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 quarterly period ended August 31, 2000
Commission file number 1-14099
Loews Cineplex Entertainment Corporation
----------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3386485
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
711 Fifth Avenue
New York, New York 10022
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(Address of Principal (Zip Code)
Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 833-6200
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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
----
Common Stock outstanding (including non-voting common stock) - 58,622,646 shares
at August 31, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
August 31, February 29,
2000 2000
---------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 54,325 $ 31,735
Accounts receivable 23,275 17,288
Inventories 4,859 5,148
Prepaid expenses and other current assets 5,412 6,057
---------- ----------
TOTAL CURRENT ASSETS 87,871 60,228
PROPERTY, EQUIPMENT AND LEASEHOLDS, NET 1,236,731 1,218,334
OTHER ASSETS
Investments in and advances to partnerships 92,339 75,932
Goodwill, net 486,683 493,390
Other intangible assets, net 21,963 22,704
Deferred charges and other assets 35,472 36,801
---------- ----------
TOTAL ASSETS $1,961,059 $1,907,389
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 203,043 $ 201,077
Deferred revenue 4,777 8,625
Current maturities of long-term debt and other obligations 656,298 1,409
Current portion of capital leases 2,865 2,740
---------- ----------
TOTAL CURRENT LIABILITIES 866,983 213,851
LONG-TERM DEBT AND OTHER OBLIGATIONS 308,448 839,029
LONG-TERM CAPITAL LEASE OBLIGATIONS 57,691 59,217
ACCRUED PENSION AND POST RETIREMENT OBLIGATIONS 8,275 8,325
OTHER LIABILITIES 189,755 168,165
---------- ----------
TOTAL LIABILITIES 1,431,152 1,288,587
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock ($.01 par value, 300,000,000 shares authorized; 58,538,646
shares issued and outstanding at August 31, 2000 and at February 29, 2000) 586 586
Common stock-Class B non-voting ($.01 par value, 10,000,000 shares authorized;
84,000 shares issued and outstanding at August 31, 2000 and at February 29,
2000) 1 1
Accumulated other comprehensive income (2,053) (167)
Additional paid-in capital 671,707 671,707
Retained deficit (140,334) (53,325)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 529,907 618,802
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,961,059 $1,907,389
========== ==========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE DATA)
For the Three Months Ended For the Six Months Ended
--------------------------- --------------------------
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
REVENUES
Box Office $ 182,137 $ 213,001 $ 325,683 $ 354,374
Concession 71,416 80,315 125,841 133,500
Other 11,465 9,976 18,764 17,202
----------- ----------- ----------- -----------
265,018 303,292 470,288 505,076
----------- ----------- ----------- -----------
EXPENSES
Theatre operations and other expenses 201,286 209,512 363,671 370,632
Cost of concessions 11,548 12,774 20,187 20,379
General and administrative 13,865 14,274 26,499 26,409
Depreciation and amortization 30,683 27,728 61,269 53,807
Loss on sale/disposal of theatres 38,669 4,713 38,779 4,713
----------- ----------- ----------- -----------
296,051 269,001 510,405 475,940
----------- ----------- ----------- -----------
(LOSS)/INCOME FROM OPERATIONS (31,033) 34,291 (40,117) 29,136
INTEREST EXPENSE 23,515 17,581 45,122 33,646
----------- ----------- ----------- -----------
(LOSS)/INCOME BEFORE INCOME TAXES (54,548) 16,710 (85,239) (4,510)
INCOME TAX EXPENSE 988 847 1,770 1,506
----------- ----------- ----------- -----------
NET (LOSS)/INCOME $ (55,536) $ 15,863 $ (87,009) $ (6,016)
=========== =========== =========== ===========
Weighted Average Shares Outstanding - basic and diluted 58,622,646 58,622,646 58,622,646 58,622,646
Net (Loss)/Income per Share - basic and diluted $ (.95) $ .27 $ (1.48) $ (.10)
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
For the Six Months Ended
-----------------------------------
August 31, August 31,
2000 1999
---------- ---------
OPERATING ACTIVITIES
Net loss $ (87,009) $ (6,016)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 61,269 53,807
Loss on sale/disposal of theatres 38,779 4,713
Equity earnings from long-term investments, net of distributions received 2,309 (373)
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,270 4,946
Increase in accounts payable and accrued expenses 23 2,520
Decrease in other operating assets and liabilities, net (13,224) (15,292)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,417 44,305
--------- --------
INVESTING ACTIVITIES
Investments in/advances to partnerships, net of repayments (18,716) (5,683)
Proceeds from sale of assets 5,338 -
Capital expenditures (99,893) (82,968)
Merger related costs - (4,109)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (113,271) (92,760)
--------- --------
FINANCING ACTIVITIES
Proceeds from Senior Revolving Credit Facility, net of repayments and deferred
financing fees 124,009 33,000
Proceeds from sale of interest rate swaps 8,650 -
Repayment of Plitt Theatres, Inc. Notes - (2,300)
Repayment of long-term debt (2,215) (2,232)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 130,444 28,468
--------- --------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 22,590 (19,987)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,735 48,174
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,325 $ 28,187
========= ========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
- -----------------------------------------------
Loews Cineplex Entertainment Corporation ("LCP" or the "Company"), formerly LTM
Holdings, Inc., is a major motion picture theatre exhibition company with
operations in North America and Europe. The Company conducts business under the
Loews Theatres, Sony Theatres, Cineplex Odeon Theatres, Star Theatres, Magic
Johnson Theatres and Yelmo Cineplex Theatres marquees. On May 14, 1998, pursuant
to the Amended and Restated Master Agreement (the "Master Agreement") dated
September 30, 1997, LTM Holdings, Inc. and Cineplex Odeon Corporation ("Cineplex
Odeon"), another motion picture exhibitor with operations in the U.S. and
Canada, combined (the "Combination").
The Combination has been accounted for under the purchase method of accounting
and, accordingly, the cost to acquire Cineplex Odeon has been allocated to the
assets acquired and liabilities assumed of Cineplex Odeon based on their
respective fair values, with the excess purchase price allocated to goodwill.
The Company arranged for an independent valuation and other studies required to
determine the fair value of the assets acquired and liabilities assumed. These
valuations and studies were completed during the first quarter of fiscal year
2000.
As of August 31, 2000, LCP owns, or has interests in, and operates 2,960 screens
at 376 theatres in 22 states and the District of Columbia, six Canadian
provinces, Spain, Hungary, Turkey and Austria. The Company's principal
geographic markets include New York and the metropolitan area, Boston, Chicago,
Baltimore, Dallas, Houston, Detroit, Los Angeles, Seattle and Washington D.C. in
the U.S.; Toronto, Montreal and Vancouver in Canada; and Madrid, Spain. The
Company holds a 50% partnership interest in each of the Yelmo Cineplex de Espana
("Yelmo"), Loeks-Star Theatres ("LST") and Magic Johnson Theatres ("MJT")
partnerships. Yelmo, LST and MJT hold interests in and operate 31 locations,
comprising a total of 356 screens. Screens and locations for the partnerships
are included in the Company amounts referred to above. The Company also holds a
50% interest in a joint venture in Italy and is considering plans to develop
multiplexes over the next five years.
The exhibition industry continues to experience significant liquidity pressures
caused by a number of factors including the downturn in attendance as reflected
in year over year operating performance measures, the moderate to aggressive new
build strategies employed by the industry's larger exhibitors which, coupled
with the difficulty in closing older, obsolete theatres, has resulted in an
oversupply of theatre screens in many North American markets, impairment write-
offs and losses on theatre dispositions, the continued downward credit ratings
of the industry and the recent announcements of bankruptcy filings and defaults
of certain loan agreements which have been publicly disclosed. These factors as
well as the industry's disappointing operating performance have contributed to
significant reductions in the prices of publicly traded debt and equity
securities and has substantially reduced the industry's access to capital.
The Company has been negatively affected by these events and is currently
experiencing significant pressures on its liquidity. On September 19, 2000 and
October 16, 2000, the Company completed second and third amendments to its
Senior Revolving Credit Facility under which, subject to the Company's
compliance with the terms of the amendments during the waiver period, its senior
lenders agreed to waive certain financial covenant requirements at August 31,
2000 and allow the Company to continue to draw limited funds that, together with
its anticipated cash flow from theatre operations, are currently expected to
allow the Company to fund its current operating requirements through November
24, 2000. The Company is currently working with participants at all levels of
its capital structure to identify and implement a longer-term financial plan to
address the Company's liquidity needs and consider various
5
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION, CONTINUED
- -----------------------------------------------------------
restructuring alternatives so as to maximize the value of the Company and its
assets and property. This longer-term financial plan may include the issuance of
equity securities to certain qualified investors, sales of assets, strategic
alliances with one or more exhibitors or a consensual restructuring of the
Company's capital structure. However, there can be no assurance that the Company
will be successful in its efforts. If the Company is unsuccessful in its
negotiations for a longer-term financial solution, the waiver will expire on
November 24, 2000 and as a result, the bank syndicate could accelerate the
maturity of the indebtedness. Accordingly, if the Company is unable to achieve a
longer-term consensual solution to its liquidity issue, it faces the prospect of
a restructuring under bankruptcy proceedings. As a result, doubt exists about
the Company's ability to continue under its existing capital structure. These
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classifications of assets or
liabilities that may result from the outcome of these uncertainties, except as
disclosed in Note 3 with regard to Long-Term Debt and Other Obligations.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information; therefore, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended February 29, 2000.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
On June 23, 1999, the Financial Accounting Standards Board decided to defer the
effective date of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activity". As a result of
this deferral, SFAS No. 133 will be effective for all of the Company's fiscal
quarters beginning March 1, 2001. This statement standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that the Company recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. The Company expects to adopt this standard when required and does not
believe that it will have a significant impact on its operating results or
financial position.
On June 26, 2000, the Securities and Exchange Commission ("SEC") decided to
defer the effective date of Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". As a result of this deferral, SAB No. 101
will be effective for all of the Company's fiscal quarters beginning December 1,
2000, requiring retroactive application to the beginning of the Company's 2001
fiscal year with restatement, if necessary, of all quarters for the current
fiscal year. SAB No. 101 expresses the views of the SEC staff in applying GAAP
to certain revenue recognition issues. The Company is currently evaluating the
impact, if any, of SAB No. 101 on its financial position and its results of
operations.
NOTE 3 - LONG-TERM DEBT AND OTHER OBLIGATIONS
- ---------------------------------------------
The Company's Senior Revolving Credit Facility is comprised of two tranches, a
$750 million senior secured revolving credit facility, secured by substantially
all of its assets, other than real property interests, and the assets, other
than real property interests, of its domestic subsidiaries, and a $250 million
6
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 3 - LONG-TERM DEBT AND OTHER OBLIGATIONS, CONTINUED
- --------------------------------------------------------
uncommitted facility. The Senior Revolving Credit Facility bears interest at a
rate of either the current prime rate as offered by Bankers Trust Company or an
Adjusted Eurodollar Rate (as defined in the credit agreement) plus an applicable
margin based on the Company's Leverage Ratio (as defined in the credit
agreement). On February 24, 2000, the Company's bank group agreed to a first
amendment of the Senior Revolving Credit Facility. Under the terms of the first
amendment, the banks agreed to modify the Maximum Consolidated Leverage Ratio,
the Maximum Total Leverage Ratio and the Minimum Debt Service Coverage Ratio, as
defined in the agreement, for a period of 18 months. These ratios address the
Company's ability to access funds under the credit facility as it relates to the
leverage ratios and debt service ratio. As of August 31, 2000, the Company was
not in compliance with these financial covenants, as amended, and therefore was
in default under the terms of the credit agreement. On September 19, 2000 and
October 16, 2000, the bank group agreed to second and third amendments to the
Senior Revolving Credit Facility. Under the terms of these amendments, subject
to the Company's compliance with the terms of the amendments during the waiver
period, the banks agreed to waive compliance with the Maximum Consolidated
Leverage Ratio, the Maximum Total Leverage Ratio and the Minimum Debt Service
Coverage Ratio, at August 31, 2000, and allow the Company to continue to draw
limited funds that, together with its anticipated cash flow from theatre
operations, are currently expected to allow the Company to fund its current
operating requirements through November 24, 2000. The Company's borrowings under
the Senior Revolving Credit Facility at August 31, 2000 totaled $655 million
with an additional $16.1 million of availability for outstanding letters of
credit but no further availability for revolving loans. As a result of the
second and third amendments, the Company's availability will increase to $705
million (plus $16.1 million for outstanding letters of credit), with the
incremental availability being secured by mortgages on five of the Company's
theatres that generated positive operating cash flow of approximately $13
million during the most recent twelve month period. The availability will be
reduced to $700 million (plus $16.1 million for outstanding letters of credit)
if the Company completes its planned disposition of a theatre in Manhattan that
it owns in fee. The Company is currently working with participants at all levels
of its capital structure to identify and implement a longer-term financial plan
to address the Company's liquidity needs and consider various restructuring
alternatives so as to maximize the value of the Company and its assets and
property. During this period, the Company will continue negotiations with its
bank group to either extend the terms of the existing agreement or negotiate a
new facility subject to prevailing market conditions. Given the factors
discussed above, there is no assurance that the Company will be able to do so
successfully. If the Company is unsuccessful in its negotiations, the waiver
will expire on November 24, 2000 and as a result the bank syndicate could
accelerate the maturity of the indebtedness. The Company currently does not have
in place arrangements to refinance or fund the accelerated maturity of these
bank loans. Accordingly, as of August 31, 2000, all of the Company's outstanding
indebtedness under its Senior Revolving Credit Facility has been classified as a
current liability in its consolidated balance sheet.
The Company currently has outstanding $300 million aggregate principal amount of
8 7/8% Senior Subordinated Notes due 2008. An acceleration by the bank group of
the obligations under the Company's Senior Revolving Credit Facility would
constitute an event of default under the indenture governing these notes. Upon
the occurrence of such an event of default and pursuant to the terms of the
indenture, Bankers Trust Company, as trustee under the indenture, would have the
right to accelerate payment of the outstanding principal amount of and accrued
interest on these notes.
In August 1998, the Company entered into interest rate swap agreements for a
period of four years to hedge a portion of the Senior Revolving Credit Facility
variable interest rate risk. On May 26, 2000, the
7
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 3 - LONG-TERM DEBT AND OTHER OBLIGATIONS, CONTINUED
- --------------------------------------------------------
Company monetized the value of these contracts and sold these swaps for $8.65
million. The Company believes that it maximized the value of these contracts as
a result of this sale. As the Company had accounted for these swaps as interest
rate hedges, the gain realized from the sale has been deferred and will be
amortized as a credit to interest expense over the remaining original term of
these swaps (through August 2002). The current portion of this gain is included
in Accounts Payable and Accrued Expenses and the long-term portion of this gain
is included in Other Liabilities.
NOTE 4 - LOSS ON SALE/DISPOSAL OF THEATRES
- ------------------------------------------
For the three months ended August 31, 2000, the Company's loss on sale/disposal
of theatres was approximately $38.7 million. The loss on sale/disposal of
theatres recorded for the second quarter includes a provision of $31.5 million
(consisting primarily of net book value) for a plan to dispose/close 42 screens
at 8 locations over the next several months. This was the result of the
continued decline in attendance experienced at these theatres which was
exacerbated by the "sub-par" industry-wide summer box office levels. During the
three months ended August 31, 2000, the Company actually disposed of 14 theatre
locations comprising 72 screens, which primarily were older, obsolete theatres
which generated marginal or negative cash flows.
NOTE 5 - COMPREHENSIVE INCOME
- -----------------------------
The following components are reflected in the Company's comprehensive income:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
-------- ------- -------- -------
Net (loss)/income $(55,536) $15,863 $(87,009) $(6,016)
Other comprehensive income 2,735 (2,012) (1,886) 482
-------- ------- -------- -------
Comprehensive income $(52,801) $13,851 $(88,895) $(5,534)
======== ======= ======== =======
The following is a reconciliation of the Company's accumulated other
comprehensive income:
Six Months Ended
August 31, 2000
----------------
Accumulated other comprehensive income as of
March 1, 2000 $ (167)
Other comprehensive income for the six months ended
August 31, 2000:
Foreign currency translation adjustment, net of
income tax benefit of $1,346 (1,800)
Unrealized loss on marketable securities, net of
income tax benefit of $64 (86)
--------
Accumulated other comprehensive
income as of August 31, 2000 $ (2,053)
========
8
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 6 - SEGMENT AND GEOGRAPHIC DATA
- ------------------------------------
The Company is engaged in one line of business, motion picture exhibition. The
following table presents summarized financial information about the Company by
geographic area. There were no material amounts of sales among geographic areas.
UNITED
STATES CANADA INT'L CONSOLIDATED
------------- ----------- ----------- ------------
Three Months Ended
August 31, 2000
Total revenue $ 218,946 $ 45,220 $ 852 $ 265,018
Loss from operations $ (27,607) $ (1,848) $ (1,578) $ (31,033)
Three Months Ended
August 31, 1999
Total revenue $ 243,233 $ 58,985 $ 1,074 $ 303,292
Income/(loss) from operations $ 28,816 $ 6,671 $ (1,196) $ 34,291
Six Months Ended
August 31, 2000
Total revenue $ 387,089 $ 81,339 $ 1,860 $ 470,288
Loss from operations $ (31,106) $ (5,977) $ (3,034) $ (40,117)
Total assets $ 1,476,816 $ 412,670 $ 71,573 $ 1,961,059
Six Months Ended
August 31, 1999
Total revenue $ 401,760 $ 101,761 $ 1,555 $ 505,076
Income/(loss) from operations $ 26,991 $ 4,354 $ (2,209) $ 29,136
9
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Commitments
The Company has entered into commitments for the future development and
construction of theatre properties aggregating approximately $163.2 million. The
Company has also guaranteed an additional $100.7 million related to obligations
under lease agreements entered into by MJT.
Metreon Arbitration
In May 1997, the Company entered into a 21 year lease with Metreon, Inc., an
affiliate of Sony Corporation of America, to operate a multiplex theatre in an
entertainment/retail complex developed by Metreon in San Francisco. Since that
theatre opened in June 1999, the Company has had a dispute with Metreon with
respect to construction costs (amount of dispute is approximately $5 million)
that may be the Company's responsibility under the lease, the nature of the
costs that Metreon is seeking to include as operating expenses under the lease,
and the proper allocation of operating expenses to this theatre, based on the
Company's proportionate share of the complex. To date, the Company has been
unable to resolve these issues through negotiation with Metreon. The estimated
difference in operating expenses allocable to this theatre, taking into account
differences over both the nature of allocable costs and determination of the
Company's proportionate share of the complex, is approximately $3-4 million per
annum for the duration of the lease. Pursuant to the terms of the lease, the
Company is to contribute to the operating expenses of the complex in an amount
equal to its proportionate share of the total floor area of the complex. Metreon
has asserted that the Company's proportionate share of the complex is
approximately 49%, while the Company asserts that its proportionate share is
approximately 32%. On September 19, 2000, as permitted by the lease, Metreon
filed a demand for arbitration with the American Arbitration Association seeking
a declaration of the proportionate share of the complex floor area occupied by
this theatre. The Company believes that it has meritorious defenses to all of
Metreon's claims against the Company under the lease and intends to vigorously
assert its position regarding its proportionate share of the complex in the
arbitration.
ADA Litigation
The Department of Justice, in coordination with the New York City Commission on
Human Rights, is currently investigating the Company's theatres in New York City
with respect to its compliance with the Americans with Disabilities Act ("ADA")
and the New York City Human Rights Law. The Department of Justice has alleged
that its investigation has identified numerous violations of the ADA. The
Company has opposed, and will continue to vigorously oppose, the allegations and
claims of the Department of Justice with respect to the compliance of these
theatres under the ADA. However, the Company cannot guarantee that the
remediation costs relating to the ADA will not be material.
Environmental Litigation
One of the Company's leased drive-in theatres and one formerly leased drive-in
theatre, both in the State of Illinois, are located on properties on which
certain third parties disposed of, or may have disposed of, substantial
quantities of construction debris, auto shredder residue and other debris. Such
material may contain hazardous substances. One of these properties is the
subject of an action, filed in August 1998 in the Circuit Court of Cook County,
Illinois by the Illinois Attorney General's office seeking civil penalties and
various forms of equitable relief, including the removal of all wastes allegedly
present at the property, soil and ground water testing and remediation, if
necessary. The Company's range of probable liability
10
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS OTHERWISE NOTED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES, CONTINUED
- --------------------------------------------------
with respect to this action cannot be reasonably estimated at this time due to
several unknown factors, including the scope of contamination at the theatre
property, the likelihood of any particular remedial action being required, the
allocation of liability, if any, to other responsible parties, and the ability
of such parties to satisfy their share of such liability. The Company will
continue to evaluate future information and developments with respect to
conditions at the theatre property and will periodically reassess any liability
accordingly. Based on the foregoing, there can be no assurance that the
Company's liability, if any, in connection with this action will not be
material.
Other
Other than the lawsuits noted above, the Company is a defendant in various
lawsuits arising in the ordinary course of business and is involved in certain
environmental matters. From time to time the Company is involved in disputes
with landlords, contractors and other third parties. It is the opinion of
management that any liability to the Company which may arise as a result of
these matters will not have a material adverse effect on its operating results
or financial position.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following discussion of the Loews Cineplex Entertainment Corporation ("we",
"us" and "our") financial condition and operating results should be read in
conjunction with our unaudited consolidated financial statements for the three
and six month periods ended August 31, 2000 and 1999.
This discussion incorporates operating results of partnerships in which we have
an interest to the extent of our equity share as required by the equity method
of accounting, except as otherwise noted.
Results of Operations
Three Months Ended August 31, 2000 Compared to Three Months Ended August 31,
1999
Operating Revenues are generated primarily from box office revenues, concession
sales and other ancillary revenues. Operating revenues of approximately $265.0
million for the three months ended August 31, 2000 were $38.3 million lower than
the three months ended August 31, 1999. Box office revenues for the three months
ended August 31, 2000 of approximately $182.1 million were $30.9 million lower,
and concession revenues of approximately $71.4 million were $8.9 million lower
in comparison to the three months ended August 31, 1999. These decreases in
operating revenues were due primarily to a significant decline in attendance
primarily due to lower industry-wide attendance levels (particularly driven by
"sub-par" performance of the summer film product) in comparison to the prior
year and the continued decline experienced at some of our older theatres. The
overall decrease in revenues is net of additional revenue (approximately $28.7
million) from new theatre openings, improvements in admission and concession
revenues per patron and revenues derived from the on-screen advertising contract
entered into during May 2000.
Operating Costs of approximately $212.8 million for the three months ended
August 31, 2000 were approximately $9.5 million lower than the three months
ended August 31, 1999. This decrease was due primarily to reductions in variable
costs commensurate with the aforementioned decrease in operating revenues. This
overall decrease in operating costs, which aggregated $31.4 million, was
partially offset by increases in operating costs associated with new theatre
openings, including incremental occupancy costs, and the impact of improvements
in admission and concession revenues per patron.
General and Administrative Costs of approximately $13.9 million for the three
months ended August 31, 2000 were approximately $400 thousand lower than the
three months ended August 31, 1999, due primarily to reductions in overhead
levels in our Canadian operations.
Depreciation and Amortization Costs of approximately $30.7 million for the three
months ended August 31, 2000 were $3.0 million higher than the three months
ended August 31, 1999, due primarily to the incremental depreciation related to
investments in new theatres which commenced operations partially offset by the
effect of theatre dispositions.
Loss on Sale/Disposal of Theatres of approximately $38.7 million for the three
months ended August 31, 2000 was $34.0 million higher than the three months
ended August 31, 1999, due primarily to the timing, nature and characteristics
of theatre dispositions. The loss on sale/disposal of theatres recorded for the
second quarter of approximately $38.7 million includes a provision of $31.5
million (consisting primarily of net book value) for a plan to dispose/close 42
screens at 8 locations over the next several months. This was the result of the
continued decline in attendance experienced at these theatres which was
exacerbated by the "sub-par" industry-wide summer box office levels. During the
three months ended August 31, 2000, we actually disposed of 14 theatre locations
comprising 72 screens, which primarily were older, obsolete theatres which
generated marginal or negative cash flows. We hope to be able to continue to
12
aggressively dispose of theatres that are underperforming or non-strategic. See
the Liquidity and Capital Resources section for additional information.
Interest Expense of approximately $23.5 million for the three months ended
August 31, 2000 was approximately $5.9 million higher than the three months
ended August 31, 1999, due primarily to the impact of additional borrowings
under our Senior Revolving Credit Facility, which were utilized primarily to
fund investments in new theatres and joint ventures and our working capital
needs, coupled with the impact of an increase in the variable borrowing rate
relating to our Senior Revolving Credit Facility. See the Liquidity and Capital
Resources section for additional information.
Attributable EBITDA of $41.1 million for the three months ended August 31, 2000
decreased $27.4 million in comparison to the three months ended August 31, 1999,
due primarily to the aforementioned shortfall in attendance levels. This
decrease was partially offset by other increases in Attributable EBITDA
including the favorable impact of new theatre openings, higher admission and
concession revenue per patron and the impact of on-screen advertising revenues,
as previously discussed. Attributable EBITDA (earnings before interest, taxes,
depreciation and amortization, loss on asset disposal or sales, and equity
earnings included in EBITDA plus EBITDA from partnerships, net of partners'
share) is a measure that management uses to evaluate our financial performance.
Attributable EBITDA measures the amount of cash that we have available for
investment or other uses and is used by us as a measure of performance.
Attributable EBITDA is primarily a management tool and only one measure of
financial performance to be considered by the investment community. Attributable
EBITDA is not an alternative to measuring operating results or cash flow under
U.S. GAAP. In addition, the Attributable EBITDA measure presented herein may not
be comparable to similarly titled measures reported by other companies.
Six Months Ended August 31, 2000 Compared to Six Months Ended August 31, 1999
Operating Revenues of approximately $470.3 million for the six months ended
August 31, 2000 were $34.8 million lower than the six months ended August 31,
1999. Box office revenues for the six months ended August 31, 2000 of
approximately $325.7 million were $28.7 million lower, and concession revenues
of approximately $125.8 million were $7.7 million lower in comparison to the six
months ended August 31, 1999. These decreases in operating revenues were due
primarily to the aforementioned decline in attendance levels experienced during
the second quarter particularly driven by the "sub-par" performance of the
summer film product. This overall decrease in revenues is net of additional
revenue (approximately $54.0 million) from new theatre openings, improvements in
admission and concession revenues per patron and revenues derived from the on-
screen advertising contract entered into during May 2000.
Operating Costs of approximately $383.9 million for the six months ended August
31, 2000 were approximately $7.2 million lower than the six months ended August
31, 1999. This decrease was due primarily to reductions in variable operating
expenses commensurate with the aforementioned decrease in operating revenues
relating to attendance declines and lower film rent terms. The lower film rent
terms experienced in the current year (impact of approximately $3.6 million)
were favorable in comparison to the film rent terms experienced in the
comparable period of the prior year primarily associated with the strong
performance of "Star Wars - Episode I: The Phantom Menace" in the prior year.
The overall decrease in operating costs, which aggregated $49.2 million, was
partially offset by incremental costs associated with new theatre openings,
including occupancy costs, and the impact of improvements in admission and
concession revenues per patron.
General and Administrative Costs of approximately $26.5 million for the six
months ended August 31, 2000 were relatively consistent with the six months
ended August 31, 1999.
Depreciation and Amortization Costs of approximately $61.3 million for the six
months ended August 31, 2000 were $7.5 million higher than the six months ended
August 31, 1999, due primarily to the
13
incremental depreciation related to investments in new theatres which commenced
operations partially offset by the effect of theatre dispositions.
Loss on Sale/Disposal of Theatres of approximately $38.8 million for the six
months ended August 31, 2000 was $34.1 million higher than the six months ended
August 31, 1999, due primarily to the timing, nature and characteristics of
theatre dispositions and includes the aforementioned second quarter charge of
$31.5 million for a plan to dispose/close 42 screens at 8 locations. This was
the result of the continued decline in attendance experienced at these theatres
which was exacerbated by the "sub-par" industry-wide summer box office levels.
During the six months ended August 31, 2000, we actually disposed of 19 theatre
locations comprising 99 screens, which primarily were older, obsolete theatres
which generated marginal or negative cash flows. We hope to be able to continue
to aggressively dispose of theatres that are underperforming or non-strategic.
See the Liquidity and Capital Resources section for additional information.
Interest Expense of approximately $45.1 million for the six months ended August
31, 2000 was approximately $11.5 million higher than the six months ended August
31, 1999, due primarily to the impact of additional borrowings under our Senior
Revolving Credit Facility, which were utilized primarily to fund investments in
new theatres and joint ventures and our working capital needs, coupled with the
impact of an increase in the variable borrowing rate relating to our Senior
Revolving Credit Facility. See the Liquidity and Capital Resources section for
additional information.
Attributable EBITDA of $65.2 million for the six months ended August 31, 2000
decreased $26.1 million in comparison to the six months ended August 31, 1999,
due primarily to the aforementioned shortfall in attendance levels experienced
during the second quarter of the current year. This decrease was partially
offset by other increases in Attributable EBITDA including the favorable impact
of new theatre openings, higher admission and concession revenue per patron and
the impact of on-screen revenues, as previously discussed.
Liquidity and Capital Resources
We generate cash flow from our theatre operations (including cash generated from
investments in new builds and reconfigurations of existing theatres). Also, we
preserve cash, after applicable buy-out costs, as a result of the closing of
obsolete, unprofitable or non-strategic theatres, the majority of which generate
negative cash flow from operations. Our revenues are generated primarily from
the sale of admission tickets, concession sales and ancillary revenues. Our
operating revenue levels are directly related to the success and appeal of the
film product produced and distributed by the studios. In addition to cash flow
generated from operations, in the past, our liquidity requirements have been
funded by availability under our Senior Revolving Credit Facility. As we discuss
in greater detail below, our ability to access additional funding under this
facility is currently very limited.
We are continually seeking other potential revenue opportunities in addition to
box office and concession revenues. For example, in May 2000, due to our broad
demographic audience, we were able to complete a long-term deal to advertise on
our U.S. screens, estimated to be worth over time in excess of $60 million. Upon
signing this contract, we received $5 million as a non-refundable signing bonus
which we have recorded as deferred revenue and are currently amortizing over the
life of the contract. Additionally, we earn revenues based upon attendance
levels and a contractual rate per patron. This new source of revenue represents
our first foray into on-screen advertising with rolling stock in our U.S.
theatres. We are considering other forms of in-theatre promotional opportunities
as well.
Unfortunately, the benefit resulting from our new build program and additional
ancillary revenues was overshadowed by the significant decline in revenues
experienced during the second quarter. This decline in revenues was primarily
due to lower than anticipated industry-wide attendance levels experienced during
the summer months (primarily attributable to the "sub-par" film product) and the
continued decline in attendance at some of our older, obsolete theatres.
14
At August 31, 2000, we had capital spending commitments aggregating
approximately $163.2 million that we had anticipated we would fund over the next
three year period for the future development and construction of 14 theatre
properties comprising approximately 234 screens. However, given the decline in
our cash flow and our need to satisfactorily resolve our liquidity needs and
rationalize our capital structure (see above and "Outlook" section below) we are
substantially scaling back our capital spending until we have resolved our
financing needs. Until we achieve a satisfactory long-term solution, we will be
deferring and/or attempting to cancel capital expenditure requirements on
certain projects and seeking accommodations where we have contractual
obligations. At August 31, 2000, our debt balance included approximately $126.6
million of capital spending on theatre projects in various stages of development
including theatres which opened during the last six months. On June 14, 2000,
Moody's Investor Services, a ratings agency, downgraded our credit rating
together with the credit ratings of three other major exhibitors. Additionally,
on September 18, 2000, Standard & Poor's, a ratings agency, lowered our
subordinated debt rating and our corporate credit and bank loan ratings. These
actions have contributed to additional tightening in credit opportunities for
us. Generally, potential lenders and investors have expressed concern with the
state of the industry given the industry's costly build out program and its
effect on industry liquidity and company credit. Nonetheless, we continue to
pursue alternative financing structures including asset-based financings using
our unencumbered real estate, developer financed deals (i.e., build-to-suit
transactions) and potential transactions to monetize existing assets. Also see
"Factors That May Affect Future Performance".
In connection with the Combination, we entered into a $1 Billion Senior
Revolving Credit Facility with Bankers Trust Company, as administrative agent.
The Senior Revolving Credit Facility, together with an $84.5 million equity
contribution provided by Universal Studios, Inc. ("Universal"), replaced the
Sony Corporation of America ("SCA") Credit Facility and Cineplex Odeon's
existing credit facility, funded cash paid to Sony Pictures Entertainment Inc.
("SPE") and/or its affiliates upon closing of the Combination, and has provided
ongoing financing to us to fund working capital requirements and theatre
expansion in North America and internationally. This Senior Revolving Credit
Facility is comprised of two tranches, a $750 million senior secured revolving
credit facility, secured by substantially all of our assets, other than real
property interests, and the assets, other than real property interests, of our
domestic subsidiaries, and a $250 million uncommitted facility. The Senior
Revolving Credit Facility bears interest at a rate of either the current prime
rate as offered by Bankers Trust Company or an Adjusted Eurodollar Rate (as
defined in the credit agreement) plus an applicable margin based on our Leverage
Ratio (as defined in the credit agreement). On February 24, 2000, our bank group
agreed to a first amendment of the Senior Revolving Credit Facility. Under the
terms of the first amendment, the banks agreed to modify the Maximum
Consolidated Leverage Ratio, the Maximum Total Leverage Ratio and the Minimum
Debt Service Coverage Ratio, as defined in the agreement, for a period of 18
months. These ratios address our ability to access funds under the credit
facility as it relates to the leverage ratios and debt service ratio. As of
August 31, 2000, we were not in compliance with the financial covenants, as
amended, and therefore were in default under the terms of the credit agreement.
On September 19, 2000 and October 16, 2000, our bank group agreed to second and
third amendments to the Senior Revolving Credit Facility. Under the terms of
these amendments, subject to our continued compliance with the terms of the
amendments during the waiver period, the banks agreed to waive compliance with
the Maximum Consolidated Leverage Ratio, the Maximum Total Leverage Ratio and
the Minimum Debt Service Coverage Ratio, at August 31, 2000, and allow us to
continue to draw limited funds that, together with our anticipated cash flow
from theatre operations, are currently expected to allow us to fund our current
operating requirements through November 24, 2000. Our borrowings under the
Senior Revolving Credit Facility at August 31, 2000 totaled $655 million with an
additional $16.1 million of availability for outstanding letters of credit but
no further availability for revolving loans. As a result of the second and third
amendments, our availability will increase to $705 million (plus $16.1 million
for outstanding letters of credit), with the incremental availability being
secured by mortgages on five of our theatres that generated positive operating
cash flow of approximately $13 million during the most recent twelve month
period. The availability will be reduced to $700 million (plus $16.1 million for
outstanding letters of credit) if we complete our planned disposition of a
theatre in Manhattan that we own in fee. We are currently working
15
with participants at all levels of our capital structure to address our
liquidity needs and consider various restructuring alternatives so as to
maximize our value, including our assets and property.
We currently have outstanding $300 million aggregate principal amount of 8 7/8%
Senior Subordinated Notes due 2008. An acceleration by the bank group of the
obligations under our Senior Revolving Credit Facility would constitute an event
of default under the indenture governing these notes. Upon the occurrence of
such an event of default and pursuant to the terms of the indenture, Bankers
Trust Company, as trustee under the indenture, would have the right to
accelerate payment of the outstanding principal amount of and accrued interest
on these notes.
At the increased availability provided in the most recent amendment to our
credit agreement, we currently expect to be able to meet our current operating
requirements through November 24, 2000. During this period, we will continue
negotiations with our bank group to either extend the term of the existing
agreement or negotiate a new facility subject to prevailing market conditions.
However, a continued industry downturn, a decline in the expected returns from
our new build program, our inability to successfully dispose of underperforming
theatres, significant changes in the credit markets, or continued pressure by
the rating agencies may, among other factors, adversely affect our ability to
renegotiate our Senior Revolving Credit Facility on satisfactory terms. In
addition, the same risk factors which have impeded our ability to comply with
the covenant requirements could also adversely affect our ability to renegotiate
our facility. If we cannot renegotiate or refinance our Senior Revolving Credit
Facility, we will continue to pursue other possible solutions, including seeking
additional capital through other sources, including asset securitizations or
equity offerings, strategic alliances with one or more exhibitors, a consensual
restructuring of our capital structure or a restructuring under bankruptcy
proceedings. Each of these alternatives could be potentially dilutive to our
existing shareholders. There can be no assurance that we will be able to arrange
for any of the foregoing. Any inability to successfully negotiate a consensual
capital restructuring or otherwise implement alternative capital transactions
would have a material adverse effect on our operations and may force us to seek
protection from our creditors under debt reorganization or financial
restructuring under bankruptcy proceedings. See "Outlook" section below.
Our joint venture in Spain entered into a revolving credit facility with a group
of banks in the amount of Euros 75 million which was put into place during
September 2000. The proceeds of this facility will be used to fund new theatre
construction activity and operations in Spain.
In August 1998, we entered into interest rate swap agreements for a period of
four years to hedge a portion of the Senior Revolving Credit Facility variable
interest rate risk. On May 26, 2000, we monetized the value of these contracts
and sold these swaps for $8.65 million. We believe that we maximized the value
of these contracts as a result of this sale. As we had accounted for these swaps
as interest rate hedges, we have deferred the gain realized from the sale which
will be amortized as a credit to interest expense over the remaining original
term of these swaps (through August 2002).
Since the Combination, we pursued the sale of certain theatres in New York City
and Chicago that were subject to approval by the Department of Justice ("DOJ"),
in accordance with the terms of an agreement reached to permit the merger of
Loews Theatres with Cineplex Odeon. As a result, during the fourth quarter of
fiscal 1999, we sold to Cablevision Systems Corporation 33 screens in 12
theatres in New York City, in accordance with the DOJ order, and an additional
14 screens in 4 theatres in the suburban New York area.
Under the agreement with the DOJ, we were required to sell 49 screens at 11
theatre locations in Chicago. On April 7, 1999, we completed the sale of 30
screens at 8 theatre locations in Chicago to a third-party. This transaction was
not significant to our operating results or financial position. A portion of
these proceeds was utilized to pay down the Senior Revolving Credit Facility.
Additionally, under the agreement with the DOJ, we were required to sell the
remaining 19 screens at 3 theatre locations in Chicago. We were unable to sell
these locations and, pursuant to the original agreement with the DOJ, a trustee
was appointed to effect the sale of these locations. The trustee was also unable
to sell these
16
locations and has submitted a final report to the court. We are currently in
discussions with the DOJ regarding the status of these theatres. The DOJ has
indicated that it will consent to us retaining these three locations and a
stipulation and order is being drafted to submit for court approval.
Outlook
Our industry continues to experience significant liquidity pressures caused by a
number of factors including the downturn in attendance as reflected in year over
year operating performance measures, the moderate to aggressive new build
strategies employed by the industry's larger exhibitors which, coupled with the
difficulty in closing older, obsolete theatres, has resulted in an oversupply of
theatre screens in many North American markets, impairment write-offs and losses
on theatre dispositions, the continued downward credit ratings of the industry
and the recent announcements of bankruptcy filings and defaults of certain loan
agreements which have been publicly disclosed. These factors as well as the
industry's disappointing operating performance have contributed to significant
reductions in the prices of publicly traded debt and equity securities and has
substantially reduced the industry's access to capital.
We have been negatively affected by these events and we are currently
experiencing significant pressures on our liquidity. On September 19, 2000 and
October 16, 2000, we completed second and third amendments to our Senior
Revolving Credit Facility under which, subject to our continued compliance with
the terms of the amendments during the waiver period, our senior lenders agreed
to waive certain financial covenant requirements at August 31, 2000, and allow
us to continue to draw limited funds that, together with our anticipated cash
flow from theatre operations, are currently expected to allow us to fund our
current operating requirements through November 24, 2000. We are currently
working with participants at all levels of our capital structure to identify and
implement a longer-term financial plan to address our liquidity needs and
consider various restructuring alternatives so as to maximize our value,
including our assets and property. This longer-term financial plan may include
the issuance of equity securities to certain qualified investors, sales of
assets, strategic alliances with one or more exhibitors or a consensual
restructuring of our capital structure. During this period we will continue
negotiations with our bank group to either extend the terms of the existing
agreement or negotiate a new facility subject to prevailing market conditions.
However, there can be no assurance that we will be successful in our efforts. If
we are unsuccessful in our negotiations for a longer-term financial solution,
the waiver will expire on November 24, 2000 and as a result, the bank syndicate
could accelerate the maturity of the indebtedness. We currently do not have in
place any arrangements to refinance or fund the accelerated maturity of these
bank loans. Therefore, if we are unable to achieve a longer-term consensual
solution to our liquidity issue, we face the prospect of a restructuring under
bankruptcy proceedings. As a result, doubt exists about our ability to continue
under our existing capital structure. See the Liquidity and Capital Resources
section above for additional information.
17
Properties
At August 31, 2000, Loews Cineplex, including Star, Magic Johnson and Yelmo
Cineplex theatres, operated or had interests in 2,960 screens in 376 theatres,
of which 31 theatres were owned by us, 341 theatres were leased and 4 theatres
were operated by us under management arrangements. Our leases are entered into
on a long-term basis. The lease terms generally range from 20 to 40 years and
contain various renewal options, generally in intervals of 5 to 10 years.
Theatre leases provide for the payment of a fixed annual rent and, sometimes, a
percentage of box office receipts or total theatre revenue. The following tables
show the locations of our screens in operation at August 31, 2000, including our
partnerships' theatres.
United States Canada
State Screens Locations Province Screens Locations
- ------------------------------------------------------- -------------------------------------------------------
Arizona 33 4 Alberta 151 17
California 80 9 British Columbia 67 11
Connecticut 32 3 Manitoba 13 3
District of Columbia 30 9 Ontario 386 54
Florida 27 2 Quebec 207 29
Georgia 12 1 Saskatchewan 27 4
Idaho 20 4 -------------- ---------------
Illinois 304 42 Total 851 118
Indiana 51 5 ============== ===============
Kentucky 9 2
Maryland 127 18
Massachusetts 93 10 International
Michigan 156 10
Minnesota 15 3 Country Screens Locations
New Hampshire 12 2 -------------------------------------------------------
New Jersey 204 19 Austria 8 1
New York 283 40 Hungary 6 1
Ohio 32 2 Spain 140 16
Pennsylvania 49 3 Turkey 5 1
Texas 161 17 -------------- ---------------
Utah 59 10 Total 159 19
Virginia 41 6 ============== ===============
Washington 120 18
-------------- ---------------
Total 1,950 239
============== ===============
18
Theatre Portfolio Changes
The following table indicates the number of theatre locations and screens and
the changes to our theatre circuit portfolio (including screens and locations
relating to all our joint ventures) for the three and six month periods ended
August 31, 2000:
Three Months ended Six Months ended
August 31, 2000 August 31, 2000
--------------- ---------------
North North
America Int'l Total America Int'l Total
------- ----- ----- ------- ----- -----
Locations
- ---------
Beginning Balance 366 19 385 367 18 385
New builds 5 - 5 9 - 9
J.V. Investments - International - - - - 1 1
Dispositions (14) - (14) (19) - (19)
----- --- ----- ----- --- -----
Ending Balance 357 19 376 357 19 376
===== === ===== ===== === =====
Screens
- -------
Beginning Balance 2,808 159 2,967 2,777 149 2,926
New builds/Expansions 65 - 65 123 - 123
J.V. Investments - International - - - - 10 10
Dispositions (72) - (72) (99) - (99)
----- --- ----- ----- --- -----
Ending Balance 2,801 159 2,960 2,801 159 2,960
===== === ===== ===== === =====
As a result of our continuing theatre reconfiguration program the average
screens per location has grown from 7.6 screens per location at March 1, 2000 to
7.9 screens per location at August 31, 2000. During the six month period ended
August 31, 2000, we opened nine theatre locations aggregating 123 screens; in
the United States, we opened the Waterfront 22 in Pennsylvania, the Fairlane 21
in Michigan, the Citywalk/Universal IMAX(R) in California and the Harlem 9 in
New York; in Canada, we opened the St. Foy 14 in Quebec, the Gardiner Road 10 in
Ontario, the Beauport 16 in Quebec, the Sunridge 14 in Alberta and the South
Edmonton 16 in Alberta.
During fiscal year 2001, we further developed the existing circuit in Spain
called Yelmo Cineplex de Espana. This joint venture opened one theatre
aggregating 10 screens during the six month period ended August 31, 2000, the
Rivas theatre in Madrid.
Additionally, during the six month period ended August 31, 2000, we disposed of
or closed 19 theatre locations comprising 99 screens. We continue to review our
theatre portfolio exploring ways to accelerate the disposition of our older,
obsolete theatres.
19
New Accounting Pronouncements
On June 23, 1999, the Financial Accounting Standards Board decided to defer the
effective date of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activity". As a result of
this deferral, SFAS No. 133 will be effective for all of our fiscal quarters
beginning March 1, 2001. This statement standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that we recognize those items as assets or
liabilities in our statement of financial position and measure them at fair
value. We expect to adopt this standard when required and do not believe that it
will have a significant impact on our operating results or financial position.
On June 26, 2000, the Securities and Exchange Commission decided to defer the
effective date of Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". As a result of this deferral, SAB No. 101
will be effective for all of our fiscal quarters beginning December 1, 2000,
requiring retroactive application to the beginning of our 2001 fiscal year with
restatement, if necessary, of all quarters for the current fiscal year. SAB No.
101 expresses the views of the SEC staff in applying generally accepted
accounting principles to certain revenue recognition issues. We are currently
evaluating the impact, if any, of SAB No. 101 on our financial position and
results of operations.
Effect of Inflation and Foreign Currency
Inflation and foreign currency fluctuations have not had a material effect on
our operations.
Cautionary Notice Regarding Forward Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements included in this
Form 10-Q, other than statements of historical facts, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may constitute forward-looking
statements. Although we believe the expectations reflected in such forward-
looking statements are reasonable, we cannot be assured that such expectations
will prove to be correct. Important factors that could cause actual results to
differ materially from our expectations are disclosed in the following section
("Factors That May Affect Future Performance"). All forward-looking statements
are expressly qualified in their entirety by these cautionary statements.
Factors That May Affect Future Performance
In addition to other factors and matters discussed elsewhere herein, factors
that, in our view, could cause actual results to differ materially from those
discussed in forward-looking statements include: (1) the effect of economic
conditions on a national, regional or international basis; (2) overbuilding and
other competitive pressures in the motion picture exhibition industry; (3) the
financial resources of, and films available to, us and our competition; (4)
changes in laws and regulations, including changes in accounting standards; (5)
our ability to reduce or otherwise restructure high debt levels, which may
further reduce our operating flexibility, is impairing our ability to obtain
financing and making us more vulnerable in the current downturn; (6) our ability
to execute successfully our foreign expansion plans; (7) the interests of our
two major shareholders, SPE and Universal, each of which produces and
distributes motion pictures; (8) actions of our creditors and other persons who
challenge our efforts to defer and/or cancel our capital expenditure and other
cash requirements; and (9) opportunities that may be presented to and pursued by
us.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have exposure to various market risks, including interest rate risk and
foreign currency exchange rate risk. See additional disclosures in our Annual
Report on Form 10-K for the fiscal year ended February 29, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Metreon Arbitration
In May 1997, we entered into a 21 year lease with Metreon, Inc., an
affiliate of Sony Corporation of America, to operate a multiplex
theatre in an entertainment/retail complex developed by Metreon in San
Francisco. Since that theatre opened in June 1999, we have had a
dispute with Metreon with respect to construction costs (amount of
dispute is approximately $5 million) that may be our responsibility
under the lease, the nature of the costs that Metreon is seeking to
include as operating expenses under the lease, and the proper
allocation of operating expenses to our theatre, based on our
proportionate share of the complex. To date, we have been unable to
resolve these issues through negotiation with Metreon. The estimated
difference in operating expenses allocable to our theatre, taking into
account differences over both the nature of allocable costs and
determination of our proportionate share of the complex, is
approximately $3-4 million per annum for the duration of the lease.
Pursuant to the terms of the lease, we are to contribute to the
operating expenses of the complex in an amount equal to our
proportionate share of the total floor area of the complex. Metreon
has asserted that our proportionate share of the complex is
approximately 49%, while we assert that our proportionate share is
approximately 32%. On September 19, 2000, as permitted by the lease,
Metreon filed a demand for arbitration with the American Arbitration
Association seeking a declaration of the proportionate share of the
complex floor area occupied by our theatre. We believe that we have
meritorious defenses to all of Metreon's claims against us under the
lease and intend to vigorously assert our position regarding our
proportionate share of the complex in the arbitration.
Antitrust Proceedings
On April 16, 1998, the United States of America, the State of New
York, by and through its Attorney General, Dennis C. Vacco, and the
State of Illinois, by and through its Attorney General, Jim Ryan, on
one hand, and us, Sony Corporation of America, Cineplex Odeon and
Seagram Co. Ltd., on the other hand, entered into, and the Southern
District of New York ordered, a Stipulation & Order setting forth a
proposed Final Judgment relating to alleged federal antitrust
violations in New York and Illinois stemming from the Loews/Cineplex
combination. This Stipulation & Order followed the filing of a
complaint on the same day relating to these alleged violations. Under
the terms of the agreement, we were required to divest certain
theatres in New York and Chicago.
Since the Combination, we pursued the sale of certain theatres in New
York City and Chicago that were subject to approval by the Department
of Justice ("DOJ"), in accordance with the terms of an agreement
reached to permit the merger of Loews Theatres with Cineplex Odeon. As
a result, during the fourth quarter of fiscal 1999, we sold to
Cablevision Systems Corporation 33 screens in 12 theatres in New York
City, in accordance with the DOJ order, and an additional 14 screens
in 4 theatres in the suburban New York area for aggregate cash
proceeds of $87.5 million. Approximately
21
$87.2 million of these proceeds was used to pay down our Senior
Revolving Credit Facility.
Under the agreement with the DOJ, we were also required to sell 49
screens at 11 theatre locations in Chicago. On April 7, 1999, we
completed the sale of 30 screens at 8 of these theatre locations to a
third party. This transaction was not significant to our operating
results or financial position. A portion of these proceeds was
utilized to pay down our Senior Revolving Credit Facility.
Additionally, under the agreement with the DOJ, we were required to
sell the remaining 19 screens at 3 theatre locations in Chicago. We
were unable to sell these locations and, pursuant to the original
agreement with the DOJ, a trustee was appointed to effect the sale of
these locations. The trustee was also unable to sell these locations
and has submitted a final report to the court. We are currently in
discussions with the DOJ regarding the status of these theatres. The
DOJ has indicated that it will consent to us retaining these three
locations and a stipulation and order is being drafted to submit for
court approval.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.9.2 Second Amendment and Limited Waiver to Credit Agreement,
dated as of September 19, 2000.
10.9.3 Third Amendment and Limited Waiver to Credit Agreement,
dated as of October 16, 2000.
10.17 Agreement between Registrant and Joseph Sparacio, dated
May 1, 1998.
10.18 Agreement between Registrant and John J. Walker, dated
May 1, 1998.
10.21 Agreement between Registrant and J. Edward Shugrue, dated
December 15, 1997.
27 Financial Data Schedule (for SEC use only)
99 Supplemental Financial Information
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended August 31, 2000.
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 thereunto duly authorized.
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
Date: October 20, 2000
By: /s/ John J. Walker
------------------
John J. Walker, Senior Vice President
and Chief Financial Officer
By: /s/ Joseph Sparacio
-------------------
Joseph Sparacio, Vice President Finance
and Controller
23