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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________________
----------------- ----------------------
Commission file number 1-8747
AMC ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1304369
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification No.)
106 West 14th Street
P. O. Box 419615
Kansas City, Missouri 64141-6615
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 221-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -------------------
Common Stock, 66 2/3 cents par value American Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the registrant's voting stock held by non-
affiliates as of May 14, 1999, computed by reference to the closing price
for such stock on the American Stock Exchange on such date, was
$236,048,311.
Number of shares
Title of each class of common stock Outstanding as of May 14, 1999
- ---------------------------------------------------------------------------
Common Stock, 66 2/3 cents par value 19,427,098
Class B Stock, 66 2/3 cents par value 4,041,993
PART I
Item 1. Business.
(a) General Development of Business
AMC Entertainment Inc. ("AMCE") is a holding company. AMCE's principal
subsidiaries are American Multi-Cinema, Inc. ("AMC"), AMC Entertainment
International, Inc., National Cinema Network, Inc. and AMC Realty, Inc.
Unless the context otherwise requires, references to "AMCE" or the "Company"
refer to AMC Entertainment Inc. and its subsidiaries. All of the Company's
U.S. theatrical exhibition business is conducted through AMC. The Company
is developing theatres in international markets through AMC Entertainment
International, Inc. and its subsidiaries. The Company engages in the on-
screen advertising business through National Cinema Network, Inc. The
Company's real estate activities are conducted through AMC Realty, Inc. and
its subsidiary, Centertainment, Inc.
The Company's predecessor was founded in Kansas City, Missouri in 1920.
AMCE was incorporated under the laws of the state of Delaware on June 13,
1983 and maintains its principal executive offices at 106 West 14th Street,
P.O. Box 419615, Kansas City, Missouri 64141-6615. Its telephone number at
such address is (816) 221-4000.
(b) Financial Information about Industry Segments
For information about the Company's operating segments and geographic
areas, see Note 14 to the Consolidated Financial Statements on page 46.
(c) Narrative Description of Business
General
The Company is one of the leading theatrical exhibition companies in
North America, based on revenues. In the fiscal year ended April 1, 1999,
the Company had revenues of $1,026,721,000. As of April 1, 1999, the
Company operated 233 theatres with a total of 2,735 screens located in 23
states, the District of Columbia, Portugal, Japan, Spain, China (Hong Kong)
and Canada. Approximately 60% of the Company's screens are located in
Florida, California, Texas, Arizona and Missouri, and approximately 69% of
its domestic screens are located in areas among the 20 largest "Designated
Market Areas" (television market areas as defined by Nielsen Media
Research).
The Company is an industry leader in the development and operation of
"megaplex" and "multiplex" theatres, primarily in large metropolitan
markets. Megaplexes are theatres with predominantly stadium-style seating
(seating with an elevation between rows to provide unobstructed viewing) and
other amenities to enhance the movie-going experience. Multiplexes are
theatres generally without stadium-style seating. All but two of the
Company's megaplexes have 14 or more screens. The Company believes that its
strategy of developing megaplexes has prompted the current theatrical
exhibition industry trend in the United States and Canada toward the
development of larger theatre complexes. This trend has accelerated the
obsolescence of many existing movie theatres, including certain multiplexes,
by setting new standards for moviegoers, who have demonstrated their
preference for the more attractive surroundings, wider variety of films,
better customer services and more comfortable seating typical of megaplexes.
In addition to providing a superior entertainment experience,
megaplexes generally realize economies of scale by serving more patrons from
common support facilities. The Company's megaplexes have consistently ranked
among its top grossing facilities on a per screen basis and many are among
the top grossing theatres in North America.
The following table provides information about the Company's domestic
megaplexes and multiplexes (those open at the beginning of fiscal 1999) for
the year ended April 1, 1999:
Megaplexes Multiplexes
-------- --------
Attendance per screen 68,000 51,000
Average revenue per patron $ 6.90 $ 6.15
Operating cash flow before rent
as a percentage of revenues 36% 32%
Operating cash flow before rent excludes non-theatre level revenues and
expenses, including all corporate overhead. The Company uses operating cash
flow before rent as an internal statistic to measure theatre level
performance.
As of April 1, 1999, 1,335 screens, or 48.8% of the Company's total
screens, were located in megaplexes and the average number of total screens
per theatre was 11.7. The average number of screens per theatre for the ten
largest North American theatrical exhibition companies (based on number of
screens) was 7.2 and the average for all North American theatrical
exhibition companies was 6.1, based on the listing of exhibitors in the
National Association of Theatre Owners 1998-99 Encyclopedia of Exhibition,
as of May 1, 1998.
The Company continually upgrades its theatre circuit by opening new
theatres (primarily megaplexes), adding new screens to existing theatres and
selectively closing or disposing of unprofitable multiplexes. From April
1996 through April 1, 1999, the Company opened 57 new theatres with 1,229
screens, representing 44.9% of its current number of screens, acquired four
multiplexes with 29 screens in strategic film zones, added 44 screens to
existing theatres and closed or disposed of 54 theatres and 286 screens. Of
the 1,229 screens opened during the period, 1,196 screens were located in a
total of 53 megaplexes. As of April 1, 1999, the Company had 14 megaplexes
under construction with a total of 316 screens.
Revenues for the Company are generated primarily from box office
admissions and theatre concessions sales, which accounted for 64% and 30%,
respectively, of the Company's fiscal 1999 revenues. The balance of the
Company's revenues are generated primarily by its on-screen advertising
business, video games located in theatre lobbies and the rental of theatre
auditoriums.
Strategy
The Company's strategy is to expand its theatre circuit primarily by
developing new megaplexes in major markets in the United States and select
international markets. New theatres will primarily be megaplexes which will
be equipped with SONY Dynamic Digital Sound (SDDS) and AMC LoveSeat style
seating (plush, high-backed seats with retractable armrests). Other
amenities may include auditoriums with TORUS Compound Curved Screens and
High Impact Theatre Systems (HITS), which enhance picture and sound quality,
respectively.
The Company's megaplex strategy enhances attendance and concessions
sales by enabling it to exhibit concurrently a variety of motion pictures
attractive to different segments of the movie-going public. Megaplexes also
allow the Company to match a particular motion picture's attendance patterns
to the appropriate auditorium size (ranging from approximately 90 to 450
seats), thereby extending the run of a motion picture and providing superior
theatre economics. The Company believes that megaplexes enhance its ability
to license commercially popular motion pictures and to economically access
prime real estate sites due to its desirability as an anchor tenant.
The Company believes that the megaplex format has started a new
replacement cycle for the industry. The new format raises moviegoers'
expectations by providing superior viewing lines, comfort, picture and sound
quality as well as increased choices of films and start times. The Company
believes that consumers will increasingly choose theatres based on the
quality of the movie-going experience rather than simply upon the location
of the theatre. As a result, the Company believes that older, smaller
theatres will become obsolete as the megaplex concept matures.
The Company believes that significant opportunities exist for
development of modern megaplexes in select international markets. The
theatrical exhibition business has become increasingly global, and box
office receipts from international markets exceed those of the U.S. market.
In addition, the production and distribution of feature films and demand for
American motion pictures are increasing in many countries. The Company
believes that its experience in developing and operating megaplexes provides
it with a significant advantage in developing megaplexes in international
markets, and the Company intends to utilize this experience, as well as its
existing relationships with domestic motion picture studios, to enter select
international markets. The Company's strategy in these markets is to operate
leased theatres. Presently, the Company's activities in international
markets are directed toward selected countries in Asia and Western Europe
and Canada.
The Company intends to consider partnerships or joint ventures, where
appropriate, to share risk and leverage resources. Such ventures may include
interests in projects that include restaurant, retail and other concepts.
The Company has formed a joint venture with Planet Hollywood International,
Inc. that is scheduled to open a Planet Movies facility on June 30, 1999
near Columbus, Ohio. This facility will consist of a 30 screen AMC megaplex,
a Planet Hollywood and Official All Star Cafe restaurant and 30,000 square
foot rotunda featuring memorabilia, entertainment related merchandise and
food kiosks.
Through Centertainment, Inc. and its subsidiaries, the Company plans to
enhance the moviegoing experience of its patrons by creating environments
that combine complementary food, retail and other synergistic uses with the
megaplex concept. Centertainment, Inc. and its subsidiaries presently are
involved in the pre-development of several retail/entertainment projects,
including a project in downtown Kansas City, Missouri, known as the "Power
and Light District."
The Company continually monitors the performance of its theatres and
has improved the profitability of certain of its older theatres by
converting them to "dollar houses" which display second-run movies and
charge lower admission prices (ranging from $1.00 to $1.75). It operated 11
such theatres with 71 screens as of April 1, 1999 (2.6% of the Company's
total screens). The Company is evaluating its future plans for many of its
multiplexes, which may include selling theatres, subleasing properties to
other exhibitors or for other uses, retrofitting certain theatres to the
standards of a megaplex or closing theatres and terminating the leases.
Closure or other dispositions of certain multiplexes will result in expenses
which are primarily comprised of expected payments to landlords to terminate
leases or conversion costs. The Company anticipates that it will incur
approximately $15 million of costs related to the closure of approximately
34 multiplexes with 220 screens in fiscal 2000. As of June 3, 1999, the
Company had closed 18 of these multiplexes with 123 screens and recognized
approximately $9 million of theatre closure expense. During fiscal 1999,
the Company closed or sold 16 multiplexes with 87 screens.
Theatre Circuit
The following table sets forth information concerning additions and
dispositions of theatres and screens during, and the number of theatres and
screens operated as of the end of, the last five fiscal years. The Company
adds and disposes of theatres based on industry conditions and its business
strategy.
Changes in Theatres Operated
Additions Dispositions Total Theatres Operated
------------------- ------------------ -----------------------
Fiscal Year Ended Number of Number of Number of Number of Number of Number of
Theatres Screens Theatres Screens Theatres Screens
-------- -------- -------- -------- --------- -------
March 30, 1995 3 53 7 26 232 1,630
March 28, 1996 7 150 13 61 226 1,719
April 3, 1997 17 314 15 76 228 1,957
April 2, 1998 24 608 23 123 229 2,442
April 1, 1999 20 380 16 87 233 2,735
Total 71 1,505 74 373
== ===== == ===
As of April 1, 1999, the Company operated 60 megaplexes having an
aggregate of 1,335 screens, representing 48.8% of its screens. The following
table provides greater detail with respect to the Company's theatre circuit
as of such date.
Total Total Theatres
Domestic Screens Theatres Multiplex Megaplex
-------- -------- -------- --------- -------
Florida 476 42 34 8
California 460 35 24 11
Texas 382 29 21 8
Arizona 172 14 9 5
Missouri 147 13 10 3
Pennsylvania 125 14 13 1
Georgia 116 9 6 3
Michigan 115 15 14 1
Colorado 102 9 6 3
Virginia 87 9 8 1
Oklahoma 66 5 3 2
Illinois 60 2 - 2
Ohio 56 4 3 1
Kansas 53 3 1 2
Maryland 42 5 5 -
New Jersey 30 5 5 -
Nebraska 24 1 - 1
North Carolina 22 1 - 1
Louisiana 20 3 3 -
Washington 20 3 3 -
New York 16 2 2 -
District of Columbia 9 1 1 -
Massachusetts 4 1 1 -
Delaware 3 1 1 -
---- ---- ---- ----
Total Domestic 2,607 226 173 53
----- ---- ---- ----
International
-------------
Portugal 20 1 - 1
Japan 29 2 - 2
Canada 44 2 - 2
China (Hong Kong) 11 1 - 1
Spain 24 1 - 1
---- ---- ---- ----
Total International 128 7 - 7
---- ---- ---- ----
Total Theatre Circuit 2,735 233 173 60
===== ==== ==== ====
Film Licensing
The Company predominantly licenses "first-run" motion pictures from
distributors owned by major film production companies and from independent
distributors that generally acquire licensing rights from smaller production
companies. Films are licensed on a film-by-film and theatre-by-theatre
basis. The Company obtains these licenses either by negotiations directly
with, or by submitting bids to, distributors. Negotiations with distributors
are based on several factors, including theatre location, competition,
season of the year and motion picture content. Rental fees are paid by the
Company under a negotiated license and are made on either a "firm terms"
basis, where final terms are negotiated at the time of licensing, or on a
settlement basis, where terms are adjusted subsequent to the exhibition of a
motion picture. Firm term fee arrangements generally are more favorable to
the distributor than settlement fee arrangements with respect to the
percentage of admissions revenue ultimately paid to license a motion
picture.
North American film distributors typically establish geographic film
licensing zones and allocate available film to one theatre within that zone.
Film zones generally encompass a radius of three to five miles in
metropolitan and suburban markets, depending primarily upon population
density. In film zones where the Company is the sole exhibitor, the Company
obtains film licenses by selecting a film from among those offered and
negotiating directly with the distributor. In film zones where there is
competition, a distributor will either require the exhibitors in the zone to
bid for a film or will allocate its films among the exhibitors in the zone.
When films are allocated, a distributor will choose which exhibitor is
offered a film and then that exhibitor will negotiate film rental terms
directly with the distributor for the film. While the allocation of films
among exhibitors may differ from film to film, patterns of film distribution
have developed over time when competing theatres are comparable in size and
quality. The Company believes these allocation patterns may change as the
megaplex concept matures.
When motion pictures are licensed through a bidding process, the
distributor decides whether to accept bids on a previewed basis or a
non-previewed ("blind-bid") basis, subject to certain state law
requirements. In most cases, the Company licenses its motion pictures on a
previewed basis. When a film is bid on a previewed basis, exhibitors are
permitted to review the film before bidding, whereas they are not permitted
to do so when films are licensed on a non-previewed or "blind-bid" basis. In
the past few years, bidding has been used less frequently by the industry.
Presently, the Company licenses substantially all of its films on a
negotiated basis.
Licenses entered into through both negotiated and bid processes
typically state that rental fees shall be 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 percentages declining over the term of the
run. Under a theatre admissions revenue formula, the distributor receives a
specified percentage of the excess of admissions revenues over a negotiated
allowance for theatre expenses. First-run motion picture rental fees are
generally the greater of (i) 70% of box office admissions, gradually
declining to as low as 30% over a period of four to seven weeks, and (ii) a
specified percentage (i.e., 90%) of the excess of box office receipts over a
negotiated allowance for theatre expenses (commonly known as a "90/10"
clause). Second-run motion picture rental fees typically begin at 35% of box
office admissions and often decline to 30% after the first week. The Company
may pay non-refundable guarantees of film rentals or make advance payments
of film rentals, or both, in order to obtain a license in a negotiated or
bid process, subject, in some cases, to a per capita minimum license fee.
The Company licenses films through film buyers who enable the Company
to capitalize on local trends and to take into account actions of local
competitors in the Company's negotiation and bidding strategies. Criteria
considered in licensing each motion picture include cast, director, plot,
performance of similar motion pictures, estimated motion picture rental
costs and expected rating by the Motion Pictures Association of America.
Successful licensing depends greatly upon knowledge of the tastes of the
residents in markets served by each theatre and insight into the trends in
those tastes, as well as the availability of commercially popular motion
pictures. The Company at no time licenses any one motion picture for all of
its theatres.
The Company's business is dependent upon the availability of marketable
motion pictures. There are several distributors which provide a substantial
portion of quality first-run motion pictures to the exhibition industry.
These include Buena Vista Pictures (Disney), Paramount Pictures, Warner
Bros. Distribution, SONY Pictures Releasing (Columbia Pictures and Tri-Star
Pictures), Twentieth Century Fox, and New Line Cinema. According to
information sourced from Variety (an industry publication), these
distributors accounted for 73% of industry admissions revenues in 1998. From
year to year, the Company's revenues attributable to individual distributors
may vary significantly depending upon the commercial success of each
distributor's motion pictures in any given year. In fiscal 1999, no single
distributor accounted for more than 10% of the motion pictures licensed by
the Company or for more than 20% of the Company's box office admissions.
Poor relationships with distributors, poor performance of motion pictures or
disruption in the production of motion pictures by the major studios and/or
independent producers may have an adverse effect upon the business of the
Company.
During the period from January 1, 1990 to December 31, 1998, the annual
number of first-run motion pictures released by distributors in the United
States ranged from a low of 370 in 1995 to a high of 490 in 1998, according
to the Motion Picture Association of America. Recently, certain distributors
have announced their intention to reduce production of films. If a motion
picture still has substantial potential following its first-run, the Company
may license it for a "sub-run." Although average daily sub-run attendance is
often less than average daily first-run attendance, sub-run film rentals are
also generally lower than first-run film rentals. Sub-runs enable the
Company to exhibit a variety of motion pictures during periods in which
there are few new film releases.
Concessions
Concessions sales are the second largest source of revenue for the
Company after box office admissions. Concessions items include popcorn, soft
drinks, candy and other products. The Company's strategy emphasizes
prominent and appealing concessions counters designed for rapid service and
efficiency.
The Company's primary concessions products are various sizes of
popcorn, soft drinks, candy and hot dogs, all of which the Company sells at
each of its theatres. However, different varieties of candy and soft drinks
are offered at theatres based on preferences in that particular geographic
region. The Company has also implemented "combo-meals" for children which
offer a pre-selected assortment of concessions products.
Newer megaplexes are designed to have more concessions service capacity
per seat than multiplexes with concessions stands that have multiple service
stations to make it easier to serve larger numbers of customers. In
addition, they generally feature the "pass-through" concept, which provides
a staging area behind the concessions equipment to prepare concessions
products. This permits the concessionist serving patrons to simply sell
concessions items instead of also preparing them, thus providing more rapid
service to customers. Strategic placement of large concessions stands within
theatres heightens their visibility, aids in reducing the length of
concessions lines and improves traffic flow around the concessions stands.
The Company negotiates prices for its concessions products and supplies
directly with concessions vendors on a national or regional basis to obtain
high volume discounts or bulk rates.
Theatrical Exhibition Industry Overview
Motion picture theatres are the primary initial distribution channel
for new motion picture releases and the Company believes that the theatrical
success of a motion picture is often the most important factor in
establishing its value in the cable television, videocassette/DVD and other
ancillary markets. The Company further believes that the emergence of
alternative motion picture distribution channels has not adversely affected
attendance at theatres and that these distribution channels do not provide
an experience comparable to that of viewing a movie in a theatre. The
Company believes that alternative motion picture distribution channels have
provided additional revenue sources for filmed entertainment product which
have stimulated production. The Company believes that the public will
continue to recognize the value of viewing a movie on a large screen with
superior audio and visual quality, while enjoying a variety of concessions
and sharing the experience with a larger audience.
Annual domestic theatre attendance has averaged approximately one
billion persons since the early 1960s. Since 1988, the industry has
experienced growth, with attendance increasing at a 3.5% compound growth
rate over the period. During 1998, domestic attendance was 1.48 billion,
according to information obtained from the Motion Picture Association of
America. Variances in year-to-year attendance are primarily related to the
overall popularity and supply of motion pictures.
The following table represents information obtained from the Motion
Picture Association of America on attendance, average ticket prices and box
office sales for 1998.
U.S. Box
Attendance Average Office Sales
Year (in millions) Ticket Price (in millions)
- ---- ------------ ------------ ------------
1994 1,292 $4.18 $5,396
1995 1,263 $4.35 $5,493
1996 1,339 $4.41 $5,911
1997 1,388 $4.59 $6,366
1998 1,481 $4.69 $6,949
Competition
The Company competes against both local and national exhibitors, some
of which may have substantially greater financial resources. There are over
500 companies competing in the domestic theatrical exhibition industry,
approximately 280 of which operate four or more screens. Industry
participants vary substantially in size, from small independent operators to
large international chains. In fiscal 1999, four of the industry's largest
companies merged, and there may be additional mergers in the future.
According to the Motion Pictures Association of America, the number of
indoor screens in the United States was 33,440 at the end of 1998. Based on
the May 1, 1998 listing of exhibitors in the National Association of Theatre
Owners 1998-99 Encyclopedia of Exhibition, the Company believes that the ten
largest exhibitors (in terms of number of screens) operated approximately
55% of such number of screens, with no one exhibitor operating more than ten
percent of the total screens. Information concerning the ten largest
exhibitors does not reflect changes in screens operated by them between the
date of the National Association of Theatre Owners information and the date
of the Motion Pictures Association of America information.
The Company's theatres are subject to varying degrees of competition in
the geographic areas in which they operate. Competitors may be national
circuits, regional circuits or smaller independent exhibitors. Competition
is often intense with respect to the following factors.
. Attracting Patrons. The competition for patrons is dependent upon
factors such as the availability of popular motion pictures, the location
and number of theatres and screens in a market, the comfort and quality of
the theatres and pricing. Many of the Company's competitors have sought to
increase the number of screens that they operate. Competitors have built or
may be planning to build theatres in certain areas where the Company
operates, which could result in excess capacity and increased competition
for patrons.
. Licensing Motion Pictures. The Company believes that the principal
competitive factors with respect to film licensing include licensing terms,
seating capacity and the location and condition of an exhibitor's theatres.
. Finding New Theatres Sites. The Company must compete with exhibitors
and others in its efforts to locate and acquire attractive sites for the
Company's theatres.
The Company expects that in the long term the addition of new megaplexes
will help it obtain more favorable allocations of film product and other
licensing terms from distributors than its competitors. However, competition
from established theatres that have established relationships with
distributors initially may negatively impact the earnings of new megaplexes.
As with other exhibitors, the Company's smaller multiplexes are subject to
deteriorating financial performance and to being rendered obsolete through
the introduction of new, competing megaplexes by the Company and other
exhibitors.
The Company also faces similar competition in the international markets
in which it operates.
The theatrical exhibition industry faces competition from other
distribution channels for filmed entertainment, such as cable television,
pay per view and home video systems, as well as from all other forms of
entertainment.
Regulatory Environment
The distribution of motion pictures is in large part regulated by
federal and state antitrust laws and has been the subject of numerous
antitrust cases. The consent decrees resulting from one of those cases, to
which the Company was not a party, have a material impact on the industry
and the Company. Those consent decrees bind certain major motion picture
distributors and require the motion pictures of such distributors to be
offered and licensed to exhibitors, including the Company, on a film-by-film
and theatre-by-theatre basis. Consequently, the Company cannot assure itself
of a supply of motion pictures by entering into long-term arrangements with
major distributors, but must compete for its licenses on a film-by-film and
theatre-by-theatre basis.
Bids for new motion picture releases are made, at the discretion of the
distributor (subject to state law requirements), either on a previewed basis
or blind-bid basis. Certain states have enacted laws regulating the practice
of blind-bidding. Management believes that it may be able to make better
business decisions with respect to film licensing if it is able to preview
motion pictures prior to bidding for them, and accordingly believes that it
may be less able to capitalize on its expertise in those states which do not
regulate blind-bidding.
The Company's theatres must comply with Title III of the Americans with
Disabilities Act of 1990 (the "ADA"). Compliance with the ADA requires that
public accommodations "reasonably accommodate" individuals with disabilities
and that new construction or alterations made to "commercial facilities"
conform to accessibility guidelines unless "structurally impracticable" for
new construction or technically infeasible for alterations. Non-compliance
with the ADA could result in the imposition of injunctive relief, fines,
awards of damages to private litigants or additional capital expenditures to
remedy such noncompliance. Although the Company believes that its theatres
are in substantial compliance with the ADA, in January 1999, the Civil
Rights Division of the Department of Justice filed suit against the Company
alleging that certain of its megaplex theatres with stadium-style seating
violate the ADA. See Item 3. Legal Proceedings on page 10.
As the Company expands internationally, it becomes subject to
regulation by foreign governments. There are significant differences between
the theatrical exhibition industry regulatory environment in the United
States and in international markets. Regulatory barriers affecting such
matters as the size of theatres, the issuance of licenses and the ownership
of land may restrict market entry. Vertical integration of production and
exhibition companies in international markets may also have an adverse
effect on the Company's ability to license motion pictures for international
exhibition. The Company's international operations also face the additional
risks of fluctuating currency values. Although the Company does not
currently hedge against foreign currency exchange rate risk, it does not
intend to repatriate funds from the operations of its Japanese and European
theatres but instead intends to use them to fund additional expansion. Quota
systems used by some countries to protect their domestic film industry may
adversely affect revenues from theatres that the Company develops in such
markets. Such differences in industry structure and regulatory and trade
practices may adversely affect the Company's ability to expand
internationally or to operate at a profit following such expansion.
Seasonality
As with other exhibitors, the Company's business is seasonal in nature,
with the highest attendance and revenues generally occurring during the
summer months and holiday seasons. See Statements of Operations by Quarter
(Unaudited) on page 49.
Employees
As of April 1, 1999, the Company had approximately 2,300 full-time and
10,000 part-time employees. Approximately 18% of the part-time employees
were minors paid the minimum wage.
Fewer than one percent of the Company's employees, consisting primarily
of motion picture projectionists, are represented by a union, the
International Alliance of Theatrical Stagehand Employees and Motion Picture
Machine Operators. The Company believes that its relationship with this
union is satisfactory.
As an employer covered by the ADA, the Company must make reasonable
accommodations to the limitations of employees and qualified applicants with
disabilities, provided that such reasonable accommodations do not pose an
undue hardship on the operation of the Company's business. In addition, many
of the Company's employees are covered by various government employment
regulations, including minimum wage, overtime and working conditions
regulations.
Item 2. Properties.
Of the Company's 233 theatres and 2,735 screens operated as of April 1,
1999, American Multi-Cinema, Inc. was the owner or lessee of 224 theatres
with 2,593 screens, and AMC Entertainment International, Inc. leased 5
theatres with 84 screens and its subsidiaries, Actividades Multi-Cinemas E
Espectaculos, LDA, and AMC Entertainment Espana S.A. leased one theatre with
20 screens and one theatre with 24 screens, respectively. American
Multi-Cinema, Inc. also operated two theatres with 14 screens owned by a
third party.
Of the 233 theatres operated by the Company as of April 1, 1999, 11
theatres with 128 screens were owned, 10 theatres with 97 screens were
leased pursuant to ground leases, 210 theatres with 2,496 screens were
leased pursuant to building leases and two theatres with 14 screens were
managed. The Company's leases generally have terms ranging from 13 to 25
years, with options to extend the lease for up to 20 additional years. The
leases typically require escalating minimum annual rent payments and
additional rent payments based on a percentage of the leased theatre's
revenue above a base amount and require the Company to pay for property
taxes, maintenance, insurance and certain other property-related expenses.
In some cases, the Company's rights as tenant are subject and
subordinate to the mortgage loans of lenders to its lessors, so that if a
mortgage were to be foreclosed, the Company could lose its lease.
Historically, this has never occurred.
The majority of the concessions, projection, seating and other
equipment required for each of the Company's theatres is owned.
The Company leases its corporate headquarters, located in Kansas City,
Missouri. Division offices are leased in Los Angeles, California;
Clearwater, Florida; and Voorhees, New Jersey (Philadelphia) and a film
licensing office is leased in Woodland Hills, California (Los Angeles).
Item 3. Legal Proceedings.
On January 29, 1999, the Department of Justice ("DOJ") filed suit
against the Company in the United States District Court for the Central
District of California, United States of America v. AMC Entertainment Inc.
and American Multi-Cinema, Inc. The complaint alleges that the Company has
designed, constructed and operated two of its motion picture theatres in the
Los Angeles area and unidentified theatres elsewhere that have stadium-style
seating in violation of DOJ regulations implementing Title III of the ADA
and related "Standards for Accessible Design" (the "Standards"). The
complaint alleges various types of non-compliance with the DOJ's Standards,
but relates primarily to issues relating to lines of sight. The DOJ seeks
declaratory and injunctive relief regarding existing and future theatres
with stadium-style seating, compensatory damages and a civil penalty.
The current DOJ position appears to be that theatres must provide
wheelchair seating locations and transfer seats with viewing angles to the
screen that are at the median or better, counting all seats in the
auditorium. Heretofore, the Company has attempted to conform to the
evolving standards imposed by the DOJ and believes its theatres are in
substantial compliance with the ADA. However, the Company believes that the
DOJ's current position has no basis in the ADA or related regulations and is
an attempt to amend the ADA regulations without complying with the
Administrative Procedures Act. The Company has filed an answer denying the
allegations and asserting that the DOJ is engaging in unlawful rulemaking.
A similar claim has been made by another exhibitor, Cinemark USA, Inc. v.
United States Department of Justice, United States District Court for the
Northern District of Texas, Case No. 399CV0183-L. Although no assurances
can be given, based on existing precedent involving stadiums or stadium
seating, the Company believes that an adverse decision in this matter is not
likely to have a material adverse effect on its financial condition,
liquidity or results of operations. However, there have been only a few
cases involving stadiums or stadium seating.
In an unrelated action filed on March 5, 1998, in the United States
District Court for the District of Arizona, Howard Bell v. AMC 24 Theatres,
CIV 98 0390, a private plaintiff alleged that the Company had violated the
ADA for not dispersing accessible seating or providing accessible signage at
a megaplex located in Phoenix, Arizona. On October 16, 1998, another
private plaintiff filed suit in the United States District Court for the
District of Southern Florida, Barbara Harris v. American Multi-Cinema, Inc.,
CIV 98-2472, alleging that the Company had violated the ADA by failing to
provide comparable seating for wheel chair patrons. Both suits have been
settled for nominal amounts. The Bell suit was dismissed on March 9, 1999
and the Harris case was dismissed on June 1, 1999.
On November 30, 1998, Cyndi Soto filed suit in the United States
District Court for the Central District of California, Cyndi Soto v.
American Multi-Cinema, Inc. and JANSS/TYS Long Beach Associates,
CV989547SLRNBX, alleging that one of the Company's theatres violated the ADA
and California law by failing to remove certain barriers to access. The
suit seeks an unspecified amount of general, special and punitive damages
under California law and an injunction requiring the Company remove the
alleged barriers. The Company has filed an answer denying the allegations in
the Soto suit. On March 4, 1999, William P. Storrs filed a purported class
action lawsuit in the United States District Court for the Southern District
of Texas, William P. Storrs v. AMC Entertainment, Inc., Case No. H-99-061,
alleging that sight lines at a Houston area megaplex violate the Americans
with Disabilities Act and Chapter 121 of the Texas Human Resources Code.
The suit seeks injunctive, declaratory and monetary relief. AMC has filed
its answer denying the allegations and asserting a number of affirmative
defenses. In addition, AMC has asked the Court to stay the suit pending
resolution of the Department of Justice litigation filed in California
referred to above.
On July 27, 1998, in the United States District Court for the Northern
District of California, Drexler Technology Corporation filed actions against
each of Sony Corporation and its affiliated companies and Dolby
Laboratories, Inc., and has included as defendants various motion picture
distributors and exhibitors, including AMC, Drexler Technology Corp. v. Sony
corp. et al, C98-02936, and Drexler Technology Corp. v. Dolby Labs. et al,
C98-02935. These actions allege infringement of two patents relating to
optical data storage and retrieval systems, which are allegedly infringed by
the encoding of digital sound on motion picture films. These infringement
allegations are based on the production, distribution and exhibition of film
with Sony Dynamic Digital Sound (SDDS) or Dolby Digital technology.
Plaintiff seeks an injunction against continued use of this technology and
also seeks damages. AMC has filed counter claims alleging that plaintiff's
patents are invalid. The court has ordered that the issues of liability and
damages be tried separately, but has not set a trial date.
AMC currently utilizes SDDS systems with respect to 2,300 of its
screens and owns 159 portable systems employing Dolby Digital technology.
AMC is the beneficiary of indemnification arrangements with respect to these
actions. Pursuant to AMC's contractual arrangements with Sony Cinema
Products Corporation ("Sony Cinema"), a subsidiary of Sony Corporation of
America, Sony Cinema is obligated to indemnify, defend and hold harmless AMC
from and against any and all liabilities, damages, losses, costs and
expenses (including attorneys' fees) suffered or incurred by AMC in
connection with any third party claim for alleged infringement of any
patent, trademark or similar right relating to the SDDS systems. The
agreement with Sony Cinema provides that Sony Cinema at its expense and
option, shall (i) settle or defend against such a claim, (ii) procure for
AMC the right to use the SDDS systems in a manner that will cause them to
perform as originally intended under the agreement between AMC and Sony
Cinema; (iii) replace or modify the SDDS systems to avoid infringement; or
(iv) remove the SDDS systems from AMC's facilities (at such time and in such
manner as to not disrupt AMC's business operations) and refund to AMC the
purchase price less depreciation. Dolby Laboratories has agreed (i) to
defend, indemnify and hold AMC harmless from any losses arising out of the
Drexler v. Dolby Labs. action and (ii) in the event the Dolby Digital
technology is found to infringe one or more of the Drexler patents, to
procure for AMC at Dolby's expense the right to make, use and sell the Dolby
Digital technology or to modify it so that it is non-infringing. As a
result, although no assurance can be given, the Company believes that these
actions will not have a material adverse effect on the Company's financial
condition, liquidity or results of operations.
The Company is party to various legal proceedings in the ordinary
course of business, none of which is expected to have a material adverse
effect on the Company.
Item 4. Submission Of Matters to a Vote of Security Holders.
There has been no submission of matters to a vote of security holders
during the thirteen weeks ended April 1, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
AMC Entertainment Inc. Common Stock is traded on the American and
Pacific Stock Exchanges under the symbol AEN. There is no established
public trading market for Class B Stock.
The table below sets forth, for the periods indicated, the high and low
closing prices of the Common Stock as reported on the American Stock
Exchange composite tape.
Fiscal 1999 Fiscal 1998
------------- ------------
High Low High Low
---- ---- ---- ----
First Quarter $23 3/4 $16 13/16 $23 3/8 $17 7/8
Second Quarter 19 7/8 11 1/4 20 3/4 17 5/8
Third Quarter 21 1/16 10 3/4 23 18 3/4
Fourth Quarter 20 3/16 13 9/16 27 3/4 21 3/4
Stock Ownership
On May 14, 1999, there were 490 stockholders of record of Common Stock
and one stockholder of record (the 1992 Durwood, Inc. Voting Trust dated
December 12, 1992) of Class B Stock.
The Company's Certificate of Incorporation provides that holders of
Common Stock and Class B Stock shall receive, pro rata per share, such cash
dividends as may be declared from time to time by the Board of Directors.
Certain provisions of the Indentures respecting the Company's 9 1/2% Senior
Subordinated Notes due 2009, the Company's 9 1/2% Senior Subordinated Notes
due 2011 and the Company's $425 million revolving credit facility (the
"Credit Facility") restrict the Company's ability to declare or pay
dividends on and purchase capital stock. Presently, it is not anticipated
that the most restrictive of these provisions, which are set forth in the
Credit Facility, will affect the Company's ability to pay dividends in the
foreseeable future should it choose to do so. Except for a $1.14 per share
dividend declared in connection with a recapitalization that occurred in
August 1992, the Company has not declared a dividend on shares of Common
Stock or Class B Stock since fiscal 1989. Any payment of cash dividends on
Common Stock in the future will be at the discretion of the Board and will
depend upon such factors as earnings levels, capital requirements, the
Company's financial condition and other factors deemed relevant by the
Board. Currently, the Company does not contemplate declaring or paying any
dividends on its Common Stock.
Item 6. Selected Financial Data.
Years Ended (1)(6)
-----------------------------------------------------------
April 1, April 2, April 3, March 28, March 30,
(In thousands, except per
- -------------------------
share and operating data) 1999 1998 1997 1996 1995
- -------------------------- ---- ---- ---- ---- ----
Statement of Operations
Data:
Total revenues $1,026,721 $852,755 $752,904 $658,549 $ 565,410
Total cost of operations 865,771 691,500 583,309 493,935 434,829
General and administrative 58,419 54,354 56,647 52,059 41,639
Depreciation and
amortization 89,221 70,117 52,572 42,087 37,913
Impairment of long-lived
assets 4,935 46,998 7,231 1,799 -
-------- ------- ------- ------- -------
Operating income (loss) 8,375 (10,214) 53,145 68,669 51,029
Interest expense 38,628 35,679 22,022 28,828 35,908
Investment income 1,368 1,090 856 7,052 10,013
Gain (loss) on disposition
of assets 2,369 3,704 (84) (222) (156)
------- ------- ------- ------- -------
Earnings (loss) before
income taxes
and extraordinary item (26,516) (41,099) 31,895 46,671 24,978
Income tax provision (10,500) (16,600) 12,900 19,300 (9,000)
------- ------- ------- ------- -------
Earnings (loss) before
extraordinary item (16,016) (24,499) 18,995 27,371 33,978
Extraordinary item,
net of taxes (2) - - - _(19,350) -
------- ------- ------- ------- -------
Net earnings (loss) $(16,016) $(24,499) $ 18,995 $ 8,021 $ 33,978
======= ======= ======= ======= =======
Preferred dividends - 4,846 5,907 7,000 7,000
------- ------- ------- ------- -------
Net earnings (loss) for
common shares $(16,016)$ (29,345) $ 13,088 $ 1,021 $ 26,978
======= ======= ======= ======= =======
Earnings (loss) per share
before extraordinary item:
Basic $ (.69)$ (1.59)$ .75 $ 1.23 $ 1.64
Diluted (.69) (1.59) .74 1.15 1.45
Earnings (loss) per share:
Basic $ (.69)$ (1.59) $ .75 $ .06(2) $ 1.64
Diluted (.69) (1.59) .74 .34 1.45
Weighted average number
of shares outstanding:
Basic 23,378 18,477 17,489 16,513 16,456
Diluted 23,378 18,477 17,784 23,741 23,489
Balance Sheet Data
(at period end):
Cash, equivalents and
investments $ 13,239 $ 9,881 $ 24,715 $ 10,795 $140,377
Total assets 975,730 795,780 719,055 483,458 522,154
Corporate borrowings 561,045 348,990 315,072 126,150 200,222
Capital lease
obligations 48,575 54,622 58,652 62,022 67,282
Stockholders' equity 115,465 139,455 170,012 158,918 157,388
Other Financial Data:
Capital expenditures $260,813 $389,217 $253,380 $120,796 $ 56,403
Proceeds from
sale/leasebacks - 283,800 - - -
Rent expense 165,370 106,383 80,061 64,813 60,076
Preopening expense (3) 2,265 2,243 2,414 573 -
Theatre closure expense (4) 2,801 - - - -
Adjusted EBITDA (5) 107,597 109,144 115,362 113,128 88,942
Operating Data (at
period end):
Number of megaplexes
operated 60 44 19 5 -
Number of megaplex
screens operated 1,335 987 379 98 -
Number of multiplexes
operated 173 185 209 221 232
Number of multiplex
screens operated 1,400 1,455 1,578 1,621 1,630
Screens per theatre
circuit wide 11.7 10.7 8.6 7.6 7.0
(1)Fiscal 1997 consists of 53 weeks. All other fiscal years have 52 weeks.
(2)Fiscal 1996 includes a $19,350 extraordinary loss on early extinguishment
of debt (net of income tax benefit of $13,400) equal to $1.17 per
common share.
(3)Preopening expense is comprised of advertising and promotional expense that
is incurred in connection with the opening of a new theatre. Certain other
preopening costs are capitalized and amortized over a two year period.
In fiscal 2000 (as the result of a new accounting pronouncement), all
capitalized preopening costs will be written off as a cumulative effect
adjustment and all future preopening costs will be expensed as incurred.
(4)Theatre closure expense relates to actual and estimated lease exit costs
on multiplex theatres. The Company anticipates that it will incur
approximately $15 million of costs related to the closure of approximately
34 multiplexes with 220 screens in fiscal 2000.
(5)Represents net earnings (loss) plus interest, income taxes, depreciation and
amortization and adjusted for impairment losses, preopening expense, theatre
closure expense, gain (loss) on disposition of assets, equity in earnings of
unconsolidated affiliates and extraordinary item. Management of the Company
has included Adjusted EBITDA because it believes that Adjusted EBITDA
provides lenders and stockholders additional information for estimating the
Company's value and evaluating its ability to service debt. Management of
the Company believes that Adjusted EBITDA is a financial measure commonly
used in the Company's industry and should not be construed as an alternative
to operating income (as determined in accordance with GAAP). Adjusted EBITDA
as determined by the Company may not be comparable to EBITDA as reported by
other companies. In addition, Adjusted EBITDA is not intended to represent
cash flow (as determined in accordance with GAAP) and does not represent
the measure of cash available for discretionary uses.
(6)There were no cash dividends declared on Common Stock during the last five
fiscal years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This report contains certain "forward-looking statements" intended to
qualify for the safe harbor from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can
be identified by use of statements that include words or phrases such as the
Company or its management "believes," "expects," "anticipates," "intends",
"plans," "foresees" or other words or phrases of similar import. Similarly,
statements that describe the Company's objectives, plans or goals also are
forward-looking statements. All such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
Important factors that could cause actual results to differ materially from the
expectations of the Company include, among others: (i) the Company's ability to
enter into various financing programs; (ii) the performance of films licensed by
the Company; (iii) competition; (iv) construction delays; (v) the ability to
open or close theatres and screens as currently planned; (vi) general economic
conditions, including adverse changes in inflation and prevailing interest
rates; (vii) demographic changes; (viii) increases in the demand for real
estate; and (ix) changes in real estate, zoning and tax laws. Readers are urged
to consider these factors carefully in evaluating the forward-looking
statements. The Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
OPERATING RESULTS
Years (52 Weeks) Ended April 1, 1999 and April 2, 1998
52 Weeks 52 Weeks
Ended Ended
April 1, April 2,
(Dollars in thousands) 1999 1998 % Change
- --------------------------------------------------------------------------
Revenues
Domestic
Admissions $ 628,373 $530,653 18.4%
Concessions 299,534 251,025 19.3
Other 20,822 16,052 29.7
--------------------------------
948,729 797,730 18.9
International
Admissions 33,788 22,918 47.4
Concessions 7,813 4,992 56.5
Other 944 59 * 42,545 27,969
--------------------------------
42,545 27,969 52.1
On-screen advertising and other 35,447 27,056 31.0
--------------------------------
Total revenues $1,026,721 $852,755 20.4%
================================
Cost of Operations
Domestic
Film exhibition costs $ 340,653 $287,516 18.5%
Concession costs 46,262 40,109 15.3
Rent 156,324 100,928 54.9
Other 252,733 215,656 17.2
--------------------------------
795,972 644,209 23.6
International
Film exhibition costs 17,784 12,410 43.3
Concession costs 2,425 1,953 24.2
Rent 9,046 5,455 65.8
Other 12,478 6,180 *
--------------------------------
41,733 25,998 60.5
On-screen advertising and other 28,066 21,293 31.8
--------------------------------
Total cost of operations $865,771 $691,500 25.2%
================================
* Percentage change in excess of 100%.
52 Weeks 52 Weeks
Ended Ended
April 1, April 2,
(Dollars in thousands) 1999 1998 % Change
- ---------------------------------------------------------------------------
General and Administrative
Corporate and domestic $ 43,958 $ 42,636 3.1%
International 9,770 6,879 42.0
On-screen advertising and other 4,691 4,839 (3.1)
--------------------------------
Total general and administrative $ 58,419 $ 54,354 7.5%
================================
Depreciation and Amortization
Corporate and domestic $ 82,500 $ 65,168 26.6%
International 4,407 2,534 73.9
On-screen advertising and other 2,314 2,415 (4.2)
--------------------------------
Total depreciation and amortization $ 89,221 $ 70,117 27.2%
================================
Revenues. Total revenues increased 20.4%, or $173,966,000, during the year
(52 weeks) ended April 1, 1999 compared to the year (52 weeks) ended April 2,
1998.
Total domestic revenues increased 18.9%, or $150,999,000, from the prior
year. Admissions revenues increased 18.4%, or $97,720,000, due to a 14.5%
increase in attendance, which contributed $77,182,000 of the increase, and a
3.4% increase in average ticket prices, which contributed $20,538,000 of the
increase. Attendance at megaplexes (theatres with predominantly stadium-style
seating) increased as a result of the addition of 11 new megaplexes with 256
screens since April 2, 1998, offset by a 3.5% decrease in attendance at
comparable megaplexes (theatres opened before fiscal 1998). Attendance at
multiplexes (theatres generally without stadium-style seating) decreased due to
a 11.7% decrease in attendance at comparable multiplexes and the closure or sale
of 15 multiplexes with 83 screens since April 2, 1998. The decline in
attendance at comparable multiplexes was related primarily to certain
multiplexes experiencing competition from new megaplexes operated by the Company
and other competing theatre circuits, a trend the Company generally anticipates
will continue. The increase in average ticket prices was due to price increases
and the growing number of megaplexes in the Company's theatre circuit, which
yield higher average ticket prices than multiplexes. Concessions revenues
increased 19.3%, or $48,509,000, due to the increase in total attendance, which
contributed $36,511,000 of the increase, and a 4.2% increase in average
concessions per patron, which contributed $11,998,000 of the increase. The
increase in average concessions per patron was attributable to the increasing
number of megaplexes in the Company's theatre circuit, where concession spending
per patron is higher than in multiplexes.
Total international revenues increased 52.1%, or $14,576,000, from the
prior year. Admissions revenues increased 47.4%, or $10,870,000, due primarily
to an increase in attendance from the addition of a 24-screen megaplex in Spain,
a 16-screen megaplex in Japan, an 11-screen megaplex in China (Hong Kong) and
two new megaplexes with a total of 44 screens in Canada during the fifty-two
weeks ended April 1, 1999. Attendance at comparable international megaplexes
increased 7.7% for the year ended April 1, 1999 compared to the year ended April
2, 1998. Concession revenues increased 56.5%, or $2,821,000, due primarily to
the increase in total attendance. International revenues were negatively
impacted by a stronger U.S. dollar, although this did not have a material impact
on consolidated net earnings.
On-screen advertising and other revenues increased 31.0%, or $8,391,000,
from the prior year due to an increase in the number of screens served, offset
by a change in the number of periods included in the results of operations of
the Company's on-screen advertising business.
Cost of Operations. Total cost of operations increased 25.2%, or
$174,271,000, during the year (52 weeks) ended April 1, 1999 compared to the
year (52 weeks) ended April 2, 1998.
Total domestic cost of operations increased 23.6%, or $15,763,000, from the
prior year. Film exhibition costs increased 18.5%, or $53,137,000, due to
higher attendance, which contributed $52,946,000 of the increase, and a slight
increase in the percentage of admissions paid to film distributors, which
increased film exhibition costs by $191,000. As a percentage of admissions
revenues, film exhibition costs were 54.2% in the current and in the prior year.
Concession costs increased 15.3%, or $6,153,000, due to the increase in
concessions revenues, which contributed $7,751,000 of the increase, offset by a
decrease in concession costs as a percentage of concessions revenues, which
produced a decrease in concession costs of $1,598,000. As a percentage of
concessions revenues, concession costs were 15.4% in the current year compared
with 16.0% in the prior year. Rent expense increased 54.9%, or $55,396,000, due
to the higher number of screens in operation, the growing number of megaplexes
in the Company's theatre circuit, which generally have higher rent per screen
than multiplexes, and the sale and lease back during the third and fourth
quarters of the prior year of the real estate assets associated with 13
megaplexes, including seven theatres opened during fiscal 1998, to Entertainment
Properties Trust ("EPT"), a real estate investment trust (the "Sale and Lease
Back Transaction"). Other cost of operations increased 17.2%, or $37,077,000,
from the prior year primarily due to the higher number of screens in operation.
Other cost of operations includes $2,801,000 of theatre closure expense related
to actual and estimated costs to close multiplexes during the current year. As
a percentage of revenues, other cost of operations was 26.6% during the current
year as compared with 27.0% in the prior year.
Total international cost of operations increased 60.5%, or $15,735,000,
from the prior year. Film exhibition costs increased 43.3%, or $5,374,000, due
to higher attendance, offset by a decrease in the percentage of admissions paid
to film distributors. Rent expense increased 65.8%, or $3,591,000, and other
cost of operations increased $6,298,000, from the prior year, primarily due to
the increased number of international screens in operation. International cost
of operations were positively impacted by a stronger U.S. dollar, although this
did not have a material impact on consolidated net earnings.
On-screen advertising and other cost of operations increased 31.8%, or
$6,773,000, due to an increase in the number of screens served, offset by a
change in the number of periods included in the results of operations of the
Company's on-screen advertising business.
General and Administrative. General and administrative expenses increased
7.5%, or $4,065,000, during the year (52 weeks) ended April 1, 1999.
Corporate and domestic general and administrative expenses increased 3.1%,
or $1,322,000, primarily due to increased payroll and other costs associated
with the Company's expansion program.
International general and administrative expenses increased 42.0%, or
$2,891,000, primarily due to the Company's international expansion program.
On-screen advertising and other general and administrative expenses
decreased 3.1%, or $148,000, primarily due to the change in the number of
periods included in the results of operations for the Company's on-screen
advertising business.
Depreciation and Amortization. Depreciation and amortization increased
27.2%, or $19,104,000, during the year (52 weeks) ended April 1, 1999. This
increase was caused by an increase in employed theatre assets resulting from the
Company's expansion plan, which was partially offset by lower depreciation and
amortization as a result of the reduced carrying amounts of impaired multiplex
assets.
Impairment of Long-lived Assets. During the fourth quarter of the current
year, the Company recognized a non-cash impairment loss of $4,935,000
($2,912,000 after tax, or $.13 per share) on 24 multiplexes with 186 screens in
11 states (primarily Georgia, Ohio, Texas and Colorado) including a loss of
$937,000 associated with 7 theatres that were included in impairment losses
recognized in previous periods. The estimated future cash flows of these
theatres, undiscounted and without interest charges, were less than the carrying
value of the theatre assets. The Company is evaluating its future plans for many
of its multiplexes, which may include selling theatres, subleasing properties to
other exhibitors or for other uses, retrofitting certain theatres to the
standards of a megaplex or closing theatres and terminating the leases. Closure
or other dispositions of certain multiplexes will result in expenses which are
primarily comprised of expected payments to landlords to terminate leases or
conversion costs. The Company anticipates that it will incur approximately $15
million of costs related to the closure of approximately 34 multiplexes with 220
screens in fiscal 2000. As of June 3, 1999, the Company had closed 18 of these
multiplexes with 123 screens and recognized approximately $9 million of theatre
closure expense. During fiscal 1999, the Company closed or sold 16 multiplexes
with 87 screens.
During the second quarter of the prior year, the Company recognized a non-
cash impairment loss of $46,998,000 ($27,728,000 after tax, or $1.50 per share)
on 59 multiplexes with 412 screens in 14 states (primarily California, Texas,
Missouri, Arizona and Florida) including a loss of $523,000 associated with 10
theatres that were included in impairment losses recognized in previous periods.
The estimated future cash flows of these theatres, undiscounted and without
interest charges, were less than the carrying value of the theatre assets.
Interest Expense. Interest expense increased 8.3%, or $2,949,000, during
the year (52 weeks) ended April 1, 1999 compared to the prior year, primarily
due to an increase in average outstanding borrowings and interest rates.
Gain on Disposition of Assets. Gain on disposition of assets decreased
from a gain of $3,704,000 in the prior year to a gain of $2,369,000 during the
current year. The prior and current year results both include the sales of
three of the Company's multiplexes.
Income Tax Provision. The provision for income taxes decreased $6,100,000
to a benefit of $10,500,000 during the current year from a benefit of
$16,600,000 in the prior year. The effective tax rate was 39.6% for the current
year compared to 40.4% for the previous year.
Net Earnings. Net earnings improved by $8,483,000 during the year (52
weeks) ended April 1, 1999 to a loss of $16,016,000 from a loss of $24,499,000
in the prior year. Net loss per common share, after deducting preferred
dividends, was $.69 compared to a loss of $1.59 in the prior year.
Years (52/53 Weeks) Ended April 2, 1998 and April 3, 1997
52 Weeks Ended 53 Weeks Ended
April 2, April 3,
(Dollars in thousands) 1998 1997 % Change
- --------------------------------------------------------------------------
Revenues
Domestic
Admissions $530,653 $479,629 10.6%
Concessions 251,025 222,945 12.6
Other 16,052 15,763 1.8
--------------------------------
797,730 718,337 11.1
International
Admissions 22,918 13,322 72.0
Concessions 4,992 2,222 *
Other 59 49 20.4
--------------------------------
27,969 15,593 79.4
On-screen advertising and other 27,056 18,974 42.6
--------------------------------
Total revenues $852,755 $752,904 13.3%
================================
Cost of Operations
Domestic
Film exhibition costs $287,516 $251,090 14.5%
Concession costs 40,109 36,045 11.3
Rent 100,928 75,116 34.4
Other 215,656 186,945 15.4
--------------------------------
644,209 549,196 17.3
International
Film exhibition costs 12,410 7,719 60.8
Concession costs 1,953 703 *
Rent 5,455 4,945 10.3
Other 6,180 5,377 14.9
--------------------------------
25,998 18,744 38.7
On-screen advertising and other 21,293 15,369 38.5
--------------------------------
Total cost of operations $691,500 $583,309 18.5%
================================
General and Administrative
Corporate and domestic $ 42,636 $ 45,558 (6.4)%
International 6,879 6,864 .2
On-screen advertising and other 4,839 4,225 14.5
--------------------------------
Total general and administrative $ 54,354 $ 56,647 (4.0)%
================================
Depreciation and Amortization
Corporate and domestic $ 65,168 $ 49,392 31.9%
International 2,534 1,436 76.5
On-screen advertising and other 2,415 1,744 38.5
--------------------------------
Total depreciation and amortization $70,117 $ 52,572 33.4%
================================
* Percentage change in excess of 100%.
Revenues. Total revenues increased 13.3%, or $99,851,000, during the year
(52 weeks) ended April 2, 1998 compared to the year (53 weeks) ended April 3,
1997.
Total domestic revenues increased 11.1%, or $79,393,000, from the prior
year. Admissions revenues increased 10.6%, or $51,024,000, due to a 5.4%
increase in attendance, which contributed $25,960,000 of the increase, and a
5.0% increase in average ticket prices, which contributed $25,064,000 of the
increase. Attendance at megaplexes (theatres with predominantly stadium-style
seating) increased as a result of the addition of 23 new megaplexes with 564
screens since April 3, 1997, offset by a 4.7% decrease in attendance at
comparable megaplexes. Attendance at multiplexes decreased due to a 11.9%
decrease in attendance at comparable multiplexes and the closure or sale of 23
multiplexes with 123 screens since fiscal 1997. The decline in attendance at
comparable multiplexes was related primarily to certain multiplexes experiencing
competition from new megaplexes operated by the Company and other competing
theatre circuits, a trend the Company generally anticipates will continue. The
increase in average ticket prices was due to price increases and the growing
number of megaplexes in the Company's theatre circuit, which yield higher
average ticket prices than multiplexes. Concessions revenues increased 12.6%,
or $28,080,000, due to a 6.8% increase in average concessions per patron, which
contributed $16,013,000 of the increase, and the increase in total attendance,
which contributed $12,067,000 of the increase. The increase in average
concessions per patron was attributable to the increasing number of megaplexes
in the Company's theatre circuit, where concession spending per patron is higher
than in multiplexes.
Total international revenues increased 79.4%, or $12,376,000, from the
prior year. Admissions revenues increased 72.0%, or $9,596,000, due to an
increase in attendance, offset by a decrease in average ticket prices.
Attendance increased as a result of the opening of the Arrabida 20 in Portugal
during December of fiscal 1997 and improved attendance at the Canal City 13 in
Japan. Concessions revenues increased $2,770,000 due to the increase in total
attendance, offset by a decrease in average concessions per patron. The
decrease in average ticket prices and concessions per patron was due to the
lower ticket and concessions prices at the theatre in Portugal compared to the
theatre in Japan. International revenues were also impacted by the
strengthening of the U.S. dollar relative to the Japanese yen.
On-screen advertising and other revenues increased 42.6%, or $8,082,000,
from the prior year due to an increase in the number of screens served, a result
of an expansion program, and a change in the number of periods included in the
results of operations from the Company's on-screen advertising business.
Cost of Operations. Total cost of operations increased 18.5%, or
$108,191,000, during the year (52 weeks) ended April 2, 1998 compared to the
year (53 weeks) ended April 3, 1997.
Total domestic cost of operations increased 17.3%, or $95,013,000, from the
prior year. Film exhibition costs increased 14.5%, or $36,426,000, due to
higher attendance, which contributed $26,712,000 of the increase, and an
increase in the percentage of admissions paid to film distributors, which
contributed $9,714,000 of the increase. As a percentage of admissions revenues,
film exhibition costs was 54.2% in the current year compared with 52.4% in the
prior year. This increase occurred because more popular films released during
fiscal 1998 were licensed from distributors that generally have higher film
rental terms and because of the concentration of attendance in the early weeks
of several films released during the year, which typically results in higher
film exhibition costs. The 11.3%, or $4,064,000, increase in concession costs
was attributable to the increase in concessions revenues. As a percentage of
concessions revenues, concession costs was 16.0% in the current year compared
with 16.2% in the prior year. Rent expense increased 34.4%, or $25,812,000, due
to the higher number of screens in operation, the growing number of megaplexes
in the Company's theatre circuit, which generally have higher rent per screen
than multiplexes, and the Sale and Lease Back Transaction. Other cost of
operations increased 15.4%, or $28,711,000, from the prior year due to the
higher number of screens in operation and higher expenses associated with the
Company's theatre management development program.
Total international cost of operations increased 38.7%, or $7,254,000, from
the prior year. Film exhibition costs increased 60.8%, or $4,691,000, due to
higher attendance, offset by a decrease in the percentage of admissions paid to
film distributors. The $1,250,000 increase in concession costs was primarily
attributable to the increase in concessions revenues. Rent expense increased
10.3%, or $510,000, and other cost of operations increased 14.9%, or $803,000,
from the prior year due primarily to the full year of operations of the Arrabida
20, which opened in December of fiscal 1997. International expenses were also
impacted by the strengthening of the U.S. dollar relative to the Japanese yen.
On-screen advertising and other cost of operations increased 38.5%, or
$5,924,000, as a result of the higher number of screens served and a change in
the number of periods included in the results of operations of the Company's on-
screen advertising business.
General and Administrative. General and administrative expenses decreased
4.0%, or $2,293,000, during the year (52 weeks) ended April 2, 1998.
Corporate and domestic general and administrative expenses decreased 6.4%,
or $2,922,000, due primarily to decreases in costs associated with the Company's
development of theatres and the reversal of $1,358,000 of compensation expense
recognized in prior years for performance stock awards which were not earned at
the end of the three-year performance period ended April 2, 1998. These
decreases were partially offset by increases in payroll and related costs and
professional and consulting expenses.
International general and administrative expenses increased .2%, or
$15,000, and on-screen advertising and other general and administrative expenses
increased 14.5%, or $614,000. The increase in on-screen advertising and other
resulted from an increase in costs to support the expansion program at the
Company's on-screen advertising business.
Depreciation and Amortization. Depreciation and amortization increased
33.4%, or $17,545,000, during the year (52 weeks) ended April 2, 1998. This
increase was caused by an increase in employed theatre assets resulting from the
Company's expansion plan, which was partially offset by lower depreciation and
amortization as a result of the reduced carrying amounts of impaired multiplex
assets. The reduced carrying amount of the impaired assets from fiscal 1998
will result in reduced depreciation and amortization in future periods. For
fiscal 1998, depreciation and amortization was reduced by approximately
$10,500,000.
Impairment of Long-lived Assets. During the second quarter of 1998, the
Company recognized a non-cash impairment loss of $46,998,000 ($27,728,000 after
tax, or $1.50 per share) on 59 multiplexes with 412 screens in 14 states
(primarily California, Texas, Missouri, Arizona and Florida) including a loss of
$523,000 associated with 10 theatres that were included in impairment losses
recognized in previous periods. The estimated future cash flows of these
theatres, undiscounted and without interest charges, were less than the carrying
value of the theatre assets.
The summer of 1997 was the first summer film season, generally the highest
grossing period for the film industry, that a significant number of megaplexes
of the Company and its competitors were operating (the first megaplex, Grand 24,
was opened by the Company in May 1995). During this period, the financial
results of certain multiplexes of the Company were significantly less than
anticipated at the beginning of fiscal 1998 due primarily to competition from
the newer megaplexes. During fiscal 1998, the Company closed or sold 23
multiplexes with 123 screens.
During the year (53 weeks) ended April 3, 1997, the Company recognized a
non-cash impairment loss of $7,231,000 ($4,266,000 after tax, or $.24 per share)
on 18 multiplexes with 82 screens in nine states (primarily Michigan,
Pennsylvania, California, Florida and Virginia).
Interest Expense. Interest expense increased 62.0%, or $13,657,000, during
the year (52 weeks) ended April 2, 1998 compared to the prior year. The
increase in interest expense resulted primarily from an increase in average
outstanding borrowings related to the Company's expansion plan and higher
average interest rates as a result of the issuance of $200,000,000 of 9 1/2%
Senior Subordinated Notes on March 19, 1997.
Gain on Disposition of Assets. Gain on disposition of assets increased
$3,788,000 during the year (52 weeks) ended April 2, 1998 primarily from the
sale of three of the Company's multiplexes during the current year.
Income Tax Provision. The provision for income taxes decreased $29,500,000
to a benefit of $16,600,000 during the current year from an expense of
$12,900,000 in the prior year. The effective tax rate was 40.4% for the current
and the prior year.
Net Earnings. Net earnings decreased
$43,494,000 during the year (52 weeks) ended April 2, 1998 to a loss of
$24,499,000 from earnings of $18,995,000 in the prior year. Net loss per
common share, after deducting preferred dividends, was $1.59 compared to
earnings of $.75 in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, principally through box
office admissions and theatre concessions sales. The Company has an operating
"float" which partially finances its operations and which generally permits the
Company to maintain a smaller amount of working capital capacity. This float
exists because admissions revenues are received in cash, while exhibition costs
(primarily film rentals) are ordinarily paid to distributors from 30 to 45 days
following receipt of box office admissions revenues. The Company is only
occasionally required to make advance payments or non-refundable guaranties of
film rentals. Film distributors generally release during the summer and holiday
seasons the films which they anticipate will be the most successful.
Consequently, the Company typically generates higher revenues during such
periods. Cash flows from operating activities, as reflected in the Consolidated
Statements of Cash Flows, were $67,167,000, $91,322,000 and $109,339,000 in
fiscal years 1999, 1998 and 1997, respectively.
The Company is currently expanding its domestic theatre circuit and
entering select international markets. During the current fiscal year, the
Company opened 16 megaplexes with 351 screens (including 5 megaplexes with 95
screens in international markets) and acquired four multiplexes with 29 screens
in strategic film zones. In addition, the Company sold three multiplexes with
17 screens, closed 12 multiplexes with 66 screens, closed 3 screens at an
existing megaplex and discontinued operating one managed theatre with one screen
resulting in a circuit total of 60 megaplexes with 1,335 screens and 173
multiplexes with 1,400 screens as of April 1, 1999.
The costs of constructing new theatres are funded by the Company through
internally generated cash flow or borrowed funds. The Company generally leases
its theatres pursuant to long-term non-cancelable operating leases which require
the developer, who owns the property, to reimburse the Company for a portion of
the construction costs. However, the Company may decide to own the real estate
assets of new theatres and, following construction, sell and leaseback the real
estate assets pursuant to long-term non-cancelable operating leases. During
fiscal 1999, 14 new theatres with 301 screens were leased from developers.
Historically, the Company has owned and paid for the equipment necessary to
fixture a theatre. However, the Company entered into a master lease agreement
in fiscal 1999 for up to $25,000,000 of equipment necessary to fixture certain
theatres. The master lease agreement has an initial term of six years and
includes early termination and purchase options. The Company classifies these
leases as operating leases. As of April 1, 1999, the Company had construction
in progress of $97,688,000 and reimbursable construction advances (amounts due
from developers on leased theatres) of $22,317,000. The Company had 14
megaplexes with 316 screens under construction on April 1, 1999 (including 6
megaplexes with 140 screens in international markets).
During the fifty-two weeks ended April 1, 1999, the Company had capital
expenditures of $260,813,000. The Company estimates that total capital
expenditures for 2000 will aggregate approximately $290 million. Included in
these amounts are real estate assets of approximately $80 million which the
Company plans to place into sale and leaseback or other comparable financing
programs, which will have the effect of reducing the Company's net cash outlays
to approximately $210 million.
On August 11, 1998, the Company loaned one of its executive officers
$5,625,000 to purchase 375,000 shares of Common Stock of the Company in a
registered secondary offering. On September 14, 1998, the Company loaned
$3,765,000 to another of its executive officers to purchase 250,000 shares of
Common Stock of the Company. The 250,000 shares were purchased in the open
market and unused proceeds of $811,000 were repaid to the Company leaving a
remaining unpaid principal balance of $2,954,000. The loans are unsecured and
are due in August and September of 2003, respectively, may be prepaid in part or
full without penalty, and are represented by promissory notes which bear
interest at a rate (5.57% per annum) at least equal to the applicable federal
rate prescribed by Section 1274 (d) of the Internal Revenue Code in effect on
the date of such loans, payable at maturity.
On January 27, 1999, the company sold $225 million aggregate principal
amount of 9 1/2% Senior Subordinated Notes due 2011 (the "Notes due 2011") in a
private offering. As required by the Indenture to the Notes due 2011, the
Company consummated a registered offer on May 10, 1999 to exchange the Notes due
2011 for notes of the Company with terms identical in all material respects to
the Notes due 2011. Net proceeds from the issuance of the Notes due 2011
(approximately $219.3 million) were used to reduce borrowings under the Credit
Facility.
The Notes due 2011 bear interest at the rate of 9 1/2% per annum, payable
in February and August. The Notes due 2011 are redeemable at the option of the
Company, in whole or in part, at any time on or after February 1, 2004 at
104.75% of the principal amount thereof, declining ratably to 100% of the
principal amount thereof on or after February 1, 2007, plus in each case
interest accrued to the redemption date. The Notes due 2011 are subordinated to
all existing and future senior indebtedness (as defined in the Note Indenture)
of the Company. The Notes due 2011 are unsecured senior subordinated
indebtedness of the Company ranking equally with the Company's 9 1/2% Senior
Subordinated Notes due 2009.
The Company's Credit Facility permits borrowings at interest rates based on
either the bank's base rate or LIBOR and requires an annual commitment fee based
on margin ratios that could result in a rate of .375% or .500% on the unused
portion of the commitment. The Credit Facility matures on April 10, 2004. The
commitment thereunder will be reduced by $25 million on each of December 31,
2002, March 31, 2003, June 30, 2003 and September 30, 2003 and by $50 million on
December 31, 2003. The total commitment under the Credit Facility is $425
million, but the facility contains covenants that limit the Company's ability to
incur debt (whether under the Credit Facility or from other sources). As of
April 1, 1999, the Company had outstanding borrowings of $123,000,000 under the
Credit Facility at an average interest rate of 8.00% per annum, and
approximately $162,000,000 was available for borrowing under the Credit
Facility.
Covenants under the Credit Facility impose limitations on indebtedness,
creation of liens, change of control, transactions with affiliates, mergers,
investments, guaranties, asset sales, dividends, business activities and
pledges. In addition, the Credit Facility contains certain financial covenants.
Covenants under the Indentures relating to the Company's 9 1/2% Senior
Subordinated Notes due 2009 and the Company's Senior Subordinated Notes due 2011
are substantially the same and impose limitations on the incurrence of
indebtedness, dividends, purchases or redemptions of stock, transactions with
affiliates, and mergers and sale of assets, and require the Company to make an
offer to purchase the notes upon the occurrence of a change in control, as
defined in the Indentures. Upon a change of control (as defined in the Note
Indentures), the Company will be required to make an offer to repurchase each
holder's Notes due 2009 and Notes due 2011 at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase. As of April 1, 1999, the Company was in compliance with all
financial covenants relating to the Credit Facility, the Notes due 2009 and the
Notes due 2011.
During fiscal 1998, the Company sold the real estate assets associated with
13 megaplex theatres, including seven theatres opened during fiscal 1998, to EPT
for an aggregate purchase price of $283,800,000. Proceeds from the Sale and
Lease Back Transaction were applied to reduce indebtedness under the Company's
Credit Facility. The Company leased the real estate assets associated with the
theatres from EPT pursuant to non-cancelable operating leases with terms ranging
from 13 to 15 years with options to extend for up to an additional 20 years.
The Company has granted an option to EPT to acquire one megaplex theatre for the
cost to the Company of developing and constructing such property. In addition,
for a period of five years subsequent to November 1997, EPT will have a right of
first refusal and first offer to purchase and lease back to the Company the real
estate assets associated with any megaplex theatre and related entertainment
property owned or ground-leased by the Company, exercisable upon the Company's
intended disposition of such property. As of April 1, 1999, the Company had one
open megaplex and two megaplexes under construction that would be subject to
EPT's right of first refusal and first offer to purchase should the Company seek
to dispose of such megaplexes. The leases are triple net leases that require
the Company to pay substantially all expenses associated with the operation of
the theatres, such as taxes and other governmental charges, insurance,
utilities, service, maintenance and any ground lease payments.
The Company believes that cash generated from operations, existing cash and
equivalents, amounts which may be received from sale and lease back transactions
and the available commitment amount under its Credit Facility will be sufficient
to fund operations and planned capital expenditures for the next 12 months.
During the fifty-two weeks ended April 1, 1999, various holders of the
Company's Convertible Preferred Stock converted 1,796,485 shares into 3,097,113
shares of Common Stock at a conversion rate of 1.724 shares of Common Stock for
each share of Convertible Preferred Stock. On April 14, 1998, the Company
redeemed the remaining 3,846 shares of Convertible Preferred Stock at a
redemption price of $25.75 per share plus accrued and unpaid dividends.
Preferred Stock dividend payments decreased $5,064,000 during the fifty-two
weeks ended April 1, 1999 compared to the prior year as a result of the
conversions.
Deferred Tax Assets
Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under the
heading "forward looking statements". The following special factors could
particularly affect the Company's ability to achieve the required level of
future taxable income to enable it to realize its deferred tax assets: (i)
competition; (ii) the ability to open or close screens as currently planned;
(iii) the performance of films licensed by the Company; and (iv) future megaplex
attendance levels.
The Company has recorded net current and non-current deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, of $65 million as of April 1, 1999 and estimates that it must
generate at least $176 million of future taxable income to realize those
deferred tax assets. To achieve this level of future taxable income, the Company
intends to pursue its current strategy that includes expansion of its megaplex
theatre circuit and closing less profitable multiplexes.
The table below reconciles earnings (loss) before income taxes for
financial statement purposes with taxable income (loss) for income tax purposes:
(estimated)
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
April 1, April 2, April 3,
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Earnings (loss) before
income taxes $ (26,516) $ (41,099) $ 31,895
Depreciation & amortization (17,790) (11,309) (15,421)
Gain on disposition of assets - 16,471 (986)
Gain on sale to EPT (1,247) 16,238 -
Impairment of long-lived assets 3,542 41,540 4,612
Other 8,660 152 8,373
--------------------------------------
Taxable income (loss) $ (33,351) $ 21,993 $ 28,473
======================================
The Company's federal income tax net operating loss of $33.4 million for
the fiscal year ended April 1, 1999 will be carried back to the fiscal years
ended April 3, 1997 and April 2, 1998, and fully absorbed in those years. The
Company's foreign subsidiaries have net operating loss carryforwards in
Portugal, Spain, France and the Untied Kingdom aggregating $3.9 million, $2.2
million of which may be carried forward indefinitely and the balance of which
expires in 2006. The Company's state income tax loss carryforwards of $33
million may be used over various periods ranging from 5 to 20 years.
The Company anticipates that net temporary differences should reverse and
become available as tax deductions as follows: during 2000, $34 million; 2001,
$41 million; 2002, $22 million; 2003, $52 million; 2004, $5 million; thereafter,
$22 million.
Year 2000 Readiness Disclosure
Potential Impact on Company. The failure of information technology ("IT")
and embedded, or ("non-IT") systems, because of the Year 2000 issue or
otherwise, could adversely affect the Company's operations.
If not corrected, many
computer-based systems and theatre equipment, such as air conditioning systems
and fire and sprinkler systems, could encounter difficulty differentiating
between the year 1900 and the year 2000 and interpreting other dates, resulting
in system malfunctions, corruption of data or system failure. Additionally, the
Company relies upon outside third parties ("business partners") to supply many
of the products and services that it needs in its business. Such products
include films which it exhibits and concessions products which it sells.
Attendance at the Company's theatres could be severely impacted if one or more
film producers are unable to produce new films because of Year 2000 issues. The
Company could suffer other business disruptions and loss of revenues if any
other types of material business partners fail to supply the goods or services
necessary for the Company's operations.
IT Systems. The Company utilizes a weighted methodology to evaluate the
readiness of its corporate and theatre level IT systems. For this purpose,
corporate and theatre system types include commercial off-the-shelf software,
custom in-house developed software, ticketing system software, concession system
software and hardware systems such as workstations and servers. The Company has
weighted each corporate and theatre system based on its overall importance to
the organization. The Company's readiness is evaluated in terms of a five-phase
process utilized in the Year 2000 strategic plan (the "Plan") with appropriate
weighting given to each phase based on its relative importance to IT system Year
2000 readiness. The phases may generally be described as follows: (i) develop
company-wide awareness; (ii) inventory and assess internal systems and business
partners, and develop contingency plans for systems that cannot be renovated;
(iii) renovate critical systems and contact material business partners; (iv)
validate and test critical systems, analyze responses from critical business
partners and develop contingency plans for non-compliant partners; and (v)
implement renovated systems and contingency plans. The Company has placed a
high level of importance on its corporate and theatre software systems and a
lesser degree of importance on its hardware systems when evaluating Year 2000
readiness. As a result, the Company has focused more of its initial efforts
toward Year 2000 readiness with respect to its software systems than it has with
respect to its hardware systems. Additionally, the Company believes that the
assessment, validation and testing and implementation phases are the most
important phases in its Plan.
Based on the weighting methodology described above, the Company has
assessed 99% of its corporate IT systems and as of April 1, 1999 has renovated
82% of those systems that require renovation as a result of the Year 2000 issue.
Of the renovated systems, 66% have been tested, verified and implemented on a
company-wide basis. In the aggregate, as of April 1, 1999, 79% of the Company's
corporate IT systems have been tested and verified as being Year 2000 ready. The
percentage of corporate IT systems that have been tested and verified as being
Year 2000 ready assumes that a significant component of commercial-off-the-shelf
software, the recently installed Oracle financial applications, is Year 2000
ready. This system was warranted to be Year 2000 ready when purchased. Although
the Company has plans to test and verify the Oracle financial applications to
validate that the implementation is in fact Year 2000 ready, it does not believe
that it has a significant risk with respect to the Oracle financial
applications.
Based on the weighting methodology described above, the Company has
assessed 100% of its theatre IT systems and as of April 1, 1999 has renovated
89% of those systems that require renovation as a result of the Year 2000 issue.
Of the renovated systems, 4% have been tested, verified and implemented on a
company-wide basis. In the aggregate, as of April 1, 1999, 61% of the Company's
theatre IT systems have been tested and verified as being Year 2000 ready.
Overall, the Company has assessed its Plan with respect to IT systems as
being 75% complete as of April 1, 1999. Although, no assurance can be given,
the Company does not believe that it has material exposure to the Year 2000
issue with respect to its internal IT systems.
Non-IT Systems. The Company's non-IT systems are in the final stages of
assessment. Based on budgeted and expended personnel hours, assessment of
critical non-IT systems was approximately 90% complete as of April 1, 1999.
Testing of individual non-IT systems and resultant remediation efforts have
begun. The Company's goal is to complete testing and remediation of critical
individual systems by July 30, 1999, and to complete testing and remediation of
critical systems on an integrated basis by October 30, 1999.
Third Parties. The Company is in the process of identifying and assessing
potential Year 2000 readiness risks associated with its outside business
partners. The inventory of the Company's business partners was complete as of
April 1, 1999. Material business partners have been contacted by the Company.
Evaluation of material business partners' responses and their state of Year 2000
readiness was underway and ongoing as of April 1, 1999.
Contingency Planning. Although the Company presently does not have all
contingency plans in place to address the possibility that either it or its
material business partners may not be Year 2000 ready, it has an ongoing process
to develop such plans as the results of systems testing and remediation and the
status of business partners' Year 2000 readiness become known.
The Company's revised goals are to complete and approve contingency plans
for critical systems and material business partners by July 30, 1999. Changes
to such contingency plans will be implemented as necessary in response to
additional data gathered via testing, remediation, and business partner
contacts.
Costs. Although a definitive estimate of costs associated with required
modifications to address the Year 2000 issue cannot be made until the Company
has at least completed the assessment phase of its Plan, presently management
does not expect such costs to be material to the Company's results of
operations, liquidity or financial condition. The total amount expended from
July 1, 1996 through May 31, 1999 was approximately $480,000. Based on
information presently known, the total amount expected to be expended on the
Year 2000 effort for IT systems is approximately $1,600,000, primarily comprised
of software upgrades and replacement costs, internal personnel hours and
consulting costs. To date, the Year 2000 effort has been funded primarily from
the IT budget.
Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under the
heading "forward looking statements". In addition to the factors listed therein
which could cause actual results to be different from those anticipated, the
following special factors could affect the Company's ability to be Year 2000
ready: (i) the Company's ability to implement the Plan, (ii) cooperation and
participation by business partners, (iii) the availability and cost of trained
personnel and the ability to recruit and retain them and (iv) the ability to
locate all system coding requiring correction.
Euro Conversion
A single currency called the euro was introduced in Europe on January 1,
1999. Certain member countries of the European Union adopted the euro as their
common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy currencies") and the
Euro were established as of that date. The transition period for the
introduction of the Euro is scheduled to continue until January 1, 2002, with
the legacy currencies being completely removed from circulation on July 1, 2002.
During this transition period, parties may pay for items using either the euro
or a participating country's legacy currency.
The Company currently operates one theatre in Portugal and one theatre in
Spain. Both countries are member countries that adopted the Euro as of January
1, 1999. The Company has implemented necessary changes to accounting,
operational, and payment systems to accommodate the introduction of the Euro.
The Company does not anticipate that the conversion will have a material impact
on its consolidated financial position, results of operations or cash flows.
Impact of Inflation
Historically, the principal impact of inflation and changing prices upon
the Company has been to increase the costs of the construction of new theatres,
the purchase of theatre equipment and the utility and labor costs incurred in
connection with continuing theatre operations. Film exhibition costs, the
largest cost of operations of the Company, is customarily paid as a percentage
of admissions revenues and hence, while the film exhibition costs may increase
on an absolute basis, the percentage of admissions revenues represented by such
expense is not directly affected by inflation. Except as set forth above,
inflation and changing prices have not had a significant impact on the Company's
total revenues and results of operations.
New Accounting Pronouncements
During fiscal 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The statement requires companies
to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes in fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. The statement is effective for all fiscal years beginning after
June 15, 1999. The statement will become effective for the Company in fiscal
2001. However, a recently proposed amendment to SFAS 133 would defer the
effective date for fiscal years beginning after June 15, 2000, or fiscal 2002
for the Company. Adoption of this statement is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
Other
A subsidiary of the Company is involved with the pre-development of a
retail/entertainment district in downtown Kansas City, Missouri known as the
"Power & Light District." Under the terms of the subsidiary's agreement with
the Tax Increment Financing Commission of Kansas City, Missouri and the City of
Kansas City, Missouri, the subsidiary is required to meet certain financial and
other conditions in order to receive assistance in financing the project. In
the event that the Company is not successful in meeting those requirements,
carrying costs related to the project will have to be expensed. Carrying costs
related to the project were approximately $3 million as of April 1, 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to various market risks including interest rate risk
and foreign currency exchange rate risk. The Company does not hold any
derivative financial instruments.
Market risk on variable rate financial instruments: The Company maintains
a $425 million credit facility (the "Credit Facility"), which permits borrowings
at interest rates based on either the bank's base rate or LIBOR. Increases in
market interest rates would cause interest expense to increase and earnings
before income taxes to decrease. The change in interest expense and earnings
before income taxes would be dependent upon the weighted average outstanding
borrowings during the reporting period following an increase in market interest
rates. Based on the Company's current outstanding borrowings under the Credit
Facility at an average interest rate of 8.0% per annum, a 100 basis point
increase in market interest rates would increase interest expense and decrease
earnings before income taxes by approximately $1.2 million.
Market risk on fixed-rate financial instruments: Included in long-term debt
are $200 million of 9 1/2% Senior Subordinated Notes due 2009 and $225 million
of 9 1/2% Senior Subordinated Notes due 2011. Increases in market interest
rates would generally cause a decrease in the fair value of the Notes due 2009
and the Notes due 2011 and a decrease in market interest rates would generally
cause an increase in fair value of the Notes due 2009 and the Notes due 2011.
Foreign currency exchange rates: The Company currently operates theatres in
Portugal, Japan, Spain, China (Hong Kong) and Canada and is currently developing
theatres in other international markets. As a result of these operations, the
Company has assets, liabilities, revenues and expenses denominated in foreign
currencies. The strengthening of the U.S. dollar against the respective
currencies causes a decrease in the carrying values of assets, liabilities,
revenues and expenses denominated in such foreign currencies and the weakening
of the U.S. dollar against the respective currencies causes an increase in the
carrying values of these items. The increases and decreases in assets,
liabilities, revenues and expenses are included in accumulated other
comprehensive income. Changes in foreign currency exchange rates also impact
the comparability of earnings in these countries on a year-to-year basis. As
the U.S. dollar strengthens comparative translated earnings decrease and as the
U.S. dollar weakens comparative translated earnings from foreign operations
increase. Although the Company does not currently hedge against foreign
currency exchange rate risk, it does not intend to repatriate funds from the
operations of its Japanese and European theatres but instead intends to use them
to fund additional expansion. A 10% fluctuation in the value of the U.S. dollar
against all foreign currencies of countries where the Company currently operates
theatres would either increase or decrease earnings before income taxes and
accumulated other comprehensive income by approximately $0.8 million and $9.2
million, respectively.
Item 8. Financial Statements and Supplementary Data.
RESPONSIBILITY FOR PREPARATION
OF FINANCIAL STATEMENTS
AMC Entertainment Inc.
TO THE STOCKHOLDERS OF AMC ENTERTAINMENT INC.
The accompanying consolidated financial statements and related notes of AMC
Entertainment Inc. and subsidiaries were prepared by management in conformity
with generally accepted accounting principles appropriate in the circumstances.
In preparing the financial statements, management has made judgments and
estimates based on currently available information. Management is responsible
for the information; representations contained elsewhere in this Annual Report
are consistent with the financial statements.
The Company has a formalized system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that its financial
records are reliable. Management monitors the system for compliance to measure
its effectiveness and recommends possible improvements. In addition, as part of
their audit of the consolidated financial statements, the Company's independent
accountants review and test the internal accounting controls on a selected basis
to establish a basis of reliance in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors oversees financial reporting and internal accounting
control through its Audit Committee. This committee meets (jointly and
separately) with the independent accountants, management and internal auditors
to monitor the proper discharge of responsibilities relative to internal
accounting controls and consolidated financial statements.
/s/ Peter C. Brown
Co-Chairman of the Board,
President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AMC ENTERTAINMENT INC.
KANSAS CITY, MISSOURI