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, 1999
Commission file number 1-14099
Loews Cineplex Entertainment Corporation
----------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3386485
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
711 Fifth Avenue
New York, New York 10022
- ----------------------------------- ------------------------------------
(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, 1999
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 28,
1999 1999
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,187 $ 48,174
Accounts receivable 24,086 28,590
Inventories 3,604 4,462
Prepaid expenses and other current assets 3,914 4,041
---------- ------------
TOTAL CURRENT ASSETS 59,791 85,267
PROPERTY, EQUIPMENT AND LEASEHOLDS, NET 1,171,587 1,119,977
OTHER ASSETS
Investments in and advances to partnerships 53,850 47,794
Goodwill, net 500,079 498,549
Other intangible assets, net 22,866 19,558
Deferred charges and other assets 35,559 35,056
---------- ------------
TOTAL ASSETS $1,843,732 $ 1,806,201
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 179,139 $ 175,943
Deferred revenue 10,841 17,241
Current maturities of long-term debt and other obligations 1,526 1,173
Current portion of capital leases 2,783 2,737
---------- ------------
TOTAL CURRENT LIABILITIES 194,289 197,094
LONG-TERM DEBT AND OTHER OBLIGATIONS 720,197 690,301
LONG-TERM CAPITAL LEASE OBLIGATIONS 60,290 61,997
ACCRUED PENSION AND POST RETIREMENT OBLIGATIONS 9,491 9,570
OTHER LIABILITIES 199,703 181,943
---------- ------------
TOTAL LIABILITIES 1,183,970 1,140,905
---------- ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Common stock ($.01 par value, 300,000,000 shares authorized; 58,538,646
shares issued and outstanding at August 31, 1999 and 58,538,646 shares issued
and outstanding at February 28, 1999) 586 586
Common stock-Class B non-voting ($.01 par value, 10,000,000 shares authorized;
84,000 shares issued and outstanding at August 31, 1999 and 84,000 issued and
outstanding at February 28, 1999) 1 1
Accumulated other comprehensive income (4,581) (5,063)
Additional paid-in capital 671,707 671,707
Retained deficit (7,951) (1,935)
---------- ------------
TOTAL STOCKHOLDERS' EQUITY 659,762 665,296
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,843,732 $ 1,806,201
========== ============
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,
1999 1998 1999 1998(A)
------------ ------------ ------------ ------------
REVENUES
Box Office $ 213,001 $ 206,856 $ 354,374 $ 290,063
Concession 80,315 81,364 133,500 112,534
Other 9,976 9,239 17,202 12,676
----------- ----------- ----------- -----------
303,292 297,459 505,076 415,273
----------- ----------- ----------- -----------
EXPENSES
Theatre operations and other expenses 209,512 210,444 370,632 295,558
Cost of concessions 12,774 12,826 20,379 17,655
General and administrative 14,274 13,936 26,409 21,882
Depreciation and amortization 27,728 26,088 53,807 40,748
Loss on sale/disposal of theatres 4,713 981 4,713 1,002
----------- ----------- ----------- -----------
269,001 264,275 475,940 376,845
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 34,291 33,184 29,136 38,428
INTEREST EXPENSE 17,581 16,416 33,646 22,522
----------- ----------- ----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES 16,710 16,768 (4,510) 15,906
INCOME TAX EXPENSE 847 8,494 1,506 8,375
----------- ----------- ----------- -----------
NET INCOME/(LOSS) $ 15,863 $ 8,274 $ (6,016) $ 7,531
=========== =========== =========== ===========
Weighted Average Shares Outstanding - basic and diluted 58,622,646 49,196,205 58,622,646 37,046,497
Earnings/(Loss) per Share - basic and diluted $ .27 $ .17 $ (.10) $ .20
=========== =========== =========== ===========
(A) Includes the operating results of Cineplex Odeon Corporation from May 15,
1998 through August 31, 1998.
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,
1999 1998
----------- ----------
OPERATING ACTIVITIES
Net (loss)/income $ (6,016) $ 7,531
Adjustments to reconcile net (loss)/income to net cash provided by
operating activities:
Depreciation and amortization 53,807 40,748
Loss on sale/disposal of theatres 4,713 1,002
Equity earnings from long-term investments, net of distributions
received (373) 241
Changes in operating assets and liabilities:
Decrease in deferred taxes - (67)
Decrease/(increase) in accounts receivable 4,946 (3,887)
Increase in accounts payable and accrued expenses 2,520 41,164
(Decrease)/increase in other operating assets and liabilities, net (15,292) 6,482
-------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,305 93,214
-------- ----------
INVESTING ACTIVITIES
Investments in and advances to partnerships, net (5,683) (9,803)
Capital expenditures (82,968) (34,980)
Merger related costs (4,109) (19,864)
-------- ----------
NET CASH USED IN INVESTING ACTIVITIES (92,760) (64,647)
-------- ----------
FINANCING ACTIVITIES
(Repayment)/ borrowing of debt due to Sony Corporation of America (SCA) affiliate - (299,487)
Proceeds from Senior Revolving Credit Facility, net of repayments and deferred
financing fees 33,000 149,044
Repayment of long-term debt (2,232) (14,535)
Repayment of Plitt Theatres, Inc. Notes (2,300) (212,731)
Proceeds of new note offering, net of deferred financing fees - 289,577
Proceeds on issuance of common stock, net of offering expenses - 102,991
Proceeds from issuance of common stock to Universal upon Combination - 84,500
Dividend paid to Sony affiliate on Combination - (80,108)
-------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,468 19,251
-------- ----------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (19,987) 47,818
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 48,174 9,064
-------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,187 $ 56,882
======== ==========
Supplemental Cash Flow Information:
Income taxes paid, net of refunds received $ 840 $ 1,462
======== ==========
Interest paid (including nil and $6,942 paid to Sony affiliates) $ 32,845 $ 19,743
======== ==========
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 SHARE DATA OR 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. As of August 31, 1999,
LCP owns, or has interests in, and operates 2,911 screens at 406 theatres in 22
states and the District of Columbia, 6 Canadian provinces, Spain, Hungary,
Turkey and Austria. The Company's principal markets include New York, 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 26 locations, comprising a total of 290 screens. Screens and locations
for the partnerships are included in the Company amounts referred to above.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information; therefore, they do not include all of the information and
footnotes required by generally accepted accounting principles 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 28, 1999.
NOTE 2 -- BUSINESS COMBINATION
- -------------------------------
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"). As called for
in the Master Agreement, on the date of the Combination, the outstanding common
shares of Cineplex Odeon were exchanged for LCP shares on a ten for one basis.
Universal Studios, Inc. ("Universal"), a major shareholder of Cineplex Odeon,
contributed cash of $84.5 million to the Company in exchange for additional
shares of stock in the Company. Sony Pictures Entertainment Inc. ("SPE") and
its affiliates received a cash payment of approximately $417 million
representing (i) a cash payment to satisfy all intercompany indebtedness to
affiliates of Sony Corporation of America ("SCA") as of the closing date, (ii) a
cash payment equal to the fair value of certain transferred assets, and (iii)
the payment of a dividend to a subsidiary of SPE. The consolidated financial
statements for the six months ended August 31, 1998 include the operating
results of Cineplex Odeon from May 15, 1998 to August 31, 1998.
At the closing of the Combination, the Company issued 7,264,642 shares of Common
Stock and 80,000 shares of Class B Non-Voting Common Stock to Universal,
4,324,003 shares of Common Stock and 4,000 shares of Class B Non-Voting Common
Stock to the Charles Rosner Bronfman Family Trust and certain related
shareholders (the "Claridge Group") and 6,111,269 shares of common stock to the
other shareholders of record of Cineplex Odeon, for an aggregate value of
approximately $266.6 million, in exchange for the outstanding shares of Cineplex
Odeon and its wholly-owned subsidiary, Plitt Theatres, Inc. ("Plitt"). In
addition, the Company issued 4,426,607 shares of common stock to Universal for
consideration of $84.5 million as required under a subscription agreement, and
2,664,304 shares of Common Stock in connection with the transfer by SPE of its
interest in Star Theatres of Michigan, Inc.
5
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
NOTE 2 -- CONTINUED
- -------------------
("Star") and S&J Theatres, Inc. ("S&J") to the Company.
On August 5, 1998, the Company sold to the public under a registered public
offering 10 million shares of Common Stock. Upon consummation of this offering,
the Company's Class A Non-Voting Common Stock held by SPE automatically
converted into an equal number of shares of Common Stock and 3,255,212
additional shares of Common Stock were issued to Universal for no consideration
under anti-dilution provisions of the Company's subscription agreement with
Universal. As a result of the Combination and public offering, SPE, Universal
and the Claridge Group own approximately 39.5%, 25.5% and 7.4%, respectively, of
the Company's Common Stock.
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 prior fiscal quarter.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENT
- --------------------------------------
The following new pronouncement has been issued but is not yet effective:
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." The new effective
date will impact 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 the above standard when required and does not
believe that it will have a significant impact on its financial position or
operating results.
6
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income". This
pronouncement establishes a standard for the reporting of comprehensive income
and its components in the Company's financial statements.
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,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net income/(loss) $15,863 $ 8,274 $(6,016) $ 7,531
Other comprehensive income/(loss) (2,012) (7,382) 482 (7,382)
------- ------- ------- -------
Comprehensive income/(loss) $13,851 $ 892 $(5,534) $ 149
======= ======= ======= =======
The following is a reconciliation of the Company's accumulated other
comprehensive income:
1999
----
Accumulated other comprehensive
income as of February 28, $(5,063)
Other comprehensive income for
the six months ended August 31,:
Foreign currency translation
adjustment, net of income tax
expense of $568 760
Unrealized loss on marketable
securities, net of income tax
benefit of $208 (278)
-------
Accumulated other comprehensive
income as of August 31, $(4,581)
=======
7
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
NOTE 5 - 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 INT'L/
STATES CANADA OTHER CONSOLIDATED
---------- -------- -------- ------------
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
Three Months Ended
August 31, 1998
Total revenue $ 243,033 $ 53,910 $ 516 $ 297,459
Income/(loss) from operations $ 26,077 $ 7,345 $ (238) $ 33,184
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
Total assets $1,457,443 $356,040 $ 30,249 $1,843,732
Six Months Ended
August 31, 1998
Total revenue $ 352,337 $ 62,346 $ 590 $ 415,273
Income/(loss) from operations $ 30,453 $ 8,236 $ (261) $ 38,428
8
LOEWS CINEPLEX ENTERTAINMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA OR AS OTHERWISE NOTED)
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Commitments
The Company has entered into commitments for the future development and
construction of theatre properties over the next three year period aggregating
approximately $445 million (including letters of credit in the amount of
approximately $15 million). The Company has also guaranteed an additional $29
million related to obligations under lease agreements entered into by MJT. The
Company is of the opinion that MJT will be able to perform under its respective
obligations and that no payment will be required and no losses will be incurred
under these guarantees.
ADA Litigation
On or about December 17, 1997, the Disability Rights Council of Greater
Washington and others commenced a lawsuit in the U.S. District Court for the
District of Columbia against Cineplex Odeon and our wholly owned subsidiary
Plitt Theatres, Inc. ("Plitt"). The complaint alleges that Cineplex Odeon's
theatres in the Washington, D.C. metropolitan area, which includes Maryland and
Virginia, deny persons with physical disabilities full and equal enjoyment of
theatres as a result of architectural and structural barriers. Furthermore, as
a consequence, they allege that Cineplex Odeon and Plitt are discriminating
against such persons in violation of the ADA and, where applicable, the District
of Columbia Human Rights Act. The plaintiffs are seeking a judgment with
injunctive relief ordering Cineplex Odeon and Plitt to cease their alleged
violation of the ADA, and to bring their facilities into compliance with the
statutes. They also seek compensatory and punitive or exemplary damages in an
unknown amount, in addition to costs and attorneys' fees. The Company intends
to defend this claim vigorously.
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 substantial quantities of auto shredder
residue and other debris. Such material may contain hazardous substances. One
of these properties is the subject of an action by the Illinois Attorney
General's office which seeks civil penalties and various forms of equitable
relief, including the removal of all wastes allegedly present at the property,
soil and groundwater testing and remediation, if necessary. The Company's range
of liability 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 allocation of such 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. 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 financial condition.
9
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, 1999 and 1998. The information presented
below includes the results of Cineplex Odeon Corporation ("Cineplex Odeon"),
which became our wholly owned subsidiary on May 14, 1998 (the "Combination"),
for the period from May 15, 1998 through August 31, 1998 and does not include
any results prior to that time. Where noted, pro forma information compares the
results for the six months ended August 31, 1999 to the six months ended August
31, 1998 for Cineplex Odeon. In addition, where noted, for a more meaningful
comparison, our prior year operating results have been adjusted to remove the
operating performance of theatres we were required to sell pursuant to an
agreement with the Department of Justice (herein referred to as the "DOJ
Theatres").
This discussion incorporates operating results of partnerships in which we have
interests to the extent of our equity share as required by the equity method of
accounting.
Results of Operations
Three Months Ended August 31, 1999 Compared to Three Months Ended August 31,
1998
Operating Revenues are generated primarily from box office revenues and
concession sales. Operating revenues of approximately $303.3 million for the
three months ended August 31, 1999 were $5.8 million higher than the comparable
period of the prior year. Excluding the prior year operating revenues of the
DOJ Theatres, operating revenues were $23.8 million or 8.5% greater than the
prior year. Excluding the impact of the DOJ Theatres, box office revenues for
the three months ended August 31, 1999 of approximately $213.0 million were
$19.9 million or 10% higher, and concession revenues of approximately $80.3
million were $3.0 million or 4% higher in comparison to the three months ended
August 31, 1998. The increases in operating revenues were primarily due to the
strong film product exhibited during the quarter as evidenced by an increase in
industry-wide box office receipt levels, additional revenue from new theatre
openings and improvements in admission revenue per patron of $.28. These
increases which aggregated $43.6 million were partially offset by other
reductions in operating revenues including the effect of theatre dispositions
(other than the DOJ Theatres), which reduced operating revenues by approximately
$19.8 million.
Operating Costs of approximately $222.3 million for the three months ended
August 31, 1999 were approximately $1.0 million lower than the three months
ended August 31, 1998. Excluding the impact of the DOJ Theatres, operating costs
increased by $13.7 million or 6.6% in comparison to the prior year. The $13.7
million increase in operating costs was due primarily to increased costs of
$24.9 million related to the aforementioned increase in operating revenues and
higher occupancy costs of $4.9 million attributable to new theatre openings
offset by lower costs, including the effect of theatre dispositions of $16.1
million.
General and Administrative Costs of approximately $14.3 million for the three
months ended August 31, 1999 were $300 thousand higher than the three months
ended August 31, 1998, due primarily to higher salaries and fringe benefits as a
result of merit increases and additional costs related to the continued
development of our international operations, which were substantially offset by
savings resulting from the merger.
Depreciation and Amortization Costs of approximately $27.7 million for the three
months ended August 31, 1999 were $1.6 million higher than for the three months
ended August 31, 1998, primarily due to the incremental depreciation related to
investments in new theatres offset by the effect of theatre dispositions.
10
Loss on Sale/Disposal of Theatres of approximately $4.7 million for the three
months ended August 31, 1999 was $3.7 million higher than the three months ended
August 31, 1998, due primarily to the timing, nature and characteristics of
theatre dispositions.
Interest Expense of approximately $17.6 million for the three months ended
August 31, 1999 was $1.2 million higher than for the three months ended August
31, 1998 primarily due to a higher amount of debt outstanding.
Modified EBITDA of $66.7 million for the three months ended August 31, 1999
increased $6.5 million in comparison to the three months ended August 31, 1998
primarily due to the aforementioned effect of new theatre openings, higher
admission and concession revenue per patron and the strong film product
exhibited during the current quarter. Excluding the prior year impact of the
DOJ Theatres, Modified EBTIDA for the quarter increased $9.7 million or 17.0%
for the period. Modified EBITDA (earnings before interest, taxes, depreciation
and amortization, and gains/losses on asset disposal or sales) is a measure of
financial performance that management uses in measuring the Company's financial
performance. Modified EBITDA measures the amount of cash that a Company has
available for investment or other uses and is used by us as a measure of
performance. Modified EBITDA is primarily a management tool and only one
measure of financial performance to be considered by the investment community.
Modified EBITDA is not an alternative to measuring operating results or cash
flow under U.S. GAAP.
Six Months Ended August 31, 1999 Compared to Six Months Ended August 31, 1998
Operating Revenues are generated primarily from box office revenues and
concession sales. Operating revenues of approximately $505.1 million for the
six months ended August 31, 1999 were $89.8 million higher than the comparable
period of the prior year. Box office revenues for the six months ended August
31, 1999 of approximately $354.4 million were $64.3 million higher, and
concession revenues of approximately $133.5 million were $21.0 million higher,
in comparison to the six months ended August 31, 1998. These increases in
operating revenue were primarily due to the inclusion of the Cineplex Odeon
theatre operating results for the full six month period in the current year as
opposed to inclusion from the date of the Combination in the prior year,
partially offset by the reduction in operating revenues related to the sale of
the DOJ Theatres, (incremental impact of approximately $64.2 million, net).
Excluding the impact of the Cineplex Odeon operations, our operating revenues
increased $25.7 million or 11.5% due primarily to new theatre openings and
increases in box office revenue per patron of $.21, partially offset by the
effect of theatre dispositions. The operating revenues generated for the six
months ended August 31, 1999 includes Cineplex Odeon operating revenues of
$255.4 million which includes operating efficiencies realized from the
continuation of our concession programs implemented throughout the Cineplex
Odeon circuit resulting in a pro forma increase in concession revenue per patron
of approximately $.05 over prior year pro forma levels.
Operating Costs of approximately $391.0 million for the six months ended August
31, 1999 were approximately $77.8 million higher than the six months ended
August 31, 1998, due primarily to the inclusion of the operating results for the
Cineplex Odeon theatres for the full six month period as compared to inclusion
from the date of the Combination in the prior year, increased costs related to
the aforementioned increase in operating revenues, higher occupancy costs
attributable to new theatre openings and higher than normal film costs. The
incremental increase in operating costs associated with the inclusion of
Cineplex Odeon's operating results for the full six month period in the current
year was approximately $58.2 million. Excluding the impact of Cineplex Odeon,
our operating costs increased $19.6 million or 12.0% primarily due to the
increase in operating revenues mentioned above and an increase of approximately
$3.0 million resulting from higher than normal film rent terms for the period
primarily associated with the strong performance of Star Wars-Episode 1, The
Phantom Menace. Cineplex Odeon's operating costs for the six months ended August
31, 1999 were approximately $207.6 million. The operating cost level
experienced by Cineplex Odeon for the period reflects costs savings and
operating
11
efficiencies, primarily in concessions operations, which resulted in a pro forma
improvement in concession margin experienced for the period from 82.6% to 84.1%
in the current year.
General and Administrative Costs of approximately $26.4 million for the six
months ended August 31, 1999 were $4.5 million higher than for the six months
ended August 31, 1998, due primarily to the inclusion of the operating results
for the Cineplex Odeon theatres for the full six month period as compared to
inclusion from the date of the Combination in the prior year (net of cost
savings realized as a result of the Combination), merit increases and the
additional costs relative to the enhancement of our international operations.
Depreciation and Amortization Costs of approximately $53.8 million for the six
months ended August 31, 1999 were $13.0 million higher than for the six months
ended August 31, 1998 due to the inclusion of the operating results for the
Cineplex Odeon theatres for the full six month period as compared to inclusion
from the date of the Combination in the prior year, incremental depreciation
related to investments in new theatres which commenced operations in prior
periods and incremental goodwill amortization resulting from the Combination
recorded for a full six month period in comparison to a partial period last
year.
Loss on Sale/Disposal of Theatres of approximately $4.7 million for the six
months ended August 31, 1999 was $3.7 million higher than for the six months
ended August 31, 1998 due primarily to the timing, nature and characteristics of
theatre dispositions.
Interest Expense of approximately $33.6 million for the six months ended August
31, 1999 was $11.1 million higher than for the six months ended August 31, 1998,
due primarily to higher borrowings related to the Combination (including debt
amounts assumed from Cineplex Odeon) and the impact of additional borrowings
under our Senior Revolving Credit Facility to fund investments in theatres and
joint ventures. See the Liquidity and Capital Resources section for additional
information.
Modified EBITDA for the six months ended August 31, 1999 of $87.7 million
increased by $7.5 million in comparison to the six months ended August 31, 1998,
due primarily to the inclusion of results for Cineplex Odeon for the full six
month period as compared to inclusion from the date of the Combination in the
prior year, new theatre openings and higher box office revenue per patron,
partially offset by the higher than normal film rental costs and the impact of
theatre dispositions. Excluding the prior year impact of the DOJ Theatres,
Modified EBITDA for the six months increased $11.0 million or 14.3% for the
period.
Liquidity and Capital Resources
We have experienced, and expect to continue to realize, improved operating
results as a result of investments in theatres (including new builds and
reconfigurations of existing theatres) and the closing of obsolete, unprofitable
or uncompetitive theatres. Further, we expect to continue to increase revenues
and cash flows as a result of the reconfiguration of the Loews and Cineplex
Odeon circuits and additional future investment in North American joint ventures
and international exhibition. In addition, we continue to realize cost savings
and operating efficiencies as a result of the Combination.
At August 31, 1999, we had capital spending commitments aggregating
approximately $445 million for the future development and construction of 49
theatre properties comprising approximately 738 screens over the next three year
period. At August 31, 1999, our debt balance included approximately $45 million
of capital spending on theatre projects in various stages of development. In
the opinion of management, these capital commitments and the working capital
requirements will be funded by free cash flow generated from operations and by
our capital structure (debt and equity) that has been effected subsequent to the
Combination. The paragraphs below present a summary of significant capital
transactions impacting the periods reported.
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
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$84.5 million equity contribution provided by Universal, replaced our existing
Sony Corporation of America credit facility and Cineplex Odeon's existing credit
facility, funded cash paid to SPE and/or its affiliates upon closing of the
Combination and provides ongoing financing to us to fund our working capital
requirements and the future 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 and the assets 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). Our borrowings under the Senior Revolving Credit Facility at August
31, 1999 totaled $411 million. We have entered into certain transactions which
have effectively fixed the interest rate on a significant portion of this
indebtedness for a period of one to three years.
During fiscal 1999, 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. Pursuant to this 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 are required to sell the remaining 19 screens at 3 theatre locations in
Chicago. We have entered into a letter agreement with the third-party buyer of
the 8 theatres in Chicago for the sale of one of these three remaining theatres.
This sale is subject to approval by the landlord of this theatre and the DOJ.
We are investigating several options in order to comply with the requirements of
the agreement with the DOJ with respect to the other two theatres.
As a result of the Combination, Plitt Theatres, Inc. ("Plitt"), Cineplex Odeon's
U.S. theatre group, became our wholly owned subsidiary. During fiscal 1999, we
commenced an offer to purchase any and all of the Plitt 10 7/8% Senior
Subordinated Notes due 2004 ("Plitt Notes"), which was completed with holders of
approximately 97% of the outstanding Plitt Notes tendering. On May 13, 1999, we
called the remaining 3% of the outstanding Plitt Notes. Payment for the called
Plitt Notes was made on June 15, 1999 in the amount of $2.5 million, which
included the premium paid to noteholders as well as the accrued and unpaid
interest.
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Properties
At August 31, 1999, Loews Cineplex, including Star, Magic Johnson and Yelmo
Cineplex theatres, operated or had interests in 2,911 screens in 406 theatres,
of which 50 theatres were owned by us, 351 theatres were leased and 5 theatres
were subject to management arrangements. Our leases are entered into on a
long-term basis. The lease terms generally range from 20 to 40 years and contain
certain 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 as at August 31, 1999, including
our partnerships' theatres.
United States Canada
State Screens Locations Province Screens Locations
- ------------------------------------------------------- -------------------------------------------------------
Arizona 33 4 Alberta 131 18
California 80 9 British Columbia 71 12
Connecticut 20 3 Manitoba 13 3
District of Columbia 33 10 Ontario 388 58
Florida 27 2 Quebec 213 33
Georgia 12 1 Saskatchewan 27 4
-------------- ---------------
Idaho 20 4 Total 843 128
============== ===============
Illinois 315 47
Indiana 51 5
Kentucky 9 2 International
Maryland 153 23
Massachusetts 93 10 Country Screens Locations
-------------------------------------------------------
Michigan 143 10 Austria 8 1
Minnesota 19 4 Hungary 6 1
New Hampshire 12 2 Spain 108 13
New Jersey 206 20 Turkey 5 1
-------------- ---------------
New York 276 44 Total 127 16
============== ===============
Ohio 6 1
Pennsylvania 7 1
Texas 201 24
Utah 62 11
Virginia 43 7
Washington 120 18
-------------- ---------------
Total 1,941 262
============== ===============
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Theatre Portfolio Changes
The following table indicates the number of theatre locations, screens and
changes to our theatre circuit configuration as a result of the Combination and
our theatre reconfiguration program (including screens and locations relating to
all our joint ventures) for the three and six month periods ended August 31,
1999:
Three Months ended Six Months ended
August 31, 1999 August 31, 1999
--------------- ---------------
North North
America Int'l Total America Int'l Total
------- ----- ----- ------- ----- -----
Locations
- ---------
Beginning Balance 400 15 415 408 15 423
New builds 3 1 4 7 1 8
Expansions - - - - - -
Dispositions (13) - (13) (25) - (25)
----- --- ----- ----- --- -----
Ending Balance 390 16 406 390 16 406
===== === ===== ===== === =====
Screens
- -------
Beginning Balance 2,789 119 2,908 2,762 119 2,881
New builds 44 8 52 114 8 122
Expansions - - - 5 - 5
Dispositions (49) - (49) (97) - (97)
----- --- ----- ----- --- -----
Ending Balance 2,784 127 2,911 2,784 127 2,911
===== === ===== ===== === =====
As a result of our continuing theatre reconfiguration program the average
screens per location has grown from 6.8 screens per location at March 1, 1999 to
7.2 screens per location at August 31, 1999. During the six month period ended
August 31, 1999 we opened eight theatre locations aggregating 122 screens; in
the United States, we opened the Woodridge 18 in Illinois, the Great Lakes 25 in
Michigan, the Kips Bay 15 in Manhattan, the Metreon and Metreon IMAX comprising
16 screens in California and the Universal 20 in Florida; in Canada, we opened
the Grand 12 in Barrie and the Aberdeen Mall 8 in Kamloops; in Austria we opened
the Auhof Center in Vienna comprising 8 screens. We also expanded one existing
theatre location by adding five screens.
During the six month period ended August 31, 1999, we disposed of or closed 25
theatre locations comprising 97 screens.
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New Accounting Pronouncements
We have determined that one new pronouncement that has been issued but is not
yet effective is applicable to us, and may have an impact on our financial
statements:
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." The new effective
date will impact 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 the statement of financial
position and measure them at fair value.
We expect to adopt the above standard when required and we do not believe that
it will have a significant impact on our financial position or operating
results.
Effect of Inflation and Foreign Currency
Inflation and foreign currency fluctuations have not had a material effect on
our operations.
Year 2000
The Year 2000 issue is a result of computer programs being written using two
digits rather than four to define a specific year. Absent corrective actions, a
computer program that has date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. The inability to recognize or
properly treat the year 2000 may cause systems to process financial and
operations information incorrectly.
We recognized this challenge early and began work on remediation and overall
upgrades to all information systems several years ago. We have largely completed
remediation of our systems to meet business continuity concerns throughout the
Loews Theatre circuit and at our corporate offices. As a result of the
Combination with Cineplex Odeon we have found that the point-of-sale systems at
several of the Cineplex Odeon theatres and within our Yelmo Cineplex de Espana
joint venture may not be Year 2000 compliant. Our management and information
systems department have evaluated these systems and are taking the necessary
action in an attempt to mitigate all Year 2000 concerns. Completion of the
necessary remediation on these systems is ongoing and expected to be
substantially completed by the end of our third quarter. We will continue to
formulate a contingency plan to address any Year 2000 issues that may arise.
Our ongoing maintenance and upgrades of our information systems have largely
addressed any significant Year 2000 issues. Due to these significant upgrades
and investments in information systems over the past several years total costs
incurred to date directly related to the remedy of the Year 2000 issues have
been minimal and the identifiable costs associated with the remaining Year 2000
conversion activities including our "non-information technology systems" related
facilities are not expected to be significant.
In addition, we do not currently know whether vendors and other third parties
with whom we conduct business will successfully address the Year 2000 issue with
respect to their own computer software. However, we are working with our major
vendors and other third parties to identify and address Year 2000 issues. If our
present efforts to address the Year 2000 issue are not successful, or if vendors
and other third parties with whom we conduct business do not successfully
address the Year 2000 issue, our business and financial condition could be
adversely affected.
Cautionary Notice Regarding Forward Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the
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Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements, other than statements of historical
facts included in this Form 10-Q, 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 that 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) 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 high debt
levels, which may reduce our operating flexibility, may impair our ability to
obtain financing and may make us more vulnerable in a 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; and (8) opportunities that may be presented to and pursued by
us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates, movement in foreign currency exchange rates and other relevant
market prices. There has been no material change in this market risk exposure
from that disclosed in our Annual Report on Form 10-K for the fiscal year ended
February 28, 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in routine litigation and legal proceedings in the
ordinary course of our business relating to personal injury claims,
employment matters and contractual disputes. Except for those noted
below, we do not have any litigation or proceedings that we believe
will have a material adverse effect on us, individually or in the
aggregate.
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.
During fiscal 1999, 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 Combination. As a result, during the fourth
quarter 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. A substantial portion of
these proceeds were 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. The sale of these theatres will not have a significant
impact on our operating results or financial position. Additionally,
under the agreement with the DOJ, we are required to sell the
remaining 19 screens at 3 theatre locations in Chicago. We have
entered into a letter agreement with the third-party buyer of the 8
theatres in Chicago for the sale of one of these three remaining
theatres. This sale is subject to approval by the landlord of this
theatre and the DOJ. We are investigating several options in order to
comply with the requirements of the agreement with the DOJ with
respect to the other two theatres.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.13 Amended and Restated Employment Agreement between Cineplex
Odeon Corporation and Allen Karp, dated August 18, 1999.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended August 31, 1999.
19
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: September 30, 1999
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
20