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 JANUARY 31, 2002
Commission File Number 12360
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION AS OF OCTOBER 11, 2000
(Exact name of registrant as specified in its charter)
DELAWARE 04-3200876
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Boylston Street, Chestnut Hill, MA 02467
(Address of principal executive offices) (Zip Code)
(617) 264-8000
(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 March 14, 2002, there were outstanding 7,830,921 shares of the issuer's
common stock, $0.01 par value.
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
I N D E X
PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
January 31, 2002 and October 31, 2001 1
Condensed Consolidated Statements of Operations for
the Three Months Ended January 31, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended January 31, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31,
2002 October 31,
(Unaudited) 2001
----------- ----
ASSETS
Current assets:
Cash and cash equivalents $ 16,107 $ 9,501
Marketable equity securities 206 481
Other current assets 4,450 4,842
--------- ---------
Total current assets 20,763 14,824
Property and equipment, net 89,211 92,070
Portfolio investments 64,005 64,109
Investment in international theatre affiliates 6,881 39,368
Other assets 9,640 9,498
--------- ---------
$ 190,500 $ 219,869
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debtor-in-possession financing $ -- $ 2,000
Trade payables 16,672 15,788
Other current liabilities 33,146 30,299
--------- ---------
Total current liabilities 49,818 48,087
Liabilities subject to compromise 196,752 196,400
Minority interest 562 566
Commitments and contingencies -- --
Shareholders' equity:
Common stock 78 78
Additional paid-in capital 141,170 141,170
Accumulated other comprehensive loss (10,727) (365)
Unearned compensation (698) (796)
Accumulated deficit (186,455) (165,271)
--------- ---------
Total shareholders' deficit (56,632) (25,184)
--------- ---------
$ 190,500 $ 219,869
========= =========
See Notes to Condensed Consolidated Financial Statements.
1
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except for per share amounts)
For The Three Months
Ended January 31,
-----------------
2002 2001
---- ----
Revenues:
Admissions $ 56,399 $ 59,067
Concessions 23,845 24,451
Other 2,184 2,793
-------- --------
82,428 86,311
Costs and expenses:
Film rentals 30,317 32,277
Concessions 4,175 4,464
Theatre operations and administrative expenses 40,202 42,316
Depreciation 2,956 3,344
Gain on disposition of theatre assets -- (30)
Reorganization items 1,614 3,152
Corporate expenses 394 419
-------- --------
Operating earnings 2,770 369
Equity losses in theatre affiliates (22,309) (1,506)
Investment loss, net (539) (714)
Interest expense (1,106) (1,539)
-------- --------
Loss before income taxes (21,184) (3,390)
Income tax provision -- --
-------- --------
Net loss $(21,184) $ (3,390)
======== ========
Net loss per share:
Basic $ (2.71) $ (0.44)
======== ========
Diluted $ (2.71) $ (0.44)
======== ========
Weighted average shares outstanding:
Basic 7,811 7,790
======== ========
Diluted 7,811 7,790
======== ========
See Notes to Condensed Consolidated Financial Statements.
2
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
For the Three Months
Ended January 31,
-----------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss $(21,184) $ (3,390)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 2,956 3,344
Equity losses in theatre affiliates 22,309 1,506
Realized gain (loss) on marketable equity
securities and portfolio investments 29 (173)
Equity losses in portfolio investments 162 553
Reorganization items 1,614 3,152
Gain on impairment or disposition of theatre
assets and restructuring -- (30)
Vesting of restricted stock awards 98 99
Other non-cash activities 1,035 1,121
Changes in assets and liabilities:
Trade payables 884 (4,104)
Other current assets and liabilities 960 1,992
-------- --------
Net cash provided by operating activities 8,863 4,070
-------- --------
Cash flows from investing activities:
Capital expenditures (181) (231)
Proceeds from the disposition of theatre assets -- 41
Proceeds from liquidation of short-term investments -- 577
Other investing activities -- 33
-------- --------
Net cash (used) provided by investing activities (181) 420
-------- --------
Cash flows from financing activities:
Decrease in debtor-in-possession financing (2,000) (3,138)
Other financing activities (76) (115)
-------- --------
Net cash used by financing activities (2,076) (3,253)
-------- --------
Net change in cash and cash equivalents 6,606 1,237
Cash and cash equivalents at beginning of period 9,501 12,946
-------- --------
Cash and cash equivalents at end of period $ 16,107 $ 14,183
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 1,093 $ 1,315
Income taxes $ -- $ --
See Notes to Condensed Consolidated Financial Statements.
3
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
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 condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the interim period 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 is subject to a high degree of volatility, accordingly, the
results of operations for this period historically have not been indicative of
the results for the full year.
In order to alleviate continuing cash flow losses at a number of theatre
locations and the inability to reach appropriate resolution to the leases with
the landlords at these locations and to restructure the Company's financial
obligations, namely the bank credit facility of $44.6 million, equipment and
leasehold operating leases of $111.0 million and outstanding letters of credit
of $6.7 million, on October 11, 2000 (the "Filing Date"), GC Companies, Inc. and
certain of its domestic subsidiaries voluntarily filed petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter
11" or the "Chapter 11 cases"). Certain other subsidiaries of the Company,
located in Georgia, Tennessee, Florida, Louisiana, and Rhode Island, filed
petitions for relief under Chapter 7 of the United States Bankruptcy Code
("Chapter 7" or the "Chapter 7 cases"). The Chapter 11 cases and Chapter 7 cases
are herein referred to as the "Bankruptcy Proceedings". The Company is presently
operating its domestic theatre business and managing its investment assets as
debtors-in-possession subject to the jurisdiction of the United States
Bankruptcy Court in the State of Delaware (the "Bankruptcy Court"). The
Company's subsidiary which holds the Company's interest in its South American
theatre joint venture did not file a petition for reorganization because there
were no significant outstanding liabilities on the books of the subsidiary other
than an intercompany payable to the Company. As a result, the Company's
subsidiary which holds the Company's interest in the South American theatre
joint venture is not subject to the jurisdiction of the Bankruptcy Court.
2. LIQUIDITY AND MANAGEMENT'S PLANS
The Company entered into an agreement dated October 12, 2000 with major
financial institutions for a debtor-in-possession credit facility (the "DIP
Facility") under which the Company may borrow up to $45.0 million, subject to
certain limitations, to fund ongoing working capital needs while the Bankruptcy
Proceedings are pending. On March 12, 2002, availability of the DIP Facility to
the Company was extended to April 30, 2002.
The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The Company's ability
to continue as a going concern is dependent upon its ability to maintain
compliance with debt covenants under the DIP Facility and the ultimate
reorganization of the Company pursuant to the plan of reorganization confirmed
by the Bankruptcy Court and a vote of the Company's creditors on March 18, 2002
(the "Reorganization Plan") and expected to become effective on or about March
28, 2002.
As a result of the Bankruptcy Proceedings, substantially all of the Company's
pre-petition indebtedness, obligations and guarantees are stayed from collection
or action by creditors. No payments have been made to date with respect to
pre-petition claims, with the exception of the payment of pre-petition
obligations to film distributors as approved by the Bankruptcy Court,
pre-petition obligations for leases assumed by the Company, as well as sales and
trust fund taxes and workers' compensation claims. The Company is operating its
domestic theatre business in the ordinary course and is paying all post-petition
debts and liabilities on normal terms as they become due. Pre-petition claims
will be funded in accordance with the Company's Reorganization Plan.
On December 6, 2001, the Company entered into a letter of intent pursuant to
which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the
Company in accordance with the Reorganization Plan. On January 16, 2002, the
Company and AMC executed a definitive Stock Purchase Agreement. In addition, the
Company entered into an interim operating agreement with AMC relating to the
4
conduct of the Company's business prior to the effective date of the
Reorganization Plan. AMC has also entered into a support agreement with certain
key creditors of the Company, namely Harcourt General, Inc., General Electric
Capital Corporation and the Official Committee of Unsecured Creditors in the
Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of
the creditor parties to the support agreement has agreed to support AMC's bid to
acquire the Company if the Reorganization Plan treats their claim as described
in the support agreement.
The Reorganization Plan was confirmed by the Bankruptcy Court and a vote of the
Company's creditors on March 18, 2002. Under the Reorganization Plan, which is
expected to become effective on or about March 28, 2002, AMC will become the
owner of all of the stock of the reorganized GC Companies, Inc. and will pay the
Company's creditors consideration, consisting of cash, AMC senior subordinated
notes or AMC common stock, having a value between $165.0 million and $180.0
million plus assumed debt of $28.5 million. The ultimate amount AMC will pay the
creditors of the Company is not presently determinable and will depend, among
other things, upon: (i) a final determination of allowed claims that will be
made by the Bankruptcy Court; (ii) the form of consideration chosen by certain
of the creditors of the Company to whom alternatives are available; (iii) the
form of recovery and consideration AMC chooses to issue to specified creditors
of the Company; (iv) the amount of cash otherwise available to the Company at
the effective date of the Reorganization Plan; and (v) the length of time it
takes to consummate the transaction. The Reorganization Plan sets forth the
terms and provisions of the Company's reorganization and AMC's acquisition of
all of the common stock of the Company.
Under the Reorganization Plan all existing shares of the Company's common stock
will be canceled and will no longer represent an equity interest in the Company;
however, on terms and conditions set forth in the Reorganization Plan, existing
holders of the Company's common stock may be provided with the opportunity to
participate in a newly-formed entity which will hold assets of the Company's
investment portfolio.
3. REORGANIZATION UNDER THE BANKRUPTCY PROCEEDINGS AND LIABILITIES SUBJECT TO
COMPROMISE
In the Bankruptcy Proceedings, approximately $196.8 million of liabilities as of
January 31, 2002 are subject to compromise under the Reorganization Plan.
Differences between liability amounts estimated by the Company and claims filed
by creditors will be investigated and a final determination of the allowable
claim will be made by the Bankruptcy Court. These claims may also be subject to
adjustment depending on the determination of the validity and the value of the
security held in respect of certain claims.
Under the Bankruptcy Code, the Company may elect to assume or reject executory
pre-petition contracts, including real estate leases, subject to Bankruptcy
Court approval. A principal reason for the Company's Bankruptcy Proceedings was
to permit the Company to reject real estate leases that were or were expected to
become burdensome due to cash losses at these locations. Section 502(b)(6) of
the Bankruptcy Code provides that the amount that may be claimed by landlords
with respect to rejected real estate leases is limited to the greater of (a) one
year's rental obligations or (b) 15% of the total lease term obligations, not to
exceed three year's rental obligations (the "Section 502(b)(6) Claim"). This
limitation provides the Company with a far smaller lease termination liability
than would have been incurred if these leases had been terminated without the
protection of the Bankruptcy Code.
A lease termination reserve of approximately $46.7 million was outstanding at
January 31, 2002. This reserve was established for theatres that were closed by
the Company and had been operated by legal entities that filed for
reorganization under Chapter 11 and certain leases
5
of the theatres operated by legal entities that filed for bankruptcy relief
under Chapter 7 and whose leases were guaranteed by Harcourt General, Inc. This
reserve was based upon the Company's estimates of the landlords' Section
502(b)(6) Claim for these theatre locations, based upon the assumption that
these leases will be rejected. The reserve may be subject to future adjustments,
as previously discussed, based on claims filed by the landlords and Bankruptcy
Court actions. The Company cannot presently determine or reasonably estimate the
ultimate liability which may result from the filing of claims for any rejected
contracts or from additional leases which may be rejected in connection with the
Bankruptcy Proceedings until the Reorganization Plan becomes effective on or
about March 28, 2002.
The activity during the quarter ended January 31, 2002 in the lease terminations
and restructuring reserve was as follows:
Lease Personnel Total
(In thousands) Termination Costs Related Costs Reserve
----------------- ------------- -------
Balance at October 31, 2001 $46,709 $599 $47,308
Cash payments in 2002 -- (22) (22)
------- ---- -------
Balance at January 31, 2002 $46,709 $577 $47,286
======= ==== =======
During the first quarter of 2002, no additional lease termination reserves were
recorded. The Company made nominal payments for personnel related costs
primarily for severance.
The Company recorded in the first quarter of 2002 the following expenses
directly associated with the Bankruptcy Proceedings: professional fees of $1.3
million, the write-off of certain assets of $0.1 million as well as severance
and retention costs for personnel of approximately $0.3 million. These charges
were partially offset by interest income of $0.1 million earned by the Company
on the cash accumulated and invested during the Bankruptcy Proceedings. Cash
paid for professional reorganization fees for the quarter totaled $2.1 million.
Certain claims against the Company in existence prior to the filing of petitions
under Chapter 11 of the Bankruptcy Code are stayed while the Company operates
its business as debtors-in-possession. These pre-petition claims are reflected
in the consolidated balance sheets as "Liabilities subject to compromise."
During the first three months of 2002, Liabilities subject to compromise
increased by approximately $0.4 million primarily due to increases in estimates
for certain pre-petition liabilities offset by the payment of pre-petition
obligations outstanding on leases assumed by the Company.
Interest due and payable, as specified under the bank credit agreement, is also
stayed during the bankruptcy. Interest due contractually and not paid during the
first quarter of 2002 totaled $1.0 million. The Company has Bankruptcy Court
approval to make monthly adequate protection payments related to the bank credit
agreement, which totaled approximately $1.0 million during the first quarter of
2002.
As part of the first day orders granted by the Bankruptcy Court, the Company is
permitted to continue to operate its business in the ordinary course, which
includes ongoing payments to vendors, employees, and others for any
post-petition obligations. In addition, the Bankruptcy Court approved payment of
all of the Company's pre-petition film liability claims, and certain other
pre-petition amounts were also permitted to be paid such as sales and trust fund
taxes, workers' compensation claims and pre-petition obligations outstanding on
leases assumed by the Company.
4. ECONOMIC DEVELOPMENTS IN ARGENTINA
During the first quarter of 2002, the government of Argentina imposed
restrictions on the withdrawal of cash balances from individuals' bank accounts
and restricted the ability of companies to pay vendors located outside of
Argentina. These fiscal policies, as well as continuing economic difficulties
and political turmoil resulted in public demonstrations in Argentina, which
required the shutdown of several theatres for a short period of time and a
decline in theatre attendance in the first quarter of 2002. In addition, in
January 2002, the government of Argentina announced the adoption of a currency
system allowing the peso to float freely rather than pegging it to the U.S.
dollar. This resulted in a significant devaluation of the peso. As certain of
the joint venture's liabilities, primarily the Argentine debt financing
arrangement of $28.0 million, are denominated in U.S. dollars, the devaluation
of the peso, the joint venture's functional currency, has resulted in the
recognition of a $12.2 million
6
foreign currency transaction loss in the first quarter of 2002 on the books of
Hoyts General Cinema South America's ("HGCSA") Argentina subsidiary. This loss
relates to increases in the actual and expected functional currency cash
outflows on transactions denominated in currencies other than the peso. The
Company's portion of this transaction loss was approximately $6.1 million and
was reflected in equity losses in theatre affiliates in the consolidated
statement of operations. In addition, HGCSA recorded a cumulative translation
adjustment of $20.4 million within accumulated other comprehensive loss in
shareholders' equity. This adjustment results from translating the financial
statements of the Argentine subsidiary from the peso into the reporting currency
of the Company (U.S. dollar). The Company's portion of this cumulative
translation adjustment was $10.2 million and was recorded as a decrease in the
carrying value of the Company's investment in international theatre affiliates
and an increase in accumulated other comprehensive loss in the consolidated
balance sheet.
As operating cash inflows and outflows of HGCSA's Argentine subsidiary are
primarily denominated in pesos and the debt service payments of HGCSA's
Argentine subsidiary are denominated in U.S. dollars, the realization of the
Company's investment in HGCSA'S Argentine subsidiary is dependent upon the
Argentine operation's ability to generate sufficient pesos to pay debt service
and provide for a return on investment to the joint venture. Because of the
continued significant uncertainty as to extent and duration of the peso's
devaluation and its ultimate impact to the operations and cash flows of the
Argentine subsidiary of HGCSA, the Company has determined that its investment in
HGCSA's Argentina subsidiary is other than temporarily impaired, and accordingly
has recorded a charge to operations of approximately $14.8 million in the three
months ended January 31, 2002. The charge is included in Equity Losses in
Theatre Affiliates in the condensed consolidated statement of operations.
5. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
Change
Cumulative in Pre-tax
Gross Pre-tax Unrealized
Aggregate Unrealized Holding
ACCOUNTING Percent of Carrying Holding Gains (Losses)
Investment as of January 31, 2002 Designation Ownership Value(a) Gains (Losses)(e) for the Year(e)
- --------------------------------- ----------- --------- -------- ----------------- ---------------
(In thousands except percentages)
Marketable Equity Securities
Claxson Interactive Group Inc. Available-for-sale(b) 0.8% $ 89 $ (633) $ (215)
(formerly El Sitio)
GrandVision SA Available-for-sale(b) 0.1% 117 83 6
------- ------ ------
Total marketable equity 206 (550) (209)
securities
Portfolio Investments
FleetCor (a.k.a. Fuelman) Equity Method(c) 37.2% 11,554 -- --
American Capital Access Cost Method(d) 15.3% 23,933 -- --
Vanguard Cost Method(d) 15.0% 7,760 -- --
MotherNature.com Cost Method(f) 4.5% 58 -- 24
VeloCom Cost Method(d) 3.2% 20,700 -- --
------- ------ ------
Total portfolio investments 64,005 -- 24
------- ------ ------
Total marketable equity
securities and portfolio
investments $64,211 $ (550) $ (185)
======= ====== ======
(a) Carrying values for public portfolio investments were determined based on
the share price of the securities traded on public markets as of 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, less impairment, if any.
(b) 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 loss."
(c) This investment is in a non-public company and is accounted for on the
equity method because the Company has a greater than 20% equity interest.
7
(d) These investments are in non-public companies and are accounted for on the
cost method.
(e) Pre-tax unrealized holding gains and losses apply only to marketable
equity securities.
(f) The investment is reported at liquidation value. As this value is not
readily determinable from a public exchange, the investment was
reclassified from marketable equity securities to portfolio investments
during the first quarter of 2002.
Investment loss, net consisted of the following for the three months ended
January 31:
(In thousands) 2002 2001
---- ----
Realized (loss) gain on marketable
equity securities and portfolio
investments $(126) $ 79
Equity losses in portfolio investments (162) (553)
Management and administrative costs (251) (240)
----- -----
Investment loss, net $(539) $(714)
===== =====
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 has identified three reportable segments: one
segment is the domestic theatre operation (which encompass all theatres in the
continental United States); the second segment includes the Company's joint
venture in South America; and the final segment primarily includes all of the
activity related to the investment portfolio business and corporate
administration. This identification of segments emanates from management's
recognition that its investing activity in a variety of non-theatre related
activities is wholly separate from theatre operations, and its South American
operations are new theatre ventures in markets that are dissimilar to the United
States market. The other expenses segment primarily includes the regional and
home office administration. The Company evaluates both domestic and
international theatre performance and allocates resources based on earnings
before interest, taxes, depreciation, reorganization items, and gain on
disposition of theatre assets. Information concerning earnings (loss) before
income taxes has also been provided so as 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 chief operating decision maker evaluates operations on this basis.
The adjustment column is utilized to return the international theatre segment to
the equity method and eliminate intercompany balances. Performance of the
investment portfolio business is evaluated using the same measures as are seen
in the consolidated financial statements.
(In thousands)
Three Months Ended January 31, 2002 Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
Revenues:
Admissions $56,399 $ 7,692 $ -- $ 64,091 ($ 7,692) $ 56,399
Concessions 23,845 2,540 -- 26,385 (2,540) 23,845
Other 2,184 1,221 -- 3,405 (1,221) 2,184
------- -------- ------- -------- -------- --------
Total revenues 82,428 11,453 -- 93,881 (11,453) 82,428
------- -------- ------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation, reorganization items,
and gain on disposition of theatre assets 7,734 538 (394) 7,878 (538) 7,340
Net investment income (loss) -- 183 (539) (356) (183) (539)
Earnings (loss) before income taxes 4,713 (29,732) (3,589) (28,608) 7,424 (21,184)
8
(In thousands)
Three Months Ended January 31, 2001: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
Revenues:
Admissions $59,067 $ 8,046 $ -- $ 67,113 ($ 8,046) $ 59,067
Concessions 24,451 2,233 -- 26,684 (2,233) 24,451
Other 2,793 913 -- 3,706 (913) 2,793
------- -------- ------ -------- -------- --------
Total revenues 86,311 11,192 -- 97,503 (11,192) 86,311
------- -------- ------ -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation, reorganization items,
and gain on disposition of theatre assets 7,253 455 (418) 7,290 (455) 6,835
Net investment income (loss) -- 672 (714) (42) (672) (714)
Earnings (loss) before income taxes 4,442 (2,281) (5,567) (3,406) 16 (3,390)
The Company's South American joint venture, HGCSA, has a $50.0 million debt
financing arrangement denominated in U.S. dollars with two major financial
institutions to fund its operations in Argentina, which is secured by a several
guarantee of the joint venture's partners. There is currently no availability of
this financing beyond $28.0 million as the remaining funds were not drawn prior
to the expiration of the funding commitment on December 29, 2000. Under the
several guarantee of the Argentina debt facility, the Company is liable for 50%
of the outstanding borrowings. At January 31, 2002, the Company's portion of the
outstanding borrowings under this facility that it guarantees was approximately
$14.0 million.
HGCSA has debt arrangements for a total of approximately $18.6 million with
financial institutions to fund its operations in Chile, which is secured by the
several guarantee of the joint venture's partners. Under the debt arrangements,
the Company is liable for 50% of the outstanding borrowings. At January 31,
2002, the Company's portion of the outstanding borrowings under these
facilities that it guarantees was approximately $9.3 million, which was
comprised of $7.5 million of outstanding borrowings and $1.8 million of
outstanding guarantees. In respect of these outstanding guarantees the Company
invested approximately $1.3 million in a certificate of deposit, which is held
as collateral for a portion of the outstanding guarantees at January 31, 2002.
This certificate of deposit is included in other current assets in the
consolidated balance sheets.
Pursuant to the Company's Reorganization Plan, the Company's obligation under
the guarantees of the Argentine and Chilean debt financing arrangements will be
extinguished and satisfied in full for a cash payment of 50% of the Company's
liability or approximately $11.0 million. For this payment, the Company will
receive a participation interest in the South American debt financing
arrangements. As part of these debt financing arrangements, the lenders to the
South American subsidiaries have agreed to one year forbearance of interest and
principal payments on these debt financing arrangements.
7. LOSS PER SHARE
The computation of basic and diluted loss per share is shown below. Basic loss
per share excludes any dilutive effect of common stock equivalents.
For The Three Months Ended
January 31,
-----------
(In thousands, except per share data) 2002 2001
---- ----
Net loss $ (21,184) $ (3,390)
--------- ---------
Determination of shares:
Weighted average number of common
shares outstanding 7,811 7,790
Net loss per share:
Basic $ (2.71) $ (0.44)
Diluted $ (2.71) $ (0.44)
8. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows for the three months ended
January 31,:
(In thousands) 2002 2001
---- ----
Net loss $(21,184) $(3,390)
Unrealized losses on securities, net of tax (185) (2,624)
Cumulative translation adjustment (10,177) --
-------- -------
Ending balance $(31,546) $(6,014)
======== =======
The cumulative translation adjustment arises from the translation of the
financial statements of HGCSA from the entity's functional currency into U.S.
dollars.
9
9. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. This statement amends the provisions of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and Accounting Principles Board No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
statement, which excludes goodwill from its scope, establishes the methodology
to be used for evaluating (i) long-lived assets to be held and used, (ii)
long-lived assets to be disposed of other than by sale, and (iii) long-lived
assets to be disposed of by sale, for both ongoing and discontinued operations.
In addition, SFAS No. 144 broadens the treatment of discontinued operations to
include components of an entity rather than just segments of a business. SFAS
No. 144 is required to be adopted by the Company in fiscal 2003. The Company has
not completed the process of evaluating the impact that will result from
adopting this statement and is therefore unable to disclose the impact that
adopting SFAS No. 144 will have on its financial position and results of
operations.
10
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In order to alleviate continuing cash flow losses at a number of theatre
locations and the inability to reach appropriate resolution to the leases with
the landlords at these locations and to restructure the Company's financial
obligations, namely the bank credit facility of $44.6 million, equipment and
leasehold operating leases of $111.0 million and outstanding letters of credit
of $6.7 million, on October 11, 2000 (the "Filing Date"), GC Companies, Inc. and
certain of its domestic subsidiaries voluntarily filed petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter
11" or the "Chapter 11 cases"). Certain other subsidiaries of the Company,
located in Georgia, Tennessee, Florida, Louisiana, and Rhode Island, filed
petitions for relief under Chapter 7 of the United States Bankruptcy Code
("Chapter 7" or the "Chapter 7 cases"). The Chapter 11 cases and Chapter 7 cases
are herein referred to as the "Bankruptcy Proceedings". The Company is presently
operating its domestic theatre business and managing its investment assets as
debtors-in-possession subject to the jurisdiction of the United States
Bankruptcy Court in the State of Delaware (the "Bankruptcy Court"). The
Company's subsidiary which holds the Company's interest in its South American
theatre joint venture did not file a petition for reorganization because there
were no significant outstanding liabilities on the books of the entity other
than an intercompany payable to the Company. As a result, the Company's
subsidiary which holds the Company's interest in the South American joint
venture is not subject to the jurisdiction of the Bankruptcy Court. Management
does not anticipate that the Company's Chapter 11 filing will have any impact on
the South American joint venture's revenues.
As a result of the Bankruptcy Proceedings, substantially all of the Company's
pre-petition indebtedness, obligations and guarantees are stayed from collection
or action by creditors. No payments have been made to date with respect to
pre-petition claims, with the exception of the payment of pre-petition
obligations to film distributors as approved by the Bankruptcy Court,
pre-petition obligations for leases assumed by the Company, as well as sales and
trust fund taxes and workers' compensation claims. The Company is operating its
domestic theatre business in the ordinary course and is paying all post-petition
debts and liabilities on normal terms as they become due. Pre-petition claims
will be funded in accordance with the Company's plan of reorganization filed
with the Bankruptcy Court on December 21, 2001 (the "Reorganization Plan"). The
Company's Reorganization Plan was confirmed by the Bankruptcy Court and a vote
of the Company's creditors on March 18, 2002 and is expected to become effective
on or about March 28, 2002.
In the Chapter 11 cases, approximately $196.8 million of liabilities as of
January 31, 2002 are subject to compromise under the Reorganization Plan.
Differences between liability amounts estimated by the Company and claims filed
by creditors will be investigated and a final determination of the allowable
claim will be made by the Bankruptcy Court. These claims may also be subject to
adjustment depending on the determination of the validity and the value of the
security held in respect of certain claims.
On December 6, 2001, the Company entered into a letter of intent pursuant to
which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the
Company in accordance with the Reorganization Plan. On January 16, 2002, the
Company and AMC executed a definitive Stock Purchase Agreement. In addition, the
Company entered into an interim operating agreement with AMC relating to the
conduct of the Company's business prior to the effective date of the
Reorganization Plan. AMC has also entered into a support agreement with certain
key creditors of the Company, namely Harcourt General, Inc., General Electric
Capital Corporation and the Official Committee of Unsecured Creditors in the
Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of
the creditor parties to the support agreement has agreed to support AMC's bid to
acquire the Company if the Reorganization Plan treats their claim as described
in the support agreement.
The Reorganization Plan was confirmed by the Bankruptcy Court and a vote of the
Company's creditors on March 18, 2002. Under the Reorganization Plan, which is
expected to become effective on or about March 28, 2002, AMC will become the
owner of all of the stock of the reorganized GC Companies, Inc. and will pay the
Company's creditors consideration, consisting of cash, AMC senior subordinated
notes or AMC common stock, having a value between $165.0 million and $180.0
million plus assumed debt of $28.5 million. The ultimate amount AMC will pay the
creditors of the Company is not presently determinable and will depend, among
other things, upon: (i) a final determination of allowed claims that will be
made by the Bankruptcy Court; (ii) the form of consideration chosen by certain
of the creditors of the Company to whom alternatives are available; (iii) the
form of recovery and consideration AMC chooses to issue to specified creditors
of the Company; (iv) the amount of cash otherwise available to the Company at
the effective date of the Reorganization Plan; and (v) the length of time it
takes to consummate the transaction. The Reorganization Plan sets forth the
terms and provisions of the Company's reorganization and AMC's acquisition of
all of the common stock of the Company.
11
Under the Reorganization Plan all existing shares of the Company's common stock
will be canceled and will no longer represent an equity interest in the Company;
however, on terms and conditions set forth in the Reorganization Plan, existing
holders of the Company's common stock may be provided with the opportunity to
participate in a newly-formed entity which will hold assets of the Company's
investment portfolio.
The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The Company's ability
to continue as a going concern is dependent upon its ability to maintain
compliance with debt covenants under the DIP Facility and the execution of the
Reorganization Plan confirmed by the Bankruptcy Court and a vote of the
Company's creditors on March 18, 2002 and expected to become effective on or
about March 28, 2002.
Forward-Looking Statements
With respect to the foregoing, forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate," and similar expressions are intended to identify such
forward-looking statements; however, the foregoing description of subsequent
events also contains other forward-looking statements. The Company cautions that
there are various important factors that could cause actual results to differ
materially from those indicated in the forward-looking statements; accordingly,
there can be no assurance that such indicated results will be realized. Among
the important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are: the overall viability of
the Company's long-term operational reorganization and financial restructuring
plan; the involvement of our secured and unsecured creditors in the Chapter 11
proceedings; potential AMC acquisition and numerous other approvals associated
with the Company's ultimate reorganization; competitive pressure in the
Company's market; dependence upon motion picture productions and performance;
seasonality; business conditions in the movie industry and other complementary
markets; confirmation of the successful renegotiation of the Argentine and
Chilean debt financing agreements; the impact on the Company's joint venture
operations and cash flows in Argentina as a result of the recent economic and
political turmoil; general economic conditions and the risk factors detailed
from time to time in the Company's periodic reports and registration statements
filed with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10K for the year ended October 31, 2001. By making these
forward-looking statements, the Company does not undertake to update them in any
manner except as may be required by the Company's disclosure obligations in
filings it makes with the Securities and Exchange Commission under Federal
securities laws.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2002 VERSUS THE THREE MONTHS ENDED JANUARY 31,
2001
THEATRE REVENUES - Total revenues decreased 4.5% to $82.4 million for the three
months ended January 31, 2002 from $86.3 million for the same period in 2001
primarily attributable to a 7.3% decrease in patronage partially offset by a
3.0% increase in average ticket price and a 5.2% increase in concession sales
per patron. The decrease in patronage was mainly due to the Company operating
fewer theatres during the first quarter compared to the same period last year.
The Company operated domestically 669 screens at 72 locations at January 31,
2002 compared to 675 screens at 75 locations at January 31, 2001. The increase
in average ticket prices was primarily due to the theatres closed subsequent to
the first quarter of 2001, which had lower ticket prices and moderate price
increases in selected theatres at the beginning of the first quarter of 2002. A
growth in concessions sales per patron was principally attributable to more
sales of higher priced specialty products.
12
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operations and administrative expenses and depreciation)
decreased $4.7 million to $77.7 million in 2002 from $82.4 million last year. As
a percentage of total revenues, cost of theatre operations was 94.2% for the
first quarter of 2002 compared to 95.5% for the same period in 2001. This
decreased percentage of the cost of theatre operations to total revenues for the
first three months of the current year compared to the same period in 2001 was
primarily due to lower film costs, advertising expenses, and depreciation
expenses. These decreases were partially offset by higher theatre payroll costs.
REORGANIZATION ITEMS - The Company incurred and recorded in the first quarter
of 2002 the following expenses directly associated with the Bankruptcy
Proceedings: professional fees of $1.3 million, the write-off of assets of $0.1
million, and severance and retention costs for personnel of approximately $0.3
million. These charges were partially offset by interest income of $0.1 million
earned by the Company on the cash accumulated and invested during the Bankruptcy
Proceedings. The Company incurred and recorded in the first quarter of 2001 the
following expenses directly associated with the Bankruptcy Proceedings:
professional fees of $2.8 million, lease termination charges of $0.2 million,
the write-off of assets of $0.3 million and severance costs for personnel at the
theatres closed during the quarter of approximately $0.1 million. These charges
were partially offset by interest income of $0.2 million earned by the Company
on the cash accumulated and invested during the Bankruptcy Proceedings.
CORPORATE EXPENSES - Corporate expenses of $0.4 million for the three months
ended January 31, 2002 decreased 6.0% versus the same period last year primarily
due to a reduction of administrative expenses.
EQUITY LOSSES IN THEATRE AFFILIATES - The Company's South American joint venture
("HGCSA") is 50% owned and is accounted for under the equity method. As a
result, the operations of the joint venture are included within the line item
"Equity losses in theatre affiliates" within the Company's consolidated
statements of operations. The revenues and expenses of the South American joint
venture are not consolidated into the Company's financial statements. The
subsidiary that holds the 50% interest in the South American joint venture did
not file for bankruptcy because there were no significant outstanding
liabilities on the books of the entity other than an intercompany payable to the
Company. Management does not anticipate that the Company's Chapter 11 filing
will have any impact on the South American joint venture's revenues.
The Company recorded equity losses in theatre affiliates of $22.3 million for
the three months ended January 31, 2002 compared to $1.5 million for the same
period in 2001. The increase in equity losses was primarily due to a charge of
$14.8 million for an other than temporary impairment of the Company's investment
in HGCSA's Argentine subsidiary and a foreign exchange loss of $6.1 million
resulting from the devaluation of the Argentine peso. During the first quarter
of 2002, the government of Argentina imposed restrictions on the withdrawal of
cash balances from individuals' bank accounts and restricted the ability of
companies to pay vendors located outside of Argentina. These fiscal policies, as
well as continuing economic difficulties and political turmoil resulted in
public demonstrations in Argentina, which required the shutdown of several
theatres for a short period of time and a decline in theatre attendance in the
first quarter of 2002. In addition, in January 2002, the government of Argentina
announced the adoption of a currency system allowing the peso to float freely
rather than pegging it to the U.S. dollar. This resulted in a significant
devaluation of the peso. As certain of the joint venture's liabilities,
primarily the Argentine debt financing arrangement of $28.0 million, are
denominated in U.S. dollars, the devaluation of the peso has resulted in the
recognition of a $12.2 million foreign currency transaction loss in the first
quarter of 2002 on the books of HGCSA's Argentine subsidiary. This loss relates
to increases in the actual and expected functional currency cash outflows on
transactions denominated in currencies other than the peso, the entity's
functional currency. The Company's portion of this transaction loss was
approximately $6.1 million and was reflected in equity losses in theatre
affiliates in the consolidated statement of operations. In addition, HGCSA
recorded a cumulative translation adjustment for $20.4 million within
accumulated other comprehensive loss in shareholders' equity. This adjustment
relates to the process of translating the financial statements of the Argentine
subsidiary from the entity's functional currency (peso) into the reporting
currency of the Company (U.S. dollar). The Company's portion of this cumulative
translation adjustment was $10.2 million and was recorded as a decrease in the
carrying value of the Company's investment in international theatre affiliates
and an increase in accumulated other comprehensive loss in the consolidated
balance sheet.
As operating cash inflows and outflows of HGCSA's Argentine subsidiary are
primarily denominated in pesos and the debt service payments of HGCSA's
Argentine subsidiary are denominated in U.S. dollars, the realization of the
Company's investment in HGCSA's Argentine subsidiary is dependent upon the
Argentine operation's ability to generate sufficient pesos to pay debt service
and provide for a return on investment to the joint venture. Because of the
continued significant uncertainty as to extent and duration of the peso's
devaluation and its ultimate impact to the operations and cash flows of the
Argentine subsidiary of HGCSA, the Company has determined that its investment in
HGCSA's Argentina subsidiary is other than temporarily impaired, and accordingly
has recorded a charge to operations of approximately $14.8 million in the three
months ended January 31, 2002." The charge is included in Equity Losses in
Theatre Affiliates in the condensed consolidated statement of operations.
At January 31, 2002, Hoyts General Cinema South America ("HGCSA") was in default
of $46.6 million in debt financing agreements in Argentina and Chile as the
debts became due in December, 2001, and payment was not made in accordance with
the agreements. Under the general guarantees of the HGCSA debt financing
agreements, the Company is liable for 50% of the outstanding borrowing, which
was $23.3 million at January 31, 2002. Pursuant to the Company's Plan of
Reorganization, the Company's obligation under the guarantees of the Argentine
and Chilean debt financing arrangements will be extinguished and satisfied in
full for a cash payment of 50% of the Company's liability or approximately $11.0
million. For this payment, the Company will receive a participation interest in
the South American debt financing arrangements. As part of these arrangements,
the lenders to the South American subsidiaries have agreed to one year
forbearance of interest and principal payments on these debt financing
arrangements.
13
INVESTMENT LOSS, NET - The Company recorded an investment loss of $0.5 million
in 2002 compared to an investment loss of $0.7 million in the same period in
2001. The Company's investment loss included equity losses in portfolio
investments of $0.2 million as well as management and administrative expenses of
approximately $0.3 million.
INTEREST EXPENSE - The Company's interest expense decreased to $1.1 million for
the three months ended January 31, 2002 compared to $1.5 million in the same
period in 2001, mainly due to decreased borrowings outstanding under the DIP
Facility.
INCOME TAX EXPENSE - The Company recorded no income tax benefit in the first
quarter of 2002 and 2001 due to the uncertainty surrounding the recoverability
of such losses.
14
GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On October 11, 2000, the Company and certain of its subsidiaries filed a
petition to reorganize under Chapter 11. As a result, substantially all of the
Company's pre-petition debts, obligations and guarantees as of this date are
stayed from collection or action by creditors and, with the exception of the
payment of pre-petition obligations to film distributors, pre-petition
obligations on leases assumed by the Company as approved by the Bankruptcy
Court, as well as sales and trust fund taxes and workers' compensation claims,
no payments have been made to date with respect to these pre-petition claims.
The Company is operating its domestic theatre business in the ordinary course
and is paying all post-petition debts and liabilities on normal terms as they
become due. In order to finance the Company's operations and its obligations to
pay adequate protection payments to secured creditors of the Company and certain
of its subsidiaries, the Company has entered into a DIP Facility, which is held
by three financial institutions (the "DIP Lenders") that have previously done
business with the Company, in the amount of $45.0 million. The Company completed
all domestic theatre construction project commitments prior to the Chapter 11
filing and has no remaining construction commitments to be financed. On March
12, 2002, availability of the DIP Facility to the Company was extended to April
30, 2002. The DIP Facility restricts the sale of certain investment assets,
without the DIP Lenders approval.
On December 6, 2001, the Company entered into a letter of intent pursuant to
which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the
Company in accordance with a plan of reorganization filed with the Bankruptcy
Court on December 21, 2001 (the "Reorganization Plan"). On January 16, 2002, the
Company and AMC executed a definitive Stock Purchase Agreement. In addition, the
Company entered into an interim operating agreement with AMC relating to the
conduct of the Company's business prior to the effective date of the
Reorganization Plan. AMC has also entered into a support agreement with certain
key creditors of the Company, namely Harcourt General, Inc., General Electric
Capital Corporation and the Official Committee of Unsecured Creditors in the
Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of
the creditor parties to the support agreement has agreed to support AMC's bid to
acquire the Company if the Reorganization Plan treats their claim as described
in the support agreement.
The Reorganization Plan was confirmed by the Bankruptcy Court and a vote of the
Company's creditors on March 18, 2002. Under the Reorganization Plan, which is
expected to become effective on or about March 28, 2002, AMC will become the
owner of all of the stock of the reorganized GC Companies, Inc. and will pay the
Company's creditors consideration, consisting of cash, AMC senior subordinated
notes or AMC common stock, having a value between $165.0 million and $180.0
million plus assumed debt of $28.5 million. The ultimate amount AMC will pay the
creditors of the Company is not presently determinable and will depend, among
other things, upon: (i) a final determination of allowed claims that will be
made by the Bankruptcy Court; (ii) the form of consideration chosen by certain
of the creditors of the Company to whom alternatives are available; (iii) the
form of recovery and consideration AMC chooses to issue to specified creditors
of the Company; (iv) the amount of cash otherwise available to the Company at
the effective date of the Reorganization Plan; and (v) the length of time it
takes to consummate the transaction. The Reorganization Plan sets forth the
terms and provisions of the Company's reorganization and AMC's acquisition of
all of the common stock of the Company.
Under the Reorganization Plan all existing shares of the Company's common stock
will be canceled and will no longer represent an equity interest in the Company;
however, on terms and conditions set forth in the Reorganization Plan, existing
holders of the Company's common stock may be provided with the opportunity to
participate in a newly-formed entity which will hold assets of the Company's
investment portfolio.
15
Earnings before interest, taxes, depreciation, gain on the disposition of
theatre assets and reorganization items ("Operating EBITDA") was $7.3 million
for the first quarter of 2002 as compared to $6.8 million for the same period in
2001. The increase in Operating EBITDA was primarily due to lower operating
expenses, particularly film, advertising and corporate expenses.
Cash paid for reorganization related items totaled $2.1 million for the three
month period ended January 31, 2002 and included the following items:
professional fees of $2.1 million and a nominal amount for personnel related
costs. These cash payments were offset by $0.1 million of interest earned on the
cash accumulated and invested during the Bankruptcy Proceedings. Cash paid for
reorganization related items totaled $0.5 million for the same period in 2001
and included the following items: professional fees of $0.3 million and
personnel related costs of $0.2 million. These cash payments were offset by $0.2
million of interest earned on the cash accumulated and invested during the
Bankruptcy Proceedings.
Domestic Theatres
Virtually all of the Company'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 14 to
30 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. At January 31, 2002, the Company
had cash and cash equivalents of $16.1 million.
The Company has significant lease commitments, and substantially all domestic
leases of the Company are non-cancelable. These leases generally provide for the
payment of fixed monthly rentals and contingent rentals based upon a percentage
of revenues over a specified amount. Annual lease payments totaled $53.0 million
in 2001 and are anticipated to approximate $41.9 million in 2002 for operating
leases the Company has not rejected as part of its Bankruptcy Proceedings. The
decrease in expected minimum lease payments in 2002 is due to the theatres
closed in 2001.
For the quarter ended January 31, 2002, the Company made capital expenditures of
approximately $0.2 million for leasehold improvements, furniture and equipment
purchases as well as information services related projects. Domestic capital
expenditures are expected to approximate $3.5 million in 2002 to cover major
maintenance and repairs of the theatres as well as upgrades to certain
information systems. The amount expended each year for major repairs and
maintenance of theatres can vary depending on need and is not easily predicted.
The amount of capital expenditures in 2001 and estimated for 2002 was, and will
be, significantly less than previous years as such capital expenditures
primarily represent maintenance capital spending. The Company is not currently
building new theatres and therefore did not incur capital expenditures relating
to new construction in 2002.
Over the past year, several theatre exhibitors have filed for bankruptcy
protection in the United States. As a result, certain older under-performing
theatres have been closed and new construction has been significantly reduced,
which has led to a decrease in the number of screens operating in the United
States. The Company cannot presently determine or reasonably estimate the extent
of additional closings of theatre screens that could possibly occur in the
United States, the markets to be directly impacted by the theatre screen
closings and the effect this could possibly have on the Company's operations.
International Theatres
Operations in South America are undertaken through equity method investees.
Fluctuations in the market value of the underlying equity are not reported for
financial statement purposes nor can a sensitivity analysis be performed
relative to the market risk of the underlying equity. Because operations are
conducted utilizing local currencies, the Company's results of operations are
exposed to foreign currency exchange rate changes.
In the first quarter of 2002, the government of Argentina announced the adoption
of a currency system allowing the peso to float freely rather than pegging it to
the U.S. dollar. This resulted in a significant devaluation of the peso. As
certain of the joint venture's liabilities, primarily its debt financing
arrangement of $28.0 million, are denominated in U.S. dollars, the devaluation
of the peso has resulted in the recognition of a $12.2 million foreign currency
transaction loss in the first quarter of 2002 on the books of Hoyts General
Cinema South America's ("HGCSA") Argentine subsidiary. This loss relates to
increases in
16
the actual and expected functional currency cash outflows on transactions
denominated in currencies other than the peso. The Company's portion of this
transaction loss was approximately $6.1 million and was reflected in equity
losses in theatre affiliates in the consolidated statement of operations. In
addition, HGCSA recorded a cumulative translation adjustment for $20.4 million
within accumulated other comprehensive loss in shareholders' equity. This
adjustment relates to the process of translating the financial statements of the
Argentine subsidiary from the entity's functional currency (peso) into the
reporting currency of the Company (U.S. dollar). The Company's portion of this
cumulative translation adjustment was $10.2 million and was recorded as a
decrease in the carrying value of the Company's investment in international
theatre affiliates and an increase in accumulated other comprehensive loss in
the consolidated balance sheet.
In addition, as operating cash inflows and outflows of the HGCSA's Argentine
subsidiary are primarily denominated in pesos, and certain liabilities,
including the debt service payments of HGCSA's Argentine subsidiary, are
denominated in U.S. dollars, the realization of the Company's investment in
HGCSA's Argentine subsidiary is dependent upon the Argentine operation's ability
to generate sufficient pesos to pay debt service and provide for a return on
investment to the joint venture. Because of the continued significant
uncertainty as to extent and duration of the peso's devaluation and its ultimate
impact to the operations and cash flows of the Argentine subsidiary of HGCSA,
the Company has determined that its investment in HGCSA's Argentine subsidiary
is other than temporarily impaired, and accordingly has recorded a charge to
operations of approximately $14.8 million in the three months ended January 31,
2002. The charge is included in Equity Losses in Theatre Affiliates in the
condensed consolidated statement of operations.
Future advances may be required of the partners under the South American joint
venture agreement, if sufficient bank financing is not available. The joint
venture currently does not have any outstanding commitments to construct new
theatres.
The Company's South American joint venture, HGCSA, has a $50.0 million debt
financing arrangement denominated in U.S. dollars with two major financial
institutions to fund its operations in Argentina, which is secured by a several
guarantee of the joint venture's partners. There is currently no availability of
this financing beyond $28.0 million as the remaining funds were not drawn prior
to the expiration of the funding commitment on December 29, 2000. Under the
several guarantee of the Argentina debt facility, the Company is liable for 50%
of the outstanding borrowings. At January 31, 2002, the Company's portion of the
outstanding borrowings under this facility that it guarantees was approximately
$14.0 million.
HGCSA has debt arrangements for a total of approximately $18.6 million with
financial institutions to fund its operations in Chile, which is secured by the
several guarantee of the joint venture's partners. Under the debt arrangements,
the Company is liable for 50% of the outstanding borrowings. At January 31,
2002, the Company's portion of the outstanding borrowings under these
facilities that it guarantees was approximately $9.3 million, which was
comprised of $7.5 million of outstanding borrowings and $1.8 million of
outstanding guarantees. In respect of these outstanding guarantees the Company
invested approximately $1.3 million in a certificate of deposit, which is held
as collateral for a portion of the outstanding guarantees at January 31, 2002.
This certificate of deposit is included in other current assets in the
consolidated balance sheets.
At January 31, 2002, HGCSA was in default of the Argentine and Chilean debt
financing agreements as the debts became due in December, 2001 and payment was
not made in accordance with the agreements. Pursuant to the Company's
Reorganization Plan, the Company's obligation under the guarantees of the
Argentine and Chilean debt financing arrangements will be extinguished and
satisfied in full for a cash payment of 50% of the Company's liability or
approximately $11.0 million. For this payment, the Company will receive a
participation interest in the South American debt financing arrangements. As
part of these arrangements, the lenders to the South American subsidiaries have
agreed to one year forbearance of interest and principal payments of these debt
financing arrangements.
Investment Portfolio
At January 31, 2002, marketable equity securities were $0.2 million, a decrease
of $0.3 million from the balance at October 31, 2001. The decrease in marketable
securities during the first quarter of 2002 was primarily due to a decrease in
value of the Company's El Sitio, Inc. (now Claxson Interactive Group Inc.)
shares and reclassification of MotherNature.com to portfolio investments. The
reclassification of the investment in MotherNature.com was the result of
recording this investment at liquidation value, rather than at a readily
determinable market value published on a registered exchange. In addition, the
fair value of the Company's investment in VeloCom is less than its carrying
cost. Management believes this impairment is not other than temporary as
VeloCom's operating entity's balance sheet was recapitalized, and the most
recent projections contemplate a recovery of invested capital. Therefore,
management has not recorded a charge to its consolidated statements of
operations to reduce the carrying value of the investment.
Other
In connection with the Company's Chapter 11 filing, the Company entered into a
DIP Facility providing for up to $45.0 million of financing, available on a
revolving basis, which was authorized by the Bankruptcy Court. During the first
three months of 2002, the
17
Company made net principal payments of $2.0 million on the DIP Facility. The
average interest rate for the first three months of 2002 was 7.0%. Proceeds of
the DIP Facility may be utilized for expenditures approved by the DIP Facility
lenders under an approved DIP Facility budget. As a condition to the DIP
Facility, the Company has agreed to certain restrictions, which limit capital
expenditures and which prevent the Company from: (a) borrowing additional funds
other than through the DIP Facility; (b) entering into any new financial leasing
transactions; (c) making any additional portfolio investments; (d) making any
distributions from the Company; and (e) making certain sales of portfolio
investments without the consent of the DIP Facility lenders. Given the
restrictions contained in its DIP Facility, during the term of the DIP Facility,
the Company (a) will not enter into any new domestic theatre lease commitments;
(b) will not make new investments; and (c) may utilize in whole or in part, any
net proceeds received from the future sales of assets to prepay the DIP
Facility. On March 12, 2002, availability of the DIP Facility to the Company was
extended to April 30, 2002.
Recent Accounting Pronouncements
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. This statement amends the provisions of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and Accounting Principles Board No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
statement, which excludes goodwill from its scope, establishes the methodology
to be used for evaluating (i) long-lived assets to be held and used, (ii)
long-lived assets to be disposed of other than by sale, and (iii) long-lived
assets to be disposed of by sale, for both ongoing and discontinued operations.
In addition, SFAS No. 144 broadens the treatment of discontinued operations to
include components of an entity rather than just segments of a business. SFAS
No. 144 is required to be adopted by the Company in fiscal 2003. The Company has
not completed the process of evaluating the impact that will result from
adopting this statement and is therefore unable to disclose the impact that
adopting SFAS No. 144 will have on its financial position and results of
operations.
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GC COMPANIES, INC.
DEBTOR-IN-POSSESSION
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company operates in three major reported segments. The first segment is the
domestic motion picture exhibition market. The second segment is the South
American motion picture exhibition market which it operates through equity
method investees. The third segment is a venture capital arm which holds
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 exhibition segment is subject primarily to interest
rate risks. As a result of the Company's Bankruptcy Proceedings, the Company
entered into the DIP Facility. The Company had no balance under the DIP Facility
at January 31, 2002. Prior to its Chapter 11 filing, the Company borrowed money
under its bank credit facility to fund operating needs, and at January 31, 2002,
the Company had outstanding borrowings of $44.6 million under this facility. The
Company's exposure related to variable interest rates 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 DIP Facility and bank credit facility would not
have a significant impact on either the earnings or cash flows of the Company.
As a result of the Chapter 11 filing by the Company, principal and interest
payments may not be made on pre-petition debt (other than court approved
adequate protection payments) until the Reorganization Plan defining the
repayment terms has been approved by the Bankruptcy Court.
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.
In January 2002, the government of Argentina imposed restrictions on the
withdrawal of cash balances from individuals' bank accounts and has restricted
the ability of companies to pay vendors located outside Argentina. These fiscal
policies, as well as continuing economic difficulties and political turmoil
resulted in public demonstrations in Argentina, which required the shutdown of
several theatres for a short period of time and a decline in theatre attendance
subsequent in the first quarter of 2002. In January, 2002, the government of
Argentina announced the adoption of a currency system allowing the peso to float
freely rather than pegging it to the U.S. dollar. This has resulted in a
significant devaluation of the peso. As operating cash inflows and outflows of
HGCSA's Argentine subsidiary are primarily denominated in pesos and the debt
financing arrangement of HGCSA's Argentine subsidiary are denominated in U.S.
dollars, the realization of the Company's investment in HGCSA's Argentine
subsidiary is dependent upon the Argentine operation's ability to generate
sufficient pesos to pay debt service and provide for a return on investment to
the joint venture. Because of the continued significant uncertainty as to extent
and duration of the peso's devaluation and its ultimate impact to the operations
and cash flows of HGCSA's Argentine subsidiary, the Company has determined that
its investment in HGCSA's Argentine subsidiary is other than temporarily
impaired, and, accordingly, has recorded a charge to operations of approximately
$14.8 million in the three months ended January 31, 2002." The charge is
included in Equity Losses in Theatre Affiliates in the condensed consolidated
statement of operations.
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. Two investment
holdings are classified herein at January 31, 2002: the Company's investments in
Claxson Interactive Group Inc. ("Claxson") (NASDAQ:XSON), formerly known as El
Sitio, a multi-platform new media company that provides integrated, branded
entertainment content targeted to Spanish and Portuguese speakers around the
world; and GrandVision ("GPS"), an optical and photo retailer that is
publicly-traded on the French Exchange under the symbol "GPS." Claxson shares
during the first quarter have traded as high as $2.00 and as low as $0.53. At
January 31, 2002, the Claxson shares closed at $0.61. During the first quarter
of 2002, the GPS shares have traded as high as 18.05 euros and as low as 15.25
euros. As of January 31, 2002, GPS shares closed at 17.60 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 not be material to
total assets.
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's interest in
GrandVision is currently valued at $0.1 million.
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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, as their current illiquidity
could possibly increase their exposure to market risk as there is not an
immediate available market for the investment. In addition, the Company's
investment in VeloCom is currently valued at an amount that is less than its
carrying cost. Management believes this impairment is not other than temporary
as VeloCom's operating entity's balance sheet was recapitalized, and the most
recent projections contemplate a recovery of invested capital. Therefore,
management has not recorded a charge to its consolidated statements of
operations to reduce the carrying value of the investment.
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
None.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended January 31, 2002.
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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: March 22, 2002 /signed/ G. Gail Edwards
------------------------------------
G. Gail Edwards President,
Chief Operating Officer,
Chief Financial Officer and Treasurer
Date: March 22, 2002 /signed/ Louis E. Casavant
------------------------------------
Louis E. Casavant, Vice President
and Corporate Controller
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