UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ......... to ...........
Commission File Number 1-8747
AMC ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1304369
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 West 14th Street
P.O. Box 419615
Kansas City, Missouri 64141-6615
(Address of principal executive offices) (Zip Code)
(816) 221-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No ________
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Number of Shares
Title of Each Class of Common Stock Outstanding as of
October 1, 1998
Common Stock, 66 2/3 cents par value 19,427,098
Class B Stock, 66 2/3 cents par value 4,041,993
1
<PAGE>
AMC ENTERTAINMENT INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
2
<PAGE>
<TABLE>
AMC ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Thirteen Twenty-six
Weeks Ended Weeks Ended
October 1,October 2, October 1, October 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Revenues
Admissions $188,739 $144,719 $343,759 $270,717
Concessions 88,745 66,355 162,562 125,427
Other 11,568 8,554 21,781 17,907
-------- -------- -------- --------
Total revenues 289,052 219,628 528,102 414,051
Expenses
Film exhibition costs 104,196 80,838 189,404 151,980
Concession costs 13,693 9,851 25,143 19,907
Other 112,107 79,819 218,395 158,252
-------- -------- -------- --------
Total cost of operations 229,996 170,508 432,942 330,139
General and administrative 15,599 12,097 30,200 26,852
Depreciation and
amortization 21,030 16,522 41,372 32,889
Impairment of long-lived
assets - 46,998 - 46,998
-------- -------- -------- --------
Total expenses 266,625 246,125 504,514 436,878
-------- -------- -------- --------
Operating income (loss) 22,427 (26,497) 23,588 (22,827)
Other expense (income)
Interest expense
Corporate borrowings 6,188 7,062 12,574 12,961
Capital lease obligations 2,134 2,343 4,294 4,689
Investment income (365) (509) (651) (681)
Loss (gain) on disposition
of assets 35 (1,318) (1,358) (2,496)
-------- -------- -------- --------
Earnings (loss) before
income taxes 14,435 (34,075) 8,729 (37,300)
Income tax provision 6,550 (13,714) 3,900 (15,100)
-------- -------- -------- --------
Net earnings (loss) $7,885$ (20,361) $4,829 $(22,200)
======== ======== ======== ========
Preferred dividends - 1,283 - 2,651
-------- -------- -------- --------
Net earnings (loss) for
common shares $7,885$ (21,644) $4,829 $(24,851)
======== ======== ======== ========
Earnings (loss) per share:
Basic $.34 $ (1.18) $ .21 $(1.37)
======== ======== ======== ========
Diluted $.33 $ (1.18) $ .21 $(1.37)
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
3
</TABLE>
<PAGE>
<TABLE>
AMC ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
October 1, April 2,
1998 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 19,632 $ 9,881
Receivables, net of allowance for doubtful
accounts of $663 as of October 1, 1998
and $706 as of April 2, 1998 15,372 13,018
Reimbursable construction advances 25,450 58,488
Other current assets 27,568 25,736
-------- --------
Total current assets 88,022 107,123
Property, net 638,876 562,158
Intangible assets, net 20,906 22,066
Other long-term assets 103,752 104,433
-------- --------
Total assets $851,556 $795,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61,037 $ 72,633
Construction payables 10,848 24,588
Accrued expenses and other liabilities 76,055 72,598
Current maturities of corporate borrowings and
capital lease obligations 3,979 4,017
-------- --------
Total current liabilities 151,919 173,836
Corporate borrowings 431,015 348,990
Capital lease obligations 46,477 50,605
Other long-term liabilities 85,310 82,894
-------- --------
Total liabilities 714,721 656,325
Stockholders' equity:
$1.75 Cumulative Convertible Preferred
Stock, 66 2/3 cents par value;
1,800,331 shares issued and outstanding
as of April 2, 1998
(aggregate liquidation preference of $45,008
as of April 2, 1998) - 1,200
Common Stock, 66 2/3 cents par value; 19,447,598
and 15,376,811 shares
issued as of October 1, 1998 and April 2, 1998,
respectively 12,965 10,251
Convertible Class B Stock, 66 2/3 cents par value;
4,041,993 and 5,015,657 shares
issued and outstanding as of October 1, 1998 and
April 2, 1998, respectively 2,695 3,344
Additional paid-in capital 106,713 107,676
Foreign currency translation adjustment (2,461) (3,689)
Retained earnings 25,871 21,042
-------- --------
145,783 139,824
Less:
Employee notes for Common Stock purchases (8,579) -
Common Stock in treasury, at cost,
20,500 shares as of October 1, 1998 and April 2, 1998 (369) (369)
-------- --------
Total stockholders' equity 136,835 139,455
-------- --------
Total liabilities and stockholders' equity $851,556 $795,780
======== ========
See Notes to Consolidated Financial Statements.
4
</TABLE>
<PAGE>
<TABLE>
AMC ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<CAPTION>
Twenty-six
Weeks Ended
October 1,October 2,
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (Unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 4,829 $ (22,200)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Impairment of long-lived assets - 46,998
Depreciation and amortization 41,372 32,889
Deferred income taxes - (19,270)
Gain on disposition of long-term assets (1,358) (2,496)
Change in assets and liabilities:
Receivables (2,354) (1,964)
Other current assets (1,832) (1,125)
Accounts payable (11,855) (9,864)
Accrued expenses and other liabilities 7,152 10,991
Other, net 401 (352)
-------- --------
Net cash provided by operating activities 36,355 33,607
-------- --------
Cash flows from investing activities:
Capital expenditures (116,130) (173,811)
Net change in reimbursable construction advances 33,038 (39,162)
Proceeds from disposition of long-term assets 8,712 3,446
Other, net (8,351) (9,634)
-------- --------
Net cash used in investing activities (82,731) (219,161)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving Credit Facility 82,000 165,000
Principal payments under capital lease obligations (4,166) (1,741)
Change in cash overdrafts 259 8,046
Change in construction payables (13,740) 18,564
Funding of employee notes for Common Stock
purchases, net (8,579) -
Dividends paid on $1.75 Preferred Stock - (2,673)
Other, net (98) (682)
-------- --------
Net cash provided by financing activities 55,676 186,514
-------- --------
Effect of exchange rate changes on cash and
equivalents 451 (112)
-------- --------
Net increase in cash and equivalents 9,751 848
Cash and equivalents at beginning of period 9,881 24,715
-------- --------
Cash and equivalents at end of period $ 19,632 $ 25,563
======== ========
5
</TABLE>
<PAGE>
<TABLE>
AMC ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<CAPTION>
Twenty-six
Weeks Ended
October 1, October 2,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash paid during the period for:
Interest (net of amounts capitalized
of $3,509 and $3,572) $ 19,805 $ 20,226
Income taxes paid 2,859 6,384
See Notes to Consolidated Financial Statements.
6
</TABLE>
<PAGE>
AMC ENTERTAINMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
AMC Entertainment Inc. ("AMCE") is a holding company which, through its
direct and indirect subsidiaries, including American Multi-Cinema, Inc.
("AMC") (collectively with AMCE, unless the context otherwise requires, the
"Company"), is principally involved in the theatrical exhibition business
throughout the United States and in Japan and Portugal. The Company is
actively pursuing additional international locations and subsequent to
October 1, 1998 opened its third international theatre in Barcelona, Spain.
The Company is also involved in the business of providing on-screen
advertising and other services to AMC and other theatre circuits through a
wholly-owned subsidiary, National Cinema Network, Inc. ("NCN").
Prior to fiscal 1998, NCN was consolidated with the Company as of a
fiscal period end that was one period earlier than the Company's fiscal
period end. Beginning in fiscal year 1998, this one-period reporting lag
was eliminated and NCN results for 1998 include activity for thirty-one
weeks.
The accompanying unaudited consolidated financial statements have been
prepared in response to the requirements of Form 10-Q and should be read in
conjunction with the Company's annual report on Form 10-K for the year (52
weeks) ended April 2, 1998. In the opinion of management, these interim
financial statements reflect all adjustments (consisting primarily of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position and results of operations. Due to the seasonal nature of
the Company's business, results for the thirteen and twenty-six weeks ended
October 1, 1998 are not necessarily indicative of the results to be expected
for the fiscal year (52 weeks) ending April 1, 1999.
The year-end consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
Certain amounts have been reclassified from prior period consolidated
financial statements to conform with the current year presentation.
NOTE 2 - STOCKHOLDERS' EQUITY
During the twenty-six weeks ended October 1, 1998, various holders of
the Company's Convertible Preferred Stock converted 1,796,485 shares into
3,097,113 shares of Common Stock at a conversion rate of 1.724 shares of
Common Stock for each share of Convertible Preferred Stock. On April 14,
1998, the Company redeemed the remaining 3,846 shares of Convertible
Preferred Stock at a redemption price of $25.75 per share plus accrued and
unpaid dividends.
On August 11, 1998, the Company and its Co-Chairman and Chief Executive
Officer, Mr. Stanley H. Durwood, together with his six children (the
"Durwood Family Stockholders") completed a registered secondary offering of
3,300,000 shares of Common Stock (the "Secondary Offering") owned by the
Durwood Family Stockholders. In connection with the Secondary Offering, Mr.
Stanley H. Durwood converted 500,000 shares of Convertible Class B Stock to
500,000 shares of Common Stock. Additionally, pursuant to an agreement with
his children, Mr. Stanley H. Durwood converted 473,664 shares of Convertible
Class B Stock to Common Stock for delivery to his children.
On August 11, 1998, the Company loaned one of its officers $5,625,000
to purchase 375,000 shares of Common Stock of the Company in the Secondary
Offering. On September 14, 1998, the Company loaned $3,765,000 to another
of its officers to purchase 250,000 shares of Common Stock of the Company.
The 250,000 shares were purchased in the open market and unused proceeds of
$811,000 were repaid to the Company leaving a remaining unpaid principal
balance of $2,954,000. The loans are unsecured and are due in August and
September of 2003, respectively, may be prepaid in part or full without
penalty, and are represented by promissory notes which bear interest at a
rate at least equal to the applicable federal rate prescribed by Section 1274
(d) of the Internal Revenue Code in effect on the date of such loans
(5.57% per annum) payable at maturity.
The Company's Board of Directors has also approved a loan under terms
similar to those described above to Mr. Stanley H. Durwood not to exceed
$10,000,000 to purchase up to 500,000 shares of the Company's Common Stock.
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
October 1, October 2, October 1, October 2,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ 7,885 $ (20,361) $ 4,829 $(22,200)
Less: Preferred dividends - 1,283 - 2,651
-------- -------- -------- --------
Net earnings (loss) for
basic and diluted earnings
per share $7,885 $ (21,644) $4,829 $ (24,851)
======== ======== ======== ========
Denominator:
Shares for basic earnings
per share -
average shares outstanding 23,469 18,382 23,287 18,194
Stock options 150 - 178 -
-------- -------- -------- --------
Shares for diluted earnings
per share 23,619 18,382 23,465 18,194
======== ======== ======== ========
Basic earnings per share $ 0.34 $ (1.18) $.21 $ (1.37)
======== ======== ======== ========
Diluted earnings per share $ 0.33 $ (1.18) $.21 $ (1.37)
======== ======== ======== ========
</TABLE>
During the thirteen weeks ended July 2, 1998, all outstanding shares of
Convertible Preferred Stock were either converted or redeemed. During the
thirteen and twenty-six weeks ended October 2, 1997, dividends and shares
issuable upon conversion of Convertible Preferred Stock, shares issuable
upon exercise of options to purchase shares of Common Stock, and
contingently issuable shares were excluded from the earnings per share
calculation because they were anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
During the current year, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income. The adoption of this statement had no impact on the
Company's consolidated financial position, results of operations or cash
flows. SFAS 130 requires disclosure of comprehensive income and its
components in a company's financial statements. SFAS 130 requires foreign
currency translation adjustments to be included in other comprehensive
income.
The components of comprehensive income for the thirteen and twenty-six
weeks ended October 1, 1998 and October 2, 1997 are as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
October 1, October 2, October 1, October 2,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 7,885 $(20,361) $ 4,829 $(22,200)
Foreign currency translation
adjustment 1,152 (469) 1,228 (716)
-------- -------- -------- --------
Comprehensive income $9,037 $(20,830) $6,057 $(22,916)
======== ======== ======== ========
</TABLE>
NOTE 5 - INTERNAL USE SOFTWARE
During fiscal 1999, the Company early adopted Statement of Position 98-
1 ("SOP 98-1"), Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires companies to capitalize
certain internal-use software costs once certain criteria are met. Adoption
of this statement did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This section contains certain "forward-looking statements" intended to
qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
generally can be identified by use of statements that include words or
phrases such as the Company or its management "believes," "expects,"
"anticipates," "intends," "plans," "foresees" or other words or phrases of
similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. All such
forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those contemplated
by the relevant forward-looking statement. Important factors that could
cause actual results to differ materially from the expectations of the
Company include, among others: (i) the Company's ability to enter into
various financing programs; (ii) the performance of films licensed by the
Company; (iii) competition; (iv) construction delays; (v) the ability to
open new theatres and screens as currently planned; (vi) general economic
conditions, including adverse changes in inflation and prevailing interest
rates; (vii) demographic changes; (viii) increases in the demand for real
estate; and (ix) changes in real estate, zoning and tax laws. Readers are
urged to consider these factors carefully in evaluating the forward-looking
statements. The forward-looking statements included herein are made only as
of the date of this Form 10-Q and the Company undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events
or circumstances.
Operating Results
Set forth in the table below is a summary of revenues, cost of
operations, general and administrative, and depreciation and amortization
expenses attributable to the Company's domestic and international theatrical
exhibition operations and the Company's on-screen advertising business.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
Oct 1, Oct 2, Oct 1, Oct 2,
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Revenues
Domestic
Admissions $181,933 $138,603 31.3% $331,402 $259,915 27.5%
Concessions 87,226 65,050 34.1 159,807 123,136 29.8
Other 4,671 3,693 26.5 8,982 7,127 26.0
-------- --------- ----- --------- -------- -----
273,830 207,346 32.1 500,191 390,178 28.2
International
Admissions 6,806 6,116 11.3 12,357 10,802 14.4
Concessions 1,519 1,305 16.4 2,755 2,291 20.3
Other 61 10 * 64 18 *
-------- --------- ----- ---------- ------- -----
8,386 7,431 12.9 15,176 13,111 15.8
On-screen advertising
and other 6,836 4,851 40.9 12,735 10,762 18.3
-------- --------- ----- --------- ------- -----
Total revenues $289,052 $219,628 31.6% $528,102 $414,051 27.5%
Cost of Operations
Domestic
Film exhibition
costs $100,461 $ 77,397 29.8% $182,791 $146,057 25.2%
Concession costs 13,241 9,423 40.5 24,312 19,065 27.5
Rent 38,135 21,674 75.9 74,776 42,654 75.3
Other 66,667 51,282 30.0 129,639 101,407 27.8
-------- -------- ----- -------- - -------- -----
218,504 159,776 36.8 411,518 309,183 33.1
International
Film exhibition costs 3,735 3,441 8.5 6,613 5,923 11.6
Concession costs 452 428 5.6 831 842 (1.3)
Rent 1,315 1,498 (12.2) 2,626 2,972 (11.6)
Other 1,643 1,467 12.0 3,115 2,932 6.2
-------- --------- ----- ----------- ------ -----
7,145 6,834 4.6 13,185 12,669 4.1
On-screen advertising
and other 4,347 3,898 11.5 8,239 8,287 (0.6)
-------- --------- ----- ----------- ------ -----
Total cost of
operations $229,996 $170,508 34.9% $432,942 $330,139 31.1%
======== ======== ====== ========= ======= ======
General and Administrative
Corporate and domestic $11,399 $9,534 19.6% $ 23,542 $ 21,160 11.3%
International 3,074 1,666 84.5 4,431 3,144 40.9
On-screen advertising
and other 1,126 897 25.5 2,227 2,548 (12.6)
-------- --------- ----- --------- -------- -----
Total general and
administrative $15,599 $ 12,097 28.9% $ 30,200 $ 26,852 12.5%
======== ======== ====== ========= ======= ======
Depreciation and Amortization
Corporate and domestic $19,973 $ 15,258 30.9% $ 39,225 $ 30,404 29.0%
International 497 671 (25.9) 1,028 1,287 (20.1)
On-screen advertising
and other 560 593 (5.6) 1,119 1,198 (6.6)
-------- --------- ----- --------- -------- -----
Total depreciation
and amortization $ 21,030 $ 16,522 27.3% $ 41,372 $ 32,889 25.8%
======== ======== ====== ======== ======== ======
*Percentage change in excess of 100%.
</TABLE>
Thirteen weeks ended October 1, 1998 and October 2, 1997.
Revenues. Total revenues increased 31.6%, or $69,424,000, during the
thirteen weeks ended October 1, 1998 compared to the thirteen weeks ended
October 2, 1997.
Total domestic revenues increased 32.1%, or $66,484,000, from the prior
year. Admissions revenues increased 31.3%, or $43,330,000, due to a 25.8%
increase in attendance, which contributed $35,753,000 of the increase, and a
4.3% increase in average ticket prices, which contributed $7,577,000 of the
increase. Attendance at megaplexes (theatres with predominantly stadium-
style seating) increased as a result of the addition of 23 new megaplexes
with 560 screens since October 2, 1997 and an 8.5% increase in attendance at
comparable megaplexes (theatres opened before the second quarter of fiscal
year 1998). Attendance at multiplexes (theatres generally without stadium-
style seating) decreased due to a 3.9% decrease in attendance at comparable
multiplexes and the closure or sale of 17 multiplexes with 100 screens since
October 2, 1997. The decline in attendance at comparable multiplexes was
related primarily to certain multiplexes experiencing competition from new
megaplexes operated by the Company and other competing theatre circuits, a
trend the Company generally anticipates will continue. The increase in
average ticket prices was due to price increases and the growing number of
megaplexes in the Company's theatre circuit, which yield higher average
ticket prices than multiplexes. Concessions revenues increased 34.1%, or
$22,176,000, due to the increase in total attendance, which contributed
$16,780,000 of the increase, and a 6.6% increase in average concessions per
patron, which contributed $5,396,000 of the increase. The increase in
average concessions per patron was attributable to the increasing number of
megaplexes in the Company's theatre circuit, where concession spending per
patron is higher than in multiplexes.
Total international revenues increased 12.9%, or $955,000, from the
prior year. Admissions revenues increased 11.3%, or $690,000, due primarily
to an increase in attendance of 24.7% produced in the aggregate by the
Arrabida 20 in Portugal and the Canal City 13 in Japan for the thirteen
weeks ended October 1, 1998 compared to the thirteen weeks ended October 2,
1997. Concessions revenues increased 16.4%, or $214,000, due primarily to
the increase in total attendance. International revenues were negatively
impacted by the strengthening of the U.S. dollar. The stronger U.S. dollar
did not have a material impact on consolidated net earnings.
On-screen advertising and other revenues increased 40.9%, or
$1,985,000, from the prior year due primarily to an increase in the number
of screens served, a result of NCN's expansion program.
Cost of Operations. Total cost of operations increased 34.9%, or
$59,488,000, during the thirteen weeks ended October 1, 1998 compared to the
thirteen weeks ended October 2, 1997.
Total domestic cost of operations increased 36.8%, or $58,728,000, from
the prior year. Film exhibition costs increased 29.8%, or $23,064,000, due
to higher attendance, which contributed $24,196,000 of the increase, offset
by a decrease in the percentage of admissions paid to film distributors,
which reduced film exhibition costs by $1,132,000. As a percentage of
admissions revenues, film exhibition costs were 55.2% in the current year
compared with 55.8% in the prior year. Concession costs increased 40.5%, or
$3,818,000, due to the increase in concessions revenues, which contributed
$3,212,000 of the increase, and an increase in concession costs as a
percentage of concessions revenues which produced an increase in concession
costs of $606,000. As a percentage of concessions revenues, concession
costs were 15.2% in the current year compared with 14.5% in the prior year.
Rent expense increased 75.9%, or $16,461,000, due to the higher number of
screens in operation, the growing number of megaplexes in the Company's
theatre circuit, which generally have higher rent per screen than
multiplexes, and the sale and lease back during the second half of the prior
year of the real estate assets associated with 13 megaplexes, including
seven theatres opened during fiscal 1998, to Entertainment Properties Trust
("EPT"), a real estate investment trust (the "Sale and Lease Back
Transaction"). Other cost of operations increased 30.0%, or $15,385,000,
from the prior year due to the higher number of screens in operation. As a
percentage of revenues, other cost of operations was 24.3% during the
current year as compared with 24.7% in the prior year.
Total international cost of operations increased 4.6%, or $311,000,
from the prior year. Film exhibition costs increased 8.5%, or $294,000, due
to higher attendance, offset by a decrease in the percentage of admissions
paid to film distributors. Rent expense decreased 12.2%, or $183,000, and
other cost of operations increased 12.0%, or $176,000, from the prior year.
International cost of operations were positively impacted by the
strengthening of the U.S. dollar. The stronger U.S. dollar did not have a
material impact on consolidated net earnings.
On-screen advertising and other cost of operations increased 11.5%, or
$449,000, due to an increase in the number of screens served as a result of
the Company's expansion program.
General and Administrative. General and administrative expenses
increased 28.9%, or $3,502,000, during the thirteen weeks ended October 1,
1998.
Corporate and domestic general and administrative expenses increased
19.6%, or $1,865,000, primarily due to additional bonus expense due to
improved profitability of the Company and increased payroll and other costs
associated with the Company's expansion program.
International general and administrative expenses increased 84.5%, or
$1,408,000, primarily due to the Company's international expansion program.
On-screen advertising and other general and administrative expenses
increased 25.5%, or $229,000, due to an increase in the number of screens
served, as a result of the Company's expansion program,
Depreciation and Amortization. Depreciation and amortization increased
27.3%, or $4,508,000, during the thirteen weeks ended October 1, 1998. This
increase was caused by an increase in employed theatre assets resulting from
the Company's expansion plan, which was partially offset by lower
depreciation and amortization as a result of reduced carrying amounts of
impaired multiplex assets.
Impairment of Long-lived Assets. During the thirteen weeks ended
October 2, 1997, the Company recognized a non-cash impairment loss of
$46,998,000 ($27,728,000 after tax, or $1.51 per share) on 59 multiplex
theatres with 412 screens in 14 states (primarily California, Texas,
Missouri, Arizona and Florida) including a loss of $523,000 associated with
10 theatres that were included in impairment losses recognized in previous
periods. The expected future cash flows of these theatres, undiscounted
and without interest charges, were less than the carrying value of the
theatre assets.
The summer of 1997 was the first summer film season, generally the
highest grossing period for the film industry, that a significant number of
megaplexes of the Company and its competitors were operating (the first
megaplex, Grand 24, was opened by the Company in May 1995). During this
period, the financial results of certain multiplexes of the Company were
significantly less than anticipated at the beginning of fiscal 1998 due
primarily to competition from the newer megaplex theatres. As a result, the
Company initiated a review of its portfolio of theatres to identify those
theatres which are not expected to provide an adequate financial return in
the future. The Company anticipates that many of its multiplexes may be
disposed of in the intermediate term but continues to evaluate its future
plans for such theatres.
Interest Expense. Interest expense decreased 11.5%, or $1,083,000,
during the thirteen weeks ended October 1, 1998 compared to the prior year.
The decrease in interest expense resulted primarily from a decrease in
average outstanding borrowings.
Gain (Loss) on Disposition of Assets. Gain on disposition of assets
decreased $1,353,000 from a gain of $1,318,000 in the prior year to a loss
of $35,000 during the thirteen weeks ended October 1, 1998. The prior year
results include the sale of one of the Company's multiplexes.
Income Tax Provision. The provision for income taxes increased
$20,264,000 to an expense of $6,550,000 during the thirteen weeks ended
October 1, 1998 from a benefit of $13,714,000 in the prior year. The
effective tax rate was 45.4% for the thirteen weeks ended October 1, 1998
compared to 40.2% for the thirteen weeks ended October 2, 1997. The change
in the effective tax rate is primarily due to an increase in estimated non-
deductible expenses as a percentage of estimated pre-tax earnings.
Net Earnings. Net earnings increased $28,246,000 during the
thirteen weeks ended October 1, 1998 to earnings of $7,885,000
from a loss of $20,361,000 in the prior year. Net earnings per
common share, after deducting preferred dividends, was $.34
comparedto a loss of $1.18 in the prior year.
Twenty-six Weeks Ended October 1, 1998 and October 2, 1997
Revenues. Total revenues increased 27.5%, or $114,051,000, during the
twenty-six weeks ended October 1, 1998 compared to the twenty-six weeks
ended October 2, 1997.
Total domestic revenues increased 28.2%, or $110,013,000, from the
prior year. Admissions revenues increased 27.5%, or $71,487,000, due to a
23.2% increase in attendance, which contributed $60,299,000 of the increase,
and a 3.5% increase in average ticket prices, which contributed $11,188,000
of the increase. Attendance at megaplexes increased as a result of the
addition of 23 new megaplexes with 560 screens since October 2, 1997 and a
2.3% increase in attendance at comparable megaplexes (theatres opened before
the first quarter of fiscal year 1998). Attendance at multiplexes
decreased due to a 5.5% decrease in attendance at comparable multiplexes and
the closure or sale of 17 multiplexes with 100 screens since October 2,
1997. The decline in attendance at comparable multiplexes was related
primarily to certain multiplexes experiencing competition from new
megaplexes operated by the Company and other competing theatre circuits, a
trend the Company generally anticipates will continue. The increase in
average ticket prices was due to price increases and the growing number of
megaplexes in the Company's theatre circuit, which yield higher average
ticket prices than multiplexes. Concessions revenues increased 29.8%, or
$36,671,000, due to the increase in total attendance, which contributed
$28,567,000 of the increase, and a 5.3% increase in average concessions per
patron, which contributed $8,104,000 of the increase. The increase in
average concessions per patron was attributable to the increasing number of
megaplexes in the Company's theatre circuit, where concession spending per
patron is higher than in multiplexes.
Total international revenues increased by 15.8%, or $2,065,000, from
the prior year. Admissions revenues increased 14.4%, or $1,555,000, due
primarily to an increase in attendance of 26.0% produced in the aggregate by
the Arrabida 20 in Portugal and the Canal City 13 in Japan for the twenty-
six weeks ended October 1, 1998 compared to the twenty-six weeks ended
October 2, 1997. Concessions revenues increased 20.3%, or $464,000, due
primarily to the increase in total attendance. International revenues were
negatively impacted by the strengthening of the U.S. dollar. The stronger
U.S. dollar did not have a material impact on consolidated net earnings.
On-screen advertising and other revenues increased 18.3%, or
$1,973,000, due to an increase in the number of screens served, a result of
NCN's expansion program, offset by a change in the number of periods
included in the results of operations of the Company's on-screen advertising
business.
Cost of Operations. Total cost of operations increased 31.1%, or
$102,803,000, during the twenty-six weeks ended October 1, 1998 compared to
the twenty-six weeks ended October 2, 1997.
Total domestic cost of operations increased 33.1%, or $102,335,000,
from the prior year. Film exhibition costs increased 25.2%, or $36,734,000,
due to higher attendance, which contributed $40,172,000 of the increase,
offset by a decrease in the percentage of admissions paid to film
distributors, which caused a decrease of $3,438,000. As a percentage of
admissions revenues, film exhibition costs decreased to 55.2% in the current
year compared with 56.2% in the prior year. Film exhibition costs in the
first thirteen weeks of the prior year included the effects of a change in
attendance patterns and the popularity of films released during the period
which had higher film exhibition terms. Attendance was more concentrated in
the early weeks for the films released during the first quarter of the prior
year, which typically results in higher film exhibition costs. The 27.5%,
or $5,247,000, increase in concession costs is attributable to the increase
in concessions revenues, which contributed $5,678,000 of the increase,
offset by a decrease in concession costs as a percentage of concessions
revenue which produced a decrease in concession costs of $431,000. As a
percentage of concessions revenues, concession costs decreased from 15.5% to
15.2%. Rent expense increased 75.3%, or $32,122,000, due to the higher
number of screens in operation, the growing number of megaplexes in the
Company's circuit, which generally have higher rent per screen than
multiplexes, and the Sale and Lease Back Transaction. Other cost of
operations increased 27.8%, or $28,232,000. As a percentage of total
revenues, other cost of operations decreased from 26.0% in the prior year to
25.9% in the current year.
Total international cost of operations increased 4.1%, or $516,000,
from the prior year. Film exhibition costs increased 11.6%, or $690,000,
due to higher attendance offset by a decrease in the percentage of
admissions paid to film distributors. Rent expense decreased 11.6%, or
$346,000, and other cost of operations increased 6.2%, or $183,000, from the
prior year. International cost of operations were positively impacted by
the strengthening of the U.S. dollar. The stronger U.S. dollar did not have
a material impact on consolidated net earnings.
On-screen advertising and other cost of operations decreased .6%, or
$48,000, primarily as a result of the decrease in the number of periods
included in the results of operations of the Company's on-screen advertising
business.
General and Administrative. General and administrative expenses
increased 12.5%, or $3,348,000, during the twenty-six weeks ended October 1,
1998.
Corporate and domestic general and administrative expenses increased
11.3%, or $2,382,000, primarily due to additional bonus expense resulting
from improved profitability of the Company and increased payroll and other
costs associated with the Company's expansion program.
International general and administrative expenses increased 40.9%, or
$1,287,000, primarily due to the Company's international expansion program.
On-screen advertising and other general and administrative costs
decreased 12.6%, or $321,000, primarily due to the number of periods
included in the results of operations for the Company's on-screen
advertising business.
Depreciation and Amortization. Depreciation and amortization increased
25.8%, or $8,483,000, during the twenty-six weeks ended October 1, 1998.
This increase was caused by an increase in employed theatre assets resulting
from the Company's expansion plan which was partially offset by reduced
depreciation and amortization as a result of the reduced carrying amount of
the impaired multiplex assets.
Impairment of Long-lived Assets. During the twenty-six weeks ended
October 2, 1997, the Company recognized a non-cash impairment loss of
$46,998,000 ($27,728,000 after tax, or $1.52 per share). See discussion of
Impairment of Long-lived assets for the thirteen weeks ended October 2,
1997.
Interest Expense. Interest expense decreased 4.4%, or $782,000, during
the twenty-six weeks ended October 1, 1998 compared to the prior year. The
decrease in interest expense resulted primarily from a decrease in average
outstanding borrowings.
Gain on Disposition of Assets. Gain on disposition of assets decreased
$1,138,000 to a gain of $1,358,000 during the twenty-six weeks ended October
1, 1998 from a gain of $2,496,000 in the prior year and includes the sale of
two of the Company's multiplexes during each of the current and prior
periods.
Income Tax Provision. The provision for income taxes increased
$19,000,000 to an expense of $3,900,000 during the current year from a
benefit of $15,100,000 in the prior year. The effective tax rate was 44.7%
during the current year compared to 40.5% in the prior year. The change in
the effective tax rate is primarily due to an increase in estimated non-
deductible expenses as a percentage of estimated pre-tax earnings.
Net Earnings. Net earnings increased $27,029,000 during the twenty-six
weeks ended October 1, 1998 to earnings of $4,829,000 from a loss of
$22,200,000 in the prior year. Net earnings per common share, after
deducting preferred dividends, was $.21 compared to a loss of $1.37 in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, principally through box
office admissions and theatre concessions sales. The Company has an
operating "float" which partially finances its operations and which
generally permits the Company to maintain a smaller amount of working
capital capacity. This float exists because admissions revenues are
received in cash, while exhibition costs (primarily film rentals) are
ordinarily paid to distributors from 30 to 45 days following receipt of box
office admissions revenues. The Company is only occasionally required to
make advance payments or non-refundable guaranties of film rentals. Film
distributors generally release during the summer and holiday seasons the
films which they anticipate will be the most successful. Consequently, the
Company typically generates higher revenues during such periods. Cash flows
from operating activities, as reflected in the Consolidated Statements of
Cash Flows, were $36,355,000 and $33,607,000 for the twenty-six weeks ended
October 1, 1998 and October 2, 1997, respectively.
The Company is currently expanding its domestic theatre circuit and
entering select international markets. During the current fiscal year, the
Company opened 5 megaplexes with 104 screens and acquired one multiplex with
5 screens. The Company plans to continue this expansion by opening 247
screens, including 95 in international markets, in 10 megaplexes during the
remainder of fiscal 1999. In addition, the Company sold two multiplexes with
13 screens, closed four multiplexes with 24 screens and discontinued
operating one managed theatre with one screen resulting in a circuit total
of 49 megaplexes with 1,091 screens and 180 multiplexes with 1,422 screens
as of October 1, 1998.
The costs of constructing new theatres are funded by the Company
through internally generated cash flow or borrowed funds. The Company
generally leases its theatres pursuant to long-term non-cancelable operating
leases which require the developer, who owns the property, to reimburse the
Company for a portion of the construction costs. However, the Company may
decide to own the real estate assets of new theatres and, following
construction, sell and leaseback the real estate assets pursuant to long-
term non-cancelable operating leases. During fiscal 1999, 5 new theatres
with 104 screens were leased from developers. Historically, the Company has
owned and paid for this type of equipment. However, the Company has
recently entered into a master lease agreement for up to $25,000,000 of
equipment necessary to fixture certain theatres currently in construction.
The master lease agreement has an initial term of six years and includes
early termination and purchase options. The Company expects these leases to
be classified as operating leases. As of October 1, 1998, the Company had
construction in progress of $102,296,000 and reimbursable construction
advances (amounts due from developers on leased theatres) of $25,450,000.
The Company had 13 megaplexes with 321 screens under construction on October
1, 1998.
During the twenty-six weeks ended October 1, 1998, the Company had
capital expenditures of $116,130,000 and estimates that total capital
expenditures for 1999 will aggregate approximately $290 million. Included
in these amounts are assets which the Company may place into sale and
leaseback or other comparable financing programs, which will have the effect
of reducing the Company's net cash outlays.
On August 11, 1998, the Company loaned one of its officers $5,625,000
to purchase 375,000 shares of Common Stock of the Company in the Secondary
Offering. On September 14, 1998, the Company loaned $3,765,000 to another
of its officers to purchase 250,000 shares of Common Stock of the Company.
The 250,000 shares were purchased in the open market and unused proceeds of
$811,000 were repaid to the Company leaving a remaining unpaid principal
balance of $2,954,000. The loans are unsecured and are due in August and
September of 2003, respectively, may be prepaid in part or full without
penalty, and are represented by promissory notes which bear interest at a
rate at least equal to the applicable federal rate prescribed by Section 1274
(d) of the Internal Revenue Code in effect on the date of such loans
(5.57% per annum) payable at maturity.
The Company's Board of Directors has also approved a loan under the
same terms described above to Mr. Stanley H. Durwood not to exceed
$10,000,000 to purchase up to 500,000 shares of the Company's Common Stock.
The Company's Credit Facility permits borrowings at interest rates
based on either the bank's base rate or LIBOR and requires an annual
commitment fee based on margin ratios that could result in a rate of .1875%
to .375% on the unused portion of the commitment. The Credit Facility
matures on April 10, 2004. The commitment thereunder will be reduced by $25
million on each of December 31, 2002, March 31, 2003, June 30, 2003 and
September 30, 2003 and by $50 million on December 31, 2003. As of October
1, 1998, the Company had outstanding borrowings of $232,000,000 under the
Credit Facility at an average interest rate of 6.5% per annum, and
$187,770,000 was available for borrowing under the Credit Facility.
Covenants under the Credit Facility impose limitations on
indebtedness, creation of liens, change of control, transactions with
affiliates, mergers, investments, guaranties, asset sales, dividends,
business activities and pledges. In addition, the Credit Facility contains
certain financial covenants. As of October 1, 1998, the Company was in
compliance with all financial covenants relating to the Credit Facility.
During fiscal 1998, the Company sold the real estate assets associated
with 13 megaplex theatres, including seven theatres opened during fiscal
1998, to EPT for an aggregate purchase price of $283,800,000. Proceeds from
the Sale and Lease Back Transaction were applied to reduce indebtedness
under the Company's Credit Facility. The Company leased the real estate
assets associated with the theatres from EPT pursuant to non-cancelable
operating leases with terms ranging from 13 to 15 years at an initial lease
rate of 10.5% with options to extend for up to an additional 20 years.
The Company has granted an option to EPT to acquire a theatre under
construction for the cost to the Company of developing and constructing such
property. In addition, for a period of five years subsequent to November
1997, EPT will have a right of first refusal and first offer to purchase and
lease back to the Company the real estate assets associated with any
megaplex theatre and related entertainment property owned or ground-leased
by the Company, exercisable upon the Company's intended disposition of such
property. As of October 1, 1998, the Company had two megaplexes under
construction that would be subject to EPT's right of first refusal and first
offer to purchase should the Company seek to dispose of such megaplexes.
The leases are triple net leases that require the Company to pay
substantially all expenses associated with the operation of the theatres,
such as taxes and other governmental charges, insurance, utilities, service,
maintenance and any ground lease payments.
The Company believes that cash generated from operations, existing cash
and equivalents, amounts received from sale and lease back transactions and
the unused commitment amount under its Credit Facility will be sufficient to
fund operations and planned capital expenditures for the next twelve months.
The Company may require additional financing after fiscal 2000 to continue
its expansion program.
During the twenty-six weeks ended October 1, 1998, various holders of
the Company's Convertible Preferred Stock converted 1,796,485 shares into
3,097,113 shares of Common Stock at a conversion rate of 1.724 shares of
Common Stock for each share of Convertible Preferred Stock. On April 14,
1998, the Company redeemed the remaining 3,846 shares of Convertible
Preferred Stock at a redemption price of $25.75 per share plus accrued and
unpaid dividends. Preferred Stock dividend payments decreased $2,673,000
during the twenty-six weeks ended October 1, 1998 compared to the prior year
as a result of the conversions.
Year 2000
Potential Impact on Company. The failure of information technology
("IT") and embedded, or "non-IT" systems, because of the Year 2000 issue or
otherwise, could adversely affect the Company's operations. If not
corrected, many computer-based systems and theatre equipment, such as air
conditioning systems and fire and sprinkler systems, could encounter
difficulty differentiating between the year 1900 and the year 2000 and
interpreting other dates, resulting in system malfunctions, corruption of
data or system failure. Additionally, the Company relies upon outside third
parties ("business partners") to supply many of the products and services
that it needs in its business. Such products include films which it
exhibits and concession products which it sells. Attendance at the
Company's theatres could be severely impacted if one or more film producers
are unable to produce new films because of Year 2000 issues. The Company
could suffer other business disruptions and loss of revenues if any other
types of material business partners fail to supply the goods or services
necessary for the Company's operations.
State of Readiness.
General. The Company began addressing its internal IT systems in 1996
and has recently implemented a strategic plan (the "Plan") which will help
it address both internal and external Year 2000 issues for non-IT systems,
third parties and contingency planning in a coordinated manner. As part of
the Plan, the Company has assembled a Year 2000 Task Force composed of
representatives from each functional area of the Company to help identify
and resolve Year 2000 issues. Under the Plan, the Company is following a
widely accepted five-phase process to resolve Year 2000 issues. The phases
may generally be described as follows: (i) develop company-wide awareness;
(ii) inventory and assess internal systems and business partners, and
develop contingency plans for systems that cannot be renovated; (iii)
renovate critical systems and contact material business partners; (iv)
validate and test critical systems, analyze responses from critical business
partners and develop contingency plans for non-compliant partners; and (v)
implement renovated systems and contingency plans.
IT Systems. The Company began addressing its internal IT systems in
1996. It has performed a review of its computer applications related to
their continuing functionality for the Year 2000 and beyond, has upgraded
certain existing systems and intends to upgrade its remaining internal
systems by modifying or replacing these systems by October 31, 1999.
The Company utilizes a weighted methodology to evaluate the readiness
of its corporate and theatre level IT systems. For this purpose, corporate
and theatre system types include commercial off-the-shelf software, custom
in-house developed software, ticketing system software, concession system
software and hardware systems such as workstations and servers. The Company
has weighted each corporate and theatre system based on its overall
importance to the organization. The Company's readiness is evaluated in
terms of the five-phase process utilized in the Plan with appropriate
weighting given to each phase based on its relative importance to IT system
Year 2000 readiness. The Company has placed a high level of importance on
its corporate and theatre software systems and a lesser degree of importance
on its hardware systems when evaluating Year 2000 readiness. As a result,
the Company has focused more of its initial efforts toward Year 2000
readiness with respect to its software systems than it has with respect to
its hardware systems. Additionally, the Company believes that the
assessment, validation and testing and implementation phases are the most
important phases in its Plan.
Based on the weighting methodology described above, the Company has
assessed 90% of its corporate IT systems and as of October 1, 1998 has
renovated 45% of those systems that require renovation as a result of the
Year 2000 issue. In the aggregate, as of October 1, 1998, 55% of the
Company's corporate IT systems have been tested and verified as being Year
2000 ready. The percentage of corporate IT systems that have been tested
and verified as being Year 2000 ready assumes that a significant component
of commercial-off-the-shelf software, the recently installed Oracle
financial applications, is Year 2000 ready. This system was warranted to be
Year 2000 ready when purchased. Although the Company has plans to test and
verify the Oracle financial applications to validate that the implementation
is in fact Year 2000 ready, it does not believe that it has a significant
risk with respect to the Oracle financial applications.
Based on the weighting methodology described above, the Company has
assessed 80% of its theatre IT systems and as of October 1, 1998 has
renovated 45% of those systems that require renovation as a result of the
Year 2000 issue. In the aggregate, as of October 1, 1998, 35% of the
Company's theatre IT systems have been tested and verified as being Year
2000 ready.
Overall, the Company has assessed its Plan with respect to IT systems
as being 60% complete as of October 1, 1998. The Company does not believe
that it has material exposure to the Year 2000 issue with respect to its
internal IT systems.
Non-IT Systems. The Company's non-IT systems are currently being
assessed. Based on budgeted and expended personnel hours, assessment of non-
IT systems was approximately 1% complete as of October 1, 1998. The
Company's goals are to complete assessment and develop a plan of
remediation for non-IT systems by December 31, 1998 and to commence
remediation by March 31, 1999.
Third Parties. The Company is in the process of identifying and
assessing potential Year 2000 readiness risks associated with its outside
business partners. Based on budgeted and expended personnel hours,
assessment of third parties was approximately 1% complete as of October 1,
1998. The Company's goals are to complete its inventory of business
partners and to communicate with material business partners regarding their
Year 2000 readiness by December 31, 1998, and to develop contingency plans
for dealing with non-ready partners by March 31, 1999.
Contingency Planning. Although the Company presently does not have
all contingency plans in place to address the possibility that either it or
its material business partners may not be Year 2000 ready, it has started a
process to develop such plans and expects that contingency plans will be in
place by January 31, 1999. The Company has the ability to issue theatre
tickets manually in the event of a system failure.
Costs. Although a definitive estimate of costs associated with
required modifications to address the Year 2000 issue cannot be made until
the Company has at least completed the assessment phase of its Plan,
presently management does not expect such costs to be material to the
Company's results of operations, liquidity or financial condition. The
total amount expended from July 1, 1996 through October 1, 1998 was
approximately $230,000. Based on information presently known, the total
amount expected to be expended on the Year 2000 effort for IT systems is
approximately $1,600,000, primarily comprised of software upgrades and
replacement costs, internal personnel hours and consulting costs. To date,
the Year 2000 effort has been funded primarily from the existing IT budget.
Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under
the heading "Forward Looking Statements". In addition to the factors listed
therein which could cause actual results to be different from those
anticipated, the following special factors could affect the Company's
ability to be Year 2000 ready: (i) the Company's ability to implement the
Plan, (ii) cooperation and participation by business partners, (iii) the
availability and cost of trained personnel and the ability to recruit and
retain them and (iv) the ability to locate all system coding requiring
correction.
Euro Conversion
A single currency called the euro will be introduced in Europe on
January 1, 1999. Eleven of the fifteen member countries of the European
Union have agreed to adopt the euro as their common legal currency on that
date. Fixed conversion rates between these participating countries'
existing currencies (the "legacy currencies") and the euro will be
established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until January 1, 2002.
During this transition period, parties may pay for items using either the
euro or a participating country's legacy currency.
The Company currently operates one theatre in Portugal and has an
additional theatre which opened in Spain in October of 1998. Both countries
are member countries scheduled for adoption as of January 1, 1999. The
Company has implemented necessary changes to accounting, operational, and
payment systems to accommodate the introduction of the euro. The Company
does not anticipate that the conversion will have a material impact on its
consolidated financial position, results of operations or cash flows.
New Accounting Pronouncements
During fiscal 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
Accounting for Derivative Instruments and Hedging Activities. The statement
requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting
for changes in fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The statement is effective for
all fiscal years beginning after June 15, 1999. The statement will become
effective for the Company in fiscal 2001. Adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
During fiscal 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
Disclosures About Segments of an Enterprise and Related Information and
Statement of Financial Accounting Standards No. 132 ("SFAS 132"), Employers'
Disclosures about Pensions and Other Postretirement Benefits. SFAS 131
requires new disclosures of segment information in a company's financial
statements and is effective for fiscal years beginning after December 15,
1997. SFAS 132 requires disclosures about pension and other postretirement
benefit plans in a company's financial statements and is effective for
fiscal years beginning after December 15, 1997. These statements will
become effective for the Company in fiscal 1999. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows.
During fiscal 1999, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the
Costs of Start-up Activities. SOP 98-5 requires costs of start-up
activities to be expensed when incurred. The Company currently capitalizes
such costs and amortizes them over a two-year period. SOP 98-5 is effective
for fiscal years beginning after December 15, 1998. The Company will adopt
this statement in fiscal 2000, which will result in a cumulative effect
adjustment to the Company's results of operations and financial position
based on balances as of April 1, 1999. Had the Company adopted SOP 98-5 at
the beginning of fiscal 1999, such adjustment would have been approximately
$10.6 million, before taxes.
Other
A subsidiary of the Company is involved with the pre-development of a
retail/entertainment district in downtown Kansas City, Missouri known as the
"Power & Light District." Under the terms of the subsidiary's proposed
agreement with the City of Kansas City (the "City"), the subsidiary is
required to engage a developer and meet certain financial and other
conditions in order to receive the City's assistance in financing the
project. In the event that the Company is not successful in meeting those
requirements, the project will have to be abandoned and related carrying
costs expensed. Carrying costs related to the project were approximately $3
million as of October 1, 1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party to various legal proceedings in the ordinary
course of business, none of which is expected to have a material adverse
effect on the Company.
On June 9, 1998, the Civil Rights Division of the Department of Justice
advised the Company that a lawsuit has been authorized against the Company
to remedy an alleged pattern or practice of violations of Title III of the
ADA at the Company's newly constructed and renovated motion picture theatres
having stadium-style seating. The threat of litigation followed an
investigation of private complaints initially involving two megaplexes,
during which the Company voluntarily provided the Justice Department with
information on and access to other theatres. Based on its investigation,
the Department of Justice alleges that the Company has violated Section 303
of the ADA at newly constructed and renovated theatres by failing to comply
with published "Standards for Accessible Design" involving lines of sight
and other matters, and is operating theatres in violation of Section 302 of
the ADA because persons whose disabilities prevent them from climbing stairs
are denied access to stadium-style seating. The Company is engaged in
discussions with the Department of Justice concerning this matter. Although
no assurance can be given, the Company believes that the Department's
allegations can be resolved in a manner which will not materially adversely
affect the Company's financial condition, liquidity or results of
operations.
In an unrelated action filed on March 5, 1998 in the United States
District Court for the District of Arizona, Howard Bell v. AMC 24 Theatres,
CIV 98 0390, a private plaintiff is alleging that the Company has violated
the ADA for not dispersing accessible seating or providing accessible
signage at a megaplex located in Phoenix, Arizona. On October 16, 1998,
another private plaintiff filed suit in the United States District Court for
the District of Southern Florida, Barbara Harris v. American Multi-Cinema,
Inc., CIV 98-2472, alleging that the Company has violated the ADA by failing
to provide comparable seating for wheel chair patrons. Both suits seek an
injunction against continued operation of the megaplex in violation of the
ADA. The Company has filed an answer denying the allegations in the Bell
suit and expects to file an answer denying the allegations in the Harris
suit.
On July 27, 1998, in the United States District Court for the Northern
District of California, Drexler Technology Corporation filed actions against
each of Sony Corporation and its affiliated companies and Dolby
Laboratories, Inc., and has included as defendants various motion picture
distributors and exhibitors, including AMC, Drexler Technology Corp. v. Sony
corp. et al, C98-02936, and Drexler Technology Corp. v. Dolby Labs. et al,
C98-02935. These actions allege infringement of two patents relating to
optical data storage and retrieval systems, which are allegedly infringed by
the encoding of digital sound on motion picture films. These infringement
allegations are based on the production, distribution and exhibition of film
with Sony Dynamic Digital Sound (SDDS) or Dolby Digital technology.
Plaintiff seeks an injunction against continued use of this technology and
also seeks damages. AMC has filed counter claims alleging that plaintiff's
patents are invalid.
AMC currently utilizes SDDS systems with respect to 2,338 of its
screens and owns 136 portable systems employing Dolby Digital technology.
AMC is the beneficiary of indemnification arrangements with respect to these
actions. Pursuant to AMC's contractual arrangements with Sony Cinema
Products Corporation ("Sony Cinema"), a subsidiary of Sony Corporation of
America, Sony Cinema is obligated to indemnify, defend and hold harmless AMC
from and against any and all liabilities, damages, losses, costs and
expenses (including attorneys' fees) suffered or incurred by AMC in
connection with any third party claim for alleged infringement of any
patent, trademark or similar right relating to the SDDS systems. The
agreement with Sony Cinema provides that Sony Cinema at its expense and
option, shall (i) settle or defend against such a claim, (ii) procure for
AMC the right to use the SDDS systems in a manner that will cause them to
perform as originally intended under the agreement between AMC and Sony
Cinema; (iii) replace or modify the SDDS systems to avoid infringement; or
(iv) remove the SDDS systems from AMC's facilities (at such time and in such
manner as to not disrupt AMC's business operations) and refund to AMC the
purchase price less depreciation. Dolby Laboratories has agreed (i) to
defend, indemnify and hold AMC harmless from any losses arising out of the
Drexler v. Dolby Labs. action and (ii) in the event the Dolby Digital
technology is found to infringe one or more of the Drexler patents, to
procure for AMC at Dolby's expense the right to make, use and sell the Dolby
Digital technology or to modify it so that it is non-infringing. As a
result, although no assurance can be given, the Company believes that these
actions will not have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
On September 2, 1998 the Company was served with a lawsuit filed in
Canada in the Ontario Court (General Division) against the Company and
its subsidiary, AMC Entertainment International, Inc. (1107656 Ontario
Inc. v. AMC Entertainment Inc. and AMC Entertainment International Inc., 98-
CV- 154393). The lawsuit arose in connection with a decision by the Company
not to execute a lease for a proposed theatre at an entertainment center
being planned by the plaintiff in Markham, Ontario. Plaintiff's petition
claimed that the alleged lease was consistent with the terms of a prior
offer to lease executed in 1997 by the plaintiff and AMC Entertainment
International, Inc. and alleged that the lease had been fully negotiated
and agreed to by the parties. Plaintiff alleged the Company's action
resulted in the wrongful repudiation of the offer to lease and alleged
lease for the proposed theatre and forced the plaintiff to abandon plans
for the entertainment center. Plaintiff claimed damages of $32,200,000
(Canadian) (approximately $20,800,000 U.S. at current exchange rates), of
which $2,200,000 (approximately $ 1,400,000 U.S.) was based on lost
development costs allegedly incurred and $30,000,000 (approximately
$19,400,000 U.S.) in lost profits.
The Company believes that this matter has been resolved. The Company
and plaintiff have entered into a lease for a theatre, and plaintiff has
agreed to file a motion to dismiss the lawsuit with prejudice.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of AMC
Entertainment Inc. (as amended on December 2, 1997)
(Incorporated by reference from Exhibit 3.1 to AMCE's Form
10-Q (File No. 1-8747) dated January 1, 1998).
3.2 Bylaws of AMC Entertainment Inc. (Incorporated by reference
from Exhibit 3.3 to AMCE's Form 10-Q (File No. 0-12429) for
the quarter ended December 26, 1996).
4.1(a) Amended and Restated Credit Agreement dated as of April 10,
1997, among AMC Entertainment Inc., as the Borrower, The
Bank of Nova Scotia, as Administrative Agent, and Bank of
America National Trust and Savings Association, as
Documentation Agent, and Various Financial Institutions, as
Lenders, together with the following exhibits thereto:
significant subsidiary guarantee, form of notes, form of
pledge agreement and form of subsidiary pledge agreement
(Incorporated by reference from Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (File No. 333-25755)
filed April 24, 1997).
4.1(b) Second Amendment, dated January 16, 1998, to Amended and
Restated Credit Agreement dated as of April 10, 1997
(Incorporated by Reference from Exhibit 4.2 to the Company's
Form 10-Q (File No. 1-8747) for the quarter ended January 1,
1998).
4.2(a) Indenture dated March 19, 1997, respecting AMC Entertainment
Inc.'s 9 1/2% Senior Subordinated Notes due 2009
(Incorporated by reference from Exhibit 4.1 to the Company's
Form 8-K (File No. 1-8747) dated March 19, 1997).
4.2(b) First Supplemental Indenture respecting AMC Entertainment
Inc.'s 9 1/2% Senior Subordinated Notes due 2009
(Incorporated by reference from Exhibit 4.4(b) to Amendment
No. 2. to the Company's Registration Statement on Form S-4
(File No.333-29155) filed August 4, 1997).
4.3 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long term debt of the
Registrant have been omitted but will be furnished to the
Commission upon request.
*10.1 Promissory Note dated August 11, 1998, made by Peter C.
Brown, payable to AMC Entertainment Inc.
*10.2 Promissory Note dated September 14, 1998, made by Philip M.
Singleton, payable to AMC Entertainment Inc.
*27 Financial Data Schedule
_______
* Filed herewith
(b) Reports on Form 8-K
On August 5, 1998, the Company filed a Form 8-K reporting under Item 5
a lawsuit filed in the United States District Court for Northern California,
by Drexler Technology Corporation against each of Sony Corporation and its
affiliated companies and Dolby Laboratories, Inc., and has included as
defendants various motion picture distributors and exhibitors, including
American Multi-Cinema, Inc. (Drexler Technology Corp. v. Dolby Labs. Et al,
C98-02935).
On September 11, 1998, the Company filed a Form 8-K reporting under
Item 5 a lawsuit filed in Canada against the Company and its subsidiaries,
AMC Entertainment International, Inc. (1107656 Ontario, Inc. v. AMC
Entertainment Inc. and AMC Entertainment International, Inc. 98-CV-154393).
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.
AMC ENTERTAINMENT INC.
Date:November 6, 1998 /s/ Peter C. Brown
Peter C. Brown
Co-Chairman of the Board,
President and Chief
Financial Officer
Date:November 6, 1998 /s/ Richard L. Obert
Richard L. Obert
Senior Vice President-
Chief Accounting and
Information Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Financial Statements of AMC Entertainment Inc. as of and for the
twenty-six weeks ended October 1, 1998 submitted in response to the requirements
to Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-01-1999
<PERIOD-END> OCT-01-1998
<CASH> 19,632
<SECURITIES> 0
<RECEIVABLES> 41,485
<ALLOWANCES> 663
<INVENTORY> 0
<CURRENT-ASSETS> 88,022
<PP&E> 999,967
<DEPRECIATION> 361,091
<TOTAL-ASSETS> 851,556
<CURRENT-LIABILITIES> 151,919
<BONDS> 477,492
0
0
<COMMON> 12,965
<OTHER-SE> 123,870
<TOTAL-LIABILITY-AND-EQUITY> 851,556
<SALES> 162,562
<TOTAL-REVENUES> 528,102
<CGS> 25,143
<TOTAL-COSTS> 432,942
<OTHER-EXPENSES> 41,372
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,868
<INCOME-PRETAX> 8,729
<INCOME-TAX> 3,900
<INCOME-CONTINUING> 4,829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,829
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
EXHIBIT 10.2
PROMISSORY NOTE
$3,765,000.00 September 14, 1998
Kansas City, Missouri
FOR VALUE RECEIVED, Philip M. Singleton ("Maker") promises to pay to
the order of AMC Entertainment Inc., a Delaware corporation (the "Company"),
the principal sum of three million, seven hundred sixty-five thousand
Dollars ($3,765,000.00 ), together with interest from the date hereof until
this Note is paid in full, at a rate per annum equal to 5.57%. Interest
shall accrue and shall be added to principal annually, on September 14 of
each year. Principal (including accrued interest that has been added to
principal) and any interest accrued thereon shall be due and payable on
September 14, 2003.
Maker may prepay this Note in whole or in part at any time without penalty.
Interest shall be calculated on the basis of a 365 day year and for the
actual number of days elapsed. Payment hereof shall be made in lawful money
of the United States of America at such place as the legal holder hereof
shall from time to time designate to Maker in writing.
To the full extent permitted by law, Maker and all endorsers, sureties,
guarantors and other persons who may become liable for the payment hereof
severally waive demand, presentment, protest, notice of dishonor or
nonpayment, notice of protest and any and all lack of diligence in the
enforcement or collection hereof and hereby consent to any and all renewals,
extensions or other indulgences and releases of any of them, all without
notice to any of them.
/s/ Philip M. Singleton
Philip M. Singleton
EXHIBIT 10.1
PROMISSORY NOTE
$5,625,000.00 August 11, 1998
Kansas City, Missouri
FOR VALUE RECEIVED, Peter C. Brown ("Maker") promises to pay to the order of
AMC Entertainment Inc., a Delaware corporation (the "Company"), the
principal sum of Five Million Six Hundred Twenty-five thousand Dollars
($5,625,000.00 ), together with interest from the date hereof until this
Note is paid in full, at a rate per annum equal to 5.57%. Interest shall
accrue and shall be added to principal annually, on August 11 of each year.
Principal (including accrued interest that has been added to principal) and
any interest accrued thereon shall be due and payable on August 11, 2003.
Maker may prepay this Note in whole or in part at any time without penalty.
Interest shall be calculated on the basis of a 365-day year and for the
actual number of days elapsed. Payment hereof shall be made in lawful money
of the United States of America at such place as the legal holder hereof
shall from time to time designate to Maker in writing.
To the full extent permitted by law, Maker and all endorsers, sureties,
guarantors and other persons who may become liable for the payment hereof
severally waive demand, presentment, protest, notice of dishonor or
nonpayment, notice of protest and any and all lack of diligence in the
enforcement or collection hereof and hereby consent to any and all renewals,
extensions or other indulgences and releases of any of them, all without
notice to any of them.
/s/ Peter C. Brown
Peter C. Brown
