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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 JULY 31, 1999
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Commission File Number 12360
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GC COMPANIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3200876
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 Boylston Street, Chestnut Hill, MA 02467
(Address of principal executive offices) (Zip Code)
(617) 278-5600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of September 9, 1999, there were outstanding 7,796,364 shares of the issuer's
common stock, $.01 par value.
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GC COMPANIES, INC.
INDEX
PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
July 31, 1999 and October 31, 1998 1
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended July 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended July 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 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 20
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 10.27 Second Amended and Restated Agreement Executed May
27, 1999 effective as of November 1, 1999 between the
Company and Paul R. Del Rossi 24
Exhibit 27.1 Financial Data Schedule 31
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GC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31,
1999 October 31,
(Unaudited) 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 10,651 $ 2,479
Short-term investments -- 12,989
Marketable equity securities 134,103 78,162
Receivable due from financing institution 36,731 21,735
Other current assets 6,443 7,565
Income tax receivable -- 12,618
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Total current assets 187,928 135,548
Property and equipment, net 112,005 112,599
Portfolio investments 54,792 61,769
Investment in international theatre affiliates 61,819 59,495
Other assets 9,839 6,590
Deferred income taxes 13,960 13,960
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$440,343 $389,961
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 611 $ 639
Trade payables 38,016 32,907
Liability for early lease terminations 28,870 36,579
Other current liabilities 88,790 89,680
Deferred income taxes 25,559 11,793
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Total current liabilities 181,846 171,598
Long-term liabilities:
Capital lease obligations 1,281 1,722
Other long-term liabilities 39,518 33,523
Revolving credit facility 28,000 16,775
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Total long-term liabilities 68,799 52,020
Shareholders' equity:
Common stock 78 77
Additional paid-in capital 140,193 137,049
Accumulated other comprehensive income 41,133 20,782
Unearned compensation (2,425) --
Retained earnings 10,719 8,435
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Total shareholders' equity 189,698 166,343
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$440,343 $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 For The Nine Months
Ended July 31, Ended July 31,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Admissions $ 76,255 $ 76,108 $ 194,383 $213,776
Concessions 35,278 35,484 88,626 98,354
Other 3,549 3,041 10,687 9,060
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115,082 114,633 293,696 321,190
Costs and expenses:
Film rentals 43,435 42,279 102,443 110,974
Concessions 6,621 6,502 16,376 17,047
Theatre operations and administrative expenses 59,218 56,181 170,996 171,717
Depreciation and amortization 3,956 4,778 11,975 14,225
Loss (gain) on disposition of theatre assets 111 (27) (2,021) 1,183
Loss on impairment of theatre assets 186 -- 686 --
Corporate expenses 1,465 1,474 4,585 4,166
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Operating (loss)earnings 90 3,446 (11,344) 1,878
Equity losses in theatre affiliates (1,017) (78) (3,156) (874)
Investment income, net 8,079 184 19,808 352
Interest expense (678) (106) (1,723) (343)
Gain (loss) on disposition of non-operating assets (162) (80) 221 786
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Earnings before income taxes 6,312 3,366 3,806 1,799
Income tax expense (2,524) (1,347) (1,522) (720)
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Net earnings $ 3,788 $ 2,019 $ 2,284 $ 1,079
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Net earnings per share:
Basic $ 0.49 $ 0.26 $ 0.30 $ 0.14
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Diluted $ 0.49 $ 0.26 $ 0.30 $ 0.14
===========================================================
Weighted average shares outstanding:
Basic 7,719 7,710 7,714 7,709
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Diluted 7,739 7,761 7,731 7,760
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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 Nine Months
Ended July 31,
-------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net earnings $ 2,284 $ 1,079
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Depreciation and amortization 11,975 14,225
Equity in losses of theatre affiliates 3,156 874
Loss from portfolio investments 8,747 647
Gain on marketable equity securities
designated as trading (24,233) (10,309)
Gain on sale of investment securities (4,231) --
(Gain) loss on impairment or disposition
of theatre assets (1,556) 397
Other non-cash activities 5,847 514
Changes in assets and liabilities:
Liability for early lease terminations (7,709) --
Income tax receivable 12,618 --
Trade payables 5,109 11,833
Other current assets and liabilities (16,971) (6,511)
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Net cash (used) provided by operating activities (4,964) 12,749
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Cash flows from investing activities:
Capital expenditures (14,971) (14,790)
Proceeds from the disposition of theatre assets 6,515 6,097
Proceeds from the liquidation of
short-term investments 12,989 20,014
Proceeds from sale of marketable securities 21,457 --
Purchase of portfolio investments (15,554) (11,042)
Advances to international theatre affiliates (5,213) (19,063)
Other investing activities (3,599) (2,108)
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Net cash provided (used) by investing activities 1,624 (20,892)
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Cash flows from financing activities:
Increase in revolving credit facility 11,225 --
Other financing activities 287 (263)
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Net cash provided (used) by financing activities 11,512 (263)
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Net increase (decrease) in cash and
cash equivalents 8,172 (8,406)
Cash and cash equivalents at beginning of period 2,479 30,038
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Cash and cash equivalents at end of period $ 10,651 $ 21,632
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See Notes to Condensed Consolidated Financial Statements.
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GC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of GC Companies, Inc. (GCC
or the Company) are submitted in response to the requirements of Form 10-Q
and should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K. In the
opinion of management, these financial statements contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the interim periods presented. Certain
prior year amounts have been reclassified to conform to the current years'
presentation. The Company's theatre business is seasonal in nature and the
results of its investment operation is subject to a high degree of
volatility, accordingly, the results of operations for these periods
historically have not been indicative of the results for the full year.
2. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
As of July 31, 1999, information concerning marketable equity securities
and portfolio investments was as follows:
(In Thousands) Change in Net Pre-tax Unrealized
Holding Gain/(Loss)
Cumulative Gross ---------------------------------
Aggregate Pre-tax Three Months Nine Months
Accounting Carrying Unrealized Holding Ended Ended
Investment Classification Value (a) Gains/(Losses) July 31, 1999 July 31, 1999
- ---------- -------------- --------- ------------------ ------------- -------------
MARKETABLE EQUITY SECURITIES:
Global TeleSystems Group, Inc. Available-for-sale (c) $ 92,972 $ 71,617 $(4,733) $33,871
PrimaCom AG Trading (b) 32,179 -- -- --
GrandVision SA Available-for-sale (c) 8,952 (3,062) (512) 47
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Total Marketable Equity Securities 134,103 68,555 (5,245) 33,918
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PORTFOLIO INVESTMENTS:
American Capital Access (d) 28,645 -- -- --
Fuelman (d) 11,047 -- -- --
Teletrac -- -- -- --
MotherNature.com (e) 10,000 -- -- --
El Sitio (e) 5,100 -- -- --
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Total Portfolio Investments 54,792 -- -- --
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Total Marketable Equity Securities
and Portfolio Investments $188,895 $ 68,555 $(5,245) $33,918
===================================================================
(a) Carrying values for marketable equity securities were determined based on
the share price of the securities traded on public markets. The carrying
values of the non-public portfolio investments were determined under the
equity method of accounting or the cost 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
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20% equity interest in each.
(e) These investments are in non-public companies and are accounted for under
the cost method.
On May 12, 1999, the Company invested $10.0 million in MotherNature.com, a
leading Web-based retailer of vitamins, supplements and minerals. On July
6, 1999, the Company invested $5.1 million in El Sitio, a leading internet
network providing global and country-specific content targeted to Spanish
and Portuguese speakers in Latin America. Both of these investments are
being accounted for under the cost method.
In addition, on May 21, 1999, the Company exercised 26,000 GTS stock
options at a cost of $0.5 million. These shares have been designated as
available-for-sale securities.
During the third quarter, the Company sold 120,000 shares of the Global
TeleSystems Group, Inc. ("GTS") shares, of which 70,000 shares were
designated as trading securities and 50,000 shares were designated as
available-for-sale, generating net proceeds of $8.9 million and a related
pre-tax gain of $3.6 million. The cumulative pre-tax gain recognized in the
consolidated statement of operations on these 120,000 shares to the date of
sale over the Company's original cost basis was $7.3 million.
Through the first nine months of fiscal 1999, the Company has sold 310,000
of the GTS shares, of which 260,000 were designated as trading securities
and 50,000 shares were designated as available-for-sale, generating net
proceeds of $21.5 million and a related pre-tax gain of $4.2 million. The
cumulative pre-tax gain recognized in the consolidated statement of
operations on these 310,000 shares to the date of sale over the Company's
original cost basis was $17.2 million.
On July 21, 1999, GTS effected a 2 for 1 stock split. This split has
increased the number of shares held in GTS as of July 31, 1999 to
approximately 3.0 million shares.
Equity in the gains of the investments accounted for on the equity basis
are included in the consolidated statements of operations under the caption
"Investment income, net" and for the current quarter of 1999 were $0.1
million, and there were no equity gains or losses for the three months
ended July 31, 1998. Equity losses on these investments for the nine months
ended July 31, 1999 and 1998 were $0.5 million and $0.8 million,
respectively.
During the second quarter of 1999, Teletrac, in which the Company has
invested $8.3 million and which was carried on the 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 failed to secure
additional capital or alternative sources of liquidity, its ability to
continue current operations would be in jeopardy. On June 9, 1999, Teletrac
filed a petition for protection under Chapter 11 of the U.S. Bankruptcy
Code. Because Teletrac's fund-raising efforts were not expected to yield
sufficient new capital at an acceptable valuation, GCC believed its
investment had 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" to
write-off its entire interest in Teletrac.
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
that 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.
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The activity during 1999 in the liability for early lease terminations was
as follows:
(In Thousands)
Balance at October 31, 1998 $36,579
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Activity During Q1:
Payments made for lease terminations and rent (1,527)
Payments made for other closing costs (301)
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Balance at January 31, 1999 34,751
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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
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Balance at April 30, 1999 $32,319
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Activity During Q3:
Payments made for lease terminations and rent (3,051)
Payments made for other closing costs (580)
Changes in estimate for lease terminations 182
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Balance at July 31, 1999 $28,870
=======
During the third quarter of 1999, the Company executed the termination of
four leases resulting in cash payments of approximately $2.7 million and
paid $0.4 million of rent payments from this reserve. These lease
termination payments were $0.2 million in excess of the reserve established
for these locations. The Company executed the termination of eleven leases
resulting in payments of approximately $6.0 million and paid $1.8 million of
rent payments for the nine months ended July 31, 1999. These lease
termination payments included $1.3 million of payments for leases that had
not been previously reserved, offset by $0.7 million of savings that were
realized when payments for lease terminations were less than what had been
reserved for in the fourth quarter of 1998.
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
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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 JULY 31, 1999: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $ 76,255 $10,557 -- $ 86,812 $(10,557) $ 76,255
Concessions 35,278 3,392 -- 38,670 (3,392) 35,278
Other 3,549 691 -- 4,240 (691) 3,549
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Total revenues 115,082 14,640 -- 129,722 (14,640) 115,082
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Earnings (loss) before taxes, interest,
depreciation and amortization 5,854 1,176 (1,511) 5,519 (1,176) 4,343
Net investment income -- 255 8,079 8,334 (255) 8,079
Earnings (loss) before income taxes 1,559 (2,105) 5,792 5,246 1,066 6,312
THREE MONTHS ENDED JULY 31, 1998: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $ 76,108 $ 4,819 -- $ 80,927 $ (4,819) $ 76,108
Concessions 35,484 1,933 -- 37,417 (1,933) 35,484
Other 3,041 175 -- 3,216 (175) 3,041
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Total revenues 114,633 6,927 -- 121,560 (6,927) 114,633
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Earnings (loss) before taxes interest,
depreciation and amortization 9,942 759 (1,745) 8,956 (759) 8,197
Net investment income 1 -- 183 184 -- 184
Earnings (loss) before income taxes 5,084 (132) (1,516) 3,436 (70) 3,366
DOMESTIC THEATRES
THREE MONTHS ENDED JULY 31, 1999: Total
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $44,725 $12,972 $ 18,558 -- $ 76,255
Concessions 20,159 6,545 8,574 -- 35,278
Other 1,676 623 1,250 -- 3,549
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Total revenues 66,560 20,140 28,382 -- 115,082
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Earnings (loss) before taxes, interest,
depreciation and amortization 9,141 2,850 (634) (5,503) 5,854
Earnings (loss) before income taxes 6,038 1,913 (889) (5,503) 1,559
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THREE MONTHS ENDED JULY 31, 1998: Total
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $39,589 $16,168 $ 20,351 -- $ 76,108
Concessions 17,707 7,598 10,179 -- 35,484
Other 1,274 881 886 -- 3,041
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Total revenues 58,570 24,647 31,416 -- 114,633
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Earnings (loss) before taxes, interest,
depreciation and amortization 10,285 4,771 473 (5,587) 9,942
Earnings (loss) before income taxes 7,595 3,753 (677) (5,587) 5,084
TOTAL COMPANY
NINE MONTHS ENDED JULY 31, 1999:
Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions $194,383 $28,328 -- $222,711 $(28,328) $194,383
Concessions 88,626 8,992 -- 97,618 (8,992) 88,626
Other 10,687 1,629 -- 12,316 (1,629) 10,687
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Total revenues 293,696 38,949 -- 332,645 (38,949) 293,696
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Earnings (loss) before taxes, interest,
depreciation and amortization 4,762 1,334 (5,466) 630 (1,334) (704)
Net investment income 38 (300) 19,770 19,508 300 19,808
Earnings before income taxes (5,804) (5,578) 12,879 1,497 2,309 3,806
NINE MONTHS ENDED JULY 31, 1998:
Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- ------------- ---------- ------- ----------- ------------
Revenues:
Admissions 213,776 14,336 - 228,112 (14,336) 213,776
Concessions 98,354 5,464 - 103,818 (5,464) 98,354
Other 9,060 368 - 9,428 (368) 9,060
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Total revenues 321,190 20,168 - 341,358 (20,168) 321,190
--------------------------------------------------------------------------------
Earnings (loss) before taxes interest,
depreciation and amortization 22,086 1,134 (4,800) 18,420 (1,134) 17,286
Net investment income (loss) (74) 0 426 352 0 352
Earnings before income taxes 7,286 (1,562) (4,331) 1,393 406 1,799
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DOMESTIC THEATRES
NINE MONTHS ENDED JULY 31, 1999:
Total
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions $110,439 $41,863 $42,081 -- $194,383
Concessions 49,255 19,694 19,677 -- 88,626
Other 5,144 2,559 2,984 -- 10,687
----------------------------------------------------------------
Total revenues 164,838 64,116 64,742 -- 293,696
----------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 20,253 5,723 (4,690) (16,524) 4,762
Earnings (loss) before income taxes 13,504 2,675 (5,459) (16,524) (5,804)
NINE MONTHS ENDED JULY 31, 1998:
Total
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
Revenues:
Admissions 111,066 45,065 57,645 -- 213,776
Concessions 49,400 21,004 27,950 -- 98,354
Other 3,871 2,501 2,688 -- 9,060
----------------------------------------------------------------
Total revenues 164,337 68,570 88,283 -- 321,190
----------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 28,869 12,425 (2,318) (16,890) 22,086
Earnings (loss) before income taxes 21,093 9,286 (6,203) (16,890) 7,286
The Company's South American joint venture, Hoyts General Cinema South
America ("HGCSA") has entered into a $75 million debt financing arrangement
with major financial institutions to fund its operations in Argentina, which
is secured by the several guaranty of the joint venture's partners.
Availability of this financing beyond $50 million is subject to syndication
to third-party financial institutions. Under the several guaranty of the
Argentina debt facility, the Company is liable for 50% of the outstanding
borrowings. At July 31, 1999, the Company's portion of the outstanding
borrowings under this facility that it guarantees was approximately $6.3
million.
HGCSA has entered into an $19.0 million debt financing arrangement with a
major financial institution to fund its operations in Chile, which is
secured by the several guaranty of the partners. The Company is liable for
50% of the outstanding borrowings. At July 31, 1999, the Company's portion
of the outstanding borrowings under this facility, that it guarantees or
indemnifies, was approximately $8.4 million.
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5. 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 Nine For The Three
Reference Months Ended Months Ended
--------- ------------------ --------------------
(In thousands, except per share data) 7/31/99 7/31/98 7/31/99 7/31/989
------- ------- ------- --------
Net earnings A $2,284 $1,079 $3,788 $2,019
Determination of shares:
Weighted average number of common shares outstanding B 7,714 7,709 7,719 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 17 51 20 51
Weighted average common shares outstanding for diluted
computation C 7,731 7,760 7,739 7,761
Net earnings per share:
Basic A/B $0.30 $0.14 $0.49 $0.26
Diluted A/C $0.30 $0.14 $0.49 $0.26
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 Nine Months Ended For the Three Months Ended
------------------------- --------------------------
7/31/99 7/31/98 7/31/99 7/31/98
------- ------- ------- -------
Beginning balance $20,782 $ -- $44,279 $29,361
Gain realized on marketable equity securities sold during period (1,568) -- (1,568) --
Unrealized gain on securities acquired during the period 673 -- 673 --
Change in value of marketable equity securities held during period 21,246 34,180 (2,251) 4,819
----------------------------------------------------
Ending balance $41,133 $34,180 $41,133 $34,180
====================================================
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 $429,000 and $143,000 for
the nine and three month periods ended July 31, 1999.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued 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 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.
The Company is not required to implement this standard until fiscal 2001.
Its requirements are complex and its scope far-reaching. The
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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 pre-tax 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.
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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 JULY 31, 1999 VERSUS THREE MONTHS ENDED JULY 31, 1998
THEATRE REVENUES - Total revenues of $115.1 million for the three months ended
July 31, 1999 were comparable to revenues of $114.6 million for the same period
in 1998 primarily attributable to a 5.8% decrease in patronage partially offset
by a 6.3% increase in the average ticket price and a 5.0% increase in concession
sales per patron. The decrease in patronage was mainly attributable to
competitor impacts in certain markets and a reduction in screens, primarily the
result of theatres closed in the last twelve 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 1,067 screens at 140 locations at July 31,
1999 compared to 1,141 screens at 169 locations at July 31, 1998. The increase
in average ticket price was due to increases in certain markets during the
quarter. The growth in concession sales per person was principally due to the
roll-out of new products, increased consumption and certain price increases.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operating and administrative expenses as well as
depreciation and amortization) increased in absolute value by $3.5 million to
$113.2 million for the three months ended July 31, 1999 from $109.7 in the same
1998 period. As a percentage of total revenues, the cost of theatre operations
increased to 98.4% for the quarter ended July 31, 1999 compared to 95.7% for the
same 1998 quarter. This increased percentage of the cost of theatre operations
to total revenues for the third quarter of 1999 compared to the same period in
1998 was primarily due to certain fixed operating costs, pre-opening expenses
incurred in opening two new theatres during the quarter as well as film and
concession margins, partially offset by a reduction in depreciation expense due
to the impairment charge recorded in the fourth quarter of 1998. In addition, in
the third quarter of fiscal 1998, the Company settled certain litigation which
had previously been accrued for, thereby lowering the cost of theatre operations
by $1.6 million. 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 were due to higher film rental charges on certain summer film
product. Although the current quarter concession margin percentage is lower than
the same period in 1998, the overall concession profitability was increased due
to a change in the product mix that resulted in a higher concession spending per
patron and improved concession margin dollars.
GAIN ON DISPOSITION OF THEATRE ASSETS - During the third quarter of 1999, the
Company sold miscellaneous assets realizing a pre-tax loss of $0.1 million.
LOSS ON IMPAIRMENT OF THEATRE ASSETS - During the third quarter of 1999, the
Company executed the termination of four leases resulting in cash payments of
approximately $2.7 million and paid $0.4 million of rent payments from the early
lease termination reserve. These lease termination payments were $0.2 million in
excess of the reserve established for these locations.
INVESTMENT INCOME, NET - The Company recorded investment income of $8.1 million
in the third quarter of 1999 compared to $0.2 million in the same 1998 period.
The Company's investment income for the quarter ended July 31, 1999 included the
unrealized pre-tax gain on the PrimaCom trading securities of $4.4 million, the
realized pre-tax gain on the GTS trading and available-for-sale securities sold
during the quarter of approximately $3.6 million and miscellaneous investment
income of $0.3 million, partially offset by additional performance-based
compensation related to the investment portfolio of $0.2 million. During the
third quarter of 1998, the Company recorded an unrealized gain on the GTS
trading securities of $1.7 million, $0.3 million of dividend and interest income
partially offset by the accrual of performance-based compensation related to the
investment portfolio of $1.8 million.
EQUITY LOSS IN THEATRE AFFILIATES - The Company recorded net equity losses in
theatre affiliates of $1.0 million for the third quarter of 1999 compared to
$0.1 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 weak film product during the quarter, administrative expenses and
start-up costs in opening a new theatre in Chile.
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INTEREST EXPENSE - The Company's interest expense increased to $0.7 million in
the third 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
RESULTS OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1999 VERSUS NINE MONTHS ENDED JULY 31, 1998
THEATRE REVENUES - Total revenues decreased 8.6% to $293.7 million for the nine
months ended July 31, 1999 from $321.2 million for the same period in 1998
primarily attributable to a 13.2% decrease in patronage partially offset by a
3.9% increase in concession sales per patron and a 4.7% increase in the average
ticket price. The decrease in patronage was mainly attributable to competitor
impacts in certain markets and a reduction in screens, primarily the result of
theatres closed in the last twelve 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 1,067 screens at 140 locations at July 31, 1999 compared
to 1,141 screens at 169 locations at July 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.
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 $12.2 million to
$301.8 million for the nine months ended July 31, 1999 from $314.0 in the same
1998 period. However, as a percentage of total revenues, the cost of theatre
operations was 102.8% for the nine months ended July 31, 1999 compared to 97.7%
for the same period in 1998. This increased percentage of the cost of theatre
operations to total revenues for the first nine 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 nine new theatres in the
first nine months of this year, and lower film and concession margins partially
offset by a reduction in depreciation expense due to the impairment charge
recorded in the fourth quarter of 1998. In addition, in the third quarter of
fiscal 1998, the Company settled certain litigation, which had previously been
accrued for, thereby lowering the cost of theatre operations by $1.6 million
during the first nine months of 1998. Fixed expenses such as occupancy costs 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 film margins were due to higher rental
charges on certain film product. Although the current year-to-date concession
margin percentage was lower than the same period in 1998, the overall concession
profitability was increased due to a change in product mix that resulted in a
higher concession spending per patron and improved concession margin dollars.
GAIN ON DISPOSITION OF THEATRE ASSETS - During the nine months ended July 31,
1999, the Company sold three theatres in Michigan, two theatres in Texas, a
theatre in New York , a theatre in Florida and miscellaneous assets generating
net proceeds of $6.5 million and a pre-tax gain of $2.0 million.
LOSS ON IMPAIRMENT OF THEATRE ASSETS - The Company executed the termination of
eleven leases resulting in payments of approximately $6.0 million and paid $1.8
million of rent payments for the nine months ended July 31, 1999. These lease
termination payments included $1.3 million of payments for leases that had not
been previously reserved, offset by $0.7 million of savings that were realized
when payments for lease terminations were less than what had been reserved for
in the fourth quarter of 1998.
INVESTMENT INCOME, NET - The Company recorded investment income of $19.8 million
for the nine months ended July 31, 1999 compared to investment income of $0.4
million for the same period in 1998. The Company's investment income for the
nine months ended July 31, 1999 included the unrealized pre-tax gain on the
PrimaCom trading securities of approximately $18.8 million, the unrealized
pre-tax gain on the GTS trading securities prior to sale of approximately $6.1
million, the realized pre-tax gain on the GTS trading and available-for-sale
securities sold during fiscal 1999 of approximately $4.2 million and
miscellaneous investment income of $0.3 million. This income was 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 $1.3 million. During the first nine months of 1998, the Company
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recorded an unrealized pre-tax gain on the GTS trading securities of $10.3
million, $1.3 million of dividend and interest income partially offset by the
accrual of performance based compensation related to the investment portfolio of
$10.4 million and an $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 $3.2 million for the first nine months of 1999 compared to
$0.9 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 the international joint ventures were negatively impacted
by weak film product during the third quarter of 1999 and a soft economic
environment in Chile.
INTEREST EXPENSE - The Company's interest expense increased to $1.7 million in
1999 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 suppliers generally 30 to 60 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 nine months ended July 31, 1999, General Cinema Theatres, Inc. (GCT)
opened 9 new theatres: a 15 screen theatre in Atlanta, Georgia, a 14 screen
theatre in Irving, Texas, a 16 screen theatre in Baltimore, Maryland, a 12
screen theatre in Plymouth Meeting, Pennsylvania, an 11 screen theatre in
Seattle, Washington, a 16 screen theatre in Clifton, New Jersey, an 18 screen
theatre in Wauwatosa, Wisconsin, a 14 screen theatre in Austin, Texas 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 $9.7 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 $85.5 million of operating leases with the
financial institution as of July 31, 1999. 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 July 31, 1999, the Company had
an outstanding receivable of $36.7 million, an increase during the first nine
months of fiscal 1999 of $17.4 million. This increase is primarily due to monies
advanced by the Company for the two theatres opened in the third quarter of 1999
and the theatres currently being constructed.
The Company has significant lease commitments. Lease payments totaled $71.2
million in 1998 and minimum lease payments are anticipated to approximate $60.3
million in 1999. Substantially all domestic leases of the Company are
noncancellable.
During the first nine months of 1999, the Company sold seven theatres; three
theatres in Michigan, two in Texas, a theatre in New York, a theatre in Florida
and miscellaneous assets realizing net proceeds of $6.5 million. During this
period, the Company closed an additional thirteen theatres with 60 screens. Ten
of these theatres had previously been identified as impaired, and the costs
associated with the closing of these theatres were provided for in 1998. At July
31, 1999, the Company had an outstanding liability for early lease terminations
of $28.9 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 $8.4 million for the cost of exiting certain leases
and other related costs during the nine months ended July 31, 1999.
For the nine months ended July 31, 1999, GCT made expenditures of $12.6 million
for leasehold improvements, furniture and equipment purchases as well as
information services related projects. Domestic capital expenditures are
expected to approximate $22.3 million in 1999. In addition, the Company made
expenditures of $2.4 million associated with its Sundance Cinema joint venture.
GCC anticipates
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contributing a total of $5.3 million of cash to this venture in 1999. The first
Sundance theatre is anticipated to open in calendar year 2000.
INTERNATIONAL THEATRES
During the nine months ended July 31, 1999, the Company opened a six screen
theatre in Cordoba, Argentina, a 12 screen theatre in Buenos Aires, Argentina, a
16 screen theatre in Chile and added two screens to a theatre in Uruguay through
its South American joint venture as well as added four screens to a theatre in
Mexico. Hoyts General Cinema South America ("HGCSA") anticipates opening an
additional 27 screens and 3 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 nine months of 1999, the Company advanced $5.3
million to the South American joint venture and anticipates advancing a total of
$8.7 million during fiscal year 1999. The anticipated $8.7 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 major
financial institutions to fund its operations in Argentina, which is secured by
the several guaranty of the joint venture's partners. Availability of this
financing beyond $50 million is subject to syndication to third-party financial
institutions. Under the several guaranty of the Argentina debt facility, the
Company is liable for 50% of the outstanding borrowings. At July 31,1999, the
Company's portion of the outstanding borrowings under this facility that it
guarantees was approximately $6.3 million.
HGCSA has entered into a $19.0 million debt financing arrangement with a major
financial institution to fund its operations in Chile, which is secured by the
several guaranty of the partners. The Company is liable for 50% of the
outstanding borrowings. At July 31, 1999, the Company's portion of the
outstanding borrowings under this facility that it guarantees or indemnifies was
approximately $8.4 million.
INVESTMENT PORTFOLIO
At July 31, 1999, marketable equity securities were $134.1 million, an increase
of $55.9 million from the balance at October 31, 1998 of $78.2 million. The
increase in marketable equity securities during the first nine months of 1999
was primarily due to the appreciation in value of the Company's investment in
GTS of $23.2 million, appreciation in its GrandVision investment of $0.5 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 July 31, 1999 of $32.2 million.
During the year, the Company sold 310,000 of its GTS shares, generating net
proceeds of $21.5 million.
On May 12, 1999, the Company invested $10.0 million in MotherNature.com, a
leading Web-based retailer of vitamins, supplements and minerals. On July 6,
1999, the Company invested $5.1 million in El Sitio, a leading internet network
providing global and country-specific content targeted to Spanish and Portuguese
speakers in Latin America. These two investments will be accounted for under the
cost method.
OTHER
The Company received proceeds of $13.0 million from the liquidation of certain
short-term investments during the nine months ended July 31, 1999.
The Company made net borrowings of $11.2 million on its outstanding revolving
credit facility and paid interest of $1.3 million during the first nine months
of 1999. The average interest rate for the first nine months of 1999 was 6.7%.
The Company believes that cash generated from operations, asset sales under
agreement, cash and cash equivalents of $10.7 million , marketable equity
securities, 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 and capital expenditures for
the forseeable future.
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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 pre-tax 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.
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
completing the remediation, replacement and testing of non-compliant systems.
The Company is on track to complete the remediation, testing and implementation
of replacement systems by the end of fiscal 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, 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
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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 July 31, 1999, the
Company had outstanding borrowings of $28.0 million, carrying a variable
interest rate, which was 6.4% 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") was included therein until the third quarter of 1999, when
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 July
31, 1999, have traded as high as 48.00 euros and as low as 29.50 euros. At July
31, 1999, the PrimaCom shares closed at 46.00 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 and earnings. A 20% fluctuation in the
aggregate value of PrimaCom trading securities from the July 31, 1999 price
would impact pre-tax earnings and total assets by $6.7 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 Company's investment in GTS and its investment in an
optical and photo service provider, GrandVision. The GTS shares are subject to
considerable market risk due to its volatility, and during the first nine months
of 1999, have traded as high as $45.75 and as low as $19.88. At July 31, 1999,
The GTS shares closed at $31.88. GrandVision shares, during the first nine
months of 1999, have traded as high as 28.50 euros and as low as 15.11 euros.
As of July 31, 1999, the GrandVision shares closed at 25.73 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
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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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PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
10.27 Second Amended and Restated Agreement Executed May
27, 1999 effective as of November 1, 1999 between
the Company and Paul R. Del Rossi
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended July 31, 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: September 13, 1999 /s/ Richard A. Smith
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Richard A. Smith
Chairman of the Board of Directors and
Chief Executive Officer
Date: September 13, 1999 /s/ G. Gail Edwards
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G. Gail Edwards
Vice President, Chief Financial Officer and
Treasurer Principal Accounting Officer
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