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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
COMMISSION FILE NUMBER 1-12360
GC COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3200876
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
27 BOYLSTON STREET
CHESTNUT HILL, MASSACHUSETTS 02467
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER AND AREA CODE: 617-264-8000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $155,485,866 on January 21, 2000.
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There were 7,806,777 shares of Common Stock outstanding as of January 21,
2000.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1999 Annual Report to Stockholders are
incorporated by reference into Parts I, II and IV of this Report. Portions of
the Proxy Statement for the Company's Annual Meeting of Stockholders to be held
on March 15, 2000 are incorporated by reference into Part III of this Report.
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GC COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
TABLE OF CONTENTS
PART I PAGE NO.
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7a. Quantitative and Qualitative Disclosure about Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 10
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 12
Item 13. Certain Relationships and Related Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 13
Signatures 14
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PART I
ITEM 1. BUSINESS
GENERAL
GC Companies, Inc. (the "Company") operates a leading motion picture exhibition
circuit in the United States under the name "General Cinema Theatres," operates
through joint ventures motion picture theatres in South America and Mexico and
also manages a pool of the Company's capital for investments. Through its
investment operations, the Company invests in businesses which have been, and
which may continue to be, unrelated to the Company's theatre business and the
broader entertainment industry. INVESTMENTS MADE BY THE COMPANY MAY BE HIGHLY
ILLIQUID AND MAY INVOLVE CONSIDERABLE RISK. SEE "GCC INVESTMENTS, INC." BELOW.
The Company was incorporated under the laws of the State of Delaware in
September 1993.
GENERAL CINEMA THEATRES, INC.
The Company's theatre operations are the outgrowth of a motion picture
exhibition business which originated in 1922. The predecessors of the Company
are credited with opening two of the first drive-in movie theatres in 1938 and
one of the first indoor shopping center theatres in 1951.
As of October 31, 1999, the Company operated 138 theatres with a total of 1,052
screens in 23 states. The Company provides convenient and comfortable theatres
offering a popular selection of films. Substantially all of the Company's
theatres are state-of-the-art facilities, equipped with high-quality sound and
projection equipment, and exhibit films on a "first run" basis.
Approximately 72 % of the Company's theatres, and approximately 72 % of the
Company's screens, are located in 23 of the 50 largest Areas of Dominant
Influence (television market areas as defined by Nielson Media Research) in the
United States, with approximately 29 % of the Company's theatres and
approximately 26.7 % of the Company's screens located in California, Florida and
Texas.
From the beginning of fiscal 1988 through the end of fiscal 1999, the Company
increased its average number of screens per theatre from 4.3 to 7.6. All of the
Company's theatres are multi-screen theatres, and approximately 88.1% of the
Company's screens are located in theatres having 6 to 18 screens. The Company
expects to continue to increase the average number of screens per theatre in its
circuit primarily by selectively closing or selling less productive theatres,
which generally have fewer screens. In addition, the building of new theatres
with more screens per theatre and adding screens to existing theatres will
increase the average number of screens per theatre in the circuit. The Company
currently has commitments to open four new theatres with 48 screens and to add 2
screens to an existing theatre in the next fiscal year. The Company currently
has no commitments for new theatres beyond that. Since November 1, 1991, the
Company has opened 35 new theatres with an average of 10.3 screens each. In
addition, the Company currently operates three "Premium Cinemas" which are
upscale movie-going experiences with features such as large leather seats, a
bistro menu of appetizers, valet parking and an elegant lounge. Key factors
which the Company considers in selecting new theatre sites are demographic
trends derived from statistical sources, distance from competitive theatres, and
accessibility and proximity to retail and other entertainment and dining areas.
The Company expects to concentrate future commitments for new theatres in the
Northeast and Midwest.
Multi-screen theatres enable the Company to present a variety of films appealing
to diverse segments of the movie-going public while serving patrons from common
support facilities such as concession stands, box offices and sales outlets. The
Company believes that this strategy enhances attendance, increases the
utilization of theatre capacity and promotes operating efficiencies. Staggered
scheduling of movie starting times minimizes staffing requirements for
auditorium entry and exit and box office and concession stand services, and
reduces congestion throughout the theatre and its parking areas. Multi-screen
theatres also provide increased flexibility in determining the length of time
that a film will run and the size of the auditorium in which it will be shown.
The Company continually seeks to maximize cash flows through adherence to cost
containment practices. In addition, the Company provides incentive compensation
to its theatre managers on the basis of performance, customer service
responsiveness and quality of theatre operations.
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MARKETING AND ADVERTISING
The Company relies principally upon television, radio and newspaper display
advertisements (substantially paid for by distributors) and newspaper directory
film schedules (generally paid for by the Company) to inform its patrons of film
titles and exhibition times. The Company also shows previews of coming
attractions and films presently playing on the other screens operated by the
Company in the same theatre or geographic area. The Company also benefits from
promotional programs involving various products and merchants.
FILM LICENSING
Consistent with industry practice, and in part required by consent decrees to
which certain film distributors are parties, distributors generally license
films to exhibitors on a screen-by-screen basis. Film licenses are obtained by
negotiating directly with film distributors.
Fees payable to distributors are based upon several factors, including theatre
location, film supply, competition, season and film content. Film licensing
(termed "film buying" in the industry) typically requires payment of a fee based
on the higher of a gross receipts formula or a theatre admissions revenue
sharing formula. Under a gross receipts formula, the distributor receives a
specified percentage of box office receipts, with the percentage declining over
the term of the run. Under a theatre admissions revenue sharing formula, the
distributor receives a specified percentage of the excess of box office receipts
over a negotiated allowance for theatre expenses. The Company may agree to
guarantee minimum license fees or make recoupable advance payments on licensing
fees, or both, in order to obtain a license for a film that is in high demand.
The Company's film buyers evaluate the prospects for upcoming films prior to the
time that distributors solicit interest. Criteria considered for each film
include all of the factors which affect box office potential, including cast,
director, plot, performance of similar films, the production cost and marketing
budget for the film, estimated film licensing costs, estimated impact on
concession sales, and the expected Motion Picture Association of America rating.
The Company maintains records of attendance by film title and theatre location
so as to enable its film buyers to evaluate a prospective film's suitability and
likelihood of success with respect to each theatre location.
The Company's business is dependent upon the availability of motion pictures
that have substantial popular appeal. There are fewer than ten major
distributors which provide a substantial portion of quality first run movies to
the exhibition industry. Historically, and during fiscal 1999, less than 20% of
the Company's total annual box office receipts have been attributable to the
films of any single distributor. From year to year, however, the Company's
revenues attributable to individual distributors may vary significantly
depending upon the commercial success of each distributor's films. The Company
believes that its relationships with each of the major distributors generally
are good.
The failure to maintain good relationships with, or the poor performance by, one
or more of the major distributors, or the disruption in the production of motion
pictures for any reason (such as labor unrest, the increased cost of production
or distribution of films, or the diversion of funds from production and
distribution to other ventures by the major studios or independent producers)
might have a materially adverse effect upon the Company's business and its
results of operations.
CONCESSIONS
The Company owns and operates the concession stands in all of its theatres.
Concession sales are the second largest source of revenue for the Company after
box office receipts and contribute significantly to the Company's earnings.
Concession items consist primarily of popcorn, soft drinks and candy. The
Company is continuing its efforts to increase concession sales through
optimizing product mix, introducing new products such as brand name fast foods,
coffee and other beverages, novelty items and film-related merchandise, offering
bulk candy snacks, training staff to cross- sell products, and making efficient
use of concession facilities and staff. In addition, the introduction of cafes
and the expansion of game rooms in our theatres is also contributing to
increased sales. The Company's strategy emphasizes prominent and appealing
concession counters designed for rapid service, efficiency, and optimal
merchandising of concession items.
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COMPETITION
The Company's theatres are subject to varying degrees of competition in the
geographic areas in which they operate. Competition is often intense with
respect to licensing films, attracting patrons and finding new theatre sites.
The Company believes that the principal competitive factors with respect to film
licensing include licensing terms, box office grossing histories, seating
capacity, location of theatres, the quality of projection and sound equipment
and the exhibitors' ability and willingness to promote films. The Company
believes that the principal competitive factors with respect to attracting
patrons include the availability and licensing of popular films, the location
and comfort of theatres, the quality of the projection and sound equipment, and
ticket prices.
Industry participants vary substantially in size, from small independent
operators of a single theatre with a single screen to large national chains of
multi-screen theatres. All compete aggressively with the Company for films,
patrons and theatre locations. The Company competes directly with its largest
competitors in most of the geographic areas in which it operates. In recent
years, construction of megaplex theatres has occurred in the industry which has
resulted in significant additions to the total industry screen count. Since
these new screens are being added at a faster rate than the increase in total
industry demand, the Company anticipates intense competition for domestic box
office receipts. New megaplex construction by competitors has impacted the
Company in several markets in which it operates. The Company anticipates this
increased competition due to the opening of new megaplexes by competitors, which
have tended and are projected, to draw audiences away from certain multiplex
theatres the Company operates.
The Company's theatres compete with other forms of entertainment for the
public's leisure time and disposable income. For example, the Company's theatres
face competition from a number of alternative motion picture exhibition delivery
systems, such as video cassettes and cable television, including pay-per-view,
and satellite entertainment technology. While the future impact of such delivery
systems on the motion picture exhibition industry cannot be determined
precisely, such delivery systems may have had, and in the future may have, an
adverse impact on attendance at the Company's theatres.
SEASONALITY
The major film distributors generally release most of the films which they
anticipate will be the most successful during the summer (Memorial Day weekend
through Labor Day weekend) and holiday (Thanksgiving weekend through New Year's
Day) seasons. Consequently, the Company historically has generated higher
revenues, and substantially all of its earnings, during these periods.
INTERNATIONAL
Effective July 1, 1998, the Company entered into an agreement to form a 50/50
joint venture with Hoyts Cinema Group creating Hoyts General Cinema South
America (HGCSA), a stand-alone theatre circuit which will pursue theatre
opportunities in South America. As of October 31, 1999, HGCSA operated six
theatre units with 60 screens in Argentina, five theatres with 41 screens in
Chile, one theatre with 15 screens in Brazil and a joint venture that operates
one theatre unit with eight screens in Uruguay. The Company also operates,
through its acquisition in 1997 of fifty percent of the common stock of a
company, five theatre units with 62 screens in Mexico as of October 31, 1999.
Key factors which are considered in selecting new theatre sites are demographic
trends derived from statistical sources, distance from competitive theatres and
accessibility and proximity to retail and other entertainment and dining areas.
Substantially all of the Company's theatres in South America and Mexico, are
state-of-the-art multi-screen facilities, are equipped with high quality sound
and projection equipment and exhibit films on a "first-run" basis. Multi-screen
theatres enable the joint ventures to present a variety of films appealing to
diverse segments of the movie-going public while serving patrons from common
support facilities such as concession stands, box office and sales outlets. This
strategy enhances attendance, increases the utilization of theatre capacity and
promotes operating efficiencies. Staggered scheduling of movie starting times
minimizes staffing requirements for auditorium entry and exit and parking areas.
Multi-screen theatres also provide flexibility in determining the length of time
that a film will run and the size of the auditorium in which it will be shown.
As the Company expands internationally, it becomes subject to regulation of
foreign governments. There are significant differences between the theatrical
exhibition industry regulatory environment in the United States and
international markets. Regulatory barriers affecting such matters as the size of
the theatres, the issuance of licenses and the ownership of land may restrict
market entry. The Company's international operations also face the additional
risks of fluctuating currency values. The Company does not hedge against
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the currency risks. Quota systems used by some countries to protect their
domestic film industry may adversely affect revenues from theatres that the
Company develops in such markets. Such differences in industry structure and
regulatory and trade practices may adversely affect the Company's ability to
expand internationally or to operate at a profit following such expansion.
GENERAL
EMPLOYEES
At October 31, 1999, the Company had approximately 789 full-time and 4,821
part-time theatre employees. The number of part-time employees generally
increases during the summer and holiday seasons in keeping with the seasonal
nature of the motion picture exhibition business.
Approximately 6.8% of the Company's employees are represented by the
International Alliance of Theatrical Stage Employees and Motion Picture Machine
Operators. The Company believes that its relationships with this union and with
its employees generally are good.
GCC INVESTMENTS, INC.
Through GCC Investments, Inc., the Company invests in companies which have been,
and which may continue to be, engaged in businesses which are unrelated to the
Company's theatre business and the broader entertainment industry. These
investment operations are conducted by a team of investment professionals who
evaluate investment opportunities, negotiate and structure the terms of each
investment, monitor the Company's investments and, as designees of the Company,
serve as members of the boards of directors of such companies. To date, the
Company has financed its investments with existing cash balances. The Company
may use cash generated by theatre operations, sales of existing investments or
borrowings under its line of credit, in addition to cash then on hand, to
finance future investments.
The investments of the Company to date have been, and are expected to continue
to be, minority positions in businesses which the Company believes will provide
substantial returns on the invested cash balances. Although the Company does not
seek to provide day-to-day managerial support to the companies in which it holds
investments, the Company may provide such companies assistance with strategic,
financial and operational matters. It also is possible that the Company may, by
reason of investment, acquisition, conversion of securities, or otherwise,
obtain control of a portfolio company.
In August of 1999, the Company formed GCC Investments, LLC ("LLC"), a limited
liability company, to act as a vehicle to hold the Company's investment
portfolio on an ongoing basis. Existing investments in non-public portfolio
companies were transferred to LLC, and it is anticipated that all future
investments will be made through LLC. LLC is owned 99% by GCC Investments, Inc.
(a wholly-owned subsidiary of the Company) and 1% by Chestnut Hill Capital
Partners, LLC ("CHCP"). CHCP is owned by the Company's Chief Investment Officer
and professional investment personnel who were former employees of the Company's
wholly-owned subsidiary, GCC Investments, Inc.
The LLC agreement specifies that the profit sharing in the LLC will be between
GCC and CHCP in accordance with certain contractual calculations. CHCP also has
a management agreement with regard to GCC Investments, LLC, which specifies that
CHCP is to be reimbursed for certain expenses according to a specific formula.
INVESTMENTS MADE BY THE COMPANY MAY BE HIGHLY ILLIQUID AND MAY INVOLVE
CONSIDERABLE RISK. BECAUSE OF THE COMPANY'S DESIRE TO MAXIMIZE RETURNS FROM ITS
INVESTMENT OPERATIONS, CURRENT INCOME CONSTITUTES A LOW STRATEGIC PRIORITY.
THERE CAN BE NO ASSURANCE THAT THE COMPANY'S INVESTMENT OPERATIONS WILL MAKE A
CONTRIBUTION TO THE COMPANY'S EARNINGS IN THE FORESEEABLE FUTURE. THE COMPANY'S
INVESTMENT OPERATIONS MAY REDUCE THE COMPANY'S EARNINGS OR CAUSE THE COMPANY TO
INCUR LOSSES. FOR INFORMATION CONCERNING THE INVESTMENTS MADE BY THE COMPANY,
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND NOTES 2, 3 and 18 TO THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS, BOTH OF WHICH ARE CONTAINED IN THE COMPANY'S 1999 ANNUAL REPORT TO
STOCKHOLDERS AND INCORPORATED HEREIN BY REFERENCE.
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RELATIONSHIP WITH HARCOURT GENERAL, INC.
Harcourt General provides certain corporate services to the Company in
consideration of a fee based on Harcourt General's costs. Harcourt General's
Chairman also serves as Chairman and Chief Executive Officer of the Company, and
one of Harcourt's Chief Executive Officers serves as President and Chief
Operating Officer of the Company. The fees payable to Harcourt General have
been, and will continue to be, subject to the approval of the Company's Special
Review Committee, a committee of the Board of Directors consisting solely of
directors who are not affiliated with Harcourt General. The fees paid or accrued
by the Company for management and other corporate services were $0.5 million in
fiscal years 1999, 1998, and 1997.
In addition, a majority of the theatre leases to which the Company is a party
are guaranteed by Harcourt General. Pursuant to a Reimbursement and Security
Agreement entered into between the Company and Harcourt General at the time GC
Companies became a stand-alone entity ("Spinoff") the Company has agreed to
reimburse Harcourt General for all liabilities, if any, which may be incurred by
Harcourt General after the Spinoff in connection with the theatre leases, and
has pledged all of the stock of its theatre subsidiaries to Harcourt General as
security for such agreement. The Company also agreed to maintain certain
financial and operating covenants designed to minimize Harcourt General's
exposure with respect to the theatre leases. In consideration of Harcourt
General's continuing guarantees of the theatre leases, the Company pays Harcourt
General a guarantor's fee measured as a percentage of the present value of all
amounts owing under the theatre leases for which Harcourt General has potential
liability. The guarantor's fees paid by the Company to Harcourt General for
fiscal years 1999, 1998, and 1997 were approximately $695,000, $230,000, and
$250,000, respectively. Harcourt General has not guaranteed any theatre leases
entered into by the Company following the Spinoff.
In addition, the Company subleases office space and a theatre location from
Harcourt General. The rent and rent-related expense associated with this
sublease totaled $1.2 million in 1999, 1998 and 1997.
Although Harcourt General has no equity ownership in the Company, Richard A.
Smith and certain members of his family (the "Smith Family Group") beneficially
own approximately 29.13% of the outstanding shares of Common Stock of the
Company and approximately 28.28% of the outstanding equity securities of
Harcourt General. In addition, Richard A. Smith, the Chairman of Harcourt
General, serves as the Chairman and Chief Executive Officer of the Company.
Robert A. Smith, one of the Chief Executive Officers of Harcourt General, serves
as the President and Chief Operating Officer of the Company. For additional
information concerning the stock ownership by the Smith Family Group, reference
may be made to the Proxy Statement for the Company's 2000 Annual Meeting (the
"Proxy Statement").
ITEM 2. PROPERTIES
DOMESTIC
As of October 31, 1999, the Company operated 138 domestic theatres with a total
of 1,052 screens in 23 states, with approximately 29.0% of the Company's
domestic theatres and approximately 26.7% of the Company's domestic screens
located in California, Florida and Texas. As of such date, virtually all of the
Company's theatres were operated pursuant to leases. The Company's theatre
leases are generally entered into on a long-term basis with terms (including
options) ranging from 15 to 40 years. Theatre leases typically provide for rent
based on box office receipts subject to an annual minimum rental. The Company
also is usually obligated to pay taxes, utilities, common area maintenance costs
and certain other expenses related to its leased theatres.
The Company's corporate, theatre and investment headquarters are located in
Chestnut Hill, Massachusetts, a suburb of Boston. Corporate headquarters'
functions include overall administration, accounting and management of the
Company and all investment operations. Theatre headquarters' functions include
administration with respect to theatre operations, finance, human resources,
information services, marketing, real estate development and strategic planning.
The Company subleases its corporate and theatre headquarters from Harcourt
General and leases its regional offices.
For additional information regarding the Company's lease obligations, see Notes
8 and 13 to the Consolidated Financial Statements contained in the Company's
1999 Annual Report to Stockholders and incorporated herein by reference.
INTERNATIONAL
As of October 31, 1999, the Company operates through HGCSA, six theatre units
with 60 screens in Argentina, 5 theatre units with 41 screens in Chile, a
theatre unit with 15 screens in Brazil and, through a joint venture, a theatre
unit with eight screens in Uruguay. In addition, through a joint venture in
Mexico, the Company operates five theatre units with a total of 62 screens as of
October 31, 1999. Virtually all of the international
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theatres were operated pursuant to leases. The theatre leases are generally
entered into on a long-term basis with terms (including options) ranging from 10
to 30 years. The theatre leases typically provide for rent based on box office
receipts subject to an annual minimal rental and typically will require for the
payment of taxes, utilities, common area maintenance and certain other expenses
related to the leased theatre.
The South American joint venture has a corporate office in Buenos Aires,
Argentina and regional theatre offices in Santiago, Chile and Buenos Aires,
Argentina. The corporate office functions include overall administration,
accounting and management of the joint venture operations. The regional offices'
functions include administration with respect to theatre operations, finance,
human resources, information services, marketing, real estate development, film
licensing and theatre management with respect to particular geographic areas.
The Mexican joint venture has an administrative office in Mexico City, Mexico.
The office functions include administration with respect to theatre operations,
accounting, human resources, information services, marketing, real estate
development and film licensing.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising in the ordinary
course of its business operations. The Company does not believe that the
disposition of any such proceedings will have a material adverse effect on the
financial position or continuing operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "GCX." The high and low sales prices for the Common Stock on the New York
Stock Exchange for the past two fiscal years were as follows:
FISCAL 1999: HIGH LOW
First Quarter $42.00 $37.00
Second Quarter $37.88 $30.00
Third Quarter $37.44 $34.63
Fourth Quarter $36.00 $22.44
FISCAL 1998: HIGH LOW
First Quarter $47.94 $41.06
Second Quarter $53.00 $45.75
Third Quarter $52.63 $46.00
Fourth Quarter $49.75 $36.00
At January 21, 2000, there were 2,845 record holders of Common Stock.
DIVIDEND POLICY
The Company has not paid and has no current plans to pay cash dividends on its
Common Stock. The Company currently intends to retain earnings for use in its
theatre business and investment operations.
ITEM 6. SELECTED FINANCIAL DATA
The response to this Item is contained in the Company's 1999 Annual Report to
Stockholders under the caption "Selected Financial Data" on page 3 and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The response to this Item is contained in the Company's 1999 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 4 through 12 and is
incorporated herein by reference.
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The response to this Item is contained in the Company's 1999 Annual Report to
stockholders under the caption "Quantitative and Qualitative Disclosure About
Market Risk" in pages 12 through 13 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data incorporated by
reference into Item 14 below are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The response to this Item regarding the directors of the Company and compliance
with Section 16(a) of the Securities Exchange Act of 1934 by the Company's
officers and directors is contained in the Proxy Statement under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by reference.
EXECUTIVE OFFICERS
Below are the name, age and principal occupations for the last five years of
each current executive officer of the Company. All such persons have been
elected to serve until the next annual election of officers and their successors
are elected or until their earlier resignation or removal.
RICHARD A. SMITH - 75
Chairman and Chief Executive Officer of the Company since 1993; President of the
Company from 1993 until November 1995; Chairman of Harcourt General, Inc.
("Harcourt General") and of The Neiman Marcus Group, Inc., ("NMG"); Chief
Executive Officer of Harcourt General (until November, 1999) and of NMG (until
December, 1998) and since January 15, 1997 and prior to December 1991; Director
of NMG. Mr. Smith is the father of Robert A. Smith, President and Chief
Operating Officer of the Company, and the father-in-law of John G. Berylson,
Senior Vice President and Chief Investment Officer of the Company.
ROBERT A. SMITH - 40
President and Chief Operating Officer of the Company since November 1995;
Co-Chief Executive Officer of Harcourt General since November, 1999, and
President and Co-Chief Operating officer prior thereto; Chief Executive Officer
of NMG since December, 1998; President and Chief Operating Officer prior
thereto; Group Vice President of Harcourt General and of NMG prior thereto;
Director of Harcourt General and NMG. Mr. Smith is the son of Richard A. Smith,
Chairman and Chief Executive Officer of the Company, and the brother-in-law of
John G. Berylson, Senior Vice President and Chief Investment Officer of the
Company.
JOHN G. BERYLSON - 46
Senior Vice President and Chief Investment Officer of the Company since 1993;
Managing Director of Advent International Financial Services, a venture capital
and financial services firm, prior thereto. Mr. Berylson is the son-in-law of
Richard A. Smith, Chairman and Chief Executive Officer of the Company, and the
brother-in-law of Robert A. Smith, President and Chief Operating Officer of the
Company.
FRANK T. STRYJEWSKI - 43
President and Chief Operating Officer of General Cinema Theatres Inc. since
September, 1999. Executive Vice President and Chief Operating Officer from
November, 1998 to September 1999. Senior Vice President, operations from 1996 to
November, 1998; Senior Vice President of Operations for the South Division of
AMC Entertainment, Inc. from 1994 to 1996.
G. GAIL EDWARDS - 44
Vice President, Chief Financial Officer and Treasurer of the Company since July
1996; Vice President and Treasurer of Delaware North Companies, Incorporated, a
private holding company, prior thereto.
PHILIP J. SZABLA - 45
Vice President, General Counsel and Secretary of the Company since December
1996; Member of the law firm of Albrecht, Maguire, Heffern & Gregg, P.C. prior
thereto.
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LOUIS E. CASAVANT - 44
Vice President and Corporate Controller of the Company since December, 1998 and
Corporate Controller prior thereto; Controller of Finast Supermarkets from 1994
to 1997; Controller of Childcraft, Inc. from 1992 to 1994.
KATHLEEN SCHOEFFLER - 52
Vice President Human Resources since July 1999. Human Resources Consultant from
October 1998 to July 1999; Senior Vice President of Human resources at Provident
Companies, Inc. from 1996 to 1998; Relationship Manager/Human Resources at Bank
Boston from 1990 to 1996.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the Proxy Statement under the captions
"Directors' Compensation," "Executive Compensation" and "Transactions Involving
Management" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is contained in the Proxy Statement under the caption
"Stock Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is contained in the Proxy Statement under the captions
"Executive Compensation" and "Transactions Involving Management" and is
incorporated herein by reference.
12
<PAGE> 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) FINANCIAL STATEMENTS
The documents listed below which are contained in the Company's 1999 Annual
Report to Stockholders are incorporated by reference into this Item 14 and into
Item 8 hereof:
Consolidated Balance Sheets - October 31, 1999 and 1998.
Consolidated Statements of Operations for the fiscal years ended October 31,
1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the fiscal years ended October 31,
1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the fiscal years ended
October 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable regulations of the
Securities and Exchange Commission have been omitted because the information is
disclosed in the Consolidated Financial Statements or because such schedules are
not required or are not applicable.
14(a)(3) EXHIBITS
The exhibits filed as part of this Annual Report on Form 10-K are listed in the
Exhibit Index immediately preceding the exhibits. The Company has identified
with an asterisk (*) in the Exhibit Index each management contract and
compensation plan filed as an exhibit to this Annual Report on Form 10-K in
response to Item 14(c) of Form 10-K.
14(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
October 31, 1999.
14(c) EXHIBITS
See Item 14(a)(3) above.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: JANUARY 28, 2000 GC COMPANIES, INC.
By: /s/ Richard A. Smith
-----------------------------------
Richard A. Smith, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the following capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Richard A. Smith Chairman and Chief January 28, 2000
- ------------------------------- Executive Officer
Richard A. Smith
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
/s/ G. Gail Edwards Vice President, Chief January 28, 2000
- ------------------------------- Financial Officer
G. Gail Edwards and Treasurer
DIRECTORS:
/s/ William L. Brown January 28, 2000
- -------------------------------
William L. Brown
/s/ Peter C. Read January 28, 2000
- -------------------------------
Peter C. Read
/s/ Richard A. Smith January 28, 2000
- -------------------------------
Richard A. Smith
/s/ Leonard A. Schlesinger January 28, 2000
- -------------------------------
Leonard A. Schlesinger
/s/ Francis E. Sutherby January 28, 2000
- -------------------------------
Francis E. Sutherby
14
<PAGE> 15
EXHIBIT INDEX
DOCUMENT
3.1 Restated Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995.
3.2 Amended and Restated By-Laws of the Company, incorporated herein by
reference to Exhibit 3.2 to the Company's Annual Report of Form 10-K
for the fiscal year ended October 31, 1996.
4.1 Form of Stock Certificate of the Company's Common Stock,
incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form 10, as amended.
4.2 Smith-Lurie/Marks Stockholders' Agreement Re GC Companies, Inc.,
dated as of December 15, 1993, incorporated herein by reference to
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994.
10.1 Distribution Agreement, dated as of December 14, 1993, between
Harcourt General, Inc. and the Company, incorporated herein by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1994.
10.2 Reimbursement and Security Agreement ("Reimbursement and Security
Agreement"), dated as of December 14, 1993, between Harcourt
General, Inc. and the Company, incorporated herein by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994.
10.3 First Amendment to Reimbursement and Security Agreement, dated as of
September 29, 1994, between Harcourt General, Inc. and the Company,
incorporated herein by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31,
1994.
10.4 Intercompany Services Agreement, dated as of December 14,1993,
between Harcourt General, Inc. and the Company, incorporated herein
by reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1994.
10.5 Amended and Restated Intercompany Services Agreement, dated as of
November 1, 1995, between Harcourt General, Inc. and the Company,
incorporated herein by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31,
1995.
10.6 Tax Agreement, dated as of December 14, 1993, between Harcourt
General, Inc. and the Company, incorporated herein by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1994.
10.7* GC Companies, Inc. 1993 Equity Incentive Plan, incorporated herein
by reference to Exhibit 10.8 to the Company's Registration Statement
on Form 10, as amended.
10.8* GC Companies, Inc. Retirement Plan, effective December 2, 1993,
incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form 10, as amended.
10.9 GC Companies, Inc, Supplemental Executive Retirement Plan, effective
December 1, 1993, incorporated herein by reference to Exhibit 10.10
to the Company's Registration Statement on Form 10, as amended.
10.10* GC Companies, Inc, Key Employee Deferred Compensation Plan,
effective December 1, 1993, incorporated herein by reference to
Exhibit 10.11 to the Company's Registration Statement on Form 10, as
amended.
10.11* GC Companies, Inc. Key Executive Stock Purchase Loan Plan,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form 10, as amended.
10.12* Agreement, dated as of December 14, 1993, between Paul R. Del Rossi
and the Company, incorporated herein by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10- K for the fiscal year ended
October 31, 1994.
10.13* Termination Agreement dated as of August 17, 1995 between William B.
Doeren and the Company, "incorporated herein by reference to Exhibit
10.13 (or .14, respectively) to the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1996."
15
<PAGE> 16
10.14* Master Lease Agreement dated as of November 21, 1996 between General
Electric Capital Corporation, for itself and as agent for certain
participants and General Cinema Theatres, Inc., incorporated herein
by reference to Exhibit 10.13 (or 10.14, respectively) to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1996.
10.15* GC Companies, Inc. 1993 Incentive Plan First Amendment incorporated
herein by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended April 30, 1997.
10.16* GC Companies, Inc. Key Executive Stock Purchase Loan Plan First
Amendment, incorporated herein by reference to Exhibit 10.16 to the
Company's Quarterly Report or Form 10-Q for the Quarter ended April
30, 1997.
10.17* GCC Investments, Inc. Incentive Pool Plan, incorporated herein by
reference to Exhibit 10.17 to the Company's Quarterly Report on form
10-Q for the quarter ended April 30, 1997.
10.18 Stock Purchase Agreement, dated as of July 25, 1997, by and among
General Cinema International, Inc., United Artists Theatre Circuit,
Inc., UA Mexico Holdings, S.A. de C.V., UATC Europe B.V. and Fondo
Optima, S.A. de C.V., incorporated herein by reference to Exhibit
10.18 to the Company's Form 8-K filed September 30, 1997.
10.19 Amendment No. 1, dated as of September 24, 1997, by and among
General Cinema International, Inc., United Artists Theatre Circuit,
Inc., UA Mexico Holdings, S.A. de C.V., UATC Europe B.V. and Fondo
Optima, S.A. de C.V., incorporated herein by reference to Exhibit
10.19 to the Company's Form 8-K filed September 30, 1997.
10.20* Amended and Restated Employment Agreement between Paul R. Del Rossi
and the Company, dated as of November 1, 1997 incorporated herein by
reference to Exhibit 10.21 of the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1997.
10.21* GC Companies, Inc. Deferred Compensation Plan for Non-Employee
Directors, Effective May 1, 1997, incorporated herein by reference
to Exhibit 10.21 of the Company's Quarterly Report for the Quarter
ended July 31, 1997.
10.22* First Amendment to GCC Investments, Inc. Incentive Pool Plan
incorporated herein by reference to Exhibit 10.21 of the Company's
Annual Report on Form 10-K for the fiscal year ended October 31,
1997.
10.23* Amendment No. 1 to the GC Companies, Inc. Deferred Compensation Plan
for Non-Employee Directors, dated as of May 1, 1998, incorporated
herein by reference to Exhibit 10.23 to the Company's Quarterly
Report on form 10-Q for the quarter ended July 31, 1998.
10.24 Revolving Credit Agreement dated as of January 26, 1999 among GC
Companies, Inc., BancBoston Robertson Stephens Inc., The Bank of
Nova Scotia and BankBoston, N.A. incorporated herein by reference to
Exhibit 10.24 of the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1998.
10.25 Amended and Restated Reimbursement and Security Agreement dated as
of January 26, 1999 between Harcourt General, Inc. and GC Companies,
Inc. incorporated herein by reference to Exhibit 10.25 of the
Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998.
10.26* Termination and Change of Control Agreement between GC Companies,
Inc. and G. Gail Edwards dated as of September 1, 1999.
10.27 Limited Liability Company Agreement of GCC Investments, LLC dated as
of August 11, 1999.
10.28 Put Agreement between GC Companies, Inc. and Chestnut Hill Capital
Partners, LLC dated as of August 11, 1999.
10.29 Management Agreement between Chestnut Hill Capital Partners, LLC and
Chestnut Hill Re, Inc. dated August 11, 1999.
11.1 Statement regarding computation of per share earnings.
13.1 1999 Annual Report to Stockholders (which is not deemed to be filed
except to the extent that portions thereof are expressly
incorporated by reference into this Annual Report on Form 10- K).
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule
16
<PAGE> 17
- -------------------
*Exhibits filed pursuant to Item 14(c) of Form 10-K.
17
<PAGE> 1
EXHIBIT 10.26
-------------
TERMINATION AND CHANGE OF CONTROL AGREEMENT
This Termination and Change of Control Agreement ("Agreement") is entered into
as of September 1, 1999 between G. Gail Edwards ("the Executive") and GC
Companies, Inc. ("GCC").
1. The Executive is employed "at-will" as GCC's Vice President and Chief
Financial Officer, and the Executive or GCC may terminate the Executive's
employment at any time, with or without notice, for any reason. Notwithstanding
this at-will employment, GCC wishes to provide some protection to the Executive
if her employment is terminated or if she resigns under certain circumstances.
2. a. While the Executive is employed at-will, if GCC terminates the Executive's
employment other than "for cause" or other than due to "total disability" or
death, GCC agrees to provide the Executive with a termination package consisting
of (i) an amount equivalent to one and one-half times her then-current, annual
base salary, less required withholding, which amount would be paid in an 18
month period in regular, monthly installments following such termination;(ii)
continuation of the medical and dental insurance coverage in which she
participates at the time of such termination (or as such coverage may be changed
from time-to-time for employees generally) for 18 months or until she starts
full-time employment, whichever is sooner; (iii) professional out placement
services for up to 18 months following such termination; and (iv) all of the
Executive's GCC stock options shall be fully vested upon such termination or
resignation and shall remain exercisable in accordance with their original terms
as if such termination or resignation had not occurred. The Executive will be
responsible for paying her portion of monthly premiums for the medical and
dental insurance coverage at the same rate paid by active employees, and the
Executive authorizes GCC to deduct such amounts from the payments it makes to
her.
b. If the Executive's services are terminated by a successor to GCC
other than "for cause" or other than due to "total disability" or death within
18 months of a change of control of GCC, as a change of control is defined in
paragraph 3.c., or if the Executive resigns her employment within 18 months of
such a change of control because the Executive reasonably determines in good
faith that she is not permitted to continue in a position comparable in duties
and responsibilities to that which she held before such a change of control, or
if she is required to relocate outside of the Boston, Massachusetts area, the
Executive shall receive the termination package set forth in paragraph 2.a.
c. Notwithstanding the payment obligations set forth in paragraphs
2.a. and 2.b., if the Executive is engaged in employment (including contract
employment or self-employment) of any kind or if the Executive receives
severance pay of any kind during the period beginning six
<PAGE> 2
months after a covered termination or resignation, GCC's payments to the
Executive will be reduced dollar-for-dollar by the amount the Executive earns
through such employment or receives as severance pay.
3. For the purposes of determining the Executive's eligibility for the
termination package set forth in this Agreement:
a. "For cause" means, in GCC's reasonable judgment, a material breach
of duty by the Executive in the course of employment involving fraud, acts of
dishonesty, or moral turpitude, repeated insubordination, failure to devote full
working time and best efforts to the performance of duties, or conviction of a
felony or other criminal offense.
b. "Total disability" means that, in GCC's reasonable judgment, the
Executive is unable to perform duties for (i) 45 consecutive business days or
(ii) a total of 90 business days during any nine month period.
c. "Change of control" means
(i) the sale of all or substantially all of the stock or assets of
General Cinema Theatres, Inc. or any entity that owns or controls GCC's domestic
theater exhibition business to an entity other than GCC or an entity wholly
owned or controlled by GCC;
(ii) the sale of all or substantially all of the stock or assets of
General Cinema International, Inc. or any entity that owns or controls GCC's
international theater exhibition business to an entity other than GCC or an
entity wholly owned or controlled by GCC;
(iii) the sale of all or substantially all of the stock or assets of
GCC Investments, Inc. or any entity that owns or controls GCC's investment
business to an entity other than GCC or an entity wholly owned or controlled by
GCC, or any restructuring of GCC's investment business resulting in a change in
responsibilities or duties required to be provided by the Executive with respect
to such business substantially less than those responsibilities and duties
provided prior to such restructuring, as reasonably determined by the Executive
in good faith; or
(iv) any person, entity or group having greater voting power in the
election of GCC's directors than the Smith Family Group ( as defined in GCC's
proxy statement from time to time) or an entity wholly owned or controlled by
the Smith Family Group.
4. Payment by GCC of the termination package set forth in paragraph 2
constitutes full satisfaction of GCC's obligations to the Executive, if any,
(including the right to any severance payments) which arise from or relate in
any way to the termination of the Executive's employment. However, nothing in
this Agreement is intended to limit any earned, vested benefits (other than any
entitlement to severance pay) that the Executive may have under the applicable
provisions of any benefit plan in which the Executive is participating at the
time of her termination of employment or resignation, or any earned but unpaid
salary or bonus due to the Executive.
<PAGE> 3
5. In addition to the forgoing:
a. The Executive shall be paid as additional compensation a retention
payment equal to one times her annual base salary on October 31, 2000 provided
she does not voluntarily terminate her employment with the Company prior to that
date. If the Company consummates a Major Transaction (as defined below) after
October 31, 2000, the Executive shall receive an incentive payment equal to one
times her annual base salary. Such incentive payment shall be paid in three
equal installments as follows: one third on consummation of a Major Transaction,
one third nine months thereafter and one third eighteen months thereafter.
b. In lieu of the retention payment described in subparagraph (a), the
Executive shall be paid as additional compensation an incentive payment of two
times her annual base salary if the Company consummates a Major Transaction (as
defined below) on or before October 31, 2000. Such incentive payment shall be
paid in three equal installments as follows: one third on consummation of a
Major Transaction, and one third nine months thereafter and one third eighteen
months thereafter.
c. The Executive shall be credited with 2 years of service credit under
GCC's Supplemental Executive Retirement Plan for each fiscal year commencing
with 1999 through fiscal year 2003 that the Executive remains employed by the
Company.
d. For purposes hereof, "Major Transaction" means:
(i) the sale of all or substantially all of the stock or
assets of General Cinema Theatres, Inc. ("GCT") or any entity that owns or
controls GCC's domestic theater exhibition business to an entity other than GCC
or an entity wholly owned or controlled by GCC;
(ii) the sale of all or substantially all of the stock or
assets of General Cinema International, Inc.("GCI") or any entity that owns or
controls GCC's international theater exhibition business to an entity other than
GCC or an entity wholly owned or controlled by GCC;
(iii) the sale of all or substantially all of the stock or
assets of GCC Investments, Inc.("GCCI") or any entity that owns or controls
GCC's investment business to an entity other than GCC or an entity wholly owned
or controlled by GCC;
(iv) a reorganization, spin off, split up, merger,
consolidation or joint venture involving GCC, GCT, GCI or GCCI or any
substantial portion of any of their assets or subsidiaries or an acquisition of
any substantial assets or controlling interest in an entity or entities from a
third party ;
(v) a placement of equity or debt securities for GCC, GCT, GCI
or GCCI; or
(vi) any other transaction determined by the GCC's President
to be of significant importance to the overall business of GCC or any of its
subsidiaries.
<PAGE> 4
6. The unenforceability of any provision of this Agreement shall not affect the
enforceability of any other provision of this Agreement. This Agreement contains
the entire agreement between the parties and supersedes all prior agreements and
understandings, oral or written, with respect to the termination of the
Executive's at-will employment and the subject matter of the Agreement. This
Agreement may not be changed orally. It may be changed only by written agreement
signed by the party against whom any waiver, change amendment, modification or
discharge is sought.
7. The validity, performance and enforceability of this Agreement will be
determined and governed by the laws of the Commonwealth of Massachusetts without
regard to its conflict of laws principles.
GC Companies, Inc. The Executive
By:___________________ _____________________
Robert A. Smith G. Gail Edwards
President and Chief Operating Officer
<PAGE> 1
EXHIBIT 10.27
-------------
LIMITED LIABILITY COMPANY AGREEMENT
OF
GCC INVESTMENTS, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
DATED AS OF AUGUST 11, 1999
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I - DEFINITIONS........................................................1
SECTION 1.01. Definitions..................................................1
ARTICLE II - ORGANIZATION......................................................1
SECTION 2.01. Formation of Limited Liability Company.......................1
SECTION 2.02. Firm Name; Registered and Principal Office...................1
SECTION 2.03. Purposes.....................................................2
SECTION 2.04. Powers.......................................................2
SECTION 2.05. Tax Treatment................................................2
ARTICLE III - MANAGING MEMBER..................................................3
SECTION 3.01. Name and Address.............................................3
SECTION 3.02. Management and Control of the Company........................3
SECTION 3.03. Powers.......................................................3
SECTION 3.04. Certificate of Formation.....................................4
SECTION 3.05. Other Activities.............................................4
SECTION 3.06. Avoidance of Conflicts of Interest...........................4
SECTION 3.07. Duty of Care.................................................4
SECTION 3.08. Investment and Other Limitations.............................5
SECTION 3.09. Borrowing; Guarantees........................................6
SECTION 3.10. Classification as Partnership................................6
ARTICLE IV - CLASS A MEMBER....................................................6
SECTION 4.01. Name and Address.............................................6
SECTION 4.02. Limited Liability............................................6
SECTION 4.03. No Control of Company........................................6
SECTION 4.04. Dissolution or Bankruptcy....................................6
ARTICLE V - EXPENSES; MANAGEMENT AGREEMENT.....................................7
SECTION 5.01. Management Agreement.........................................7
SECTION 5.02. Fees and Commissions from Portfolio Companies................7
ARTICLE VI - ADVISORY COMMITTEE................................................7
SECTION 6.01. Appointment..................................................7
SECTION 6.02. Meetings.....................................................8
SECTION 6.03. Duties.......................................................8
SECTION 6.04 Valuation Procedures..........................................8
SECTION 6.05. Voting; Rules and Procedures.................................9
SECTION 6.06. Duty of Care.................................................9
-i-
<PAGE> 3
ARTICLE VII - CAPITAL OF THE COMPANY...........................................9
SECTION 7.01. Capital Contributions........................................9
SECTION 7.02. No Interest or Withdrawals..................................10
SECTION 7.03. Minimum Capital Contribution of Managing Member.............10
ARTICLE VIII - ACCOUNTS.......................................................10
SECTION 8.01. Capital Accounts............................................10
SECTION 8.02. Accounting for Distributions in Kind........................11
SECTION 8.03. Compliance with Treasury Regulations........................11
ARTICLE IX - ALLOCATIONS......................................................11
SECTION 9.01. Allocations of Net Gain.....................................11
SECTION 9.02. Allocations of Net Loss.....................................12
SECTION 9.03. Other Specially Allocated Items.............................12
SECTION 9.04. Limitation on Loss Allocations..............................13
SECTION 9.05. Timing of Allocations.......................................13
SECTION 9.06. Advisory Nature of Allocations..............................14
ARTICLE X - DISTRIBUTIONS.....................................................14
SECTION 10.01. Amount, Timing and Form....................................14
SECTION 10.02. Distributions..............................................15
SECTION 10.03. Distribution Limitations...................................16
SECTION 10.04. Tax Withholding............................................19
SECTION 10.05. Certain Distributions Prohibited...........................19
ARTICLE XI - DURATION OF THE COMPANY..........................................20
SECTION 11.01. Term of Company............................................20
SECTION 11.02. Dissolution................................................20
ARTICLE XII - LIQUIDATION OF THE COMPANY......................................20
SECTION 12.01. General Provisions.........................................20
SECTION 12.02. Liquidating Distributions..................................20
SECTION 12.03. Expenses of Liquidator(s)..................................20
SECTION 12.04. Duration of Liquidation....................................21
SECTION 12.05. Duty of Care...............................................21
SECTION 12.06. No Liability for Return of Capital.........................21
ARTICLE XIII - LIMITATION ON TRANSFERS OF INTEREST OF CLASS A MEMBER..........21
SECTION 13.01. Transfers of Class A Membership Interest...................21
SECTION 13.02. Publicly Traded Partnership Provisions.....................22
SECTION 13.03. Other Prohibited Legal Consequences........................22
SECTION 13.04. Admission of Substituted Class A Members...................22
SECTION 13.05. Covenants of Class A Member................................23
ARTICLE XIV - NO WITHDRAWAL OF COMPANY MEMBERSHIP INTERESTS...................23
SECTION 14.01. No Withdrawal of Company Membership Interests..............23
SECTION 14.02. Withdrawal of the Managing Member..........................23
-ii-
<PAGE> 4
ARTICLE XV - NO TRANSFER OF MEMBERSHIP INTEREST OF THE MANAGING MEMBER........25
SECTION 15.01. No Transfer of Membership Interest of the Managing
Member.....................................................25
ARTICLE XVI - INDEMNIFICATION.................................................25
SECTION 16.01. General Provisions.........................................25
SECTION 16.02. Advance Payment of Expenses................................26
SECTION 16.03. Limitation by Law..........................................26
ARTICLE XVII - ACCOUNTING; RECORDS AND REPORTS; ANNUAL MEETINGS...............26
SECTION 17.01. Fiscal Year; Tax Elections.................................26
SECTION 17.02. Keeping of Accounts and Records............................27
SECTION 17.03. Inspection Rights..........................................27
SECTION 17.04. Independent Accountants....................................27
ARTICLE XVIII - WAIVER AND AMENDMENT..........................................27
SECTION 18.01. Waiver and Amendment.......................................27
ARTICLE XIX - GENERAL PROVISIONS..............................................28
SECTION 19.01. Notices....................................................28
SECTION 19.02. Additional Documents.......................................28
SECTION 19.03. Binding on Successors......................................28
SECTION 19.04. Counterparts...............................................28
SECTION 19.05. Governing Law..............................................28
SECTION 19.06. Securities Act Matters.....................................28
SECTION 19.07. Right to Rely on Authority of Managing Member..............29
SECTION 19.08. Tax Matters Partner........................................29
SECTION 19.09. Contract Construction......................................29
SECTION 19.10. Section Headings...........................................29
APPENDIX A - Definitions...................................................A-1
APPENDIX B - Regulatory and Tax Allocations................................B-1
SCHEDULE A - Names and Addresses of the Members ..............................
SCHEDULE B - Put Agreement....................................................
SCHEDULE C - Management Agreement.............................................
SCHEDULE D - Certain Portfolio Securities.....................................
-iii-
<PAGE> 5
GCC INVESTMENTS, LLC
LIMITED LIABILITY COMPANY AGREEMENT
LIMITED LIABILITY COMPANY AGREEMENT, dated as of this 11th day of
August, 1999, by and among Chestnut Hill Capital Partners, LLC, a limited
liability company organized under the laws of the State of Delaware, as the
Managing Member, and Chestnut Hill Re, Inc., a wholly-owned subsidiary of GCC
Investments, Inc. and a corporation organized under the laws of the State of
[DELAWARE], as the Class A Member. The Managing Member and the Class A Member
are sometimes referred to herein collectively as the "MEMBERS".
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS. Capitalized terms used herein without
definition have the meanings ascribed to them in APPENDIX A annexed hereto.
ARTICLE II
ORGANIZATION
SECTION 2.01. FORMATION OF LIMITED LIABILITY COMPANY. The Members agree
to carry on a limited liability company (the "COMPANY") subject to the terms of
this Agreement pursuant to and in accordance with the Delaware Limited Liability
Company Act, as amended (the "DELAWARE ACT").
SECTION 2.02. FIRM NAME; REGISTERED AND PRINCIPAL OFFICE. The name of
the Company is "GCC Investments, LLC." The initial address of the Company's
registered office in Delaware is 1013 Centre Road, Wilmington, County of New
Castle, Delaware 19085 and its initial registered agent at such address for
service of process is Corporation Service Company. The principal office of the
Company initially shall be located at 1300 Boylston Street, Chestnut Hill, MA
02467. With the prior approval of the Advisory Committee, the Managing Member
may change the location of the registered office and principal office of the
Company to such other location within the United States as the Managing Member
may determine at any time, upon written notice to all the Members indicating the
new location of such principal office. With the prior approval of the Advisory
Committee, the Managing Member may cause the Company to open such additional
offices at such other locations as the Managing Member in its sole discretion
may determine.
<PAGE> 6
SECTION 2.03. PURPOSES. The principal purpose of the Company is to
locate, analyze and invest in equity and equity-oriented securities, including
securities convertible into or exercisable or exchangeable for equity securities
and, in furtherance thereof, (a) to hold, and to sell, distribute or otherwise
dispose of its Portfolio Securities in accordance with this Agreement over such
period as the Advisory Committee, after soliciting the recommendation of the
Managing Member, determines to be in the best interest of the Members, and (b)
subject to the terms and provisions of this Agreement, otherwise to engage in
any lawful activity for which limited liability companies may be organized under
the laws of the State of Delaware.
SECTION 2.04. POWERS. Subject to all of the terms and provisions
hereof, and consistent with the purposes of the Company, the Company shall have
the following powers:
(a) to purchase, invest in and sell securities and interests in
securities of every kind, including, without limitation, capital stock,
partnership interests, limited liability company membership interests, bonds,
notes, debentures, trust receipts, and other obligations, as well as rights and
options to purchase and sell securities;
(b) to make and perform all contracts and engage in all activities and
transactions necessary or advisable to carry out the purposes of the Company,
including, without limitation, the purchase, sale, transfer, pledge and exercise
of all rights, privileges and incidents of ownership or possession with respect
to any Company asset or liability; the securing of payment of any Company
obligation by hypothecation or pledge of Company assets; and the guaranty of or
becoming surety for the debts of others, subject to Section 3.09 hereof; and
(c) otherwise to have all the powers available to it as a limited
liability company under the laws of the State of Delaware.
SECTION 2.05. TAX TREATMENT. The Members intend that the Company shall
be classified and treated as a partnership for federal income tax purposes
within the meaning of Section 761(a) of the Code and that the Managing Member
and the Class A Member shall be treated as partners in a partnership for such
purposes within the meaning of Section 761(b) of the Code. The Members agree
that the economic sharing agreement among the Members set forth in this
Agreement appropriately reflects the contributions and the activities of the
Members on behalf of the Company in their respective capacities as "partners" in
a partnership within the meaning of Subchapter K of the Code. Further, the
Members intend, and the Managing Member shall use its best efforts to ensure,
that the Company will be treated as an "investment partnership" as such term is
defined in Section 731(c)(3)(A)(iii) of the Code and the Treasury Regulations
promulgated thereunder.
ARTICLE III
MANAGING MEMBER
SECTION 3.01. NAME AND ADDRESS. The name and address of the Managing
Member is set forth in Schedule A. SCHEDULE A shall be amended from time to time
to reflect any change
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in the address or identity of the Managing Member. The liability of the Managing
Member to make capital contributions to the Company shall be limited to any
unpaid capital contributions which it agreed to make to the Company, except as
otherwise provided under the Delaware Act or as expressly provided in this
Agreement.
SECTION 3.02. MANAGEMENT AND CONTROL OF THE COMPANY. Subject to the
provisions of this Agreement and consistent with the investment purposes set
forth herein, the management of the Company shall be vested in the Managing
Member. Company policies shall be subject to the approval of the Advisory
Committee.
SECTION 3.03. POWERS. Subject to the provisions of this Agreement and
consistent with the investment purposes set forth herein, the Managing Member
shall have the power on behalf and in the name of the Company to carry out and
implement any and all of the purposes of the Company set forth in Section 2.03
and to exercise any of the powers of the Company set forth in Section 2.04
including, without limitation, the power to:
(a) open, maintain and close accounts with brokers and give
instructions or directions in connection therewith;
(b) open, maintain and close bank accounts and draw checks or other
orders for the payment of money;
(c) receive, dispose of and deal in all securities, checks, money and
other assets or liabilities of the Company;
(d) hire and fire investment bankers, attorneys, accountants,
consultants, custodians, contractors and other agents, and pay them
compensation;
(e) enter into, make and perform such contracts, agreements and other
undertakings, and do any and all such other acts required of the Company with
respect to its interest in any corporation, partnership, limited partnership,
limited liability company, trust, association or other entity or activity,
including but not limited to, entering into agreements with respect to such
interests, which agreements may contain such terms, conditions and provisions as
the Managing Member in its sole discretion shall approve;
(f) maintain one or more offices and in connection therewith rent or
acquire office space and do such other acts as may be advisable in connection
with the maintenance of such offices; and
(g) notwithstanding the foregoing, the Managing Member shall not enter
into any material contracts, agreements or undertakings without the approval of
the Advisory Committee.
SECTION 3.04. CERTIFICATE OF FORMATION. The Managing Member shall file
for public record with the appropriate public authorities, and, if required,
publish the Certificate of Formation of the Company and any amendments thereto
and take all such other action as may be
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required to preserve the limited liability of the Members in any jurisdiction in
which the Company shall conduct operations.
SECTION 3.05. OTHER ACTIVITIES. The Managing Member and the Principals
at all times shall devote substantially all of their business time and effort to
the activities of the Company.
SECTION 3.06. AVOIDANCE OF CONFLICTS OF INTEREST. The Company has
adopted the following policies to deal with potential conflicts of interest.
(a) All investment opportunities which come to the attention of the
Managing Member or a Principal, except for such opportunities which it or he
reasonably believes are not within the purposes of the Company, shall be made
available to the Company before it or he invests, directly or indirectly, if the
investment decision is controlled by it or him, in such opportunities.
(b) The Managing Member and the Principals shall not invest directly or
indirectly, if the investment decision is controlled by the Managing Member or a
Principal (other than through the Company), in any Portfolio Company or in any
Person being considered by the Company as a prospective Portfolio Company.
(c) The Managing Member and each Principal shall comply with the
policies and guidelines for trading of securities established from time to time
by GCX.
(d) Except for transactions that are specifically permitted under the
terms and provisions of this Agreement or as otherwise approved by the Advisory
Committee, any transaction between the Managing Member, the Principals or their
Affiliates and the Company or any Portfolio Company shall be on terms no less
favorable to the Company or the Portfolio Company, as the case may be, than are
generally afforded to unrelated third parties in comparable transactions.
SECTION 3.07. DUTY OF CARE.
(a) It is recognized that decisions concerning investments or potential
investments involve the exercise of judgment and the risk of loss. The Managing
Member and the Principals shall exercise their best judgment in making
investments on behalf of the Company and in carrying out their other obligations
hereunder, and the Managing Member, its members, employees, agents and
Affiliates and the Principals shall not incur any liability to the Company or to
the Class A Member for making such investments on behalf of the Company or
carrying out such obligations, in each case in accordance with the standard of
care set forth in Section 3.07(b). In addition, the Managing Member, its
members, employees, agents and Affiliates, and the Principals and their
respective partners, employees, agents and Affiliates shall be entitled to
indemnification by the Company to the extent provided in Article XVI hereof.
(b) The Managing Member, its members (including the Principals),
employees, agents and the Affiliates of the Managing Member and any Principal
shall not be liable to the Company or to any Member for any loss suffered by the
Company or any Member which arises
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out of any investment or any other action or omission of the Managing Member,
any member, employee, agent or Affiliate of the Managing Member or any
Principal, provided that (1) the Managing Member, member, employee, agent or
Affiliate of the Managing Member, or such Principal acted in good faith and in a
manner such Person reasonably believed to be in, or not opposed to, the best
interest of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe such Person's conduct was unlawful, and (2)
such course of conduct did not constitute gross negligence or willful misconduct
of the Managing Member, member, employee, agent or Affiliate of the Managing
Member or such Principal; nor shall the Managing Member, any member, employee,
agent of the Managing Member or any Affiliate of the Managing Member or any
Principal be liable for the negligence, whether of omission or commission,
dishonesty or bad faith of any employee, broker or other agent of the Company
selected and supervised by the Managing Member (or any member, employee or agent
of the Managing Member or any Affiliate of the Managing Member or any Principal)
with reasonable care. The Managing Member, the members, employees and agents and
the Affiliates of the Managing Member and the Principals shall be fully
protected and justified with respect to any action or omission taken or suffered
by any of them in good faith if such action or omission is taken or suffered in
reliance upon and in accordance with the opinion or advice as to matters of law
of legal counsel, or as to matters of accounting of accountants, selected by any
of them with reasonable care.
SECTION 3.08. INVESTMENT AND OTHER LIMITATIONS. The Company shall not,
without the prior approval of the Advisory Committee, invest in the securities
issued by any entity. The Managing Member shall sell, transfer or otherwise
dispose of a Portfolio Security as directed by the Advisory Committee; provided
that any decision by the Advisory Committee to sell, transfer or otherwise
dispose of a Portfolio Security shall be made only after soliciting the
recommendation of the Managing Member. The Managing Member and the Principals
shall not cause the terms and provisions of the GPLLC Agreement to be waived,
modified, terminated or amended without the written consent of the Advisory
Committee. If a "Cause Event", as defined in the GPLLC Agreement, occurs with
respect to a member of the Managing Member, the Managing Member shall cause such
member's interest in the Managing Member to be converted into a "Retired
Member's interest", as defined in the GPLLC Agreement, if, as and when directed
by the Advisory Committee.
SECTION 3.09. BORROWING; GUARANTEES. Without the prior approval of the
Advisory Committee, the Managing Member may not cause the Company to borrow
money, pledge any assets of the Company, grant a lien on such assets, or
otherwise incur indebtedness or guaranty the indebtedness of Portfolio
Companies.
SECTION 3.10. CLASSIFICATION AS PARTNERSHIP. The Managing Member agrees
that it (a) will not cause or permit the Company to elect (1) to be excluded
from the provisions of Subchapter K of the Code or (2) to be treated as a
corporation for federal income tax purposes; (b) will cause the Company to make
any election reasonably determined to be necessary or appropriate in order to
ensure the treatment of the Company as a partnership for federal income tax
purposes; (c) will cause the Company to file any required tax returns in a
manner consistent with its treatment as a partnership for federal income tax
purposes; and (d) has not taken, and
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will not take, any action that would be inconsistent with the treatment of the
Company as a partnership for such purposes.
ARTICLE IV
CLASS A MEMBER
SECTION 4.01. NAME AND ADDRESS. The Class A Member's address is set
forth in SCHEDULE A. SCHEDULE A shall be amended from time to time to reflect
any change in such address or the identity of the Class A Member.
SECTION 4.02. LIMITED LIABILITY. The liability of the Class A Member to
the Company shall be limited to any unpaid capital contributions which it agreed
to make to the Company, except as otherwise provided under the Delaware Act or
as expressly provided in this Agreement.
SECTION 4.03. NO CONTROL OF COMPANY. The Class A Member, in its
capacity as such, shall not take any part in the control of the affairs of the
Company, shall not undertake any transactions on behalf of the Company, and
shall not have any power to sign for or to bind the Company.
SECTION 4.04. DISSOLUTION OR BANKRUPTCY. The bankruptcy, liquidation or
dissolution of the Class A Member shall not result in the termination of the
Company, but the rights and obligations of the Class A Member under this
Agreement shall accrue to the Class A Member's successor or legal
representative. Except as expressly provided in this Agreement, no other event
affecting the Class A Member (including but not limited to insolvency) shall
affect this Agreement.
ARTICLE V
EXPENSES; MANAGEMENT AGREEMENT
SECTION 5.01. MANAGEMENT AGREEMENT.
(a) The Class A Member (or an Affiliate thereof) shall enter into a
Management Agreement of even date herewith, in the form attached hereto as
SCHEDULE C, with the Managing Member (as amended from time to time, the
"Management Agreement).
Except as specifically provided in this Agreement, the Managing Member
shall not receive any salary, commission, fee or other compensation from the
Company and, while the Management Agreement is in effect, the Principals shall
not receive any salary, commission, fee or other compensation for services from
the Company.
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SECTION 5.02. FEES AND COMMISSIONS FROM PORTFOLIO COMPANIES. The
Managing Member and its Affiliates (including the Principals) shall be permitted
to receive fees, commissions and other compensation from Portfolio Companies,
provided, however, that any director's, consulting, monitoring, investment
banking, transaction or break-up fees or other remuneration (including, without
limitation, proceeds from the disposition of any stock option received in
connection with service as a director, consultant or investment banker) paid to
the Managing Member, a Principal, or any Affiliate of the Managing Member or
Principal by or with respect to a Portfolio Company for services rendered shall
be received by the Managing Member or any such Affiliate as an agent of the
Company and remitted to the Company immediately or at such other time or times
as determined by the Managing Member with the approval of the Advisory
Committee. Any Person receiving such Portfolio Company remuneration hereby
agrees to use its or his best efforts to ensure that the Company, rather than
such Person, is treated for tax purposes as earning such remuneration.
ARTICLE VI
ADVISORY COMMITTEE
SECTION 6.01. APPOINTMENT. The Company shall have an advisory committee
(the "ADVISORY COMMITTEE") which shall consist of four members, one of whom
shall be a designee of the Managing Member and the remainder of whom shall be
designees of the Class A Member. A member of the Advisory Committee may be
removed and replaced at any time, with or without cause, by the Member that
designated such member to the Advisory Committee. The Advisory Committee shall
elect a chairman (the "CHAIRMAN") from among its members. Any member of the
Advisory Committee, other than the designee of the Managing Member, is eligible
to become the Chairman.
SECTION 6.02. MEETINGS. The Advisory Committee shall meet at least
quarterly at such times as its members may determine. At all meetings, a
majority of the members then holding office (including the Chairman) shall
constitute a quorum for the transaction of business. Any action required or
permitted to be taken at any meeting may be taken without a meeting if a
majority of the members then holding office consent thereto and such action and
consent is memorialized in a writing or writings filed with the records of
proceedings of the Advisory Committee.
SECTION 6.03. DUTIES. The functions of the Advisory Committee shall be:
(a) to review and approve or disapprove of proposed Company actions and
investments to the extent required by Sections 2.02, 3.02, 3.06(d), 3.08 and
3.09 or any other applicable sections of this Agreement;
(b) to review and approve or disapprove of Company distributions
proposed to be made to the extent provided in Article X;
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(c) to review and approve or disapprove of proposed valuations of
assets and liabilities of the Company in accordance with Section 6.04;
(d) to review and approve the Management Fee for the Managing Member in
accordance with the Management Agreement;
(e) to review the Managing Member's investment progress;
(f) to approve the selection of the Company's independent public
accountants;
(g) to resolve any questions relating to potential conflicts of
interest between the Managing Member, a Principal or an Affiliate of either such
Person on the one hand, and the Company on the other hand;
(h) to resolve any other issues brought to the Advisory Committee by
the Managing Member and to perform such other functions as are provided for
under this Agreement; and
(i) to hire and replace such attorneys, accountants or other advisors
on behalf of the Company as the Advisory Committee may determine.
SECTION 6.04. VALUATION PROCEDURES. Whenever valuation of Company
assets or net assets is required by this Agreement, the Managing Member shall
submit to the Advisory Committee for approval its proposed valuation of Company
assets, including therewith a statement setting forth the basis of valuation of
each such asset. If the Advisory Committee fails to approve the valuations
proposed by the Managing Member within fifteen (15) business days following
submission by the Managing Member, then the managers of the Managing Member will
meet with the Advisory Committee, either in person or by telephone conference,
to review the proposed valuations and to consider changes therein proposed by
the Advisory Committee. If the Managing Member and the Advisory Committee cannot
agree on the valuation of Company assets within thirty (30) business days after
the original submission by the Managing Member, then the alternative valuations
proposed by the Advisory Committee shall be deemed accepted as the valuation of
the Company assets.
SECTION 6.05. VOTING; RULES AND PROCEDURES. All approvals,
disapprovals, vetoes and other actions taken by the Advisory Committee shall be
authorized by a majority of the Committee members then holding office, including
the Chairman. The Advisory Committee shall have the authority to adopt rules and
procedures, not inconsistent with this Agreement, relating to the conduct of its
affairs.
SECTION 6.06. DUTY OF CARE. The members of the Advisory Committee shall
exercise their best judgment in carrying out their functions for the Company. No
member of the Advisory Committee shall be liable to the Company or to any Member
for any loss suffered by the Company or any Member which arises out of any
action or omission of such member, provided that (1) such member acted in good
faith and in a manner such Person reasonably believed to be in, or not opposed
to, the best interest of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such Person's conduct was
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unlawful, and (2) such course of conduct did not constitute gross negligence or
willful misconduct of such member. The Advisory Committee and each member
thereof shall be fully protected and justified with respect to any action or
omission taken or suffered by any of them in good faith if such action or
omission is taken or suffered in reliance upon and in accordance with the
opinion or advice as to matters of law of legal counsel, or as to matters of
accounting of accountants, selected by any of them with reasonable care. In
addition, each member of the Advisory Committee shall be entitled to
indemnification by the Company to the extent provided in Article XVI hereof.
ARTICLE VII
CAPITAL OF THE COMPANY
SECTION 7.01. CAPITAL CONTRIBUTIONS.
(a) Each Member's initial capital contribution shall be due on the date
determined by the Advisory Committee. The amount of the Members' initial capital
contributions shall be determined by the Managing Member with the consent of the
Advisory Committee. Each Member's initial capital contribution shall be made,
with the approval of the Advisory Committee, (i) in cash, (ii) in securities of
entities that would be treated as Portfolio Companies hereunder if the Company,
rather than the Member, had acquired such securities directly from the issuer,
or (iii) in a combination of the foregoing. The Managing Member's initial
capital contribution shall be made in an amount equal to 1% of the aggregate
capital contribution due from all Members (including the Managing Member).
(b) Each Member shall make additional contributions to the capital of
the Company ("ADDITIONAL CAPITAL CONTRIBUTIONS"), upon no less than three (3)
business days' prior written notice from the Managing Member, solely for the
purpose of allowing the Company to make investments in Portfolio Securities
approved by the Advisory Committee pursuant to Section 3.08. Each contribution
notice shall set forth the date on which the related Additional Capital
Contribution is due. The amount of capital required to be contributed by each
Member on each occasion of a capital contribution shall be computed by the
Managing Member so that the Class A Member contributes 99% of the aggregate
capital contribution to be made by all Members at such time and the Managing
Member contributes 1% of the aggregate capital contribution to be made by all
Members at such time. A Member may not make less than the full amount of an
Additional Capital Contribution and all Additional Capital Contributions shall
be made in cash in United States dollars, unless otherwise approved by the
Advisory Committee.
(c) In the event that a Member makes all or a portion of its initial
capital contribution to the Company by contributing securities (the "CONTRIBUTED
SECURITIES"), such securities shall be credited to the Member's Capital Account,
as such term is defined in Article VIII hereof, at their respective Gross Asset
Values. The books and records of the Company, including for this purpose the
Capital Account of the Member, shall reflect such Gross Asset Value. SCHEDULE D
shall set forth the Gross Asset Values of any Contributed Securities and any
Contributed Securities Interest applicable to such Contributed Securities.
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SECTION 7.02. NO INTEREST OR WITHDRAWALS. No interest shall accrue on
any capital contribution made by a Member, and no Member shall have the right to
withdraw or to be repaid any of its capital contributions so made, except as
specifically provided in this Agreement.
SECTION 7.03. MINIMUM CAPITAL CONTRIBUTION OF MANAGING MEMBER.
Notwithstanding any other provision of this Agreement, the Managing Member shall
contribute cash (unless otherwise agreed to by the Advisory Committee) to the
Company at such times and in such amounts as necessary to ensure that the
paid-in capital contributions of the Managing Member are at all times equal to
1% of the aggregate paid-in capital contributions of all Members at such time.
ARTICLE VIII
ACCOUNTS
SECTION 8.01. CAPITAL ACCOUNTS. There shall be established on the books
of the Company a capital account (the "CAPITAL ACCOUNT") for each Member that
shall consist of such Member's initial capital contribution to the Company and
that shall be:
(a) Increased by (1) any Additional Capital Contributions made to the
Company by such Member pursuant to this Agreement and (2) any amounts from time
to time in the nature of income or gain added to the Capital Account of such
Member pursuant to Article IX or APPENDIX B; and
(b) Decreased by (1) any distributions made to such Member and (2) any
amounts in the nature of loss, deduction or expense subtracted from the Capital
Account of such Member pursuant to Article IX or Appendix B.
SECTION 8.02. ACCOUNTING FOR DISTRIBUTIONS IN KIND. For purposes of
maintaining Capital Accounts when Company property is distributed in kind:
(a) The Company shall treat such property as if it had been sold for
its Gross Asset Value on the date of distribution;
(b) Any difference between the Gross Asset Value as so determined and
the Cost of such property shall constitute Net Gain or Loss and shall be
allocated to the Capital Accounts of the Members pursuant to Article IX; and
(c) The Capital Account of any Member receiving a distribution in kind
shall be reduced by an amount equal to the fair market value of such property on
the date of distribution (net of any liabilities secured by such distributed
property that such Member is considered to assume or take subject to under
Section 752 of the Code).
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SECTION 8.03. COMPLIANCE WITH TREASURY REGULATIONS. To the extent
consistent with Section 9.06, the foregoing provisions and the other provisions
of this Agreement relating to the maintenance of Capital Accounts are intended
to comply with Section 704(b) of the Code and Treasury Regulations Section
1.704-1(b), and shall be interpreted and applied in a manner consistent with
such regulations. In the event that the Advisory Committee shall determine that
it is prudent to modify the manner in which the Capital Accounts, or any debits
or credits thereto, are computed in order to comply with such regulations, the
Advisory Committee may make such modification.
ARTICLE IX
ALLOCATIONS
SECTION 9.01. ALLOCATIONS OF NET GAIN. Except as provided in Section
9.05, as of the end of each fiscal year of the Company and after giving effect
to the special allocations set forth in Sections 9.03 and 9.04 and APPENDIX B,
the Net Gain (if any) of the Company for such fiscal year shall be allocated to
the Capital Accounts of the Members as follows (provided, however, that the
Class A Member shall be entitled at such times and in the manner determined by
the Advisory Committee, to a priority allocation of Net Gain, in an amount equal
to the aggregate amount of Contributed Securities Interest, so as to ensure that
the balance in its Capital Account reflects the Contributed Securities
Interest):
(a) First, to all Members, in proportion to the respective amounts of
Net Loss (if any) previously allocated to each such Member pursuant to Section
9.02(d) and not offset by prior allocations of Net Gain made pursuant to this
Section 9.01(a), an amount of Net Gain equal to the aggregate amount of such Net
Loss;
(b) Second, to all Members, in proportion to their respective
Preferential Return Allocations, an amount of Net Gain equal to the aggregate
amount of all such Preferential Return Allocations;
(c) Third, to the Class A Member, an amount of Net Gain equal to the
Class A Member's Make-Whole Amount; and
(d) Fourth, 80% to all Members in proportion to their respective
Contributions and 20% to the Managing Member.
SECTION 9.02. ALLOCATIONS OF NET LOSS. Except as provided in Section
9.05, as of the end of each fiscal year of the Company and after giving effect
to the special allocations set forth in Sections 9.03 and 9.04 and APPENDIX B,
the Net Loss (if any) of the Company for such fiscal year shall be allocated to
the Capital Accounts of the Members as follows (provided, however, that the
Advisory Committee may in its discretion adjust the allocations of Net Loss
hereunder in a manner consistent with the economic agreement between the Members
with respect to Contributed Securities Interest):
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(a) First, to all Members, in proportion to the respective amounts of
Net Gain (if any) previously allocated to each such Member pursuant to Section
9.01(d) and not offset by prior allocations of Net Loss made pursuant to this
Section 9.02(a), an amount of Net Loss equal to the aggregate amount of such Net
Gain (if any);
(b) Second, to the Class A Member, an amount of Net Loss equal to the
aggregate amount of Net Gain (if any) previously allocated to the Class A Member
pursuant to Section 9.01(c) and not previously offset by prior allocations if
Net Loss pursuant to this Section 9.02(b);
(c) Third, to all Members, in proportion to the respective amounts of
Net Gain (if any) previously allocated to each such Member pursuant to Section
9.01(b) and not offset by prior allocations of Net Loss made pursuant to this
Section 9.02(c), an amount of Net Loss equal to the aggregate amount of such Net
Gain (if any); and
(d) Fourth, to all Members in proportion to their respective
Contributions.
SECTION 9.03. OTHER SPECIALLY ALLOCATED ITEMS.
(a) As of the end of each fiscal year of the Company and after giving
effect to the special allocations set forth in Section 9.04 and APPENDIX B, the
Return Interest of the Company for such fiscal year shall be allocated to the
Managing Member.
(b) From time to time, in its sole discretion, the Advisory Committee
may set off against the Excess Costs the unallocated pool amounts described in
Sections 4 and 5 of the GCC Investments, Inc. Incentive Pool Plan as adopted
effective November 1, 1996, as amended from time to time, and the Advisory
Committee in its sole discretion may make such adjustments to the allocations
made or to be made under this Article IX as it may determine to be necessary or
appropriate.
SECTION 9.04. LIMITATION ON LOSS ALLOCATIONS.
(a) If and to the extent that any allocation of Company items in the
nature of loss or expense to any Member would cause such Member's Capital
Account to be negative, then such item(s) shall be allocated first to the
Capital Accounts of the other Members in proportion to the positive balances in
their respective Capital Accounts until all such Capital Accounts are reduced to
zero, and then to the Capital Accounts of the Members in such proportions as the
Advisory Committee may determine. An allocation pursuant to this Section 9.04
shall be made only if and to the extent that such Member's Capital Account would
be negative after all allocations required by this Article IX have been made
tentatively as if this Section 9.04 and APPENDIX B were not included in this
Agreement.
(b) In the event that any special allocations of losses or expenses are
made pursuant to Section 9.04(a), items of gross Company income and gain from
subsequent periods shall be specially allocated to offset, to the extent
feasible and as promptly as possible, such special allocations of loss or
expense.
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SECTION 9.05. TIMING OF ALLOCATIONS.
(a) The Advisory Committee shall cause the allocations required by this
Agreement to be made no less frequently than as of the end of each fiscal year.
(b) With respect to gains and losses on distributions in kind, (i) any
Net Gain or Loss deemed to have been realized pursuant to Section 8.02 on a
distribution of property in kind shall be allocated, immediately prior to the
time such distribution is made, to and among the Members' Capital Accounts on
the same basis as an equivalent amount of Net Gain or Loss would be allocated
for a hypothetical fiscal year ending immediately prior to such distribution;
and (ii) for this purpose, there shall be taken into account any Net Gain or
Loss attributable to distributions in kind previously made during the fiscal
year but, for administrative convenience, there shall not be taken into account
other items of Company income, gain, loss or deduction realized or incurred
since the end of the prior fiscal year, except as provided in Section 9.05(c).
(c) The Advisory Committee may cause the Company to make the
allocations described in this Article IX (other than allocations for tax
purposes pursuant to Part 4 of APPENDIX B) at a time other than as of the end of
a fiscal year on the basis of an interim closing of the Company's books at such
time. In that event, each short fiscal period attributable to any such interim
closing shall constitute a fiscal year for purposes of this Article IX. In the
event that the Company sells, transfers or otherwise exchanges a Portfolio
Security during a fiscal quarter, and such sale, transfer or exchange would
cause such Portfolio Security to be treated as a Disposed Investment for
purposes of this Agreement, then the Managing Member shall make the allocations
described in Article IX (other than allocations for tax purposes pursuant to
Part 4 of APPENDIX B) as of the end of such fiscal quarter on the basis of an
interim closing of the Company's books at such time.
SECTION 9.06. ADVISORY NATURE OF ALLOCATIONS. The allocation provisions
contained in this Article IX and in APPENDIX B are advisory allocations only,
and shall have no effect on the amounts to be distributed to the Members
pursuant to the Agreement, whether in liquidation or otherwise. Accordingly, if
the Advisory Committee determines that in any fiscal year the allocations set
forth in this Article IX and in APPENDIX B do not satisfy the "economic effect
equivalence" test or the "partners' interest in the partnership" test and would
not otherwise be respected under the provisions of Section 704(b) of the Code,
then all items of Net Gain, Net Loss and other items of income, gain, loss,
deduction and credit shall be allocated to and among the Members so as to ensure
to the maximum extent possible (i) that such allocations satisfy the economic
effect equivalence test of Treasury Regulations Section 1.704-1(b)(2)(ii)(i) or
the partners interest in the partnership test of Treasury Regulations Section
1.704-(b)(3) and (ii) that all allocations of items that cannot have economic
effect are allocated to the Members in accordance with their interests in the
Company. Without limiting the foregoing, the economic effect equivalence test
may generally be satisfied by allocating items that can have economic effect so
that the balance of each Member's Capital Account at the end of any taxable year
would be equal to the amount of cash that the Member would receive (or would be
negative by the amount of cash that such Member would be required to contribute
to the Company) if the Company sold all of its property for an amount of cash
equal to the book value (as determined pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)) of such property, and all of the cash
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of the Company remaining after payment of all liabilities of the Company were
distributed in liquidation immediately following the end of such taxable year
pursuant to the Agreement. In the event that the Company incurs any liability,
claim or indebtedness that would constitute a "nonrecourse liability" within the
meaning of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder, the Advisory Committee may make such adjustments to the foregoing
allocation provisions as it may determine to be necessary or appropriate.
ARTICLE X
DISTRIBUTIONS
SECTION 10.01. AMOUNT, TIMING AND FORM.
(a) The Advisory Committee, after soliciting the recommendation of the
Managing Member, shall determine the amount, timing and form (including whether
such distribution shall be made in cash or in securities) of all distributions
made by the Company and the decision of the Advisory Committee shall be binding
upon the Members. Notwithstanding the foregoing, the Advisory Committee shall
cause the Company to distribute the net proceeds from the disposition of
Portfolio Securities within ten (10) days after the end of the fiscal quarter in
which such disposition occurs.
(b) Unless otherwise determined by the Advisory Committee, each class
of securities to be distributed in kind shall be distributed to the Members in
proportion to their respective shares of the proposed distribution as provided
in Section 10.02, except to the extent that a disproportionate distribution of
such securities is necessary in order to avoid distributing fractional shares.
For purposes of the preceding sentence, each lot of stock or other securities
having a separately identifiable tax basis or holding period shall be treated as
a separate class of securities.
(c) Notwithstanding anything to the contrary set forth herein, in the
event that the distribution of securities to any Member would result in the
recognition of gain by any Member under federal, state or local income tax laws,
the Advisory Committee, in its sole discretion, shall have the authority to make
such adjustments to the amounts distributable to the Members under this Article
X as it may deem to be necessary or appropriate, including but not limited to
causing the Company to refrain from making any distribution of securities to any
Member.
SECTION 10.02. DISTRIBUTIONS.
(a) Except as otherwise explicitly provided in this Agreement, all
distributions prior to the commencement of the liquidation of the Company's
assets pursuant to Article XII shall be made in accordance with this Section
10.02. All distributions made pursuant to, or referred to in, this Section 10.02
are referred to herein as "DISTRIBUTIONS."
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(b) First, Distributions shall be made to all Members in proportion to
their respective Priority Return Amounts until each Member has received
aggregate Distributions pursuant to this Section 10.02(b) equal to such Member's
Priority Return Amount;
(c) Second, Distributions shall be made to and among the Members until
each Member has received aggregate Distributions pursuant to this Section
10.02(c) and the proviso in the first sentence of Section 10.03(f) equal to such
Member's Distribution Preference;
(d) Third, Distributions shall be made to the Class A Member until the
Class A Member has received aggregate Distributions pursuant to this Section
10.02(d) and Section 10.03(f)(i) equal to the Class A Member's Make-Whole
Amount; and
(e) Thereafter, Distributions shall be made 80% to all Members in
proportion to their respective Contributions and 20% to the Managing Member.
(f) For purposes of Sections 10.02(b), (c), (d) and (e) hereof:
(i) If at any time the Managing Member is entitled to a larger
distribution than it would otherwise be entitled in order to achieve
the result required by clause (2) of the proviso in Section 14.2(c) of
the GPLLC Agreement, then the distribution to the Class A Member shall
be reduced proportionately and the aggregate amount of such reductions
from time to time is referred to herein as the "Distribution
Deficiency."
(ii) All Distributions made to any Member's predecessors in
interest shall be treated as having been made to such Member;
(iii) In calculating the amount of any Distribution to be made
pursuant to Section 10.02(b), (c), (d) or (e), amounts to be
distributed contemporaneously pursuant to an earlier clause (e.g.,
Section 10.02(b)) shall be taken into account in determining the
amounts distributable with respect to each later clause (e.g., Section
10.02(c)) as if such amounts had actually been distributed pursuant to
the earlier clause before the amounts distributable pursuant to the
later clause are determined;
(iv) As of the date that any Distribution is to be made "20%
to the Managing Member" pursuant to Section 10.02(e), the "Applicable
Percentage" of the aggregate amount of such Distribution shall be
retained by the Company and later distributed to the Managing Member
pursuant to the terms of Section 10.03(a) hereof (the aggregate amounts
so retained are referred to herein as the "UNALLOCATED AMOUNT");
(v) As of the date that any Distribution is to be made "20% to
the Managing Member" pursuant to Section 10.02(e), seventy percent of
the aggregate amount of such Distribution that is not part of the
Unallocated Amount (the "CASH COMPONENT") shall be retained by the
Company and distributed to the Managing Member pursuant to the terms of
Section 10.03(b) hereof; and
(vi) As of the date that any Distribution is to be made "20%
to the Managing Member" pursuant to Section 10.02(e), thirty percent of
the aggregate amount of such
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Distribution that is not part of the Unallocated Amount (the "STOCK
COMPONENT") shall be retained by the Company and distributed to the
Managing Member pursuant to the terms of Section 10.03(c) hereof.
SECTION 10.03. DISTRIBUTION LIMITATIONS. Notwithstanding anything to
the contrary contained in Section 10.02(e) or in any other provision of this
Agreement, as of the date that any Distribution is to be made "20% to the
Managing Member" pursuant to Section 10.02(e) (the "DISTRIBUTION DATE"), the
Company shall retain to the extent required by Section 10.02(f)(iv), (v) and
(vi), a portion of such Distribution and shall distribute the amount retained in
the manner set forth in this Section 10.03.
(a) From time to time, the Advisory Committee may apply against the
Unallocated Amount (i) any Distribution Deficiency to the extent not previously
applied against the Unallocated Amount, plus (ii) 20% of the sum of the
following: (A) Excess Management Fee Payments; plus (B) the portion of the
Members' Contributions that is reflected in the Company's books as having been
used by the Company to acquire Portfolio Securities that are Disposed
Investments and which were disposed of by the Company for a value which was less
than the Cost of such Portfolio Securities, but only to the extent that the
amounts in clauses (A) and (B) have not been applied previously against the
Unallocated Amount, recovered pursuant to Distributions under Sections 10.02(b)
and (d), or set off by the Advisory Committee pursuant to Section 9.03(b) (the
foregoing amounts in clauses (i) and (ii) being referred to as the "Excess
Cost"). The amount so applied shall reduce the Unallocated Amount as follows:
First, against any amount credited to the Unallocated Amount pursuant to Section
10.03(f) plus interest accrued thereon; and Second, against the remainder of the
Unallocated Amount plus interest accrued thereon on a first-in, first-out basis,
and the amount applied against the remainder of the Unallocated Amount shall be
distributed to the Class A Member. Any funds plus interest accrued thereon
retained by the Company in the Unallocated Amount for more than five years,
other than funds credited to the Unallocated Amount pursuant to Section
10.03(f), shall be released from the Unallocated Amount and distributed to the
Managing Member within thirty days after the end of the fiscal quarter in which
such anniversary date occurs. Interest shall accrue on the Unallocated Amount at
the Class A Member's investment rate, as designated from time to time by the
Class A Member, and shall constitute Return Interest.
(b) The Cash Component of any Distribution shall be distributed to the
Managing Member in three annual installments beginning on the Distribution Date.
The first installment distributable to the Managing Member shall constitute 45%
of the total amount of the Cash Component. The second and third installments of
the Cash Component shall each constitute 27.5% of the total amount of the Cash
Component. The second and third annual installment of the Cash Component shall
include interest on the amount of such installment calculated at the Prime Rate
per annum from the Distribution Date, which interest shall constitute Return
Interest. Notwithstanding the foregoing, the Advisory Committee may reduce (but
not below 33.3%) or increase the amount of the first installments distributable
to the Managing Member if the Advisory Committee determines, after consulting
with the Company's tax advisors, that the federal, state and local income tax
liability of the members of the Managing Member on account of Net Gain allocated
to the Managing Member pursuant to Article IX with respect to such Distribution
(i) may be offset by previously allocated Net Loss which is carried forward from
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prior fiscal years or (ii) may be greater or lesser due to changes in federal,
state or local tax rates. One-half of the amount of any such reduction or
increase shall be reflected in the second installment of the Cash Component and
the other one-half shall be reflected in the third installment of the Cash
Component.
(c) The Stock Component of any Distribution shall be distributed to the
Managing Member in five equal annual installments beginning on the Distribution
Date. Upon the distribution of each such installment, GCX shall have the right
to require the Managing Member to use the entire amount of such installment to
purchase on that date common stock of GCX, as provided in the Put Agreement
attached as SCHEDULE B.
(d) Any amounts retained by the Company pursuant to Section 10.03(a),
(b) and (c) which have not been distributed after the liquidation of the Company
pursuant to this Agreement shall be immediately released to the Managing Member;
provided, however, that the Managing Member has not been required to withdraw as
the Managing Member for Cause pursuant to Article XIV.
(e) At the election of the Class A Member, the Company shall make
available an advance to a designated Affiliate of the Class A Member that
portion of the Unallocated Amount, the Cash Component and the Stock Component
not distributed to the Managing Member as the Class A Member may specify. Any
such advance shall be repaid to the Company, with interest (i) on the Cash
Component calculated at the Prime Rate per annum, and (ii) on any Unallocated
Amount, calculated at the Class A Member's investment rate, as designated from
time to time by the Class A Member, and the amount of such interest shall be
applied against and reduce interest accruing pursuant to Section 10.03(a) and
(b). No interest shall be payable by the designated Affiliate of the Class A
Member on the portion of an advance that corresponds to the Stock Component of
any Distribution.
(f) If the interest of a member of the Managing Member is converted
into a "retired member" interest under the GPLLC Agreement resulting in the
forfeiture of certain distributions to which such member would otherwise have
been entitled under the provisions of the GPLLC Agreement but for the provisions
of Section 10.02(f)(iv), (v) and (vi) hereof, then the amount of such forfeited
distributions shall be distributed as follows: (i) First, to the Class A Member
in the event that, at such time, the Class A Member has not received
distributions pursuant to Section 10.02(d) hereof equal to its Make-Whole
Amount, in an amount equal to such shortfall; and (ii) Second, the remainder
shall be distributed to the Class A Member, and any amount so distributed
pursuant to this clause Second shall be credited to the Unallocated Amount;
provided, however, that if the interest of a member of the Managing Member is
converted into a "retired member" interest pursuant to Section 14.2(c)(i) of the
GPLLC Agreement due to the voluntary retirement of such member after the date
which is five years but prior to the date which is twelve years after such
member's admission as a member of the Managing Member, then the amount of such
forfeited distributions shall be distributed to all Members pursuant to Section
10.02(c) and in accordance with the provisions of Section 10.01 until each
Member has received aggregate Distributions pursuant to Section 10.02(c) and
this proviso equal such Member's Distribution Preference and, thereafter, to all
Members in proportion to their respective Contributions, and the amount
distributed to each Member in proportion to its Contribution shall be credited
to, and
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shall reduce the amount of, such Member's Distribution Preference which accrues
from time to time thereafter. Notwithstanding the foregoing, upon the
recommendation of the Managing Member, the Advisory Committee may determine to
distribute any such forfeited distributions to the Managing Member. The Managing
Member, at the direction of the Advisory Committee, shall make such adjustments
to the allocation of Net Gain, Net Loss and gross items of income, gain, loss,
deduction and credit as the Advisory Committee may determine to be necessary to
reflect the economic agreement of the Members set forth in this Section
10.03(f).
(g) If a Distribution relates to a Portfolio Company which had an
initial public offering of its securities after the Company's initial investment
in such Portfolio Company, then the date of each installment under Sections
10.03(b) and 10.03(c) with respect to such Distribution, other than the initial
installment of such Distribution, shall be an anniversary date of such initial
public offering commencing with the anniversary date following the date on which
the securities of such Portfolio Company are disposed of or distributed in kind
by the Company.
SECTION 10.04. TAX WITHHOLDING.
(a) If the Company incurs any obligation to pay any amount in respect
of taxes (including withholding taxes and any interest, penalties or additions
to tax) imposed on income of or distributions made to any Member or former
Member, any amount so required to be paid by the Company with respect to such
Person shall be treated for all purposes of this Agreement as if it had been
loaned to such Person, and the Managing Member shall cause the Company to give
prompt written notice to such Person of the date and amount of such loan.
(b) Each Member covenants, for itself, its successors, assigns, heirs
and personal representatives, that such Person shall pay to the Company at any
time after notice of the loan has been given, but not later than thirty (30)
days after the Company delivers a written demand to such Person for such
repayment (which demand may be made at any time prior to or after the
dissolution of the Company or the Managing Member or the withdrawal of such
Person or its predecessors from the Company); provided, however, that if any
such repayment is not made within such thirty (30) day period:
(i) Such Person shall pay interest to the Company at the
Short-Term T-Bill Rate for the entire period commencing on the date on
which the Company paid such amount and ending on the date on which such
Person repays such amount to the Company together with all accrued but
previously unpaid interest; and
(ii) The Company, at the discretion of the Managing Member,
shall (1) collect such unpaid amounts (including interest) from any
Company distributions that otherwise would be made to such Person
and/or (2) subtract from the Capital Account of such Person, no later
than the day prior to the Company's initial liquidating distribution,
any such unpaid amounts (plus unpaid interest) not so collected, in
each case treating the amount so collected or subtracted as having been
distributed to such Person at the time of such collection or
subtraction.
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(iii) For purposes of this Agreement, any interest paid by a
Member to the Company pursuant to Section 10.04(b)(i) shall not be
included in "NET GAIN OR LOSS" as defined hereunder, and shall instead
be allocated to and among the other Members in proportion to their
respective Contributions. No such interest shall increase the Capital
Account or the Contributions of the paying Member for any purpose.
(c) For purposes of this Section 10.04, any tax withholding obligation
incurred by the Managing Member with respect to any Member shall constitute a
Company obligation.
SECTION 10.05. CERTAIN DISTRIBUTIONS PROHIBITED. Anything in this
Article X to the contrary notwithstanding, no distribution shall be made to any
Member if, and to the extent that such distribution would not be permitted under
Section 18-607(a) of the Delaware Act.
ARTICLE XI
DURATION OF THE COMPANY
SECTION 11.01. TERM OF COMPANY. The Company shall continue until the
date that is twenty (20) years after the date hereof, unless it is sooner
dissolved as provided in Section 11.02 or by operation of law.
SECTION 11.02. DISSOLUTION. The Company shall be dissolved:
(a) in the event of the bankruptcy, dissolution or withdrawal of the
Managing Member, unless the Class A Member agrees to continue the Company and
elect a replacement for the Managing Member within ninety (90) days after such
event; or
(b) upon the written notice of the Class A Member.
ARTICLE XII
LIQUIDATION OF THE COMPANY
SECTION 12.01. GENERAL PROVISIONS. At dissolution, the Company's assets
shall be liquidated in an orderly manner. The Managing Member shall be the
liquidator to wind up the affairs of the Company pursuant to this Agreement;
provided that the Class A Member may designate one or more other Persons to act
as the liquidator(s) instead of the Managing Member. Any such liquidator(s),
other than the Managing Member, shall be a "liquidating trustee" within the
meaning of Section 18-101(9) of the Delaware Act.
SECTION 12.02. LIQUIDATING DISTRIBUTIONS. The liquidator(s) shall pay
or provide for the satisfaction of the Company's liabilities and obligations to
creditors. Any Net Gain or Loss, and other items in the nature of income, gain,
loss, deduction and credit realized in connection with the liquidation of the
Company shall be allocated among the Members pursuant to
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Article IX, and the remaining assets of the Company shall then be distributed to
the Members in cash (to the extent feasible) or in kind in the manner described
in Article X, subject to any adjustments to the amounts distributable to the
Managing Member pursuant to Article XIV. In performing their duties, the
liquidator(s) shall be authorized to sell, exchange or otherwise dispose of the
assets of the Company in such reasonable manner as the liquidator(s) shall
determine to be in the best interest of the Members. During the liquidation of
the Company, the liquidator(s) shall furnish to the Members the financial
statements and other information specified in Article XVII.
SECTION 12.03. EXPENSES OF LIQUIDATOR(S). The expenses incurred by the
liquidator(s) in connection with winding up the Company, all other losses or
liabilities of the Company incurred in accordance with the terms of this
Agreement, and reasonable compensation for the services of the liquidator(s)
(which, with respect to any liquidator who is a Managing Member, shall be paid
only if the Managing Member is not also receiving the management fee pursuant to
the terms of the Management Agreement) shall be borne by the Company.
SECTION 12.04. DURATION OF LIQUIDATION. A reasonable time shall be
allowed for the winding up of the affairs of the Company in order to minimize
any losses otherwise attendant upon such a winding up. The liquidator(s) shall
use its best efforts to dispose of or distribute all Company assets within one
year of dissolution, but shall not be bound to do so or liable in any way to any
Member for failure to do so. The liquidator(s) shall then make final liquidating
distributions from the Company on or before the later of (a) the end of the
taxable year in which the date of liquidation of the Company occurs, or (b)
ninety (90) days after the date of the liquidation of the Company. For this
purpose, (1) the date of the liquidation of the Company shall be the date on
which the Company has ceased to be a going concern, and (2) the Company shall
not be deemed to have ceased to be a going concern until it has sold,
distributed or otherwise disposed of its Portfolio Securities.
SECTION 12.05. DUTY OF CARE. The liquidator(s) shall not be liable to
the Company or any Member for any loss attributable to any act or omission of
the liquidator(s) taken in good faith in connection with the liquidation of the
Company and distribution of its assets in the belief that such course of conduct
was in the best interest of the Company. The liquidator(s) may consult with
counsel and accountants with respect to liquidating the Company and distributing
its assets and shall be justified in acting or omitting to act in accordance
with the advice or opinion of such counsel or accountants, provided they shall
have been selected with reasonable care.
SECTION 12.06. NO LIABILITY FOR RETURN OF CAPITAL. The liquidator(s),
the Managing Member and their respective officers, directors, agents, partners,
members and Affiliates shall not be personally liable for the return of the
capital contributions of any Member to the Company. Neither the Managing Member
nor the Class A Member shall be obligated to restore to the Company any amount
with respect to a negative Capital Account; PROVIDED, HOWEVER, that the
foregoing shall not affect the obligation of any Member to make such Member's
agreed upon capital contributions to the Company.
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ARTICLE XIII
LIMITATION ON TRANSFERS OF INTEREST OF CLASS A MEMBER
SECTION 13.01. TRANSFERS OF CLASS A MEMBERSHIP INTEREST. Subject to all
of the terms, conditions, restrictions and obligations set forth in this
Agreement, the Class A Member may Transfer all or any part of its membership
interest in the Company to any Affiliate of the Class A Member or to another
Person. Each Transfer shall be evidenced by a written agreement that is executed
by the transferor and the transferee(s).
SECTION 13.02. PUBLICLY TRADED PARTNERSHIP PROVISIONS.
In order to permit the Company to qualify for the benefit of a "safe
harbor" under Section 7704 of the Code, the Managing Member shall not cause or
permit any offering of membership interests in the Company to be registered
under the Securities Act or to become "traded on an established securities
market," and shall not recognize any Transfer that, to the Managing Member's
knowledge after reasonable inquiry, would otherwise be accomplished by a trade
on a "secondary market (or the substantial equivalent thereof)," in each case
within the meaning of Sections 7704 or 469(k) of the Code and the applicable
Treasury Regulations.
SECTION 13.03. OTHER PROHIBITED LEGAL CONSEQUENCES. No Transfer shall
be permitted, and the Managing Member shall not recognize any Transfer, if such
Transfer would:
(a) Result in a violation of the Securities Act;
(b) Require the Company to register as an investment company under the
U.S. Investment Company Act of 1940, as amended;
(c) Require the Managing Member to register as an investment adviser
under the U.S. Investment Advisers Act of 1940, as amended;
(d) Result in the Company being classified for U.S. federal income tax
purposes as an association taxable as a corporation; or
(e) Result in the Company being subject to U.S. federal income tax at
the entity level under Section 7704 of the Code.
SECTION 13.04. ADMISSION OF SUBSTITUTED CLASS A MEMBERS.
(a) Any transferee of a Company membership interest transferred in
accordance with the provisions of this Article XIII shall be admitted as a
substituted Class A Member.
(b) The transferee of a membership interest in the Company transferred
pursuant to Article XIII that is admitted to the Company as a substituted Class
A Member shall succeed to the rights and liabilities of the transferor Class A
Member and, after the effective date of such
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admission, the Contribution and Capital Account of the transferor shall become
the Contribution and Capital Account, respectively, of the transferee, to the
extent of the membership interest transferred.
SECTION 13.05. COVENANTS OF CLASS A MEMBER. The Class A Member agrees
that it will not make any Transfer of all or any part of its membership interest
in the Company except in accordance with the provisions of this Article XIII.
ARTICLE XIV
NO WITHDRAWAL OF COMPANY MEMBERSHIP INTERESTS
SECTION 14.01. NO WITHDRAWAL OF COMPANY MEMBERSHIP INTERESTS. No Member
shall have the right to withdraw its capital and profits from the Company.
SECTION 14.02. WITHDRAWAL OF THE MANAGING MEMBER.
(a) The Managing Member may be removed as the Managing Member hereof,
for Cause or Without Cause, by the Class A Member upon five (5) days' prior
written notice delivered to the Managing Member, and shall be so removed Without
Cause by the Class A Member if there is a Change in Control. Upon a proper
removal of the Managing Member (A) the Managing Member shall cease to be the
Managing Member of the Company, (B) the Class A Member shall be entitled to
appoint a new Managing Member (upon such terms and conditions as the Class A
Member and the new Managing Member may negotiate), (C) subject to Section
14.02(b), the Managing Member shall be deemed to be a Retired Member for all
purposes of this Agreement and (D) the Retired Member shall not have any further
obligation to make capital contributions to the Company pursuant to Section
7.01(b), but shall continue to be entitled to allocations and distributions
pursuant to Article IX and X in respect of its capital contributions to the
Company;
(b) (i) in the event that the Managing Member's interest in the Company
is converted into a Retired Member interest under this Section 14.02, the Class
A Member, in its sole and unreviewable discretion, shall adjust subsequent
allocations of items of Net Gain and Net Loss and gross items of income, gain,
loss, deduction and credit in its discretion as it determines to be necessary to
reflect the economic agreement among the Members concerning the consequences of
such removal;
(ii) the holder of a Retired Member interest shall continue to
be treated as a Member for purposes of this Agreement, but shall take no part in
the management, policy or control of the Company and shall have no power or
authority to undertake any activities on behalf of the Company or to sign for or
to bind the Company. A Retired Member shall be bound by the terms of this
Agreement and by any action taken by the Class A Member and the new Managing
Member. A Retired Member shall not participate in any consent or vote of the
Members pursuant to this Agreement;
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(iii) if the Managing Member's interest is converted into a
Retired Member's interest Without Cause (other than as described in clause (iv)
below), (1) the Unallocated Amount, the Cash Component and the Stock Component
of any Distribution then retained by the Company pursuant to Section 10.02 shall
immediately be distributed to the Retired Member, and (2) solely with respect to
Portfolio Securities held by the Company as of the date that such Managing
Member becomes a Retired Member, the Retired Member shall be treated as the
"Managing Member" of the Company (with the provisions of Section 14.02(b)(ii)
remaining applicable to the Retired Member for all other purposes) for the
one-year period following the date that such Member becomes a Retired Member,
the Retired Member shall be entitled to Distributions pursuant to Section 10.02
as if the Retired Member were the "Managing Member" hereunder for such one-year
period, and the provisions of this Agreement concerning Distributions retained
by the Company pursuant to Section 10.03 shall NOT apply to amounts otherwise
distributable pursuant to Section 10.02 to such Retired Member; and
(iv)(A) if the Managing Member's interest is converted into a
Retired Member's interest Without Cause and concurrently therewith the Board of
Directors of GCX affirmatively resolves to wind down the private equity
investment activities of GCX, (1) the Cash Component and the Stock Component
(but not the Unallocated Amount) of any Distribution then retained by the
Company pursuant to Section 10.02 shall immediately be distributed to the
Retired Member, and (2) the Retired Member shall be treated as the "Managing
Member" of the Company (with the provisions of Section 14.02(b)(ii) remaining
applicable to the Retired Member for all other purposes), the Retired Member
shall be entitled to Distributions pursuant to Section 10.02 as if the Retired
Member were the "Managing Member" hereunder, and the provisions of this
Agreement concerning Distributions retained by the Company pursuant to Section
10.03 SHALL apply to amounts otherwise distributable pursuant to Section 10.02
to such Retired Member.
(B) if the interest of a member of the Managing Member is
converted into a "retired member" interest under the GPLLC Agreement at any time
after the Managing Member's interest is converted into a Retired Member's
interest as described in clause (iv)(A) above, resulting in the forfeiture of
certain distributions to which such member would otherwise have been entitled
under the provisions of the GPLLC Agreement but for the provisions of Section
10.02(f)(iv), then the amount of such forfeited distributions shall be retained
or distributed as follows: (i) First, such forfeited distributions shall be
retained by the Company to pay for the current expenses and reasonably
anticipated future expenses of the Company; and (ii) Second, such forfeited
distributions shall be distributed to the Managing Member at such times as
provided in Section 10.03(a).
(C) all Company expenses (including any compensation,
fixed or performance based, to be paid to the new Managing Member, if any)
incurred after the Managing Member's interest is converted into a Retired
Member's interest as described in clause (iv)(A) above, shall be applied as
follows: (i) First, against forfeited distributions as provided in clause
(iv)(B) above; (ii) Second, against the Unallocated Amount pursuant to the
provisions of Section 10.03(a), and the amount so applied shall be deemed to be
"Excess Costs"; and (iii) Third, against future gains and, for that purpose
(including for purposes of determining the timing of such application), the
amount so applied shall be included in the "Make-Whole Amount."
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(v) if the Managing Member's interest is converted into a
Retired Member's interest for Cause, the Managing Member shall forfeit the
Unallocated Amount, the Cash Component and the Stock Component of any
Distribution then retained by the Company pursuant to Section 10.02, and such
amounts shall instead be distributed to the Class A Member.
ARTICLE XV
NO TRANSFER OF MEMBERSHIP INTEREST OF THE MANAGING MEMBER
SECTION 15.01. NO TRANSFER OF MEMBERSHIP INTEREST OF THE MANAGING
MEMBER. The Managing Member shall not assign, pledge, mortgage, hypothecate,
sell or otherwise dispose of or encumber all or any part of its membership
interest. Any attempted transfer of the Managing Member's interest shall be
void.
ARTICLE XVI
INDEMNIFICATION
SECTION 16.01. GENERAL PROVISIONS. The Managing Member, its members
(including but not limited to each Principal), officers, employees and agents,
each member of the Advisory Committee, and the Class A Member (each such Person
being referred to herein as an "INDEMNITEE") shall be indemnified by the Company
(only out of Company assets, including the proceeds of liability insurance)
against any claim, demand, controversy, dispute, cost, loss, damage, expense
(including attorneys' fees), judgment and/or liability incurred by or imposed
upon the Indemnitee in connection with any action, suit or proceeding (including
any proceeding before any administrative or legislative body or agency) to which
the Indemnitee may be a party or otherwise involved, or with which the
Indemnitee may be threatened, by reason of the Indemnitee's being at the time
the cause of action arose or thereafter, the Managing Member, a member,
director, officer, employee, consultant or other agent of the Managing Member, a
member of the Advisory Committee, or the Class A Member, or an Affiliate of any
of the foregoing, or a director, officer, partner, employee, consultant or other
agent of any other organization in which the Company owns or has owned an
interest or of which the Company is or has been a creditor, which other
organization the Indemnitee serves or has served as director, officer, partner,
employee, consultant or other agent at the request of the Company (whether or
not the Indemnitee continues to serve in such capacity at the time such action,
suit or proceeding is brought or threatened), except with respect to matters
which result in the Indemnitee being enjoined from future violations of federal
or state securities laws or as to which the Indemnitee shall have been finally
adjudicated in any such action, suit or proceeding (a) not to have acted in good
faith or to have acted with gross negligence or a willful disregard of his
duties, or in breach of his fiduciary obligations, or (b) with respect to any
criminal action or proceeding, not to have had reasonable cause to believe that
the Indemnitee's conduct was lawful. In the event of a settlement in connection
with any action, suit or proceeding, such indemnification shall apply to all
matters covered by the settlement except for matters as to which the Company is
advised by independent counsel (chosen by the Managing Member and approved by
the Advisory
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Committee), that in the opinion of such counsel the person seeking
indemnification did not act in good faith or acted with gross negligence or
willful disregard of his duties. Each Indemnitee shall be entitled to
indemnification pursuant to this Article XVI notwithstanding that the Company
has sold, assigned, distributed or otherwise transferred its entire interest in
such other organization prior to the time that such action, suit or proceeding
is brought or threatened. The foregoing right of indemnification shall be in
addition to any rights to which any Indemnitee may otherwise be entitled. The
foregoing right of indemnification shall inure to the benefit of the executors,
administrators, personal representatives, successors or assigns of each such
Indemnitee.
SECTION 16.02. ADVANCE PAYMENT OF EXPENSES. The Company shall pay the
expenses incurred by an Indemnitee in defending a civil or criminal action, suit
or proceeding, or in opposing any claim arising in connection with any potential
or threatened civil or criminal action, suit or proceeding, in advance of the
final disposition of such action, suit or proceeding, upon receipt of an
enforceable undertaking by such Indemnitee to repay such payment if he shall be
determined to be not entitled to indemnification therefor as provided herein;
PROVIDED, HOWEVER, that in such instance the Indemnitee is not defending an
action, suit or proceeding commenced against him by the Company or opposing a
claim by the Company arising in connection with any such potential or threatened
action, suit or proceeding.
SECTION 16.03. LIMITATION BY LAW. If the Managing Member or the Company
is subject to any federal or state law, rule or regulation which restricts the
extent to which any person may be exonerated or indemnified by the Company, then
the indemnification provisions set forth in this Article XVI and the exoneration
provisions set forth in Sections 3.07, 6.06 and 12.05 shall be deemed to be
amended, automatically and without further action by the Managing Member or the
Class A Member, to conform to such restrictions on exoneration or
indemnification as set forth in such applicable federal or state law, rule or
regulation. The rights to indemnification and advancement of expenses conferred
in this Article XVI shall not be exclusive of any other right which any
Indemnitee may have or hereafter acquire under any law, statute, rule,
regulation, charter document, by-law, contract or agreement.
ARTICLE XVII
ACCOUNTING; RECORDS AND REPORTS; ANNUAL MEETINGS
SECTION 17.01. FISCAL YEAR; TAX ELECTIONS. The fiscal year of the
Company shall be the year ending October 31, or such other year as is required
by Section 706 of the Code. Without the consent of the Advisory Committee, the
Managing Member shall not make any elections under tax or other applicable laws
on behalf of the Company or the Members. Upon the request of the Class A Member,
the Managing Member shall make (or shall cause the Company to make) any filings,
applications or elections required to be made by the Company or the Managing
Member in order to obtain any available exemption from, or any available refund
of, any withholding or similar taxes imposed by any taxing authority with
respect to amounts distributable to the Members or items of income allocable to
the Members under this Agreement.
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SECTION 17.02. KEEPING OF ACCOUNTS AND RECORDS. At all times the
Managing Member shall cause to be kept proper and complete books of account, in
which shall be entered fully and accurately the transactions of the Company. The
Managing Member shall at all times keep such books of account in the manner
directed by the Advisory Committee, and shall not make any changes to any method
of accounting with respect to any item without the consent of the Advisory
Committee. Such books of account (which shall be kept on the accrual method of
accounting), together with (a) an executed copy of this Agreement (and any
amendments hereto); (b) the Certificate of Formation of the Company (and any
amendments thereto); (c) executed copies of any powers of attorney pursuant to
which any certificate has been executed by the Company; (d) a current list of
the full name, taxpayer identification number and last known address of each
Member; (e) copies of all tax returns, if any, filed by the Company; and (f) all
financial statements of the Company, shall at all times be maintained at the
principal office of the Company.
SECTION 17.03. INSPECTION RIGHTS. At any time while the Company
continues and until its complete liquidation, each Member (or the designee
thereof) may fully examine and audit the Company's books, records, accounts and
assets, including bank balances, and may make, or cause to be made, any
examination or audit at such Member's expense. The Class A Member (or the
designee thereof) may examine, or request that the Managing Member furnish, such
additional information as is reasonably necessary to enable the requesting
Member (or the designee thereof) to review the state of the activities of the
Company. The Managing Member shall not have the benefit of the confidential
information provisions of Section 18-305(b) of the Delaware Act.
SECTION 17.04. INDEPENDENT ACCOUNTANTS. The Company's independent
public accountants shall be a nationally recognized independent public
accounting firm selected by the Advisory Committee. The Managing Member may
change accounting firms to another such firm at any time with the consent of the
Advisory Committee.
ARTICLE XVIII
WAIVER AND AMENDMENT
SECTION 18.01. WAIVER AND AMENDMENT. Except as otherwise provided in
this Agreement, the terms and provisions of this Agreement may be waived,
modified, terminated or amended with the written consent of the Managing Member
and the Class A Member. The Managing Member shall promptly furnish copies of any
amendments to this Agreement to all Members.
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ARTICLE XIX
GENERAL PROVISIONS
SECTION 19.01. NOTICES. Except where otherwise specifically provided in
this Agreement, all notices, requests, consents, approvals and statements shall
be in writing and shall be deemed to have been properly given by personal
delivery or if mailed from within the country of the sender by air mail, postage
prepaid, or if sent by prepaid telegram, electronic facsimile transmission or
telex, or if sent by courier service, addressed in each case, if to the Company
or to any Member, at its address set forth in SCHEDULE A, or, in each case, to
such other address or addresses as the addressee may have specified by written
notice as aforesaid to the other parties.
SECTION 19.02. ADDITIONAL DOCUMENTS. Each Member hereby agrees to
execute all certificates, counterparts, amendments, instruments or documents
that may be required by the laws of the various jurisdictions in which the
Company conducts its activities, to conform with the laws of such jurisdictions
governing limited liability companies.
SECTION 19.03. BINDING ON SUCCESSORS. This Agreement shall be binding
upon and it shall inure to the benefit of the respective heirs, successors,
assigns and legal representatives of the parties hereto.
SECTION 19.04. COUNTERPARTS. This Agreement or any amendment hereto may
be signed in any number of counterparts, each of which shall be an original, but
all of which taken together shall constitute one agreement (or amendment, as the
case may be).
SECTION 19.05. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
SECTION 19.06. SECURITIES ACT MATTERS. Each Member understands that in
addition to the restrictions on transfer contained in this Agreement, it must
bear the economic risks of its investment for an indefinite period because the
Company interests have not been registered under the Securities Act and,
therefore, may not be sold or otherwise transferred unless they are registered
under the Securities Act or an exemption from such registration is available.
Each Member agrees with all other Members that it will not sell or otherwise
transfer its interest in the Company unless such interest has been so registered
or in the opinion of counsel for the Company, or of other counsel reasonably
satisfactory to the Company, such an exemption is available.
SECTION 19.07. RIGHT TO RELY ON AUTHORITY OF MANAGING MEMBER. No Person
that is not a Member, in dealing with the Managing Member, shall be required to
determine such Managing Member's authority to make any commitment or engage in
any undertaking on behalf of the Company, or to determine any fact or
circumstance bearing upon the existence of the authority of the Managing Member.
SECTION 19.08. TAX MATTERS PARTNER. The "tax matters partner," as
defined in Section 6231 of the Code, of the Company shall be the Class A Member
(the "TAX MATTERS
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PARTNER"). The Tax Matters Partner shall not resign as tax matters partner of
the Company unless, on the effective date of such resignation, the Company has
designated another Member as Tax Matters Partner and that Member has given its
consent in writing to its appointment as Tax Matters Partner. The Tax Matters
Partner shall receive no additional compensation from the Company for its
services in that capacity, but all reasonable expenses incurred by the Tax
Matters Partner in its capacity as such shall be borne by the Company. The Tax
Matters Partner is authorized to employ such accountants, attorneys and agents
as it, in its sole discretion, determines are necessary to or useful in the
performance of its duties. If the Class A Member is not eligible to serve as the
Tax Matters Partner under applicable law, then the Managing Member shall be the
Tax Matters Partner, but in that event the Managing Member shall consult with
the Class A Member, and shall obtain the Class A Member's advance consent, in
connection with any action the Managing Member proposes to take as Tax Matters
Partner. Any Person who serves as Tax Matters Partner shall not be liable to the
Company or to any Member for any action it takes or fails to take as Tax Matters
Partner with respect to any administrative or judicial proceeding involving
"Partnership items" (as defined in Section 6231 of the Code) of the Company,
unless such action or failure to act constitutes a violation of the duty of care
standards set forth in Section 3.07.
SECTION 19.09. CONTRACT CONSTRUCTION. Whenever the content of this
Agreement permits, the masculine gender shall include the feminine and neuter
genders, and reference to singular or plural shall be interchangeable with the
other. The invalidity or unenforceability of any one or more provisions of this
Agreement shall not affect the other provisions, and this Agreement shall be
construed in all respects as if any such invalid or unenforceable provision(s)
were omitted. References in this Agreement to particular sections of the Code or
to provisions of Delaware law shall be deemed to refer to such sections or
provisions as they may be amended after the date of this Agreement.
SECTION 19.10. SECTION HEADINGS. Captions in this Agreement are for
convenience only and do not define or limit any term of this Agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Limited
Liability Company Agreement of GCC Investments, LLC as of the day, month and
year first above written.
MANAGING MEMBER:
CHESTNUT HILL CAPITAL PARTNERS, LLC
By: _____________________________
Senior Manager
CLASS A MEMBER:
CHESTNUT HILL RE, INC.
By: _____________________________
Name: ___________________________
Title: __________________________
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APPENDIX A
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DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below (such meanings to be equally applicable to both
singular and plural forms of the terms so defined). Additional defined terms are
set forth in the Sections of this Agreement to which they relate.
"ADDITIONAL CAPITAL CONTRIBUTIONS" shall have the meaning set forth in
Section 7.01(b).
"ADVISORY COMMITTEE" means the committee formed and operating pursuant
to Article VI.
"AFFILIATE" means, with respect to the Person to which it refers, a
Person that directly or indirectly through one or more intermediaries, controls
or is controlled by, or is under common control with, such subject Person. For
this purpose, each member of the immediate family of any Person who is an
individual, or trust for the benefit of such Person or such Person's immediate
family, (including with respect to a Principal, such Principal's spouse,
parents, grandparents, siblings and lineal descendants) shall be deemed to be an
Affiliate of such Person.
"AGGREGATE PREFERRED RETURN ACCRUAL" means, with respect to any Member,
the sum of such Member's Preferred Return Accruals for each fiscal period (and
partial fiscal period) from the inception of the Company through the end of such
fiscal period.
"ALLOCATED POOL" means the total points, up to 100, allocated to
members of the Managing Member by the Class A Member, from time to time in its
sole and absolute discretion, after consulting with the Managing Member. The
Allocated Pool shall not exceed 90 unless otherwise requested by the Managing
Member and approved by the Class A Member. The initial Allocated Pool shall
equal 80 points. No member of the Managing Member admitted to the Managing
Member after the date hereof shall have an initial allocation of points in
excess of 25; provided that such allocation may be increased to more than 25
points thereafter by the Advisory Committee. If the points to be allocated to a
new member of the Managing Member would cause the total points allocated to
exceed 90, or 100 if determined by the Advisory Committee, then the current
members shall forfeit an amount equal to the excess on a pro-rata basis or on
such other basis as is determined by the Advisory Committee.
"APPLICABLE PERCENTAGE" means 100 minus the Allocated Pool, stated as a
percentage.
"CAPITAL ACCOUNT" shall have the meaning set forth in Section 8.01.
"CASH COMPONENT" shall have the meaning set forth in Section
10.02(f)(v).
"CAUSE" shall mean that the Managing Member: (a) committed fraud in
respect of any matter involving the Company in any respect whatsoever; (b)
breached this Agreement, the
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Management Agreement or any other contract with, or other obligation to, the
Company, the Class A Member or an Affiliate of the Class A Member; (c)
misappropriated an asset or assets of the Company, whether tangible or
intangible; or (d) committed gross misconduct.
"CHAIRMAN" shall have the meaning set forth in Section 6.01.
"CHANGE IN CONTROL" shall be deemed to have occurred if, after the
occurrence of any of the events described in (a), (b) or (c) below, the capital
made available for investment to the Company by the Class A Member for any
fiscal year following such event falls below $50,000,000 or the total amount
under investment by the Company (determined by taking (1) the greater of the
Cost of all Portfolio Securities then held by the Company and (2) the Gross
Asset Values of all such Portfolio Securities, plus amounts available for
investment but not currently invested) falls below $200,000,000.
(a) Any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Act")) becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the
Act) (other than the Smith Family Group (as described in the most recent proxy
statement filed by GCX with the Securities and Exchange Commission)) directly or
indirectly, of securities of GCX representing more than the greater of (i)
twenty percent (20%) of the combined voting power of GCX's then outstanding
securities or (ii) the percentage of the combined voting power of GCX's then
outstanding securities as to which the Smith Family Group is the beneficial
owner; provided, however, that a "person" shall not be deemed to include two or
more persons who are acting as a group if such group is comprised of one or more
registered investment companies under the Investment Company Act of 1940, as
amended.
(b) The Smith Family Group becomes the beneficial owner of less than
twenty percent (20%) of the combined voting power of GCX's then outstanding
securities.
(c) Persons who, as of November 1, 1996, constituted GCX's Board of
Directors (the "Incumbent Board") cease for any reason, including without
limitation as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board of Directors,
provided that any person becoming a director of GCX subsequent to November 1,
1996 whose nomination or election was approved by at least a majority of the
directors then comprising the Incumbent Board shall, for purposes of this Plan,
be considered a member of the Incumbent Board.
"CLASS A MEMBER" means Chestnut Hill Re, Inc.
"COMPANY" means GCC Investments, LLC, a limited liability company
organized under the laws of the State of Delaware.
"CONTRIBUTED SECURITIES" shall have the meaning set forth in Section
7.01(c).
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"CONTRIBUTED SECURITIES INTEREST" means the compounded annual rate of
return with respect to the Contributed Securities which has accrued prior to the
date of this Agreement, as determined by the Advisory Committee.
"CONTRIBUTION" means, with respect to any Member and at any time, the
aggregate amount of such Member's initial capital contribution pursuant to this
Agreement and any Additional Capital Contributions pursuant to this Agreement
made to the Company by such Member at or before such time pursuant to this
Agreement, either in cash or, as permitted under this Agreement, in Contributed
Securities (the amount of which shall be the Gross Asset Value of such
Contributed Securities). A Partner's Contribution shall not be reduced on
account of any distributions of capital to such Partner or for any other reason.
"COST" means, with respect to any asset held by the Company, the direct
cost to the Company of acquiring that asset (e.g., with respect to securities of
a Portfolio Company, the price paid by the Company to the issuer or holder of
such securities for those securities, determined without regard to any finders,
brokers or similar fees). If any of the assets of the Company consist of
Contributed Securities, which are treated pursuant to Section 7.01(c) hereof as
contributed to the Company at their respective Gross Asset Values (plus
Contributed Securities Interest), the Advisory Committee shall make such
adjustments to this definition of "Cost" as it may deem to be appropriate in
order to comply with the principles of Section 704(c) of the Code, Article V and
APPENDIX B hereof, and the economic agreement among the Members with respect to
such Contributed Securities.
"DELAWARE ACT" means the Delaware Limited Liability Company Act, as
amended from time to time.
"DISPOSED INVESTMENTS" means, as of any time of determination, all
Portfolio Securities that have been sold, distributed to the Members, written
off as worthless securities, or otherwise disposed of, in whole or in part, to
the extent so distributed or disposed of at or prior to the date of
determination; provided, however, that any exchange of any securities of a
Portfolio Company for other securities or property (other than cash or cash
equivalents) shall not constitute a disposition of the original securities. For
this purpose, the following events shall be treated as partial dispositions of
securities:
(a) Each principal payment (or portion thereof) on any security that
constitutes a debt instrument for federal income tax purposes shall be treated
as a disposition of a portion of such security that is equivalent on a
percentage basis to the portion of the original principal amount of such debt
instrument represented by such principal payment;
(b) In the event that the Company agrees to capitalize any interest
that is accrued but remains unpaid on any security that constitutes a debt
instrument for federal income tax purposes and to add such interest to
principal, the amount so capitalized shall be treated, solely for purposes of
determining whether payments subsequently made to the Company with respect to
such security constitute amounts to be treated as Distributions, as a follow-on
investment in the debt securities of the issuer, and any determination regarding
the extent to which subsequent payments made to the Company with respect to the
original or any such follow-on investment in
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debt securities is properly treated as a payment of principal shall be made in
accordance with federal income tax principles;
(c) Each payment (or portion thereof) made to the Company in redemption
of any security constituting stock for federal income tax purposes that is
treated for such purposes as a distribution in part or full payment in exchange
for such stock (rather than, for example, a dividend paid on such security)
shall be treated as a disposition of the portion of such security treated for
such purposes as having been exchanged;
(d) Any partial repurchase by the issuer and any lapse or other
termination of part of any security constituting an option or warrant for
federal income tax purposes shall be treated as a disposition of a portion of
such security that is equivalent on a percentage basis to the portion of the
Company's investment in such security (as reflected in the Company's financial
records maintained in accordance with federal income tax principles) represented
by the portion of such security that was repurchased, lapsed or terminated; and
(e) With respect to any portfolio investment that is subject to a Net
Write-Down, such portfolio investment shall be treated as a Disposed Investment
to the extent of such Net Write-Down while such Net Write-Down is in effect.
"DISTRIBUTION" shall have the meaning set forth in Section 10.02.
"DISTRIBUTION DATE" shall have the meaning set forth in Section 10.03.
"DISTRIBUTION DEFICIENCY" shall have the meaning set forth in Section
10.02(f)(i).
"DISTRIBUTION PREFERENCE" means, with respect to any Member and at any
time, an amount which, if distributed to such Member at such time, would cause
the aggregate amount of distributions made to such Member and such Member's
predecessors in interest by the Company pursuant to Section 10.02(c)
(determined, with respect to distributions in kind, pursuant to 8.02) to equal
but not exceed an amount equal to such Member's (and any such predecessor's)
Aggregate Preferred Return Accrual as of such time to the extent attributable to
such Member's Contribution used by the Company to acquire Portfolio Investments
that, at such time, constitute Disposed Investments.
"EXCESS COSTS" shall have the meaning set forth in Section 10.03(a).
"EXCESS MANAGEMENT FEE PAYMENTS" shall have the meaning set forth in
the Management Agreement.
"GCX" means GC Companies, Inc.
"GPLLC AGREEMENT" means the limited liability company agreement of the
Managing Member, as amended from time to time.
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"GROSS ASSET VALUE" shall mean the fair market value of any asset of
the Company at any time, as determined in accordance with Section 6.04.
"INDEMNITEE" shall have the meaning set forth in Section 16.01.
"INTEREST RATE" shall mean that compounded annual rate of interest
selected by the Advisory Committee from time to time.
"ISSUANCE ITEMS" shall have the meaning set forth in APPENDIX B.
"MAKE-WHOLE AMOUNT" means the aggregate amount of Excess Management Fee
Payments, but only to the extent such Excess Management Fee Payments have not
been applied to reduce the Unallocated Amount. For purposes of the foregoing,
the amount deemed applied to reduce the Unallocated Amount shall equal the
actual amount applied against the Unallocated Amount pursuant to Section
10.03(a)(ii) divided by .20.
"MANAGEMENT AGREEMENT" shall have the meaning set forth in Section
5.01.
"MANAGEMENT FEE" shall have the meaning set forth in Section 5.01(a).
"MANAGING MEMBER" means Chestnut Hill Capital Partners, LLC, a limited
liability company organized under the laws of the state of Delaware.
"MEMBERS" means the Managing Member and the Class A Member.
"NET GAIN OR LOSS" means, with respect to any Company fiscal year, the
sum of the Company's:
(a) Net gain or loss attributable to the sale or exchange of Portfolio
Securities during such fiscal year;
(b) Net gain or loss deemed to have been realized by the Company,
pursuant to Section 8.02, on a distribution in kind during such fiscal year of
Portfolio Securities;
(c) Dividend and interest income for such fiscal year (if any) that is
attributable to investments in Portfolio Securities;
(d) Other items of income and gain for such fiscal year that are not
included in (a), (b) or (c), including any income exempt from federal income
tax; and
(e) A negative number equal to all Company losses for such fiscal year
not taken into account under clauses (a) or (b) above, and all expenses properly
chargeable to the Company for such fiscal year (whether deductible or
non-deductible and whether described in Section 705(a)(2)(B) of the Code,
treated as so described pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(i), or otherwise).
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For this purpose, Net Gain or Loss shall be determined in accordance
with tax accounting principles rather than generally accepted accounting
principles, and the following items shall be disregarded:
(1) All items specially allocated pursuant to Sections 9.03 and 9.04 or
APPENDIX B; and
(2) Expenses required to be capitalized and included in the Company's
adjusted tax basis in any asset or which reduce the amount realized by the
Company on the disposition of any asset.
"NET WRITE-DOWN" means, as of any time, the sum of the amounts by which
any Portfolio Security that is not a Disposed Investment in its entirety has
been determined by the Company to have a Gross Asset Value which is less than
its Cost. Unless otherwise determined by the Advisory Committee, a Portfolio
Security which has been held by the Company for six years shall be written down
to its Gross Asset Value as determined pursuant to Article VI on the sixth
anniversary of the original date that such Portfolio Security was acquired by
the Company.
"PERSON" means any individual, general partnership, limited
partnership, limited liability company, corporation, joint venture, trust,
business trust, cooperative or association and the heirs, executors,
administrators, legal representatives, successors and assigns of such Person
where the context so admits.
"PORTFOLIO COMPANY" means any entity in which the Company has made an
investment in furtherance of its primary purposes as set forth in Section 2.03
(other than a temporary investment of the Company's idle funds pending the use
of those funds in furtherance of those primary purposes) or a successor in
interest to such entity.
"PORTFOLIO SECURITY" means any security of a Portfolio Company.
"PREFERENTIAL RETURN ALLOCATION" shall mean, with respect to any Member
and as of the end of any fiscal period such Member's Aggregate Preferred Return
Accrual determined as of the end of such fiscal period.
"PREFERRED RETURN ACCRUAL" shall mean, with respect to any Member and
as of the end of any fiscal period an amount (not less than zero) equal to such
Member's Return Base as of such time multiplied by the Interest Rate. A Member's
Preferred Return Accrual for any fiscal period consisting of less than a full
calendar year shall be determined by applying a daily convention to all
calculations hereunder, which shall be determined by the Advisory Committee in
its discretion.
"PRIME RATE" with respect to any fiscal period, shall mean the prime
rate for such fiscal period as designated by BankBoston (or any successor in
interest).
"PRINCIPAL" means any manager of the Managing Member for so long as
such Person is a manager of the Managing Member, and any other Person that
becomes a manager of the
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Managing Member after the date of this Agreement for so long as such Person is a
manager of the Managing Member.
"PRIORITY RETURN AMOUNT" shall mean, with respect to any Member and at
any time, an amount which, if distributed to such Member at such time, would
cause the aggregate amount of distributions made by the Company to such Member
and such Member's predecessors in interest from the inception of the Company
through such time pursuant to Section 10.02(b) to equal but not exceed that
portion of such Member's Contribution that, at or prior to the time of
determination, is reflected in the Company's books as having been used by the
Company to acquire any Portfolio Securities that, as of such time, are Disposed
Investments (including any investments that are subject to a Net Write Down as
provided for in clause (e) in the definition of "Disposed Investment"), but only
to the extent amounts used by the Company to acquire Portfolio Securities that
are Disposed Investments have not previously been applied to reduce the
Unallocated Amount. For purposes of the foregoing, the amount deemed applied to
reduce the Unallocated Amount shall equal the actual amount applied against the
Unallocated Amount pursuant to Section 10.03(a)(ii) divided by .20. Solely with
respect to the Class A Member and for purposes of this definition, the
Contribution of the Class A Member treated as having been used by the Company to
acquire Portfolio Securities shall include the aggregate amount of the
Contributed Securities Interest, apportioned among the Contributed Securities in
the manner set forth on SCHEDULE D. In no event shall the Members' aggregate
Priority Return Amounts exceed, at any time, their aggregate Contributions at
such time.
"PUT AGREEMENT" shall have the meaning set forth in Section 10.03.
"REGULATORY ALLOCATIONS" shall have the meaning set forth in APPENDIX
B.
"RETIRED MEMBER" shall have the meaning set forth in Section 14.02.
"RETURN BASE" shall mean, with respect to any Member and as of any
determination date, an amount equal to:
(a) with respect to the Class A Member only, the Contributed Securities
Interest; plus
(b) such Member's Return Base as of the end of the date preceding such
determination date;
(c) increased by --
(1) all contributions made by such Member to fund investments
in Portfolio Securities made after the preceding determination date; plus
(2) such Member's full Preferred Return Accrual for the period
commencing immediately after the last day of the preceding determination date
and ending on such determination date; and
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(d) reduced by an amount equal to all Distributions made to such Member
on or before such determination date pursuant to Section 10.02(b) hereof.
"RETURN INTEREST" means interest calculated on the Unallocated Amount
and Cash Component pursuant to Section 10.03(a), (b) and (e).
"SECURITIES ACT" means the United States Securities Act of 1933, as
amended from time to time.
"SHORT-TERM T-BILL RATE" means, as of any determination date, a rate
equal to the rate fixed at the government auction of securities for short-term
U.S. government bills with 26 week maturities as set forth in the Wall Street
Journal dated the business day preceding such determination date, compounded
daily.
"STOCK COMPONENT" shall have the meaning set forth in Section
10.02(f)(vi).
"TAX MATTERS PARTNER" shall have the meaning set forth in Section
19.08.
"TRANSFER" means any transfer, sale, assignment, gift, pledge,
hypothecation or other disposition or encumbrance of an interest in the Company.
"TREASURY REGULATIONS" mean the Regulations promulgated by the United
States Department of the Treasury under the Code, as amended.
"UNALLOCATED AMOUNT" shall have the meaning set forth in Section
10.02(f)(iv).
"WITHOUT CAUSE" shall mean (i) for any reason or for no reason, other
than for Cause, in the Class A Member's sole discretion, or (ii) upon a Change
in Control.
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APPENDIX B
REGULATORY AND TAX ALLOCATIONS
1. REGULATORY ALLOCATIONS.
The following provisions are included in order to comply with tax rules set
forth in the Code and in the Treasury Regulations.
1.1 QUALIFIED INCOME OFFSET.
If any Member unexpectedly receives an adjustment, allocation or distribution
described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6),
and such adjustment, allocation or distribution causes such Member to have a
deficit balance in such Member's Capital Account or further reduces a balance in
such Member's Capital Account that already has a deficit balance, there shall be
allocated to such Member items of income and gain (consisting of a pro rata
portion of each item of Company income, including gross income, and gain for
such fiscal period) in an amount and manner sufficient to eliminate such
Member's deficit Capital Account balance, to the extent required by Treasury
Regulations Section 1.704-1(b)(2)(ii)(d), as quickly as possible, provided that
an allocation pursuant to this 1.1 shall be made only if and to the extent that
there would be a deficit in such Member's Capital Account after all allocations
provided for in Article IX of the Agreement and in this APPENDIX B have been
made tentatively as if this 1.1 were not included in this Agreement. The
foregoing sentence is intended to constitute a "qualified income offset"
provision as described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d), and
shall be interpreted and applied in all respects in accordance with that
Section.
1.2 GROSS INCOME ALLOCATION.
In the event that any Member has a negative Capital Account at the end of any
Company fiscal year, there shall be allocated to such Member items of Company
income (including gross income) and gain in the amount of such excess as quickly
as possible, provided that an allocation pursuant to this 1.2 shall be made only
if and to the extent that there would be a deficit in such Member's Capital
Account after all allocations provided for in Article IX of the Agreement and in
this APPENDIX B have been made tentatively as if 1.1 and this 1.2 were not
included in this APPENDIX B.
1.3 ADJUSTMENTS TO REFLECT SECTION 754 ELECTION.
To the extent that an adjustment to the adjusted tax basis of any Company asset
pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis) and such
gain or loss shall be specially allocated to the Members in a manner consistent
with the manner in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Treasury Regulations.
1.4 OFFSETTING ALLOCATIONS.
The allocations set forth in 1.1, 1.2 and 1.3 of this APPENDIX B (the
"REGULATORY ALLOCATIONS") are intended to comply with certain requirements of
Treasury Regulations Section 1.704-1(b).
<PAGE> 43
Notwithstanding any other provisions of Article IX of the Agreement and of this
APPENDIX B (other than the Regulatory Allocations), the Regulatory Allocations
shall be taken into account in allocating subsequent items of income, gain, loss
and expense among the Members so that, to the extent possible, the net amount of
such allocations of subsequent items of income, gain, loss and expense and the
Regulatory Allocations to each Member shall be equal to the net amount that
would have been allocated to each such Member pursuant to the provisions of
Article IX of the Agreement and this APPENDIX B if the Regulatory Allocations
had not occurred.
For purposes of applying the foregoing sentence, allocations pursuant to this
1.4 shall be made with respect to allocations pursuant to 1.3 of this APPENDIX B
only to the extent the Advisory Committee reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement among the
Members. Further, if allocations to the Managing Member include or are affected
by Regulatory Allocations or allocations pursuant to this 1.4 that are intended
to offset such Regulatory Allocations, the Advisory Committee, after consulting
with the Company's accountants and other advisors, shall have discretion to make
such adjustments to subsequent allocations that the Advisory Committee deems
reasonably necessary or appropriate to effectuate the economic arrangements of
the Members.
2. ADJUSTMENTS TO REFLECT CHANGES IN INTERESTS.
With respect to any fiscal period during which any Member's interest in the
Company changes, whether by reason of the admission of a Member, the withdrawal
of a Member, a non-pro rata contribution of capital to the Company or any other
event described in Section 706(d)(1) of the Code and the regulations issued
thereunder, allocations of Net Gain, Net Loss and other items of Company income,
gain, loss and expense shall be adjusted appropriately to take into account the
varying interests of the Members during such period. The Advisory Committee
shall consult with the Company's accountants and other advisors and shall select
the method of making such adjustments, which method shall be used consistently
thereafter.
3. SPECIAL ALLOCATIONS OF GROSS GAINS AND LOSSES.
In making allocations of Net Gain or Net Loss pursuant to Article IX of the
Agreement, the Advisory Committee, after consulting with the Company's tax
advisors, is authorized to separate these aggregate amounts into their
components and to allocate the components separately in order to further the
intent of such provisions of the Agreement. For example, if with respect to a
particular fiscal period the Company realizes a gross loss of $100 on a sale of
Portfolio Securities and a gross gain of $200 on a sale of other securities
resulting in a Net Gain of $100 ($200 gross gain minus $100 gross loss = $100
Net Gain), the Advisory Committee may allocate the $100 gross loss as a $100 Net
Loss in the manner required by Section 9.02, and then allocate the $200 gross
gain as a $200 Net Gain in the manner required by Section 9.01, if advised by
the Company's tax advisors that such special allocations will cause the Capital
Accounts of the Members to reflect more closely the Members' relative economic
interests in the Company.
4. TAX ALLOCATIONS.
4.1 GENERAL.
For federal, state and local income tax purposes, Company income, gain, loss,
deduction or credit (or any item thereof) for each fiscal year shall be
allocated to and among the Members in
<PAGE> 44
order to reflect the allocations made pursuant to the provisions of Article IX
of the Agreement and the provisions of this APPENDIX B for such fiscal year
(other than allocations of items which are not deductible or are excluded from
taxable income), taking into account any variation between the adjusted tax
basis and book value of Company property in accordance with the principles of
Section 704(c) of the Code.
4.2 SECTION 704(c) ALLOCATIONS; SECTION 704(c)(1)(B) AND SECTION 737 ITEMS.
In the event that the value of an item of property contributed to the Company
differs from its adjusted tax basis, allocations of depreciation, depletion,
amortization, gain, and loss with respect to such property will be made for
federal income tax purposes in a manner that takes account of the variation
between the adjusted tax basis and value of such property in accordance with
Section 704(c) of the Code using, as determined by the Advisory Committee,
either (i) the traditional method specified in Treasury Regulations Section
1.704-3(b), (ii) the traditional method with curative allocations specified in
Treasury Regulations Section 1.704-3(c), or (iii) the remedial allocation method
specified in Treasury Regulations Section 1.704-3(d).
If (i) any property is contributed to the Company by any Member, (ii) such
property is subsequently distributed to any Member, and (iii) pursuant to
Sections 704 (c)(1)(B) and 737 of the Code, any gain is required to be
recognized on such distribution by a contributing Member, the Advisory
Committee, in its sole discretion, may make such amendments to this Agreement as
it may deem necessary or appropriate, including but not limited to making a
special distribution from the Company to such contributing Member in an amount
determined by the Advisory Committee.
4.3 ALLOCATION OF NON-RECOURSE DEDUCTIONS.
Neither the Managing Member nor the Class A Member anticipate that the Company
will incur or realize any "nonrecourse deductions" (as defined in applicable
Treasury Regulations) or similar items but, if the Members anticipate at any
time that the Company may incur or realize any such items, the Managing Member
and the Class A Member may cause this Agreement to be amended to ensure to the
extent feasible that any such items are allocated in a manner that is both
consistent with the intent of the Members and likely to be respected for tax
purposes.
4.4 ISSUANCE ITEMS.
Notwithstanding any provision of this Agreement other than this APPENDIX B, any
income, gain, loss or deduction realized as a direct or indirect result of the
compensatory issuance of a Company interest by the Company to a Member (the
"ISSUANCE ITEMS") and, if necessary, all other items allocable to the Members
under this Agreement, shall be allocated among the Members so that, to the
extent possible, the net amount of such Issuance Items and other items allocated
to each Member shall be equal to the net amount that would have been allocated
to such Member if the Issuance Items had not been realized.
<PAGE> 1
EXHIBIT 10.28
-------------
PUT AGREEMENT
PUT AGREEMENT, dated as of this _____ day of August, 1999, by and among
GC Companies, Inc., a corporation organized under the laws of the State of
Delaware ("GCX"), and Chestnut Hill Capital Partners, LLC, a limited liability
company organized under the laws of the State of Delaware (the "MANAGING
MEMBER").
WHEREAS, the Managing Member is the managing member of GCC Investments,
LLC, a limited liability company organized under the laws of the State of
Delaware to make investments in equity and equity-oriented securities (the
"COMPANY").
WHEREAS, the Managing Member may receive from time to time certain
distributions ("STOCK COMPONENT DISTRIBUTIONS") pursuant to the terms of Section
10.03(c) of the Limited Liability Company Agreement of Company, dated as of the
date hereof (the "FUND AGREEMENT").
WHEREAS, GCX and the Managing Member wish to set forth the terms and
conditions under which GCX may require the Managing Member to use such Stock
Component Distributions to purchase common shares of GCX (the "GCX COMMON
STOCK").
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
SECTION 1.0. GCX PUT RIGHT. On or within five days following the date
that any Stock Component Distribution is made to the Managing Member pursuant to
the terms of Section 10.03(c) of the Fund Agreement, GCX shall have the right to
require the Managing Member, upon written notice to the Managing Member, to use
such Stock Component Distribution to purchase GCX Common Stock at a per share
price determined in accordance with Section 1.1 hereof. The put rights set forth
in this Agreement shall expire and be of no further force or effect if the
Managing Member is removed as the managing member of Company "Without Cause" as
provided in Section 14.02(a) of the Fund Agreement.
SECTION 1.1. PURCHASE PRICE OF COMMON STOCK. The price per share of
Common Stock purchased by the Managing Member pursuant to Section 1.1 hereof
shall be equal to the closing price of the Common Stock on the New York Stock
Exchange on the day prior to the Distribution Date (as defined in the Fund
Agreement) for the Stock Component (as defined in the Fund Agreement) giving
rise to such Stock Component Distribution.
SECTION 1.2. CANCELLATION OF RIGHTS BECAUSE OF STOCK PRICE. The rights
of GCX set forth in Section 1.0 hereof shall not be exercisable if the closing
price of the GCX Common Stock on the New York Stock Exchange on the date that
such Stock Component Distribution is made to the Managing Member pursuant to the
terms of Section 10.03(c) of the Fund Agreement is 80% or less of the average
closing price of the GCX Common Stock on the New York Stock
<PAGE> 2
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Exchange on each of the 30 days prior to the Distribution Date for the Stock
Component giving rise to such Stock Component Distribution.
SECTION 1.3. WITHHOLDING TAXES. If GCX in its discretion determines
that it is obligated to withhold any tax in connection with the exercise of the
put right set forth herein, the Managing Member hereby agrees that it will
reimburse GCX on demand, in cash, in an amount sufficient to satisfy the
withholding obligation of GCX.
SECTION 1.4. NOTICES. All notices, requests, consents, approvals and
statements shall be in writing and shall be deemed to have been properly given
by personal delivery or if mailed from within the country of the sender by air
mail, postage prepaid, or if sent by prepaid telegram, electronic facsimile
transmission or telex, or if sent by courier service, addressed at its address
set forth in SCHEDULE A to the Fund Agreement, or, in each case, to such other
address or addresses as the addressee may have specified by written notice as
aforesaid to the other parties.
SECTION 1.5. BINDING ON SUCCESSORS. This Agreement shall be binding
upon and it shall inure to the benefit of the respective heirs, successors,
assigns and legal representatives of the parties hereto.
SECTION 1.6. COUNTERPARTS. This Agreement or any amendment hereto may
be signed in any number of counterparts, each of which shall be an original, but
all of which taken together shall constitute one agreement (or amendment, as the
case may be).
SECTION 1.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
SECTION 1.8. CONTRACT CONSTRUCTION. The invalidity or unenforceability
of any one or more provisions of this Agreement shall not affect the other
provisions, and this Agreement shall be construed in all respects as if any such
invalid or unenforceable provision(s) were omitted.
SECTION 1.9. SECTION HEADINGS. Captions in this Agreement are for
convenience only and do not define or limit any term of this Agreement.
<PAGE> 3
-3-
IN WITNESS WHEREOF, the undersigned have executed this Put Agreement as
of the day, month and year first above written.
GC COMPANIES, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
CHESTNUT HILL CAPITAL PARTNERS, LLC
By: __________________________________
Senior Manager
<PAGE> 1
EXHIBIT 10.29
MANAGEMENT AGREEMENT
AGREEMENT dated August 11, 1999, between Chestnut Hill Capital
Partners, LLC (the "MANAGING MEMBER") and Chestnut Hill Re, Inc. (the "CLASS A
MEMBER").
In consideration of the premises and the agreements herein contained,
and intending to be legally bound hereby, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined herein
shall have the respective meanings given them in the Limited Liability Company
Agreement of GCC Investments, LLC (the "Company") of even date herewith, as
hereafter amended (the "FUND AGREEMENT").
SECTION 2. PAYMENT OF OPERATING EXPENSES. The Managing Member shall
assume all "normal operating expenses" of the Company and the GCC Investments,
Inc. Incentive Pool Plan as adopted effective November 1, 1996, as amended from
time to time (the "Plan"), on the terms and conditions herein set forth. Normal
operating expenses INCLUDE all recurring routine expenses incident to conducting
the affairs of the Company and the investment program under the Plan, including
but not limited to, expenses incurred in investigating investment opportunities
for the Company or under the Plan; usual and necessary office and clerical
salaries and benefits of the employees of the Managing Member; normal investment
banking, investment management, legal, custodial, auditing and accounting
services provided to the Company or with respect to the Plan; expenses for
administrative services, office space and facilities, utility and other overhead
charges; expenses for travel and entertainment incurred in connection with the
business of the Company or the investment program under the Plan; telephone,
telegram, cablegram, telegraph and similar charges; postage and courier
expenses; dues, subscriptions, office supplies and similar expenses; fees for
bookkeeping and other similar services relating to the business of the Company
or the investment program under the Plan and other routine expenses incurred in
connection with the Company's affairs or the investment program under the Plan.
Normal operating expenses EXCLUDE, without limitation, the following expenses of
the Company and the investment program under the Plan, which shall be assumed by
the Managing Member: any taxes which may be assessed against the Company or the
investment program under the Plan; commissions, brokerage fees or similar
charges incurred in connection with the purchase and sale of Portfolio
Securities; all expenses relating to litigation and threatened litigation
involving the Company or the investment program under the Plan; extraordinary
investment banking, investment management, legal, custodial, auditing and
accounting services provided to the Company or with respect to the Plan; and all
other nonrecurring or extraordinary expenses properly chargeable to the business
of the Company or the investment program under the Plan.
SECTION 3. MANAGEMENT FEE. (a) The Company shall pay the Managing
Member during the term of this Agreement an annual management fee for the
investment advice to be provided hereunder which shall be determined by the
"Senior Manager" of the Managing Member, as such term is defined in the limited
liability company agreement of the Managing
<PAGE> 2
-2-
Member, in consultation with the Class A Member, and approved by the Advisory
Committee (the "MANAGEMENT FEE"). The proposed Management Fee for each fiscal
year shall be submitted by the Senior Manager to the Advisory Committee at least
forty-five (45) days prior to the beginning of each such fiscal year. The
proposal shall include an expense budget itemizing normal operating expenses in
reasonable detail. The proposed Management Fee shall not exceed in any fiscal
year the greatest of (1) 2% of the Cost of Portfolio Securities held by the
Company at the end of the prior fiscal year, (2) $4 million or (3) such other
amount as is approved by Richard A. Smith, for so long as he serves as Chairman
of the Advisory Committee, and by the Advisory Committee as a group if Mr. Smith
is no longer Chairman.
(b) From time to time during each fiscal year, the Managing Member
shall submit written invoices and the like to the Class A Member for the
expenses (whether normal operating expenses or not) attributable to the Company
and, for normal operating expenses, such written invoice shall be generally in
accordance with the expense budget approved pursuant to Section 3(a). Any
material deviation from such expense budget which would cause the aggregate
expense budget to exceed an amount equal to the greatest of (1) 2% of the Cost
of Portfolio Securities, (2) $4 million or (3) the amount approved pursuant to
clause (b)(3) above, shall require the approval of Richard A. Smith, for so long
as he serves as Chairman of the Advisory Committee, and by the Advisory
Committee as a group if Mr. Smith is no longer Chairman. The Class A Member
shall promptly pay, or cause to be paid, all such invoices in the manner
directed by the Managing Member.
(c) The amount of the Management Fee during each fiscal year shall
equal the total amount of expenses of the Company and the Plan incurred or
assumed (whether or not invoiced) by the Managing Member during such fiscal year
pursuant to this Agreement. Any portion of the Management Fee which exceeds the
limitation set forth in the last sentence of clause (a) above shall constitute
"Excess Management Fee Payments" for purposes of the Fund Agreement.
SECTION 4. MANAGING MEMBER DUTIES. The Managing Member shall maintain a
staff trained and experienced in identifying and providing assistance to growth
companies. Such staff shall be adequate for the performance of the Managing
Member's duties under this Agreement. Services to be rendered by the Managing
Member shall include assistance within the areas of expertise of its staff and,
when considered necessary by the Managing Member, the services of its officers
and employees as directors, consultants and advisors for Portfolio Companies and
companies invested in under the Plan. In addition to the services of its own
staff, the Managing Member shall, after consultation with the Company concerning
services to be rendered at the request of the Company, arrange for and
coordinate the services of other professionals and consultants.
SECTION 5. SECONDARY INVESTMENTS. (a) Upon the consummation of any
Secondary Investment (as defined below), an amount equal to the sum of (a) three
percent (3%) of the first $50 million invested by the Class A Member or an
Affiliate of the Class A Member as part of such Secondary Investment and (b) one
and one-half percent (1.5%) of any amount in excess of $50 million invested as
part of such Secondary Investment will be paid to the Managing Member. Such
amount shall be paid in cash in three substantially equal installments, with the
first installment made upon the closing of the relevant Secondary Investment and
the second and third installments made on the first and second anniversary of
such closing. Amounts to be paid
<PAGE> 3
-3-
in installments after the first installment shall be credited with interest
until paid at an annual rate specified by the Advisory Committee from time to
time.
(b) Notwithstanding the foregoing, the Advisory Committee may cause the
Class A Member or its Affiliate to defer any payment to be made under this
Section 5 to the extent such payment would not be deductible by the Class A
Member or its Affiliate for Federal income tax purposes. Any such deferral will
be credited with interest, until paid at a time when it would be deductible by
the Class A Member or its Affiliate, at an annual rate specified by the Advisory
Committee from time to time.
(c) A "Secondary Investment" shall mean an investment made by the Class
A Member or an Affiliate of the Class A Member in a Portfolio Company to
increase the direct or indirect interest of the Class A Member or its Affiliates
in a Portfolio Company or secure or supplement control positions in a Portfolio
Company which the Advisory Committee determines to be a core investment.
SECTION 6. TERM OF AGREEMENT. This Agreement shall terminate on the
earlier of (a) such time as the liquidation of the Company has been completed,
and (b) upon the Managing Member's bankruptcy, dissolution or withdrawal from
the Company or the conversion of the Managing Member's interest to a Retired
Member interest.
SECTION 7. AMENDMENT. This Agreement can be modified or amended only by
a writing signed by the parties hereto, with the written consent of the Advisory
Committee.
SECTION 8. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
<PAGE> 4
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IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date first above written.
CHESTNUT HILL RE, INC.
By: ____________________________________
Title: _________________________________
CHESTNUT HILL CAPITAL PARTNERS, LLC
By: ____________________________________
Senior Manager
<PAGE> 1
EXHIBIT 11.1
------------
GC COMPANIES, INC.
OCTOBER 31, 1999
EXHIBIT TO FORM 10-K
Computation of weighted average number of shares outstanding used in determining
basic and diluted earnings (loss) per share:
Year Ended October 31,
(In thousands) 1999 1998 1997
----- ----- -----
BASIC
1. Weighted average number of
common shares outstanding 7,715 7,710 7,728
===== ===== =====
DILUTED (A)
1. Weighted average number of
common shares outstanding 7,715 7,710 7,728
2. Diluted effect of shares issuable
on exercise of stock options, net
of shares assumed to be purchased
out of proceeds of market price -- -- 40
----- ----- -----
3. Weighted average number of shares
used in diluted per share
computations 7,715 7,710 7,768
===== ===== =====
(A) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083.
<PAGE> 1
GC COMPANIES, INC.
----------------------------------------------------------------------
1999 Annual Report
[GC COMPANIES, INC. LOGO]
<PAGE> 2
GC COMPANIES, INC.
- --------------------------------------------------------------------------------
manages a pool of the Company's capital that is utilized to make investments in
a variety of industries and operates General Cinema's domestic and international
motion picture exhibition circuits presently consisting of 1,041 screens at 134
locations in the United States as well as 194 screens at 19 locations in South
America and Mexico.
<PAGE> 3
DEAR SHAREHOLDERS:
- --------------------------------------------------------------------------------
The transition of your Company that began in fiscal 1998 continued throughout
fiscal 1999. We have continued to build value through our investment portfolio
and our international theatre joint venture, and we have made significant
progress in the ongoing restructuring of our domestic theatre business. The
performance of our investment portfolio has been impressive and three of our
five private investments were taken public by the end of December, 1999,
producing substantial unrealized gains in our portfolio. The international
theatre operations continued to expand and show great promise with new theatres
opening in Argentina, Brazil and Chile. Our domestic theatre circuit, however,
still faces significant challenges. The continuing impact of competition from
new theatre construction by other exhibitors in the United States has resulted
in below-expected levels of business at both our new and older units, which has
resulted in disappointing domestic operating results.
Investment Portfolio: Building Value for GC Companies
Our corporate strategy of diverting excess corporate capital out of the domestic
theatre business into a portfolio of investment opportunities has generated
considerable returns for the Company. The performance of our investment group
has greatly contributed to the financial strength of our Company. The Company's
original cash position of $64.0 million, invested gradually over the past six
years, has grown to a portfolio that is today valued at $210.0 million, (with
private investments valued at cost) plus $9.0 million of net cash realized from
the divestiture of investments.
Among the investment group's highlights for fiscal 1999 was the initial
public offering ("IPO") of PrimaCom, a German cable television systems operator,
which was listed on the German Neuer Markt. We have now sold this entire
investment - a portion in the fourth quarter and the balance subsequent to the
end of the year. The total value realized was $41.2 million, with an original
cost of $13.3 million and a 27% time-weighted return on our investment.
In December, 1999, after the close of the Company's fiscal year, our
two Internet-related investments also completed IPO's. These were El Sitio, an
Internet provider of global and country-specific content targeting Spanish and
Portuguese speaking people in Latin America that is now traded on NASDAQ under
the symbol "LCTO," and MotherNature.com, a leading Web-based retailer of
vitamins, supplements and minerals that is now traded on NASDAQ under the symbol
"MTHR".
In addition to El Sitio, MotherNature.com and PrimaCom, the Company's
investment portfolio at October 31, 1999 included publicly-held investments in
Global TeleSystems Group, Inc., an international (primarily European)
telecommunications company that is publicly traded on the NYSE under the symbol
"GTS"; and the remaining small portion of our investment in GrandVision, an
optical and photo retailer that is publicly traded on the French Exchange under
the symbol "GPS". Privately-held investments include Fuelman, a leading provider
of vehicle fleet management information services and American Capital Access, a
financial guaranty insurance company. The aggregate carrying value of the
investment portfolio at fiscal year-end 1999 was $157.6 million. The current
portfolio is valued at $210.0 million with an original cost of $102.0 million.
After our fiscal year-end, the Company made two new investments, a
$10.4 million investment in VeloCom, Inc., a facilities-based provider of voice,
data and Internet communications services in Latin America, and an $8.0 million
investment in Vanguard Modular Building Systems, LLC, a leading regional
provider of commercial modular complexes, for rental mostly to the school
market.
We are pleased by the performance of our investment group and the value
it is building for your Company.
International Theatres: Capitalizing on the South American Opportunity
GC Companies' international theatre circuit is an important component of our
strategy to both improve profitability and build value. Our international
strategy is to establish a leading presence in under-served markets such as
Argentina, where there is a proven demand for a high-quality movie-going
experience. The high level of patronage experienced in our existing South
American locations, the density of the population in the major cities, such as
Buenos Aires, and the scarcity of quality megaplexes all contribute to our
expectations of significant profit contributions from new theatres in these
markets. In fiscal 1999, we made significant progress in both Argentina and
Chile in expanding our presence with the completion of four new theatres with a
total of 46 screens and opened our first theatre in Brazil in a suburb of Sao
Paulo. After our fiscal year-end, we executed a letter of intent to sell our
five-theatre investment in Mexico to a local competitor, thereby allowing us to
focus our capital and efforts on growth in South America, where our competitive
position is much stronger. Excluding the Mexican investment, we have a total of
13 locations and 124 screens in South America as of October 31, 1999.
GC COMPANIES, INC.
----------------------------
1
<PAGE> 4
Domestic Theatres: A Year of Transition
In fiscal 2000, GC Companies' domestic theatre operations remain our challenge
for improvement in profitability and return on capital. The domestic theatre
business is under immense pressure due to the unprecedented build-up of megaplex
theatres throughout the country over the past three years that has resulted in a
dramatic increase in the number of screens. This has negatively impacted our
patronage and our profitability. We believe that the pace of new building has
finally slowed and that this will allow the market to begin to absorb these new
theatres without additional material declines in patronage for existing
theatres. However, this will take some time as the building commitments made by
the industry are completed in calendar 2000 and 2001.
General Cinema Theatres has been conservative in its domestic building
program in the last few years and is committed to only four new theatres in
fiscal 2000 and none beyond that. Commitment of further new capital to the
domestic theatre business will require a return to profitability in our existing
theatre operations. We believe we are making important strides in this direction
by reducing central overhead and taking price increases where appropriate.
In fiscal 1998, we made the strategic decision to concentrate the
Company's resources on its core geographic areas of the Northeast and Midwest.
In these areas, we have built solid profitable market positions and can more
effectively compete. In fiscal 1999, we closed or sold 21 sites and 111 screens.
In line with this geographically focused strategy, we took action in the fourth
quarter of fiscal 1999 to more effectively manage General Cinemas Theatres'
circuit. By centralizing the Company's existing regional offices into our
headquarters in Chestnut Hill, Massachusetts, we expect to save approximately
$10.0 million per year in general and administrative expenses by fiscal 2001.
During the past few years, GC Companies' overall theatre business has
not been without challenges. We have been in the middle of a domestic "work-out"
while building our international presence. We believe we are taking the
appropriate actions to position our exhibition assets for profitable growth for
the long-term - focusing on extremely select domestic theatre markets and
international opportunities, and redirecting and consolidating resources where
necessary. Our screen count for fiscal year-end 1999 reflects these strategic
efforts. As of October 31, 1999, the Company operated 1,052 screens at 138
locations in 23 states as well as 186 screens at 18 locations in Mexico and
South America. This compares with 1,045 screens at 150 locations in 24 states as
well as 120 screens at 13 locations in Mexico and South America at the end of
fiscal 1998.
Financial Review: Building a Balanced Company
For fiscal year 1999, GC Companies reported a net loss of $2.3 million, or $0.30
per share, which includes charges of approximately $6.7 million relating to the
restructuring of the domestic theatre business. In addition, favorable
settlements with landlords and changes in the estimated cost of theatre closures
resulted in a $9.3 million favorable impact to operating results. This compares
with a net loss in fiscal 1998 of $41.6 million, or $5.39 per share, which
included a charge for specific theatre asset impairments and certain lease exit
cost estimates of approximately $68.2 million (approximately $40.9 million after
taxes). Revenues for fiscal 1999 were $386.2 million compared with $407.4
million last year. GC Companies had an operating loss of $13.7 million for
fiscal 1999 compared with an operating loss of $66.9 million in fiscal 1998.
Although we have not been satisfied with our performance during the
past few years, we are keenly aware of the market challenges affecting our
financial results, and we are confident in our strategy to address these issues.
To accomplish this, we are building on the success of GC Companies' investment
business and international theatre business and focusing our energies on the
continued restructuring of the domestic theatre operations.
We are keenly aware of our need to enhance shareholder value and
believe that our current strategies are the best way to accomplish this. In
closing, we would like to thank all of our employees for their dedication to GC
Companies, our customers for their loyal patronage, and of course, our
shareholders for their continued support.
Sincerely,
/s/ Richard A. Smith /s/ Robert A. Smith
Richard A. Smith Robert A. Smith
Chairman and President and
Chief Executive Officer Chief Operating Officer
January 18, 2000
GC COMPANIES, INC.
----------------------------
2
<PAGE> 5
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) Fiscal Years(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands except for per share amounts) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Revenues $386,150 $407,386 $445,133 $443,984 $450,306
Operating earnings (loss) (13,658) (66,898) 11,822 20,373 18,001
Equity losses in theatre affiliates (7,468) (539) -- -- --
Investment income (loss), net 20,116 (1,378) 13,880 10,107 (2,316)
Interest expense (2,430) (1,048) (586) (639) (631)
Gain (loss) on disposition
of non-operating assets (382) 593 (100) (617) (300)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes (3,822) (69,270) 25,016 29,224 14,754
Income tax benefit (provision) 1,529 27,708 (10,257) (11,982) (6,049)
-------- -------- -------- -------- --------
Net earnings (loss) $ (2,293) $(41,562) $ 14,759 $ 17,242 $ 8,705
-------- -------- -------- -------- --------
Weighted average common shares outstanding:
Basic 7,715 7,710 7,728 7,816 7,811
-------- -------- -------- -------- --------
Diluted 7,715 7,710 7,768 7,858 7,865
-------- -------- -------- -------- --------
Net earnings (loss) per common share:
Basic $ (0.30) $ (5.39) $ 1.91 $ 2.21 $ 1.11
-------- -------- -------- -------- --------
Diluted $ (0.30) $ (5.39) $ 1.90 $ 2.19 $ 1.11
Depreciation and amortization $ 16,256 $ 19,180 $ 19,229 $ 19,369 $ 19,367
Marketable equity securities and
portfolio investment assets $157,613 $139,931 $ 87,078 $ 50,187 $ 44,977
Total assets $375,607 $389,961 $339,600 $314,303 $300,067
Long-term capital lease obligations $ 990 $ 1,722 $ 2,254 $ 3,059 $ 3,623
Revolving credit facility $ 13,000 $ 16,775 $ -- $ -- $ --
Other long-term liabilities $ 36,297 $ 33,523 $ 31,912 $ 29,029 $ 28,156
Number of movie screens
Domestic 1,052 1,045 1,113 1,159 1,180
International(2) 186 120 53 -- --
Number of locations
Domestic 138 150 175 189 196
International(2) 18 13 5 -- --
</TABLE>
(1) The selected financial data are derived from the consolidated financial
statements of the Company.
(2) International theatres represent the Company's investment in
international theatre affiliates in South America and Mexico which are
accounted for under the equity method.
GC COMPANIES, INC.
----------------------------
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 COMPARED WITH YEAR ENDED OCTOBER 31, 1998
---------------------------------------------------------------------
Net losses decreased $39.3 million to a loss of $2.3 million in 1999 from a loss
of $41.6 million in 1998. The loss in 1999 included $19.9 million of pre-tax
gains associated with the Company's marketable securities and investment
portfolio, a pre-tax gain of $2.1 million related to a sale of a theatre in New
York, a charge of $6.7 million relating to restructuring of the domestic theatre
business, a charge of $3.5 million to write-off the net book values of impaired
theatre assets, a charge of $3.6 million to accrue for lease termination costs,
a gain of $8.5 million related to lease settlements less than the amount
previously accrued and a gain of $7.9 million related to change in estimates of
lease termination costs. Net losses in 1998 included a $28.6 million pre-tax
impairment charge on theatre assets, a pre-tax charge of $39.6 million primarily
relating to the cost of exiting certain leases, a $12.8 million pre-tax gain
related to the sale of a theatre in Texas and $1.0 million of interest expense.
Theatre operations showed a loss of $6.2 million in 1999 compared to a loss of
$58.6 million in 1998. Operating losses after corporate expenses for 1999 were
$13.7 million, an improvement of $53.2 million from a loss of $66.9 million in
1998.
Theatre Revenues
Total revenues decreased 5.2% to $386.2 million for the year ended October 31,
1999 from $407.4 million for the same period in 1998 primarily attributable to a
10.5% decrease in patronage partially offset by a 3.4% increase in concession
sales per patron, a 5.0% increase in the average ticket price and a $4.2 million
increase in other revenue. The decrease in patronage was primarily attributable
to competitor impacts in certain markets and a reduction in average theatre
screens operated by the Company in 1999 compared to 1998. The opening of
megaplexes by the Company's competitors has drawn audiences away from certain of
the Company's theatre locations. During 1999, the Company operated an average of
1,063 screens at 142 locations compared to an average of 1,121 screens at 167
locations in 1998. The decrease in the average screens and units is primarily
due to the closing of 19 theatres with 96 screens during the fourth quarter of
1998. In 1999, the Company opened nine new theatres with 118 screens, which was
offset by the closing of 21 theatres with 111 screens. The Company operated
domestically 1,052 screens at 138 locations at October 31, 1999 compared to
1,045 screens at 150 locations at October 31, 1998. The growth in concession
sales per person was principally due to the continued rollout of new products,
increased consumption and certain price increases. The increase in average
ticket price was due to price increases in certain markets. The increase in
other revenues is primarily due to income generated from the management of
theatres owned by independent third parties and increased in-theatre advertising
revenues.
Costs of Theatre Operations
Cost of theatre operations (film rentals, concessions, theatre operating and
administrative expenses as well as depreciation and amortization) decreased in
absolute value by $13.0 million to $398.3 million for the year ended October 31,
1999 from $411.3 million in the same 1998 period. However, as a percentage of
total revenues, the cost of theatre operations was 103.1% for the year ended
October 31, 1999 compared to 101.0% for the same period in 1998. This increased
percentage of the cost of theatre operations to total revenues for the current
year compared to the same period in 1998 was primarily due to certain fixed
operating costs, pre-opening expenses incurred in the opening of nine new
theatres during the year compared to five new locations in 1998, and lower film
and concession margins partially offset by a reduction in depreciation expense
due to the impairment charge recorded in the fourth quarter of 1998. In
addition, in the third quarter of fiscal 1998, the Company settled certain
litigation, which had previously been accrued for, thereby lowering the cost of
theatre operations by $1.6 million during 1998. Fixed expenses such as occupancy
costs and administrative expenses are compared to a lower revenue amount
generated in the current year than the previous year. Occupancy costs have
increased as a percentage of total revenues in 1999 compared to the same period
in 1998 primarily as a result of the Company's operating lease arrangement
associated with new theatres. The average pre-opening costs associated with a
new multiplex theatre range from $0.2 million to $0.5 million but may vary
depending on several factors including, among other things, number of screens,
location of the theatre and additional amenities which may be offered in the
theatre such as premium auditoriums and cafes. Lower film margins were due to
higher rental charges on certain film product primarily during the summer
season. Overall concession profitability increased due to a change in product
mix that resulted in a higher concession spending per patron and improved
concession margin dollars.
GC COMPANIES, INC.
----------------------------
4
<PAGE> 7
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Gain on Disposition of Theatre Assets
During the year ended October 31, 1999, the Company sold three theatres in
Michigan, two theatres in Texas, a theatre in New York, a theatre in Florida and
other miscellaneous assets generating net proceeds of $6.6 million and a pre-tax
gain of $2.1 million. In 1998, the Company sold a theatre in Texas resulting in
a pre-tax gain of $12.8 million. The theatre asset sales and resulting gains
recognized by the Company in 1999 and 1998 are not indicative of possible
results from future sales.
Impairment and Restructuring
In 1999, the Company recorded a net gain of $2.6 million related to the
impairment of theatre assets and the restructuring of the domestic theatre
business. A charge of $68.2 million was recorded in 1998 related to the
impairment of theater assets and to establish a reserve for early lease
terminations. The components of these charges are discussed below.
During the ordinary course of business, management has and will make
determinations that impact the recoverability of theatre assets. Such decisions
have impacted operations in 1999, 1998 and 1997. As part of the Company's annual
budgeting process, management has and will review the long-lived assets used in
the theatre business for impairment. This analysis has and will take place at
the individual theatre level, which management believes is the lowest level for
which there are identifiable cash flows. In addition, management has and will
review internal management reports as well as monitor current and potential
future competition in its markets for indicators of impairment of individual
theatre assets. As a result of this analysis, management has and will determine
whether impairment has occurred, whether a write-down of the asset carrying
value to fair value is required and whether to abandon or continue to operate
the theatre. The impairment loss is measured as the amount by which the carrying
value of the asset exceeds the fair value, which is based on management's
estimates. The primary technique to determine fair value is to discount the
future cash flows of the theatre. There is considerable management judgement
necessary to determine the future cash flows of a theatre, and, accordingly,
actual results could vary significantly from such estimates.
Significant industry building of new megaplexes has caused the Company
to re-assess the value and utility of certain theatre locations through its
internal evaluation process described above. There continues to be an increase
in competition in certain markets as a result of the opening of megaplexes by
competitors, which have tended to, and are projected to draw audiences away from
certain theatre locations that the Company operates.
The evaluation described above resulted in an impairment charge of $3.5
million in 1999 and $28.6 million in 1998. The significant decrease in the
amount of impairment charges in 1999 was due to the bulk of decisions regarding
individual theatre assets being made in 1998.
As described above, the Company has and will identify the impaired
theatres management has committed to closing in the next 12 months and record a
liability for the estimated costs of exiting certain leases. The Company's
termination reserves established for its leases on properties it has committed
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. While in most instances, the Company has accurately predicted
its costs to terminate leases, there have been circumstances where there was a
material difference; therefore, the amounts the Company will eventually be
obligated for could differ materially from the amounts included in the original
reserve.
In 1999, the Company accrued additional reserves of $3.6 million for
theatres that management has committed to exiting within the next 12 months in
accordance with the evaluation process described above. In 1998, the Company
recorded a $39.6 million reserve to cover such lease abandonments.
During the year, the Company executed the termination of 12 leases
resulting in payments of approximately $12.2 million and made additional
payments of $2.7 million for other related closing costs. Of the lease
terminations executed by the Company in 1999, and previously accrued for in
1998, the payment was less than the amount previously accrued by $5.8 million,
partially offset by amounts accrued for lease terminations executed in 1999 and
not accrued in 1998 of $1.5 million. In addition, the Company either reduced or
reversed the amount reserved on certain theatre locations by $7.9 million due to
a number of factors, including revisions made in the estimates to terminate the
leases because negotiations with landlords indicate that the buyout will not be
as high as originally anticipated, because anticipated competitor
GC COMPANIES, INC.
----------------------------
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
construction did not occur in the market or management has determined that the
location will not be closed in the foreseeable future.
In the fourth quarter of 1999, the Company's Board of Directors
approved a restructuring plan of its domestic theatre operations to centralize
its existing regional offices into the Company's home office located in
Massachusetts. Accrued restructuring charges of $6.7 million include the cost of
involuntary employee termination benefits for 45 employees of approximately $1.5
million, the cost of a voluntary special retirement program of $4.3 million for
30 employees, which will be funded by the Company's pension asset, and a charge
of $0.9 million for subleasing certain regional office space. Employee
termination benefits include severance, medical and other benefits and
outplacement services. No cash payments have been made in 1999 related to this
restructuring charge. Cash payments are anticipated to be made over the next 18
months.
Corporate Expenses
Corporate expenses in 1999 of $6.2 million were comparable to 1998.
Equity Loss in Theatre Affiliates
The Company recorded net equity losses in theatre affiliates of $7.5 million for
1999 compared to $0.5 million in 1998. The equity losses primarily resulted from
the Company's international theatre joint ventures and were primarily due to a
charge of $3.5 million related to a permanent loss in value of the Company's
Mexican investment and administrative and start-up costs incurred in South
America in opening new theatres in Argentina, Brazil and Chile. In addition,
operating results in the international joint ventures were negatively impacted
by a soft economic environment in Chile and Argentina.
Investment Income (Loss), Net
The Company recorded investment income of $20.1 million for the year ended
October 31, 1999 compared to an investment loss of $1.4 million for the same
period in 1998. The Company's investment income for the year ended October 31,
1999 included the unrealized pre-tax gain on the PrimaCom trading securities of
approximately $14.7 million, the realized pre-tax gain on the GTS trading and
available-for-sale securities sold during fiscal 1999 of approximately $10.3
million, the realized pre-tax gain recognized on the shares of PrimaCom trading
securities of $5.2 million, the realized gain of $2.1 million on the lifting of
restrictions on GrandVision escrow shares held by the Company, partially offset
by the realized pre-tax loss of $2.9 million on the GrandVision
available-for-sale securities sold during the fourth quarter, performance-based
compensation of $0.9 million and miscellaneous investment losses of $0.1
million. This income was partially offset by the impairment charge on the
Teletrac investment of $8.3 million.
The Company's investment loss of $1.4 million in 1998 included
performance-based compensation of $8.8 million earned by certain employees as a
result of the successful completion of the initial public offering by GTS during
the year, equity losses of $0.6 million for those investments accounted for
under the equity method and included as part of portfolio investments, partially
offset by the unrealized pre-tax gain of $6.8 million on the GTS securities
designated as trading and $1.3 million of dividend and interest income.
Interest Expense
The Company's interest expense increased $1.4 million to $2.4 million for the
year ended October 31, 1999 from $1.0 million for the same period in 1998 due to
increased borrowings outstanding during the year under the Company's revolving
credit facility. During the same period in 1998, the Company had outstanding
borrowings under its revolving credit facility only during the fourth quarter.
Income Tax Expense
The Company's effective tax rate was 40.0% in 1999, unchanged from 1998.
GC COMPANIES, INC.
----------------------------
6
<PAGE> 9
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 COMPARED WITH YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
Net earnings (loss) decreased $56.3 million to a loss of $41.6 million in 1998
from earnings of $14.8 million in 1997. The loss in 1998 included a $28.6
million pre-tax impairment charge on theatre assets, a pre-tax charge of $39.6
million primarily relating to the cost of exiting certain leases, a $12.8
million pre-tax gain related to the sale of a theatre in Texas and $1.0 million
of interest expense. Net earnings in 1997 included a pre-tax gain of $9.0
million from a share-for-share exchange of GC Companies' ("GCC" or the
"Company") minority investment in Vision Express into GrandOptical-PhotoService
and a subsequent sale of a portion of those shares. GCC's 1997 net earnings also
included a $10.3 million pre-tax gain on the sale of seven theatre units in
Oklahoma, a $7.4 million pre-tax impairment loss relating to the Company's
theatre circuit and $4.3 million of dividend and interest income from short-term
investments. Theatre operations showed a loss of $58.6 million in 1998 when
compared to a profit of $18.9 million in 1997. Operating earnings (loss) after
corporate expenses for 1998 were $66.9 million, a decrease of $78.7 million from
$11.8 million in 1997.
Theatre Revenues
Revenues of $407.4 million were 8.5% below 1997 revenues of $445.1 million. This
decrease was principally due to a 12.4% reduction in patronage partially offset
by a 7.1% increase in concession sales per patron and a 3.3% increase in average
ticket price. The decrease in patronage was mainly attributable to competitor
impacts in certain markets and a reduction in screens, primarily the result of
the theatres closed in the fourth quarter of 1998. The opening of megaplexes by
the Company's competitors have tended to, and are projected to, draw audiences
away from certain of the Company's older multiplex theatre locations. The
Company operated domestically 1,045 screens at 150 locations at October 31, 1998
compared with 1,113 screens at 175 locations at October 31, 1997. The growth in
concession sales per person was principally due to the continued roll out of new
products, increased consumption and certain price increases. The increase in the
average ticket price was due to increases in ticket prices in certain markets
during the year.
Cost of Theatre Operations
Cost of theatre operations (film rentals, concessions, theatre operations and
administrative expenses and depreciation and amortization) decreased 4.4% to
$411.3 million in 1998 from $430.0 million in the previous year. As a percentage
of revenues, the cost of theatre operations was 101.0% in 1998 compared to 96.6%
in 1997 primarily due to higher theatre operations and administrative expenses.
The theatre operations and administrative expenses, as a percentage of
revenues, were 56.8% in 1998 compared to 52.0% in 1997. The percentage increase
was principally due to increased occupancy costs as a result of the Company's
operating leasing arrangement for new assets and increased costs associated with
the new units opened in 1998, higher variable labor costs primarily due to a
full year's impact of the minimum wage increase in 1997, costs associated with
the start-up of the Sundance Cinema theatres and repairs required during the
year at certain of our older locations. These increases were partially offset by
the settlement of certain litigation, which had previously been accrued for,
resulting in a credit to the cost of theatre operations of $1.6 million in the
third quarter of 1998. In addition, concession margins improved primarily due to
product mix.
Gain on Disposition of Theatre Assets
The Company recorded a gain on the disposition of theatre assets of $11.3
million compared to a gain of $11.0 million in 1997. In October 1998, the
Company disposed of a theatre in Texas, resulting in a gain of $12.8 million and
disposed of miscellaneous theatre assets throughout the year recognizing a loss
of approximately $1.5 million. In 1997, the Company sold several theatres it
operated in Oklahoma for $15.8 million realizing a gain of $10.3 million and
sold miscellaneous assets during the year, realizing a gain of approximately
$0.7 million.
GC COMPANIES, INC.
----------------------------
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Gain (Loss) on Impairment and Restructuring
During the ordinary course of business, management makes determinations that
impact both the recoverability of theatre assets and potential lease termination
charges. Such decisions have impacted operations in both 1997 and 1998. As part
of the Company's annual budgeting process, management reviews the long-lived
assets used in the theatre business for impairment. This analysis takes place at
the individual theatre level, which management believes is the lowest level for
which there are identifiable cash flows. In addition, management will review
internal management reports as well as monitor current and potential future
competition in its markets for indicators of impairment of individual theatre
assets. As a result of this analysis, management will determine whether
impairment has occurred, whether a write-down of the asset carrying value to
fair value is required and whether to abandon or continue to operate the
theatre. The impairment loss is measured as the amount by which the carrying
value of the asset exceeds the fair value, which is based on management's
estimates. The primary technique to determine fair value is to discount the
future cash flows of the theatre. There is considerable management judgement
necessary to determine the future cash flows of a theatre, and, accordingly,
actual results could vary significantly from such estimates.
Over the last year, significant industry construction development has
caused the Company to reassess the value and utility of certain theatre
locations through its internal evaluation process described above. There has
been an increase in competition in certain markets as a result of the opening of
megaplexes by competitors, which have tended to, and are projected to, continue
to draw audiences away from certain older multiplex theatre locations that the
Company operates, particularly in the southern and western United States.
The evaluation described above resulted in an impairment charge of
approximately $7.4 million in certain marginal markets in 1997 and an impairment
charge of approximately $28.6 million in 1998.
There were also charges in 1998 totaling $39.6 million primarily
relating to the monies either spent or anticipated to be spent to exit certain
leases. The Company accrued approximately $15.2 million primarily for the cost
to exit certain leases for the theatres closed during the fourth quarter of 1998
and accrued approximately $24.4 million for the cost to exit the existing leases
of theatres management intends on abandoning in the next 12 months. The
Company's reserves established for leases on properties it intends to abandon
reflect management's best estimate of these potential costs associated with
exiting the existing lease. While the estimates are based on analysis of the
facilities, correspondence with the landlords, exploratory discussions with
sublessees and market conditions, there has been limited experience to consider
in preparing such estimates. The amounts the Company will eventually be
obligated for could differ materially from the amounts assumed in arriving at
the original reserve. The Company has made approximately $3.2 million of cash
payments for the cost of exiting leases and other costs through October 31,
1998.
Corporate Expenses
Corporate expenses decreased 9.8% to $6.2 million in 1998 from $6.8 million in
the previous year. The decrease is primarily attributable to costs incurred in
1997 associated with the Company's acquisition of five theatres with 53 screens
in Mexico and Argentina. This decrease was partially offset by the increased
personnel and travel costs associated with the Company's investment group.
Equity Losses in Theatre Affiliates
The Company recorded equity losses in theatre affiliates of $0.5 million in
1998. The losses related primarily to the Company's South American operations
and result from the administrative and start-up costs associated with the Hoyts
General Cinema South American joint venture established as of July 1, 1998.
Investment Income (Loss), Net
The Company recorded an investment loss of $1.4 million in 1998 compared to
investment income of $13.9 million in 1997. The Company's investment loss in
1998 included performance-based compensation of $8.8 million earned by certain
employees as a result of the successful completion of the initial public
offering by Global TeleSystems Group, Inc. ("GTS") in February 1998, the equity
losses of $0.7 million of investments accounted for under the equity method and
included as part of portfolio investments. These losses were partially offset by
the $6.8 million gain recognized on the GTS shares designated as trading
securities and $1.3 million of interest and dividend income earned on the
Company's short-term investment portfolio. The
GC COMPANIES, INC.
----------------------------
8
<PAGE> 11
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
investment income in 1997 included a pre-tax gain of $9.0 million from a
fourth-quarter share-for-share exchange of GCC's minority investment in Vision
Express into GrandOptical-PhotoService and a subsequent sale of a portion of
those shares, a fourth-quarter pre-tax gain of $0.6 million resulting from the
release of escrow related to the sale of the Company's radio group investment in
1996 and $4.3 million of dividend and interest income earned on the Company's
short-term investment portfolio.
Interest Expense
The Company's interest expense increased to $1.0 million in 1998 from $0.6
million in 1997. The increase was due to borrowings under its revolving credit
facility in the fourth quarter of 1998 primarily for theatre expansion
domestically and internationally.
Income Tax Benefit (Provision)
The Company's effective tax rate was 40.0% in 1998, a reduction from the 41.0%
in 1997 due to lower state taxes.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Virtually all of GCC's revenues are collected in cash, principally through
theatre admissions and concession sales. The Company has an operating "float,"
which partially finances its operations and allows the Company to operate on a
negative working capital basis. This "float" exists because admissions and
concessions revenues are typically received in cash, while film rentals and
concessions costs are ordinarily paid to suppliers generally 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.
Domestic Theatres
For the year ended October 31, 1999, General Cinema Theatres, Inc. ("GCT")
opened nine new theatres: a 15-screen theatre in Atlanta, Georgia, a 14-screen
theatre in Irving, Texas, a 16-screen theatre in Baltimore, Maryland, a
12-screen theatre in Plymouth Meeting, Pennsylvania, an 11-screen theatre in
Seattle, Washington, a 16-screen theatre in Clifton, New Jersey, an 18-screen
theatre in Wauwatosa, Wisconsin, a 14-screen theatre in Austin, Texas and a
managed unit with a single screen. Aggregate costs, including construction and
pre-opening costs paid by the Company in opening these theatres amounted to
approximately $11.2 million. The aggregate construction costs paid by the
Company for a theatre vary depending on the lease negotiated with the landlord,
the number of auditoriums, additional amenities which may be offered at the
theatre and the portion of the costs provided by the Company's agreement with a
major financial institution to provide operating leases on leasehold
improvements and equipment. Capital outflows have been minimized on these
projects as a result of this operating lease agreement. The overall operating
lease program was designed to provide up to $250.0 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 as of October 31, 1999.
Availability of this lease arrangement is, in part, dependent upon the ability
of the financial institution to syndicate leases to third-party financial
institutions. The receivable due from a financial institution results from the
Company initially advancing monies for leased assets related to new theatres as
the financial institution' s agent in accordance with its leasing arrangement.
On a periodic basis, these advances are reimbursed by the financial institution.
At October 31, 1999, the Company had an outstanding receivable of $15.5 million,
a decrease of $6.2 million from the outstanding receivable of $21.7 million at
October 31, 1998. This decrease is primarily due to a reduction in the number of
theatre openings in the first quarter of the next fiscal year; in the first
quarter of fiscal 2000, the Company will open two new theatres with 21 screens
compared to the five new theatres with 69 screens that opened in the first
quarter of fiscal 1999. The Company plans to open four new theatres with 48
screens and add two screens to an existing theatre in the next fiscal year. The
Company currently has no commitments to open new theatres beyond 2000.
GC COMPANIES, INC.
----------------------------
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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. Substantially all domestic leases of the Company are
noncancelable. During 1999, the Company sold seven theatres; three theatres in
Michigan, two in Texas, a theatre in New York, a theatre in Florida and other
miscellaneous assets realizing net proceeds of $6.6 million. During this period,
the Company closed an additional 14 theatres with 70 screens. Eleven of these
theatres had previously been identified as impaired, and seven of these theatres
were locations management had committed to closing and the closing costs were
provided for in 1998. At October 31, 1999, the Company had an outstanding
liability for early lease terminations and severance of $15.5 million. The
Company's reserve established for leases on properties it is committed to close
reflects management's best estimate of the potential cost associated with
exiting the existing lease. While the estimates are based on analysis of the
facilities, correspondence with the landlords, exploratory discussions with
sublessees and market conditions, there has been limited experience to consider
in preparing such estimates. The amounts the Company will eventually be
obligated for could differ materially from the amounts assumed at arriving at
the reserve. This process will continue, and the Company from time to time, may
be required to make additional substantial one-time cash payments in connection
with the closing of theatres in the future. The Company made cash payments of
approximately $14.9 million for the cost of exiting certain leases and other
related costs during the year ended October 31, 1999.
For the year ended October 31, 1999, GCT made expenditures of $18.1
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 $2.9 million associated with its Sundance Cinema joint venture.
GCC anticipates contributing a total of approximately $6.0 million of cash to
this venture in 2000. The first Sundance theatre is anticipated to open in
calendar year 2000.
International Theatres
The Company advanced $5.0 million towards its international theatre operations
in 1999. During the year ended October 31, 1999, the Company opened, through its
South American joint venture, three theatres with 26 screens in Argentina, a
theatre in Chile with 16 screens, a theatre in Brazil with 15 screens and added
two screens to its theatre in Uruguay. In addition, the Company added seven
screens to existing theatres in Mexico.
The Company's South American joint venture, Hoyts General Cinema South
America ("HGCSA") plans on opening six new theatres with 58 screens by the end
of calendar 2000. This theatre expansion program will be financed through debt
facilities that HGCSA negotiated in Chile and Argentina as well as capital
contributed by its partners. 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 theater expansion program in Chile and Argentina.
HGCSA has entered into a $75.0 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 $50.0 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
October 31, 1999, the Company's portion of the outstanding borrowings under this
facility that it guarantees was approximately $7.5 million.
HGCSA has entered into a $22.0 million debt financing arrangement with
major financial institutions to fund its operations in Chile, which is secured
by the several guaranty of the partners. $3.0 million of this debt financing was
arranged after October 31, 1999. The Company is liable for 50% of the
outstanding borrowings. At October 31, 1999, the Company's portion of the
outstanding borrowings under this facility that it guarantees or indemnifies was
approximately $9.0 million, which was comprised of $6.6 million of outstanding
borrowings and $2.4 million of outstanding guarantees.
Investment Portfolio
At October 31, 1999, marketable equity securities were $103.0 million, an
increase of $24.8 million from the balance at October 31, 1998 of $78.2 million.
The increase in marketable equity securities during 1999 was primarily due to an
increase in value of the Company's investment in GTS of $3.7 million, a decrease
in value
GC COMPANIES, INC.
----------------------------
10
<PAGE> 13
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
of the Company's investment in GrandVision of $4.0 million due to the
sale during the year of a portion of the shares held and an increase of $25.1
million in the Company's investment in PrimaCom, which, as a result of its
initial public offering during 1999, was reclassified from portfolio investments
to marketable equity securities and recorded at its fair value on October 31,
1999.
During the year, the Company sold 310,000 of its GTS shares, generating
net proceeds of $21.5 million, 250,000 of its GrandVision shares, generating net
proceeds of $6.4 million, and 150,000 of its PrimaCom shares, generating net
proceeds of $8.1 million.
On May 12, 1999, the Company invested $10.0 million in
MotherNature.com, a leading Web-based retailer of vitamins, supplements and
minerals. On July 6, 1999, the Company invested $5.1 million in El Sitio, a
leading Internet network providing global and country-specific content targeted
to Spanish and Portuguese speakers in Latin America. These two investments will
be accounted for under the cost method. In addition, on May 21, 1999, the
Company exercised 26,000 shares of GTS stock options at a cost of $17.45 per
share for a total cost of $0.5 million.
Other
The Company received proceeds of $13.0 million from the liquidation of certain
short-term investments during the year ended October 31, 1999.
The Company made net payments of $3.8 million on its outstanding
revolving credit facility and paid interest of $1.8 million during 1999. The
average interest rate for 1999 was 6.9%.
In December 1999, the Company's Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock over the
next 12 months.
The Company believes that cash generated from operations, asset sales
under agreement, cash and cash equivalents of $11.1 million, marketable equity
securities, amounts available under the Company's revolving credit facility, the
operating lease arrangement and the South American joint venture debt agreements
will be sufficient to fund operating requirements and capital expenditures for
the foreseeable future.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("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 finances a majority of its theatre
construction through a leasing arrangement with a financial institution. The
Company anticipates that changes will be made to certain elements of its current
leasing arrangement to conform with the requirements of an operating lease under
Issue No. 97-10. If the Company is unsuccessful in this endeavor, future
operating leases under the current leasing arrangement will be recorded on its
consolidated balance sheet as lease financing arrangements.
The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position ("SOP") 98-5, "Reporting the Costs of
Start-Up Activity," which must be adopted by the Company in fiscal 2000. The
Company anticipates that it will incur a cumulative pre-tax effect charge of
approximately $5.0 million relative to specific lease costs incurred prior to
openings of theatres which were previously allowed to be capitalized and
amortized by generally accepted accounting principles.
Year 2000
The Year 2000 issue 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
GC COMPANIES, INC.
----------------------------
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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.
Forward-Looking Statements
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to shareholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify "forward-looking statements." The Company believes that its
forward-looking statements are within the meaning of the safe harbor provisions
of the federal securities laws.
The results contemplated by the Company's forward-looking statements
are subject to certain risks, trends and uncertainties that could cause actual
results to vary materially from anticipated results, including, without
limitation, delays in obtaining leases for new megaplex locations, construction
risks and delays, the lack of strong film product, the impact of competition,
risks associated with international operations, construction risks and delays
associated with Sundance Cinemas, market and other risks associated with the
Company's investment activities and other factors described herein.
Subsequent Events
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 the public offerings of both El Sitio
and MotherNature.com, the Company will reclassify these investments from
portfolio investments to marketable equity securities in the first quarter of
fiscal 2000 in accordance with SFAS No. 115.
On December 22, 1999, the Company sold its remaining holdings in
PrimaCom generating net proceeds of $30.4 million.
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.
GC COMPANIES, INC.
----------------------------
12
<PAGE> 15
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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
October 31, 1999, the Company had outstanding borrowings of $13.0 million,
carrying a variable interest rate, which was 6.7% on that date. The Company's
exposure related to variable interest resides in the earnings and cash flow
implications caused by changes in interest rates. However, a 100 basis point
change in the variable rate of interest paid by the Company on its outstanding
borrowings under its revolving credit facility would not have a significant
impact on either the earnings or cash flows of the Company. The second component
of interest rate risk relates to amounts earned on the Company's short-term
investments of excess cash. Such risk affects fair values, earnings and cash
flows.
Operations in Mexico and South America are undertaken through equity
method investees. Fluctuations in the market value of the underlying equity are
not reported for financial purposes nor can a sensitivity analysis be performed
relative to the market risk of the underlying equity. Because these investments
are in Mexico and South America and because the operations of each of these
entities are conducted utilizing local currencies, the Company's earnings are
exposed to foreign currency exchange rate changes. Mexico's economy was removed
from the hyper-inflationary category, and, as a result, gains or losses
attributable to movements of net monetary assets or liabilities in the Mexican
operations no longer directly impact equity earnings in Mexico. Market risk
relative to exchange fluctuations does not exist in the Company's Mexican and
South American locations since these currently operate in non hyper-inflationary
environments.
The Company does not consider its cash flows to be currently exposed to
exchange rate risk because it has no current intention of repatriating earnings
from these Mexican and South American locations. 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
three categories. The first category includes those securities that have been
classified as trading. A portion of the Company's holding in Global TeleSystems
Group, Inc. ("GTS") was included therein until the third quarter of 1999, when
the Company disposed of its remaining investment in the GTS securities
designated as trading. In addition, the Company's investment in PrimaCom
completed an initial public offering during the second quarter of 1999. These
securities have been designated as trading securities by the Company. PrimaCom's
shares, since its initial public offering through October 31, 1999, have traded
as high as 56.00 euros and as low as 29.05 euros. At October 31, 1999, the
PrimaCom shares closed at 47.00 euros. Equity market fluctuations, without
taking into account the impact of fluctuations in the euro vis-a-vis the US
dollar, can impact fair values and earnings. A 20% fluctuation in the aggregate
value of PrimaCom trading securities from the October 31, 1999 price would
impact pre-tax earnings and total assets by $5.3 million.
The second category of investments held in the portfolio relate to
those marketable equity securities classified as available-for-sale. Two
holdings are classified herein: the Company's remaining investment in GTS and
its investment in an optical and photo service provider, GrandVision. The GTS
shares are subject to considerable market risk due to its volatility, and during
1999, have traded as high as $45.75 and as low as $19.38. At October 31, 1999,
the GTS shares closed at $23.94. GrandVision shares, during 1999, have traded as
high as 29.40 euros and as low as 15.11 euros. As of October 31, 1999, the
GrandVision shares closed at 29.40 euros. Equity market fluctuations, without
taking into account the impact of fluctuations in the euro vis-a-vis the US
dollar, can impact fair values (although not earnings, unless such equity
positions are actually liquidated). A 20% fluctuation in the aggregate value of
the GrandVision and GTS available-for-sale securities would either reduce or
increase total assets by $19.6 million.
In addition, the PrimaCom and 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 $3.1 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.
GC COMPANIES, INC.
----------------------------
13
<PAGE> 16
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
October 31,
- --------------------------------------------------------------------------------
(In thousands except par value) 1999 1998
ASSETS
Current assets
Cash and cash equivalents $ 11,106 $ 2,479
Short-term investments -- 12,989
Marketable equity securities 102,956 78,162
Receivable due from financing institution 15,522 21,735
Other current assets 5,123 7,565
Income tax receivable 8,666 12,618
-------- --------
Total current assets 143,373 135,548
Property and equipment, net 109,353 112,599
Portfolio investments 54,657 61,769
Investment in international theatre affiliates 58,815 59,495
Other assets 4,641 6,590
Deferred income taxes 4,768 13,960
-------- --------
$375,607 $389,961
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term obligations $ 587 $ 639
Trade payables 34,325 32,907
Liability for early lease terminations 15,477 36,579
Other current liabilities 81,740 89,680
Deferred income taxes 16,732 11,793
-------- --------
Total current liabilities 148,861 171,598
Long-term liabilities
Capital lease obligations 990 1,722
Other long-term liabilities 36,297 33,523
Revolving credit facility 13,000 16,775
-------- --------
Total long-term liabilities 50,287 52,020
Commitments and contingencies
Shareholders' equity
Common stock - $.01 par value
Authorized - 25,000 shares
Issued and outstanding - 7,796 and 7,710
shares 78 77
Additional paid-in capital 140,166 137,049
Accumulated other comprehensive income 32,353 20,782
Unearned compensation (2,280) --
Retained earnings 6,142 8,435
-------- --------
Total shareholders' equity 176,459 166,343
-------- --------
$375,607 $389,961
======== ========
See Notes to Consolidated Financial Statements
GC COMPANIES, INC.
----------------------------
14
<PAGE> 17
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended October 31,
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands except for per share amounts) 1999 1998 1997
REVENUES
Admissions $255,752 $271,999 $301,349
Concessions 115,093 124,317 132,633
Other 15,305 11,070 11,151
-------- -------- --------
386,150 407,386 445,133
COSTS AND EXPENSES
Film rentals 135,062 138,565 155,316
Concessions 21,639 21,975 23,865
Theatre operations and administrative expenses 225,313 231,556 231,634
Depreciation and amortization 16,256 19,180 19,229
Gain on disposition of theatre assets (2,117) (11,342) (11,017)
Impairment and restructuring (2,601) 68,186 7,451
Corporate expenses 6,256 6,164 6,833
-------- -------- --------
Operating earnings (loss) (13,658) (66,898) 11,822
Equity losses in theatre affiliates (7,468) (539) --
Investment income (loss), net 20,116 (1,378) 13,880
Interest expense (2,430) (1,048) (586)
Gain (loss) on disposition of non-operating assets (382) 593 (100)
-------- -------- --------
Earnings (loss) before income taxes (3,822) (69,270) 25,016
Income tax benefit (provision) 1,529 27,708 (10,257)
-------- -------- --------
Net earnings (loss) $ (2,293) $(41,562) $ 14,759
======== ======== ========
NET EARNINGS (LOSS) PER SHARE
Basic $ (0.30) $ (5.39) $ 1.91
======== ======== ========
Diluted $ (0.30) $ (5.39) $ 1.90
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 7,715 7,710 7,728
======== ======== ========
Diluted 7,715 7,710 7,768
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
GC COMPANIES, INC.
----------------------------
15
<PAGE> 18
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended October 31,
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (2,293) $(41,562) $ 14,759
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 16,256 19,180 19,229
Deferred income taxes 7,137 (19,224) (6,817)
Equity losses in theatre affiliates 7,468 539 --
Realized gains on marketable equity
securities and portfolio investments (14,047) -- (9,585)
Unrealized gains on marketable
equity securities (14,690) (6,815) --
Loss on impairment of portfolio investments 8,273 -- --
Equity losses in portfolio investments 589 571 --
(Gain) loss on impairment or disposition
of theatre assets and restructuring (4,336) 19,672 (3,466)
Other non-cash activities 6,059 2,228 (1,170)
Changes in assets and liabilities
Liabilities for early lease terminations (15,228) 36,579 --
Income tax receivable 3,952 (12,618) --
Trade payables 1,413 (3,434) 2,157
Other current assets and liabilities 787 (9,564) 28,563
-------- -------- --------
Net cash provided (used) by operating activities 1,340 (14,448) 43,670
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (20,967) (19,788) (18,742)
Proceeds from the disposition of theatre assets 6,578 19,805 18,824
Proceeds from the liquidation of or (purchase of)
short-term investments 12,989 7,025 (18,448)
Proceeds from the sale of portfolio investments and
marketable equity securities 35,904 -- 15,825
Purchase of portfolio investments (15,554) (12,315) (42,073)
Incremental investments in international theatre affiliates (5,029) (24,325) (36,598)
Other investing activities (2,949) 131 815
-------- -------- --------
Net cash provided (used) by investing activities 10,972 (29,467) (80,397)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in revolving credit facility (3,775) 16,775 --
Repurchase of common stock -- -- (4,307)
Other financing activities 90 (419) (673)
-------- -------- --------
Net cash (used) provided by financing activities (3,685) 16,356 (4,980)
-------- -------- --------
Net change in cash and cash equivalents 8,627 (27,559) (41,707)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,479 30,038 71,745
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,106 $ 2,479 $ 30,038
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
GC COMPANIES, INC.
----------------------------
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Comprehensive
---------------- Paid-in Comprehensive Retained Unearned Earnings
Shares Amount Capital Earnings Earnings Compensation (Loss) Total
------ ------ ------- ------------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
BALANCE AT NOVEMBER 1, 1996 7,816 $78 $136,359 $ -- $ 39,544 $ -- $175,981
Comprehensive earnings
Net earnings 14,759 $ 14,759 14,759
--------
Comprehensive earnings 14,759
========
Repurchase of common stock (119) (1) (4,306) (4,307)
Exercise of stock options 8 287 287
---------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 7,705 77 136,646 -- 49,997 -- 186,720
Comprehensive earnings (loss)
Net loss (41,562) (41,562) (41,562)
Other comprehensive earnings
Unrealized gains
on securities, net of tax 20,782 20,782 20,782
--------
Comprehensive earnings (loss) (20,780)
========
Exercise of stock options 5 403 403
---------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 7,710 77 137,049 20,782 8,435 -- 166,343
Comprehensive earnings
Net loss (2,293) (2,293) (2,293)
Other comprehensive earnings
Unrealized gains
on securities, net of tax 10,485 10,485 10,485
Foreign currency
translation adjustments 1,086 1,086 1,086
--------
Other comprehensive earnings 11,571
--------
Comprehensive earnings $ 9,278
========
Exercise of stock options 10 263 263
Grant of restricted stock
for future services 76 1 2,854 (2,855) --
Amortization of
restricted stock awards 575 575
---------------------------------------------------------------------
AT OCTOBER 31, 1999 7,796 $78 $140,166 $32,353 $ 6,142 $(2,280) $176,459
=====================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
GC COMPANIES, INC.
----------------------------
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
- --------------------------------------------------------------------------------
GC Companies, Inc. (GCC or the Company) operates a motion picture exhibition
business and manages a pool of the Company's capital for investments. It
operates theatres in the United States, South America and Mexico. Its investment
portfolio includes United States, European and Latin American holdings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Presentation
The consolidated financial statements include the accounts of GCC and all of its
majority-owned subsidiaries. Where GCC has the ability to exercise significant
influence over the operating and financial policies of companies in which GCC
has invested, those investments are accounted for under the equity method, and
GCC's share of the net earnings or losses of those companies is included under
either the caption "Equity losses in theatre affiliates" (for those investees
engaged in theatre operations) or "Investment income (loss), net" (for those
investees engaged in non-theatre related operations) in the consolidated
statements of operations. These investments are included under either the
caption "Portfolio investments" or "Investments in international theatre
affiliates" in the consolidated balance sheets. Investments in international
theatre affiliates and other investments accounted for under the equity method
are reported on a one-month lag.
Other investments where the Company has less than a 20% interest in an
investee and which do not have readily-determinable fair values because of a
lack of quoted market prices, are carried at cost less impairment, if
applicable. These investments are also included under the caption "Portfolio
investments" in the consolidated balance sheets. Investments with
readily-determinable fair values are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These investments are included under
the caption "Marketable equity securities" in the consolidated balance sheets.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Foreign Currency Translation
The Company's South American joint venture, which is recorded using the equity
method of accounting, uses the local currency as the functional currency and, as
such, translation adjustments are not included as part of the equity earnings or
losses recorded in the consolidated statements of operations; rather, they are
included as a component of "Accumulated other comprehensive income" in the
consolidated balance sheets. The Company's Mexican venture also currently uses
the local currency as the functional currency. Prior to the second quarter of
1999, however, Mexico's economy was considered hyper-inflationary and, as a
result, gains and losses attributable to non-monetary assets and liabilities in
the Mexican operations directly impacted equity earnings in Mexico. In 1999,
prior to the removal of the hyper-inflationary category, translation gains
included in equity earnings were $0.1 million. The translation gain totaled $0.8
million in 1998.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred.
The Company's investments in PrimaCom AG ("PrimaCom") and GrandVision
SA ("GrandVision") are traded on public exchanges in euros. Accordingly, the
Company has recorded both realized and unrealized foreign currency transaction
gains relative to these securities.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three
months or less from the date of purchase. Cash equivalents are stated at cost
plus accrued interest, which approximates market value. The Company's policy is
to invest cash with financial institutions or in instruments that have
acceptable credit ratings and to limit the amount of credit exposure to any one
financial institution or issuer.
GC COMPANIES, INC.
----------------------------
18
<PAGE> 21
Short-term Investments
Short-term investments typically consist primarily of commercial paper,
certificates of deposit, corporate debt securities and U.S. Government
securities, and are carried at cost plus accrued interest, which approximates
fair value.
Marketable Equity Securities
Marketable equity securities are stated at fair value. Unrealized holding gains
or losses on trading securities are included in the consolidated statements of
operations under the caption "Investment income (loss), net." Unrealized holding
gains and losses on available-for-sale securities are excluded from the
consolidated statements of operations and are included as a component of
shareholders' equity under the caption "Accumulated other comprehensive income."
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization except impaired assets, which are stated at fair market value. Also
included in property and equipment is the cost of certain internally-developed
software. These costs include external direct costs of materials and services
consumed as well as payroll and payroll-related costs for employees who are
directly associated with such projects. Such amounts totalled approximately $2.0
million in 1999. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of 20 to 30 years for
buildings and improvements and 3 to 20 years for equipment and fixtures.
Leasehold improvements are amortized using the straight-line method over the
lesser of the lease period or the estimated useful lives of the leasehold
improvements. When property and equipment are retired or have been fully
depreciated, the cost and the related accumulated depreciation are eliminated
from the respective accounts. Gains or losses arising from dispositions of
property and equipment are reported as income or expense.
Stock-based Compensation
The Company follows the precepts set forth in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
its Common Stock incentive plan. In compliance with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company has disclosed, in Note 11, the
required pro-forma effect on net earnings (loss) and diluted earnings (loss) per
share had the Company employed this statement.
Long-lived Assets
On an ongoing basis, the Company evaluates the carrying value of its long-lived
assets, including goodwill included in its investments accounted for under the
equity method. It relies on a number of factors, including operating results,
future anticipated cash flows, business plans and certain economic projections.
In addition, the Company considers non-financial data such as changes in the
operating environment, competitive information, market trends and business
relationships. As discussed in Notes 4 and 6, impairment charges have been
recorded in the consolidated financial statements.
Income Taxes
Income taxes are accounted for using the asset and liability method under which
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes for a
change in tax rates is recognized in income in the period that includes the
enactment date. No provision is made for U.S. income taxes on the undistributed
earnings of its foreign joint ventures as it is the Company's intention to
utilize those earnings in the foreign operations for an indefinite period of
time.
GC COMPANIES, INC.
----------------------------
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Revenues
Revenues are recognized when admission and concession proceeds are received at
the theatres. Revenues for other services are recognized at the time those
services are provided.
Film Rental Costs
Film rental costs are recognized as a percentage of admission revenue and in
accordance with the terms of the Company's film agreements.
Net Earnings (Loss) Per Share
Basic earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted average number of common shares
outstanding ("the denominator") for the period. Such outstanding shares are
adjusted for those shares that are contingently returnable. The computation of
diluted earnings per share is similar to basic earnings per share, except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential dilutive common shares had
been issued and restrictions on contingently returnable shares had been lifted.
<TABLE>
<CAPTION>
Reference October 31,
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands except per share data) 1999 1998 1997
Net earnings (loss) A $(2,293) $(41,562) $14,759
Determination of shares:
Weighted average number of
common shares outstanding B 7,715 7,710 7,728
Dilutive effect of contingently returnable shares
and shares issuable on exercise of stock options -- -- 40
Weighted average common shares
outstanding for diluted computation C 7,715 7,710 7,768
Net earnings (loss) per share ("EPS"):
Basic A/B $ (0.30) $ (5.39) $ 1.91
Diluted A/C $ (0.30) $ (5.39) $ 1.90
</TABLE>
As a result of the losses incurred by the Company in 1999 and 1998, options to
purchase 44,084 shares of common stock in 1999 and 46,153 shares of common stock
in 1998 as well as 76,131 shares of contingently returnable shares in 1999 were
not included in the computation of diluted EPS in 1999 and 1998.
Significant Estimates
In the process of preparing its consolidated financial statements, the Company
estimates the appropriate carrying value of certain assets and liabilities,
which are not readily apparent from other sources. The primary estimates
underlying the Company's consolidated financial statements include goodwill,
impairment charges, lease termination reserves, deferred taxes, accruals for
pension and post-retirement benefits, self insurance and other matters. Actual
results could differ from these estimates. Material changes in estimates are
summarized in Note 4 "Impairment of Theatre Assets, Early Lease Terminations and
Restructure." Management bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances
at the time such estimates are made.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, is not required to be adopted by the Company until 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 consolidated
financial statements.
GC COMPANIES, INC.
----------------------------
20
<PAGE> 23
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 the 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 to the requirements of an operating lease under Issue No.
97-10. If the Company is unsuccessful in this endeavor, future operating leases
under the current leasing arrangement will be recorded on its consolidated
balance sheet as lease financing arrangements.
The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position ("SOP") 98-5, "Reporting the Costs of
Start-Up Activity", which must be adopted by the Company in fiscal 2000. The
Company is currently evaluating this standard and anticipates that it will incur
a cumulative pre-tax effect charge of approximately $5.0 million in the first
quarter of fiscal 2000 relative to lease costs incurred prior to openings of
theatres which were previously allowed to be capitalized and amortized under
generally accepted accounting principles.
Changes in Presentation
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
3. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Change
Cumulative in Pre-tax
Gross Pre-tax Unrealized
Aggregate Unrealized Holding
Accounting Percent of Carrying Holding Gains (Losses)
Investment as of October 31, 1999 Designation Ownership Value(a) Gains (Losses)(g) for the Year(g)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except percentages)
Marketable Equity Securities
Global TeleSystems Group, Inc. Available-for-sale(b) 1.9 $ 73,495 $52,140 $14,394
PrimaCom AG
(formerly named Kabelmedia) Trading(c)(f) 3.3 25,092 -- --
GrandVision SA Available-for-sale(b) 1.6 4,369 (28) 3,081
-------- ------- -------
Total marketable
equity securities 102,956 52,112 17,475
======== ======= =======
Portfolio Investments
American Capital Access Equity Method(d) 23.8 28,757 -- --
Fuelman Equity Method(d) 45.2 10,800 -- --
MotherNature.com Cost Method(e) 5.5 10,000 -- --
El Sitio Inc. Cost Method(e) 7.6 5,100 -- --
-------- ------- -------
Total portfolio investments 54,657 -- --
-------- ------- -------
Total marketable equity securities
and portfolio investments $157,613 $52,112 $17,475
======== ======= =======
</TABLE>
GC COMPANIES, INC.
----------------------------
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Change
Cumulative in Pre-tax
Gross Pre-tax Unrealized
Aggregate Unrealized Holding
Accounting Percent of Carrying Holding Gains (Losses)
Investment as of October 31, 1998 Designation Ownership Value(a) Gains (Losses)(g) for the Year(g)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except percentages)
Marketable Equity Securities
Global TeleSystems Group, Inc. Available-for-sale(b) $ 59,340 $37,746 $37,746
Global TeleSystems Group, Inc. Trading(c) 10,416 -- --
-------- ------- -------
Total Global TeleSystems Group, Inc. 2.3 69,756 37,746 37,746
GrandVision SA Available-for-sale(b) 1.6 8,406 (3,109) (3,109)
-------- ------- -------
Total marketable
equity securities 78,162 34,637 34,637
======== ======= =======
Portfolio Investments
American Capital Access Equity Method(d) 23.8 29,031 -- --
Fuelman Equity Method(d) 45.2 11,135 -- --
PrimaCom AG
(formerly named Kabelmedia) Cost Method(e)(f) 9.6 13,330 -- --
Teletrac Cost Method(e) 7.4 8,273 -- --
-------- ------- -------
Total portfolio investments 61,769 -- --
-------- ------- -------
Total marketable equity securities
and portfolio investments $139,931 $34,637 $34,637
======== ======= =======
</TABLE>
(a) Carrying values for public portfolio investments were determined based on
the share price of the securities traded on public markets as of 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) 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."
(c) Unrealized gains or losses on securities classified as trading securities
are recorded in the consolidated statements of operations within the
caption "Investment income (loss), net."
(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.
(f) PrimaCom AG (formerly Kabelmedia) became public in February, 1999, and this
resulted in its transfer from Portfolio Investments to Marketable Equity
Securities.
(g) Pre-tax unrealized holding gains and losses apply only to marketable equity
securities.
Investment Activity - Marketable Equity Securities
Global TeleSystems Group, Inc.
Global TeleSystems Group, Inc. ("GTS") is an operator of long distance and
access telecommunications networks and a provider of voice and data
telecommunications services to business customers and other telecommunications
service providers in Europe, the Commonwealth of Independent States and Asia.
In February 1998, GTS completed an initial public offering of its
common stock, which is traded on the New York Stock Exchange under the symbol
"GTS." Under SFAS No. 115, the GTS shares were split into two separate
classifications within marketable equity securities - available-for-sale
securities and trading securities. Unrealized holding gains on these securities
in 1999 and 1998 are shown in the table above and have been recorded either in
"Investment income (loss), net" for the securities designated as trading or in
"Accumulated other comprehensive income" for the securities designated as
available-for-sale. None of the GTS holdings were sold in 1998. During 1999,
however, all the GTS securities designated as "trading" and a portion of the GTS
securities designated as "available-for-sale" were sold. Realized gains on the
sale of GTS securities were determined on a specific identification basis and
totaled $17.2 million, of which $6.9 million had been previously recognized in
the consolidated statements of operations as an unrealized holding gain in 1998.
GC COMPANIES, INC.
----------------------------
22
<PAGE> 25
On May 21, 1999, the Company exercised stock options to purchase 26,000
shares of GTS at a cost of $17.45 per share. These options were part of the
Company's original investment in GTS. These shares have been designated as
available-for-sale securities.
PrimaCom AG (formerly Kabelmedia)
On December 30, 1998, Kabelmedia, the German cable television systems operator,
merged with another company and was renamed PrimaCom AG ("PrimaCom"). At the
time of the merger, Kabelmedia shareholders owned 47% of the new company and
GCC's ownership in the merged company was 4.3%. In February 1999, PrimaCom
successfully completed an initial public offering and is currently traded on the
German Neuer Markt under the symbol "PRC." As a result of this public offering,
and in accordance with SFAS No. 115, the Company reclassified this investment
from portfolio investments to marketable equity securities and designated the
shares as trading securities. Unrealized gains in 1999 of $14.7 million have
been recorded in the consolidated statements of operations within the caption
"Investment income (loss), net."
In the fourth quarter of 1999, the Company sold a portion of its
PrimaCom holdings, generating net proceeds of $8.1 million, and a gross realized
gain of $5.2 million.
GrandVision (SA)
All shares of GrandVision SA ("GrandVision"), an optical and photo retailer,
have been classified as "available-for-sale." Unrealized holding gains and
losses on these securities in 1999 and 1998 are shown in the table above and
have been recorded in the consolidated balance sheets under the caption
"Accumulated other comprehensive income."
In the fourth quarter of 1999, the Company sold a portion of its
GrandVision holdings, generating net proceeds of $6.4 million and a realized
loss of $2.9 million.
The shares of GrandVision had been received in connection with the
Company's sale of a portfolio investment in 1997. The agreement required that
shares of GrandVision be held back pending the resolution of certain purchase
contingencies. In the fourth quarter of 1999, pursuant to the agreement, certain
shares held in escrow were released to the Company. The value as of the date of
the release was recorded by the Company as a transaction-related gain of $2.1
million in "Investment income (loss), net." These shares have subsequently been
designated as available-for-sale securities.
Investment Activity - Portfolio Investments Accounted
for Under the Cost Method
On May 12, 1999, the Company invested $10.0 million in MotherNature.com, a
leading Web-based retailer of vitamins, supplements and minerals. On July 6,
1999, the Company invested $5.1 million in El Sitio, a leading Internet provider
of global and country-specific content targeted to Spanish and Portuguese
speaking customers in Latin America. Because of the illiquidity of these
investments and the Company's less than 20% ownership, such investments are
carried at cost.
Teletrac
During the second quarter of 1999, Teletrac, a wireless location and two-way
messaging company, announced that it had retained the services of an investment
banking firm in its efforts to raise additional capital and to assist in
discussions with the holders of Teletrac's senior debt concerning a possible
restructuring of that debt. In addition, Teletrac disclosed that if it failed to
secure additional capital or alternative sources of liquidity, its ability to
continue current operations would be in jeopardy. Because Teletrac's
fund-raising efforts were not expected to yield sufficient new capital at an
acceptable valuation, GCC believed its investment had become impaired. As a
result, during the second quarter of 1999, the Company recorded a charge of $8.3
million to the consolidated statements of operations under the caption
"Investment income, net" to write-off its entire interest in Teletrac. On June
9, 1999, Teletrac filed a petition for protection under Chapter 11 of the U.S.
Bankruptcy Code. This investment was subsequently sold for a nominal amount.
GC COMPANIES, INC.
----------------------------
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Investment Activity - Portfolio Investments Accounted
for Under the Equity Method
On February 9, 1998, the Company completed an $11.0 million investment in
Fuelman, a leading provider of fleet management services. Through its
proprietary systems and network, Fuelman currently provides services to
commercial vehicle operators throughout the United States. Fuelman's results of
operations for the 12 months ended September 30, 1999 and the eight months ended
September 30, 1998 are shown below.
On September 24, 1997, the Company invested $30.0 million in a
newly-formed financial guaranty insurance company, American Capital Access
("ACA"). ACA's results of operations for 1999 and 1998 are shown below.
Unaudited summarized financial information of the Company's investees
accounted for under the equity method for the periods ended September 30, 1999
and 1998 are as follows:
Unaudited American Capital Access Fuelman
- --------------------------------------------------------------------------------
(In thousands) 12 Months 12 Months 12 Months 8 Months
1999 1998 1999 1998
Current assets $153,356 $133,234 $ 32,370 $21,978
Non-current assets 26,498 16,841 24,216 18,271
Current liabilities 7,734 5,650 15,276 11,884
Non-current liabilities 57,657 23,367 26,326 13,054
Redeemable preferred stock -- -- 18,448 16,049
Total revenues or premiums written 54,551 23,445 157,428 77,484
Earnings (loss) before taxes (1,155) (1,261) (163) 1,319
Net earnings (loss) (1,155) (1,261) (549) 776
Investment Activity - Summary of Results Shown in the
Consolidated Statements of Operations
In summary, investment income (loss) consisted of the following:
<TABLE>
<CAPTION>
Years Ended October 31,
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
Interest and dividend income $ 241 $ 1,300 $ 4,295
Unrealized gain (loss) on marketable equity securities 14,690 (2,107) --
Realized gain on marketable equity securities
and portfolio investments 14,047 -- 9,585
Equity-losses in portfolio investments (589) (571) --
Loss on impairment of portfolio investments (8,273) -- --
------- ------- -------
Net investment income (loss) $20,116 $(1,378) $13,880
======= ======= =======
</TABLE>
Also included in investment income (loss) are charges of $0.9 million,
$8.8 million and $1.6 million in 1999, 1998 and 1997, respectively, relating to
performance-based compensation earned by certain employees based on certain
investment events as defined in the GCC Investments, Inc. Incentive Pool Plan.
This compensation calculation is determined according to a plan adopted in 1996.
The amounts are paid in cash and/or restricted shares of GCC. The restricted
shares vest over a period of time. Compensation related to the GCC restricted
shares is recognized pro-ratably over the vesting period. This Incentive Pool
Plan remains in place for investments in GTS, GrandVision and PrimaCom for both
current and certain former employees.
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 calculations. There
has been no activity relative to the minority interest
GC COMPANIES, INC.
----------------------------
24
<PAGE> 27
other than the initial investment in the LLC by CHCP of approximately $0.6
million, an amount which is currently included in other long-term liabilities.
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. This agreement was in place for only two months in 1999;
amounts payable or paid totaled $0.7 million during the year.
4. IMPAIRMENT OF THEATRE ASSETS, EARLY LEASE TERMINATIONS AND RESTRUCTURE
The components of impairment and restructuring charges in the consolidated
statements of operations were as follows:
Years Ended October 31,
- --------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
Impairment of fixed assets $ 3,501 $28,614 $7,451
Accrual of lease termination costs 3,588 39,572 --
Lease settlements less than amounts accrued (8,491) -- --
Changes in estimates of lease termination costs (7,861) -- --
Restructuring 6,662 -- --
------- ------- ------
$(2,601) $68,186 $7,451
======= ======= ======
Impairment of Fixed Assets
During the ordinary course of business, management has and will make
determinations that impact the recoverability of theatre assets. Such decisions
have impacted operations in 1999, 1998 and 1997. As part of the Company's annual
budgeting process, management has and will review the long-lived assets used in
the theatre business for impairment. This analysis has and will take place at
the individual theatre level, which management believes is the lowest level for
which there are identifiable cash flows. In addition, management has and will
review internal management reports as well as monitor current and potential
future competition in its markets for indicators of impairment of individual
theatre assets. As a result of this analysis, management has and will determine
whether impairment has occurred, whether a write-down of the asset carrying
value to fair value is required and whether to abandon or continue to operate
the theatre. The impairment loss is measured as the amount by which the carrying
value of the asset exceeds the fair value, which is based on management's
estimates. The primary technique to determine fair value is to discount the
future cash flows of the theatre. There is considerable management judgement
necessary to determine the future cash flows of a theatre, and accordingly,
actual results could vary significantly from such estimates.
Significant industry building of new megaplexes has caused the Company
to re-assess the value and utility of certain theatre locations through its
internal evaluation process described above. There continues to be an increase
in competition in certain markets as a result of the opening of megaplexes by
competitors, which have tended to, and are projected to, draw audiences away
from certain theatre locations that the Company operates.
The evaluation described above resulted in the impairment charges shown
above under the caption "Impairment of fixed assets."
Accrual of Lease Termination Costs
As described above, the Company has and will identify the impaired theatres
management has committed to closing in the next 12 months and record a liability
for the estimated costs of exiting certain leases. The Company's termination
reserves established for leases on properties that management has committed 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. While in most instances, the Company has accurately predicted
its costs to terminate leases, there have been circumstances where there was a
material difference; therefore, the amounts the Company will eventually be
obligated for could differ materially from the amounts included in the original
reserve.
GC COMPANIES, INC.
----------------------------
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 1999, the Company accrued additional reserves of $3.6 million for
theatres that management has committed to exiting within the next 12 months in
accordance with the evaluation process described above.
During the year, the Company executed the termination of 12 leases
resulting in payments of approximately $12.2 million and made additional
payments of $2.7 million for other related closing costs. Of the lease
terminations executed by the Company in 1999 and previously accrued for in 1998,
the payment was less than the amount previously accrued by $5.8 million, which
was partially offset by amounts accrued for lease terminations executed in 1999
and not accrued in 1998 of $1.5 million. In addition, the Company either reduced
or reversed the amount reserved on certain theatre locations by $7.9 million due
to a number of factors, including revisions made in the estimates to terminate
the leases because negotiations with landlords indicate that the buyout will not
be as high as originally anticipated, because anticipated competitor
construction did not occur in the market or management has determined that the
location will not be closed in the foreseeable future.
Restructure
In the fourth quarter of 1999, the Company's Board of Directors approved a
restructuring plan of its domestic theatre operations to centralize its existing
regional offices into the Company's home office located in Massachusetts.
Accrued restructuring charges of $6.7 million include the cost of involuntary
employee termination benefits for 45 employees of approximately $1.5 million,
the cost of a voluntary special retirement program of $4.3 million for 30
employees, which will be funded by the Company's pension asset and a charge of
$0.9 million for subleasing certain regional office space. Employee termination
benefits include severance, medical and other benefits and outplacement
services. No cash payments have been made in 1999 related to this restructuring
charge. The Company anticipates that cash payments will be made over the next 18
months.
The following is a tabular presentation of the reserves described
above:
<TABLE>
<CAPTION>
Reserve for
Reserve for Lease Personnel
Termination Costs Related Costs Total Reserve
----------------- ------------- -------------
<S> <C> <C> <C>
(In thousands)
Balance at October 31, 1998 $ 36,579 $ -- $ 36,579
Cash payments in 1999:
Lease buyouts (12,249) -- (12,249)
Rent and other payments (2,674) -- (2,674)
Changes in 1998 reserve estimates:
Lease buyouts less than the original lease
termination reserve amount (4,250) -- (4,250)
Changes in estimate of lease termination reserves
for units not resolved (7,861) -- (7,861)
Additional 1999 reserves:
Restructure 859 1,485 2,344
Theatres identified as impaired 3,526 62 3,588
-------- ------ --------
Balance at October 31, 1999 $ 13,930 $1,547 $ 15,477
======== ====== ========
</TABLE>
GC COMPANIES, INC.
----------------------------
26
<PAGE> 29
5. PROPERTY AND EQUIPMENT, NET
- --------------------------------------------------------------------------------
Property and equipment consisted of the following at October 31
- --------------------------------------- ----------------------------------------
(In thousands) 1999 1998
Cost:
Land $ 1,234 $ 1,417
Building and improvements 26,970 19,244
Leasehold improvements 104,837 116,484
Furniture and fixtures 111,646 119,557
-------- --------
244,687 256,702
Less accumulated depreciation and amortization 135,334 144,103
-------- --------
Net property and equipment $109,353 $112,599
======== ========
6. INVESTMENT IN INTERNATIONAL THEATRE AFFILIATES
- --------------------------------------------------------------------------------
The Company has equity-based investments in theatre operations in South America
and Mexico which are joint ventures with unrelated third parties. These two
joint ventures are accounted for by the Company under the equity method. The net
assets of these joint ventures appear in the balance sheet under the caption
"Investments in international theatre affiliates." The results of operations for
the years ended October 31, 1999 and 1998 appear under the caption "Equity
losses in theatre affiliates."
The Company purchased its interest in these joint ventures in
September, 1997 for a cash purchase price of $36.3 million. The purchase price
has been allocated to assets acquired (primarily fixed assets) and liabilities
assumed based on their fair value at the date of acquisition and in accordance
with the purchase method of accounting. The excess of purchase price over net
assets acquired is being amortized by the Company over a 10-year period.
In October, 1999, the Company determined that there was a loss in value
of its Mexican investment that was other than temporary. Accordingly, it
recorded in "Equity losses in theatre affiliates" a charge of approximately $3.5
million relating to this loss in value of the Mexican joint venture.
The Company's South American joint venture, Hoyts General Cinema South
America ("HGCSA"), has entered into a $75.0 million debt financing arrangement
with major financial institutions to fund its operations in Argentina, which is
secured by a several guaranty of the joint venture's partners. Availability of
this financing beyond $50.0 million is subject to potential 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
October 31, 1999, the Company's portion of the outstanding borrowings under this
facility that it guarantees was approximately $7.5 million.
HGCSA has also structured $22.0 million in debt financings to fund its
operations in Chile, which is secured by the several guaranty of the partners.
$3.0 million of this debt financing was arranged after October 31, 1999. The
Company is liable for 50% of the outstanding exposure. At October 31, 1999, the
Company's portion of the outstanding exposure under these facilities was
approximately $9.0 million, which was comprised of $6.6 million of outstanding
borrowings and $2.4 million of outstanding guarantees.
GC COMPANIES, INC.
----------------------------
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. OTHER CURRENT LIABILITIES
- --------------------------------------------------------------------------------
Other current liabilities consisted of the following at October 31
- --------------------------------------------------------------------------------
(In thousands) 1999 1998
Rent and related charges $16,352 $14,928
Payroll and related benefits 4,204 5,792
Deal-related performance-based compensation 9,568 11,212
Self insurance 12,207 14,451
Deferred income 18,364 20,210
Other 21,045 23,087
------- -------
$81,740 $89,680
======= =======
8. LONG-TERM LIABILITIES
- --------------------------------------------------------------------------------
Other long-term liabilities consisted of the following at October 31
- -------------------------------------------------------- -----------------------
(In thousands) 1999 1998
Deferred lease obligations $23,664 $22,898
Post-retirement health care benefits (see Note 14) 6,556 6,306
Other 6,077 4,319
------- -------
$36,297 $33,523
======= =======
The present value of the future minimum lease payments due under
capital lease obligations over the remaining term of the leases totals $1.1
million. The net book value of property under capital leases was $0.6 million
at October 31, 1999 and $0.9 million at October 31, 1998.
9. RELATED-PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
GCC was previously a 100%-owned subsidiary of Harcourt General, Inc. ("Harcourt
General"). Certain shareholders also function as officers of both companies and
have significant interests in both companies.
As a result of the 1993 spin-off of GCC, certain leases were
transferred from Harcourt General to GCC. Under an Amended and Restated
Reimbursement and Security Agreement ("Reimbursement and Security Agreement")
dated January 26, 1999, GCC has agreed to indemnify Harcourt General from losses
Harcourt General could incur due to its secondary liability on theatre leases
that were transferred to GCC as part of the spin-off. In order to secure its
obligations under the Reimbursement and Security Agreement, GCC pledged all of
the stock of its theatre subsidiaries to Harcourt General. In connection with
the Harcourt General guarantee, the Company is charged a fee based on total
commitments outstanding. This fee totaled $695,000, $230,000 and $250,000 in
1999, 1998 and 1997, respectively. In addition, GCC is required to maintain
certain financial covenants under its Reimbursement and Security Agreement
including, among others, a minimum net worth and fixed charge coverage ratio, a
maximum amount of total debt to cash flow and restrictions on the issuance of
additional debt. In addition, the amended Reimbursement and Security Agreement
contains limitations on the payment of dividends and other distributions.
Harcourt General provides certain management services to GCC. The fees
for these services, which totaled $0.5 million in each of 1999, 1998 and 1997,
were based on Harcourt General's costs. Harcourt General's Chairman and Chief
Executive Officer also serves as the Chairman and Chief Executive Officer of the
Company, and one of Harcourt General's Presidents and Co-Chief Operating
Officers serves as President and Chief Operating Officer of GCC. The fees
payable to Harcourt General have been, and will continue to be, subject to the
approval of a committee of independent directors of GCC who are not affiliated
with Harcourt General.
GC COMPANIES, INC.
----------------------------
28
<PAGE> 31
In addition, the Company subleases office space and a theatre location
from Harcourt General. The rent and rent-related expense associated with these
subleases totaled $1.2 million in 1999, 1998 and 1997.
10. REVOLVING CREDIT AGREEMENT AND LETTERS OF CREDIT
- --------------------------------------------------------------------------------
At October 31, 1999 and 1998, the Company had outstanding borrowings under its
revolving credit agreement of $13.0 million and $16.8 million, respectively. The
revolving credit agreement was amended on January 26, 1999 to extend the term of
the agreement through January 26, 2002 at which date the commitment terminates
and any outstanding borrowings are due. Under the amended agreement, the Company
may borrow up to $50.0 million. The Company is able to select a floating
interest rate based on the primary bank's base interest rate for up to six
months. The fixed rate interest rates are based on the Eurodollar rate plus a
margin that ranges from 0.625% to 1.25% based on the level of total debt to cash
flow earnings as defined in the agreement. As of October 31, 1999 and 1998, the
variable interest rate on the outstanding borrowings of the revolving credit
agreement was 6.7% and 8.0%, respectively. The Company paid interest of $1.8
million in 1999. The revolving credit agreement contains restrictive financial
covenants including, among others, the maintenance of minimum net worth, a
minimum fixed charge coverage ratio, maximum amount of debt to cash flow and a
restriction on the issuance of additional debt. In addition, the revolving
credit agreement contains limitations on the payment of dividends and other
distributions.
At October 31, 1999 and 1998, the Company had outstanding standby
letters of credit totaling $7.6 million and $9.6 million, respectively. The
letters of credit expire at varying times over the next year.
11. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Common Stock
Common Stock is entitled to dividends if declared by the Board of Directors, and
each share carries one vote. Holders of Common Stock have no cumulative voting,
redemption or preemptive rights.
Common Stock Incentive Plan
The Company has a Common Stock incentive plan that provides for the granting of
stock options, stock appreciation rights, restricted stock or other stock-based
awards. Options outstanding at October 31, 1999 were granted at prices not less
than 100% of the fair market value on the date of original grant. These options
generally vest over five years and have maximum terms of 10 years. Options for
86,131 shares, 66,143 shares and 69,183 shares were exercisable under all option
arrangements at October 31, 1999, 1998 and 1997, respectively. Under the
existing stock incentive plan, there were 465,214 and 556,263 shares available
for future grants at October 31, 1999 and 1998, respectively. Exercises in years
ended October 31, 1997 and 1998 took the form of both stock option exercises and
stock appreciation awards; the latter being permitted at the sole discretion of
the Company. All 1999 exercises were in the form of stock option exercise.
GC COMPANIES, INC.
----------------------------
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following summarizes transactions under all stock option arrangements
for the years ended October 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Per Share Option Price Exercise Price
- ------------------------------------- --------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding as of November 1, 1996 138,220 $15.81 -- $51.25 $27.69
Granted 38,990 34.62 34.62
Exercised (22,396) 15.81 -- 35.00 21.25
Canceled (8,533) 22.34 -- 35.00 31.99
-----------------------------------------------------
Outstanding as of October 31, 1997 146,281 15.81 -- 51.25 30.28
Granted 36,192 41.94 -- 52.42 43.86
Exercised (25,839) 15.81 -- 35.00 23.93
Canceled (530) 25.50 -- 41.94 33.05
-----------------------------------------------------
Outstanding as of October 31, 1998 156,104 15.81 -- 52.42 34.45
Granted 24,555 40.00 40.00
Exercised (9,801) 15.81 -- 35.00 23.64
Canceled (7,967) 25.50 -- 52.42 37.15
-----------------------------------------------------
Outstanding as of October 31, 1999 162,891 $15.81 -- $52.42 $35.81
=====================================================
</TABLE>
The following summarizes information about all stock options outstanding at
October 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------------
Weighted-Average
--------------------------------
Number Remaining Number Weighted
Outstanding Contractual Exercisable Average
Range of Exercise Prices at 10/31/99 Life (years) Exercise Price at 10/31/99 Exercise Price
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$15.01 - $20.00 2,294 2.1 $15.81 2,294 $15.81
20.01 - 30.00 30,069 2.9 25.67 27,699 25.68
30.01 - 40.00 90,363 6.9 35.98 41,274 34.55
40.01 - 50.00 32,806 7.5 42.25 10,385 42.91
50.01 - 52.42 7,359 7.0 52.10 4,479 51.90
------- ------
Total 162,891 86,131
------- ------
</TABLE>
Had compensation cost for stock option grants issued during 1999, 1998 and
1997 been determined under the provisions of SFAS No. 123, the Company's net
earnings (loss) as well as basic and diluted earnings (loss) per share would
have been as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands except for per share amounts) 1999 1998 1997
Net earnings (loss) $ (2,518) $(41,820) $14,571
Basic earnings (loss) per share $ (0.33) $ (5.42) $ 1.89
Diluted earnings (loss) per share $ (0.33) $ (5.42) $ 1.88
</TABLE>
The pro-forma effect on net earnings (loss) as well as basic and diluted
earnings (loss) per share for 1999, 1998 and 1997 is not representative of the
pro-forma effect on net income in future years, because it does not take into
consideration pro-forma compensation expense related to grants made prior to
1996.
GC COMPANIES, INC.
----------------------------
30
<PAGE> 33
The fair value of each stock option granted in 1999, 1998 and 1997 under
the Company's plans was estimated on the date of the grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used to value grants issued under the plans in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
Expected volatility 24.62% 18.00% 18.20%
Risk-free interest rates 4.54% 5.88% 5.75%
Expected life 7 years 7 years 7 years
Dividend payments None None None
</TABLE>
The weighted average fair values per share of stock options granted during
1999, 1998 and 1997 were $15.25, $15.03 and $12.98, respectively.
Unearned Compensation
The Company's GCC Investments, Inc. Incentive Pool Plan provides for
performance-based compensation for certain employees based on certain investment
events. A portion of the performance-based compensation may be paid in
restricted shares, which vest over a period of time subsequent to the investment
event. The balance in unearned compensation represents the unvested portion of
the restricted stock award. Compensation expense related to the restricted
shares is charged to the consolidated statement of operations pro-ratably over
the vesting period. Such expense totaled approximately $575,000 for 1999.
12. RETIREMENT PLANS
- --------------------------------------------------------------------------------
GCC has a non-contributory defined benefit pension plan covering substantially
all full-time employees.
GCC also sponsors an unfunded supplemental executive retirement plan, which
provides certain employees additional pension benefits. Benefits under the plans
are based on years of service and compensation prior to retirement. When funding
is required for the defined benefit plans, the policy is to contribute amounts
that are deductible for federal income tax purposes. Pension plan assets consist
primarily of equity and fixed income securities.
The components of the net periodic pension costs are as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
Service cost $ 433 $ 431 $ 451
Interest cost 1,332 1,278 1,191
Expected return on plan assets (2,483) (2,364) (2,062)
Amortization of prior service 76 76 76
Recognized actuarial gains (161) (190) (316)
Amortization of transition asset (298) (298) (353)
-------------------------------------------
Total (1,101) (1,067) (1,013)
Special termination benefit 4,284 -- --
-------------------------------------------
Net pension charge (credit) $ 3,183 $(1,067) $(1,013)
===========================================
</TABLE>
GC COMPANIES, INC.
----------------------------
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
The following table sets forth the change in the defined benefit plans'
funded status for the years ended October 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
Funded Unfunded Funded Unfunded
Plan Plan Plan Plan
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $ 17,912 $ 2,047 $ 14,472 $ 1,825
Service cost 380 53 386 45
Interest cost 1,229 103 1,135 143
Special termination benefit 4,284 -- -- --
Actuarial loss (gain) (3,666) (850) 2,592 111
Benefits paid (871) (69) (673) (77)
-----------------------------------------------------------------
Benefit obligation, end of year 19,268 1,284 17,912 2,047
=================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year 28,234 -- 27,639 --
Actual return on plan assets 2,096 -- 1,268 --
Company contributions -- 69 -- 77
Benefits paid (871) (69) (673) (77)
-----------------------------------------------------------------
Fair value of plan assets, end of year 29,459 -- 28,234 --
=================================================================
Over (under) funded status 10,191 (1,284) 10,322 (2,047)
Unrecognized net transition asset (298) -- (568) --
Unrecognized net actuarial gain (7,207) (287) (4,089) (70)
Unrecognized prior service cost 21 377 36 448
-----------------------------------------------------------------
Net asset (liability) recognized
in the consolidated balance sheets $ 2,707 $ (1,194) $ 5,701 $ (1,669)
=================================================================
</TABLE>
The significant actuarial assumptions as of the year-end measurement dates
were as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Discount rate 8.0% 7.0% 7.5%
Rate of compensation increases 4.5% 5.0% 5.0%
Rate of return on plan assets 9.0% 9.0% 9.0%
</TABLE>
In addition to the defined benefit plans, GCC has two defined contribution
plans for certain employees. The GCC Savings Plan permits employee contributions
and provides for certain matching contributions by the Company. The Company's
contributions in fiscal years 1999, 1998 and 1997 were $508,432, $337,525, and
$431,218, respectively. The GCC Employee Stock Ownership Plan ("ESOP") is
non-contributory.
GC COMPANIES, INC.
----------------------------
32
<PAGE> 35
13. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Leases
GCC conducts the majority of its operations in leased premises under
noncancelable leases which typically have initial lease terms of 20 years. These
leases generally provide for the payment of fixed monthly rentals, contingent
rentals based on a percentage of revenue over a specified amount and the payment
of property taxes, common area maintenance, insurance and repairs. At its
option, GCC can renew a substantial portion of such leases, following the
initial lease term, for various periods up to an additional 20 years. Certain of
GCC's leases require periodic increased rentals. The rental costs on these
leases have been recognized on a straight-line basis and are included in
deferred lease obligations. On theatre locations assigned to third parties, GCC
is secondarily liable for certain lease commitments that extend through 2017 and
totaled approximately $81.0 million at October 31, 1999.
Assuming renewal options are not exercised, the future minimum payments
under noncancelable operating leases as of October 31, 1999 were as follows:
<TABLE>
<CAPTION>
Operating Leases
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
(In thousands)
2000 $ 79,476
2001 79,787
2002 78,796
2003 78,061
2004 78,698
Thereafter 561,760
--------
$956,578
--------
</TABLE>
Rent expense under noncancelable leases was as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
- ----------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
(In thousands)
Minimum rentals $73,401 $68,198 $62,710
Percentage rentals based on revenues 3,096 3,049 3,750
------- ------- -------
$76,497 $71,247 $66,460
------- ------- -------
</TABLE>
The Company has an agreement with a major financial institution to provide
operating leases for up to $250.0 million of assets for its theatre circuit
expansion program. This agreement expires in November, 2001. The Company
currently has entered into $118.8 million of operating leases. Availability of
this lease arrangement is, in part, dependent upon the ability of the financial
institution to syndicate leases to third-party financial institutions. At
October 31, 1999 and 1998, current assets included a receivable due from this
institution related to advances provided by the Company as the lessor's agent on
certain projects of $15.5 million and $21.7 million, respectively.
Litigation
GCC is involved in various suits and claims in the ordinary course of business.
Management does not believe that the disposition of such suits and claims will
have a material adverse effect upon the consolidated financial position or
continuing operations of the Company.
14. POST-RETIREMENT HEALTH CARE BENEFITS
- --------------------------------------------------------------------------------
The Company provides health care benefits for retired employees that are funded
as claims are incurred. Retirees and active employees hired prior to March 1,
1989 are eligible for these benefits if they meet certain service and minimum
age requirements. The Company paid $358,000, $271,000 and $208,000 during fiscal
1999, 1998 and 1997, respectively, for post-retirement health care benefit
claims.
GC COMPANIES, INC.
----------------------------
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------
Net post-retirement benefit costs are as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
Service cost $ 18 $ 25 $ 30
Interest cost 311 300 298
Net amortization and deferral (101) (168) (168)
-------------------------------------
Net post-retirement benefit cost $ 228 $ 157 $ 160
=====================================
</TABLE>
The following table sets forth the funded status of the Company's
post-retirement benefit obligations and the amounts recognized in GCC's
consolidated balance sheets:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
1999 1998
Change in benefit obligation:
Benefit obligation, beginning of year $ 4,375 $ 4,169
Service cost 18 25
Interest cost 311 300
Actuarial loss (gain) (176) 205
Benefits paid (358) (324)
-------------------------
Benefit obligation, end of year 4,170 4,375
-------------------------
Fair value of plan assets -- --
-------------------------
Under funded status (4,170) (4,375)
Unrecognized net actuarial gain (2,386) (1,931)
-------------------------
Net liability recognized in the balance sheets $(6,556) $(6,306)
=========================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 12.0% in fiscal 1998 and 1999, gradually
declining to 5.0% in fiscal 2005. Measurement of the accumulated post-retirement
benefit obligation was based on an assumed 8.0% discount rate for 1999, 7.0% for
1998 and 7.5% for 1997.
If the health care cost trend rate assumptions were increased by 1.0%, the
accumulated post-retirement obligation as of October 31, 1999 would be increased
by $484,000. The effect of this change on the service cost and interest cost
would be an aggregate increase of $38,000.
15. INCOME TAX BENEFIT (PROVISION)
- --------------------------------------------------------------------------------
Income tax benefit (provision) was as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands) 1999 1998 1997
CURRENT
Federal $ 8,666 $ 7,442 $(14,875)
State -- 1,042 (2,199)
----------------------------------------------
8,666 8,484 (17,074)
DEFERRED
Federal (6,245) 16,754 6,933
State (892) 2,470 (116)
----------------------------------------------
(7,137) 19,224 6,817
----------------------------------------------
$ 1,529 $ 27,708 $(10,257)
==============================================
</TABLE>
GC COMPANIES, INC.
----------------------------
34
<PAGE> 37
GCC's effective income tax rate was 40.0% in 1999 and 1998 and 41.0% in
1997. The differences between the statutory federal tax rate and the effective
tax rate are due primarily to state income taxes. The Company paid approximately
$300,000, $8.0 million and $13.7 million in income taxes during the years ended
October 31, 1999, 1998 and 1997, respectively.
Significant components of the Company's net deferred income tax liability
(asset) stated on a gross basis at October 31, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands) 1999 1998
GROSS DEFERRED INCOME TAX ASSETS
Financial accruals and reserves $ 20,591 $ 15,757
Investment write downs 2,953 2,953
Post-retirement health care benefits 2,661 2,595
State net operating loss carryforwards 1,114 --
Self insurance accruals 773 1,550
--------------------------
Total deferred tax assets 28,092 22,855
GROSS DEFERRED INCOME TAX LIABILITIES
Basis difference in fixed assets 13,259 4,107
Unrealized gain on trading securities 5,948 2,726
Unrealized gain on available-for-sale securities 20,849 13,855
--------------------------
Total deferred income tax liabilities 40,056 20,688
--------------------------
Net deferred tax liability (asset) $ 11,964 $ (2,167)
==========================
</TABLE>
16. 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 has identified six reportable segments - four
segments within what the Company considers its domestic theatre operation (which
encompass 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 primarily 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 investing activity in a
variety of non-theatre related activities is wholly separate from theatre
operations; (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 domestic theatre locations are being operated in different manners
given their ultimate strategic importance to the Company. 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 has 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 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. The other
expenses segment primarily includes the regional and home office administration.
The Company evaluates both domestic and international theatre performance
and allocates resources based on 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
chief operating decision maker evaluates operations on this basis. The
adjustment column is utilized to return the international theatre segment to the
equity method and eliminate intercompany balances. Performance of the investment
portfolio business is evaluated using the same measures as are seen in the
consolidated financial statements.
GC COMPANIES, INC.
----------------------------
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------
TOTAL COMPANY
<TABLE>
<CAPTION>
Year Ended October 31, 1999
-----------------------------------------------------------------------------------------
Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Revenues:
Admissions $ 255,752 $ 45,010 $ -- $ 300,762 $ (45,010) $ 255,752
Concessions 115,093 14,577 -- 129,670 (14,577) 115,093
Other 15,305 2,595 -- 17,900 (2,595) 15,305
--------- --------- --------- --------- --------- ---------
Total revenues 386,150 62,182 -- 448,332 (62,182) 386,150
--------- --------- --------- --------- --------- ---------
Earnings (loss) before
interest, taxes, depreciation
and amortization 5,127 6,341 (7,246) 4,222 (6,341) (2,119)
Depreciation and amortization 16,071 6,870 185 23,126 (6,870) 16,256
Gain on impairment or
disposition of theatre assets
and restructuring (4,718) -- -- (4,718) -- (4,718)
Net investment income 40 825 20,076 20,941 (825) 20,116
Earnings (loss)
before income taxes (6,637) (8,282) 9,163 (5,756) 1,934 (3,822)
Total assets 237,740 142,982 179,637 560,359 (184,752) 375,607
Total capital expenditures 18,123 33,507 2,844 54,474 (33,507) 20,967
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1998
-----------------------------------------------------------------------------------------
Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Revenues:
Admissions $ 271,999 $ 24,483 $ -- $ 296,482 $ (24,483) $ 271,999
Concessions 124,317 8,823 -- 133,140 (8,823) 124,317
Other 11,070 958 -- 12,028 (958) 11,070
--------- --------- --------- --------- --------- ---------
Total revenues 407,386 34,264 -- 441,650 (34,264) 407,386
--------- --------- --------- --------- --------- ---------
Earnings (loss) before
interest, taxes, depreciation
and amortization 17,234 4,435 (8,108) 13,561 (4,435) 9,126
Depreciation and amortization 18,987 3,906 193 23,086 (3,906) 19,180
Loss on impairment or
disposition of theatre assets 56,844 -- -- 56,844 -- 56,844
Net investment income (loss) 50 (10) (956) (916) (462) (1,378)
Earnings (loss)
before income taxes (58,797) 24 (9,462) (68,235) (1,035) (69,270)
Total assets 269,192 103,670 157,529 530,391 (140,430) 389,961
Total capital expenditures 17,597 28,761 2,191 48,549 (28,761) 19,788
</TABLE>
GC COMPANIES, INC.
----------------------------
36
<PAGE> 39
<TABLE>
<CAPTION>
Year Ended October 31, 1997
-----------------------------------------------------------------------------------------
Domestic International Other Segment Consolidated
Theatres Theatres Operations Totals Adjustments Totals
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Revenues:
Admissions $ 301,080 $ 269 $ -- $ 301,349 $ -- $ 301,349
Concessions 132,575 58 -- 132,633 -- 132,633
Other 11,151 -- -- 11,151 -- 11,151
--------- --------- --------- --------- --------- ---------
Total revenues 444,806 327 -- 445,133 -- 445,133
--------- --------- --------- --------- --------- ---------
Earnings (loss) before interest,
taxes, depreciation and
amortization 34,351 (33) (6,833) 27,485 -- 27,485
Depreciation and amortization 18,972 89 168 19,229 -- 19,229
Gain on impairment or
disposition of theatre assets (3,566) -- -- (3,566) -- (3,566)
Net investment income -- -- 13,880 13,880 -- 13,880
Earnings (loss)
before income taxes 18,158 (122) 6,980 25,016 -- 25,016
Total assets 271,174 48,935 142,479 462,588 (122,988) 339,600
Total capital expenditures 17,725 -- 1,017 18,742 -- 18,742
</TABLE>
DOMESTIC THEATRES
<TABLE>
<CAPTION>
Year Ended October 31, 1999
----------------------------------------------------------------------
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Revenues:
Admissions $ 146,244 $ 57,400 $ 52,108 $ -- $ 255,752
Concessions 64,294 25,599 25,200 -- 115,093
Other 7,025 4,522 3,758 -- 15,305
--------- --------- --------- -------- ---------
Total revenues 217,563 87,521 81,066 -- 386,150
--------- --------- --------- -------- ---------
Earnings (loss) before interest,
taxes, depreciation and
amortization 25,580 8,241 (6,174) (22,520) 5,127
Depreciation and amortization 7,610 3,279 889 4,293 16,071
Gain on impairment or
disposition of theatre assets
and restructuring (2,224) (1,162) (1,072) (260) (4,718)
Net investment income -- -- -- 40 40
Earnings (loss) before income taxes 20,186 6,033 (6,043) (26,813) (6,637)
Total assets 81,548 22,484 4,524 129,184 237,740
Total capital expenditures 7,404 6,015 18 4,686 18,123
</TABLE>
GC COMPANIES, INC.
----------------------------
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31, 1998
----------------------------------------------------------------------
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Revenues:
Admissions $ 143,644 $ 57,905 $ 70,450 $ -- $ 271,999
Concessions 63,527 26,803 33,987 -- 124,317
Other 4,584 3,471 3,015 -- 11,070
--------- --------- --------- --------- ---------
Total revenues 211,755 88,179 107,452 -- 407,386
--------- --------- --------- --------- ---------
Earnings (loss) before
interest, taxes, depreciation
and amortization 32,893 13,577 (5,527) (23,709) 17,234
Depreciation and amortization 7,440 3,960 4,145 3,442 18,987
(Gain) loss on impairment or
disposition of theatre assets 315 (12,718) 69,247 -- 56,844
Net investment income -- -- -- 50 50
Earnings (loss) before income taxes 25,138 22,335 (78,919) (27,351) (58,797)
Total assets 80,416 34,963 3,639 150,174 269,192
Total capital expenditures 5,826 3,354 902 7,515 17,597
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1997
----------------------------------------------------------------------
Core Other Impaired Other Domestic
Markets Markets Theatres Expenses Theatres
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Revenues:
Admissions $ 137,644 $ 55,997 $ 107,439 $ -- $ 301,080
Concessions 58,349 24,944 49,282 -- 132,575
Other 3,913 3,346 3,892 -- 11,151
--------- --------- --------- --------- ---------
Total revenues 199,906 84,287 160,613 -- 444,806
--------- --------- --------- --------- ---------
Earnings (loss) before interest,
taxes, depreciation and
amortization 35,730 14,749 8,629 (24,757) 34,351
Depreciation and amortization 6,685 3,664 6,085 2,538 18,972
Gain on impairment or
disposition of theatre assets (2) (4) (3,560) -- (3,566)
Net investment income (loss) -- -- -- -- --
Earnings (loss)
before income taxes 29,047 11,089 6,104 (28,082) 18,158
Total assets 71,301 27,854 46,636 125,383 271,174
Total capital expenditures 6,992 1,367 1,773 7,593 17,725
</TABLE>
GC COMPANIES, INC.
----------------------------
38
<PAGE> 41
17. COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except for per share amounts)
Revenues $ 104,398 $ 74,216 $ 115,082 $ 92,454 $ 386,150
Gross profit 9,537 200 11,479 6,049 27,265
Net earnings (loss) 1,417 (2,921) 3,788 (4,577) (2,293)
Net earnings (loss) per share
Basic $ 0.18 $ (0.38) $ 0.49 $ (0.59) $ (0.30)
--------- --------- --------- --------- ---------
Diluted $ 0.18 $ (0.38) $ 0.49 $ (0.59) $ (0.30)
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands except for per share amounts)
Revenues $ 121,087 $ 85,470 $ 114,633 $ 86,196 $ 407,386
Gross profit 18,288 2,117 18,764 1,570 40,739
Net earnings (loss) 3,105 (4,045) 2,019 (42,641) (41,562)
Net earnings (loss) per share
Basic $ 0.40 $ (0.52) $ 0.26 $ (5.53) $ (5.39)
--------- --------- --------- --------- ---------
Diluted $ 0.40 $ (0.52) $ 0.26 $ (5.53) $ (5.39)
--------- --------- --------- --------- ---------
</TABLE>
18. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
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 the public offerings of both El Sitio and
MotherNature.com, the Company will reclassify these investments from portfolio
investments to marketable equity securities in the first quarter of fiscal 2000,
in accordance with SFAS No. 115.
On December 22, 1999, the Company sold its remaining holdings in PrimaCom
generating net proceeds of $30.4 million.
GC COMPANIES, INC.
----------------------------
39
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
------------------------------------------------------
Board of Directors and Shareholders
GC Companies, Inc.
Chestnut Hill, Massachusetts
We have audited the consolidated balance sheets of GC Companies, Inc. and
subsidiaries (the Company) as of October 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of GC Companies, Inc. and
subsidiaries as of October 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
December 7, 1999
(January 7, 2000 as to Note 18)
GC COMPANIES, INC.
----------------------------
40
<PAGE> 43
CORPORATE INFORMATION
-----------------------------------------------------------
Directors
RICHARD A. SMITH
Chairman and Chief Executive Officer;
Chairman of Harcourt General, Inc. and the Neiman Marcus
Group, Inc.
WILLIAM L. BROWN*
Former Chairman
Bank of Boston Corporation
PETER C. READ*
Former Executive Vice President Bank of Boston Corporation
FRANCIS E. SUTHERBY*
Former Partner
Deloitte & Touche LLP
DR. LEONARD A. SCHLESINGER*
Executive Vice President
The Limited, Inc.
* Audit Committee
Compensation Committee
Special Review Committee
Corporate Officers
RICHARD A. SMITH
Chairman and Chief Executive Officer
ROBERT A. SMITH
President and Chief Operating Officer
JOHN G. BERYLSON
Senior Vice President and Chief Investment Officer
FRANK T. STRYJEWSKI
President
General Cinema Theatres, Inc.
G. GAIL EDWARDS
Vice President,
Chief Financial Officer
and Treasurer
PHILIP J. SZABLA
Vice President, General Counsel and Secretary
LOUIS E. CASAVANT
Vice President and Corporate Controller
KATHLEEN SCHOEFFLER
Vice President
Human Resources
Transfer Agent and Registrar
BankBoston, N.A.
c/o EquiServe
Post Office Box 8040
Boston, MA 02266-8040
Form 10-K
Additional copies of the Company's Form 10-K as filed with the Securities and
Exchange Commission are available upon written request to the Secretary of the
Company.
Annual Meeting
The Annual Meeting of the Stockholders will be held on Wednesday, March 15, 2000
at 10:00 a.m. at the Company's Framingham Cinema at 22 Flutie Pass in
Framingham, Massachusetts.
Stock Information
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "GCX." The table below indicates the quarterly price range of GC
Companies' Common Stock for the past two fiscal years.
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Quarter High Low High Low
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $ 42.00 $ 37.00 $ 47.94 $ 41.06
Second $ 37.88 $ 30.00 $ 53.00 $ 45.75
Third $ 37.44 $ 34.63 $ 52.63 $ 46.00
Fourth $ 36.00 $ 27.44 $ 49.75 $ 36.00
</TABLE>
The Company had 7,796,364 shares of Common Stock outstanding and approximately
2,890 Common shareholders of record at October 31, 1999.
Requests for general information or published financial information can be made
in writing to GC Companies, Inc., 1300 Boylston Street, Chestnut Hill, MA 02467,
telephone (617) 264-8601.
<PAGE> 44
GC Companies, Inc.
27 Boylston Street
Chestnut Hill, MA 02467
GC Companies and General Cinema: (617) 277-4320
Shareholder Information: (617) 264-8601
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
GC COMPANIES, INC.
------------------
GENERAL CINEMA THEATRES, INC.
G.C. Theatre Corp. of California
GC Grill Holdings, Inc.
Cinema Ventures, LLC (50%)
Cinema Grill of Aurora, LLC
GC Security Corp.
GCT Louisiana Beverage Services, Inc.
GCT Management, Inc.
GCT Pacific Beverage Services, Inc.
General Cinema Corp. of Clifton
General Cinema Corp. of Georgia
General Cinema Corp. of Greenwood
General Cinema Corp. of Indiana
General Cinema Corp. of Landmark
General Cinema Corp. of Louisiana
General Cinema Corp. of Maryland, Inc.
General Cinema Corp. of Massachusetts
General Cinema Corp. of Mayfair
General Cinema Corp. of Mazza
General Cinema Corp. of Michigan
General Cinema Corp. of Minnesota, Inc.
General Cinema Corp. of New York, Inc.
General Cinema Corp. of North Carolina
General Cinema Corp. of Northeast Tower
General Cinema Corp. of Northwestern
General Cinema Corp. of Oklahoma, Inc.
General Cinema Corp. of Owings Mills
General Cinema Corp. of Parkway Pointe
General Cinema Corp. of Pennsylvania
General Cinema Corp. of Plymouth Meeting
General Cinema Corp. of Rhode Island
General Cinema Corp. of South Carolina
General Cinema Corp. of Tennessee
General Cinema Corp. of Texas
General Cinema Corp. of Virginia
General Cinema Corp. of Washington
General Cinema Corp. of West Palm Beach
General Cinema of Framingham, Inc.
General Cinema of New Mexico, Inc.
General Cinema Theatre of Columbia, Inc.
General Cinema Theatre of Yorktown, Inc.
General Cinema Theatres of Delaware, Inc.
General Cinema Theatres of Florida, Inc.
General Cinema Theatres of Illinois, Inc.
General Cinema Theatres of New Jersey, Inc.
General Cinema Theatres of Ohio, Inc.
General Cinema Tickets, Inc.
General Cinema Specialty Film, Inc.
Sundance Cinema Circuit, LLC (55%)
Cinema Ad-Ventures, Inc.
Global Cinema Network, Inc.
Joliet Cinema, Inc.
Knights Holding Corp.
Knights Realty Corp.
Knights Theatre Corp.
Louis Joliet Cinema, Inc.
Premium Cinema of Owings Mills, Inc.
Premium Cinema of Yorktown, Inc.
Premium Theater of Framingham, Inc.
Premium Theatre of Mayfair, Inc.
Club Cinema of Mazza, Inc.
GENERAL CINEMA INTERNATIONAL, INC.
Arrendadora Inmobiliaria Cinematografica
S.A. de C.V. (50%)
Operadora de Cinemas, S.A. de C.V. (50%)
Servicios Especializados Cinematograficos,
S.A. de C.V. (50%)
HOYTS GENERAL CINEMA SOUTH AMERICA, INC. (50%)
GCC/Hoyts Brazil, Inc.
General Cinema do Brasil Empreendimentos, Ltda.
Boca Holdings, Inc.
Hoyts General Cinema de Argentina, S.A.
GCC/Hoyts Chile, Inc.
Hoyts Cinemas Chile S.A.(90%)
GCC Hoyts Uruguay, Inc.
Telnir, S.A. (50%)
GCC INVESTMENTS, INC.
Chestnut Hill Clothes, Inc.
Chestnut Hill Foods, Inc.
Chestnut Hill Media, Inc.
Chestnut Hill Re, Inc.
Chestnut Hill Telecom, Inc.
Chestnut Hill (GTS Trust)
Chestnut Hill Vision, Inc.
Chestnut Hill Wireless, Inc.
GCC Radio, Inc.
GCC INVESTMENTS, LLC (99%)
Chestnut Hill ACA, LLC
Chestnut Hill Fuel, LLC
Chestnut Hill Nature, LLC
Chestnut Hill (El Sitio), LLC
Chestnut Hill (Vanguard), LLC
Chestnut Hill Velocom, LLC
<PAGE> 1
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-76196 of GC Companies, Inc. on Form S-8 of our report dated December 7, 1999
(January 7, 2000 as to Note 18) incorporated by reference in this Annual Report
on Form 10-K of GC Companies, Inc. for the year ended October 31, 1999.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS A SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 11,106
<SECURITIES> 102,956
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 143,373
<PP&E> 244,687
<DEPRECIATION> 135,334
<TOTAL-ASSETS> 375,607
<CURRENT-LIABILITIES> 148,861
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 176,381
<TOTAL-LIABILITY-AND-EQUITY> 375,607
<SALES> 386,150
<TOTAL-REVENUES> 386,150
<CGS> 156,701
<TOTAL-COSTS> 399,808
<OTHER-EXPENSES> (12,266)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,430
<INCOME-PRETAX> (3,822)
<INCOME-TAX> 1,529
<INCOME-CONTINUING> (2,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,293)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
