1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 1999
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Commission File Number 12360
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GC COMPANIES, INC.
- --------------------------------------------------------------------------------
(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.)
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 June 8, 1999, there were outstanding 7,796,351 shares of the issuer's
common stock, $.01 par value.
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GC COMPANIES, INC.
INDEX
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PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
April 30, 1999 and October 31, 1998 1
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended April 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended April 30, 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 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Part II. OTHER INFORMATION 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit 27.1 Financial Data Schedule
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GC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30,
1999 October 31,
(Unaudited) 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 10,775 $ 2,479
Short-term investments -- 12,989
Marketable equity securities 139,674 78,162
Receivable due from financing institution 31,826 21,735
Other current assets 9,514 7,565
Income tax receivable 8,423 12,618
-------- --------
Total current assets 200,212 135,548
Property and equipment, net 111,249 112,599
Portfolio investments 39,626 61,769
Investment in international theatre affiliates 59,133 59,495
Other assets 7,083 6,590
Deferred income taxes 13,960 13,960
-------- --------
$431,263 $389,961
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 596 $ 639
Trade payables 36,001 32,907
Liability for early lease terminations 32,319 36,579
Other current liabilities 82,685 89,680
Deferred income taxes 27,606 11,793
-------- --------
Total current liabilities 179,207 171,598
Long-term liabilities:
Capital lease obligations 1,428 1,722
Other long-term liabilities 37,122 33,523
Revolving credit facility 25,000 16,775
-------- --------
Total long-term liabilities 63,550 52,020
Shareholders' equity:
Common stock 78 77
Additional paid-in capital 139,786 137,049
Accumulated other comprehensive income 44,279 20,782
Unearned compensation (2,568) --
Retained earnings 6,931 8,435
-------- --------
Total shareholders' equity 188,506 166,343
-------- --------
$431,263 $389,961
======== ========
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 Six Months For The Three Months
Ended April 30, Ended April 30,
-------------- --------------
Revenues: 1999 1998 1999 1998
---- ---- ---- ----
Admissions $118,128 $137,668 $ 49,710 $ 56,863
Concessions 53,348 62,870 22,016 26,203
Other 7,138 6,019 2,490 2,404
-------- -------- -------- --------
178,614 206,557 74,216 85,470
Costs and expenses:
Film rentals 59,008 68,695 22,781 25,373
Concessions 9,755 10,545 3,821 4,031
Theatre operations and administrative expenses 111,778 115,536 53,556 57,024
Depreciation and amortization 8,019 9,447 4,144 4,736
Loss (gain) on disposition of theatre assets (2,132) 1,210 (2,182) 1,022
Loss on impairment of theatre assets 500 -- 452 --
Corporate expenses 3,120 2,692 1,612 1,420
-------- -------- -------- --------
Operating loss (11,434) (1,568) (9,968) (8,136)
Equity (losses) gains in theatre affiliates (2,139) (796) (634) 191
Investment income, net 11,729 168 6,408 327
Interest expense (1,045) (237) (665) (120)
Gain (loss) on disposition of non-operating assets 383 866 (9) 996
-------- -------- -------- --------
Loss before income taxes (2,506) (1,567) (4,868) (6,742)
-------- -------- -------- --------
Income tax benefit 1,002 627 1,947 2,697
-------- -------- -------- --------
Net loss $ (1,504) $ (940) $ (2,921) $ (4,045)
======== ======== ======== ========
Net loss per share:
Basic $ (0.20) $ (0.12) $ (0.38) $ (0.52)
======== ======== ======== ========
Diluted $ (0.20) $ (0.12) $ (0.38) $ (0.52)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 7,711 7,709 7,712 7,710
======== ======== ======== ========
Diluted 7,711 7,709 7,712 7,710
======== ======== ======== ========
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 Six Months
Ended April 30,
---------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $ (1,504) $ (940)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Depreciation and amortization 8,019 9,447
Equity in losses of theatre affiliates 2,139 796
Loss from portfolio investments 8,813 647
Gain on marketable equity securities
designated as trading (19,859) (8,619)
Gain on sale of investment securities (614) --
(Gain) loss on impairment or disposition
of theatre assets (2,015) 344
Other non-cash activities 3,680 (314)
Changes in assets and liabilities:
Liability for early lease terminations (4,260) --
Income tax receivable 4,195 --
Trade payables 3,094 6,419
Other current assets and liabilities (19,947) (6,293)
-------- --------
Net cash (used) provided by operating activities (18,259) 1,487
-------- --------
Cash flows from investing activities:
Capital expenditures (10,042) (11,492)
Proceeds from the disposition of theatre assets 5,295 6,097
Proceeds from the liquidation of
short-term investments 12,989 20,014
Proceeds from sale of marketable securities 12,513 --
Purchase of portfolio investments -- (11,042)
Advances to international theatre affiliates (1,419) (13,082)
Other investing activities (849) (663)
-------- --------
Net cash provided (used) by investing activities 18,487 (10,168)
-------- --------
Cash flows from financing activities:
Increase in revolving credit facility 8,225 --
Other financing activities (157) (107)
-------- --------
Net cash provided (used) by financing activities 8,068 (107)
-------- --------
Net increase (decrease) in cash and
cash equivalents 8,296 (8,788)
Cash and cash equivalents at beginning of period 2,479 30,038
-------- --------
Cash and cash equivalents at end of period $ 10,775 $ 21,250
======== ========
See Notes to Condensed Consolidated Financial Statements.
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GC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of GC Companies, Inc. (GCC
or the Company) are submitted in response to the requirements of Form 10-Q
and should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K. In the
opinion of management, these financial statements contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the interim periods presented. Certain
prior year amounts have been reclassified to conform to the current year
presentation. The Company's business is seasonal in nature, and the results
of operations for these periods historically have not been indicative of
the results for the full year.
2. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
As of April 30, 1999, information concerning marketable equity securities
and portfolio investments was as follows:
(In Thousands) Change in Net Unrealized Holding
Gain/(Loss)
-----------
Aggregate Cumulative Gross
Carrying Unrealized Holding Three Months Ended Six Months Ended
Investment Classification Value (a) Gains/(Losses) April 30, 1999 April 30, 1999
- ---------- -------------- --------- -------------- -------------- --------------
MARKETABLE EQUITY SECURITIES:
Global TeleSystems Group, Inc Trading (b) $ 4,629 $ 3,659 $ 245 $ 1,787
Global TeleSystems Group, Inc Available-for-sale (c) 97,943 76,350 5,457 39,797
-------- -------- -------- --------
Total Global Telesystems Group, Inc. 102,572 80,009 5,702 41,584
PrimaCom AG Trading (b) 27,764 14,434 14,434 14,434
GrandVision Available-for-sale (c) 9,338 (2,177) 481 451
-------- -------- -------- --------
Total Marketable Equity Securities 139,674 92,266 20,617 56,469
-------- -------- -------- --------
PORTFOLIO INVESTMENTS:
American Capital Access (d) 28,731 -- -- --
Fuelman (d) 10,895 -- -- --
Teletrac -- -- -- --
-------- -------- -------- --------
Total Portfolio Investments 39,626 -- -- --
-------- -------- -------- --------
Total Marketable Equity Securities $179,300 $ 92,266 $ 20,617 $ 56,469
and Portfolio Investments ======== ======== ======== ========
(a) Carrying value for marketable equity securities is determined based on the
share price of the securities traded on public markets. The carrying value
of the non-public portfolio investments is the value under the equity
method of accounting.
(b) Unrealized gains or losses on securities classified as trading are recorded
in the consolidated statement of operations within the caption "Investment
income, net."
(c) Unrealized gains or losses on securities classified as available-for-sale
are recorded in the balance sheet net of tax within the shareholders'
equity caption "Accumulated other comprehensive income."
(d) These investments are in non-public companies and are accounted for on the
equity basis because the Company has a greater than 20% equity interest in
each.
During the second quarter, the Company sold 190,000 of the Global
TeleSystems Group, Inc. ("GTS") shares, designated as trading securities,
generating net proceeds of $12.5 million and a related pre-tax gain of $0.6
million. The cumulative pre-tax gain recognized in the consolidated
statement of operations on these 190,000 shares to the date of sale over
the Company's original cost basis was $9.9 million.
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On December 30, 1998, Kabelmedia, the German cable television systems
operator, merged with another company. Kabelmedia shareholders now own 47%
of the new company, which has been renamed PrimaCom AG ("PrimaCom"). GCC's
ownership in the merged company is approximately 4.3%. In February, 1999
PrimaCom successfully completed an initial public offering and is currently
traded on the German Neuer Markt under the symbol "PRC." As a result of
this public offering, and in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," the Company reclassified this investment
from portfolio investments to marketable equity securities and recorded it
at its fair value as of April 30, 1999. Within the category of marketable
equity securities, the PrimaCom shares have been designated as trading
securities.
Equity in the losses of the investments accounted for on the equity basis
is included in the consolidated statements of operations under the caption
"Investment income, net" and for the six months ended April 30, 1999 and
1998 were $0.5 million and $0.6 million, respectively. Equity losses on
these investments for the current quarter of 1999 were $0.2 million and
equity gains were $0.1 million for the same period last year.
During the second quarter of 1999, Teletrac, in which the Company has
invested $8.3 million and which was carried on a cost basis, 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 restructuring of that debt.
In addition, Teletrac disclosed that if it fails to secure additional
capital or alternative sources of liquidity, 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. In addition, on June 9, 1999, Teletrac filed a petition
under Chapter 11 of the Bankruptcy Code. Because Teletrac's fund-raising
efforts are not expected to yield sufficient new capital at an acceptable
valuation, GCC believes its investment has become impaired. As a result,
during the second quarter of 1999, the Company recorded a charge of $8.3
million to the consolidated statements of operations under the caption
"Investment income, net."
3. 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 for theatres closed in the fourth quarter of 1998 and for 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 activity in the liability for early lease terminations was as follows:
(In Thousands)
BALANCE AT OCTOBER 31, 1998 $36,579
Activity During Q1:
Payments made for lease terminations and rent (1,527)
Payments made for other closing costs (301)
-------
BALANCE AT JANUARY 31, 1999 34,751
-------
Activity During Q2:
Payments made for lease terminations and rent (2,797)
Payments made for other closing costs (103)
Changes in estimate for lease terminations 395
Changes in estimate for other closing costs 73
-------
BALANCE AT APRIL 30, 1999 $32,319
=======
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During the second quarter of 1999, the Company executed the termination of
three leases resulting in cash payments of approximately $2.3 million and
an additional $0.5 million of rent payments. These lease terminations
resulted in a favorable change in the early lease termination reserve of
$0.9 million, which was offset by the recording of an additional accrual of
$1.3 million for revisions in the estimated cost to exit the leases of two
theatres that were designated as impaired during the fourth quarter of
fiscal 1998, resulting in a net change in the reserve of $0.4 million.
4. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION
The Company adopted 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 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 includes the regional and home office administration.
The Company evaluates both domestic and international theatre performance
and allocates resources based on current and projected earnings before
interest, taxes, depreciation and amortization. Information concerning
earnings (loss) before income taxes 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 Company
evaluates operations on this basis. The adjustment column is utilized to
return the international theatre segment to the equity method, as the
international joint ventures are 50% owned, and eliminate intercompany
balances.
TOTAL COMPANY
-------------
(In thousands)
THREE MONTHS ENDED APRIL 30, 1999: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
Revenues:
Admissions $ 49,710 $ 10,070 $ -- $ 59,780 $(10,070) $ 49,710
Concessions 22,016 2,960 -- 24,976 (2,960) 22,016
Other 2,490 509 -- 2,999 (509) 2,490
-------- -------- -------- -------- -------- --------
Total revenues 74,216 13,539 -- 87,755 (13,539) 74,216
-------- -------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization (5,696) 1,628 (1,858) (5,926) (1,628) (7,554)
Net investment income 1 -- 6,407 6,408 -- 6,408
Earnings (loss) before income taxes (8,181) (241) 3,965 (4,457) (411) (4,868)
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THREE MONTHS ENDED APRIL 30, 1998: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
Revenues:
Admissions $ 56,863 $ 5,984 $ -- $ 62,847 $ (5,984) $ 56,863
Concessions 26,203 2,210 -- 28,413 (2,210) 26,203
Other 2,404 76 -- 2,480 (76) 2,404
-------- -------- -------- -------- -------- --------
Total revenues 85,470 8,270 -- 93,740 (8,270) 85,470
-------- -------- -------- -------- -------- --------
Earnings (loss) before taxes interest,
depreciation and amortization (592) 531 (1,786) (1,847) (531) (2,378)
Net investment income (loss) (24) -- 351 327 -- 327
Earnings (loss) before income taxes (5,419) (447) (1,356) (7,222) 480 (6,742)
DOMESTIC THEATRES
-----------------
THREE MONTHS ENDED APRIL 30, 1999: Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $ 27,910 $ 12,279 $ 9,521 $ -- $ 49,710
Concessions 12,115 5,505 4,396 -- 22,016
Other 1,133 798 559 -- 2,490
-------- -------- -------- -------- --------
Total revenues 41,158 18,582 14,476 -- 74,216
-------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization 3,039 458 (3,252) (5,941) (5,696)
Earnings (loss) before income taxes 2,202 (665) (3,777) (5,941) (8,181)
THREE MONTHS ENDED APRIL 30, 1998: Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $ 29,609 $ 12,395 $ 14,859 $ -- $ 56,863
Concessions 13,373 5,801 7,029 -- 26,203
Other 981 858 565 -- 2,404
-------- -------- -------- -------- --------
Total revenues 43,963 19,054 22,453 -- 85,470
-------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization 5,965 2,844 (3,520) (5,881) (592)
Earnings (loss) before income taxes 3,393 1,762 (4,693) (5,881) (5,419)
TOTAL COMPANY
-------------
SIX MONTHS ENDED APRIL 30, 1999: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
Revenues:
Admissions $118,128 $ 17,772 $ -- $135,900 $(17,772) $118,128
Concessions 53,348 5,601 -- 58,949 (5,601) 53,348
Other 7,138 933 -- 8,071 (933) 7,138
-------- -------- -------- -------- -------- --------
Total revenues 178,614 24,306 -- 202,920 (24,306) 178,614
-------- -------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization (1,333) 158 (3,714) (4,889) (158) (5,047)
Net investment income (loss) 38 (555) 11,691 11,174 555 11,729
Earnings (loss) before income taxes (7,363) (3,473) 7,087 (3,749) 1,243 (2,506)
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SIX MONTHS ENDED APRIL 30, 1998: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
Revenues:
Admissions $137,668 $ 9,517 $ -- $147,185 $ (9,517) $137,668
Concessions 62,870 3,531 -- 66,401 (3,531) 62,870
Other 6,019 193 -- 6,212 (193) 6,019
-------- -------- -------- -------- -------- --------
Total revenues 206,557 13,241 -- 219,798 (13,241) 206,557
-------- -------- -------- -------- -------- --------
Earnings (loss) before taxes interest,
depreciation and amortization 12,147 375 (3,058) 9,464 (375) 9,089
Net investment income (loss) (75) -- 243 168 -- 168
Earnings (loss) before income taxes 2,204 (1,430) (2,817) (2,043) 476 (1,567)
DOMESTIC THEATRES
-----------------
SIX MONTHS ENDED APRIL 30, 1999: Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $ 65,715 $ 28,891 $ 23,522 $ -- $118,128
Concessions 29,095 13,149 11,104 -- 53,348
Other 3,468 1,936 1,734 -- 7,138
-------- -------- -------- -------- --------
Total revenues 98,278 43,976 36,360 -- 178,614
-------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization 11,462 2,694 (4,221) (11,268) (1,333)
Earnings (loss) before income taxes 8,774 582 (5,012) (11,707) (7,363)
SIX MONTHS ENDED APRIL 30, 1998: Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $ 71,477 $ 28,897 $ 37,294 $ -- $137,668
Concessions 31,693 13,406 17,771 -- 62,870
Other 2,597 1,620 1,802 -- 6,019
-------- -------- -------- -------- --------
Total revenues 105,767 43,923 56,867 -- 206,557
-------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization 19,025 7,519 (2,714) (11,683) 12,147
Earnings (loss) before income taxes 14,560 5,375 (5,357) (12,374) 2,204
The Company's South American joint venture, Hoyts General Cinema South
America ("HGCSA") has entered into a $75 million debt financing arrangement
with a local bank to fund its operations in Argentina, which is secured by
the several guaranty of the joint venture's partners. Availability of this
financing beyond $50 million is subject to syndication to third-party
financial institutions. Under the several guaranty of the Argentina debt
facility, the Company is liable for 50% of the outstanding borrowings. At
April 30,1999, the Company's portion of the outstanding borrowings under
this facility that it guarantees was approximately $5.0 million.
HGCSA has entered into an $18.0 million debt financing arrangement with a
local bank to fund its operations in Chile, which is secured by the several
guaranty of the partners. The Company is liable for 47.5% of the
outstanding borrowings. At April 30, 1999, the Company's portion of the
outstanding borrowings under this facility, that it guarantees or
indemnifies, was approximately $8.2 million.
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5. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is shown below.
Option awards and contingently returnable shares were excluded from the
dilutive share computation because of their anti-dilutive impact on
earnings per share. Such shares using the computational guidance totaled,
in thousands, 150 and 50 for the six months ended April 30, 1999 and 1998
and 159 and 53 for the three month period then ended.
For The Six For The Three
Reference Months Ended Months Ended
--------- ------------ ------------
(In thousands, except per share data) 4/30/99 4/30/98 4/30/99 4/30/98
------- ------- ------- -------
Net loss A $(1,504) $ (940) $(2,921) $(4,045)
Determination of shares:
Weighted average number of common shares outstanding B 7,711 7,709 7,712 7,710
Diluted effect of contingently returnable shares and
shares issuable on exercise of stock options, net
of shares assumed to be purchased out of proceeds at
market price -- -- -- --
Weighted average common shares outstanding for diluted
computation C 7,711 7,709 7,712 7,710
Net earnings per share:
Basic A/B $ (0.20) $ (0.12) $ (0.38) $ (0.52)
Diluted A/C $ (0.20) $ (0.12) $ (0.38) $ (0.52)
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company adopted SFAS 130 "Reporting Comprehensive Income," in the first
quarter of 1999. SFAS No. 130 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 income balance, which is comprised solely
of the unrealized gain on the marketable equity securities:
(In thousands) FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
4/30/99 4/30/98 4/30/99 4/30/98
------- ------- ------- -------
Beginning balance $20,782 $ -- $41,104 $ --
Change during period 23,497 29,361 3,175 29,361
------- ------- ------- -------
Ending balance $44,279 $29,361 $44,279 $29,361
======= ======= ======= =======
7. UNEARNED COMPENSATION
The Company's GCC Investments, Inc. Incentive Pool Plan provides for
performance-based compensation for certain employees based on certain
investment events. A portion of the performance-based compensation is paid
in restricted shares, which vest over a period of time subsequent to the
investment event. The balance in the unearned compensation represents the
unvested portion. Compensation expense related to the restricted shares is
charged to the consolidated statement of operations pro-ratably over the
vesting period. Such expense totaled approximately $303,000 and $152,000
for the six and three month periods ended April 30, 1999.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post- Retirement
Benefits." SFAS No. 132 will be adopted for the Company's fiscal 1999 year
end financial statements. The effect of adopting this standard will not be
material to the Company's financial position or results of operations;
however, it will require additional disclosure. SFAS No. 133, "Accounting
for Derivative Instruments in Hedging Activity" was also recently issued.
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The Company is not required to implement this standard until fiscal 2001.
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. The Company anticipates that changes will be made to
certain elements of its current leasing arrangement to conform with the
requirements of an operating lease under Issue No. 97-10. If the Company is
unsuccessful in this endeavor, future operating leases under the current
leasing arrangement will 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 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
under generally accepted accounting principles.
9. SUBSEQUENT EVENTS
On May 12, 1999, the Company invested $10.0 million in MotherNature.com, a
leading Web-based retailer of vitamins, supplements and minerals. The
Company's investment will be accounted for under the cost method.
Subsequent to the close of the second quarter, the Company sold an
additional 110,000 shares of GTS. This sale included the remaining 70,000
shares designated as trading securities and 40,000 shares of
available-for-sale securities and generated net proceeds of $8.0 million
and a realized pre-tax gain in the third quarter of 1999 of approximately
$2.9 million. The cumulative pre-tax gain recognized in the consolidated
financial statements on these 110,000 shares to the date of sale over the
Company's original cost basis was approximately $6.5 million.
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GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1999 VERSUS SIX MONTHS ENDED APRIL 30, 1998
- ----------------------------------------------------------------------
THEATRE REVENUES - Total revenues decreased 13.5% to $178.6 million for the six
months ended April 30, 1999 from $206.6 million for the same period in 1998
primarily attributable to a 17.2% decrease in patronage partially offset by a
3.1% increase in concession sales per patron and a 3.6% 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,
and a reduction in screens, primarily the result of theatres closed in the last
nine months. 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 1,059
screens at 142 locations at April 30, 1999 compared to 1,150 screens at 175
locations at April 30, 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.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operating and administrative expenses as well as
depreciation and amortization) decreased in absolute value by $15.6 million to
$188.6 million for the six months ended April 30, 1999 from $204.2 in the same
1998 period. However, as a percentage of total revenues, the cost of theatre
operations increased to 105.6% for the six months ended April 30, 1999 compared
to 98.8% for the same period in 1998. This increased percentage of the cost of
theatre operations to total revenues for the first six months of the current
year compared to the same period in 1998 was primarily due to certain fixed
operating costs, pre-opening expenses incurred in the opening of six new
theatres in the first six months of this year and lower concession margins.
Fixed expenses such as occupancy costs, facility repairs and administrative
expenses are compared to a lower revenue amount generated in the current year
than the previous year. Occupancy costs have increased as a percentage of total
revenues in 1999 compared to the same period in 1998 primarily as a result of
the Company's operating lease arrangement associated with new theatres. The
average pre-opening costs associated with a new multiplex theatre range from
$0.2 million to $0.5 million but may vary depending on several factors
including, among other things, number of screens, location of the theatre and
additional amenities which may be offered in the theatre such as premium
auditoriums and cafes. Lower concession margins are primarily due to the
introduction of new products which changes the product mix.
GAIN ON DISPOSITION OF THEATRE ASSETS - During the six months ended April 30,
1999, the Company sold three theatres in Michigan, two theatres in Texas, a
theatre in New York and miscellaneous assets generating net proceeds of $4.7
million and a pre-tax gain of $2.1 million.
INVESTMENT INCOME, NET - The Company recorded investment income of $11.7 million
for the six months ended April 30, 1999 compared to $0.2 million for the same
period in 1998. The Company's investment income for the six months ended April
30, 1999 included the unrealized gain on the PrimaCom trading securities of
approximately $14.4 million, the unrealized gain on the GTS trading securities
of approximately $6.1 million, and the realized gain on the GTS trading
securities sold during the quarter of approximately $0.6 million, partially
offset by the impairment charge on the Teletrac investment of $8.3 million and
additional incentive performance based compensation related to the investment
portfolio of $1.1 million. During the first six months of 1998, the Company
recorded an unrealized gain on the GTS trading securities of $8.6 million, $0.9
million of dividend and interest income partially offset by the accrual of
performance based compensation related to the investment portfolio of $8.6
million and $0.8 million pre-tax charge to record the Company's share of losses
from its equity method investments.
EQUITY LOSS IN THEATRE AFFILIATES - The Company recorded net equity losses in
theatre affiliates of $2.1 million for the first six months of 1999 compared to
$0.8 million for the same period in 1998. The equity losses primarily result
from the Company's international theatre joint ventures and are primarily due to
administrative and start-up costs in opening new theatres. In addition,
operating results in Chile have been negatively impacted by a soft economic
environment.
INTEREST EXPENSE - The Company's interest expense increased to $1.0 million in
1999 mainly due to borrowings outstanding during the quarter under the revolving
credit facility. During the same period in 1998, there were no revolving credit
balances outstanding.
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
RESULTS OF OPERATIONS
---------------
THREE MONTHS ENDED APRIL 30, 1999 VERSUS THREE MONTHS ENDED APRIL 30, 1998
- --------------------------------------------------------------------------
THEATRE REVENUES - Total revenues decreased 13.2% to $74.2 million for the three
months ended April 30, 1999 from $85.5 million for the same period in 1998
primarily attributable to a 16.9% decrease in patronage partially offset by a
5.2% increase in the average ticket price and a 1.3% increase in concession
sales per patron. The decrease in patronage was mainly attributable to
competitor impacts in certain markets, film product that was not as strong as
last year, and a reduction in screens, primarily the result of theatres closed
in the last nine months. 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
1,059 screens at 142 locations at April 30, 1999 compared to 1,150 screens at
175 locations at April 30, 1998. 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 as well as
depreciation and amortization) decreased in absolute value by $6.9 million to
$84.3 million for the three months ended April 30, 1999 from $91.2 in the same
1998 period. However, as a percentage of total revenues, the cost of theatre
operations increased to 113.6% for the quarter ended April 30, 1999 compared to
106.7% for the same 1998 quarter. This increased percentage of the cost of
theatre operations to total revenues for the second quarter of 1999 compared to
the same period in 1998 was primarily due to certain fixed operating costs, as
well as lower concession and film margins. Fixed expenses such as occupancy
costs, facility repairs and administrative expenses are compared to a lower
revenue amount generated in the current quarter than the same period in the
previous year. Occupancy costs have increased as a percentage of total revenues
in 1999 compared to the same period in 1998 primarily as a result of the
Company's operating lease arrangement associated with new theatres. Lower film
margins are due to the mix of film playing in the theatres and the length of
time they have been playing since their release date. Lower concession margins
are primarily due to the introduction of new products which change the product
mix.
GAIN ON DISPOSITION OF THEATRE ASSETS - During the second quarter of 1999, the
Company sold three theatres in Michigan, a theatre in New York and certain
miscellaneous assets generating net proceeds of $4.5 million and a realized
pre-tax gain of $2.2 million.
INVESTMENT INCOME, NET - The Company recorded investment income of $6.4 million
in the second quarter of 1999 compared to $0.3 million in the same 1998 period.
The Company's investment income for the quarter ended April 30, 1999 included
the unrealized gain on the PrimaCom trading securities of approximately $14.4
million, the unrealized gain on the GTS trading securities of approximately $0.2
million, the realized gain on the GTS trading securities sold during the quarter
of approximately $0.6 million and other investment income of $0.3 million
partially offset by the impairment charge on the Teletrac investment of $8.3
million and additional incentive performance based compensation of $0.8 million.
During the second quarter of 1998, the Company recorded an unrealized gain on
the GTS trading securities of $8.6 million, $0.3 million of dividend and
interest income partially offset by the accrual of performance based
compensation related to the investment portfolio of $8.6 million.
EQUITY LOSS IN THEATRE AFFILIATES - The Company recorded net equity losses in
theatre affiliates of $0.6 million for the second quarter of 1999 compared to
equity earnings of $0.2 million for the same period in 1998. The equity losses
in 1999 primarily result from the Company's international theatre joint ventures
and are primarily due to administrative and start-up costs in opening new
theatres. In addition, operating results in Chile have been negatively impacted
by a soft economic environment.
INTEREST EXPENSE - The Company's interest expense increased to $0.7 million in
the second quarter of 1999 mainly due to borrowings outstanding during the
quarter under the revolving credit facility. During the same period in 1998,
there were no revolving credit balances outstanding.
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
---------------
Virtually all of GCC's revenues are collected in cash, principally through
theatre admissions and concession sales. The Company has an operating "float"
which partially finances its operations and allows the Company to operate on a
negative working capital basis. This "float" exists because admissions and
concessions revenues are typically received in cash, while film rentals and
concessions costs are ordinarily paid to distributors and vendors generally 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.
DOMESTIC THEATRES
For the six months ended April 30, 1999, General Cinema Theatres, Inc. (GCT)
opened six new theatres: a 15 screen theatre in Atlanta, Georgia, a 14 screen
theatre in Irving, Texas, a 17 screen theatre in Baltimore, Maryland, a 12
screen theatre in Pennsylvania, an 11 screen theatre in Seattle, Washington, a
16 screen theatre in Clifton, New Jersey and a managed unit with a single
screen. Aggregate costs, including construction and pre-opening costs paid by
the Company in opening these theatres amounted to approximately $5.3 million.
The aggregate construction costs paid by the Company for a theatre vary
depending on the lease negotiated with the landlord, the number of auditoriums,
additional amenities which may be offered at the theatre and the portion of the
costs provided by the Company's agreement with a major financial institution to
provide operating leases on leasehold improvements and equipment. Capital
outflows have been minimized on these projects as a result of this operating
lease agreement. The overall operating lease 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 $83.6 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. The receivable due from a financial institution results
from the Company initially advancing monies for leased assets related to new
theatres as the financial institution's agent in accordance with its leasing
arrangement. On a periodic basis, these advances are reimbursed by the financial
institution. At April 30, 1999, the Company had an outstanding receivable of
$31.8 million, an increase during the first six months of fiscal 1999 of $10.1
million. This increase is primarily due to monies advanced by the Company for
the theatre that opened during the second quarter and the two theatres opening
in the third quarter of 1999.
The Company has significant lease commitments. Lease payments totaled $71.2
million in 1998 and minimum lease payments are anticipated to approximate $61.2
million in 1999. Substantially all domestic leases of the Company are
noncancellable.
During the first six months of 1999, the Company sold two theatres in Texas, a
theatre in New York, three theatres in Michigan and miscellaneous assets
realizing net proceeds of $4.7 million. In addition, the Company sold certain
non-operating assets, primarily land in Indiana, realizing net proceeds of
approximately $0.6 million. The Company closed an additional nine theatres with
36 screens. Seven of the theatres had previously been identified as impaired,
and the costs associated with the closing of these theatres were provided for in
1998. At April 30, 1999, the Company had an outstanding liability for early
lease terminations of $32.3 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 payments in connection with the closing of theatres in the future.
The Company made cash payments of approximately $4.7 million for the cost of
exiting certain leases and other costs during the six months ended April 30,
1999.
For the six months ended April 30, 1999, GCT made expenditures of $8.1 million
for leasehold improvements, furniture and equipment purchases as well as
information services related projects. Domestic capital expenditures are
expected to approximate $18.3 million in 1999. In addition, the Company made
expenditures of $2.0 million associated with its Sundance Cinema joint venture.
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GCC anticipates contributing a total of $5.3 million of cash as well as
properties to this venture in 1999. The first Sundance theatre is anticipated to
open in calendar year 2000.
INTERNATIONAL THEATRES
During the six months ended April 30, 1999, the Company opened a 6-screen
theatre in Cordoba, Argentina through its South American joint venture. Hoyts
General Cinema South America ("HGCSA") anticipates opening an additional 67
screens and 5 units by the end of calendar year 1999. This theatre expansion
program will be financed through debt facilities the joint venture negotiated in
Chile and Argentina as well as capital contributed by the partners. During the
first six months of 1999, the Company advanced $1.4 million to the South
American joint venture and anticipates advancing a total of $8.8 million during
fiscal year 1999. The anticipated $8.8 million contribution is required under
the joint venture agreement only if sufficient bank financing is not available.
HGCSA has obtained debt financing through its local subsidiaries for its theatre
expansion program in Chile and Argentina.
HGCSA has entered into a $75 million debt financing arrangement with a local
bank to fund its operations in Argentina, which is secured by the several
guaranty of the joint venture's partners. Availability of this financing beyond
$50 million is subject to syndication to third-party financial institutions.
Under the several guaranty of the Argentina debt facility, the Company is liable
for 50% of the outstanding borrowings. At April 30,1999, the Company's portion
of the outstanding borrowings under this facility that it guarantees was
approximately $5.0 million.
HGCSA has entered into a $18.0 million debt financing arrangement with a local
bank to fund its operations in Chile, which is secured by the several guaranty
of the partners. The Company is liable for 47.5% of the outstanding borrowings.
At April 30, 1999, the Company's portion of the outstanding borrowings under
this facility that it guarantees or indemnifies was approximately $8.2 million.
INVESTMENT PORTFOLIO
At April 30, 1999, marketable equity securities were $139.7 million, an increase
of $61.5 million from the balance at October 31, 1998 of $78.2 million. The
increase in marketable equity securities during the first six months of 1999 was
due to the appreciation in value of the Company's investment in GTS of $32.8
million, appreciation in its GrandVision investment of $0.9 million and the
Company's PrimaCom AG ("PrimaCom") investment. PrimaCom, formerly named
Kabelmedia, completed a successful initial public offering during the second
quarter of 1999. As a result of the public offering, and in accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company reclassified this
investment from portfolio investments to marketable equity securities and
recorded its fair value on April 30, 1999 of $27.8 million.
During the second quarter of 1999, the Company sold 190,000 of the GTS shares,
designated as trading securities, generating net proceeds of $12.5 million and a
related pre-tax gain of $0.6 million. The cumulative pre-tax gain recognized in
the consolidated statement of operations on these 190,000 shares to the date of
sale over the Company's original cost basis was $9.9 million.
During the second quarter of 1999, Teletrac, in which GCC has invested $8.3
million and which was carried on a cost basis, 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 restructuring of that debt. In addition, Teletrac
disclosed that if it fails to secure additional capital or alternative sources
of liquidity, 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. In addition, on June 9, 1999,
Teletrac filed a petition under Chapter 11 of the Bankruptcy Code. Because
Teletrac's fund-raising efforts are not expected to yield sufficient new capital
at an acceptable valuation, GCC believes its investment has become impaired. As
a result, during the second quarter of 1999, the Company recorded a charge of
$8.3 million to the consolidated statements of operations under the caption
"Investment income, net."
OTHER
The Company received proceeds of $13.0 million from the liquidation of certain
short-term investments during the six months ended April 30, 1999. In addition,
the Company received an income tax refund during the first six months of 1999 of
approximately $5.2 million.
The Company made net borrowings of $8.2 million on its outstanding revolving
credit facility and paid interest of $0.8 million during the first six months of
1999. The average interest rate for the first six months of 1999 was 7.0%.
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The Company believes that cash generated from operations, asset sales under
agreement, cash and cash equivalents of $10.8 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued and SFAS No. 132,
"Employers' Disclosures about Pensions and Other PostRetirement Benefits." SFAS
No. 132 will be adopted for the Company's fiscal 1999 year end financial
statements. The effect of adopting this standard is not material to the
Company's financial position or results of operations; however, it 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 2001. 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. The
Company anticipates that changes will be made to certain elements of its current
leasing arrangement to conform with the requirements of an operating lease under
Issue No. 97-10. If the Company is unsuccessful in this endeavor, future
operating leases under the current leasing arrangement will 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
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.
SUBSEQUENT EVENTS
On May 12, 1999, the Company invested $10.0 million in MotherNature.com, a
leading Web-based retailer of vitamins, supplements and minerals. The Company's
investment, will be accounted for under the cost method. Subsequent to the close
of the second quarter, the Company sold an additional 110,000 shares of GTS, the
remaining 70,000 shares designated as trading securities and 40,000 shares of
available-for-sale securities, generating net proceeds of $8.0 million and a
realized pre-tax gain in the third quarter of 1999 of approximately $2.9
million. The cumulative pre-tax gain recognized in the consolidated statement of
operations on these 110,000 shares to the date of sale over the Company's
original cost basis was $6.5 million.
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 late summer 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 is in the
process of developing contingency plans for key operational areas which might be
affected by the Year 2000 problem. Under a worst case scenario, the Company
could experience a temporary delay in delivery of film product - in which case,
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the theatres would continue to exhibit films on hand. Since there are few, if
any, new pictures released in January, the Company does not believe that this
would have a substantial impact on its business. Additional areas of operation
that might be impacted by Year 2000 problems include, but are not limited, to
the following: loss of local or regional electric power, loss of
telecommunication services, bank error, computer errors by vendors or our
internal systems including the box office ticketing systems, and delays in
concession deliveries. The Company has the ability to issue theatre tickets
manually in the event of a system failure and is working with all its suppliers
to ensure it has an adequate inventory of all supplies on hand before December
31, 1999. The total cost of executing this plan is estimated at $2.0 million.
The Company's aggregate cost estimate 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 compliant 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.
FORWARD-LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to shareholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates",
"expects", "will continue", "estimates", "projects", or similar expressions are
intended to identify "forward-looking statements". The Company believes that its
forward looking statements are within the meaning of the safe harbor provisions
of the federal securities laws.
The results contemplated by the Company's forward-looking statements are subject
to certain risks, trends and uncertainties that could cause actual results to
vary materially from anticipated results, including without limitation, 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 April 30, 1999,
the Company had outstanding borrowings of $25.0 million, carrying a variable
interest rate, which was 6.2% 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. Recently, Mexico's economy
was removed from the hyper-inflationary category, and, as a result, gains or
losses attributable to net monetary assets or liabilities in the Mexican
operations no longer directly impact equity earnings in Mexico. Market risk
relative to exchange fluctuations does not exist in the Company's Mexican and
South American locations since these currently operate in non hyper-inflationary
environments.
The Company does not consider its cash flows to be currently exposed to exchange
rate risk because it has no current intention of repatriating earnings from
these Mexican and South American locations.
The Company's investment 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
six months of 1999, have traded as high as $74.56 and as low as $39.75. At April
30, 1999, the GTS shares closed at $66.125. At April 30, 1999, 70,000 shares of
GTS are classified by the Company as trading securities. Early in the third
quarter of 1999, the Company disposed of its remaining investment in the GTS
securities designated as trading. In addition, the Company's investment in
PrimaCom recently completed a successful initial public offering during the
second quarter of 1999. These securities have been designated as trading
securities by the Company. PrimaCom's shares, since its initial public offering
through April 30, 1999, have traded as high as 40.50 euros and as low as 29.05
euros. At April 30, 1999, the PrimaCom shares closed at 40.50 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 and earnings. A 20%
fluctuation in the aggregate value of GTS and PrimaCom trading securities from
the April 30, 1999 price would impact pre-tax earnings and total assets by $6.8
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 six months of 1999, have traded as high as 27.20 euros and as low as
15.11 euros. As of April 30, 1998, the GrandVision shares closed at 27.20 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 GrandVision and GTS
available-for-sale securities would either reduce or increase total assets by
$22.5 million.
In addition, the PrimaCom and GrandVision securities are traded in euros. A 10%
fluctuation in the value of the euro vs. the US dollar (holding the value of the
underlying equity securities constant) could impact pre-tax earnings and total
assets by $3.9 million.
The final category of securities in the Company's investment 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. During the second quarter, the Company
determined its investment in Teletrac, a wireless location and two-way messaging
company, had become impaired and recorded a charge of $8.3 million to the
consolidated statement of operations.
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20
PART II
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Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on March 5, 1999. The
following matters were voted upon at the meeting:
1. Election of the following individual as Class II Director for a
term of three years:
Peter C. Read
-------------------------------
For 6,833,706
Withheld 14,085
2. Approval of the Second Amendment to the GCC Investments, Inc.
Incentive Pool Plan
For 6,788,680
Against 47,555
Abstain 11,556
3. Ratification of the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the 1999 fiscal year.
For 6,842,409
Against 1,878
Abstain 3,504
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended April 30, 1999.
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21
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: June 11, 1999 By: /s/ Richard A. Smith
---------------------------------------------
Name: Richard A. Smith
Title: Chairman of the Board of Directors and
Chief Executive Officer
Date: June 11, 1999 By: /s/ G. Gail Edwards
---------------------------------------------
Name: G. Gail Edwards
Title: Vice President, Chief Financial
Officer and Treasurer Principal
Accounting Officer
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