ITEM 1. BUSINESS
GENERAL
GC Companies, Inc. (the "Company"), through its subsidiaries, operates a motion picture exhibition circuit in the United States under the name "General Cinema Theatres," through a joint venture, operates motion picture theatres in South America and also manages the Company's investments. Through its investment operations, the Company invested in businesses which are unrelated to the Company's theatre business and the broader entertainment industry. INVESTMENTS MADE BY THE COMPANY ARE HIGHLY ILLIQUID AND INVOLVE CONSIDERABLE RISK. SEE "GCC INVESTMENTS, INC." BELOW.
In order to alleviate continuing cash flow losses at a number of theatre locations and the inability to reach appropriate resolution to the leases with the landlords at these locations and to restructure the Company's financial obligations, namely the bank credit facility of $44.6 million, equipment and leasehold operating leases of $111.0 million and outstanding letters of credit of $6.7 million, on October 11, 2000 (the "Filing Date"), GC Companies, Inc. and certain of its domestic subsidiaries voluntarily filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Chapter 11 cases"). Certain other subsidiaries of the Company, located in Georgia, Tennessee, Florida, Louisiana, and Rhode Island, filed petitions for relief under Chapter 7 of the United States Bankruptcy Code ("Chapter 7" or the "Chapter 7 cases"). The Chapter 11 cases and Chapter 7 cases are herein referred to as the "Bankruptcy Proceedings". The Company is presently operating its domestic theatre business and managing its investment assets as debtors-in-possession subject to the jurisdiction of the United States Bankruptcy Court in the State of Delaware (the "Bankruptcy Court"). The Company's subsidiary which holds the Company's interest in its South American theatre joint venture did not file a petition for reorganization because there were no significant outstanding liabilities on the books of the subsidiary other than an intercompany payable to the Company. As a result, the Company's subsidiary which holds the Company's interest in the South American theatre joint venture is not subject to the jurisdiction of the Bankruptcy Court.
In the Chapter 11 cases, as debtors-in-possession, the Company is authorized to operate its businesses in the ordinary course. Actions to collect pre-petition indebtedness are stayed.
On December 6, 2001, the Company entered into a letter of intent pursuant to which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the Company in accordance with a plan of reorganization filed with the Bankruptcy Court on December 21, 2001 (the "Reorganization Plan"). On January 16, 2002, the Company and AMC executed a definitive Stock Purchase Agreement. In addition, the Company entered into an interim operating agreement with AMC relating to the conduct of the Company's business prior to the effective date of the Reorganization Plan. AMC has also entered into a support agreement with certain key creditors of the Company, namely Harcourt General, Inc., General Electric Capital Corporation and the Official Committee of Unsecured Creditors in the Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of the creditor parties to the support agreement has agreed to support AMC's bid to acquire the Company if the Reorganization Plan treats their claim as described in the support agreement.
The Reorganization Plan is subject to Bankruptcy Court approval, a vote of the Company's creditors and certain other conditions. Under the Reorganization Plan, AMC will become the owner of all of the stock of the reorganized GC Companies, Inc. and will pay the Company's creditors consideration, consisting of cash, AMC senior subordinated notes or AMC common stock, having a value between $175 million and $195 million plus assumed debt of $28.5 million based upon the estimated date of confirmation of the proposed Reorganization Plan of March 12, 2002, among other factors. The ultimate amount AMC will pay the creditors of the Company is not presently determinable and will depend upon, among other things: (i) a final determination of allowed claims that will be made by the Bankruptcy Court; (ii) the form of consideration chosen by certain of the creditors of the Company to whom alternatives are available; (iii) the form of recovery and consideration AMC chooses to issue to specified
creditors of the Company; (iv) the amount of cash otherwise available to the Company at the effective date of the Reorganization Plan; and (v) the length of time it takes to consummate the transaction. The Reorganization Plan sets forth the terms and provisions of the Company's reorganization and AMC's acquisition of all of the common stock of the Company.
If the Reorganization Plan is confirmed by the Bankruptcy Court and implemented, all existing shares of the Company's common stock will be canceled and will no longer represent an equity interest in the Company; however, on terms and conditions set forth in the Reorganization Plan, existing holders of the Company's common stock may be provided with the opportunity to participate in a newly formed entity which will hold assets of the Company's investment portfolio. However, if a party in interest objects to such participation, and such objection is sustained by the Bankruptcy Court, existing holders of the Company's common stock will not receive a right to participate in the newly formed entity, nor will they receive any consideration for their shares in the Company.
Management's objective is to have the Reorganization Plan confirmed prior to the expiration of the DIP Facility on March 31, 2002 and believes that this timing is reasonably likely. However, there can be no assurance of a confirmation by this date. Until the Reorganization Plan is confirmed by the Bankruptcy Court, there can be no assurance that the Company will emerge from these reorganization proceedings, and the effect of the terms and conditions of such Reorganization Plan on the Company's business cannot be determined.
The Company entered into an agreement dated October 13, 2000 with major financial institutions for a debtor-in-possession credit facility (the "DIP Facility") under which the Company may borrow up to $45.0 million, subject to certain limitations, to fund ongoing working capital needs while the Bankruptcy Proceedings are pending. The DIP Facility is available to the Company through the earlier of emergence from Chapter 11 or March 31, 2002. A further discussion regarding liquidity is in Item 7 and Note 2 to the Company's consolidated financial statements.
RECENT DEVELOPMENTS IN ARGENTINA
Subsequent to October 31, 2001, the government of Argentina imposed restrictions on the withdrawal of cash balances from individuals' bank accounts and has restricted the ability of companies to pay vendors located outside of Argentina. These fiscal policies, as well as continuing economic difficulties and political turmoil have resulted in public demonstrations in Argentina, which required the shutdown of several theatres for a short period of time and a decline in theatre attendance subsequent to October 31, 2001. In January 2002, the government of Argentina announced the adoption of a currency system allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. As operating cash inflows and outflows of the Company's Argentine subsidiary are predominantly denominated in pesos and the debt service payments of the Argentine subsidiary are denominated in U.S. dollars, the realization of the Company's investment in Argentina is dependent upon the Argentine operation's ability to generate sufficient pesos to pay debt service and provide for a return on investment to the joint venture. Because of the recency of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on the joint ventures' operations, cash flows and its ability to meet its debt obligations. Accordingly, while the Company's investment in Argentina is currently impaired, management has not determined that the impairment is other than temporary; therefore, no charge to operations has been recorded.
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, 2001, the Company operated 73 theatres with a total of 677 screens in 19 states and the District of Columbia. Substantially all of the Company's theatres are equipped with high-quality sound and projection equipment and exhibit a popular selection of films on a "first-run" basis.
Approximately 82% of the Company's theatres and screens are located in 17 of the 50 largest Designated Market Areas (television market areas as defined by Nielson Media Research) in the United States.
During 2001, the Company increased its average number of screens per theatre from 8.8 to 9.3 as a result of closing seven older theatres with 28 screens during the year. All of the Company's theatres are multi-screen theatres, and approximately 60% of the Company's screens are located in theatres having 10 to 18 screens. Since November 1, 1991, the Company has opened 35 new theatres with an average of 12 screens each. In addition, the Company currently operates two "Premium Cinemas" which are upscale movie-going experiences with features such as large leather seats, a bistro menu of appetizers and an elegant lounge.
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 and box offices. 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.
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 2001, less than 16% 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 Company continues to receive film in the ordinary course. The Company has not experienced any interruption of film supply as a result of the Company filing Chapter 11 and continues to enjoy a good supply of film product. The Company received Bankruptcy Court approval to pay in full all of its pre-petition obligations to film distributors. In 2001, the Company paid the final installment of $6.5 million to the film distributors on the pre-petition balance outstanding of $21.7 million.
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, offering bulk candy snacks, training staff to cross-sell products, and making efficient use of concession facilities and staff. In addition, cafes and game rooms in the Company's theatres also contribute to sales. The Company's strategy emphasizes prominent and appealing concession counters designed for rapid service, efficiency, and optimal merchandising of concession items.
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 a majority of the markets in which it operates.
The Company ensures the availability and licensing of popular films by maintaining good relationships with film distributors. New megaplex theatres constructed by the Company since 1997 typically range in size from 14 to 18 screens, which the Company believes provides the maximum utilization of the theatre's auditorium throughout the year. In addition, these new theatres provide the latest amenities including, among other things, cafes, game rooms, large concession areas with multiple offerings to the customer, stadium seating and comfortable seats. The Company provides a comfortable and clean movie-going experience to its customers with state of the art technology. The Company has actively pursued "THX" sound certification in its theatres to maximize the film experience.
The Company frequently reviews both its box office and concession pricing to stay competitive with other entertainment offerings and competitors. The major theatre exhibitors that the Company competes with are Loews Cineplex Entertainment, Inc., Regal Cinemas, Inc. and United Artists Theatre Company.
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 DVDs as well as 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 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 a 50/50 joint venture with Hoyts Cinema Group creating Hoyts General Cinema South America (HGCSA), a stand-alone theatre circuit which pursues theatre opportunities in South America. As of October 31, 2001, HGCSA operated nine theatres with 87 screens in Argentina, six theatres with 50 screens in Chile, a theatre with 15 screens in Brazil and a joint venture with an eight-screen theatre in Uruguay. Key factors which are considered in selecting new theatre sites are demographic trends derived from statistical sources, distance from competitive theatres as well as accessibility and proximity to retail, other entertainment and dining areas.
All of the Company's theatres in South America 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 venture 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, such as foreign countries requiring a certain amount of local film product being shown in the theatres. The Company's international operations also face the additional risk of fluctuating currency values in varying economic climates. The Company does not hedge against 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.
RECENT DEVELOPMENTS IN ARGENTINA
Subsequent to October 31, 2001, the government of Argentina imposed restrictions on the withdrawal of cash balances from individuals' bank accounts and has restricted the ability of companies to pay vendors located outside of Argentina. These fiscal policies, as well as continuing economic difficulties and political turmoil have resulted in public demonstrations in Argentina, which required the shutdown of several theatres for a short period of time and a decline in attendance at our theatres subsequent to October 31, 2001. In January 2002, the government of Argentina announced the adoption of a currency system allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. As operating cash inflows and outflows of the Company's Argentine subsidiary are predominantly denominated in pesos and the debt service payments of the Argentine subsidiary are denominated in U.S. dollars, the realization of the Company's investment in Argentina is dependent upon the Argentine operation's ability to generate sufficient pesos to pay debt service and provide for a return on investment to the joint venture. Because of the recency of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on the joint ventures' operations, cash flows and its ability to meet its debt obligations. Accordingly, while the Company's investment in Argentina is currently impaired, management has not determined that the impairment is other than temporary; therefore, no charge to operations has been recorded.
EMPLOYEES
At October 31, 2001, the Company had approximately 412 full-time and 3,481 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.
Certain of the Company's projectionists and floor staff, representing approximately 7.1% of the Company's employees as of October 31, 2001, 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 invested in companies that are engaged in businesses which are unrelated to the Company's theatre business and the broader entertainment industry. The Company's investment professionals monitor the Company's investments and, as designees of the Company, serve as members of the boards of directors of
such companies. At the present time, the Company is restricted from making any additional new investments under agreements with its lenders, and certain sales of portfolio investments require consent of the DIP Facility lenders.
The investments of the Company are minority positions. Although the Company does not seek to provide day-to-day managerial support to the companies in which it holds investments, the Company, through its board of directors representation, may provide such companies assistance with strategic, financial and operational matters.
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. Existing investments in non-public portfolio companies were transferred to 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 former Chief Investment Officer and an investment professional formerly employed by 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 had a management agreement with regard to GCC Investments, LLC, which specified that CHCP was to be reimbursed for certain expenses according to a specific formula. This management agreement was terminated in October, 2000, and the remaining members of CHCP now provide services to the Company as employees.
INVESTMENTS MADE BY THE COMPANY ARE HIGHLY ILLIQUID AND 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 INVESTMENTS WILL MAKE A CONTRIBUTION TO THE COMPANY'S EARNINGS IN THE FORESEEABLE FUTURE. THE COMPANY'S INVESTMENTS 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 4 and 5 TO THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS.
PRIOR RELATIONSHIP WITH HARCOURT GENERAL, INC.
GCC was previously a 100%-owned subsidiary of Harcourt General. Certain shareholders also functioned as officers of both companies and had significant interests in both companies. Harcourt General was sold to Reed Elsivier in August 2001. Neither Harcourt General nor Reed Elsivier has any officers or directors in common with the Company.
GC Companies, Inc. was incorporated in 1993 as a result of a spin-off from Harcourt General. Harcourt General provided certain corporate services to the Company in consideration of a fee based on Harcourt General's costs. Harcourt General's former Chairman, Richard A. Smith, also served as Chairman of the Company until June 19, 2001. The fees payable to Harcourt General have been 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. No fees were incurred or paid by the Company to Harcourt General for management and other corporate services in 2001. The fees paid or accrued by the Company to Harcourt General for management and other corporate services were approximately $0.2 million and $0.5 million in fiscal years 2000 and 1999, respectively. The reduction in fees and services was a result of an agreement with Harcourt General which provided that no charges for the services of Richard A. Smith be incurred after April, 2000.
In addition, a majority of the pre-1993 theatre leases to which the Company is a party are guaranteed by Harcourt General (the "Guaranteed Leases"). Pursuant to a Reimbursement and Security Agreement entered into between the Company and Harcourt General at the time the Company became a stand-alone entity (the "Spinoff"), the Company agreed to reimburse Harcourt General for all liabilities, if any, incurred by Harcourt General after the Spinoff in connection with the Guaranteed Leases, and pledged all of the stock of its theatre subsidiaries to Harcourt General as security for such agreement. The Reimbursement and
Security Agreement contained financial and operating covenants; however, enforceability of these covenants and other limitations were stayed in connection with the Chapter 11 proceedings. In consideration of Harcourt General's continuing guarantees of the Guaranteed Leases, the Company paid Harcourt General a guarantor's fee measured as a percentage of the present value of all amounts owing under the Guaranteed Leases for which Harcourt General has potential liability. No guarantee fees were paid or accrued by the Company in 2001 as a result of the Chapter 11 bankruptcy proceedings. The guarantor's fees paid by the Company to Harcourt General for fiscal years 2000 and 1999 were approximately $0.6 million and $0.7 million, 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 $0.7, $1.2, and $1.2 million in 2001, 2000, and 1999, respectively.
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 29.12% of the outstanding shares of common stock of the Company.
ITEM 2.
ITEM 2. PROPERTIES
DOMESTIC
As of October 31, 2001, the Company operated 73 theatres with a total of 677 screens in 19 states and the District of Columbia. All of the Company's theatres, with one exception, are 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. Substantially all domestic leases of the Company are noncancelable. 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.
At October 31, 2001, the Company operated in the following major metropolitan markets: Chicago, Illinois; Boston, Massachusetts; Baltimore, Maryland and Washington, DC; northern New Jersey and New York City; Los Angeles, California; Seattle, Washington; Philadelphia, Pennsylvania; Indianapolis, Indiana; and Minneapolis, Minnesota. During 2001, the Company closed seven theatres with 28 screens. The areas impacted by these closings were California with two theatres and nine screens, North Carolina with two theatres and seven screens, Illinois with two theatres and seven screens, and Ohio with a five screen theatre.
The Company's corporate, theatre and investment headquarters are located in Chestnut Hill, Massachusetts, a suburb of Boston. Corporate headquarters' functions include overall administration, finance, accounting, human resources and management of the Company and all investment operations. Theatre headquarters' functions include administration with respect to theatre operations, information services, marketing and real estate development. The Company subleases its corporate and theatre headquarters from Harcourt General, which was sold to Reed Elsivier in August, 2001.
For additional information regarding the Company's lease obligations, see the Notes to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data.
INTERNATIONAL
As of October 31, 2001, the Company operates through HGCSA, nine theatres with 87 screens in Argentina, six theatres with 50 screens in Chile, a theatre with 15 screens in Brazil and, through a joint venture, a theatre with eight screens in Uruguay. The average number of screens per theatre is 9.4 with the theatres ranging in size from five to 16 screens. All of the international theatres are 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 the payment of taxes, utilities, common area maintenance and certain other expenses related to the leased theatre. Certain Argentina theatre leases require the joint venture to make rent payments in U.S. dollars, which will be impacted by the Argentine government's adoption of a currency system, subsequent to October 31, 2001, allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. On the theatre leases requiring rent payments in U.S. dollars, the joint venture has outstanding loans due from the landlords for construction costs. These loans due from the landlords to the joint venture require payments in U.S. dollars, which partially offset the rent payments. There is the potential that the government will require that contractual payments pegged in U.S. dollars be converted to pesos. Management cannot predict the outcome of possible legislation or the impact a floating peso will have on its operations and cash flows.
The South American joint venture has a corporate office in Buenos Aires, Argentina and a regional theatre office in Santiago, Chile. The corporate office functions include overall administration, finance, information services, real estate development, accounting and management of the joint venture operations. The Chile regional office functions include administration with respect to theatre operations, human resources, marketing, film licensing and theatre management with respect to Chile.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On October 11, 2000, the Company and the following domestic operating subsidiaries filed voluntary petitions to reorganize their businesses under Chapter 11 of the US Bankruptcy Code in the United States Bankruptcy Court for the State of Delaware under the case name In re GC Companies, Inc., et. al.
Case Numbers 00-3897 through 00-3927 (the "Chapter 11 cases"):
GCC Investments, Inc. General Cinema Theatres, Inc. G.C. Theatre Corp. of California General Cinema Corp. of Clifton General Cinema Theatre of Columbia, Inc. General Cinema Theatres of Delaware, Inc. General Cinema Corp. of Greenwood General Cinema Theatres of Illinois, Inc. General Cinema Corp. of Indiana General Cinema Corp. of Landmark 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 Minnesota, Inc. General Cinema Theatres of New Jersey, Inc. General Cinema of New Mexico, Inc. General Cinema Corp. of New York, Inc. General Cinema Corp. of North Carolina General Cinema Corp. of Northwestern General Cinema Theatres of Ohio, 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 South Carolina General Cinema Corp. of Texas General Cinema Corp. of Virginia General Cinema Corp. of Washington General Cinema Theatre of Yorktown, Inc.
In addition, on October 11, 2000, the following domestic subsidiaries filed voluntary petitions for protection under Chapter 7 of US Bankruptcy Code in the United States Bankruptcy Court for the State of Delaware:
General Cinema Theatres of Georgia (Case No. 00-3932) General Cinema Corp. of Florida, Inc. (Case No. 00-3933) General Cinema Corp. of Louisiana (Case No. 00-3931) General Cinema Corp. of Tennessee, Inc. (Case No. 00-3929) General Cinema Corp. of Rhode Island (Case No. 00-3930) General Cinema Corp. of West Palm Beach (Case No. 00-3928)
All of the Chapter 11 and Chapter 7 proceedings are currently pending.
At this time, it is not possible to predict the outcome of the Chapter 11 cases or their effect on the Company's business. Additional information regarding the Chapter 11 cases is set forth in Item 1, Item 7, and Item 8, Financial Statements and Supplementary Data.
The Company is involved in various other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK
The Company's Common Stock was traded on the New York Stock Exchange under the symbol "GCX" through June 12, 2001 at which time trading was suspended. The Company's Common Stock began trading on the OTC Bulletin Board under the symbol "GCCXQ" on June 18, 2001. On August 10, 2001, the Company was delisted from the New York Stock Exchange.
The following table sets forth for the periods indicated the high and low prices of the Company's Common Stock in the market systems noted above.
At January 18, 2002, there were 2,449 record holders of Common Stock. 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. No repurchases were made in fiscal 2000, and the Company did not renew this program in 2001.
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. The DIP Facility restricts the Company from paying dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) The selected financial data are derived from the consolidated financial statements of the Company.
(2) These liability categories are classified in "Liabilities subject to compromise" at October 31, 2001 and 2000.
(3) These locations and screens are owned by the Company's South American joint venture and, as such, are accounted for under the equity method.
(4) At October 31, 2001 and October 31, 2000, $38,580 and $34,122, respectively, of other long-term liabilities are classified as "Liabilities subject to a compromise" in the Company's consolidated balance sheets.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
In order to alleviate continuing cash flow losses at a number of theatre locations and the inability to reach appropriate resolution to the leases with the landlords at these locations and to restructure the Company's financial obligations, namely the bank credit facility of $44.6 million, equipment and leasehold operating leases of $111.0 million and outstanding letters of credit of $6.7 million, on October 11, 2000 (the "Filing Date"), GC Companies, Inc. and certain of its domestic subsidiaries voluntarily filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Chapter 11 cases"). Certain other subsidiaries of the Company, located in Georgia, Tennessee, Florida, Louisiana, and Rhode Island, filed petitions for relief under Chapter 7 of the United States Bankruptcy Code ("Chapter 7" or the "Chapter 7 cases"). The Chapter 11 cases and Chapter 7 cases are herein referred to as the "Bankruptcy Proceedings". The Company is presently operating its domestic theatre business and managing its investment assets as debtors-in-possession subject to the jurisdiction of the United States Bankruptcy Court in the State of Delaware (the "Bankruptcy Court"). The Company's subsidiary which holds the Company's interest in its South American theatre joint venture did not file a petition for reorganization because there were no significant outstanding liabilities on the books of the
entity other than an intercompany payable to the Company. As a result, the Company's subsidiary which holds the Company's interest in the South American joint venture is not subject to the jurisdiction of the Bankruptcy Court. Management does not anticipate that the Company's Chapter 11 filing will have any impact on the South American joint venture's revenues.
The Company closed 55 locations with 375 screens in the fourth quarter of 2000 and seven theatres with 28 screens in fiscal year 2001. These closures will permit the ongoing losses associated with those theatres to be eliminated. The Bankruptcy Proceedings will allow the Company to incur a far lower cost to terminate these leases than would have been incurred had these leases been terminated outside of the Bankruptcy Proceedings because of the lease termination cost limitation contained in Section 502(b)(6) of the Bankruptcy Code. The Company is negotiating with certain of its remaining landlords and is continuing to evaluate its remaining leases as part of its reorganization plan process. The Company has addressed its general and administrative costs, and these have already been reduced in part as a result of the downsizing of the number of theatres operated and other management initiatives.
In the Chapter 11 cases, approximately $196.4 million of liabilities as of October 31, 2001 are subject to compromise under a plan of reorganization filed on December 21, 2001 (the "Reorganization Plan") to be voted upon by the Company's creditors and shareholders and confirmed by the Bankruptcy Court. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and a final determination of the allowable claim will be made by the Bankruptcy Court. These claims may also be subject to adjustment depending on the determination of the validity and the value of the security held in respect of certain claims. The ultimate amount and settlement terms for such liabilities are subject to the Reorganization Plan and, accordingly, are not presently determinable.
On December 6, 2001, the Company entered into a letter of intent pursuant to which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the Company in accordance with the Reorganization Plan. On January 16, 2002, the Company and AMC executed a definitive Stock Purchase Agreement. In addition, the Company entered into an interim operating agreement with AMC relating to the conduct of the Company's business prior to the effective date of the Reorganization Plan. AMC has also entered into a support agreement with certain key creditors of the Company, namely Harcourt General, Inc., General Electric Capital Corporation and the Official Committee of Unsecured Creditors in the Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of the creditor parties to the support agreement has agreed to support AMC's bid to acquire the Company if the Reorganization Plan treats their claim as described in the support agreement.
The Reorganization Plan is subject to Bankruptcy Court approval, a vote of the Company's creditors and certain other conditions. Under the Reorganization Plan, AMC will become the owner of all of the stock of the reorganized GC Companies, Inc. and will pay the Company's creditors consideration, consisting of cash, AMC senior subordinated notes or AMC common stock, having a value between $175 million and $195 million plus assumed debt of $28.5 million based upon the estimated date of confirmation of the proposed Reorganization Plan of March 12, 2002, among other factors. The ultimate amount AMC will pay the creditors of the Company is not presently determinable and will depend, among other things, upon: (i) a final determination of allowed claims that will be made by the Bankruptcy Court; (ii) the form of consideration chosen by certain of the creditors of the Company to whom alternatives are available; (iii) the form of recovery and consideration AMC chooses to issue to specified creditors of the Company; (iv) the amount of cash otherwise available to the Company at the effective date of the Reorganization Plan; and (v) the length of time it takes to consummate the transaction. The Reorganization Plan sets forth the terms and provisions of the Company's reorganization and AMC's acquisition of all of the common stock of the Company.
If the Reorganization Plan is confirmed by the Bankruptcy Court and implemented, all existing shares of the Company's common stock will be canceled and will no longer represent an equity interest in the Company; however, on terms and conditions set forth in the Reorganization Plan, existing holders of the Company's common stock may be provided with the opportunity to
participate in a newly formed entity which will hold assets of the Company's investment portfolio. However, if a party in interest objects to such participation, and such objection is sustained by the Bankruptcy Court, existing holders of the Company's common stock will not receive a right to participate in the newly formed entity, nor will they receive any consideration for their shares in the Company.
Management's objective is to have the Reorganization Plan confirmed prior to the expiration of the DIP Facility on March 31, 2002 and believes that this timing is reasonably likely. However, there can be no assurance of a confirmation by this date. Until the Reorganization Plan is confirmed by the Bankruptcy Court, there can be no assurance that the Company will emerge from these reorganization proceedings, and the effect of the terms and conditions of such Reorganization Plan on the Company's business cannot be determined.
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to maintain compliance with debt covenants under the DIP Facility and confirmation by the Bankruptcy Court of the Reorganization Plan.
Forward-Looking Statements
With respect to the foregoing, forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements; however, the foregoing description of subsequent events also contains other forward-looking statements. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: the overall viability of the Company's long-term operational reorganization and financial restructuring plan; the involvement of our secured and unsecured creditors in the Chapter 11 proceedings; the Bankruptcy Court approval of the proposed Reorganization Plan and the related potential AMC acquisition and numerous other approvals incident to the Company's operations in Chapter 11 and the Company's ultimate reorganization; competitive pressure in the Company's market; dependence upon motion picture productions and performance; seasonality; business conditions in the movie industry and other complementary markets; the ability of the Argentina and Chile companies to successfully renegotiate their debt financing agreements; the impact on the Company's joint venture operations and cash flows in Argentina as a result of the recent economic and political turmoil; general economic conditions and the risk factors detailed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10K for the year ended October 31, 2001. By making these forward-looking statements, the Company does not undertake to update them in any manner except as may be required by the Company's disclosure obligations in filings it makes with the Securities and Exchange Commission under Federal securities laws.
RESULTS OF OPERATIONS YEAR ENDED OCTOBER 31, 2001 COMPARED WITH THE YEAR ENDED OCTOBER 31, 2000
Net losses decreased $99.7 million to $35.9 million in 2001 from $135.6 million in 2000. Net losses in 2001 included reorganization items related to the Bankruptcy Proceedings of $21.7 million and impairment charges on the investment portfolio of $4.4 million. Net losses in 2000 included an impairment and restructuring charge of $37.6 million relating to the nonrecoverability of assets of the Company's domestic theatre businesses and ventures, a reorganization charge of $28.9 million related to the Bankruptcy Proceedings as well as impairment charges on the investment portfolio of $19.1 million. Theatre operations showed a loss of $8.9 million in 2001 compared to a loss of $73.8 million in 2000. Operating losses
after corporate expenses for 2001 were $17.7 million, a decrease of $75.0 million from operating losses after corporate expenses of $92.7 million in 2000. Earnings before interest, taxes, depreciation, gain on disposition of theatre assets, impairment, restructuring and reorganization ("Operating EBITDA") was $16.9 million for 2001, an improvement of $26.5 million over the Operating EBITDA loss of $9.6 million in 2000.
Theatre Revenues
Total revenues decreased 16.6% to $298.4 million for the year ended October 31, 2001 from $358.0 million for the same period in 2000, primarily attributable to a 20.1% decrease in patronage partially offset by a 7.4% increase in average ticket price and a 2.0% increase in concession sales per patron. The decrease in patronage was mainly due to the Company operating fewer theatres during the year. In 2000, the Company closed 64 theatres with 417 screens, of which 55 theatres with 375 screens were closed in the fourth quarter. Seven theatres with 28 screens were closed in fiscal year 2001. The Company operated domestically 677 screens at 73 locations at October 31, 2001 compared to 685 screens at 78 locations at October 31, 2000. The increase in average ticket prices was due to the theatres closed in the fourth quarter of 2000, which had lower average ticket prices, and moderate price increases during the summer of 2001. A growth in concessions sales per patron was principally attributable to the theatres closed in the fourth quarter of 2000, which had lower concession sales per person.
Costs of Theatre Operations
Cost of theatre operations (film rentals, concessions, theatre operations and administrative expenses and depreciation) for the year ended October 31, 2001 decreased $88.2 million to $292.8 million in 2001 from $381.0 million last year. As a percentage of total revenues, cost of theatre operations was 98.1% for the year ended October 31, 2001 compared to 106.4% for the year ended October 31, 2000. This decreased percentage of the cost of theatre operations to total revenues for the year compared to the same period in 2000 was primarily due to lower rent and rent related expenses, a decrease in theatre payroll costs, lower administrative costs and a decrease in advertising expenses. These decreases were partially offset by lower film margins.
Reorganization Items
For the year ended October 31, 2001, the Company recorded the following expenses directly associated with the Bankruptcy Proceedings: professional fees of $8.1 million, lease termination charges of $12.8 million, the write-off of certain assets of $0.9 million and severance and retention costs for personnel of approximately $0.8 million. These charges were partially offset by an early lease termination credit of $0.4 million and interest income of $0.5 million earned by the Company on the cash accumulated and invested during the Bankruptcy Proceedings. In 2000, the Company incurred and recorded the following expenses directly associated with the Bankruptcy Proceedings: reorganization items of $28.9 million, which included the write-off of the net book value of assets of $6.0 million for the 55 theatres closed during the fourth quarter, accrued lease termination costs of $20.0 million, professional services related to the bankruptcy of $2.4 million and severance costs of $0.5 million.
Corporate Expenses
Corporate expenses decreased 54.0% to $1.8 million in 2001 from $3.8 million in 2000, primarily due to a reduction of expenses as a result of decreasing the number of theatres the Company operates and other management initiatives.
Equity Losses in Theatre Affiliates
The Company's South American joint venture is 50% owned and is accounted for under the equity method. As a result, the operations of the joint venture are included within the line item
"Equity losses in theatre affiliates" within the Company's consolidated statements of operations. The revenues and expenses of the South American joint venture are not consolidated into the Company's financial statements. The subsidiary that holds the 50% interest in the South American joint venture did not file for bankruptcy because there were no significant outstanding liabilities on the books of the entity other than an intercompany payable to the Company. Management does not anticipate that the Company's Chapter 11 filing will have any impact on the South American joint venture's revenues. However, 50% of the $46.0 million debt, of which a portion is denominated in U.S. dollars, of the South American joint venture is guaranteed by the Company. Subsequent to October 31, 2001, HGCSA was in default of the Argentina and Chile debt financing agreements as the debts became due in December 2001 and payment was not made in accordance with the agreements. Management of the Argentine and Chilean companies and HGCSA are in negotiations with the financial institutions to restructure the debt financing agreements. Subject to the results of these negotiations, the guarantees may become unsecured claims of the Company and be resolved through its Bankruptcy Proceedings. In the event that the negotiations to restructure the financing agreements are unsuccessful and the financial institutions elect to demand payment, the Argentine and Chilean companies would be unable to make such payment. Therefore, the Company's investment in HGCSA, represented by the Argentine and Chilean subsidiaries, would become fully impaired. The carrying value of the investment attributable to Argentina and Chile operations is in excess of $30 million.
The Company recorded equity losses in theatre affiliates of $3.0 million for the year ended October 31, 2001 compared to $3.6 million for the prior year. Included in the equity losses in theatre affiliates for the year ended October 31, 2000, was a charge of $1.6 million related to the Company's Mexican theatre investment, which was sold in May of 2000. Revenues of the HGCSA joint venture increased 1.8% to $60.1 million for the year ended October 31, 2001 from $59.1 million for the year ended October 31, 2000, primarily due to increased patronage because of additional theatres operating during fiscal year 2001 compared to fiscal year 2000. HGCSA operated 160 screens in 17 theatres at October 31, 2001 compared to 143 screens in 15 theatres at October 31, 2000. The increased patronage was partially offset by a lower average ticket price, which resulted from a discounting of prices to attract patrons in response to a very weak economy in Argentina. The pre-tax loss of HGCSA increased to $4.2 million for the year ended October 31, 2001 compared to a loss of $1.5 million for the year ended October 31, 2000, primarily due to higher depreciation expense, occupancy costs, interest expense and a charge of $0.7 million for pre-construction costs associated with potential theatre development no longer being pursued. Operations of the theatres in Argentina have been negatively impacted by the continuing decline of Argentina's economy.
RECENT DEVELOPMENTS IN ARGENTINA
Subsequent to October 31, 2001, the government of Argentina imposed restrictions on the withdrawal of cash balances from individuals' bank accounts and has restricted the ability of companies to pay vendors located outside of Argentina. These fiscal policies, as well as continuing economic difficulties and political turmoil have resulted in public demonstrations in Argentina, which required the shutdown of several theatres for a short period of time and a decline in theatre attendance subsequent to October 31, 2001. In January 2002, the government of Argentina announced the adoption of a currency system allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. As operating cash inflows and outflows of the Argentine subsidiary are predominantly denominated in pesos and the debt service payments of the Argentine subsidiary are denominated in U.S. dollars, the realization of the Company's investment in Argentina is dependent upon the Argentine operation's ability to generate sufficient pesos to pay debt service and provide for a return on investment to the joint venture. Because of the recency of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on the joint ventures' operations, cash flows and its ability to meet its debt obligations. Accordingly, while the Company's investment in Argentina is currently impaired, management has not determined that the impairment is other than temporary; therefore, no charge to operations has been recorded.
Investment (Loss) Income, Net
The Company recorded an investment loss of $9.8 million in fiscal year 2001 compared to an investment loss of $19.8 million for fiscal year 2000. The Company's investment loss during the year ended October 31, 2001 included equity losses in portfolio investments of $3.8 million, management and administrative costs of approximately $1.4 million, a charge of $4.4 million for the other than temporary impairment taken on El Sitio, Inc. (now Claxson Interactive Group Inc.) and other net charges of $0.1 million. The Company's investment loss during fiscal year 2000 included a charge of $9.6 million for the other than temporary impairment taken on American Capital Access ("ACA"), a charge of $9.5 million on MotherNature.com, a realized pre-tax loss of $2.9 million on the sale of the remaining shares of Global TeleSystems, Inc. in the fourth quarter, equity losses of $1.5 million, management and administrative costs of $3.3 million and performance-based compensation of $2.0 million. These investment losses were partially offset by the realized pre-tax gain of $8.0 million on the sale of PrimaCom, interest and dividend income of $0.6 million as well as miscellaneous income of $0.4 million.
Interest Expense
The Company's interest expense increased to $5.4 million for the year ended October 31, 2001 compared to $4.3 million in 2000, mainly due to adequate protection payments of $ 3.9 million on the outstanding bank credit facility of $44.6 million and borrowings during the year under
the Company's DIP Facility.
Income Tax Expense
The Company recorded no income tax benefit for the year ended October 31, 2001 due to the uncertainty surrounding the future realization of such benefits.
RESULTS OF OPERATIONS YEAR ENDED OCTOBER 31, 2000 VERSUS THE YEAR ENDED OCTOBER 31, 1999
Net losses increased $133.3 million to a loss of $135.6 million in 2000 from a net loss of $2.3 million in 1999. The net loss in 2000 included an impairment and restructuring charge of $37.6 million relating to the nonrecoverability of assets of the Company's domestic theatre businesses and ventures, a reorganization charge of $28.9 million related to the Bankruptcy Proceedings as well as impairment charges on the investment portfolio of $19.1 million. Net losses 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-down 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. Theatre operations showed a loss of $73.8 million in 2000 compared to a loss of $6.2 million in 1999. Operating losses after corporate expenses for 2000 were $92.7 million, an increase of $79.0 million from an operating loss after corporate expenses of $13.7 million in 1999.
Theatre Revenues
Total revenues decreased 7.3% to $358.0 million for the year ended October 31, 2000 from $386.2 million for the same period in 1999 primarily attributable to a 13.9% decrease in patronage, partially offset by a 7.9% increase in average ticket price and a 6.1% 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. 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 685 screens at 78 locations at October 31, 2000 compared to 1,052 screens at 138 locations at October 31, 1999. During 2000, the Company closed 64 theatres with 417 screens, of which 55 theatres with 375 screens were closed in the fourth quarter. The increase in average ticket prices was due to price increases adopted in November, 1999 and May, 2000 in a majority of theatres. The growth in concessions sales per patron was principally attributable to marketing promotions during the year and some minor price increases. In addition, both the Company's average ticket price and concession sales per person were positively impacted by the closing of theatres, which, as a group, had lower ticket prices and weaker concession performance.
Costs of Theatre Operations
Cost of theatre operations (film rentals, concessions, theatre operations, administrative expenses and depreciation and amortization) decreased $17.2 million to $381.0 million for the year ended October 31, 2000 from the $398.3 million from the previous year; however, as a percentage of total revenues, cost of theatre operations was 106.4% for the year ended October 31, 2000 compared to 103.1% for the same period in 1999. This increased percentage of the cost of theatre operations to total revenues for the year ended October 31, 2000 compared to the same period in 1999, was primarily due to higher rent, occupancy and
depreciation costs associated with new megaplex theatres opened over the last twelve months. These increases were partially offset by lower administration costs, lower pre-opening expenses and higher film and concession margins.
Disposition of Theatre Assets
During the year ended October 31, 2000, the Company sold two theatres with 10 screens as well as miscellaneous assets generating net proceeds of $2.4 million and a pre-tax gain of $0.6 million. During 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.
Impairment and Restructuring
In 2000, the Company recorded a loss on impairment and restructuring of $37.6 million, which included a charge for impairment of assets of $34.2 million and an accrual for lease termination costs of $6.9 million which were limited due to the Bankruptcy Code Section 502(b)(6), partially offset by the reversal, as a result of a change in estimate, of previously accrued lease termination costs of $3.5 million. In 1999, the Company reversed previously accrued lease termination costs of $7.9 million and recorded a credit of $8.5 million from lease settlements less than amounts accrued. These credits were partially offset by an impairment of assets charge of $3.5 million, an accrual for new lease termination costs of $3.6 million and a restructuring charge of $6.7 million.
Impairment of assets in 2000 includes a charge of $27.3 million to write-down fixed assets of under-performing theatres currently operating under Chapter 11 and a charge of $6.9 million for the impairment of assets of the Company's domestic joint venture as a result of the inability of the venture to obtain funds for required capital expenditures.
During the ordinary course of business, management has and will make determinations that impact the recoverability of theatre assets. Such decisions impacted operations in 2000 and 1999. 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.
Continued 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. This increase in competition in certain markets as a result of the opening of megaplexes by competitors, which has tended to and is projected to draw audiences away from certain theatre locations that the Company operates.
Accrual for lease termination costs of $6.9 million in 2000 represents a charge related to the guarantee of certain third party leases. The amount accrued by the Company was determined in accordance with Section 502(b)(6) of the Bankruptcy Code, which limits a landlord's lease claim to the greater of one year's rental obligation or 15% of the total lease term obligation, not to exceed three year's rental obligation. The accrual recorded for these leases may be subject to future adjustments based on the claims filed by the landlords and Bankruptcy Court actions. The Company cannot presently determine or reasonably estimate the ultimate liability which may result from the filing of claims for any rejected contracts or
from additional leases, which may be rejected in connection with the Bankruptcy Proceedings. These estimated lease termination accruals were partially offset by a reversal, as a result of a change in estimate of previously accrued lease termination costs of $3.5 million.
In addition, in 2000 the Company recorded a post retirement benefit charge of $1.9 million, offset by a pension settlement gain of $1.9 million related to the 1999 special retirement program.
Reorganization Items
The Company incurred and recorded the following expenses directly associated with the Bankruptcy Proceedings: (i) reorganization items of $28.9 million, which included the write-off of the net book value of assets of $6.0 million for the 55 theatres closed during the fourth quarter, (ii) accrued lease termination costs of $20.0 million, (iii) professional services related to the bankruptcy of $2.4 million and (iv) severance of $0.5 million. The accrued lease termination costs are for those 36 of the 55 closed theatres that were operated by subsidiaries that filed for reorganization under Chapter 11 and have been closed. This provision is based upon the Company's estimates of the landlords' Section 502(b)(6) claim for these theatre locations, based upon the assumption that these leases will be rejected. The provision recorded in respect of the 36 leases noted above may be subject to future adjustments based on claims filed by the landlords and Bankruptcy Court determinations. The Company cannot presently determine or reasonably estimate the ultimate liability, which may result from the filing of claims for any rejected contracts or from additional leases which may be rejected in connection with Bankruptcy Proceedings.
Nineteen of the 55 closed theatres, which were located in Florida, Georgia, Louisiana, Tennessee and Rhode Island were operated by subsidiaries that filed for bankruptcy under Chapter 7.
Corporate Expenses
Corporate expenses decreased 38.7% to $3.8 million in 2000 from $6.3 million in 1999 primarily due to a reclassification of the investment group expenses from corporate expenses to investment income (loss) as a result of the new subsidiary established in the fourth quarter of 1999, GCC Investments, LLC ("LLC"). This 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 former Chief Investment Officer and investment professionals formerly employed by the Company's investment subsidiary. Through October 10, 2000 CHCP had a management agreement with LLC, which specified that CHCP was to be reimbursed for certain expenses according to a specific formula. Under this agreement, the management fee expense for the year ended October 31, 2000, and included in investment income, was $3.3 million. The management agreement was terminated in October, 2000.
Equity Losses in Theatre Affiliates
The Company recorded net equity losses in theatre affiliates of $3.6 million for the year ended October 31, 2000 compared to $7.5 million for the same period in 1999. Included in equity losses in theatre affiliates for the year ended October 31, 2000 was a charge of $1.6 million related to the Company's Mexican theatre investment sold in May, 2000 for approximately $14.3 million and losses of $0.5 million incurred with respect to the Company's domestic theatre venture. The Company's equity losses in Hoyts General Cinema South America ("HGCSA") joint venture improved for the year ended October 31, 2000 to a loss of $1.5 million from a loss of $3.7 million in 1999. This improvement was primarily due to an increase in revenues and a reduction of start-up costs incurred by the venture in 1999. Revenues of the HGCSA venture increased 33.7% to $59.1 million for the year ended October 31, 2000 versus $44.2 million for the same period in 1999. This increase in revenues was primarily due to higher patronage as a result of opening two theatres with 16 screens in 2000
and for having a full year of operating results for the five theatres with 59 screens that opened during 1999.
Investment Income (Loss), Net
The Company recorded an investment loss of $19.8 million for the year ended October 31, 2000 compared to investment income of $20.1 million for the same period in 1999. The Company's investment loss during fiscal year 2000 included a charge of $9.6 million for the other than temporary impairment taken on American Capital Access ("ACA"), a charge of $9.5 million on MotherNature.com, a realized pre-tax loss of $2.9 million on the sale of the remaining shares of Global TeleSystems, Inc. in the fourth quarter, equity losses of $1.5 million, management expenses of $3.3 million and performance-based compensation of $2.0 million. These investment losses were partially offset by the realized pre-tax gain of $8.0 million on the sale of PrimaCom, interest and dividend income of $0.6 million as well as miscellaneous income of $0.4 million. 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.
Interest Expense
The Company's interest expense increased to $4.3 million for the year ended October 31, 2000 compared to $2.4 million in 1999 mainly due to increased borrowings outstanding during the year under the revolving credit facility, a higher interest rate and interest accrued on the DIP Facility.
Income Tax Expense
The Company recorded an income tax provision of $9.3 million in 2000. No benefit from losses incurred was recorded due to uncertainty surrounding the recoverability of such losses. The Company's effective tax rate was 40% in 1999.
Cumulative Effect of Accounting Change
In the first quarter of 2000, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that start-up activities be expensed when incurred. The Company's practice had been to capitalize lease costs incurred prior to the openings of theatres and amortize the costs under accounting principles generally accepted in the United States of America. The adoption of this new accounting pronouncement resulted in a one-time non-cash charge to the Company's statements of operations for the year ended October 31, 2000 of $4.7 million or $0.60 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
On October 11, 2000, the Company and certain of its subsidiaries filed a petition to reorganize under Chapter 11. As a result, substantially all of the Company's pre-petition debts, obligations and guarantees as of this date are stayed from collection or action by creditors and, with the exception of the payment of pre-petition obligations to film distributors, pre-petition obligations on leases assumed by the Company as approved by the Bankruptcy Court, as well as sales and trust fund taxes and workers' compensation claims, no payments have been made to date with respect to these pre-petition claims. In 2001, the Company made payments on pre-petition film payables of $6.5 million and payments of pre-
petition liabilities for assumed leases of $5.2 million. The Company is operating its domestic theatre business in the ordinary course and is paying all post-petition debts and liabilities on normal terms as they become due. In order to finance the Company's operations and its obligations to pay adequate protection payments to secured creditors of the Company and certain of its subsidiaries, the Company has entered into a DIP Facility, which is held by three financial institutions that have previously done business with the Company, in the amount of $45.0 million. The Company completed all domestic theatre construction project commitments prior to the Chapter 11 filing and has no remaining construction commitments to be financed. The DIP Facility is available to the Company through the earlier of emergence from Chapter 11 or March 31, 2002. It is management's belief that along with estimated cash flow from operations, this DIP Facility amount is sufficient to fund its operations through March 31, 2002. The DIP Facility restricts the sale of certain investment assets, without DIP Lender approval.
On December 6, 2001, the Company entered into a letter of intent pursuant to which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the Company in accordance with the plan of reorganization filed with the Bankruptcy Court on December 21, 2001 (the "Reorganization Plan"). On January 16, 2002, the Company and AMC executed a definitive Stock Purchase Agreement. In addition, the Company entered into an interim operating agreement with AMC relating to the conduct of the Company's business prior to the effective date of the Reorganization Plan. AMC has also entered into a support agreement with certain key creditors of the Company, namely Harcourt General, Inc., General Electric Capital Corporation and the Official Committee of Unsecured Creditors in the Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of the creditor parties to the support agreement has agreed to support AMC's bid to acquire the Company if the Reorganization Plan treats their claim as described in the support agreement.
The Reorganization Plan is subject to Bankruptcy Court approval, a vote of the Company's creditors and certain other conditions. Under the Reorganization Plan, AMC will become the owner of all of the stock of the reorganized GC Companies, Inc. and will pay the Company's creditors consideration, consisting of cash, AMC senior subordinated notes or AMC common stock, having a value between $175 million and $195 million plus assumed debt of $28.5 million based upon the estimated date of confirmation of the proposed Reorganization Plan of March 12, 2002, among other factors. The ultimate amount AMC will pay the creditors of the Company is not presently determinable and will depend, among other things, upon: (i) a final determination of allowed claims that will be made by the Bankruptcy Court; (ii) the form of consideration chosen by certain of the creditors of the Company to whom alternatives are available; (iii) the form of recovery and consideration AMC chooses to issue to specified creditors of the Company; (iv) the amount of cash otherwise available to the Company at the effective date of the Reorganization Plan; and (v) the length of time it takes to consummate the transaction. The Reorganization Plan sets forth the terms and provisions of the Company's reorganization and AMC's acquisition of all of the common stock of the Company.
If the Reorganization Plan is confirmed by the Bankruptcy Court and implemented, all existing shares of the Company's common stock will be canceled and will no longer represent an equity interest in the Company; however, on terms and conditions set forth in the Reorganization Plan, existing holders of the Company's common stock may be provided with the opportunity to participate in a newly formed entity which will hold assets of the Company's investment portfolio. However, if a party in interest objects to such participation, and such objection is sustained by the Bankruptcy Court, existing holders of the Company's common stock will not receive a right to participate in the newly formed entity, nor will they receive any consideration for their shares in the Company.
Management's objective is to have the Reorganization Plan confirmed prior to the expiration of the DIP Facility on March 31, 2002 and believes that this timing is reasonably likely. However, there can be no assurance of a confirmation by this date. Until the Reorganization Plan is confirmed by the Bankruptcy Court, there can be no assurance that the Company will emerge from these reorganization proceedings, and the effect of the terms and conditions of such Reorganization Plan on the Company's business cannot be determined.
Operating cash flow improved as a result of the non-performing theatres closed in 2000 and 2001 and reductions made in administrative costs. Earnings before interest, taxes, depreciation, gain on the disposition of theatre assets, impairment, restructuring and
reorganization ("Operating EBITDA") was $16.9 million for 2001, an improvement of $26.5 million over the Operating EBITDA loss of $9.6 million in 2000. In 2001, the Company closed seven theatres with 28 screens. In the fourth quarter of 2000, the Company closed 55 theatres with 375 screens. During the year, prior to closing, these theatres collectively generated an Operating EBITDA loss of $10.6 million. As a result of these closings in 2001 and 2000, the cash losses from these leases have been eliminated. General and administrative costs were reduced as part of the downsizing of the number of theatres operated and other management initiatives.
Cash paid for reorganization related items totaled $11.6 million for the year ended October 31, 2001 and included the following items: professional fees of $5.2 million, assumed lease liabilities of $5.2 million, and personnel related costs of $1.2 million. These cash payments were offset by $0.5 million of interest earned on the cash accumulated and invested during the Bankruptcy Proceedings.
Domestic Theatres
Virtually all of the Company'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 14 to 30 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. At October 31, 2001, the Company had cash and cash equivalents of $9.5 million.
The Company has significant lease commitments, and substantially all domestic leases of the Company are non-cancelable. Lease payments totaled $53.0 million in 2001 and are anticipated to approximate $41.9 million in 2002. The decrease in minimum lease payments is due to the theatres closed in 2000 and 2001.
For the year ended October 31, 2001, the Company made capital expenditures of $1.6 million for leasehold improvements, furniture and equipment purchases as well as information services related projects. Domestic capital expenditures are expected to approximate $3.5 million in 2002 to cover major maintenance and repairs of the theatres as well as upgrades to certain information systems. The amount expended each year for major repairs and maintenance of theatres can vary depending on need and is not easily predicted. The amount of capital expenditures in 2001 was significantly less than 2000 and previous years as such capital expenditures primarily represented maintenance capital spending. The Company is not currently building new theatres and therefore did not incur capital expenditures relating to new construction in 2001. The Company opened five new theatres in 2000, with the last theatre opened in June, 2000. The construction costs of these five new theatres are the majority of the $61.5 million of capital expenditures in 2000.
Over the past year, several theatre exhibitors have filed for bankruptcy protection in the United States. As a result, certain older under-performing theatres have been closed and new construction has been significantly reduced, which has led to a decrease in the number of screens operating in the United States. The Company cannot presently determine or reasonably estimate the extent of additional closings of theatre screens that could possibly occur in the United States, the markets to be directly impacted by the theatre screen closings and the effect this could possibly have on the Company's operations.
During the year, the film studios were able to negotiate labor agreements with the Writers Guild of America and Screen Actors Guild therefore avoiding possible labor strikes which were threatened during the spring and summer of 2001.
International Theatres
Operations in South America are undertaken through equity method investees. Fluctuations in the market value of the underlying equity are not reported for financial statement purposes nor can a sensitivity analysis be performed relative to the market risk of the underlying equity. Because operations are conducted utilizing local currencies, the Company's results of operations are exposed to foreign currency exchange rate changes.
The Company does not consider its cash flows from its international operations to be exposed to exchange rate risk because it has no intention of repatriating earnings from the South American locations, some of which are denominated in U.S. dollars and others are denominated in local currencies. The Company guarantees certain of the international joint venture debt facilities. In the event of default under these debt facilities and if such guarantees were called, the guaranteed obligations denominated in local currencies would be subject to change in foreign currency exchange rates.
During the year ended October 31, 2001, the Company opened two theatres with 17 screens in Argentina through its South American joint venture. Future advances may be required of the partners under the South American joint venture agreement, if sufficient bank financing is not available. The joint venture currently does not have any outstanding commitments to construct new theatres.
In September, 2001, the Company made a capital contribution of $1.8 million to its South American joint venture.
HGCSA has a $50.0 million debt financing arrangement denominated in U.S. dollars with two major financial institutions to fund its operations in Argentina, which is secured by the several guarantee of the joint venture's partners. There is currently no availability of this financing beyond $28.0 million as the remaining funds were not drawn prior to the expiration of the funding commitment on December 29, 2000. Under the several guarantee of the Argentina debt facility, the Company is liable for 50% of the outstanding borrowings. At October 31, 2001, the Company's portion of the outstanding borrowings under this facility that it guarantees was approximately $14.0 million.
HGCSA has debt arrangements for a total of approximately $18.0 million with financial institutions to fund its operations in Chile, which is secured by the several guarantee of the joint venture's partners. Under the debt arrangements, the Company is liable for 50% of the outstanding borrowings. At October 31, 2001, the Company's portion of the outstanding borrowings under these facilities that it guarantees was approximately $9.0 million, which was comprised of $7.3 million of outstanding borrowings and $1.7 million of outstanding guarantees. In respect of these outstanding guarantees the Company invested approximately $1.3 million in a certificate of deposit, which is held as collateral for a portion of the outstanding guarantees at October 31, 2001. This certificate of deposit is included in other current assets in the consolidated balance sheets.
Subsequent to October 31, 2001, HGCSA was in default of the Argentina and Chile debt financing agreements as the debts became due in December 2001 and payment was not made in accordance with the agreements. Management of the Argentina and Chile companies and HGCSA are in negotiations with the financial institutions to restructure the debt financing agreements. Subject to the result of these negotiations, the guarantees may become unsecured claims of the Company and be resolved through its Bankruptcy Proceedings. In the event that the negotiations to restructure the financing agreements are unsuccessful and the financial institutions elect to demand payment, the Argentine and Chilean companies would be unable to make such payment. Therefore, the Company's investment in HGCSA, represented by the Argentine and Chilean subsidiaries, would become fully impaired. The carrying value of the investment attributable to Argentina and Chile operations is in excess of $30 million.
In May 2001, the Company received $6.4 million as payment in full on a note receivable, which arose from the sale of the Mexican theatre investment in 2000.
Recent Developments in Argentina
Subsequent to October 31, 2001, the government of Argentina imposed restrictions on the withdrawal of cash balances from individuals' bank accounts and has restricted the ability of companies to pay vendors located outside of Argentina. These fiscal policies, as well as continuing economic difficulties and political turmoil have resulted in public demonstrations in Argentina, which required the shutdown of several theatres for a short period of time and a decline in theatre attendance subsequent to October 31, 2001. In January 2002, the government of Argentina announced the adoption of a currency system allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. As operating cash inflows and outflows of the Argentine subsidiary are predominantly denominated in pesos and the debt service payments of the Argentine subsidiary are denominated in U.S. dollars, the realization of the Company's investment in Argentina is dependent upon the Argentine operation's ability to generate sufficient pesos to pay debt service and provide for a return on investment to the joint venture. Because of the recency of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on the joint ventures' operations, cash flows and its ability to meet its debt obligations. Accordingly, while the Company's investment in Argentina is currently impaired, management has not determined that the impairment is other than temporary; therefore, no charge to operations has been recorded.
Investment Portfolio
At October 31, 2001, marketable equity securities were $0.5 million, a decrease of $4.9 million from the balance at October 31, 2000. The decrease in marketable securities during the year ended October 31, 2001 was primarily due to a decrease in value of the Company's El Sitio, Inc. (now Claxson Interactive Group Inc.) shares. In addition, the fair value of the Company's investment in VeloCom is valued at an amount less than its carrying cost. Management believes this impairment is not permanent as VeloCom's operating entity's balance sheet was recapitalized, and the most recent projections contemplate a recovery of invested capital, and, therefore, management has not recorded a charge to its consolidated statements of operations to reduce the carrying value of the investment.
During the year ended October 31, 2001, the Company received an initial distribution of liquidation proceeds of $0.6 million on its holdings in MotherNature.com.
Other
In connection with the Company's Chapter 11 filing, the Company entered into a DIP Facility providing for up to $45.0 million of financing, available on a revolving basis, which was authorized by the Bankruptcy Court. In 2001, the Company made net principal payments of $5.9 million on the DIP Facility. The average interest rate was 9.6%. Proceeds of the DIP Facility may be utilized for expenditures approved by the DIP Facility lenders under an approved DIP Facility budget. As a condition to the DIP Facility, the Company has agreed to certain restrictions, which limit capital expenditures and which prevent the Company from: (a) borrowing additional funds other than through the DIP Facility; (b) entering into any new financial leasing transactions; (c) making any additional portfolio investments; (d) making any distributions from the Company; and (e) making certain sales of portfolio investments without the consent of the DIP Facility lenders. Given the restrictions contained in its DIP Facility, during the term of the DIP Facility, the Company (a) will not enter into any new domestic theatre lease commitments; (b) will not make new investments; and (c) may utilize in whole or in part, any net proceeds received from the future sales of assets to prepay the DIP Facility.
In September, 2001, the maturity date of the DIP Facility was extended to the earlier of the Company emerging from bankruptcy or March 31, 2002.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, was required to be adopted by the Company on November 1, 2000. The effect of adopting this standard was not material to the Company's financial position or results of operations or cash flows.
In July, 2001, SFAS no. 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets" were issued. SFAS No. 141 requires all business combinations to be accounted for using the purchase method effective for transactions initiated after June 30, 2001. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets as well as initiates an annual review for impairment.
The Company is required to adopt SFAS No. 142 in the first quarter of fiscal year 2003. Goodwill amortization expense for each of the three fiscal years ending on October 31, 2001 approximated $0.8 million. The Company has goodwill associated with its equity method investment in HGCSA of approximately $4.6 million at October 31, 2001.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. This statement amends the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and Accounting Principles Board No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This statement, which excludes goodwill from its scope, establishes the methodology to be used for evaluating (i) long-lived assets to be held and used, (ii) long-lived assets to be disposed of other than by sale, and (iii) long-lived assets to be disposed of by sale, for both ongoing and discontinued operations. In addition, SFAS No. 144 broadens the treatment of discontinued operations to include components of an entity rather than just segments of a business. SFAS No. 144 is required to be adopted by the Company in fiscal 2003. The Company has not completed the process of evaluating the impact that will result from adopting this statement and is therefore unable to disclose the impact that adopting SFAS No. 144 will have on its financial position and results of operations.
ITEM 7a
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company operates in three major reported segments. The first segment is the domestic motion picture exhibition market. The second segment is the South American motion picture exhibition market which it operates through equity method investees. The third segment is a venture capital arm which holds 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 exhibition segment is subject primarily to interest rate risks. As a result of the Company's Bankruptcy Proceedings, the Company entered into the DIP Facility. The Company had $2.0 million outstanding under the DIP Facility at October 31, 2001. Prior to its Chapter 11 filing, the Company borrowed money under its bank credit facility to fund operating needs, and at October 31, 2001, the Company had outstanding borrowings of $44.6 million. The Company's exposure related to variable interest rates 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 DIP Facility and bank credit facility would not have a significant impact on either the earnings or cash flows of the Company. As a result of the Chapter 11 filing by the Company, principal and interest payments may not be made on pre-petition debt (other than court approved adequate protection payments) until the Reorganization Plan defining the repayment terms has been approved by the Bankruptcy Court.
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 operations are conducted utilizing local currencies, the Company's results of operations are exposed to foreign currency exchange rate changes.
The Company does not consider its cash flows from international operations to be exposed to exchange rate risk because it has no intention of repatriating earnings from the South American locations. Certain of the international joint venture debt facilities are guaranteed by the Company and certain of the debt facilities are in local currency. In the event of default under certain of these debt facilities and, if such guarantees were called, the guaranteed obligations would be subject to changes in foreign currency exchange rates.
Subsequent to October 31, 2001, the government of Argentina imposed restrictions on the withdrawal of cash balances from individuals' bank accounts and has restricted the ability of companies to pay vendors located outside of Argentina. These fiscal policies, as well as continuing economic difficulties and political turmoil have resulted in public demonstrations in Argentina, which required the shutdown of several theatres for a short period of time and a decline in theatre attendance subsequent to October 31, 2001. In January 2002, the government of Argentina announced the adoption of a currency system allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. As operating cash inflows and outflows of the Argentine subsidiary are predominantly denominated in pesos and the debt service payments of the Argentine subsidiary are denominated in U.S. dollars, the realization of the Company's investment in Argentina is dependent upon the Argentine operation's ability to generate sufficient pesos to pay debt service and provide for a return on investment to the joint venture. Because of the recency of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on the joint ventures' operations, cash flows and its ability to meet its debt obligations. Accordingly, while the Company's investment in Argentina is currently impaired, management has not determined that the impairment is other than temporary; therefore, no charge to operations has been recorded.
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. Three investment holdings are classified herein at October 31, 2001: the Company's investments in El Sitio, now known as Claxson Interactive Group Inc. ("Claxson") (NASDAQ:XSON), a multi-platform new media company that provides integrated, branded entertainment content targeted to Spanish and Portuguese speakers around the world; MotherNature.com, 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." El Sitio, now known as Claxson (after a 1-for-10 reverse share split on August 22, 2001 and after an exchange of El Sitio shares for Claxson shares on September 24, 2001) shares during the year ended October 31, 2001 have traded as high as $33.75 and as low as $2.10. At October 31, 2001,the Claxson shares closed at $2.10. MotherNature.com shares during the year ended October 31, 2001 have traded as high as $.94 and as low as $.07, post liquidating distribution of $0.85 per share. At October 31, 2001, the MotherNature.com shares closed at $.085. During the year ended October 31, 2001, the GPS shares have traded as high as 23.47 euros and as low as 13.5 euros. As of October 31, 2001, GPS shares closed at 16.85 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 not be material to total assets.
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's interest in GrandVision is currently valued at $0.1 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, as their current illiquidity could possibly increase their exposure to market risk as there is not an immediate available market for the investment. In addition, the Company's investment in VeloCom is currently valued at an amount that is less than its carrying cost. Management believes this impairment is not permanent as VeloCom's operating entity's balance sheet was recapitalized, and the most recent projections contemplate a recovery of invested capital and, therefore, management has not recorded a charge to its consolidated statements of operations to reduce the carrying value of the investment.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GC COMPANIES, INC. CONSOLIDATED BALANCE SHEETS
(In thousands except par value)
See Notes to Consolidated Financial Statements.
GC COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements.
GC COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
GC COMPANIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
GC Companies, Inc. ("GCC" or "the Company") operates a motion picture exhibition circuit in the United States under the name "General Cinema Theatres," through a joint venture, operates motion picture theatres in South America and also manages the Company's investments. Its investment portfolio includes United States, European and Latin American holdings.
In order to alleviate continuing cash flow losses at a number of theatre locations and the inability to reach appropriate resolution to the leases with the landlords at these locations and to restructure the Company's financial obligations, namely the bank credit facility of $44.6 million, equipment and leasehold operating leases of $111.0 million and outstanding letters of credit of $6.7 million, on October 11, 2000 (the "Filing Date"), GC Companies, Inc. and certain of its domestic subsidiaries voluntarily filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Chapter 11 cases"). Certain other subsidiaries of the Company, located in Georgia, Tennessee, Florida, Louisiana, and Rhode Island, filed petitions for relief under Chapter 7 of the United States Bankruptcy Code ("Chapter 7" or the "Chapter 7 cases"). The Chapter 11 cases and Chapter 7 cases are herein referred to as the "Bankruptcy Proceedings". The Company is presently operating its domestic theatre business and managing its investment assets as debtors-in-possession subject to the jurisdiction of the United States Bankruptcy Court in the State of Delaware (the "Bankruptcy Court"). The Company's subsidiary which holds the Company's interest in its South American theatre joint venture did not file a petition for reorganization because there were no significant outstanding liabilities on the books of the subsidiary other than an intercompany payable to the Company. As a result, the Company's subsidiary which holds the Company's interest in the South American theatre joint venture is not subject to the jurisdiction of the Bankruptcy Court.
2. LIQUIDITY AND MANAGEMENT'S PLANS
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to maintain compliance with debt covenants under the debtor-in-possession facility (the "DIP Facility")and the confirmation by the Bankruptcy Court of a plan of reorganization filed with the Bankruptcy Court on December 21, 2001 (the "Reorganization Plan").
As a result of the Bankruptcy Proceedings, substantially all of the Company's pre-petition indebtedness, obligations and guarantees are stayed from collection or action by creditors. No payments have been made to date with respect to pre-petition claims, with the exception of the payment of pre-petition obligations to film distributors as approved by the Bankruptcy Court, pre-petition obligations for leases assumed by the Company, as well as sales and trust fund taxes and workers' compensation claims. The Company is operating its domestic theatre business in the ordinary course and is paying all post-petition debts and liabilities on normal terms as they become due. Pre-petition claims will be funded in accordance with the Company's Reorganization Plan.
On December 6, 2001, the Company entered into a letter of intent pursuant to which AMC Entertainment Inc. ("AMC") would acquire all of the stock of the Company in accordance with the Reorganization Plan. On January 16, 2002, the Company and AMC executed a definitive Stock Purchase Agreement. In addition, the Company entered into an interim operating agreement with AMC relating to the conduct of the Company's business prior to the effective date of the Reorganization Plan. AMC has also entered into a support agreement with certain key creditors of the Company, namely Harcourt General, Inc., General Electric Capital Corporation and the Official Committee of Unsecured Creditors in the
Chapter 11 cases of the Company and certain of its subsidiaries, wherein each of the creditor parties to the support agreement has agreed to support AMC's bid to acquire the Company if the Reorganization Plan treats their claim as described in the support agreement.
The Reorganization Plan is subject to Bankruptcy Court approval, a vote of the Company's creditors and certain other conditions. Under the Reorganization Plan, AMC will become the owner of all of the stock of the reorganized GC Companies, Inc. and will pay the Company's creditors consideration, consisting of cash, AMC senior subordinated notes or AMC common stock, having a value between $175 million and $195 million plus assumed debt of $28.5 million based upon the estimated date of confirmation of the proposed Reorganization Plan of March 12, 2002, among other factors. The ultimate amount AMC will pay the creditors of the Company is not presently determinable and will depend, among other things, upon: (i) a final determination of allowed claims that will be made by the Bankruptcy Court; (ii) the form of consideration chosen by certain of the creditors of the Company to whom alternatives are available; (iii) the form of recovery and consideration AMC chooses to issue to specified creditors of the Company; (iv) the amount of cash otherwise available to the Company at the effective date of the Reorganization Plan; and (v) the length of time it takes to consummate the transaction. The Reorganization Plan sets forth the terms and provisions of the Company's reorganization and AMC's acquisition of all of the common stock of the Company.
If the Reorganization Plan is confirmed by the Bankruptcy Court and implemented, all existing shares of the Company's common stock will be canceled and will no longer represent an equity interest in the Company; however, on terms and conditions set forth in the Reorganization Plan, existing holders of the Company's common stock may be provided with the opportunity to participate in a newly formed entity which will hold assets of the Company's investment portfolio. However, if a party in interest objects to such participation, and such objection is sustained by the Bankruptcy Court, existing holders of the Company's common stock will not receive a right to participate in the newly formed entity, nor will they receive any consideration for their shares in the Company.
Management's objective is to have the Reorganization Plan confirmed prior to the expiration of the DIP Facility on March 31, 2002 and believes that this timing is reasonably likely. However, there can be no assurance of a confirmation by this date. Until the Reorganization Plan is confirmed by the Bankruptcy Court, there can be no assurance that the Company will emerge from these reorganization proceedings, and the effect of the terms and conditions of the Reorganization Plan on the Company's business cannot be determined.
3. REORGANIZATION UNDER THE BANKRUPTCY PROCEEDINGS AND LIABILITIES SUBJECT TO COMPROMISE
In the Bankruptcy Proceedings, approximately $196.4 million of liabilities as of October 31, 2001 are subject to compromise under the Reorganization Plan. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and a final determination of the allowable claim will be made by the Bankruptcy Court. These claims may also be subject to adjustment depending on the determination of the validity and the value of the security held in respect of certain claims. The ultimate amount and settlement terms for such liabilities are subject to the Reorganization Plan and, accordingly, are not presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject executory pre-petition contracts, including real estate leases, subject to Bankruptcy Court approval. A principal reason for the Company's Bankruptcy Proceedings was to permit the Company to reject real estate leases that were or were expected to become burdensome due to cash losses at these locations. Section 502(b)(6) of the Bankruptcy Code provides that the amount that may be claimed by landlords with respect to rejected real estate leases is limited to the greater of (a) one year's rental obligations or (b) 15% of the total lease term obligations, not to exceed three year's rental obligations (the "Section 502(b)(6) Claim"). This limitation provides the Company with a far smaller lease termination liability than would have been incurred if these leases had been terminated without the protection of the Bankruptcy Code.
A lease termination reserve of approximately $46.7 million was outstanding at October 31,
2001. This reserve was established for theatres that were closed by the Company and had been operated by legal entities that filed for reorganization under Chapter 11 and certain leases of theatres operated by legal entities that filed for bankruptcy relief under Chapter 7 and whose leases were guaranteed by Harcourt General, Inc. This reserve was based upon the Company's estimates of the landlords' Section 502(b)(6) Claim for these theatre locations, based upon the assumption that these leases will be rejected. The reserve may be subject to future adjustments, as previously discussed, based on claims filed by the landlords and Bankruptcy Court actions. The Company cannot presently determine or reasonably estimate the ultimate liability which may result from the filing of claims for any rejected contracts or from additional leases which may be rejected in connection with the Bankruptcy Proceedings.
The activity during the year ended October 31, 2001 in the lease terminations and restructuring reserve was as follows:
During the year ended October 31, 2001, additional lease termination reserves of $13.3 million were recorded as a result of changes in estimates for leases at theatre locations for which relief was sought under Chapter 7 of the United States Bankruptcy Code. The Company made payments of $0.5 million primarily for severance related costs.
The Company recorded in the year ended October 31, 2001 the following expenses directly associated with the Bankruptcy Proceedings: professional fees of $8.1 million, lease termination charges of $12.8 million, the write-off of certain assets of $0.9 million and severance and retention costs for personnel of approximately $0.8 million. These charges were partially offset by an early lease termination credit of $0.4 million and interest income of $0.5 million earned by the Company on the cash accumulated and invested during the Bankruptcy Proceedings. The accrued lease termination charge recorded in 2001 was for changes in estimate for leases at theatre locations for which relief was sought under Chapter 7 of the United States Bankruptcy Code. This change in estimate was based upon the Company's estimates of the potential liability to Harcourt General, Inc. for the landlords' claims under Section 502(b)(6) of the Bankruptcy Code, which Harcourt General, Inc. had guaranteed. Cash paid for professional reorganization fees for the year totaled $5.2 million.
The Company incurred and recorded in 2000 the following expenses directly associated with the Bankruptcy Proceedings: reorganization items of $28.9 million, which included the write-off of the net book value of assets of $6.0 million of the 55 theatres closed during the fourth quarter, lease termination costs of $20.0 million, professional services related to the bankruptcy of $2.4 million, and severance of $0.5 million. The accrued lease termination costs are for those 36 of the 55 closed theatres that were operated by subsidiaries that filed for reorganization under Chapter 11 and have been closed. This provision was based upon the Company's estimates of the landlords' claims under Section 502(b)(6) of the Bankruptcy Code for these theatre locations, based upon the assumption that these leases will be rejected.
The provisions recorded in 2001 and 2000 with respect to the Section 502(b)(6) lease liabilities noted above may be subject to future adjustments based on amendments to claims filed by the landlords and the approval by the Bankruptcy Court of the Reorganization Plan.
Certain claims against the Company in existence prior to the filing of petitions under Chapter 11 of the Bankruptcy Code are stayed while the Company operates its business as
debtors-in-possession. These pre-petition claims are reflected in the consolidated balance sheets as "Liabilities subject to compromise." During the year ended October 31, 2001, the liabilities subject to compromise were increased by approximately $11.1 million primarily as a result of additional reserves for potential lease termination liabilities offset by the payment of pre-petition obligations outstanding on leases assumed by the Company.
Interest due and payable, as specified under the bank credit agreement, is also stayed during the bankruptcy. Interest due contractually and not paid during the year ended October 31, 2001 totaled $4.2 million. The Company has Bankruptcy Court approval to make monthly adequate protection payments which totaled approximately $3.9 million during fiscal year 2001.
As part of the first day orders granted by the Bankruptcy Court, the Company is permitted to continue to operate its business in the ordinary course, which includes ongoing payments to vendors, employees, and others for any post-petition obligations. In addition, the Bankruptcy Court approved payment of all of the Company's pre-petition film liability claims, and certain other pre-petition amounts were also permitted to be paid such as sales and trust fund taxes and workers' compensation claims. In addition, pre-petition obligations outstanding on leases assumed by the Company were paid during the year ended October 31, 2001.
Liabilities Subject to Compromise
Certain claims against the Company in existence prior to the filing of petitions under Chapter 11 of the Bankruptcy Code are stayed while the Company operates its business as debtors-in-possession. These pre-petition claims are reflected in the consolidated balance sheets as "Liabilities subject to compromise." Liabilities subject to compromise consist of the following:
(In thousands)
Trade payables as well as rent and rent related charges decreased in 2001 because of payments made for rent and rent related items for leases assumed by the Company during the year.
Lease terminations and restructure increased due to theatres closed in Florida, Georgia, Louisiana, Tennessee and Rhode Island that were operated by subsidiaries that filed for bankruptcy under Chapter 7.
4. 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 (loss) income, 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.
The Reorganization Plan must be approved by the Bankruptcy Court. The approval of a final plan of reorganization could materially change the amounts recorded in the consolidated financial statements.
Cumulative Effect of Accounting Change
In the first quarter of 2000, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that start-up activities be expensed when incurred. The Company's practice had been to capitalize lease costs incurred prior to the openings of theatres and amortize the costs under accounting principles generally accepted in the United States of America. The adoption of this new accounting pronouncement resulted in a one-time, non-cash charge to the Company's consolidated statements of operations for the year ended October 31, 2000 of $4.7 million or $0.60 per diluted share.
Foreign Currency Translation
The Company's South American joint venture, which is recorded using the equity method of accounting, uses the applicable local currency as the functional currency and, as such, translation adjustments are not included as part of the equity losses recorded in the consolidated statements of operations; rather, they are included as a component of "Accumulated other comprehensive loss" in the consolidated balance sheets.
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.
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.
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 (loss) income, net." Unrealized holding gains and losses on available-for-sale securities are excluded from the consolidated statements of operations except for any impairment, if applicable, and are included as a component of shareholders' equity under the caption "Accumulated other comprehensive loss."
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization except impaired assets, which are stated at net realizable 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. No such costs were capitalized in 2001 or 2000. 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.
Stock-based Compensation
The Company follows the intrinsic value method 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 13, the required pro-forma effect on net loss and diluted loss per share had the Company employed the fair value method.
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. See Notes 5, 6 and 8 for further discussions on impairment for long-lived assets.
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 United States 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.
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. The Company also sells gift certificates and discounted theatre tickets in exchange for cash. At the point of sale of these gift certificates and discounted tickets, the Company records a deferred liability. Revenue is recorded upon the redemption of the certificates and discounted tickets at the theatre.
Film Rental Costs
Film rental costs are recognized as a percentage of admission revenue.
Net Loss Per Share
Basic loss per share is computed by dividing loss 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.
As a result of losses in 2001, 2000 and 1999 options to purchase 175,351, 190,125 and 44,084 shares of common stock, respectively, were not included in the computation of diluted earnings per share. In 1999, 76,131 contingently returnable shares were also not included in the computation of diluted earnings per share.
Significant Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management (i) to make estimates and assumptions that affect the recorded amounts of assets and liabilities and (ii) to provide disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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. Actual results could differ from these estimates. The primary estimates underlying the Company's consolidated financial statements include the estimated useful lives of fixed assets, goodwill, impairment charges, lease termination reserves, deferred taxes, accruals for pension and post-retirement benefits, insurance, liabilities subject to compromise and other matters. Material changes in estimates are summarized in Notes 2, 3, 6 and 8. 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
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, was required to be adopted by the Company on November 1, 2000. The effect of adopting this standard was not material to the Company's financial position, results of operations or cash flows.
In July, 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued. SFAS No. 141 requires all business combinations to be accounted for using the purchase method effective for transactions initiated after June 30, 2001. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets as well as initiates an annual review for impairment.
The Company will adopt SFAS No. 142 in the first quarter of fiscal year 2003. Goodwill amortization expense for each of the three fiscal years ending on October 31, 2001 approximated $0.8 million. The Company has goodwill associated with its equity method investment in the South American theatre joint venture of approximately $4.6 million at October 31, 2001.
In August, 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued. This statement amends the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and Accounting Principles Board No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This statement, which excludes goodwill from its scope, establishes the methodology to be used for evaluating (i) long-lived assets to be held and used, (ii) long-lived assets to be disposed of other than by sale, and (iii) long-lived assets to be disposed of by sale, for both ongoing and discontinued operations. In addition, SFAS No. 144 broadens the treatment of discontinued operations to include components of an entity rather than just segments of a business. SFAS No. 144 is required to be adopted by the Company in fiscal 2003. The Company has not completed the process of evaluating the impact that will result from adopting this statement and is therefore unable to disclose the impact that adopting SFAS No. 144 will have on its financial position and results of operations.
Changes in Presentation
Certain prior-year amounts have been reclassified to conform to the current-year presentation.
5. MARKETABLE EQUITY SECURITIES AND PORTFOLIO INVESTMENTS
(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, less impairment, if any.
(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 loss."
(c) This investment is in a non-public company and is accounted for on the equity method because the Company has a greater than 20% equity interest.
(d) These investments are in non-public companies and are accounted for on the cost method.
(e) Pre-tax unrealized holding gains and losses apply only to marketable equity securities.
(f) The Company's ownership of this entity decreased below 20% in fiscal 2001. Beginning in fiscal 2001 the Company accounts for this investment on the cost method.
Investment Activity - Marketable Equity Securities
El Sitio, Inc. (now Claxson Interactive Group, Inc.)
During the quarter ended July 31, 2001, the Company determined that its investment in El Sitio, had become permanently impaired and recorded a pre-tax charge of $4.4 million to the
consolidated statements of operations. As a result of the marketable equity security's designation as available-for-sale, previous declines in the investment's market value had been reflected in the consolidated balance sheet within the shareholders' equity section under the caption "Accumulated other comprehensive loss."
Effective as of August 22, 2001, El Sitio's common shares had a 1-for-10 reverse share split. As a result of the reverse share split, the Company owned 145,675 shares of El Sitio. On September 7, 2001, El Sitio, Inc. announced that its shareholders approved the company's merger with Ibero-American Media Partners II, Ltd. ("IAMP") to form Claxson Interactive Group Inc. ("Claxson") a multi-platform new media company that provides integrated branded entertainment content targeted to Spanish and Portuguese speakers around the world. On September 24, 2001, the merger was completed, and each El Sitio common share was exchanged for one new class A common share of Claxson. On the same date, Claxson Interactive Group Inc. began trading on the NASDAQ National Market under the symbol "XSON."
MotherNature.com
During the third quarter of 2000, the Company determined that its $10 million investment in MotherNature.com, a Web-based retailer of vitamins, supplements and minerals, had become permanently impaired and recorded a pre-tax charge of $9.5 million to the consolidated statement of operations. As a result of the marketable equity security's designation as available-for-sale, previous declines in the investment's market value had been reflected in the Company's consolidated balance sheet within the shareholders' equity section under the caption "Accumulated other comprehensive loss."
On November 30, 2000, MotherNature.com's shareholders approved a plan of complete liquidation and dissolution. MotherNature.com is proceeding with the sale of all of its assets, and thereafter intends to make distributions of liquidation proceeds to its shareholders. Because of uncertainties as to the precise net realizable value of assets and the ultimate settlement amount of liabilities, it is impossible to predict with certainty the aggregate net values that will ultimately be distributed to shareholders. However, management believes, based upon information available from MotherNature.com management, that the Company could, over time, receive proceeds from liquidation of approximately $0.7 million. An initial distribution of liquidation proceeds of $0.6 million was received by GCC in the first quarter of 2001 resulting in a pre-tax realized gain of $0.2 million.
GrandVision (SA)
During 2000, the Company sold 139,740 shares of its investment in GrandVision, which generated net proceeds of $4.3 million and a realized pre-tax gain of $133,000. 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 2001 and 2000 are shown in the table above and were recorded in the consolidated balance sheets under the caption "Accumulated other comprehensive loss."
Investment Activity - Portfolio Investments Accounted for Under the Cost Method
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 stations. In 2000, the Company invested $20.7 million in VeloCom, Inc. ("VeloCom"), a facilities-based voice, data and Internet provider primarily in Brazil. Because of the illiquidity of these investments and the Company's less than 20% ownership, such investments are carried at cost. In addition, the Company's investment in VeloCom is valued at an amount that is less than its carrying cost. Management believes this impairment is not permanent as VeloCom's operating entity's balance sheet was recapitalized, and the most recent projections contemplate a recovery of invested capital and, therefore, management has not recorded a charge to its consolidated statements of operations to reduce the carrying value of the investment.
On September 24, 1997, the Company invested $30.0 million in a newly-formed financial guarantee insurance company, American Capital Access ("ACA"). During the first quarter of 2000, ACA began to actively pursue raising additional capital to maintain the long-term stability of its "A" rating. In May, 2000, existing investors contributed $15.0 million as
part of this effort (GCC's portion was $5.0 million). ACA also retained an investment banking firm to help raise an additional $45.0 million, which was unsuccessful. As a result, on January 3, 2001, Standard & Poors Corporation placed ACA on "Credit Watch" with negative implications. ACA continued to pursue alternatives for new capital. However, because of the uncertainty of additional capital being raised at an attractive valuation, GCC reduced the carrying value of its investment in ACA by $9.6 million in 2000. In the first quarter of 2001, American Capital Access ("ACA") raised $45.0 million of capital from three original and two new investor groups. GCC did not participate in this offering and, as a result, the Company's ownership interest decreased from approximately 24% to 15%. Since the Company's ownership interest has fallen below 20% and GCC can no longer exercise significant influence over the operations of ACA, the investment is now accounted for under the cost method.
Investment Activity - Portfolio Investments Accounted for Under the Equity Method
On February 9, 1998, the Company completed an $11.0 million investment in FleetCor (formerly Fuelman), a provider of fleet management services. Through its proprietary systems and network, FleetCor provides services to commercial vehicle operators throughout the United States. In 2000, the Company invested an additional $6.0 million in FleetCor bringing its total interest to 42.1% on a fully diluted basis. In May 2001, additional equity was contributed to FleetCor and as a result, the Company's ownership decreased to 37.2% as of October 31, 2001. FleetCor's results of operations for the 12 months ended September 30, 2001 and 2000 are shown below. FleetCor finalized its audited financial statements for the year ended December 31, 2000 during the Company's second quarter. FleetCor recorded a non-recurring charge of approximately $6.1 million on its 2000 income statement, which is reflected in the net loss for the 12 months ended September 30, 2001 shown below. This charge is primarily related to networking settlements on certain licensee customer accounts and additional reserves for doubtful accounts. Because of the lag in time for the equity method reporting of FleetCor's results, GCC's portion of this charge was reflected in its second quarter of 2001 results.
Unaudited summarized financial information of the Company's FleetCor investment for the 12-month periods ended September 30, 2001 and 2000 were as follows:
Investment Activity - Summary of Results Shown in the Consolidated Statements of Operations
In summary, investment (loss) income, net consisted of the following:
6. IMPAIRMENT AND RESTRUCTURING
The components of impairment and restructuring charges in the consolidated statements of operations were as follows:
Impairment of assets in 2000 includes a charge of $27.3 million to write-off fixed assets of under performing theatres currently operating under Bankruptcy Proceedings and a charge of $6.9 million for the impairment of assets of the Company's domestic joint venture, due to the inability of the venture to obtain further funds for required capital expenditures.
During the ordinary course of business, management has and will make determinations that impact the recoverability of theatre assets. 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.
Continued 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. This increase in competition in certain markets as a result of the opening of megaplexes by competitors, has tended to and is projected to draw audiences away from certain theatre locations that the Company operates.
The accrual for lease termination costs of $6.9 million in 2000 represents a charge related to the Company's guarantee of certain third party leases. The amount of the lease termination costs accrued by the Company was determined in accordance with Section 502(b)(6) of the
Bankruptcy Code, which limits a landlord's lease claim to the greater of one year's rental obligation or 15% of the total lease term obligation, not to exceed three year's rental obligations. The accrual recorded for these leases may be subject to future adjustments based on the claims filed by the landlords and Bankruptcy Court actions. The Company cannot presently determine the ultimate liability, which may result from the filing of claims for any rejected contracts or from additional leases, which may be rejected in connection with Bankruptcy Proceedings. The impairment and restructuring was partially offset by a reversal of previously accrued lease termination costs of approximately $3.5 million.
In addition, the Company recorded in 2000 a post-retirement benefit charge of $1.9 million, offset by a pension settlement gain of $1.9 million related to the 1999 special retirement program.
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at October 31:
8. INVESTMENT IN INTERNATIONAL THEATRE AFFILIATES
The Company has an equity-based investment in theatre operations in South America which is a joint venture with an unrelated third party. This joint venture is accounted for by the Company under the equity method. The net assets of this joint venture appear in the balance sheet under the caption "Investment in international theatre affiliates." The results of operations of this joint venture appear under the caption "Equity losses in theatre affiliates." (See Note 18)
The Company purchased its interest in the South American joint venture and theatre operations in Mexico in September, 1997 for a cash purchase price of $36.3 million. The purchase price was 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.
In May 2000, the Company sold its Mexican theatre investment for approximately $14.3 million resulting in a charge of approximately $1.6 million relating to its further loss in value. The Company received $7.5 million in cash proceeds and a $6.75 million note due in installments over two years. In May 2001, the Company received $6.4 million as payment in full on the notes receivable.
The Company's South American joint venture, Hoyts General Cinema South America ("HGCSA"), has a $50.0 million debt financing arrangement denominated in U.S. dollars with two major
financial institutions to fund its operations in Argentina, which is secured by a several guarantee of the joint venture's partners. There is currently no availability of this financing beyond $28.0 million as the remaining funds were not drawn prior to the expiration of the funding commitment on December 29, 2000. Under the several guarantee of the Argentina debt facility, the Company is liable for 50% of the outstanding borrowings. At October 31, 2001, the Company's portion of the outstanding borrowings under this facility that it guarantees was approximately $14.0 million.
HGCSA has debt arrangements for a total of $18.0 million in debt financings to fund its operations in Chile, which are secured by the several guarantee of the partners. The Company is liable for 50% of the outstanding exposure. At October 31, 2001, the Company's portion of the outstanding exposure under these facilities was approximately $9.0 million, which was comprised of $7.3 million of outstanding borrowings and $1.7 million of outstanding guarantees. In respect of these outstanding guarantees, the Company invested approximately $1.3 million in a certificate of deposit, which is held as collateral for a portion of the outstanding guarantees at October 31, 2001. This certificate of deposit is included in other current assets in the consolidated balance sheets.
Subsequent to October 31, 2001, HGCSA was in default of the Argentina and Chile debt financing agreements as the debt became due in December, 2001 and payment was not made in accordance with the agreements. Management of the Argentina and Chile companies and HGCSA are in negotiations with the financial institutions to restructure the debt financing agreements. Subject to the result of these negotiations, the guarantees may become unsecured claims of the Company and be resolved through its Bankruptcy Proceedings. In the event that the negotiations to restructure the financing agreements are unsuccessful and the financial institutions elect to demand payment, the Argentine and Chilean companies would be unable to make such payment. Therefore, the Company's investment in HGCSA, represented by the Argentine and Chilean subsidiaries, would become fully impaired. The carrying value of the investment attributable to Argentina and Chile operations is in excess of $30 million.
RECENT DEVELOPMENTS IN ARGENTINA
Subsequent to October 31, 2001, the government of Argentina imposed restrictions on the withdrawal of cash balances from individuals' bank accounts and has restricted the ability of companies to pay vendors located outside of Argentina. These fiscal policies, as well as continuing economic difficulties and political turmoil have resulted in public demonstrations in Argentina, which required the shutdown of several theatres for a short period of time and a decline in theatre attendance subsequent to October 31, 2001. In January 2002, the government of Argentina announced the adoption of a currency system allowing the peso to float freely rather than pegging it to the U.S. dollar. This has resulted in a significant devaluation of the peso. As operating cash inflows and outflows of the Company's Argentine subsidiary are predominantly denominated in pesos and the debt service payments of the Argentine subsidiary are denominated in U.S. dollars, the realization of the Company's investment in Argentina is dependent upon the Argentine operation's ability to generate sufficient pesos to pay debt service and provide for a return on investment to the joint venture. Because of the recency of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on the joint ventures' operations, cash flows and its ability to meet its debt obligations. Accordingly, while the Company's investment in Argentina is currently impaired, management has not determined that the impairment is other than temporary; therefore, no charge to operations has been recorded.
9. OTHER CURRENT LIABILITIES
At October 31, 2001 and 2000, certain other current liabilities are included in liabilities subject to compromise in the consolidated balance sheets. (See Note 3).
10. RELATED-PARTY TRANSACTIONS
GCC was previously a 100%-owned subsidiary of Harcourt General, Inc. ("Harcourt General"). Certain shareholders also functioned as officers of both companies and had significant interests in both companies. Harcourt General was sold to Reed Elsivier in August, 2001. Neither Harcourt General nor Reed Elsivier have any officers or directors in common with the Company.
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 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 was charged a fee based on total commitments outstanding. In 2001, no fee was incurred or paid by the Company to Harcourt General as a result of the Bankruptcy
Proceedings. In 2000 and 1999, the Company was charged a fee of $0.6 million and $0.7 million, respectively. In addition, GCC was required to maintain certain financial covenants under its Reimbursement and Security Agreement. Enforceability of these covenants and other limitations are stayed in connection with the Chapter 11 proceedings.
Harcourt General provided certain management services to GCC. In 2001, Harcourt General did not provide any management services, and, therefore, no fees were charged to the Company. The fees for these services, which totaled $0.2 million and $0.5 million in each of 2000 and 1999, respectively, were based on Harcourt General's costs. The reduction in the amount paid in 2000 was a result of an agreement with Harcourt General, which provided that no charges for services of Richard A. Smith, Chairman of the Company, and Robert A. Smith, President and Chief Operating Officer of the Company, would be incurred after April, 2000. Harcourt General's Chairman and Chief Executive Officer also served as the Chairman of the Company until June 19, 2001, and one of Harcourt General's Presidents and Co-Chief Operating Officers served as President and Chief Operating Officer of GCC until October 10, 2000. The fees payable to Harcourt General were subject to the approval of a committee of independent directors of GCC who are not affiliated with Harcourt General.
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 $0.7 million in 2001 and $1.2 million in 2000 and 1999.
11. DEBTOR-IN-POSSESSION FINANCING
In connection with the Company's Chapter 11 filing, the Company entered into a Debtor-in-Possession Credit Agreement on October 13, 2000 providing initial financing of $25 million as of October 31, 2000 and as approved by the Bankruptcy Court on November 8, 2000, final financing up to $45.0 million. In September, 2001, the maturity date of the DIP Facility was extended to the earlier of the Company emerging from bankruptcy or March 31, 2002. At October 31, 2001, the Company had outstanding borrowings under the DIP Facility of $2.0 million. The interest rate on the DIP Facility is the greater of a participating bank's prime lending rate plus 2.00% or the Federal Reserve Rate plus 0.50%. The interest rate at October 31, 2001 was 7.5%. In addition, the Company is required to pay a commitment fee of 0.5% per annum on the unused portion of the DIP Facility.
Proceeds of the DIP Facility may be utilized for expenditures as outlined in the approved DIP Facility budget. As a condition to the DIP Facility, the Company has agreed to the following restrictions, which limit capital expenditures and which prevent the Company from: (a) borrowing additional funds other than through the DIP Facility; (b) entering into any new financial leasing transactions; (c) making additional portfolio investments; (d) making any distributions from the Company; and (e) making certain sales of portfolio investments without the consent of the DIP Facility lenders. In addition, the Company must maintain minimum operating earnings, as defined.
Given the restrictions contained in its DIP Facility, the Company (a) will not enter into any new domestic theatre lease commitments; (b) will not make any new portfolio investments; and (c) may utilize, in whole or in part, any new proceeds received from the future sale of assets to prepay the DIP Facility.
The lenders under the DIP Facility have a "super priority" claim against the assets of the Company and its subsidiaries. The Company was in compliance with the DIP Facility covenants at October 31, 2001.
12. REVOLVING CREDIT AGREEMENT AND LETTERS OF CREDIT
As a result of the Chapter 11 cases, all outstanding borrowings under the Company's revolving credit agreement have been included in "Liabilities subject to compromise" at October 31, 2001 and 2000 (See Note 3). At October 31, 2001 and 2000, the Company had outstanding
borrowings under its revolving credit agreement of $44.6 million, respectively. The Company was 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, 2001 and 2000, the variable interest rate on the outstanding borrowings of the revolving credit agreement was 9.0% and 10.0%, respectively. There is currently no availability under the revolving credit facility.
At October 31, 2001 and 2000, the Company had outstanding standby letters of credit totaling $6.9 million and $6.7 million, respectively.
Interest due and payable, as specified under the revolving credit agreement, is also stayed during bankruptcy. Interest due contractually and not paid totaled $4.2 million in 2001 and $0.3 million in 2000. The Company has Bankruptcy Court approval to make monthly adequate protection payments of $0.3 million, in respect of the revolving credit agreement, which began in November, 2000. The amount paid under the adequate protection program totaled $3.9 million in fiscal year 2001.
13. 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. No such grants were made in fiscal 2001. Options outstanding at October 31, 2001 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 and one day. Options for 87,689, 69,059 and 86,131 shares were exercisable under all option arrangements at October 31, 2001, 2000 and 1999, respectively. Under the existing stock incentive plan, there were 422,103 and 407,329 shares available for future grants at October 31, 2001 and 2000, respectively.
The following summarizes transactions under all stock option arrangements for the years ended October 31, 2001, 2000 and 1999:
The following summarizes information about all stock options outstanding at October 31, 2001:
Had compensation cost for stock option grants issued since November 1, 1996 been determined under the provisions of SFAS No. 123, the Company's net loss as well as basic and diluted loss per share would have been as follows:
The pro-forma effect on net loss as well as basic and diluted loss per share for 2001, 2000 and 1999 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.
The fair value of each stock option granted in 2000 and 1999 (no options were granted in 2001) 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 2000 and 1999:
The weighted average fair values per share of stock options granted during 2000 and 1999 were $11.81 and $15.25, 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 or at the time the employee terminates their employment. Such expense totaled approximately $0.4 million in 2001, $1.6 million in 2000 and $0.6 million in 1999.
14. 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:
The following table sets forth the change in the defined benefit plans' funded status for the years ended October 31, 2001 and 2000:
The significant actuarial assumptions as of the year-end measurement dates were as follows:
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 2001, 2000 and 1999 were $0.4 million, $0.5 million and $0.5 million, respectively. The GCC Employee Stock Ownership Plan ("ESOP") is non-contributory.
15. 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. In connection with the Bankruptcy Proceedings, all lease contracts, whether assumed or rejected, are subject to Bankruptcy Court approval. The commitments shown below reflect future lease obligations for all operating leases the Company has not rejected as part of its Bankruptcy Proceedings and, therefore, may not reflect actual future cash outlays.
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. Assuming renewal options are not exercised, the future minimum payments under noncancelable operating leases that the Company has not rejected as part of its Bankruptcy Proceedings as of October 31, 2001 were as follows:
Rent expense under noncancelable operating leases the Company has not rejected as part of its Bankruptcy Proceedings was as follows:
At October 31, 2001, the Company has outstanding $111.0 million of equipment and leasehold operating leases with several financial institutions under a lease financing arrangement. A receivable due from the financing institutions at October 31, 1999 of $15.5 million was reclassified to capital expenditures in 2000. The Company has Bankruptcy Court approval to make monthly adequate protection payments of approximately $1.1 million, in respect of the lease financing arrangement.
Litigation
On October 11, 2000, the Company and 30 of its domestic subsidiaries filed to reorganize under Chapter 11 of the United States Bankruptcy Code, and six of its domestic subsidiaries filed for liquidation under Chapter 7 of the United States Bankruptcy Code (See Notes 1, 2 and 3).
GCC is involved in various other 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.
16. 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 $0.3 million, $0.5 million and $0.4 million during fiscal 2001, 2000 and 1999, respectively, for post-retirement health care benefit claims.
Net post-retirement benefit costs are as follows:
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:
The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 8.0% in fiscal 2001 and 10% in fiscal 2000, gradually declining to 5.0% in fiscal 2005. Measurement of the accumulated post-retirement benefit obligation was based on an assumed 7.25% discount rate for 2001 and 8.0% discount rate for 2000 and 1999. If the health care cost trend rate assumptions were increased by 1.0%, the accumulated post-retirement obligation as of October 31, 2001 would be increased by $0.5 million. The effect of this change on the service cost and interest cost would not be material.
17. INCOME TAX BENEFIT (PROVISION)
Income tax benefit (provision) was as follows:
No income taxes were recorded in 2001 as a result of the Company's net operating loss carryforward position. GCC's effective income tax rate was 7.4% in 2000 and 40.0% in 1999. The differences between the statutory federal tax rate and the effective tax rate for 2001 and 2000 are due primarily to the recording of a valuation allowance. The difference between the statutory federal tax rate and the effective tax rate for 1999 is due primarily to state income taxes.
Significant components of the Company's net deferred income tax liability (asset) stated on a gross basis at October 31, were as follows:
The Company anticipates utilizing its deferred tax assets only to the extent of its deferred tax liabilities. Accordingly, the Company has fully reserved all remaining deferred tax assets, which it presently cannot utilize.
As of October 31, 2001, the Company has net operating loss carryforwards of approximately $91.0 million, which will begin to expire in 2021.
18. 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 three reportable segments: one segment is the domestic theatre operation (which encompass all theatres in the continental United States); the second segment includes the Company's joint venture in South America; and the final segment 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 its investing activity in a variety of non-theatre related activities is wholly separate from theatre operations, and its South American operations are new theatre ventures in markets that are dissimilar to the United States market. 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, impairment, restructuring and reorganization items. Information concerning (loss) earnings before income taxes has 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.
TOTAL COMPANY
As a result of the Company's filing of a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code, management no longer reviews its domestic theatre operations in the segments of core market, other markets, impaired theatres and other expenses. Below is a condensed operating statement for 2001 that provides financial data of those theatres that were open at October 31, 2001 and those theatres closed during 2001.
GENERAL CINEMA THEATRES, INC.
- --------------
(1) Theatre cash flow is the domestic theatres' earnings (loss) before interest, taxes and depreciation, disposition, impairment, restructuring and reorganization items and without consideration of general and administrative expenses.
19. COMPARATIVE QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------------ (1) The net loss in the fourth quarter includes a charge for restructuring and reorganization of $70.0 million and an impairment charge of $9.6 million (See Note 6).
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders GC Companies, Inc., Debtor-in Possession Chestnut Hill, Massachusetts
We have audited the accompanying consolidated balance sheets of GC Companies, Inc. and subsidiaries, Debtors-in-Possession (the "Company"), as of October 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended October 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company and certain of its subsidiaries filed petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. A Reorganization Plan was filed December 21, 2001. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for costs of start-up activities in 2000 to conform with the American Institute of Certified Public Accountants Statement of Position 98-5.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has experienced significant losses from operations. On October 11, 2000, the Company and certain of its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. The Company has filed a reorganization plan with the United States Bankruptcy Court on December 21, 2001 (the "Reorganization Plan"). The Reorganization Plan has not been confirmed by the United States Bankruptcy Court. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts January 24, 2002
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Below are the name, age and principal occupations for each current director of the Company.
PETER C. READ - 65 - Director since 1994. Currently active in consulting, venture capital and civic and charitable matters; Executive Vice President of The First National Bank of Boston until his retirement in September 1992; Director of Granite State Bank.
FRANCIS E. SUTHERBY - 69 - Director since 1993. Partner of Deloitte & Touche LLP, the independent auditors of the Company, from 1968 until his retirement in May 1992.
G. GAIL EDWARDS - 46 - Director since 2001. President, Chief Operating Officer, Chief Financial Officer and Treasurer of the Company since October 2000; Vice President, Chief Financial Officer and Treasurer of the Company from July 1996 to October 2000; Vice President and Treasurer of Delaware North Companies, Incorporated, a private holding company, prior thereto.
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.
G. GAIL EDWARDS - 46 - President, Chief Operating Officer, Chief Financial Officer and Treasurer of the Company since October 2000; Vice President, Chief Financial Officer and Treasurer of the Company from July 1996 to October 2000; Vice President and Treasurer of Delaware North Companies, Incorporated, a private holding company, prior thereto.
FRANK T. STRYJEWSKI - 45 - 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.
JOHN G. BERYLSON - 48 - President of GCC Investments, Inc. since October, 2000 and Senior Vice President and Chief Investment Officer of the Company from 1993 until October 10, 2000; 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, former Chairman of the Company.
PHILIP J. SZABLA - 47 - 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.
LOUIS E. CASAVANT - 46 - 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.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information on the compensation provided for services rendered to the Company during fiscal 2001, 2000, and 1999 by the Company's Chief Executive Officer, President, Chief Operating Officer, and the other executive officers of the Company at the end of fiscal 2001.
(1) Bonus payments are reported with respect to the year in which the related services were performed.
(2) No disclosure regarding items included in this category is required unless the amount in any year exceeds the lesser of $50,000 or 10% of the annual salary and bonus for the named executive officer.
(3) Value is calculated by multiplying the number of shares awarded by the closing price of the Common Stock on the New York Stock Exchange on the last date of the fiscal quarter in which the related services were performed. In general, twenty percent of an award of restricted Common Stock are freed from the restrictions on transfer each year, commencing one year after the date of grant, provided that the recipient continues to be employed by the Company on the anniversary date of the grant. Holders of restricted stock are entitled to vote their restricted shares.
(4) The long term incentive plan ("LTIP") payout reported in this category with respect to Mr. Berylson for fiscal 2000 includes cash portions of Mr. Berylson's share of incentive pool payment relating to the Company's investment activity in accordance with the terms of the GCC Investments, Inc. Incentive Pool Plan (the "Pool Plan"). Of the Pool Plan awards, 70% is payable in cash in three equal installments over three years, and 30% is paid in restricted stock at the time of the award which vests over the succeeding five years. Mr. Berylson received $1,246,130, which is the second cash installment of a total $5,340,559 award relating to the initial public offering of Global TeleSystems, Inc. in fiscal 1998, plus interest of $97,207. Mr. Berylson also received $1,010,447 representing the first two installments of a total $1,729,289 award relating to the gain from the sale of PrimaCom plus interest of $12,471. Mr. Berylson received $37,750 representing the last installment due from the share exchange for GrandVision, plus interest of $6,575. Mr. Berylson received $126,902 plus interest of $21,986, representing the last installment of a $380,705 investment banking fee relating to the acquisition of international theatre assets, which fee is payable in cash in three equal installments over two years. In
connection with the Global TeleSystems and PrimaCom awards, a total of 9,399 restricted shares were awarded in fiscal 2000, which had a value of $2.38 per share or $22,370 on October 31, 2000.
(5) The items accounted for in this category include the value of allocated ESOP shares, the cost to the Company of matching contributions under the Key Employee Deferred Compensation Plan and life insurance premiums. For fiscal 2001, such amounts for each of the named executive officers were, respectively, as follows: Mr. Berylson - $0, $0 and $792; and Ms. Edwards - $0, $0 and $792; Mr. Stryjewski - $0, $0 and $594; and Mr. Szabla - $0, $0 and $545. In addition, pursuant to their agreements with the Company, Ms. Edwards and Mr. Szabla received payment in respect of their SERP benefit of $63,144 and $36,601, respectively. In August, 2000, the Company's Board of Directors terminated the Company's Key Employee Deferred Compensation Plan (the "Deferred Comp Plan") which allowed key executives to defer receipt of up to 15% of base salary annually. As a result, current participants received payment of their account balances as of August 31, 2000 as follows: Ms. Edwards - $198,099; Mr. Stryjewski - $104,346; Mr. Berylson - $578,848; and Mr. Szabla - $86,773. These amounts included employee contributions as follows: Ms. Edwards - $114,550; Mr. Stryjewski - $59,390; Mr. Berylson - $291,933; and Mr. Szabla - $54,954 with the remaining amount paid representing Company matching contributions of the current and prior years and interest earned on balances.
(6) Represents a retention payment pursuant to Ms. Edward's 1999 agreement with the Company.
(7) Represents a retention payment to Mr. Stryjewski pursuant to his agreement with the Company.
(8) Mr. Berylson resigned as Chief Investment Officer of the Company on October 10, 2000. He remains President of GCC Investments, Inc.
(9) Represents Mr. Berylson's share of management fees paid to Chestnut Hill Capital Partners under a management agreement with the Company. This management agreement was terminated on October 10, 2000.
(10) Represents a retention payment pursuant to Mr. Szabla's 1999 agreement with the Company.
(11) Mr. Smith resigned as Chairman of the Company on June 19, 2001.
Pension Plans
The Company maintains a funded, qualified pension plan known as the GC Companies, Inc. Retirement Plan (the "Retirement Plan"). Non-union employees of the Company who have reached the age of 21 and completed one year of service with 1,000 or more hours participate in the Retirement Plan, which pays benefits upon retirement or termination of employment by reason of disability. Benefits under the Retirement Plan become fully vested after five years of service with the Company.
The Company also maintains a Supplemental Executive Retirement Plan (the "SERP"). The SERP is an unfunded, non-qualified plan under which benefits are paid to certain employees following their retirement from the Company from the Company's general assets to supplement Retirement Plan benefits. Employees with an annual base salary at least equal to a self adjusting minimum at the time of initial participation ($170,000 as of January 21, 2000) are eligible to participate in the SERP. Benefits under the SERP become fully vested after five years of service with the Company. Former Harcourt General employees who became employees of the Company have been given full credit under the SERP for their service with Harcourt General. At normal retirement age, a participant with 25 or more years of service is entitled to payments under the SERP sufficient to bring his or her combined annual benefit from the Retirement Plan and the SERP, up to 50% of the participant's highest 60 month average of annual pensionable earnings, less 60% of his or her estimated annual primary Social Security benefit. If the participant has fewer than 25 years of service or retired before age 62, the
combined benefit is reduced. In computing the combined benefit, "pensionable earnings" means base salary, including any salary which may have been deferred.
The following table shows the estimated annual pension benefits payable to employees in various compensation and years of service categories. The estimated benefits apply to an employee retiring at age 65 in 2001 who elects to receive his or her benefit in the form of a straight life annuity. These benefits include amounts attributable to both the Retirement Plan and the SERP, in aggregate, and exclude the impact of any retirement benefits that might be received from Social Security.
Estimated Aggregate Annual Retirement Benefits Under the Retirement Plan and the SERP (1)
- -------------- (1) The amounts actually payable will be lower than the amounts shown above, since the above amounts will be reduced by 60% of the participant's estimated Social Security benefit.
The following table shows the pensionable earnings and credited years of service for the executive officers named in the Summary Compensation Table as of October 31, 2001 and years of service creditable at age 65. Credited service may not exceed 25 years for purpose of calculating retirement benefits under any of the Company's retirement plans.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of January 18, 2002 (except as noted in footnotes 4, 5, 6 and 7 below) with respect to the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of the Company's Common Stock, (ii) each executive officer named in the Summary Compensation Table, (iii) each director of the Company, and (iv) all current executive officers and directors as a group.
Shares of Common
- ---------- * Less than 1%
(1) The number of shares of Common Stock reported in the table for the executive officers of the Company individually and as a group includes shares allocated to each executive officer's account under the Company's Employee Stock Ownership Plan ("ESOP"), as to which the officers share voting power with the trustee of the ESOP. The number of shares is as follows: John G. Berylson - 55; G. Gail Edwards - 30; Frank T. Stryjewski - 42, Philip J. Szabla - 30, and all current executive officers as a group - 187. Except as set forth in the preceding sentence or in the following footnotes, each stockholder referred to above has sole voting and investment power with respect to the shares listed. The number of shares reported in the table also includes shares of Common Stock subject to options exercisable within 60 days of January 18, 2002 as follows: John G. Berylson - 14,645; G. Gail Edwards -- 18,844; Frank T. Stryjewski - 12,256; Philip J. Szabla - 7,117; and all current executive officers as a group -- 56,062.
(2) Certain of the shares included in the table have been counted more than once because of certain rules and regulations of the Securities and Exchange Commission ("SEC"). The total number of shares owned by, or for the benefit of, Richard A. Smith, Nancy L. Marks and members of their families is as shown for the "Smith Family Group". See Note 3. Mr. Smith and Mrs. Marks are "control" persons of the Company within the meaning of the rules and regulations of the SEC.
(3) The Smith Family Group includes Richard A. Smith, former Chairman of the Company; Nancy L. Marks, Richard A. Smith's sister; Robert A. Smith,
former President and Chief Operating Officer of the Company and son of Richard A. Smith; John G. Berylson, President of GCC Investments, Inc., a subsidiary of the Company, who is Richard A. Smith's son-in-law; other members of their families; and various Smith family corporations, trusts and charitable foundations. Members of the Smith Family Group possess sole or shared voting power over all of the shares shown in the table as being beneficially owned by the Smith Family Group.
Certain members of the Smith Family Group have filed a Schedule 13D dated December 15, 1993 (the "Smith Family Group 13D") with the SEC. The Smith Family Group 13D discloses that certain members of the Smith Family Group have executed the "Smith-Lurie/Marks Family Stockholders' Agreement Re GC Companies, Inc." dated December 15, 1993, as amended and supplemented (the "Stockholders' Agreement"). The Stockholders' Agreement imposes obligations on members of the Smith Family Group prior to disposing of their shares of Common Stock of the Company. According to the Smith Family Group 13D, not all of the shares of Common Stock owned beneficially by the members of the Smith Family Group are subject to the Stockholders' Agreement. Currently, 1,801,432 shares of Common Stock are subject to the terms of the Stockholders' Agreement.
(4) The information reported is based on an amendment to Schedule 13D dated October 29, 2001 filed with the SEC by the Gabelli Funds, Inc. and its affiliates (collectively, the "Gabelli Affiliates"). The Gabelli Affiliates have sole investment power over 1,750,450 and sole voting power over 1,706,650 of such shares.
(5) The information reported is based on a Schedule 13G dated July 11, 2001 filed with the SEC by The Baupost Group, L.L.C. and its affiliates (collectively, the "Baupost Affiliates"). The Baupost Affiliates have sole investment power and sole voting power over all such shares.
(6) This information is based upon a Schedule 13G dated February 7, 2001 filed with the SEC by Boston Partners Asset Management, L.P. and its affiliates (collectively, the "Boston Partners Affiliates"). The Boston Partners Affiliates have shared investment power and shared voting power over all such shares.
(7) The information reported is based upon a Schedule 13G dated February 2, 2001 filed with the SEC by Dimensional Fund Advisors, Inc. ("Dimensional"). Dimensional has sole investment power and sole voting power over all of such shares.
(8) Messrs. Read and Sutherby hold, respectively 3,503 and 3,527 Common Stock based units which are included in the table. These individuals do not have voting or dispositive power with respect to these Common Stock based units, which were received in lieu of the payment of directors' fees.
(9) Includes 94,462 shares held by Mr. Berylson's wife, 2,219 shares held by Mr. Berylson's daughter, 16,000 shares held in an insurance trust for the benefit of Mr. Berylson's wife, 42,481 shares held by Mr. Berylson as a trustee, and 4,438 shares held as guardian for his children, as to which Mr. Berylson disclaims beneficial ownership. Also includes 42,401 shares of restricted stock over which Mr. Berylson has voting, but not investment power. Mr. Berylson, a member of the Smith Family Group, is the son-in-law of Richard A. Smith, former Chairman of the Company.
Option Grants in the Last Fiscal Year
No options were granted under the Company's 1993 Equity Incentive Plan during the fiscal year ended October 31, 2001 to the executive officers named in the Summary Compensation Table
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information regarding stock options exercised during fiscal 2001 and the number and value of stock options held at October 31, 2001 by the executive officers named in the Summary Compensation Table.
- ------------
(1) The value of unexercised in-the-money options is calculated by multiplying the number of underlying shares by the difference between the closing price of the Company's Common Stock at October 31, 2001 ($0.10 per share) and the option exercise price for those shares. As a result of the decline in the Company's share price, none of the options currently outstanding has any value.
(2) Richard A. Smith did not participate in the Company's 1993 Equity Incentive Plan.
(3) There are no outstanding SAR's.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Involving Management
G. Gail Edwards
In June, 1996, the Company provided unsecured loans totaling $120,000 to Ms. Edwards, the Company's President, Chief Operating Officer, Chief Financial Officer and Treasurer. The loans bear interest at 5% per annum and are payable in annual principal installments equal to the lesser of $20,000 per year or 20% of Ms. Edwards' annual bonus. The loans had a principal balance of $40,000 on October 31, 2001 and are payable in full on or before December 31, 2002 or sooner if Ms. Edwards' employment is terminated for cause.
Pursuant to an amended and restated agreement between Ms. Edwards and the Company, which was approved by the Bankruptcy Court on March 16, 2001, Ms. Edwards shall receive a retention payment of one times her base salary upon confirmation of the Company's Reorganization Plan. Ms. Edwards may also receive a performance payment equal to half her base salary when the Company's Reorganization Plan is effective, which amount is payable in an amount of 1/3 of base salary on filing of the Reorganization Plan and an amount equal to 1/6 of base salary on the effective date of the Reorganization Plan. In addition, in the event the Company
enters into one or more defined major transactions, Ms. Edwards will be paid an incentive payment equal to one times her base salary which amount is payable in two installments over 6 months. Pursuant to the same agreement, Ms. Edwards shall receive a bonus payment equal to 50% of her base salary on the effective date of the Reorganization Plan.
In the event Ms. Edwards' employment is terminated other than for cause, total disability or death, or if Ms. Edwards voluntarily terminates her employment due to a reduction in duties following a change of control of the Company or if she is required to relocate out of the Boston area, she will receive termination benefits consisting of (1) severance payments equal to her then base salary for up to 18 months following such termination, which payments will be reduced by any amounts received by her from other employment beginning six months and ending 18 months following such termination (the severance payable during the first six months following termination is to be secured by an irrevocable letter of credit); (2) continuation of medical and dental insurance coverage during this 18 month period or until such earlier time as Ms. Edwards commences full time employment; (3) outplacement services; and (4) immediate vesting of all her stock options.
Ms. Edwards will receive in lieu of payments due under the Company's Supplemental Executive Retirement Plan (the "SERP") for 2001 and each subsequent year, annual payments equal to the present value of the benefits payable under the SERP upon retirement, earned with respect to such year.
Frank T. Stryjewski
Pursuant to an agreement between Mr. Stryjewski and the Company that was approved by the Bankruptcy Court, the Company has agreed that, provided he remains employed in good standing, Mr. Stryjewski received a retention payment of 50% of his base salary on October 31, 2001, and shall receive a retention payment of 50% of his base salary on October 31, 2002. In addition, in the event Mr. Stryjewski's employment is terminated other than for cause, total disability or death, or if Mr. Stryjewski voluntarily terminates his employment due to a reduction in duties following a change of control of the Company, or if he is required to relocate out of the Boston area, he will receive termination benefits consisting of (1) a continuation of his then current annual base salary for 18 months, reduced by any amounts earned from subsequent employment during this period; (2) continuation of medical and dental insurance coverage during this 18 month period or until such earlier time as Mr. Stryjewski commences full time employment; (3) outplacement services and (4) immediate vesting of all his stock options.
John G. Berylson
Mr. Berylson is the President of GCC Investments, Inc., a subsidiary of the Company, and Senior Manager of Chestnut Hill Capital Partners, LLC (the "Manager") formed in 1999 to manage the Company's investment portfolio pursuant to a Management Agreement dated August 11, 1999. The Management Agreement between the Company and the Manager was terminated on October 10, 2000. Prior to the termination of the Management Agreement, Mr. Berylson received $435,558 of the fees paid by the Company to the Manager.
Under the agreements with the Manager, capital contributions required for investments were made 99% by the Company and 1% by the Manager. The Company provided loans to each member of the Manager, including Mr. Berylson for these required capital contributions. Interest is payable at 8% annually. Principal is payable in full at the end of seven years, unless prepayments are required based upon the share of any investment gains payable to the Manager under these agreements. The note is secured by Mr. Berylson's interest in the Manager and any amounts due to him by the Company. The amount of the principal currently owed by Mr. Berylson under this note is $419,309.
Philip J. Szabla
Pursuant to an amended and restated agreement between Mr. Szabla and the Company, which was approved by the Bankruptcy Court on March 16, 2001, Mr. Szabla shall receive a retention payment equal to one times his base salary upon confirmation of the Company's Reorganization Plan. Mr. Szabla shall also receive a performance payment equal to one half his base salary when the Company's Reorganization Plan is effective, which amount is payable in an amount of 1/3 of base salary on filing of the Reorganization Plan and an amount of 1/6 of base salary on the effective date of the Reorganization Plan. In addition, in the event the Company enters into one or more defined major transactions, Mr. Szabla will be paid an incentive payment equal to one times his base salary which amount is payable in two installments over 6 months. Pursuant to the same agreement, Mr. Szabla shall receive a bonus payment equal to 40% of his base salary on the effective date of the Reorganization Plan.
In the event Mr. Szabla's employment is terminated other than for cause, total disability or death, or if Mr. Szabla voluntarily terminates his employment due to a reduction in duties following a change of control of the Company or if he is required to locate out of the Boston area, he will receive termination benefits consisting of: (1) severance payments equal to his then base salary for up to 18 months following such termination, which payments will be reduced by any amounts received by him from other employment beginning six months and ending 18 months following such termination. (the severance payable during the first six months following termination is to be secured by an irrevocable letter of credit); (2) continuation of medical and dental insurance coverage during this 18 month period or until such earlier time as Mr. Szabla commences full time employment; (3) outplacement services; and (4) immediate vesting of all his stock options.
Mr. Szabla will receive in lieu of payments due under the Company's SERP for 2001 and each subsequent year, annual payments equal to the present value of the benefits payable under the SERP upon his retirement earned with respect to such year.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) FINANCIAL STATEMENTS
The following financial statements are incorporated into Item 8 above:
Consolidated Balance Sheets - October 31, 2001 and 2000.
Consolidated Statements of Operations for the fiscal years ended October 31, 2001, 2000, and 1999.
Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2001, 2000, and 1999.
Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 2001, 2000, and 1999.
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
On June 26, 2001, the Company filed a report on Form 8-K announcing that on June 12, 2001, the Company had signed a letter of intent with Onex Corporation and Oaktree Capital Management ("Onex/Oaktree") providing for the acquisition by Onex/Oaktree of all of the equity of the reorganized Company pursuant to the Reorganization Plan to be filed with the Bankruptcy Court pursuant to Chapter 11 of the U.S. Bankruptcy Code.
On June 26, 2001, the Company filed a report on Form 8-K announcing that Richard A. Smith had resigned as a member of the Company's Board of Directors, and G. Gail Edwards had been elected to the Company's Board of Directors.
On June 29, 2001, the Company filed a report on Form 8-K announcing that it had signed an amended letter of intent with Onex/Oaktree increasing the proposed consideration to be paid and modifying the consideration to be paid to the various creditors of the Company.
On July 13, 2001, the Company filed a report on Form 8-K announcing that the Company had agreed with the Official Committee of Unsecured Creditors (the "Committee") to extend for a period of 45 days (to and including August 27, 2001, subject to extension for an additional 30 days through and including September 26, 2001) the Company's exclusive period for filing the Reorganization Plan and to grant joint exclusivity to the Committee and the Company.
On December 12, 2001, the Company filed a report on Form 8-K announcing that it had signed a non-binding letter of intent with AMC Entertainment Inc. ("AMCE") providing for the acquisition by AMCE of all of the equity of the reorganized Company pursuant to a Reorganization Plan to be filed with the Bankruptcy Court pursuant to Chapter 11 of the U.S. Bankruptcy Code.
14(c) EXHIBITS
See Item 14(a)(3) above.
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 29, 2002 GC COMPANIES, INC.
By: /s/ G. Gail Edwards ----------------------------------- President, Chief Operating Officer and Chief Financial 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.
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."
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, incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999.
10.27 Limited Liability Company Agreement of GCC Investments, LLC dated as of August 11, 1999, incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999.
10.28 Put Agreement between GC Companies, Inc. and Chestnut Hill Capital Partners, LLC dated as of August 11, 1999, incorporated herein by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999.
10.29 Management Agreement between Chestnut Hill Capital Partners, LLC and Chestnut Hill Re, Inc. dated August 11, 1999, incorporated herein by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999.
10.30 Debtor-in-Possession Credit Agreement, dated as of October 13, among GC Companies, Inc., General Electric Capital Corporation as DIP Administrative Agent and DIP Collateral Agent and Fleet National Bank as DIP Documentation Agent, incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000.
10.31* Amended and Restated Termination and Change of Control Agreement
between GC Companies, Inc. and G. Gail Edwards, dated as of September 15, 2000 and first modification thereto, incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000.
10.32* Amended and Restated Termination and Change of Control Agreement between GC Companies, Inc. and Philip J. Szabla, dated as of September 15, 2000 and first modification thereto, incorporated herein by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000.
10.33 Amended and Restated Letter of Intent dated as of January 28, 2002, between GC Companies, Inc. and AMC Entertainment Inc.
10.34 Stock Purchase Agreement dated January 15, 2002, by and among GC Companies, Inc., AMC Entertainment Inc., American Multi-Cinema, Inc. and Centertainment Development, Inc.
10.35 First Amended Joint Plan of Reorganization of Debtors and Official Committee of Unsecured Creditors for GC Companies, Inc. and its Jointly Administered Subsidiaries, to be filed on January 29, 2002 with the United States Bankruptcy Court for the District of Delaware.
10.36 Interim Operating Agreement, dated as of December 6, 2001, as amended, between AMC Entertainment Inc. and the Company.
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
- -------------------
*Exhibits filed pursuant to Item 14(c) of Form 10-K.