion
of the outstanding guarantees at July 31, 2000. This certificate of deposit is
included in other current assets in the consolidated balance sheets.
10
13
7. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is shown below.
Basic earnings per share excludes any dilutive effect of options.
For The Three Months For The Nine Months
Reference Ended July 31, Ended July 31,
--------- -------------------- -------------------
(In thousands, except per share data) 2000 1999 2000 1999
---- ---- ---- ----
(Loss) earnings before cumulative effect of
accounting change A $(10,077) $ 3,788 $(14,173) $ 2,284
----------------------------------------------------------------
Determination of shares:
Weighted average number of common shares
outstanding B 7,757 7,719 7,748 7,714
Diluted effect of contingently returnable
shares and shares issuable on exercise
of stock options -- 20 -- 17
----------------------------------------------------------------
Weighted average common shares outstanding
for diluted computation C 7,757 7,739 7,748 7,731
----------------------------------------------------------------
(Loss) earnings per share before cumulative
effect of accounting change:
Basic A/B $ (1.30) $ 0.49 $ (1.83) $ 0.30
Diluted A/C $ (1.30) $ 0.49 $ (1.83) $ 0.30
8. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
(In thousands) For the Three Months Ended July 31, For the Nine Months Ended July 31,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net (loss) earnings $(10,077) $ 3,788 $(16,979) $ 2,284
Unrealized (losses) gains on securities, net of tax (11,913) (3,146) (28,762) 20,351
-------- -------- -------- --------
Ending balance $(21,990) $ 642 $(45,741) $ 22,365
-------- -------- -------- --------
9. ACCOUNTING FOR START-UP ACTIVITIES
In the first quarter of 2000, the Company adopted Statement of Position
("SOP") 98-5, "Reporting the Costs of Start-Up Activity." SOP 98-5 required
that start-up activities be expensed when incurred. The Company's practice
had been to capitalize lease costs incurred prior to openings of theatres
and amortize these costs under generally accepted accounting principles.
The adoption of this new accounting pronouncement resulted in a one-time
non-cash charge to the Company's statements of operations for the nine
months ended July 31, 2000 of $4.7 million (net of income tax benefit of
$1.9 million) or $0.36 per diluted share.
10. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments in Hedging Activity." The Company is not required to implement
this standard until fiscal 2001. Its requirements are complex and its scope
far-reaching. The effect of adopting this standard is not anticipated to be
material to the Company's financial position or results of operations.
11
14
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000 VERSUS THE THREE MONTHS ENDED JULY 31, 1999
- ----------------------------------------------------------------------------
THEATRE REVENUES - Total revenues decreased 5.6% to $108.6 million for the three
months ended July 31, 2000 from $115.1 million for the same period in 1999
primarily attributable to an 11.4% decrease in patronage partially offset by a
6.8% increase in average ticket price and a 4.4% increase in concession sales
per patron. The decrease in patronage was mainly due to continued competitor
impacts resulting from the construction of megaplex theatres throughout the
country. The build-up of megaplex theatres over the past three years has
resulted in a dramatic increase in the number of screens throughout the country.
This has negatively impacted the Company's patronage and profitability. The
Company operated domestically 1,060 screens in 133 locations at July 31, 2000
compared to 1,067 screens at 140 locations at July 31, 1999. The increase in
average ticket prices was due to price increases adopted in May, 2000 in a
majority of theatres. The growth in concessions sales per patron was principally
attributable to marketing promotions during the year, the continued rollout of
new products and increased consumption.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operations and administrative expenses and depreciation and
amortization) decreased 2.8% to $110.0 million in 2000 from $113.2 million last
year. However, as a percentage of total revenues, cost of theatre operations was
101.3% for the third quarter of 2000 compared to 98.4% for the same period in
1999. This increased percentage of the cost of theatre operations to total
revenues for the three months ended July 31, 2000 compared to the same period in
1999 was primarily due to higher rent, occupancy costs and depreciation
associated with new megaplex theatres opened over the last nine months. These
increases were partially offset by lower administrative costs and a higher film
margin.
CORPORATE EXPENSES - Corporate expenses decreased 36.6% to $0.9 million for the
three months ended July 31, 2000 from $1.5 million in 1999 primarily due to a
reclassification of the investment group expenses from corporate expenses to
investment income (loss) as a result of the new subsidiary established in the
fourth quarter of 1999, GCC Investments, LLC ("LLC"). The new subsidiary is
owned 99% by the Company and the remaining 1% interest is owned by Chestnut Hill
Capital Partners, LLC ("CHCP"), which is owned by the Chief Investment Officer
and investment professionals formerly employed by the Company's investment
subsidiary. CHCP has a management agreement with LLC, which specifies that CHCP
is to be reimbursed for certain expenses according to a specific formula. Under
this agreement, the management fee expense for the third quarter of fiscal 2000
was $1.1 million and is included in investment income (loss).
EQUITY LOSSES IN THEATRE AFFILIATES- The Company recorded net equity losses in
theatre affiliates of $1.8 million for the three months ended July 31, 2000
compared to $1.0 million for the same period in 1999. Equity losses in theatre
affiliates for the third quarter of 2000 include a charge of $0.6 million
related to the Company's Mexican theatre investment sold in May, 2000 for
approximately $14.3 million. In addition, the equity losses of the Company's
Hoyts General Cinema South America ("HGCSA") were comparable to the same period
last year. Revenues of the HGCSA venture increased 35% to $13.8 million for the
third quarter of 2000, versus $10.3 million for the same period in 1999. This
increase in revenues was primarily due to higher patronage as a result of an
increase in the number of screens and theatres operating during the quarter.
HGCSA operated 135 screens in 14 theatres at July 31, 2000 compared to 101
screens and 11 theatres at July 31, 1999.
INVESTMENT INCOME (LOSS), NET - The Company recorded an investment loss of $10.3
million for the third quarter of 2000 compared to investment income of $8.1
million for the same period in 1999. The Company's investment loss during the
third quarter of 2000 included a charge of $9.5 million for the permanent
impairment taken on MotherNature.com, management expenses of $1.1 million and
other gains of $0.3 million. The investment income in 1999, included the
unrealized pre-tax gain on the PrimaCom trading securities of $4.4 million, the
realized pre-tax gain on the Global TeleSystems, Inc. trading and
available-for-sale securities sold during the quarter of approximately $3.6
million and miscellaneous investment income of $0.3 million, partially offset by
additional performance-based compensation related to the investment portfolio of
$0.2 million.
12
15
INTEREST EXPENSE - The Company's interest expense increased to $1.4 million for
the three months ended July 31, 2000 compared to $0.7 million in 1999 mainly due
to increased borrowings outstanding during the quarter under the revolving
credit facility and a higher interest rate.
INCOME TAX EXPENSE - The Company's effective tax rate was 40.0% in 2000,
unchanged from 1999.
13
16
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 2000 VERSUS THE NINE MONTHS ENDED JULY 31, 1999
- --------------------------------------------------------------------------
THEATRE REVENUES - Total revenues decreased 2.7% to $285.8 million for the nine
months ended July 31, 2000 from $293.7 million for the same period in 1999
primarily attributable to a 9.8% decrease in patronage partially offset by a
7.9% increase in average ticket price and a 5.4% increase in concession sales
per patron. The decrease in patronage was mainly due to continued competitor
impacts resulting from the construction of megaplex theatres throughout the
country. The build-up of megaplex theatres over the past three years has
resulted in a dramatic increase in the number of screens throughout the country.
This has negatively impacted the Company's patronage and profitability. The
Company operated domestically 1,060 screens at 133 locations at July 31, 2000
compared to 1,067 screens at 140 locations at July 31, 1999. The increase in
average ticket prices was due to price increases adopted in November, 1999 and
May, 2000 in a majority of theatres. The growth in concessions sales per patron
was principally attributable to marketing promotions during the year, the
continued rollout of new products and increased consumption.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operations and administrative expenses and depreciation and
amortization) decreased $4.9 million to $296.9 million for the nine months ended
July 31, 2000 from the $301.8 million from the previous year; however, as a
percentage of total revenues, cost of theatre operations was 103.9% for the
first nine months of 2000 compared to 102.8% for the same period in 1999. This
increased percentage of the cost of theatre operations to total revenues for the
first nine months of 2000 compared to the same period in 1999, was primarily due
to higher rent, occupancy and depreciation costs associated with new megaplex
theatres opened over the last twelve months. These increases were partially
offset by lower administration costs, a decrease in payroll theatre costs, lower
pre-opening expenses and higher film margins.
(GAIN) LOSS ON DISPOSITION OF THEATRE ASSETS - During the first nine months of
2000, the Company sold two theatres with 10 screens as well as miscellaneous
assets generating proceeds of $2.4 million and a realized pre-tax gain of $0.3
million. During the same period in 1999, the Company sold three theatres in
Michigan, two theatres in Texas, a theatre in New York, a theatre in Florida and
miscellaneous assets generating net proceeds of $6.5 million and a pre-tax gain
of $2.0 million.
(GAIN) LOSS ON IMPAIRMENT AND RESTRUCTURING - The Company recorded a gain of
$3.4 million in the nine months ended July 31, 2000 as a result of the
settlement gain of $1.8 million associated with the voluntary special retirement
program offered by the Company in the fourth quarter of 1999, a reversal of an
accrual for a lease buyout of approximately $1.8 million and miscellaneous
charges of $0.2 million. The settlement gain was realized as a result of benefit
payments made out of the Company's pension plan under the special retirement
program.
CORPORATE EXPENSES - Corporate expenses decreased 48.4% to $2.4 million in 2000
from $4.6 million in 1999 primarily due to a reclassification of the investment
group expenses from corporate expenses to investment income (loss) as a result
of the new subsidiary established in the fourth quarter of 1999, GCC
Investments, LLC ("LLC"). The new subsidiary is owned 99% by the Company and the
remaining 1% interest is owned by Chestnut Hill Capital Partners, LLC ("CHCP"),
which is owned by the Chief Investment Officer and investment professionals
formerly employed by the Company's investment subsidiary. CHCP has a management
agreement with LLC, which specifies that CHCP is to be reimbursed for certain
expenses according to a specific formula. Under this agreement, the management
fee expense for the first nine months of fiscal 2000, and included in investment
income, was $3.0 million.
EQUITY LOSSES IN THEATRE AFFILIATES- The Company recorded net equity losses in
theatre affiliates of $3.2 million for the nine months ended July 31, 2000
compared to $3.2 million for the same period in 1999. Included in equity losses
in theatre affiliates for the first nine months of 2000, was a charge of $1.6
million related to the Company's Mexican theatre investment sold in May, 2000
for approximately $14.3 million. The Company's equity losses in Hoyts General
Cinema South America ("HGCSA") joint venture improved for the nine months ended
July 31, 2000 to $1.5 million. This improvement is primarily due to an increase
in revenues and a reduction of start-up costs incurred by the venture in the
first quarter of 1999. Revenues of the HGCSA venture increased 54% to $42.6
million
14
17
for the nine months ended July 31, 2000 versus $27.6 million for the same period
in 1999. This increase in revenues was primarily due to higher patronage as a
result of opening six theatres with 70 screens over the last twelve months.
INVESTMENT INCOME (LOSS), NET - The Company recorded investment loss of $6.8
million for the nine months ended July 31, 2000 compared to investment income of
$19.8 million for the same period in 1999. The Company's investment income
during the first nine months of 2000 included the realized pre-tax gain of $8.0
million on the sale of the remaining shares of PrimaCom, partially offset by
performance-based compensation of $2.7 million earned by certain former
employees as a result of the sale of all the Company's holdings in PrimaCom, a
charge of $9.5 million for the permanent impairment taken on MotherNature.com,
management expenses of $3.0 million and other gains of $0.4 million. In the
first nine months of 1999, the Company recorded an unrealized gain on the
PrimaCom trading securities of approximately $18.8 million, an unrealized gain
on Global TeleSystems Group, Inc. ("GTS") of approximately $6.1 million and a
realized gain on the GTS trading and available-for-sale securities sold of
approximately $4.2 million and miscellaneous investment income of $0.3 million.
This income in 1999 was partially offset by the impairment charge on the
Teletrac investment of $8.3 million and additional performance-based
compensation related to the investment portfolio of $1.3 million.
INTEREST EXPENSE - The Company's interest expense increased to $2.9 million for
the nine months ended July 31, 2000 compared to $1.7 million in 1999 mainly due
to increased borrowings outstanding during the year under the revolving credit
facility and a higher interest rate.
INCOME TAX EXPENSE - The Company's effective tax rate was 40.0% in 2000,
unchanged from 1999.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX - In the first quarter of
2000, the Company adopted Statement of Position ("SOP") 98-5, "Reporting the
Costs of Start-Up Activity." SOP 98-5 required that start-up activities be
expensed when incurred. The Company's practice had been to capitalize lease
costs incurred prior to openings of theatres and amortize the costs under
generally accepted accounting principles. The adoption of this new accounting
pronouncement resulted in a one-time non-cash charge to the Company's statements
of operations for the nine months ended July 31, 2000 of $4.7 million (net of
income tax benefit of $1.9 million) or $0.36 per diluted share.
15
18
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
---------------
DOMESTIC THEATRES - Virtually all of the GCC's revenues are collected in cash,
principally through theatre admissions and concession sales. The Company has an
operating "float" which partially finances its operations and allows the Company
to operate on a negative working capital basis. This "float" exists because
admissions and concessions revenues are typically received in cash, while film
rentals and concessions costs are ordinarily paid to suppliers generally 15 to
45 days after the receipt of box office admissions and concessions revenues.
Occasionally, the Company is required to make film advances to distributors.
Significant changes to components of the Company's working capital will be
discussed in the appropriate sections below.
In the nine months ended July 31, 2000, General Cinema Theatres, Inc. (GCT)
opened a 14-screen theatre in Chicago, Illinois, a seven- screen theatre in
Washington, D.C., a 14-screen theatre in Greenwood, Indiana, a 13-screen theatre
in Boston, Massachusetts and added two screens to an existing theatre in the
Boston, Massachusetts area. Aggregate costs including construction and
pre-opening costs paid by the Company during fiscal 2000 and over the term of
the project in opening these theatres amounted to approximately $29.9 million
and $51.7 million, respectively. The aggregate construction costs paid by the
Company for a theatre vary depending on the lease negotiated with the landlord,
the number of auditoriums, additional amenities that may be offered at the
theatre and the portion of costs provided by the Company's agreement with a
major financial institution to provide operating leases on leasehold
improvements and equipment.
The Company has significant lease commitments. Lease payments totaled $76.5
million in 1999, and minimum lease payments are anticipated to approximate $79.5
million in 2000.
During the first nine months of 2000, the Company sold two theatres with ten
screens and miscellaneous assets generating proceeds of $2.4 million. In
addition, the Company closed seven theatres with 32 screens. Two of the theatres
were identified as impaired, and the costs associated with the closing of these
theatres were previously provided and included as part of the early lease
termination reserve. At July 31, 2000, the Company had an outstanding liability
for early lease terminations of $6.8 million. The Company's reserve established
for leases on properties it intends to abandon reflects management's best
estimate of the potential cost associated with exiting the existing lease.
Estimates are based on analysis of the facilities, correspondence with the
landlords, exploratory discussions with sublessees and market conditions. The
amounts the Company will eventually be obligated for could differ materially
from the amounts assumed at arriving at the reserve. This process will continue,
and the Company from time to time may be required to make additional substantial
one-time cash outflows. During the first nine months of 2000, the Company made
cash payments of $5.7 million to terminate leases and $1.3 million for rent,
severance and other payments
The Company's total capital expenditures of $55.4 million for the nine months
ended July 31, 2000 included cash expenditures for domestic theatres of $36.1
million, cash expenditures of $3.8 million associated with the Sundance Cinema
joint venture and the reclassification of the outstanding receivable due from a
financing institution at October 31, 1999 of $15.5 million. The domestic theatre
cash expenditures of $36.1 million were for new theatre projects, leasehold
improvements, furniture and equipment purchases as well as information services
related projects. Domestic theatre capital expenditures are expected to
approximate $60.8 million in 2000, including the reclassification of the
receivable due from a financing institution at October 31, 1999 of $15.5
million. In addition, the Company anticipates contributing $7.7 million of cash
to the Sundance Cinema joint venture during fiscal 2000 primarily to fund its
share of construction of the two Sundance theatre projects which will open in
2001.
INTERNATIONAL THEATRES - During the nine months ended July 31, 2000, the Company
opened an 8-screen theatre in Chile through its South American joint venture.
The joint venture in South America, HGCSA, anticipates opening an additional 25
screens and three units by the end of calendar 2000. This theatre expansion
program will be financed through debt facilities in Chile and Argentina. Future
advances are required of the partners under the South American joint venture
agreement only if sufficient bank financing is not available. Debt financing has
been obtained by HGCSA through its local subsidiaries for its theatre expansion
program in Chile and Argentina.
16
19
HGCSA has entered into a $75 million debt financing agreement with major
financial institutions to fund its operations in Argentina, which is secured by
the several guaranty of the joint venture's partners. Availability of this
financing beyond $50 million is subject to syndication to third-party financial
institutions. Under the several guaranty of the Argentina debt facility, the
Company is liable for 50% of the outstanding borrowings. At July 31, 2000, the
Company's portion of the outstanding borrowings under this facility that it
guarantees was approximately $10.0 million.
HGCSA has entered into a $22.5 million debt arrangement with financial
institutions to fund its operations in Chile, which is secured by the several
guaranty of the joint venture's partners. The Company is liable for 50% of the
outstanding borrowings. At July 31, 2000, the Company's portion of the
outstanding borrowings under these facilities that it guarantees was
approximately $10.7 million, which was comprised of $8.7 million outstanding
borrowings and $2.0 million of outstanding guarantees. The Company invested
approximately $1.4 million in a certificate of deposit, which is held as
collateral for a portion of the outstanding guarantees at July 31, 2000. This
certificate of deposit is included in other current assets in the consolidated
balance sheets.
In May, 2000, the Company sold its Mexican theatre investment for approximately
$14.3 million of which $7.5 million of the sales price was received in cash, and
the remaining balance will be paid in three installments over two years.
INVESTMENT PORTFOLIO - At July 31, 2000, marketable equity securities were $33.0
million, a decrease of $70.0 million from the balance at October 31, 1999. The
decrease in marketable securities during the first nine months of 2000 was
primarily due to a decline in value of its Global TeleSystems, Group, Inc.
investment of $47.4 million, the sale of a portion of the Company's investment
in GrandVision SA, the sale of the remaining shares of PrimaCom offset by the
initial public offering of the Company's El Sitio and MotherNature.com
investments.
During the first nine months of 2000, the Company sold 139,740 shares of
GrandVision SA generating proceeds of approximately $4.3 million. In addition,
the Company sold its remaining 532,702 shares in PrimaCom during the first
quarter of 2000 generating net cash proceeds of approximately $33.1 million.
During the first nine months of 2000, the Company invested an additional $5.0
million in Fuelman bringing its total interest to 44.9% on a fully diluted basis
and advanced $1.0 million to Fuelman in the form of a note. On December 17,
1999, the Company invested $8.0 million in Vanguard Modular Building Systems, a
leading provider of relocatable classrooms and other commercial modular space
solutions. In addition, during the first nine months of 2000, the Company
invested $15.5 million as part of an overall $20.7 million commitment in VeloCom
Inc., a facilities-based voice, data and Internet provider in Brazil and
Argentina. The remaining portion of the commitment to VeloCom of $5.2 million
will be made in the fourth quarter of 2000. During the third quarter, the
Company invested an additional $5.0 million in American Capital Access, a
financial guaranty insurance company.
Both El Sitio and MotherNature.com completed initial public offerings during the
first quarter of 2000. As a result of these public offerings, and in accordance
with Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company reclassified both these
investments to marketable equity securities and recorded them at their fair
values at July 31, 2000 of $6.2 million for El Sitio and $0.5 million for
MotherNature.com.
OTHER - The Company received net borrowings of $31.6 million on its outstanding
revolving credit facility and paid interest of $1.4 million during the first
nine months of 2000. The average interest rate for the first nine months of 2000
was 8.3%.
Due to the Company's lower than expected results of operations and the
continuing decline in the value of the Company's marketable equity securities,
the Company received waivers as of July 31, 2000 of certain financial covenants
in its lease financing arrangements, its revolving credit facility and its
reimbursement agreement with Harcourt General, Inc. As a condition to obtaining
these waivers, the Company has agreed to certain restrictions, which limit
future capital expenditures and which prevent the Company from: (a) borrowing
additional funds under its revolving credit facility; (b) entering into any new
financial leasing transactions; (c) making any additional portfolio investments
other than certain identified investments; and (d) making any distributions from
the Company.
The Company also has requested certain amendments of its financial covenants
under its lease financing arrangements, its revolving credit facility and its
reimbursement agreement with Harcourt General to provide the Company with
additional flexibility to operate its business. If these amendments are not
obtained by October 31, 2000, the Company anticipates that it will not be in
compliance with certain covenants in these financing agreements for the quarter
ending October 31, 2000. Accordingly, as of July 31, 2000, all of the Company's
outstanding indebtedness under its revolving credit facility has been classified
as a current liability in its condensed consolidated balance sheet. There can be
no assurance that the Company will be successful in obtaining the amendments of
these agreements or as to the terms and conditions of such amendments.
Accordingly, the Company may need to refinance all or a portion of the Company's
indebtedness on or before maturity, and management can give no assurance that it
will be able to refinance its indebtedness on commercially reasonable terms or
at all.
17
20
Given the restrictions contained in its financing agreements, management
believes that in the near future (a) it is unlikely to enter into any new
domestic theatre lease commitments; (b) new investment activity will be limited
to $5.25 million of identified investments, and as a result, the Company is
continuing to reduce the cost of managing its portfolio investments; and (c) any
net proceeds received from the future sales of assets may be utilized in part to
prepay debt.
The Company's ability to make scheduled payments of principal, to pay the
interest on, or to refinance its indebtedness, or to fund ongoing capital
expenditures and projected working capital needs will depend on its future
performance and its ability to realize the value of its holdings in portfolio
investments and marketable equity securities. As discussed above, the Company
has been experiencing a decline in patronage and profitability, primarily due to
the build-up of megaplex theatres over the last several years and its inability
to terminate leases, which have or will have a negative operating cash flow, on
economically acceptable terms. These factors could continue to have an adverse
impact on the Company's future performance. Based upon the Company's current
level of operations, anticipated revenues and cash flow, the current market
value of the Company's marketable equity securities and the Company's ability to
realize such values, and assuming the Company is successful in obtaining the
amendments of its financing agreements, management believes that cash flow from
operations, available cash, proceeds from sales of portfolio investments and
marketable equity securities will be adequate to meet the Company's liquidity
needs over the next twelve months.
In light of the factors discussed above, the Company is actively considering all
of its strategic alternatives, including additional closings of nonprofitable
units, sales of certain of the Company's assets, or a potential restructuring,
recapitalization or bankruptcy reorganization of the Company.
In December, 1999, the Company's Board of Directors authorized the repurchase of
up to one million shares of the Company's common stock through December, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
recently issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments in Hedging Activity." The Company is not
required to implement this standard until fiscal 2001. Its requirements are
complex and its scope far-reaching. The effect of adopting this standard is not
anticipated to be material to the Company's financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to shareholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates",
"expects", "will continue", "estimates", "projects", or similar expressions are
intended to identify "forward-looking statements". The Company believes that its
forward-looking statements are within the meaning of the safe harbor provisions
of the federal securities laws.
The results contemplated by the Company's forward-looking statements are subject
to certain risks, trends and uncertainties that could cause actual results to
vary materially from anticipated results, including without limitation, the
terms and conditions that may be required by the Company's financial
institutions in connection with its proposed amended financing arrangements,
construction risks and delays, the lack of strong film product, the impact of
competition including its impact on patronage, risks associated with
international operations, construction risks and delays associated with Sundance
Cinemas, market and other risks associated with the Company's investment
activities and other factors described herein.
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GC COMPANIES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
GC Companies operates in six major reported segments. The first four operate the
domestic motion picture exhibition market. The fifth operates through equity
method investees in the South American motion picture exhibition markets.
Subsequent to the end of the second quarter, the Company sold its Mexican
investment in May, 2000. The sixth segment operates as a venture capital arm
making investments in a variety of companies in several industries. Disclosures
under this heading address risks arising from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market risk-sensitive instruments.
The domestic motion picture segment is subject primarily to interest rate risks.
It bears this risk in two specific ways. First, the Company borrows money under
its revolving credit facility to fund its operating needs. At July 31, 2000, the
Company had outstanding borrowings of $44.6 million, carrying a variable
interest rate, which was 9.5% on that date. The Company's exposure related to
variable interest resides in the earnings and cash flow implications caused by
changes in interest rates. However, a 100 basis point change in the variable
rate of interest paid by the Company on its outstanding borrowings under its
revolving credit facility would not have a significant impact on either the
earnings or cash flows of the Company. The second component of interest rate
risk relates to amounts earned on the Company's short- term investments of
excess cash. Such risk affects fair values, earnings and cash flows.
Operations in South America are undertaken through equity method investees.
Fluctuations in the market value of the underlying equity are not reported for
financial purposes nor can a sensitivity analysis be performed relative to the
market risk of the underlying equity. Because the investment is in South
America, and operations are conducted utilizing local currencies, the Company's
results of operations are exposed to foreign currency exchange rate changes.
Market risk relative to exchange fluctuations does not exist in the Company's
South American locations since these currently operate in non hyper-inflationary
environments.
The Company does not consider its cash flows to be currently exposed to exchange
rate risk because it has no current intention of repatriating earnings from the
South American locations. Certain of the international joint venture debt
facilities are guaranteed by the Company. In the event of default under certain
of these debt facilities and if such guarantees were called, the contingent
guaranteed obligations would be subject to changes in foreign currency exchange
rates.
The Company's investment portfolio is primarily exposed to risks arising from
changes in equity prices. Such portfolio has been segmented into two categories.
The first category of investments held in the portfolio relate to those
marketable equity securities classified as available-for-sale. Four investment
holdings are classified herein at July 31, 2000: the Company's investments in
Global TeleSystems Group, Inc. ("GTS"), an international telecommunications
company (NYSE:GTS); El Sitio (NASDAQ:LCTO), an Internet provider of global and
country-specific content targeting Spanish and Portuguese speaking people in
Latin America; MotherNature.com (NASDAQ:MTHR), a Web-based retailer of vitamins,
supplements and minerals; and GrandVision ("GPS"), an optical and photo retailer
that is publicly-traded on the French Exchange under the symbol "GPS." The GTS
shares are subject to considerable market risk due to its volatility, and during
the first nine months of 2000, have traded as high as $36.13 and as low as
$8.38. At July 31, 2000, the GTS shares closed at $8.50. El Sitio shares since
its initial public offering through July 31, 2000, have traded as high as $41.00
and as low as $4.25. At July 31, 2000,the El Sitio shares closed at $4.25.
MotherNature.com shares since its initial public offering through July 31, 2000
have traded as high as $13.00 and as low as $0.72. At July 31, 2000, the
MotherNature.com shares closed at $0.72. During the first nine months of 2000,
The GPS shares have traded as high as 33.20 euros and as low as 24.50 euros. As
of July 31, 2000, GPS shares closed at 31.05 euros. Equity market fluctuations,
without taking into account the impact of fluctuations in the euro vis-a-vis the
US dollar, can impact fair values (although not earnings, unless such equity
positions are actually liquidated). A 20% fluctuation in the aggregate value of
the available-for-sale securities would either reduce or increase total assets
by $5.3 million.
In addition, the GrandVision securities are traded in euros. A 10% fluctuation
in the value of the euro versus the US dollar (holding the value of the
underlying equity securities constant) would not impact pre-tax earnings and
total assets by a significant amount because the Company currently holds only
16,357 shares of GrandVision.
The final category of securities in the Company's investment portfolio includes
a number of holdings in non-publicly traded companies. The Company values these
at either cost less impairment (if any) or under the equity method of
accounting. Equity method investees are specifically excluded from the scope of
this disclosure. Non-public investees where the Company owns less than a 20%
stake are also subject to fluctuations in value, but their current illiquidity
reduces their exposure to pure market risk.
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PART II
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Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended July 31, 2000.
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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 hereunto duly authorized.
GC COMPANIES, INC.
Date: September 14, 2000 /signed/
--------------------------------------
Richard A. Smith
Chairman of the Board of Directors and
Chief Executive Officer
Date: September 14, 2000 /signed/
--------------------------------------
G. Gail Edwards
Vice President, Chief Financial
Officer and Treasurer Principal
Accounting Officer
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