<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended APRIL 30, 2000
------------------------------------------------
Commission File Number 12360
-----------------------------------------------
GC COMPANIES, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3200876
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 Boylston Street, Chestnut Hill, MA 02467
(Address of principal executive offices) (Zip Code)
(617) 278-5600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of June 8, 2000, there were outstanding 7,830,702 shares of the issuer's
common stock, $.01 par value.
<PAGE> 2
GC COMPANIES, INC.
I N D E X
PAGE
NUMBER
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of
April 30, 2000 and October 31, 1999 1
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended April 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended April 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 20
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit 27.1 Financial Data Schedule
<PAGE> 3
GC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
APRIL 30,
2000 OCTOBER 31,
(UNAUDITED) 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,635 $ 11,106
Marketable equity securities 62,362 102,956
Receivable due from financing institution -- 15,522
Other current assets 6,781 5,123
Income tax receivable 9,104 8,666
--------- ---------
Total current assets 94,882 143,373
Property and equipment, net 139,686 109,353
Portfolio investments 63,618 54,657
Investment in international theatre affiliates 55,068 58,815
Other assets 6,876 4,641
Deferred income taxes 4,330 4,768
--------- ---------
$ 364,460 $ 375,607
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 588 $ 587
Trade payables 42,199 34,325
Liability for early lease terminations 7,181 15,477
Other current liabilities 70,552 81,740
Deferred income taxes 6,233 16,732
--------- ---------
Total current liabilities 126,753 148,861
Long-term liabilities:
Capital lease obligations 698 990
Other long-term liabilities 36,513 34,575
Revolving credit facility 44,600 13,000
--------- ---------
Total long-term liabilities 81,811 48,565
Minority interest 2,459 1,722
Commitments and contingencies
Shareholders' equity:
Common stock 78 78
Additional paid-in capital 141,013 140,166
Accumulated other comprehensive income 15,504 32,353
Unearned compensation (2,398) (2,280)
Retained earnings (deficit) (760) 6,142
--------- ---------
Total shareholders' equity 153,437 176,459
--------- ---------
$ 364,460 $ 375,607
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
GC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except for per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
----------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Admissions $ 52,712 $ 49,710 $ 117,114 118,128
Concessions 23,242 22,016 51,855 53,348
Other 3,359 2,490 8,207 7,138
--------- --------- --------- ---------
79,313 74,216 177,176 178,614
Costs and expenses:
Film rentals 25,903 22,781 59,166 59,008
Concessions 3,759 3,821 9,362 9,755
Theatre operations and administrative expenses 53,522 53,556 109,800 111,778
Depreciation and amortization 4,631 4,144 8,589 8,019
(Gain) loss on disposition of theatre assets 284 (2,182) (303) (2,132)
(Gain) loss on impairment and restructuring (2,352) 452 (3,430) 500
Corporate expenses 685 1,612 1,436 3,120
--------- --------- --------- ---------
Operating loss (7,119) (9,968) (7,444) (11,434)
Equity losses in theatre affiliates (590) (634) (1,388) (2,139)
Investment income (loss), net (1,335) 6,408 3,528 11,729
Interest expense (915) (665) (1,474) (1,045)
Gain (loss) on disposition of non-operating assets (50) (9) (50) 383
--------- --------- --------- ---------
Loss before income taxes (10,009) (4,868) (6,828) (2,506)
Income tax benefit 4,004 1,947 2,732 1,002
--------- --------- --------- ---------
Loss before cumulative effect of accounting change (6,005) (2,921) (4,096) (1,504)
Cumulative effect of accounting change, net of tax -- -- (2,806) --
--------- --------- --------- ---------
Net loss $ (6,005) $ (2,921) $ (6,902) $ (1,504)
========= ========= ========= =========
Loss per share:
Basic:
Loss before cumulative effect of
accounting change $ (0.77) $ (0.38) $ (0.53) $ (0.20)
Cumulative effect of accounting change -- -- (0.36) --
--------- --------- --------- ---------
Net loss $ (0.77) $ (0.38) $ (0.89) $ (0.20)
========= ========= ========= =========
Loss per share:
Diluted:
Loss before cumulative effect of
accounting change $ (0.77) $ (0.38) $ (0.53) $ (0.20)
Cumulative effect of accounting change -- -- $ (0.36) --
--------- --------- --------- ---------
Net loss $ (0.77) $ (0.38) $ (0.89) $ (0.20)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 7,753 7,712 7,744 7,711
========= ========= ========= =========
Diluted 7,753 7,712 7,744 7,711
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
GC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED APRIL 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,902) $ (1,504)
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Depreciation and amortization 8,589 8,019
Equity losses in theatre affiliates 1,388 2,139
Unrealized gains on marketable equity securities -- (19,945)
Realized gains on marketable equity
securities and portfolio investments (5,513) (526)
Equity losses in portfolio investments 289 540
Loss on impairment of portfolio investments -- 8,273
Cumulative effect of accounting change 2,806 --
Gain on disposition of assets, impairment and
restructuring (3,683) (2,015)
Other non-cash activities 1,545 3,678
Changes in assets and liabilities:
Liabilities for early lease terminations (6,683) (4,260)
Trade payables 7,874 3,094
Other current assets and liabilities 2,339 (15,752)
-------- --------
Net cash provided (used) by operations 2,049 (18,259)
-------- --------
Cash flows from investing activities:
Capital expenditures (45,421) (10,042)
Proceeds from the disposition of theatre assets 2,390 5,295
Proceeds from the liquidation of short-term
investments -- 12,989
Proceeds from sale of marketable equity securities 37,390 12,513
Purchase of portfolio investments (24,350) --
Advances from (to) international theatre affiliates 1,091 (1,419)
Other investing activities 342 (849)
-------- --------
Net cash (used) provided by investing activities (28,558) 18,487
-------- --------
Cash flows from financing activities:
Increase in revolving credit facility 31,600 8,225
Other financing activities 438 (157)
-------- --------
Net cash provided by financing activities 32,038 8,068
-------- --------
Net increase in cash and cash equivalents 5,529 8,296
Cash and cash equivalents at beginning of period 11,106 2,479
-------- --------
Cash and cash equivalents at end of period $ 16,635 $ 10,775
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
GC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of GC Companies, Inc. (GCC or
the Company) are submitted in response to the requirements of Form 10-Q and
should be read in conjunction with the consolidated financial statements
included in the Company's Annual Report on Form 10-K. In the opinion of
management, these financial statements contain all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the results
for the interim periods presented. Certain prior year amounts have been
reclassified to conform to the current years' presentation. The Company's
theatre business is seasonal in nature and the results of its investment
operation are subject to a high degree of volatility, accordingly, the results
of operations for these periods historically have not been indicative of the
results for the full year.
2. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENT
As of April 30, 2000, information concerning marketable equity securities and
portfolio investments was as follows:
(In thousands except percentages)
<TABLE>
<CAPTION>
CHANGE CHANGE
CUMULATIVE IN PRE-TAX IN PRE-TAX
GROSS PRE-TAX UNREALIZED UNREALIZED
AGGREGATE UNREALIZED HOLDING HOLDING
ACCOUNTING PERCENT OF CARRYING HOLDING GAINS (LOSSES) GAINS (LOSSES)
INVESTMENT DESIGNATION OWNERSHIP VALUE (a) GAINS (LOSSES)(b) FOR THE QUARTER(b) YEAR TO DATE(b)
---------- ----------- ---------- --------- ----------------- ------------------ ---------------
MARKETABLE EQUITY SECURITIES
<S> <C> <C> <C> <C> <C> <C>
Global TeleSystems Available-for-sale (c) 1.7 $44,711 $23,356 ($31,854) ($28,784)
GrandVision Available-for-sale (c) 0.1 209 166 368 194
MotherNature.com Available-for-sale (c) 4.5 1,782 (8,137) (3,401) (8,137)
El Sitio Available-for-sale (c) 3.8 15,660 10,455 (18,929) 10,455
====================================================================================================================================
Total Marketable Equity Securities 62,362 25,840 (53,816) (26,272)
====================================================================================================================================
PORTFOLIO INVESTMENTS
Fuelman Equity Method (d) 46.7 16,548 n/a n/a n/a
American Capital Access Equity Method (d) 23.8 28,720 n/a n/a n/a
Vanguard Cost Method (e) 15.0 8,000 n/a n/a n/a
VeloCom Cost Method (e) 3.9 10,350 n/a n/a n/a
====================================================================================================================================
Total Portfolio Investments 63,618 n/a n/a n/a
====================================================================================================================================
Total Investments $125,980 $25,840 ($53,816) ($26,272)
====================================================================================================================================
</TABLE>
(a) Carrying values for public portfolio investments were determined based on
the share price of the securities traded on public markets on the last
business day of the period. The carrying values of the non-public portfolio
investments were determined under either the equity or cost method of
accounting.
(b) Pre-tax unrealized holding gains and losses apply only to marketable equity
securities.
(c) Unrealized gains or losses on securities classified as available-for-sale
securities are recorded in the consolidated balance sheets net of tax
within the caption "Accumulated other comprehensive income."
(d) These investments are in non-public companies and are accounted for on the
equity method because the Company has a greater than 20% equity interest in
each.
(e) These investments are in non-public companies and are accounted for on the
cost method.
4
<PAGE> 7
On November 29, 1999, the Company invested an additional $5.0 million in Fuelman
bringing its total interest to 46.7% on a fully diluted basis. On December 17,
1999, the Company invested $8.0 million in Vanguard Modular Building Systems
("Vanguard"), a leading regional provider of relocatable classrooms and other
commercial modular space solutions. On January 7, 2000, the Company invested
$10.4 million as part of an overall commitment of $20.7 million in VeloCom Inc.,
a facilities-based voice, data and Internet provider in Brazil and Argentina.
The Company anticipates the additional investment in VeloCom of approximately
$10.4 million will be made by the end of the fiscal year.
During the second quarter of 2000, the Company invested an additional $1.0
million in Fuelman in the form of a note.
On December 9, 1999, El Sitio, Inc. completed an initial public offering and is
currently traded on the NASDAQ under the symbol "LCTO." The Company currently
owns 1,456,756 shares of El Sitio. In addition, on December 9, 1999,
MotherNature.com completed an initial public offering and is currently traded on
the NASDAQ under the symbol "MTHR." The Company currently owns 678,589 shares of
MotherNature.com. As a result of these public offerings, and in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the Company reclassified
both these investments from portfolio investments to marketable equity
securities and records them at their fair values. The holdings in El Sitio and
MotherNature.com have been designated as available-for-sale securities.
During the first quarter of 2000, the Company sold the remaining 532,702 shares
of its investment in PrimaCom AG, a German cable television systems operator,
which is traded on the German Neuer Markt, generating net proceeds of $33.1
million and a realized pre- tax gain of $8.0 million. The cumulative pre-tax
gain recognized in the consolidated statement of operations on these 532,702
shares to the date of sale over the Company's original cost basis was $22.7
million. In addition, the Company sold 59,000 shares of its investment in
GrandVision SA, an optical and photo retailer that is publicly-traded on the
French Exchange under the symbol"GPS," generating net proceeds of approximately
$1.8 million and a realized loss of $54,000.
During the second quarter, the Company sold 80,740 shares of GrandVision, which
generated net proceeds of approximately $2.5 million and a realized gain of
approximately $187,000.
Investment income (loss), consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, SIX MONTHS ENDED APRIL 30,
====================================================================================================================================
(In thousands) 2000 1999 2000 1999
====================================================================================================================================
<S> <C> <C> <C> <C>
Interest and dividend income $ 109 $ 25 $ 206 $ 71
Unrealized gain on marketable securities -- 14,311 -- 19,945
Realized gain (loss) on marketable equity securities (190) 526 5,513 526
Equity losses on portfolio investments (242) (181) (289) (540)
Management fee (1,012) -- (1,902) --
Loss on impairment of portfolio investments -- (8,273) -- (8,273)
==========================================================================
Investment income (loss), net $(1,335) $ 6,408 $ 3,528 $11,729
==========================================================================
</TABLE>
Included in investment income (loss) for the six months ended April 30, 2000
and 1999 are charges of $2.7 million and $1.1 million, respectively,
relating to performance-based compensation earned by the Chief Investment
Officer and certain former employees based on certain investment events as
defined in the GCC Investments, Inc. Incentive Pool Plan. Such
performance-based compensation for the three months ended April 30, 2000 and
1999 was $0.4 million and $0.8 million, respectively.
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. Subsequent investments in Fuelman, Vanguard and
Velocom Inc. have also been made through this LLC. 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.
5
<PAGE> 8
The LLC agreement specifies that profit sharing in the LLC will be between
GCC and CHCP in accordance with certain contractual agreements. The activity
relative to the minority interest includes the initial investment in the LLC
by CHCP of approximately $0.6 million and the investment in LLC by CHCP for
the investments purchased in the first six months of 2000 of approximately
$0.2 million.
CHCP also has a management agreement with GCC Investments, LLC which
specifies that CHCP is to be reimbursed for certain expenses according to a
specific formula. The amounts payable or paid for such expenses total $1.0
million during the second quarter of 2000 and $1.9 million for the six
months ended April 30, 2000.
3. RECEIVABLE DUE FROM FINANCING INSTITUTION
The Company's overall operating lease program was designed to provide up to
$250 million of funding over five years for the Company's theatre expansion
program. Since the inception of this leasing arrangement in 1996, the
Company has entered into $118.8 million of operating leases under this
program. 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
resulted when the Company initially advanced monies for leased assets for
new theatres as the financial institution's agent.
At the end of the second quarter, the Company elected to reclassify the
balance in the receivable due from the financing institution at January 31,
2000 of $ 31.0 million to property and equipment, net in the consolidated
balance sheets.
4. IMPAIRMENT OF THEATRE ASSETS, EARLY TERMINATIONS AND RESTRUCTURE
The activity during the first two quarters of 2000 in the liability for
early lease terminations was as follows:
RESERVE RESERVE FOR
FOR LEASE PERSONNEL
TERMINATION RELATED TOTAL
COSTS COSTS RESERVE
----------- ------------ ---------
Balance at October 31, 1999 $ 13,930 $ 1,547 $ 15,477
Cash payments:
Lease buyouts (3,490) -- (3,490)
Rent and other payments (323) (182) (505)
-------- -------- --------
Balance at January 31, 2000 10,117 1,365 11,482
======== ======== ========
Cash payments:
Lease buyouts (2,179) -- (2,179)
Rent and other payments (23) (334) (357)
Changes in estimate (1,765) -- (1,765)
-------- -------- --------
Balance at April 30, 2000 $ 6,150 $ 1,031 $ 7,181
======== ======== ========
During the first six months of 2000, the Company executed the termination of
two theatre leases resulting in the payment of $5.2 million as well as the
buyout of several equipment leases resulting in the payment of approximately
$0.5 million. In addition, the Company made rent, severance and other
payments of $0.9 million during the first six months of 2000 with respect to
certain impaired theatres.
6
<PAGE> 9
The gain on impairment and restructuring of $3.4 million in the first six
months of 2000 was primarily due to a reversal of an accrual for a lease
buyout of approximately $1.8 million, a settlement gain of $1.8 million
recognized as a result of the voluntary special retirement program offered
by the Company in the fourth quarter of 1999 and miscellaneous charges of
$0.2 million. The settlement gain was realized as a result of benefit
payments made out of the Company's pension plan under the special retirement
program.
The Company's reserves established for its leases on properties it intends
to close reflect management's best estimate of the potential costs
associated with exiting these leases. Estimates are based on analysis of the
facilities, correspondence with the landlords, exploratory discussions with
sublessees and market conditions. The amounts the Company eventually spends
could differ materially from the amounts assumed in arriving at the original
reserve.
5. FINANCING AGREEMENTS
Due to a decline in the value of one of the Company's holdings in marketable
securities during the last fiscal quarter, as of April 30, 2000, the Company
was not in compliance with certain financial covenants in its financing
arrangements with certain of its financial institutions, including its
revolving credit facility and its reimbursement agreement with Harcourt
General, Inc. The Company has received waivers of these covenants for the
period ended April 30, 2000 from all of its financial institutions and
Harcourt General, Inc. As a condition to these waivers, the Company has
agreed to certain restrictions. These restrictions prevent the Company,
through September 30, 2000, from: (a) borrowing additional funds, including
borrowing additional funds under its revolving credit facility; (b) entering
into any new financial leasing transactions; (c) making any additional
portfolio investments other than certain identified investments; (d) making
any distributions from the Company and limit future capital expenditures.
As a result, the Company's current available borrowings under its revolving
credit facility are limited to $44.6 million, the balance outstanding as of
April 30, 2000.
The Company has requested amendment of its financial covenants under its
lease financing arrangements, its revolving credit facility and its
reimbursement agreement with Harcourt General to provide additional
flexibility. If these amendments are not obtained by July 31, 2000, the
Company will be required to seek additional waivers of its existing
covenants. If these amendments are entered into, the Company may be required
to (a) make certain mandatory prepayments on its revolving credit facility
or on its leasing obligations, (b) grant certain collateral in its
investment portfolio, (c) limit future investments, (d) limit additional
borrowing and (e) not make distributions from the Company. There can be no
assurances given as to the specific terms and conditions of these
amendments, or that such amendments will be forthcoming.
6. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION
The Company has segmented its operations in a manner that reflects how its
chief operating decision maker reviews the results of the businesses that
make up the consolidated entity. The Company identified six reportable
segments - four segments within what the Company considers its domestic
theatre operation (which encompasses all theatres in the continental United
States); one segment which includes the Company's joint ventures in South
America and Mexico; and the final segment which includes all of the activity
related to the investment portfolio business and corporate administration.
This identification of segments emanates from management's recognition that
(i) its domestic theatre locations are being operated in different manners
given their ultimate strategic importance to the Company; (ii) its South
American and Mexican operations are new theatre ventures in markets that are
completely dissimilar to the United States market; and (iii) its investing
activity in a variety of non-theatre related activities is wholly separate
from theatre operations. The four operating segments within the domestic
operations are core markets, other markets, impaired theatres and other
expenses. The core segment represents those markets management defined as
its strategic area of operations and includes theatres operating in the
Northeast and Midwest. The other market segment includes those theatres
outside of the core markets that are profitable and therefore are not
defined as impaired. The impaired theatre segment includes all theatres that
have been identified as impaired units in accordance with the analysis
discussed in Note 4 of the Company's Annual Report. The other expenses
column includes the regional and home office administration expenses of the
domestic theatre operations.
The Company evaluates both domestic and international theatre performance
and allocates resources based on current and projected earnings before
interest, taxes, depreciation and amortization. Information concerning
earnings (loss) before income taxes has also been provided 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
7
<PAGE> 10
financial statements because the Company evaluates operations on this basis.
The adjustment column is utilized to return the international theatre
segment to the equity method, as the international joint ventures are 50%
owned, and to eliminate intercompany balances.
TOTAL COMPANY
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 2000: DOMESTIC INTERNATIONAL OTHER SEGMENT CONSOLIDATED
THEATRES THEATRES OPERATIONS TOTALS ADJUSTMENTS TOTALS
-------- ------------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 52,712 $ 14,390 $ -- $ 67,102 ($14,390) $ 52,712
Concessions 23,242 4,402 -- 27,644 (4,402) 23,242
Other 3,359 697 -- 4,056 (697) 3,359
-------- -------- -------- -------- -------- --------
Total revenues 79,313 19,489 -- 98,802 (19,489) 79,313
-------- -------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization (3,645) 4,787 (911) 231 (4,787) (4,556)
Net investment income (loss) 28 -- (1,363) (1,335) -- (1,335)
Loss before income taxes (6,228) (405) (3,081) (9,714) (295) (10,009)
THREE MONTHS ENDED APRIL 30, 1999: DOMESTIC INTERNATIONAL OTHER SEGMENT CONSOLIDATED
THEATRES THEATRES OPERATIONS TOTALS ADJUSTMENTS TOTALS
-------- ------------- ---------- -------- ----------- ------------
Revenues:
Admissions $ 49,710 $ 10,070 $ -- $ 59,780 ($10,070) $ 49,710
Concessions 22,016 2,960 -- 24,976 (2,960) 22,016
Other 2,490 509 -- 2,999 (509) 2,490
-------- -------- -------- -------- -------- --------
Total revenues 74,216 13,539 -- 87,755 (13,539) 74,216
-------- -------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization (5,696) 1,628 (1,858) (5,926) (1,628) (7,554)
Net investment income 1 -- 6,407 6,408 -- 6,408
Earnings (loss) before income taxes (8,181) (241) 3,965 (4,457) (411) (4,868)
</TABLE>
DOMESTIC THEATRES
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30, 2000: CORE OTHER IMPAIRED OTHER TOTAL DOMESTIC
MARKETS MARKETS THEATRES EXPENSES THEATRES
-------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 32,565 $ 11,668 $ 8,479 $ -- $ 52,712
Concessions 14,354 4,981 3,907 -- 23,242
Other 1,883 892 584 -- 3,359
-------- -------- -------- -------- --------
Total revenues 48,802 17,541 12,970 79,313
-------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization 3,400 505 (3,058) (4,492) (3,645)
Earnings (loss) before income taxes 1,235 (413) (1,433) (5,617) (6,228)
THREE MONTHS ENDED APRIL 30, 1999: CORE OTHER IMPAIRED OTHER TOTAL DOMESTIC
MARKETS MARKETS THEATRES EXPENSES THEATRES
-------- -------- -------- -------- --------------
Revenues:
Admissions $ 27,910 $ 12,279 $ 9,521 $ -- $ 49,710
Concessions 12,115 5,505 4,396 -- 22,016
Other 1,133 798 559 -- 2,490
-------- -------- -------- -------- --------
Total revenues 41,158 18,582 14,476 -- 74,216
-------- -------- -------- -------- --------
Earnings (loss) before taxes, interest,
depreciation and amortization 3,039 458 (3,252) (5,941) (5,696)
Earnings (loss) before income taxes 2,202 (665) (3,777) (5,941) (8,181)
</TABLE>
8
<PAGE> 11
TOTAL COMPANY
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000: DOMESTIC INTERNATIONAL OTHER SEGMENT CONSOLIDATED
THEATRES THEATRES OPERATIONS TOTALS ADJUSTMENTS TOTALS
--------- ------------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 117,114 $ 25,774 $ -- $ 142,888 ($ 25,774) $ 117,114
Concessions 51,855 8,058 -- 59,913 (8,058) 51,855
Other 8,207 1,875 -- 10,082 (1,875) 8,207
--------- --------- --------- --------- --------- ---------
Total revenues 177,176 35,707 -- 212,883 (35,707) 177,176
--------- --------- --------- --------- --------- ---------
Earnings (loss) before taxes, interest,
depreciation and amortization (752) 7,257 (1,836) 4,669 (7,257) (2,588)
Net investment income 57 25 3,471 3,553 (25) 3,528
Earnings (loss) before income taxes (5,623) (1,309) 283 (6,649) (179) (6,828)
SIX MONTHS ENDED APRIL 30, 1999: DOMESTIC INTERNATIONAL OTHER SEGMENT CONSOLIDATED
THEATRES THEATRES OPERATIONS TOTALS ADJUSTMENTS TOTALS
--------- ------------- ---------- --------- ----------- ------------
Revenues:
Admissions $ 118,128 $ 17,772 $ -- $ 135,900 ($ 17,772) $ 118,128
Concessions 53,348 5,601 -- 58,949 (5,601) 53,348
Other 7,138 933 -- 8,071 (933) 7,138
--------- --------- --------- --------- --------- ---------
Total revenues 178,614 24,306 -- 202,920 (24,306) 178,614
--------- --------- --------- --------- --------- ---------
Earnings (loss) before taxes, interest,
depreciation and amortization (1,333) 158 (3,714) (4,889) (158) (5,047)
Net investment income (loss) 38 (555) 11,691 11,174 555 11,729
Earnings (loss) before income taxes (7,363) (3,473) 7,087 (3,749) 1,243 (2,506)
</TABLE>
DOMESTIC THEATRES
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000: CORE OTHER IMPAIRED OTHER TOTAL DOMESTIC
MARKETS MARKETS THEATRES EXPENSES THEATRES
--------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 71,632 $ 25,977 $ 19,505 $ -- $ 117,114
Concessions 31,592 11,161 9,102 -- 51,855
Other 4,279 2,624 1,304 -- 8,207
--------- --------- --------- --------- ---------
Total revenues 107,503 39,762 29,911 -- 177,176
--------- --------- --------- --------- ---------
Earnings (loss) before taxes, interest,
depreciation and amortization 9,680 3,523 (4,673) (9,282) (752)
Earnings (loss) before income taxes 7,173 1,937 (3,199) (11,534) (5,623)
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000: CORE OTHER IMPAIRED OTHER TOTAL DOMESTIC
MARKETS MARKETS THEATRES EXPENSES THEATRES
--------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 65,715 $ 28,891 $ 23,522 $ -- $ 118,128
Concessions 29,095 13,149 11,104 -- 53,348
Other 3,468 1,936 1,734 -- 7,138
--------- --------- --------- --------- ---------
Total revenues 98,278 43,976 36,360 -- 178,614
--------- --------- --------- --------- ---------
Earnings (loss) before taxes, interest,
depreciation and amortization 11,462 2,694 (4,221) (11,268) (1,333)
Earnings (loss) before income taxes 8,774 582 (5,012) (11,707) (7,363)
</TABLE>
The Company's South American joint venture, Hoyts General Cinema South America
("HGCSA"), has entered into a $75 million debt financing arrangement with major
financial institutions to fund its operations in Argentina, which is secured by
the several guaranty of the joint venture's partners. Availability of this
financing beyond $50 million is subject to syndication to third-party financial
institutions. Under the several guaranty of the Argentina debt facility, the
Company is liable for 50% of the outstanding borrowings. At April 30, 2000, The
Company's portion of the outstanding borrowings under this facility that it
guarantees was approximately $10.0 million.
HGCSA has entered into a $22.5 million debt financing arrangement with financial
institutions to fund its operations in Chile, which is secured by the several
guaranty of the partners. The Company is liable for 50% of the outstanding
borrowings. At April 30, 2000, the Company's portion of the outstanding
borrowings under this facility, that it guarantees, was approximately $11.2
million, which was comprised of $9.1 million of outstanding borrowings and $2.1
million of outstanding guarantees. The Company has invested approximately $1.4
million in a certificate of deposit, which is held as collateral for a portion
of the outstanding guarantees at April 30, 2000. This certificate of deposit is
included in other current assets in the consolidated balance sheets.
7. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is shown below.
Basic earnings per share excludes any dilutive effect of options.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
REFERENCE --------------------- ---------------------
(In thousands, except per share data) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loss before cumulative effect of accounting change A $(6,005) $(2,921) $(4,096) $(1,504)
------- ------- ------- -------
Determination of shares:
Weighted average number of common shares outstanding B 7,753 7,712 7,744 7,711
Diluted effect of contingently returnable shares and shares
issuable on exercise of stock options -- -- -- --
------- ------- ------- -------
Weighted average common shares outstanding for diluted computation C 7,753 7,712 7,744 7,711
------- ------- ------- -------
Loss per share before cumulative effect of accounting change:
Basic A/B $ (0.77) $ (0.38) $ (0.53) $ (0.20)
Diluted A/C $ (0.77) $ (0.38) $ (0.53) $ (0.20)
</TABLE>
8. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
(In thousands) FOR THE THREE MONTHS ENDED APRIL 30 FOR THE SIX MONTHS ENDED APRIL 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (6,005) $ (2,921) $ (6,902) $ (1,504)
Unrealized gains (losses) on securities, net of tax (32,290) 3,175 (15,763) 23,497
Foreign currency translation adjustment (1,086) -- (1,086) --
-------- -------- -------- --------
Ending balance ($39,381) $ 254 $(23,751) $ 21,993
-------- -------- -------- --------
</TABLE>
10
<PAGE> 13
9. ACCOUNTING FOR START-UP ACTIVITIES
In the first quarter of 2000, the Company adopted Statement of Position
("SOP") 98-5, "Reporting the Costs of Start-Up Activity." SOP 98-5 required
that start-up activities be expensed when incurred. The Company's
practice had been to capitalize lease costs incurred prior to openings of
theatres and amortize these costs under generally accepted accounting
principles. The adoption of this new accounting pronouncement resulted in a
one-time non-cash charge to the Company's statements of operations for the
six months ended April 30, 2000 of $4.7 million (net of income tax benefit
of $1.9 million) or $0.36 per diluted share.
10. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments in Hedging Activity." The Company is not required to implement
this standard until fiscal 2001. Its requirements are complex and its scope
far-reaching. The Company has not completed its evaluation of the impact of
this standard on the financial statements.
11. SUBSEQUENT EVENTS
In May, 2000, the Company sold its Mexican theatre investment for
approximately $14.3 million of which $7.5 million of the sales price was
received in cash, and the remaining balance will be paid in three
installments over two years.
On May 19, 2000, the Company invested an additional $5.0 million in American
Capital Access Holdings, LLC ("ACA").
11
<PAGE> 14
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2000 VERSUS THE THREE MONTHS ENDED APRIL 30, 1999
THEATRE REVENUES - Total revenues increased 6.9% to $79.3 million for the three
months ended April 30, 2000 from $74.2 million for the same period in 1999
primarily attributable to an 8.4% increase in average ticket price and a 7.9%
increase in concession sales per patron partially offset by a 2.2% decrease in
patronage. The decrease in patronage was mainly due to continued competitor
impacts resulting from the construction of megaplex theatres throughout the
country as well as a reduction in the number of units and screens that the
Company operates. The build-up of megaplex theatres over the past three years
has resulted in a dramatic increase in the number of screens throughout the
country. This has negatively impacted the Company's patronage and profitability.
The Company operated domestically 1,047 screens in 132 locations at April, 30,
2000 compared to 1,059 screens at 142 locations at April 30, 1999. The increase
in average ticket prices was due to price increases adopted at the beginning of
the year in a majority of theatres. The growth in concessions sales per patron
was principally attributable to marketing promotions during the year, the
continued rollout of new products and increased consumption.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operations and administrative expenses and depreciation and
amortization) increased 4.2% to $87.8 million in 2000 from $84.3 million last
year. However, as a percentage of total revenues, cost of theatre operations was
110.7% for the second quarter of 2000 compared to 113.6% for the same period in
1999. This decreased percentage of the cost of theatre operations to total
revenues for the three months ended April 30, 2000 compared to the same period
in 1999 was primarily due to lower administrative costs, a decrease in theatre
payroll costs, lower pre-opening expenses due to fewer theatres opening in the
quarter and lower repair costs, partially offset by increased occupancy costs
associated with new megaplex theatres opened over the last twelve months.
(GAIN) LOSS ON IMPAIRMENT AND RESTRUCTURING - The Company recorded a gain of
$2.4 million in the three months ended April 30, 2000 as a result of the
settlement gain of $0.8 million associated with the voluntary special retirement
program offered by the Company in the fourth quarter of 1999 and a reversal of
an accrual for a lease buyout of approximately $1.8 million, partially offset by
other charges of $0.2 million. The settlement gain was realized as a result of
benefit payments made out of the Company's pension plan under the special
retirement program.
CORPORATE EXPENSES - Corporate expenses decreased 58% to $0.7 million for the
six months ended April 30, 2000 from $1.6 million in 1999 primarily due to a
reclassification of the investment group expenses from corporate expenses to
investment income as a result of the new subsidiary established in the fourth
quarter of 1999, GCC Investments, LLC ("LLC"). The new subsidiary is owned 99%
by the Company, and the remaining 1% interest is owned by Chestnut Hill Capital
Partners, LLC ("CHCP"), which is owned by the Chief Investment Officer and
investment professionals formerly employed by the Company's investment
subsidiary. CHCP has a management agreement with LLC, which specifies that CHCP
is to be reimbursed for certain expenses according to a specific formula. Under
this agreement, the management fee expense for the second quarter of fiscal
2000, was $1.0 million and is included in investment income (loss).
EQUITY LOSSES IN THEATRE AFFILIATES- The Company recorded net equity losses in
theatre affiliates of $0.6 million for the three months ended April 30, 2000
compared to $0.6 million for the same period in 1999. Equity losses in theatre
affiliates for the second quarter of 2000 compared to the same period in 1999
reflected improved operating results of the Hoyts General Cinema South America
("HGCSA") joint venture. Revenues of the HGCSA venture increased 47% to $15.2
million for the second quarter of 2000, versus $10.3 million for the same period
in 1999. This increase in revenues was primarily due to higher patronage as a
result of opening five theatres with 55 screens over the last twelve months.
HGCSA's pre-tax income improved to $0.7 million for the second quarter of 2000.
This improvement was primarily due to the increase in revenues and a reduction
in start-up costs that were incurred by the venture in the second quarter of
1999. In addition, the Company recorded a charge of $0.9 million in the second
quarter of 2000 related to the permanent loss in value of its Mexican
investment. Subsequent to the end of the second quarter of 2000, the Company
sold its Mexican investment for $14.3 million.
12
<PAGE> 15
INVESTMENT INCOME (LOSS), NET - The Company recorded an investment loss of $1.3
million for the second quarter of 2000 compared to investment income of $6.4
million for the same period in 1999. The Company's investment loss during the
second quarter of 2000 included performance-based compensation of $0.4 million
earned by certain former employees as a result of the sale of all the Company's
holdings in PrimaCom, management expenses of $1.0 million, equity losses on
portfolio investments of $0.2 million, partially offset by the realized gain on
GrandVision shares sold during the quarter of $0.2 million and other gains of
$0.1 million. In the second quarter of 1999, the Company recorded an unrealized
gain on the PrimaCom trading securities of approximately $14.4 million, an
unrealized gain on the Global TeleSystems Group, Inc. ("GTS") trading securities
of $0.2 million, a realized gain on the GTS trading securities sold during the
quarter of approximately $0.6 million and other investment income of $0.3
million, partially offset by the impairment charge on the Teletrac investment of
$8.3 million and additional incentive performance-based compensation of $0.8
million.
INTEREST EXPENSE - The Company's interest expense increased to $0.9 million for
the three months ended April 30, 2000 compared to $0.7 million in 1999 mainly
due to increased borrowings outstanding during the quarter under the revolving
credit facility.
INCOME TAX EXPENSE - The Company's effective tax rate was 40% in 2000, unchanged
from 1999.
13
<PAGE> 16
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2000 VERSUS THE SIX MONTHS ENDED APRIL 30, 1999
THEATRE REVENUES - Total revenues decreased 0.8% to $177.2 million for the
six months ended April 30, 2000 from $178.6 million for the same period in
1999 primarily attributable to an 8.8% decrease in patronage partially
offset by an 8.7% increase in average ticket price and a 6.5% increase in
concession sales per patron. The decrease in patronage was mainly due to
continued competitor impacts resulting from the construction of megaplex
theatres throughout the country as well as a reduction in the number of
units and screens that the Company operates. The build-up of megaplex
theatres over the past three years has resulted in a dramatic increase in
the number of screens throughout the country. This has negatively impacted
the Company's patronage and profitability.
The Company operated domestically 1,047 screens at 132 locations at April
30, 2000 compared to 1,059 screens at 142 locations at April 30, 1999. The
increase in average ticket prices was due to price increases adopted at the
beginning of the year in a majority of theatres. The growth in concessions
sales per patron was principally attributable to marketing promotions during
the year, the continued rollout of new products and increased consumption.
COSTS OF THEATRE OPERATIONS - Cost of theatre operations (film rentals,
concessions, theatre operations and administrative expenses and depreciation
and amortization) for the six months ended April 30, 2000 of $186.9 million
decreased $1.7 million from the $188.6 million from the previous year
primarily due to a decrease in revenues. As a percentage of total revenues,
cost of theatre operations was 105.5% for the first six months of 2000,
which was comparable to 105.6% for the same period in 1999. Although
comparable to the prior years, the cost of theatre operations to total
revenues for the first six months of the current year versus the same period
in 1999 was negatively impacted by increased occupancy costs associated with
the new megaplex theatres opened over the last twelve months, offset by
lower administrative costs, a decrease in theatre payroll costs and lower
pre-opening expenses due to fewer theatres opening in the first six months
of 2000 compared to the same period in 1999.
(GAIN) LOSS ON DISPOSITION OF THEATRE ASSETS - During the first six months
of 2000, the Company sold two theatres with 10 screens as well as
miscellaneous assets generating proceeds of $2.4 million and a realized
pre-tax gain of $0.3 million.
(GAIN) LOSS ON IMPAIRMENT AND RESTRUCTURING - The Company recorded a gain of
$3.4 million in the six months ended April 30, 2000 as a result of the
settlement gain of $1.8 million associated with the voluntary special
retirement program offered by the Company in the fourth quarter of 1999, a
reversal of an accrual for a lease buyout of approximately $1.8 million and
miscellaneous charges of $0.2 million. The settlement gain was realized as a
result of benefit payments made out of the Company's pension plan under the
special retirement program.
CORPORATE EXPENSES - Corporate expenses decreased 54% to $1.4 million in
2000 from $3.1 million in 1999 primarily due to a reclassification of the
investment group expenses from corporate expenses to investment income as a
result of the new subsidiary established in the fourth quarter of 1999, GCC
Investments, LLC ("LLC"). The new subsidiary is owned 99% by the Company and
the remaining 1% interest is owned by Chestnut Hill Capital Partners, LLC
("CHCP"), which is owned by the Chief Investment Officer and investment
professionals formerly employed by the Company's investment subsidiary. CHCP
has a management agreement with LLC, which specifies that CHCP is to be
reimbursed for certain expenses according to a specific formula. Under this
agreement, the management fee expense for the first six months of fiscal
2000, and included in investment income, was $1.9 million.
EQUITY LOSSES IN THEATRE AFFILIATES- The Company recorded net equity losses
in theatre affiliates of $1.4 million for the six months ended April 30,
2000 compared to $2.1 million for the same period in 1999. The decrease in
equity losses was primarily due to the Hoyts General Cinema South America
("HGCSA") joint venture. Revenues of the HGCSA venture increased 56% to
$27.0 million for the six months ended April 30, 2000 versus $17.3 million
for the same period in 1999. This increase in revenues was primarily due to
higher patronage as a result of opening five theatres with 55 screens over
the last twelve months. HGCSA's pre-tax loss improved to $0.3 million for
the first six months of 2000. This improvement is primarily due to the
increase in revenues
14
<PAGE> 17
and a reduction in start-up costs that were incurred by the venture in the
first quarter of 1999. The Company recorded a charge of $0.9 million related
to the permanent loss in value of its Mexican investment during the second
quarter of 2000. Subsequent to the end of the second quarter of 2000, the
Company sold its Mexican investment for $14.3 million.
INVESTMENT INCOME (LOSS), NET - The Company recorded investment income of
$3.5 million for the six months ended April 30, 2000 compared to investment
income of $11.7 million for the same period in 1999. The Company's
investment income during the first six months of 2000 included the realized
pre-tax gain of $8.0 million on the sale of the remaining shares of
PrimaCom, partially offset by performance-based compensation of $2.7 million
earned by certain former employees as a result of the sale of all the
Company's holdings in PrimaCom, management expenses of $1.9 million and
other gains of $0.1 million. In the first six months of 1999, the Company
recorded an unrealized gain on the PrimaCom trading securities of
approximately $14.4 million, an unrealized gain on Global TeleSystems Group,
Inc. ("GTS") of approximately $6.1 million and a realized gain on the GTS
trading securities sold of approximately $0.6 million, partially offset by
the impairment charge on the Teletrac investment of $8.3 million and
additional performance-based compensation related to the investment
portfolio of $1.1 million.
INTEREST EXPENSE - The Company's interest expense increased to $1.5 million
for the six months ended April 30, 2000 compared to $1.0 million in 1999
mainly due to increased borrowings outstanding during the quarter under the
revolving credit facility.
INCOME TAX EXPENSE - The Company's effective tax rate was 40% in 2000,
unchanged from 1999.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX - In the first quarter of
2000, the Company adopted Statement of Position ("SOP") 98-5, "Reporting the
Costs of Start-Up Activity." SOP 98-5 required that start-up activities
be expensed when incurred. The Company's practice had been to capitalize
lease costs incurred prior to openings of theatres and amortize the costs
under generally accepted accounting principles. The adoption of this new
accounting pronouncement resulted in a one-time non-cash charge to the
Company's statements of operations for the six months ended April 30, 2000
of $4.7 million (net of income tax benefit of $1.9 million) or $0.36 per
diluted share.
15
<PAGE> 18
GC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
---------------
DOMESTIC THEATRES - Virtually all of the GCC's revenues are collected in
cash, principally through theatre admissions and concession sales. The
Company has an operating "float" which partially finances its operations and
allows the Company to operate on a negative working capital basis. This
"float" exists because admissions and concessions revenues are typically
received in cash, while film rentals and concessions costs are ordinarily
paid to suppliers generally 15 to 45 days after the receipt of box office
admissions and concessions revenues. Occasionally, the Company is required
to make film advances to distributors. Significant changes to components of
the Company's working capital will be discussed in the appropriate sections
below.
In the six months ended April 30, 2000, General Cinema Theatres, Inc. (GCT)
opened a 14-screen theatre in Chicago, Illinois, a seven screen theatre in
Washington, D.C., a 14-screen theatre in Greenwood, Indiana and added two
screens to an existing theatre in the Boston, Massachusetts area. The
Company has commitments to open one additional theatre in 2000 and,
currently, no commitments beyond that. Aggregate costs including
construction and pre-opening costs paid by the Company during fiscal 2000
and over the term of the project in opening these theatres amounted to
approximately $23.2 million and $45.0 million, respectively. The aggregate
construction costs paid by the Company for a theatre vary depending on the
lease negotiated with the landlord, the number of auditoriums, additional
amenities that may be offered at the theatre and the portion of costs
provided by the Company's agreement with a major financial institution to
provide operating leases on leasehold improvements and equipment.
The Company has significant lease commitments. Lease payments totaled $76.5
million in 1999, and minimum lease payments are anticipated to approximate
$79.5 million in 2000.
During the first six months of 2000, the Company sold two theatres with ten
screens and miscellaneous assets generating proceeds of $2.4 million. In
addition, the Company closed seven theatres with 32 screens. Two of the
theatres were identified as impaired, and the costs associated with the
closing of these theatres were previously provided and included as part of
the early lease termination reserve. At April 30, 2000, the Company had an
outstanding liability for early lease terminations of $7.2 million. The
Company's reserve established for leases on properties it intends to abandon
reflects management's best estimate of the potential cost associated with
exiting the existing lease. Estimates are based on analysis of the
facilities, correspondence with the landlords, exploratory discussions with
sublessees and market conditions. The amounts the Company will eventually be
obligated for could differ materially from the amounts assumed at arriving
at the reserve. This process will continue, and the Company from time to
time may be required to make additional substantial one-time cash outflows.
During the first six months of 2000, the Company made cash payments of $5.7
million to terminate leases and $0.9 million for rent, severance and other
payments
The Company's total capital expenditures of $45.4 million for the six months
ended April 30, 2000 included cash expenditure for domestic theatres of
$28.2 million, cash expenditures of $1.7 million associated with the
Sundance Cinema joint venture and the reclassification of the outstanding
receivable due from a financing institution at October 31, 1999 of $15.5
million. The domestic theatre cash expenditures of $28.2 million were for
new theatre projects, leasehold improvements, furniture and equipment
purchases as well as information services related projects. Domestic
theatre capital expenditures are expected to approximate $60.8 million in
2000, including the reclassification of the receivable due from a financing
institution at October 31, 1999 of $15.5 million. In addition, the Company
anticipates contributing $7.7 million of cash to the Sundance Cinema joint
venture during fiscal 2000, primarily to fund its share of construction of
the two Sundance theatre projects which will open in calendar 2000.
INTERNATIONAL THEATRES - During the six months ended April 30, 2000, the
Company opened an 8-screen theatre in Chile through its South American joint
venture. The joint venture in South America, HGCSA, anticipates opening an
additional 16 screens and two units by the end of calendar 2000. This
theatre expansion program will be financed through debt facilities in Chile
and Argentina. Future advances are required of the partners under the South
American joint venture agreement only if sufficient bank
16
<PAGE> 19
financing is not available. Debt financing has been obtained by HGCSA
through its local subsidiaries for its theatre expansion program in Chile
and Argentina.
HGCSA has entered into a $75 million debt financing agreement with major
financial institutions to fund its operations in Argentina, which is secured
by the several guaranty of the joint venture's partners. Availability of
this financing beyond $50 million is subject to syndication to third-party
financial institutions. Under the several guaranty of the Argentina debt
facility, the Company is liable for 50% of the outstanding borrowings. At
April 30, 2000, the Company's portion of the outstanding borrowings under
this facility that it guarantees was approximately $10.0 million.
HGCSA has entered into a $22.5 million debt arrangement with financial
institutions to fund its operations in Chile, which is secured by the
several guaranty of the joint venture's partners. The Company is liable for
50% of the outstanding borrowings. At April 30, 2000, the Company's portion
of the outstanding borrowings under these facilities that it guarantees was
approximately $11.2 million, which was comprised of $9.1 million outstanding
borrowings and $2.1 million of outstanding guarantees. The Company invested
approximately $1.4 million in a certificate of deposit, which is held as
collateral for a portion of the outstanding guarantees at April 30, 2000.
This certificate of deposit is included in other current assets in the
consolidated balance sheets.
Subsequent to the end of the second quarter of 2000, the Company sold its
five-theatre investment in Mexico to a local competitor for approximately
$14.3 million, of which $7.5 million was paid in cash at the time of the
sale, and the remaining sales price will be paid in three installments over
two years.
INVESTMENT PORTFOLIO - At April 30, 2000, marketable equity securities were
$62.4 million, a decrease of $40.6 million from the balance at October 31,
1999. The decrease in marketable securities during the first six months of
2000 was primarily due to a decline in value of its Global TeleSystems,
Group, Inc. investment of $28.8 million, the sale of a portion of the
Company's investment in GrandVision SA, the sale of the remaining shares of
PrimaCom offset by the initial public offering of the Company's El Sitio and
MotherNature.com investments.
During the first six months of 2000, the Company sold 139,740 shares of
GrandVision SA generating proceeds of approximately $4.3 million. In
addition, the Company sold its remaining 532,702 shares in PrimaCom during
the first quarter of 2000 generating net cash proceeds of approximately
$33.1 million.
During the first six months of 2000, the Company invested an additional $5.0
million in Fuelman bringing its total interest to 46.7% on a fully diluted
basis and advanced $1.0 million to Fuelman in the form of a note. On
December 17, 1999, the Company invested $8.0 million in Vanguard Modular
Building Systems, a leading provider of relocatable classrooms and other
commercial modular space solutions. On January 7, 2000, the Company invested
$10.4 million as part of an overall $20.7 million commitment in VeloCom
Inc., a facilities-based voice, data and Internet provider in Brazil and
Argentina. The Company anticipates the additional investment in VeloCom Inc.
of approximately $10.4 million will be made by the end of the fiscal year.
Both El Sitio and MotherNature.com completed initial public offerings during
the first quarter of 2000. As a result of these public offerings, and in
accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company reclassified both these investments to marketable equity securities
and recorded them at their fair values at April 30, 2000 of $15.7 million
for El Sitio and $1.8 million for MotherNature.com.
Subsequent to the end of the second quarter of 2000, the Company invested
an additional $5.0 million in American Capital Access Holdings LLC.
OTHER - The Company received net borrowings of $31.6 million on its
outstanding revolving credit facility and paid interest of $0.9 million
during the first six months of 2000. The average interest rate for the first
six months of 2000 was 7.6%.
Due to a decline in the value of one of the Company's holdings in marketable
securities during the last fiscal quarter, as of April 30, 2000 the Company
was not in compliance with certain financial covenants in its financing
arrangements with certain of its financial institutions, including its
revolving credit facility and its reimbursement agreement with Harcourt
General, Inc. The Company has received waivers of these covenants for the
period ended April 30, 2000 from all of its financial institutions and
Harcourt General, Inc. As a condition to these waivers, the Company has
agreed to certain restrictions, which prevent the Company, through September
30, 2000, from: (a) borrowing additional funds, including borrowing
additional funds under its revolving credit facility; (b) entering into any
new financial leasing transactions; (c) making any additional portfolio
investments other than certain identified
17
<PAGE> 20
investments; (d) making any distributions from the Company and limit future
capital expenditures. As a result, the Company's current available
borrowings under its revolving credit facility are limited to $44.6 million,
the balance outstanding as of April 30, 2000.
The Company has requested amendment of its financial covenants under its
lease financing arrangements, its revolving credit facility and its
reimbursement agreement with Harcourt General to provide additional
flexibility. If these amendments are not obtained by July 31, 2000, the
Company will be required to seek additional waivers of its existing
covenants. If these amendments are entered into, the Company may be required
to (a) make certain mandatory prepayments on its revolving credit facility
or on its leasing obligations, (b) grant certain collateral in its
investment portfolio, (c) limit future investments, (d) limit additional
borrowing and (e) not make distributions from the Company. There can be no
assurances given as to the specific terms and conditions of these
amendments, or that such amendments will be forthcoming.
The Company believes that it has sufficient resources from its cash of $16.6
million and its marketable securities to meet its ongoing capital
expenditures and projected working capital needs. In addition, the Company
believes that there will be sufficient resources available under the
existing credit lines in its South American joint venture to complete the
venture's ongoing capital expenditures. However, given the restrictions
contained in the waivers and the Company's expectation that similar
restrictions will be contained in the amended agreements with its financial
institutions, the Company believes that in the near future (a) it is
unlikely to enter into any new domestic theatre lease commitments that
require substantial capital expenditures; (b) new investment activity will
be limited to the $15.4 million identified investments and, as a result, the
Company will be reducing its cost of management of its portfolio
investments; and (c) any net proceeds received from future sales of assets
will likely be utilized in part to prepay debt .
In December, 1999, the Company's Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock through
December, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
recently issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments in Hedging Activity." The Company is
not required to implement this standard until fiscal 2001. Its requirements
are complex and its scope far-reaching. The Company has not completed its
evaluation of the impact of this standard on the financial statements.
YEAR 2000 - The Year 2000 issue was primarily the result of computer
programs using a two-digit format, as opposed to four digits, to indicate
the year. As a result, such computer systems would be unable to interpret
dates beyond the year 1999, which could have caused a system failure or
other computer errors leading to a disruption in the operation of such
systems. In 1996, the Company developed a strategic plan to update its
information systems in order to meet business needs, move away from a
mainframe processing environment and create a new system infrastructure. As
a result of this plan, several major processing systems were replaced or
significantly upgraded during 1997 and 1998, and are, for the most part,
Year 2000 compliant, including certain point of sale systems, theatre
timekeeping and financial reporting systems. In 1998, the Company
established a project team to coordinate existing Year 2000 activities and
address remaining Year 2000 issues.
The Company's plan devoted the necessary resources to identify and modify
systems potentially impacted by Year 2000, or implement new systems to
become Year 2000 compliant in a timely manner. In 1999, the Company executed
its Year 2000 plan as systems potentially impacted by Year 2000 were
identified and, if necessary, were modified. In addition, the Company
developed contingency plans for key operational areas that could have been
impacted by the Year 2000 problem.
The Company did not incur any significant Year 2000 issues during, or after,
the move into the new calendar year. The total cost of executing the
Company's Year 2000 plan in 1999 was approximately $2.0 million.
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
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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, the
terms and conditions that may be required by the Company's financial
institutions in connection with its proposed amended financing arrangements,
construction risks and delays, the lack of strong film product, the impact of
competition including its impact on patronage, 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.
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GC COMPANIES, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
GC Companies operates in six major reported segments. The first four operate the
domestic motion picture exhibition market. The fifth operates through equity
method investees in the South American motion picture exhibition markets.
Subsequent to the end of the second quarter, the Company sold its Mexican
investment in May, 2000. The sixth segment operates as a venture capital arm
making investments in a variety of companies in several industries. Disclosures
under this heading address risks arising from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market risk-sensitive instruments.
The domestic motion picture segment is subject primarily to interest rate risks.
It bears this risk in two specific ways. First, the Company borrows money under
its revolving credit facility to fund its operating needs. At April 30, 2000,
the Company had outstanding borrowings of $44.6 million, carrying a variable
interest rate, which was 7.9% 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 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 the investment is in South
America, and because the operations of each of these entities are conducted
utilizing local currencies, the Company's financial statements are exposed to
foreign currency exchange rate changes. Market risk relative to exchange
fluctuations does not exist in the Company's 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 the
South American locations. Certain of the international joint venture debt
facilities are guaranteed by the Company. In the event of default under certain
of these debt facilities and if such guarantees were called, the contingent
guaranteed obligations would be subject to changes in foreign currency exchange
rates.
The Company's investment portfolio is primarily exposed to risks arising from
changes in equity prices. Such portfolio has been segmented into two categories.
The first category of investments held in the portfolio relate to those
marketable equity securities classified as available-for-sale. Four investment
holdings are classified herein at April 30, 2000: the Company's investments in
Global TeleSystems Group, Inc. ("GTS"), an international telecommunications
company (NYSE:GTS); El Sitio (NASDAQ:LCTO), an Internet provider of global and
country-specific content targeting Spanish and Portuguese speaking people in
Latin America; MotherNature.com (NASDAQ:MTHR), a Web-based retailer of vitamins,
supplements and minerals; and GrandVision ("GPS"), an optical and photo retailer
that is publicly-traded on the French Exchange under the symbol "GPS." The GTS
shares are subject to considerable market risk due to its volatility, and during
the first six months of 2000, have traded as high as $36.13 and as low as
$12.94. At April 30, 2000, the GTS shares closed at $14.56. El Sitio shares
since its initial public offering through April 30, 2000 have traded as high as
$41.00 and as low as $6.94. At April 30, 2000, the El Sitio shares closed at
$10.75. MotherNature.com shares since its initial public offering through April
30, 2000 have traded as high as $13.00 and as low as $1.63. At April 30, 2000,
the MotherNature.com shares closed at $2.63. During the first six months of
2000, The GPS shares have traded as high as 33.20 euros and as low as 24.50
euros. As of April 30, 2000, GPS shares closed at 29.71 euros. Equity market
fluctuations, without taking into account the impact of fluctuations in the euro
vis-a-vis the US dollar, can impact fair values (although not earnings, unless
such equity positions are actually liquidated). A 20% fluctuation in the
aggregate value of the available-for-sale securities would either reduce or
increase total assets by $9.0 million.
In addition, the GrandVision securities are traded in euros. A 10% fluctuation
in the value of the euro versus the US dollar (holding the value of the
underlying equity securities constant) would not impact pre-tax earnings and
total assets by a significant amount because the Company currently holds only
16,357 shares of GrandVision.
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
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also subject to fluctuations in value, but their current illiquidity reduces
their exposure to pure market risk.
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PART II
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on March 15, 2000.
The following matters were voted upon at the meeting:
1. Election of the following individuals as Class III
Directors for a term of three years:
RICHARD A. SMITH
For 6,633,512
Withheld 8,850
WILLIAM L. BROWN
For 6,633,715
Withheld 8,647
2. Ratification of the appointment of Deloitte & Touche
LLP as the Company's independent auditors for the
2000 fiscal year.
For 6,637,744
Against 2,030
Abstain 2,588
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended April 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GC COMPANIES, INC.
Date: June 14, 2000 /signed/
------------------------------------------
Richard A. Smith
Chairman of the Board of Directors and
Chief Executive Officer
Date: June 14, 2000 /signed/
------------------------------------------
G. Gail Edwards
Vice President, Chief Financial
Officer and Treasurer Principal Accounting
Officer
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