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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, 1999
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Commission File Number 1-12360
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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 March 11, 1999, there were outstanding 7,788,156 shares of the issuer's
common stock, $.01 par value.
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GC COMPANIES, INC.
I N D E X
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Part I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Condensed Consolidated Balance Sheets as of
January 31, 1999 and October 31, 1998 1
Condensed Consolidated Statements of Operations for
the Three Months Ended January 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended January 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 10.26 GCC Investments, Inc. Incentive Pool Plan Second Amendment 18
Exhibit 27.1 Financial Data Schedule --
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GC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JANUARY 31, OCTOBER 31,
1999 1998
(UNAUDITED) (AUDITED)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 11,195 2,479
Short-term investments -- 12,989
Marketable equity securities 117,899 78,162
Receivable due from financing institution 21,574 21,735
Other current assets 8,895 7,565
Income tax receivable 7,421 12,618
-------- --------
Total current assets 166,984 135,548
Property and equipment, net 113,039 112,599
Portfolio investments 61,410 61,769
Investment in international theatre affiliates 60,557 59,495
Other assets 6,877 6,590
Deferred income taxes 13,960 13,960
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$422,827 $389,961
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 582 $ 639
Trade payables 36,581 32,907
Liability for early lease terminations 34,751 36,579
Other current liabilities 87,115 89,680
Deferred income taxes 25,340 11,793
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Total current liabilities 184,369 171,598
Long-term liabilities:
Capital lease obligations 1,575 1,722
Other long-term liabilities 35,979 33,523
Revolving credit facility 12,800 16,775
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Total long-term liabilities 50,354 52,020
Shareholders' equity:
Common stock 77 77
Additional paid-in capital 137,071 137,049
Accumulated other comprehensive income 41,104 20,782
Retained earnings 9,852 8,435
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Total shareholders' equity 188,104 166,343
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$422,827 $389,961
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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
ENDED JANUARY 31,
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1999 1998
Revenues:
Admissions $ 68,418 $ 80,805
Concessions 31,332 36,667
Other 4,648 3,615
-------- --------
104,398 121,087
Costs and expenses:
Film rentals 36,227 43,322
Concessions 5,934 6,514
Theatre operations and administrative expenses 58,222 58,512
Depreciation and amortization 3,875 4,711
Loss on impairment or disposition of theatre assets (98) (188)
Corporate expenses 1,508 1,272
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Operating earnings (loss) (1,466) 6,568
Investment income (loss), net 3,816 (1,146)
Interest expense (380) (117)
Gain (loss) on disposition of non-operating assets 392 (130)
-------- --------
Earnings before income taxes 2,362 5,175
Income tax expense (945) (2,070)
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Net earnings $ 1,417 $ 3,105
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Net earnings per share:
Basic $ 0.18 $ 0.40
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Diluted $ 0.18 $ 0.40
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Weighted average shares outstanding:
Basic 7,710 7,709
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Diluted 7,852 7,756
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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 THREE MONTHS
ENDED JANUARY 31,
------------------------------
1999 1998
------- --------
Cash flows from operating activities:
Net earnings $ 1,417 $ 3,105
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,875 4,711
Equity in losses of theatre affiliates 1,590 987
Loss from portfolio investments 359 700
Gain on marketable equity securities
designated as trading (5,634) --
(Gain) loss on impairment or disposition
of theatre assets (294) 318
Other non-cash activities 2,446 (200)
Changes in assets and liabilities:
Liability for early lease terminations (1,828) --
Income tax receivable 5,197 --
Trade payables 3,674 13,784
Other current assets and liabilites (3,968) (3,511)
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Net cash provided by operating activities 6,834 19,894
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Cash flows from investing activities:
Capital expenditures (4,928) (13,037)
Proceeds from the disposition of theatre assets 815 5,073
Proceeds from the liquidation of
short-term investments 12,989 14,816
Advances to international theatre affiliates (2,541) --
Other investing activities (306) (1,969)
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Net cash provided by investing activitie 6,029 4,883
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Cash flows from financing activities:
Decrease in revolving credit facility (3,975) --
Other financing activities (172) 78
------- --------
Net cash provided (used) by financing activities (4,147) 78
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Net increase in cash and cash equivalents 8,716 24,855
Cash and cash equivalents at beginning of period 2,479 30,038
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Cash and cash equivalents at end of period $11,195 $ 54,893
======= ========
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 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 year presentation. The Company's business is seasonal in nature,
and historically the results of operations for this period have not been
indicative of the results for the full year.
2. MARKETABLE EQUITY SECURITIES
At January 31, 1999, marketable equity securities included $109.0 million
in publicly traded shares of an international telecommunications service
provider, Global Telesystems Group, Inc. ("GTS") and $8.9 million in the
shares of an optical and photo service retailer, GrandVision (formerly
named GrandOptical-PhotoService).
The GTS shares have been split into two separate classifications within
marketable equity securities: $92.8 million have been classified as
available-for-sale securities, and $16.3 million have been classified as
trading securities. On the shares classified as available-for- sale, an
unrealized holding gain of $71.2 million has been recorded in the balance
sheet net of tax, but is not reflected in the consolidated statements of
operations because of its stated classification. The shares classified as
trading securities have generated an unrealized gain for the three months
ended January 31,1999 of $5.9 million that has been recognized in the
consolidated statements of operations within the caption "Investment
income (loss), net." The Company's 1.8 million shares in GTS are subject
to certain other trading restrictions under applicable law.
The GrandVision shares have generated an unrealized holding loss of $2.7
million which has been recorded on the Company's consolidated balance
sheet net of tax, but has not been reflected in the consolidated
statements of operations because of the available-for-sale designation.
3. PORTFOLIO INVESTMENTS
Included in portfolio investments at January 31, 1999 were a $28.7
million investment in a financial guaranty insurer, an $11.1 million
investment in a fleet management services company, a $13.3 million
investment in a German cable television systems operator, and an $8.3
million investment in a wireless location and two-way messaging company.
As of January 31, 1999, the investments in the German cable television
operator and the wireless location and two-way messaging company did not
have readily determinable fair value because of a lack of quoted market
price and are, therefore, carried at cost less impairment, if applicable.
The Company accounts for its investment in the financial guaranty insurer
and the fleet management services company on the equity basis. Equity in
the losses of these investments for the three months ended January 31,
1999 and 1998 totaled $0.4 million and $0.7 million, respectively, and
are included in the consolidated statements of operations under the
caption "Investment income (loss), net."
On December 30, 1998, Kabelmedia, the German cable television systems
operator, merged with another company. Kabelmedia shareholders now own
47% of the new
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company, which has been renamed PrimaCom AG. The Company's ownership in
the merged company is approximately 4.3%.
4. LIABILITY FOR EARLY LEASE TERMINATIONS
In the fourth quarter of 1998, the Company recorded a charge totaling
$39.6 million primarily related to the estimated liability of exiting
certain leases. The Company accrued approximately $15.2 million primarily
for the estimated cost to exit the leases of those theatres closed during
the fourth quarter of 1998 and accrued approximately $24.4 million for
the estimated cost to exit certain leases for those theatres management
intends on closing in the next twelve months. 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. While the estimates are based on analysis of the
facilities, correspondence with the landlords, exploratory discussions
with sublessees and market conditions, there has been limited experience
to consider in preparing such estimates. The amounts the Company
eventually spends could differ materially from the amounts assumed in
arriving at the original reserve.
The Company paid approximately $3.2 million for the costs of exiting
leases and other costs through October 31, 1998. In the first quarter of
1999, the Company made cash payments of approximately $1.8 million
primarily for the cost of exiting certain leases on units closed during
the fourth quarter of 1998. There were no significant changes made to the
estimates related to initial costs to exit existing leases of closed
facilities or those facilities management intends on closing in the
next twelve months.
5. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131 in 1998. Accordingly, it 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 ventures in South America and Mexico; and the final
segment which 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
(i) its domestic theatre locations are being operated in different
manners given their ultimate strategic importance to the Company; (ii)
its South American and Mexican 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 3 of the
Company's Annual Report. The other expenses column 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 and amortization. Information concerning earnings (loss)
before income taxes have 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
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to return the international theatre segment to the equity method and
eliminate intercompany balances.
TOTAL COMPANY
QUARTER ENDED JANUARY 31, 1999
DOMESTIC INTERNATIONAL OTHER SEGMENT CONSOLIDATED
(In thousands) THEATRES THEATRES OPERATIONS TOTALS ADJUSTMENTS TOTALS
-------- -------- ---------- -------- ----------- ------------
Revenues:
Admissions $ 68,418 $ 7,702 $ -- $ 76,120 $ (7,702) $ 68,418
Concessions 31,332 2,641 -- 33,973 (2,641) 31,332
Other 4,648 424 -- 5,072 (424) 4,648
---------------------------------------------------------------------------------
Total revenues 104,398 10,767 -- 115,165 (10,767) 104,398
---------------------------------------------------------------------------------
Earnings (loss) before taxes,
interest, depreciation
and amortization 4,363 (1,470) (1,856) 1,037 1,470 2,507
Net investment income (loss) 37 (193) 5,356 5,200 (1,384) 3,816
Earnings (loss) before income
taxes 818 (3,233) 3,122 707 1,655 2,362
TOTAL COMPANY
QUARTER ENDED JANUARY 31, 1998
DOMESTIC INTERNATIONAL OTHER SEGMENT CONSOLIDATED
(In thousands) THEATRES THEATRES OPERATIONS TOTALS ADJUSTMENTS TOTALS
-------- -------- ---------- -------- ----------- ------------
Revenues:
Admissions $ 80,805 $ 3,533 $ -- $ 84,338 $ (3,533) $ 80,805
Concessions 36,667 1,321 -- 37,988 (1,321) 36,667
Other 3,615 117 -- 3,732 (117) 3,615
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Total revenues 121,087 4,971 -- 126,058 (4,971) 121,087
---------------------------------------------------------------------------------
Earnings (loss) before taxes
interest, depreciation
and amortization 12,739 (156) (1,272) 11,311 156 11,467
Net investment loss (51) -- (263) (314) (832) (1,146)
Earnings (loss) before income 7,623 (983) (1,616) 5,024 151 5,175
taxes
DOMESTIC THEATRES
QUARTER ENDED JANUARY 31, 1999
CORE OTHER IMPAIRED OTHER DOMESTIC
(In thousands) MARKETS MARKETS THEATRES EXPENSES THEATRES
-------- ------- -------- -------- --------
Revenues:
Admissions $ 37,805 $16,612 $14,001 $ -- $ 68,418
Concessions 16,980 7,644 6,708 -- 31,332
Other 2,335 1,138 1,175 -- 4,648
------------------------------------------------------------------
Total revenues 57,120 25,394 21,884 -- 104,398
------------------------------------------------------------------
Earnings (loss) before taxes,
interest, depreciation
and amortization 8,423 2,236 (969) (5,327) 4,363
Earnings (loss) before income 6,572 1,247 (1,235) (5,766) 818
taxes
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DOMESTIC THEATRES
QUARTER ENDED JANUARY 31, 1998:
CORE OTHER IMPAIRED OTHER DOMESTIC
(In thousands) MARKETS MARKETS THEATRES EXPENSES THEATRES
-------- ------- -------- -------- --------
Revenues:
Admissions $41,868 $16,502 $ 22,435 $ -- $ 80,805
Concessions 18,320 7,605 10,742 -- 36,667
Other 1,616 762 1,237 -- 3,615
------- ------- -------- ------- --------
Total revenues 61,804 24,869 34,414 -- 121,087
------- ------- -------- ------- --------
Earnings (loss) before taxes,
interest, depreciation
and amortization 13,060 4,675 806 (5,802) 12,739
Earnings (loss) before income 11,167 3,613 (664) (6,493) 7,623
taxes
The South American joint venture has obtained debt financing through its
local subsidiaries for its theatre expansion program. The joint venture
partners provide a several guarantee on the debt facilities in Chile and
Argentina. At January 31, 1999, the Company's portion of this
guarantee was $6.5 million.
6. 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,
warrants and convertible securities.
FOR THE THREE
MONTHS ENDED
------------
(In thousands except per share data) 1/31/99 1/31/98
------- -------
Net earnings (A) $1,417 $3,105
====== ======
Determination of shares:
Weighted average number of common shares outstanding (B) 7,710 7,709
Diluted effect of shares issuable on exercise of stock
options, net of shares assumed to be purchased out of
proceeds at market price 142 47
------ ------
Weighted average common shares outstanding for diluted
computation (C) 7,852 7,756
====== ======
Net earnings per share:
Basic (A/B) $0.18 $0.40
Diluted (A/C) $0.18 $0.40
7. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company adopted SFAS 130 "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income
and its components in a full set of general purpose financial
statements. The following reflects the activity in the accumulated
other comprehensive balance for the first quarter ended January 31,
1999:
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Accumulated Other
Unrealized Gains Comprehensive
(In thousands except per share data) on Securities Income
---------------- -----------------
Beginning balance $20,782 20,782
Current quarter change 20,322 20,322
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Ending balance $41,104 $41,104
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There was no activity in other comprehensive income for the quarter
ended January 31, 1998.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits." SFAS
No. 130 was adopted in the first quarter of 1999. SFAS No. 132 will be
adopted for the Company's fiscal 1999 year end financial statements.
The effect of adopting these two standards is not material to the
Company's financial position or results of operations; however, they
will require additional disclosure. SFAS No. 133, "Accounting for
Derivative Instruments in Hedging Activity" was also recently issued.
The Company is not required to implement this standard until fiscal
2000. Its requirements are complex and its scope far-reaching. The
Company has not completed its evaluation of the impact of this standard
on the financial statements.
In addition, the Emerging Issues Task Force (EITF) released issue No.
97-10, "The Effect of Lessee Involvement in Asset Construction." Issue
No. 97-10 is applicable to entities involved on behalf of an
owner-lessor with the construction of an asset that will be leased to
the lessee when construction of the asset is completed. The consensus
reached in Issue No. 97-10 applies to construction projects committed
to after May 21, 1998 and also to those projects that were committed to
on May 21, 1998 if construction does not commence by December 31, 1999.
Currently, the Company leases a majority of its new theatres through a
leasing arrangement with a financial institution. Unless the Company
changes certain elements of its current leasing arrangement, the
Company believes that Issue No. 97-10 will require future operating
leases under this leasing arrangement to be recorded on its
consolidated balance sheet as lease financing arrangements. The
American Institute of Certified Public Accountants (AICPA) recently
issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activity" which must be adopted by the Company in fiscal 2000.
The Company is currently evaluating this standard and anticipates that
it will incur a cumulative effect charge of $4 million and $6 million
relative to lease costs incurred prior to openings of theatres which
were previously allowed to be capitalized and amortized by generally
accepted accounting principles.
9. SUBSEQUENT EVENTS
On February 22, 1999, GC Companies' German cable television systems
operator, PrimaCom AG's (formerly named Kabelmedia), successfully
completed an initial public offering of its common stock. PrimaCom AG's
stock is currently traded on the German Neuer Markt. As a result,
beginning with the second quarter the Company will account for this
investment in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities."
At January 31, 1999, GCC had an investment of $8.3 million in Teletrac,
a wireless location and two-way messaging company. Subsequent to the
end of the first quarter, Teletrac announced that it had retained the
services of an investment banking firm in its efforts to raise
additional capital and to assist in discussions with the holders of
Teletrac's senior debt concerning a possible
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restructuring of that debt. In addition, Teletrac disclosed that if it
fails to secure additional capital or alternative sources of liquidity
before March 31, 1999, its ability to continue current operations will
be in jeopardy. There can be no assurances that Teletrac's efforts to
raise additional capital or to restructure its debt will be successful.
Based on the above, the Company believes its investment may become
impaired, which would result in a charge, up to the full amount of the
investment, to the consolidated statement of operations.
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GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JANUARY 31, 1999 VERSUS THREE MONTHS ENDED JANUARY 31, 1998
------------------------------------------------------------------------------
THEATRE REVENUES - Total revenues decreased 13.8% to $104.4 million in 1999 from
$121.1 million in 1998 primarily attributable to a 17.4% decrease in patronage
partially offset by a 2.5% increase in concession sales per patron and a 2.6%
increase in the average ticket price. The decrease in patronage was mainly
attributable to competitor impacts in certain markets, film product that was not
as strong as last year when Titanic was at its peak, and a reduction in screens,
primarily the result of theatres closed in the fourth quarter of 1998. The
opening of megaplexes by the Company's competitors have tended to, and are
projected to, draw audiences away from certain of the Company's older multiplex
theatre locations. The Company operated domestically 1,074 screens at 147
locations at January 31, 1999 compared to 1,148 screens at 175 locations at
January 31, 1998. The growth in concession sales per person was principally due
to the continued rollout of new products, increased consumption and certain
price increases. The increase in average ticket price was due to increases in
certain markets during the quarter.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operating and administrative expenses and depreciation and
amortization) decreased 7.8% to $104.3 in 1999 from $113.1 last year. As a
percentage of revenues, cost of theatre operations was 100% in 1999 compared to
93.3% in 1998 primarily due to higher theatre operating and administrative
expenses and lower concession margins due to product mix. Theatre operating and
administrative expenses, as a percentage of revenues, were 55.8% in 1999
compared to 48.3% in 1998. The percentage increase was principally due to
increased occupancy costs as a result of the Company's operating lease
arrangement associated with the five new theatres opened in the quarter,
increased advertising and pre-opening expenses incurred with these theatres
and costs associated with the start-up of the Sundance Cinema theatres.
INVESTMENT INCOME (LOSS), NET - The Company recorded investment income of $3.8
million in 1999 compared to an investment loss of $1.1 million in 1998. The
Company's investment income during the quarter included the unrealized gain on
the Global TeleSystems Group, Inc. trading securities of approximately $5.8
million, partially offset by the equity in losses of international theatre
affiliates of $1.6 million and the equity losses of other investments of
approximately $0.4 million. The investment loss in 1998 was primarily due to
equity losses on international theatre affiliates of $0.9 million and equity
losses of other investments of $0.7 million, partially offset by dividend and
interest income of $0.5 million.
INTEREST EXPENSE - The Company's interest expense increased to $0.4 million in
1999 mainly due to borrowings outstanding during the quarter under the revolving
credit facility. There were no borrowings outstanding in the first quarter of
1998.
INCOME TAX EXPENSE - The Company's effective tax rate was 40.0% in 1999,
unchanged from 1998.
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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. Because revenues are received in cash
prior to the payment of related expenses, the Company has an operating float,
which partially finances its operations.
For the three months ended January 31, 1999, General Cinema Theatres, Inc. (GCT)
opened five new theatres: a 15 screen theatre in Atlanta, Georgia, a 14 screen
theatre in Irving, Texas, a 14 screen theatre in Baltimore, Maryland, a 12
screen theatre in Pennsylvania and an 11 screen theatre in Seattle, Washington.
Capital outflows have been minimized on these projects as a result of an
agreement with a major financial institution to provide operating leases for
five theatres! The overall program was designed to provide up to $250 million of
funding over five years for the Company's theatre expansion program. Since the
inception of this leasing arrangement in 1996, the Company has entered into
$76.6 million of operating leases with the financial institution. Availability
of this lease arrangement is in part dependent upon the ability of the financial
institution to syndicate leases to third party financial institutions. A
receivable due from this financial institution may arise from time to time
throughout the year from the Company initially advancing monies for leased
assets as the financial institution's agent. On a periodic basis, these advances
are reimbursed by the financial institution. At January 31, 1999, the Company
had an outstanding receivable of $21.6 million.
The Company has significant lease commitments. Lease payments totaled $71.2
million in 1998 and minimum lease payments are anticipated to approximate $63.1
million in 1999.
During the quarter, the Company sold two theatres in Texas, certain land in
Indiana as well as miscellaneous assets realizing net proceeds of $0.8 million.
During the first quarter of 1999, the Company closed an additional six theatres
with 24 screens. Four of the theatres were identified as impaired and the costs
associated with the closing of these theatres were provided for in 1998. At
January 31, 1999, the Company had an outstanding liability for early lease
terminations of $36.6 million. The Company's reserve established for leases on
properties it intends to close reflects management's best estimate of the
potential cost associated with exiting the existing lease. While the estimates
are based on analysis of the facilities, correspondence with the landlords,
exploratory discussions with sublessees and market conditions, there has been
limited experience to consider in preparing such estimates. 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. The Company made cash payments of approximately $1.8
million for the cost of exiting certain leases and other costs during the first
quarter of 1999.
For the three months ended January 31, 1999, GCT made expenditures of $3.6
million for leasehold improvements, furniture and equipment purchases as well as
information services related projects. Domestic capital expenditures are
expected to approximate $21.3 million in 1999. In addition, the Company made
expenditures of $1.4 million associated with its Sundance Cinema joint venture.
GCC anticipates contributing $5.0 million of cash as well as properties to this
venture in 1999. The first Sundance theatre is anticipated to open in calendar
1999.
INTERNATIONAL THEATRES
During the three months ended January 31, 1999, the Company opened a 12-screen
theatre in Buenos Aires, Argentina through its South American joint venture and
added four screens to a theatre in Mexico. The joint venture in South America
anticipates opening an additional 73 screens and 6 units by the end of calendar
1999. This theatre expansion program will be financed through debt facilities in
Chile and Argentina as well as capital contributed by
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the partners. During the first quarter of 1999, the Company advanced $1.8
million to the South American joint venture and anticipates advancing $12.0
million during fiscal 1999. The South American joint venture has obtained debt
financing through its local subsidiaries for its theatre expansion program. The
joint venture partners provide a several guarantee on the debt facilities in
Chile and Argentina. At January 31, 1999, the Company's portion of the
outstandings under these facilities that it guarantees was approximately $6.5
million.
INVESTMENT PORTFOLIO
On February 22, 1999, GC Companies' German cable television systems operator,
PrimaCom AG (formerly named Kabelmedia), successfully completed an initial
public offering of its common stock. PrimaCom AG's stock is currently traded on
the German Neuer Markt. As a result, beginning with the second quarter the
company will account for this investment in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
At January 31, 1999, GCC had an investment of $8.3 million in Teletrac, a
wireless location and two-way messaging company. Subsequent to the end of the
first quarter, Teletrac announced that it had retained the services of an
investment banking firm to assist in its efforts to raise additional capital and
to assist in discussions with the holders of Teletrac's senior debt concerning a
possible restructuring of that debt. In addition, Teletrac disclosed that if it
fails to secure additional capital or alternative sources of liquidity before
March 31, 1999, it's ability to continue current operations will be in jeopardy.
There can be no assurances that Teletrac's efforts to raise additional capital
or to restructure the debt will be successful. Based on the above, the Company
believes its investment may become impaired, which would result in a charge, up
to the full amount of the investment, to the consolidated statement of
operations.
OTHER
The Company received proceeds of $13.0 million from the liquidation of certain
short-term investments during the quarter. In addition, the Company received an
income tax refund during the first quarter of 1999 of $5.2 million.
The Company made net payments of $4.0 million on its outstanding revolving
credit facility and paid interest of $0.3 million during the first quarter. The
average interest rate for the first quarter was 7.3%.
The Company believes that cash generated from operations, asset sales under
agreement, cash and cash equivalents of $11.2 million, amounts available under
the Company's revolving credit facility, the operating lease arrangement and the
South American joint venture debt agreements will be sufficient to fund
operating requirements, capital expenditures and the Company's investment
activities for the foreseeable future.
YEAR 2000
The year 2000 issue is primarily the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors leading to a disruption in the
operation of such systems. In 1996, the Company developed a strategic plan to
update its information systems in order to meet business needs, move away from a
mainframe processing environment and create a new system infrastructure. As a
result of this plan, several major processing systems were replaced or
significantly upgraded during 1997 and 1998, and are, for the most part, Year
2000 compliant, including certain point of sale systems, theatre timekeeping and
financial reporting systems. In 1998, the Company established a project team to
coordinate existing Year 2000 activities and address remaining Year 2000 issues.
During 1998, the Company developed a plan to devote the necessary resources to
identify and modify systems potentially impacted by Year 2000, or implement new
systems to become Year 2000 compliant in a timely manner. The Company has
completed the identification and assessment portion of its plan and is now
focused on remediation or replacement of non-compliant systems. Concurrently
with this phase is the testing of new systems prior to implementation. The
Company is on track to complete the remediation, testing and implementation of
replacement systems by the middle of calendar year 1999. In addition, the
Company is in the process of contacting suppliers and vendors seeking
information about their internal compliance efforts. The Company's risks
involved with not solving the Year 2000 issue
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include, but are not limited, to the following: loss of local or regional
electric power, loss of telecommunication services, delays or cancellations in
getting film product, bank errors and computer errors by vendors or our internal
systems. The Company is in the process of developing contingency plans for key
areas which might be affected by the Year 2000 problem. The Company has the
ability to issue theatre tickets manually in the event of a system failure. The
total cost of executing this plan is estimated at $2.0 million. The Company's
aggregate cost does not include time and costs that may be incurred by the
Company as a result of the failure of any third parties, including suppliers, to
become Year 2000 ready or costs to implement any contingency plans. This
estimate is based on the Company's current assessment of its Year 2000
compliance needs and is subject to change as the Company proceeds with its
compliance efforts.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits." SFAS No. 130 was adopted in
the first quarter of 1999. SFAS No. 132 will be adopted for the Company's fiscal
1999 year end financial statements. The effect of adopting these two standards
is not material to the Company's financial position or results of operations;
however, they both have or will require additional disclosure. SFAS No. 133,
"Accounting for Derivative Instruments in Hedging Activity" was also recently
issued. The Company is not required to implement this standard until fiscal
2000. Its requirements are complex and its scope far-reaching. The Company has
not completed its evaluation of the impact of this standard on the financial
statements.
In addition, the Emerging Issues Task Force (EITF) released issue No. 97-10,
"The Effect of Lessee Involvement in Asset Construction." Issue No. 97-10 is
applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when construction of
the asset is completed. The consensus reached in Issue No. 97-10 applies to
construction projects committed to after May 21, 1998 and also to those projects
that were committed to on May 21, 1998 if construction does not commence by
December 31, 1999. Currently, the Company finances a majority of its theatre
construction through a leasing arrangement with a financial institution. Unless,
the Company changes certain elements of its leasing arrangement, the Company
believes that Issue No. 97-10 will require certain of its future operating
leases to be recorded on its consolidated balance sheet as lease financing
arrangements. The American Institute of Certified Public Accountants (AICPA)
recently issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activity" which must be adopted by the Company in fiscal 2000. The
Company is currently evaluating this standard and anticipates that it will incur
a cumulative effect charge at between $4 million and $6 million relative to
lease costs incurred prior to openings of theatres which were previously allowed
to be capitalized and amortized by generally accepted accounting principles.
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" within the meaning of the
Private Securities Litigation Reform Act of 1995.
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, delays
in obtaining leases for new megaplex locations, construction risks and delays,
the lack of strong film product, the impact of competition, 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 Mexican and South American motion picture exhibition
markets. 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 January 31, 1999,
the Company had outstanding borrowings of $12.8 million, carrying a variable
interest rate, which was 7.16% 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 Mexico and 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 these investments
are in Mexico and South America and because the operations of each of these
entities are conducted utilizing local currencies, the Company's earnings are
exposed to foreign currency exchange rate changes. In particular, because of the
classification of Mexico as a hyper-inflationary economy, foreign exchange gains
or losses attributable to net monetary assets or liabilities in the Mexican
operations directly impact equity earnings in Mexico. Using the January 31, 1999
net monetary asset (liability) position of the Company's Mexican investment, a
10% negative movement in the peso exchange rate would not have a significant
impact on the consolidated pre-tax earnings of the Company. Such market risk
relative to exchange fluctuations does not exist in the Company's South American
locations since these 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
these Mexican and South American locations.
The Company's venture capital portfolio is primarily exposed to risks arising
from changes in equity prices. Such portfolio has been segmented into three
categories. The first category includes those securities that have been
classified as trading. A portion of the Company's holding in Global TeleSystems
Group, Inc. ("GTS") is included therein. This security is subject to
considerable market risk due to its volatility. The GTS shares during the first
quarter, have traded as high as $65.75 and as low as $39.75. At January 31,
1999, the GTS shares closed at $62.625. Currently, 260,000 shares of GTS are
classified by the Company as trading securities. A 20% fluctuation in the value
of these securities from the January 31, 1999 price, would impact pre-tax
earnings and total assets by $3.3 million.
The second category of investments held in the portfolio relate to those
marketable equity securities classified as "available-for-sale." Two holdings
are classified herein: the remainder of the Company's investment in GTS and its
investment in an optical and photo service provider, GrandVision. The market
volatility of the GTS stock has been described above. GrandVision shares, during
the first quarter, have traded as high as 24.80 euros and as low as 15.11 euros.
As of January 31, 1998, the GrandVision shares closed at 24.00 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
value of the GrandVision and GTS available-for-sale securities would
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either reduce or increase total assets by $21.3 million. A 10% fluctuation in
the value of the euro vs. the US dollar (holding the value of the underlying
equity security constant) could reduce or increase total assets by $0.9 million
and impact after tax earnings by $0.5 million.
The final category of securities in the Company's venture capital portfolio
include 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.
10.26 GCC Investments, Inc. Incentive Pool Plan Second
Amendment
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 January 31, 1999.
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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 17, 1999 /s/ Richard A. Smith
-------------------------------
Richard A. Smith
Chairman of the Board of
Directors and Chief Executive
Officer
Date: March 17, 1999 /s/ G. Gail Edwards
-------------------------------
G. Gail Edwards
Vice President, Chief Financial
Officer and Treasurer
Principal Accounting Officer
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