<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended JANUARY 31, 2000
-----------------------------------------
Commission File Number 12360
-----------------------------------------
GC COMPANIES, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3200876
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 Boylston Street, Chestnut Hill, MA 02467
(Address of principal executive offices) (Zip Code)
(617) 278-5600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of March 10, 2000, there were outstanding 7,827,281 shares of the issuer's
common stock, $.01 par value.
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GC COMPANIES, INC.
I N D E X
---------
PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of 1
January 31, 2000 and October 31, 1999
Condensed Consolidated Statements of Operations for 2
the Three Months Ended January 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for 3
the Three Months Ended January 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market 15
Risk
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 27.1 Financial Data Schedule 18
<PAGE> 3
GC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 31,
2000 October 31,
(Unaudited) 1999
----------- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,454 $ 11,106
Marketable equity securities 118,757 102,956
Receivable due from financing institution 31,032 15,522
Other current assets 8,344 5,123
Income tax receivable 9,104 8,666
--------- ---------
Total current assets 172,691 143,373
Property and equipment, net 100,912 109,353
Portfolio investments 62,860 54,657
Investment in international theatre affiliates 57,537 58,815
Other assets 5,931 4,641
Deferred income taxes 4,330 4,768
--------- ---------
$ 404,261 $ 375,607
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 588 $ 587
Trade payables 29,217 34,325
Liability for early lease terminations 11,482 15,477
Other current liabilities 75,148 81,740
Deferred income taxes 27,850 16,732
--------- ---------
Total current liabilities 144,285 148,861
Long-term liabilities:
Capital lease obligations 886 990
Other long-term liabilities 36,375 34,575
Revolving credit facility 27,700 13,000
--------- ---------
Total long-term liabilities 64,961 48,565
Minority interest 2,544 1,722
Commitments and contingencies
Shareholders' equity:
Common stock 78 78
Additional paid-in capital 140,404 140,166
Accumulated other comprehensive income 48,880 32,353
Unearned compensation (2,136) (2,280)
Retained earnings 5,245 6,142
--------- ---------
Total shareholders' equity 192,471 176,459
--------- ---------
$ 404,261 $ 375,607
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
GC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except for per share amounts)
<TABLE>
<CAPTION>
For The Three Months
Ended January 31,
------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Admissions $ 64,402 $ 68,418
Concessions 28,613 31,332
Other 4,848 4,648
--------------------
97,863 104,398
Costs and expenses:
Film rentals 33,263 36,227
Concessions 5,603 5,934
Theatre operations and administrative expenses 56,278 58,222
Depreciation and amortization 3,958 3,875
(Gain) loss on disposition of theatre assets (587) 65
(Gain) loss on impairment and restructuring (1,078) 33
Corporate expenses 751 1,508
--------------------
Operating loss (325) (1,466)
Equity losses in theatre affiliates (798) (1,505)
Investment income, net 4,863 5,321
Interest expense (559) (380)
Gain (loss) on disposition of non-operating assets - 392
--------------------
Earnings before income taxes 3,181 2,362
Income tax expense (1,272) (945)
--------------------
Earnings before cumulative effect of accounting change 1,909 1,417
Cumulative effect of accounting change, net of tax (2,806) -
--------------------
Net earnings (loss) $ (897) $ 1,417
====================
Earnings per share:
Basic:
Earnings before cumulative effect of
accounting change $ 0.25 $ 0.18
Cumulative effect of accounting change (0.37) -
--------------------
Net earnings (loss) $ (0.12) $ 0.18
====================
Earnings per share:
Diluted:
Earnings before cumulative effect of
accounting change $ 0.25 $ 0.18
Cumulative effect of accounting change (0.37) -
--------------------
Net earnings (loss) $ (0.12) $ 0.18
====================
Weighted average shares outstanding:
Basic 7,734 7,710
====================
Diluted 7,735 7,852
====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
GC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended January 31,
----------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (897) $ 1,417
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Depreciation and amortization 3,958 3,875
Equity losses in theatre affiliates 798 1,505
Realized gains on marketable equity
securities and portfolio investments (5,703) --
Unrealized gains on marketable equity securities -- (5,634)
Equity losses in portfolio investments 47 359
Cumulative effect of accounting change 2,806 --
Gain on disposition of assets, impairment and
restructuring (1,665) (294)
Other non-cash activities 752 2,531
Changes in assets and liabilities:
Liabilities for early lease terminations (3,995) (1,828)
Trade payables (5,108) 3,674
Other current assets and liabilities (24,782) 1,229
----------------------
Net cash (used) provided by operations (33,789) 6,834
----------------------
Cash flows from investing activities:
Capital expenditures (2,185) (4,928)
Proceeds from the disposition of theatre assets 2,558 815
Proceeds from the liquidation of short-term
investments -- 12,989
Proceeds from sale of marketable equity securities 34,863 --
Purchase of portfolio investments (23,350) --
Advances from (to) international theatre affiliates 493 (2,541)
Other investing activities 779 (306)
----------------------
Net cash provided by investing activities 13,158 6,029
----------------------
Cash flows from financing activities:
Increase (decrease) in revolving credit facility 14,700 (3,975)
Other financing activities 279 (172)
----------------------
Net cash provided (used) by financing activities 14,979 (4,147)
----------------------
Net (decrease) increase in cash and
cash equivalents (5,652) 8,716
Cash and cash equivalents at beginning of period 11,106 2,479
----------------------
Cash and cash equivalents at end of period $ 5,454 $ 11,195
======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
GC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of GC Companies, Inc. (GCC
or the Company) are submitted in response to the requirements of Form 10-Q
and should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K. In the
opinion of management, these financial statements contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the interim period presented. Certain
prior year amounts have been reclassified to conform to the current years'
presentation. The Company's theatre business is seasonal in nature and the
results of its investment operation is subject to a high degree of
volatility, accordingly, the results of operations for this period
historically has not been indicative of the results for the full year.
2. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
As of January 31, 2000, information concerning marketable equity securities
and portfolio investments was as follows:
<TABLE>
<CAPTION>
Change
Cumulative in Pre-tax
(In thousands except percentages) Gross Pre-tax Unrealized
Aggregate Unrealized Holding
Accounting Percent of Carrying Holding Gains (Losses)
Investment Designation Ownership Value(a) Gains (Losses)(b) for the Quarter(b)
---------- ----------- --------- --------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
MARKETABLE EQUITY SECURITIES
Global TeleSystems Group, Inc. Available-for-sale (c) 1.7 $ 76,566 $ 55,210 $ 3,070
GrandVision SA Available-for-sale (c) 0.4 2,194 (202) (174)
MotherNature.com Available-for-sale (c) 4.5 5,217 (4,736) (4,736)
El Sitio Available-for-sale (c) 3.8 34,780 29,383 29,383
- -------------------------------------------------------------------------------------------------------------------------------
Total Marketable Equity Securities 118,757 79,655 27,543
- -------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS
Fuelman Equity Method (d) 46.7 15,754 n/a n/a
American Capital Access Equity Method (d) 23.8 28,756 n/a n/a
Vanguard Cost Method (e) 15.0 8,000 n/a n/a
VeloCom Cost Method (e) 3.9 10,350 n/a n/a
- -------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments 62,860 n/a n/a
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments $ 181,617 $ 79,655 $ 27,543
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Carrying values for public portfolio investments were determined based on
the share price of the securities traded on public markets on the last
business day of the period. The carrying values of the non-public portfolio
investments were determined under either the equity or cost method of
accounting.
(b) Pre-tax unrealized holding gains and losses apply only to marketable equity
securities.
(c) Unrealized gains or losses on securities classified as available-for-sale
securities are recorded in the consolidated balance sheets net of tax
within the caption "Accumulated other comprehensive income."
(d) These investments are in non-public companies and are accounted for on the
equity method because the Company has a greater than 20% equity interest in
each.
(e) These investments are in non-public companies and are accounted for on the
cost method.
4
<PAGE> 7
On November 29, 1999, the Company invested an additional $5.0 million in
Fuelman bringing its total interest to 46.7% on a fully diluted basis. On
December 17, 1999, the Company invested $8.0 million in Vanguard Modular
Building Systems, a leading regional provider of relocatable classrooms and
other commercial modular space solutions. On January 7, 2000, the Company
invested $10.4 million in VeloCom Inc., a facilities-based voice, data and
Internet provider in Brazil and Argentina.
On December 9, 1999, El Sitio, Inc. completed an initial public offering
and is currently traded on the NASDAQ under the symbol "LCTO." The Company
currently owns 1,456,756 shares of El Sitio. In addition, on December 9,
1999, MotherNature.com completed an initial public offering and is
currently traded on the NASDAQ under the symbol "MTHR." The Company
currently owns 678,589 shares of MotherNature.com. As a result of these
public offerings, and in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company reclassified both these investments from
portfolio investments to marketable equity securities and recorded them at
their fair values at January 31, 2000. The holdings in El Sitio and
MotherNature.com have been designated as available-for-sale securities.
During the first quarter of 2000, the Company sold the remaining 532,702
shares of its investment in PrimaCom AG, a German cable television systems
operator, which is traded on the German Neuer Markt, generating net
proceeds of $33.1 million and a realized pre-tax gain of $8.0 million. The
cumulative pre-tax gain recognized in the consolidated statement of
operations on these 532,702 shares to the date of sale over the Company's
original cost basis was $22.7 million. In addition, the Company sold 59,000
shares of its investment in GrandVision SA, an optical and photo retailer
that is publicly-traded on the French Exchange under the symbol"GPS,"
generating net proceeds of approximately $1.8 million and a realized loss
of $54,000.
Investment income, consisted of the following for the three months ended
January 31,
<TABLE>
<CAPTION>
(In thousands) 2000 1999
----------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income $ 97 $ 46
Unrealized gain on marketable securities -- 5,634
Realized gain on marketable equity securities 5,703 --
Equity losses on portfolio investments (47) (359)
Management fee (890) --
--------------------
Investment income, net $ 4,863 $ 5,321
====================
</TABLE>
Included in investment income are charges of $2.3 million in 2000 and $0.2
million in 1999 relating to performance-based compensation earned by the
Chief Investment Officer and certain former employees based on certain
investment events as defined in the GCC Investments, Inc. Incentive Pool
Plan.
In August, 1999, the Company established a new 99% owned subsidiary, GCC
Investments, LLC ("LLC"). A portion of the investment portfolio -
specifically the investments in El Sitio, MotherNature.com, ACA and
Fuelman, was transferred into this entity at its fair value which
approximated its current carrying amount. The remaining 1% interest was
purchased at fair value by Chestnut Hill Capital Partners, LLC ("CHCP"),
which is owned by the Company's Chief Investment Officer and investment
professionals formerly employed by the Company's investment subsidiary.
The LLC agreement specifies that profit sharing in the LLC will be between
GCC and CHCP in accordance with certain contractual agreements. The
activity relative to the minority interest includes the initial investment
in the LLC by CHCP of approximately $0.6 million and the investment in LLC
by CHCP for the investments purchased in the first quarter of 2000 of $0.2
million.
CHCP also has a management agreement with GCC Investments, LLC which
specifies that CHCP is to be reimbursed for certain expenses according to a
specific formula. The amounts payable or paid for such expenses total $0.8
million during the first quarter of 2000.
5
<PAGE> 8
3. IMPAIRMENT OF THEATRE ASSETS, EARLY TERMINATIONS AND RESTRUCTURE
The activity during the three months ended January 31, 2000 in the
liability for early lease terminations was as follows:
<TABLE>
<CAPTION>
Reserve Reserve for
for Lease Personnel
Termination Related Total
Costs Costs Reserve
----- ----- -------
<S> <C> <C> <C>
Balance at October 31, 1999 $ 13,930 $ 1,547 $ 15,477
Cash payments:
Lease buyouts (3,490) -- (3,490)
Rent and other payments (323) (182) (505)
-----------------------------------
Balance at January 31, 2000 $ 10,117 $ 1,365 $ 11,482
===================================
</TABLE>
During the first quarter of 2000, the Company executed the termination of a
theatre lease resulting in the payment of $3.0 million as well as the
buyout of several equipment leases resulting in the payment of
approximately $0.5 million. In addition, the Company made rent and other
payments of $0.5 million during the quarter with respect to certain
impaired theatres.
The Company's reserves established for its leases on properties it intends
to close reflect management's best estimate of the potential costs
associated with exiting these leases. Estimates are based on analysis of
the facilities, correspondence with the landlords, exploratory discussions
with sublessees and market conditions. The amounts the Company eventually
spends could differ materially from the amounts assumed in arriving at the
original reserve.
The gain on impairment and restructuring of $1.1 million in the first
quarter of 2000 is primarily due to the settlement gain recognized as a
result of the voluntary special retirement program offered by the Company
in the fourth quarter of 1999.
4. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION
The Company has segmented its operations in a manner that reflects how its
chief operating decision maker reviews the results of the businesses that
make up the consolidated entity. The Company identified six reportable
segments - four segments within what the Company considers its domestic
theatre operation (which encompasses all theatres in the continental United
States); one segment which includes the Company's joint ventures in South
America and Mexico; and the final segment which includes all of the
activity related to the investment portfolio business and corporate
administration. This identification of segments emanates from management's
recognition that (i) its domestic theatre locations are being operated in
different manners given their ultimate strategic importance to the Company;
(ii) its South American and Mexican operations are new theatre ventures in
markets that are completely dissimilar to the United States market; and
(iii) its investing activity in a variety of non-theatre related activities
is wholly separate from theatre operations. The four operating segments
within the domestic operations are core markets, other markets, impaired
theatres and other expenses. The core segment represents those markets
management defined as its strategic area of operations and includes
theatres operating in the Northeast and Midwest. The other market segment
includes those theatres outside of the core markets that are profitable and
therefore are not defined as impaired. The impaired theatre segment
includes all theatres that have been identified as impaired units in
accordance with the analysis discussed in Note 4 of the Company's Annual
Report. The other expenses column includes the regional and home office
administration expenses of the domestic theatre operations.
6
<PAGE> 9
The Company evaluates both domestic and international theatre performance
and allocates resources based on current and projected earnings before
interest, taxes, depreciation and amortization. Information concerning
earnings (loss) before income taxes have also been provided so as to aid in
the reconciliation to the consolidated totals. The international theatre
segment has been reported in this footnote as if it were a
fully-consolidated subsidiary rather than under the equity method as it has
been reported in the consolidated financial statements because the Company
evaluates operations on this basis. The adjustment column is utilized to
return the international theatre segment to the equity method, as the
international joint ventures are 50% owned, and to eliminate intercompany
balances.
TOTAL COMPANY
-------------
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31, 2000: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 64,402 $ 11,384 $ -- $ 75,786 $ (11,384) $ 64,402
Concessions 28,613 3,656 -- 32,269 (3,656) 28,613
Other 4,848 1,178 -- 6,026 (1,178) 4,848
----------------------------------------------------------------------------
Total revenues 97,863 16,218 -- 114,081 (16,218) 97,863
----------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 2,892 2,470 (924) 4,438 (2,470) 1,968
Net investment income 29 25 4,834 4,888 (25) 4,863
Earnings (loss) before income taxes 605 (674) 3,364 3,295 (114) 3,181
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31, 1999: Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
-------- -------- ---------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 68,418 $ 7,702 $ -- $ 76,120 $ (7,702) $ 68,418
Concessions 31,332 2,641 -- 33,973 (2,641) 31,332
Other 4,648 424 -- 5,072 (424) 4,648
----------------------------------------------------------------------------
Total revenues 104,398 10,767 -- 115,165 (10,767) 104,398
----------------------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 4,363 (1,470) (1,856) 1,037 1,470 2,507
Net investment income (loss) 37 (193) 5,284 5,128 193 5,321
Earnings (loss) before income taxes 818 (3,233) 3,122 707 1,655 2,362
</TABLE>
DOMESTIC THEATRES
-----------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31, 2000: Core Other Impaired Other Total Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 39,067 $ 14,309 $ 11,026 $ -- $ 64,402
Concessions 17,238 6,180 5,195 -- 28,613
Other 2,396 1,732 720 -- 4,848
----------------------------------------------------------------
Total revenues 58,701 22,221 16,941 -- 97,863
----------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 6,280 3,018 (1,615) (4,791) 2,892
Earnings (loss) before income taxes 5,938 2,350 (1,766) (5,917) 605
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31, 1999: Core Other Impaired Other Total Domestic
Markets Markets Theatres Expenses Theatres
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 37,805 $ 16,612 $ 14,001 $ -- $ 68,418
Concessions 16,980 7,644 6,708 -- 31,332
Other 2,335 1,138 1,175 -- 4,648
----------------------------------------------------------------
Total revenues 57,120 25,394 21,884 -- 104,398
----------------------------------------------------------------
Earnings (loss) before taxes, interest,
depreciation and amortization 8,423 2,236 (969) (5,327) 4,363
Earnings (loss) before income taxes 6,572 1,247 (1,235) (5,766) 818
</TABLE>
The Company's South American joint venture, Hoyts General Cinema South
America ("HGCSA") has entered into a $75 million debt financing arrangement
with major financial institutions to fund its operations in Argentina,
which is secured by the several guaranty of the joint venture's partners.
Availability of this financing beyond $50 million is subject to syndication
to third-party financial institutions. Under the several guaranty of the
Argentina debt facility, the Company is liable for 50% of the outstanding
borrowings. At January 31, 2000, the Company's portion of the outstanding
borrowings under this facility that it guarantees was approximately $8.5
million.
HGCSA has entered into a $22.5 million debt financing arrangement with
financial institutions to fund its operations in Chile, which is secured by
the several guaranty of the partners. The Company is liable for 50% of the
outstanding borrowings. At January 31, 2000, the Company's portion of the
outstanding borrowings under this facility, that it guarantees, was
approximately $11.1 million, which was comprised of $8.8 million of
outstanding borrowings and $2.3 million of outstanding guarantees. During
the first quarter of 2000, the Company invested $1.5 million in a
certificate of deposit, which is held as collateral for a portion of the
outstanding guarantees at January 31, 2000. This certificate of deposit is
included in other current assets in the consolidated balance sheets.
5. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is shown below.
Basic earnings per share excludes any dilutive effect of options, warrants
and convertible securities.
<TABLE>
<CAPTION>
For The Three Months Ended
Reference January 31,
--------- -----------
(In thousands, except per share data) 2000 1999
---- ----
<S> <C> <C> <C>
Earnings before cumulative effect of accounting change A $ 1,909 $ 1,417
--------------- -------------
Determination of shares:
Weighted average number of common shares outstanding B 7,734 7,710
Diluted effect of contingently returnable shares and shares
issuable on exercise of stock options 1 142
--------------- -------------
Weighted average common shares outstanding for diluted computation C 7,735 7,852
--------------- -------------
Earnings per share before cumulative affect of accounting change:
Basic A/B $0.25 $0.18
Diluted A/C $0.25 $0.18
</TABLE>
8
<PAGE> 11
6. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
(In thousands) For the Three Months Ended January 31,
--------------------------------------
2000 1999
---- ----
<S> <C> <C>
Net earnings (loss) $ (897) $ 1,417
Unrealized gains on securities, net of tax 16,527 20,322
----------------- ---------------
Ending balance $ 15,630 $ 21,739
----------------- ---------------
</TABLE>
7. ACCOUNTING FOR START-UP ACTIVITIES
In the first quarter of 2000, the Company adopted Statement of Position
("SOP") 98-5, "Reporting the Costs of Start-Up Activity." SOP 98-5 requires
start-up activities to be expensed when incurred. The Company's practice
had been to capitalize lease costs incurred prior to openings of theatres
and amortize these costs under generally accepted accounting principles.
The adoption of this new accounting pronouncement resulted in a one-time
non-cash charge to the Company's statements of operations for the three
months ended January 31, 2000 of $4.7 million (net of income tax benefit of
$1.9 million) or $0.37 per diluted share.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments in Hedging Activity." The Company is not required to implement
this standard until fiscal 2001. Its requirements are complex and its scope
far-reaching. The Company has not completed its evaluation of the impact of
this standard on the financial statements.
In addition, the Emerging Issues Task Force (EITF) released Issue No.
97-10, "The Effect of Lessee Involvement in Asset Construction." Issue No.
97-10 is applicable to entities involved on behalf of an owner-lessor with
the construction of an asset that will be leased to the lessee when
construction of the asset is completed. The consensus reached in Issue No.
97-10 applies to construction projects committed to after May 21, 1998 and
also to those projects that were committed to on May 21, 1998 if
construction does not commence by December 31, 1999. Currently, the Company
leases a majority of its new theatres through a leasing arrangement with a
financial institution. The Company anticipates that changes will be made to
certain elements of its current leasing arrangement to conform with the
requirements of an operating lease under Issue No. 97-10. If the Company is
unsuccessful in this endeavor, future operating leases under the current
leasing arrangement will be recorded on its consolidated balance sheet as
lease financing arrangements.
9
<PAGE> 12
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 21, 2000 VERSUS THE THREE MONTHS ENDED JANUARY 31,
- -----------------------------------------------------------------------------
1999
- ----
THEATRE REVENUES - Total revenues decreased 6.3% to $97.9 million for the three
months ended January 31, 2000 from $104.4 million for the same period in 1999
primarily attributable to a 13.4% decrease in patronage partially offset by a
8.7% increase in average ticket price and a 5.5% increase in concession sales
per patron. The decrease in patronage was mainly due to continued competitor
impacts resulting from the construction of megaplex theatres throughout the
country as well as a reduction in the number of units and screens that the
Company operates. The build-up of megaplex theatres over the past three years
has resulted in a dramatic increase in the number of screens throughout the
country. This has negatively impacted the Company's patronage and profitability.
In the first quarter of 2000, the competitor impact was particularly felt in the
non-core markets. The Company operated domestically 1,041 screens at 134
locations at January 31, 2000 compared to 1,074 screens at 147 locations at
January 31, 1999. The increase in average ticket prices was due to price
increases adopted at the beginning of the quarter in a majority of theatres. The
growth in concessions sales per patron was principally attributable to marketing
promotions during the quarter, the continued rollout of new products and
increased consumption.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operations and administrative expenses and depreciation and
amortization) decreased 5.0% to $99.1 million in 2000 from $104.3 million last
year. However, as a percentage of total revenues, cost of theatre operations was
101.3% for the first quarter of 2000 compared to 99.9% for the same period in
1999. This increased percentage of the cost of theatre operations to total
revenues for the first three months of the current year compared to the same
period in 1999 was primarily due to increased occupancy costs associated with
the new megaplex theatres opened over the last twelve months. This increase was
partially offset by lower administrative costs, a decrease in theatre payroll
costs, lower pre-opening expenses due to less theatres opening in the quarter
and higher film margins.
(GAIN) LOSS ON DISPOSITION OF THEATRE ASSETS - During the first quarter of 2000,
the Company sold two theatres with 10 screens as well as miscellaneous assets
generating proceeds of $2.6 million and a realized pre-tax gain of $0.6 million.
(GAIN) LOSS ON IMPAIRMENT AND RESTRUCTURING - The Company recorded a gain of
$1.1 million in the three months ended January 31, 2000, as a result of the
settlement gain associated with the voluntary special retirement program offered
by the Company in the fourth quarter of 1999. The gain was realized as a result
of benefit payments made out of the Company's pension plan under the special
retirement program.
CORPORATE EXPENSES - Corporate expenses decreased 50% to $0.8 million in 2000
from $1.5 million in 1999 primarily due to a reclassification of the investment
group expenses from corporate expenses to investment income as a result of the
new subsidiary established in the fourth quarter of 1999, GCC Investments, LLC
("LLC"). The new subsidiary is owned 99% by the Company and the remaining 1%
interest is owned by Chestnut Hill Capital Partners, LLC ("CHCP"), which is
owned by the Chief Investment Officer and investment professionals formerly
employed by the Company's investment subsidiary. CHCP has a management agreement
with LLC, which specifies that CHCP is to be reimbursed for certain expenses
according to a specific formula. Under this agreement, the management fee
expense for the first quarter of fiscal 2000, and included in investment income,
was $0.9 million.
EQUITY LOSSES IN THEATRE AFFILIATES - The Company recorded net equity losses in
theatre affiliates of $0.8 million for the three months ended January 31, 2000
compared to $1.5 million for the same period in 1999. The decrease in equity
losses was primarily due to the Hoyts General Cinema South America ("HGCSA")
joint venture. Revenues of the HGCSA venture increased 68% to $11.9 million for
the first quarter of 2000, versus $7.1 million for the same period in 1999. This
increase in revenues was primarily due to higher patronage as a result of
opening four theatres with 45 screens over the last twelve months. The net
loss of HGCSA improved to $0.7 million for the first three months of 2000, which
is an improvement of $1.3 million over the same period in 1999. This improvement
is primarily due to the increase in revenues and a reduction in start-up costs
that were incurred by the venture in the first quarter of 1999.
10
<PAGE> 13
INVESTMENT INCOME, NET - The Company recorded investment income of $4.9 million
in 2000 compared to investment income of $5.3 million in 1999. The Company's
investment income during the current quarter included the realized pre-tax gain
of $8.0 million on the sale of the remaining shares of PrimaCom, partially
offset by performance based compensation of $2.3 million earned by certain
former employees as a result of the sale of all the Company's holdings in
PrimaCom, management expenses of $0.9 million and other gains of $0.1 million.
In the first quarter of 1999, the Company recorded a $5.8 million unrealized
pre-tax gain on the Global TeleSystems Group, Inc. trading securities, partially
offset by other losses of $0.5 million.
INTEREST EXPENSE - The Company's interest expense increased to $0.6 million for
the three months ended January 31, 2000 compared to $0.4 million in 1999 mainly
due to increased borrowings outstanding during the quarter under the revolving
credit facility.
INCOME TAX EXPENSE - The Company's effective tax rate was 40% in 2000, unchanged
from 1999.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX - In the first quarter of
2000, the Company adopted Statement of Position ("SOP") 98-5, "Reporting the
Costs of Start-Up Activity." SOP 98-5 requires start-up activities to be
expensed when incurred. The Company's practice had been to capitalize lease
costs incurred prior to openings of theatres and amortize the costs under
generally accepted accounting principles. The adoption of this new accounting
pronouncement resulted in a one-time non-cash charge to the Company's statements
of operations for the three months ended January 31, 2000 of $4.7 million (net
of income tax benefit of $1.9 million) or $0.37 per diluted share.
11
<PAGE> 14
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
---------------
DOMESTIC THEATRES - Virtually all of the GCC's revenues are collected in cash,
principally through theatre admissions and concession sales. The Company has an
operating "float" which partially finances its operations and allows the Company
to operate on a negative working capital basis. This "float" exists because
admissions and concessions revenues are typically received in cash, while film
rentals and concessions costs are ordinarily paid to suppliers generally 15 to
45 days after the receipt of box office admissions and concessions revenues.
Occasionally, the Company is required to make film advances to distributors.
Significant changes to components of the Company's working capital will be
discussed in the appropriate sections below.
In the three months ended January 31, 2000, General Cinema Theatres, Inc. (GCT)
opened a 14-screen theatre in Chicago, Illinois, a 7-screen theatre in
Washington, D.C. and added a screen to an existing theatre in the Boston,
Massachusetts area. The Company has commitments to open two additional theatres
in 2000 and, currently, no commitments beyond that. Aggregate costs, including
construction and pre-opening costs paid by the Company in opening these theatres
amounted to approximately $0.4 million. The aggregate construction costs paid by
the Company for a theatre vary depending on the lease negotiated with the
landlord, the number of auditoriums, additional amenities that may be offered at
the theatre and the portion of costs provided by the Company's agreement with a
major financial institution to provide operating leases on leasehold
improvements and equipment. Capital outflows have been minimized on these
projects as a result of this operating lease agreement. The overall operating
lease program was designed to provide up to $250 million of funding over five
years for the Company's theatre expansion program. Since the inception of this
leasing arrangement in 1996, the Company has entered into $118.8 million of
operating leases with the financial institution. Availability of this lease
arrangement is in part dependent upon the ability of the financial institution
to syndicate leases to third party financial institutions. The receivable due
from a financial institution results from the Company initially advancing monies
for leased assets for new theatres as the financial institution's agent. On a
periodic basis these advances are reimbursed by the financial institution. At
January 31, 2000, the Company had an outstanding receivable of $31.0 million, an
increase during the first three months of 2000 of $15.5 million. This increase
is primarily due to monies advanced by the Company for the two theatres opened
in the first quarter and the two theatres currently under construction.
The Company has significant lease commitments. Lease payments totaled $76.5
million in 1999 and minimum lease payments are anticipated to approximate $79.5
million in 2000.
During the quarter, the Company sold two theatres with ten screens and
miscellaneous assets generating proceeds of $2.6 million. In addition, the
Company closed four theatres with 23 screens during the first quarter of 2000.
Two of the theatres were identified as impaired and the costs associated with
the closing of these theatres were previously provided and included as part of
the early lease termination reserve. At January 31, 2000, the Company had an
outstanding liability for early lease terminations of $11.5 million. The
Company's reserve established for leases on properties it intends to abandon
reflects management's best estimate of the potential cost associated with
exiting the existing lease. Estimates are based on analysis of the facilities,
correspondence with the landlords, exploratory discussions with sublessees and
market conditions. The amounts the Company will eventually be obligated for
could differ materially from the amounts assumed at arriving at the reserve.
This process will continue and the Company from time to time may be required to
make additional substantial one-time cash outflows. During the first quarter of
2000, the Company made cash payments of $3.5 million to terminate leases and
$0.5 million for rent and other payments
For the three months ended January 31, 2000, GCT made expenditures of $1.7
million for leasehold improvements, furniture and equipment purchases as well as
information services related projects. Domestic capital expenditures are
expected to approximate $12.0 million in 2000. In addition, the Company made
expenditures of $0.5 million associated with its Sundance Cinema joint venture.
GCC anticipates contributing $6.0 million of cash to this joint venture during
fiscal 2000. The Company currently has commitments to open two Sundance
theatres. The first Sundance theatre is anticipated to open in calendar year
2000.
12
<PAGE> 15
INTERNATIONAL THEATRES - During the three months ended January 31, 2000, the
Company opened an 8-screen theatre in Chile through its South American joint
venture. The joint venture in South America, HGCSA, anticipates opening an
additional 39 screens and 4 units by the end of calendar 2000. This theatre
expansion program will be financed through debt facilities in Chile and
Argentina. Future advances are required of the partners under the South American
joint venture agreement only if sufficient bank financing is not available. Debt
financing has been obtained by HGCSA through its local subsidiaries for its
theatre expansion program in Chile and Argentina.
HGCSA has entered into a $75 million debt financing agreement with major
financial institutions to fund its operations in Argentina, which is secured by
the several guaranty of the joint venture's partners. Availability of this
financing beyond $50 million is subject to syndication to third-party financial
institutions. Under the several guaranty of the Argentina debt facility, the
Company is liable for 50% of the outstanding borrowings. At January 31, 2000,
the Company's portion of the outstanding borrowings under this facility that it
guarantees was approximately $8.5 million.
HGCSA has entered into a $22.5 million debt arrangement with financial
institutions to fund its operations in Chile, which is secured by the several
guaranty of the joint venture's partners. The Company is liable for 50% of the
outstanding borrowings. At January 31, 2000, the Company's portion of the
outstanding borrowings under these facilities that it guarantees was
approximately $11.1 million, which was comprised of $8.8 million outstanding
borrowings and $2.3 million of outstanding guarantees. During the first quarter
of 2000, the Company invested $1.5 million in a certificate of deposit, which is
held as collateral for a portion of the outstanding guarantees at January 31,
2000. This certificate of deposit is included in other current assets in the
consolidated balance sheets.
During the first quarter of 2000, the Company executed a letter of intent to
sell its five-theatre investment in Mexico to a local competitor.
INVESTMENT PORTFOLIO - At January 31, 2000, marketable equity securities were
$118.8 million, an increase of $15.8 million from the balance at October 31,
1999. The increase in marketable securities during the first three months of
2000 was primarily due to appreciation in value of its Global TeleSystems,
Group, Inc. investment of $3.1 million, the sale of a portion of the Company's
investment in GrandVision SA, the sale of the remaining shares of PrimaCom and
the initial public offering of the Company's El Sitio and MotherNature.com
investments.
In November, 1999, the Company sold 59,000 shares of GrandVision SA generating
proceeds of approximately $1.8 million. In addition, the Company sold its
remaining 532,702 shares in PrimaCom during the first quarter of 2000 generating
net cash proceeds of approximately $33.1 million.
On November 29, 1999, the Company invested an additional $5.0 million in Fuelman
bringing its total interest to 46.7% on a fully diluted basis. On December 17,
1999, the Company invested $8.0 million in Vanguard Modular Building Systems, a
leading provider of relocatable classrooms and other commercial modular space
solutions. On January 7, 2000, the Company invested $10.4 million as part of an
overall $20.7 million commitment in VeloCom Inc., a facilities-based voice,
data and Internet provider in Brazil and Argentina. The Company anticipates the
additional investment in VeloCom Inc. of approximately $10.4 million will be
made by the third quarter of 2000.
Both El Sitio and MotherNature.com completed initial public offerings during the
first quarter of 2000. As a result of these public offerings, and in accordance
with Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company reclassified both these
investments to marketable equity securities and recorded them at their fair
values at January 31, 2000 of $34.8 million for El Sitio and $5.2 million for
MotherNature.com.
OTHER - The Company received net borrowings of $14.7 million on its outstanding
revolving credit facility and paid interest of $0.4 million during the first
three months of 2000. The average interest rate for the first quarter was 7.4%.
In December, 1999, the Company's Board of Directors authorized the repurchase of
up to one million shares of the Company's common stock through December, 2000.
13
<PAGE> 16
The Company believes that cash generated from operations, asset sales under
agreement, cash and cash equivalents of $5.5 million, amounts available under
the Company's revolving credit facility, the operating lease arrangement and the
South American joint venture debt agreements will be sufficient to fund
operating requirements, capital expenditures and the Company's investment
activities for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
recently issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments in Hedging Activity." The Company is not
required to implement this standard until fiscal 2001. Its requirements are
complex and its scope far-reaching. The Company has not completed its evaluation
of the impact of this standard on the financial statements.
In addition, the Emerging Issues Task Force (EITF) released Issue No. 97-10,
"The Effect of Lessee Involvement in Asset Construction." Issue No. 97-10 is
applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when construction of
the asset is completed. The consensus reached in Issue No. 97-10 applies to
construction projects committed to after May 21, 1998 and also to those projects
that were committed to on May 21, 1998 if construction does not commence by
December 31, 1999. Currently, the Company leases a majority of its new theatres
through a leasing arrangement with a financial institution. The Company
anticipates that changes will be made to certain elements of its current leasing
arrangement to conform with the requirements of an operating lease under Issue
No. 97-10. If the Company is unsuccessful in this endeavor, future operating
leases under the current leasing arrangement will be recorded on its
consolidated balance sheet as lease financing arrangements.
YEAR 2000 - The Year 2000 issue was primarily the result of computer programs
using a two-digit format, as opposed to four digits, to indicate the year. As a
result, such computer systems would be unable to interpret dates beyond the year
1999, which could have caused a system failure or other computer errors leading
to a disruption in the operation of such systems. In 1996, the Company developed
a strategic plan to update its information systems in order to meet business
needs, move away from a mainframe processing environment and create a new system
infrastructure. As a result of this plan, several major processing systems were
replaced or significantly upgraded during 1997 and 1998, and are, for the most
part, Year 2000 compliant, including certain point of sale systems, theatre
timekeeping and financial reporting systems. In 1998, the Company established a
project team to coordinate existing Year 2000 activities and address remaining
Year 2000 issues.
The Company's plan devoted the necessary resources to identify and modify
systems potentially impacted by Year 2000, or implement new systems to become
Year 2000 compliant in a timely manner. In 1999, the Company executed its Year
2000 plan as systems potentially impacted by Year 2000 were identified and, if
necessary, were modified. In addition, the Company developed contingency plans
for key operational areas that could have been impacted by the Year 2000
problem.
The Company did not incur any significant Year 2000 issues during, or after, the
move into the new calendar year. The total cost of executing the Company's Year
2000 plan in 1999 was approximately $2.0 million.
14
<PAGE> 17
GC COMPANIES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
GC Companies operates in six major reported segments. The first four operate the
domestic motion picture exhibition market. The fifth operates through equity
method investees in the Mexican and South American motion picture exhibition
markets. The sixth segment operates as a venture capital arm making investments
in a variety of companies in several industries. Disclosures under this heading
address risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect
market risk-sensitive instruments.
The domestic motion picture segment is subject primarily to interest rate risks.
It bears this risk in two specific ways. First, the Company borrows money under
its revolving credit facility to fund its operating needs. At January 31, 2000,
the Company had outstanding borrowings of $27.7 million, carrying a variable
interest rate, which was 7.61% on that date. The Company's exposure related to
variable interest resides in the earnings and cash flow implications caused by
changes in interest rates. However, a 100 basis point change in the variable
rate of interest paid by the Company on its outstanding borrowings under its
revolving credit facility would not have a significant impact on either the
earnings or cash flows of the Company. The second component of interest rate
risk relates to amounts earned on the Company's short-term investments of excess
cash. Such risk affects fair values, earnings and cash flows.
Operations in Mexico and South America are undertaken through equity method
investees. Fluctuations in the market value of the underlying equity are not
reported for financial purposes nor can a sensitivity analysis be performed
relative to the market risk of the underlying equity. Because these investments
are in Mexico and South America and because the operations of each of these
entities are conducted utilizing local currencies, the Company's financial
statements are exposed to foreign currency exchange rate changes. Market risk
relative to exchange fluctuations does not exist in the Company's Mexican and
South American locations since these currently operate in non hyper-inflationary
environments.
The Company does not consider its cash flows to be currently exposed to exchange
rate risk because it has no current intention of repatriating earnings from
these Mexican and South American locations. Certain of the international joint
venture debt facilities are guaranteed by the Company. In the event of default
under certain of these debt facilities and if such guarantees were called, the
contingent guaranteed obligations would be subject to changes in foreign
currency exchange rates. If the Company should effect the sale of its Mexican
investment, such transaction would occur in US dollars.
The Company's investment portfolio is primarily exposed to risks arising from
changes in equity prices. Such portfolio has been segmented into two categories.
The first category of investments held in the portfolio relate to those
marketable equity securities classified as available-for-sale. Four investment
holdings are classified herein at January 31, 2000: the Company's investments in
Global TeleSystems Group, Inc. ("GTS"), an international telecommunications
company (NYSE:GTS); El Sitio (NASDAQ:LCTO), an Internet provider of global and
country-specific content targeting Spanish and Portuguese speaking people in
Latin America; MotherNature.com (NASDAQ:MTHR), a Web-based retailer of vitamins,
supplements and minerals; and GrandVision ("GPS"), an optical and photo retailer
that is publicly-traded on the French Exchange under the symbol "GPS." The GTS
shares are subject to considerable market risk due to its volatility, and during
the first quarter of 2000, have traded as high as $36.13 and as low as $24.94.
At January 31, 2000, the GTS shares closed at $24.94. El Sitio shares, since its
initial public offering through January 31, 2000, have traded as high as $41.00
and as low as $16.00. At January 31, 2000, the El Sitio shares closed at $23.88.
MotherNature.com shares, since its initial public offering through January 31,
2000, have traded as high as $13.00 and as low as $7.31. At January 31, 2000,
the MotherNature.com shares closed at $7.69. During the first quarter of 2000,
The GPS shares have traded as high as 31.00 euros and as low as 26.22 euros. As
of January 31, 2000, GPS shares closed at 26.78 euros. Equity market
fluctuations, without taking into account the impact of fluctuations in the euro
vis-a-vis the US dollar, can impact fair values (although not earnings, unless
such equity positions are actually liquidated). A 20% fluctuation in the
aggregate value of the available-for-sale securities would either reduce or
increase total assets by $15.7 million.
In addition, the GrandVision securities are traded in euros. A 10% fluctuation
in the value of the euro versus the US dollar (holding the value of the
underlying equity securities constant) could impact pre-tax earnings and total
assets by $0.2 million.
The final category of securities in the Company's investment portfolio includes
a number of holdings in non-publicly traded companies. The Company values these
at either cost less impairment (if any) or under the equity method of
accounting. Equity method investees are specifically excluded from the scope of
this disclosure. Non-public investees where the Company owns less than a 20%
stake are also subject to fluctuations in value, but their current illiquidity
reduces their exposure to pure market risk.
15
<PAGE> 18
PART II
-------
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended January 31, 2000.
16
<PAGE> 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 hereunto duly authorized.
GC COMPANIES, INC.
Date: March 16, 2000 /s/ Richard A. Smith
--------------------------------------
Richard A. Smith
Chairman of the Board of Directors and
Chief Executive Officer
Date: March 16, 2000 /s/ G. Gail Edwards
--------------------------------------
G. Gail Edwards Vice President, Chief
Financial Officer and Treasurer Principal
Accounting Officer
17
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THIS SCHEDULE CONTAINS A SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM THE
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