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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 30, 2000
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
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AMC ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1304369
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 WEST 14TH STREET, 64121-9615
P. O. BOX 219615, (Zip Code)
KANSAS CITY, MISSOURI
(Address of principal executive
offices)
Registrant's telephone number, including area code: (816) 221-4000
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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.
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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. / /
The aggregate market value of the registrant's voting stock held by
non-affiliates as of May 12, 2000, computed by reference to the closing price
for such stock on the American Stock Exchange on such date, was $83,257,382.
NUMBER OF SHARES
TITLE OF EACH CLASS OF COMMON OUTSTANDING AS OF MAY 12,
STOCK 2000
- ----------------------------- -----------------------------
Common Stock, 66 2/3 CENTS
par value 19,427,098
Class B Stock, 66 2/3 CENTS
par value 4,041,993
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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 outside the U.S. 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 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 14(th) Street, P.O. Box
219615, Kansas City, Missouri 64121-9615. 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 15 to the Consolidated Financial Statements on page 53.
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is one of the leading theatrical exhibition companies in the
world, based on revenues. In the fiscal year ended March 30, 2000, the Company
had revenues of $1.17 billion. As of March 30, 2000, the Company operated 211
theatres with a total of 2,903 screens located in 22 states, the District of
Columbia, Portugal, Japan, Spain, China (Hong Kong), France and Canada.
Approximately 55% of the Company's screens are located in Florida, California,
Texas, Arizona and Missouri, and approximately 72% of its U.S. 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 three 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.
2
The following table provides information about the Company's North America
megaplexes and multiplexes (those open at the beginning of fiscal 2000) for the
year ended March 30, 2000:
MEGAPLEXES MULTIPLEXES
---------- -----------
Attendance per screen.................................. 66,400 46,200
Average revenue per patron............................. $ 7.57 $ 6.96
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 March 30, 2000, 1,782 screens, or 61% of the Company's total screens,
were located in megaplexes and the average number of total screens per theatre
was 13.8. The average number of screens per theatre for the ten largest North
American theatrical exhibition companies (based on number of screens) was 8.1
and the average for all North American theatrical exhibition companies was 6.7,
based on the listing of exhibitors in the National Association of Theatre Owners
1999-00 Encyclopedia of Exhibition, as of June 1, 1999.
The Company continually upgrades its theatre circuit by opening new theatres
(megaplexes), adding new screens to existing theatres and selectively closing or
disposing of unprofitable multiplexes. From April 1996 through March 30, 2000,
the Company opened 77 new theatres with 1,679 screens, representing 57.8% 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 96 theatres and 568 screens. Of the 1,679 screens opened during the
period, 1,646 screens were located in a total of 73 megaplexes. As of March 30,
2000, the Company had 4 megaplexes under construction with a total of 87
screens.
Revenues for the Company are generated primarily from box office admissions
and theatre concessions sales, which accounted for 65% and 28%, respectively, of
the Company's fiscal 2000 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-TM- (SDDS-TM-) and AMC
LoveSeat(-Registered Trademark-) style seating (plush, high-backed seats with
retractable armrests). Other amenities may include auditoriums with TORUS-TM-
Compound Curved Screens and High Impact Theatre Systems-TM- (HITS-TM-), 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 opportunities exist for development of megaplexes
in select international markets. The theatrical exhibition business has become
increasingly global, and box office receipts from international markets exceed
those of the North American market. In addition, the production and distribution
of feature films and demand for American motion pictures are increasing in many
countries.
3
Presently, the Company's activities in international markets are directed toward
selected countries in Asia and Western Europe.
The Company believes there are opportunities to increase ancillary revenues.
Where appropriate, it may consider partnerships or joint ventures to share risk
and leverage resources. Such ventures may include interests in projects that
include restaurant, retail, the Internet and other concepts. During fiscal 2000,
the Company formed MOVIETICKETS.COM, INC an Internet ticketing joint venture
with Hollywood.com, Inc., National Amusements, Inc., Famous Players, Marcus
Theatres and CBS Corporation. MOVIETICKETS.COM is an Internet site dedicated to
the sale of movie tickets, with additional content to assist users with their
movie-going plans. MOVIETICKETS.COM was launched May 24, 2000 and services
approximately 5,500 screens. MOVIETICKETS.COM will generate revenues from
advertising and sponsorship of the web site and possibly from ticketing fees in
the future.
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
are increasingly choosing 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 generally have become obsolete.
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 or closing theatres and terminating the leases. During fiscal
2000, the Company closed or sold 42 multiplexes with 279 screens. Closure or
other dispositions of certain multiplexes may result in expenses related to
payments to landlords to terminate leases. The Company anticipates that it will
close approximately 350 multiplex screens over the next two years. The Company
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 8 such theatres with
59 screens as of March 30, 2000 (2.0% of the Company's total 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
TOTAL THEATRES
ADDITIONS DISPOSITIONS OPERATED
------------------------- --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
FISCAL YEAR ENDED THEATRES SCREENS THEATRES SCREENS THEATRES SCREENS
- ----------------- ------------- --------- --------- --------- --------- ---------
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
March 30, 2000.................... 20 450 42 282 211 2,903
-- ----- --- ---
Total......................... 88 1,902 109 629
== ===== === ===
4
As of March 30, 2000, the Company operated 80 megaplexes having an aggregate
of 1,782 screens, representing 61% of its screens. The following table provides
greater detail with respect to the Company's theatre circuit as of such date.
THEATRES
TOTAL TOTAL --------------------
SCREENS THEATRES MULTIPLEX MEGAPLEX
-------- -------- --------- --------
NORTH AMERICA
Florida.................................................. 494 40 30 10
California............................................... 463 32 20 12
Texas.................................................... 355 21 11 10
Arizona.................................................. 158 10 4 6
Missouri................................................. 135 11 7 4
Georgia.................................................. 132 9 5 4
Michigan................................................. 131 13 11 2
Pennsylvania............................................. 119 13 12 1
Ohio..................................................... 86 5 3 2
Virginia................................................. 79 7 6 1
Colorado................................................. 70 5 2 3
Illinois................................................. 60 2 -- 2
New Jersey............................................... 50 5 4 1
Oklahoma................................................. 50 3 1 2
Kansas................................................... 50 3 1 2
North Carolina........................................... 46 2 -- 2
Maryland................................................. 42 5 5 --
Washington............................................... 34 4 3 1
Nebraska................................................. 24 1 -- 1
Louisiana................................................ 20 3 3 --
District of Columbia..................................... 9 1 1 --
New York................................................. 8 1 1 --
Massachusetts............................................ 4 1 1 --
Canada................................................... 122 5 -- 5
----- --- --- --
Total North America.................................... 2,741 202 131 71
----- --- --- --
INTERNATIONAL
Japan.................................................... 63 4 -- 4
Spain.................................................... 48 2 -- 2
Portugal................................................. 20 1 -- 1
France................................................... 20 1 -- 1
China (Hong Kong)........................................ 11 1 -- 1
----- --- --- --
Total International.................................... 162 9 -- 9
----- --- --- --
Total Theatre Circuit.................................... 2,903 211 131 80
===== === === ==
5
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 Picture 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
6
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, Universal Pictures,
Warner Bros. Distribution, New Line Cinema, SONY Pictures Releasing (Columbia
Pictures and Tri-Star Pictures), Miramax and Twentieth Century Fox. According to
information sourced from ACNielson EDI., Inc., these distributors accounted for
91% of industry admissions revenues from January 3, 2000 through June 18, 2000.
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 2000, no single
distributor accounted for more than 15% of the motion pictures licensed by the
Company or for more than 17% 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, 1999, 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. 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
7
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 1990, attendance for the industry has
increased at an average annual compound growth rate of 3.4%. During 1999,
domestic attendance was 1.47 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 the most recent five years.
U.S. BOX
ATTENDANCE AVERAGE OFFICE SALES
YEAR (IN MILLIONS) TICKET PRICE (IN MILLIONS)
- ---- ------------- ------------ -------------
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
1999....................................... 1,465 $5.08 $7,448
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 North American theatrical exhibition industry,
approximately 290 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 Picture Association of America, the number of indoor screens in the
United States was 36,448 at the end of 1999. Based on the June 1, 1999 listing
of exhibitors in the National Association of Theatre Owners 1999-00 Encyclopedia
of Exhibition, the Company believes that the ten largest exhibitors (in terms of
number of screens) operated approximately 56% of such number of screens, with
one exhibitor operating 11.5% 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 Picture 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.
8
- 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 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 11.
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. Quota systems used by
some
9
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
57.
EMPLOYEES
As of March 30, 2000, the Company had approximately 2,100 full-time and
10,700 part-time employees. Approximately 4% 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 211 theatres and 2,903 screens operated as of March 30,
2000, American Multi-Cinema, Inc. was the owner or lessee of 194 theatres with
2,575 screens, and AMC Entertainment International, Inc. and its subsidiaries
leased 14 theatres with 284 screens. American Multi-Cinema, Inc. also operated
three theatres with 44 screens owned by third parties.
Of the 211 theatres operated by the Company as of March 30, 2000, 10
theatres with 156 screens were owned, 10 theatres with 97 screens were leased
pursuant to ground leases, 188 theatres with 2,606 screens were leased pursuant
to building leases and three theatres with 44 screens were managed. The
Company's leases generally have initial 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 and a film licensing office is leased in Woodland Hills, California
(Los Angeles).
10
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.
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. The Court has stayed the suit pending
resolution of the Department of Justice litigation filed in California referred
to above.
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 to remove the alleged barriers.
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. AMC
currently utilizes SDDS systems with respect to 2,300 of its screens and owns
159 portable systems employing 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.
11
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 on 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.
Two cases, Nonoy Mendoza, et al. v. AMC Entertainment Inc., American
Multi-Cinema, Inc., Neil Katcher, Michael Johannes, Susan Navarro, Nancy Garcia
and Matt Quinn filed on July 1, 1999 in the Probate Court of Dallas County,
Texas ("Mendoza"), and Mabayoje Erinkitola, et al. v. AMC Entertainment Inc.,
American Multi-Cinema, Inc., Neil Katcher, Michael Johannes, Susan Navarro,
Nancy Garcia and Matt Quinn filed on July 15, 1999 in the Probate Court of
Dallas County, Texas, arise out of the murders of two patrons, Roxanne Mendoza
and Foluke Erinkitola, in the parking lot of the Grand Theatre in Dallas, Texas
on August 13, 1997. The defendants are being sued on various theories related to
allegations of improper or inadequate security. Each complaint seeks the
recovery of damages for wrongful death, survival damages and exemplary damages,
although neither complaint states specific monetary demands. A plaintiff in the
Mendoza lawsuit also seeks abatement of the theatre as a public nuisance. The
Company has answered both lawsuits and has removed both cases to the United
States District Court of Texas, Dallas Division, as of August 13, 1999, where
the two cases have been combined. Discovery in the combined case has been
completed, but the court has not yet set a trial date.
On December 16, 1999, Alberta Rose Investments, Inc. filed suit in Court of
Queen's Bench of Alberta (Canada), Judicial District of Edmonton, Alberta Rose
Investments, Inc. v. AMC Theatres of Canada, Inc. and AMC Entertainment Inc.,
Action Number: 9903-23494, alleging a breach of a lease agreement concerning a
proposed theatre in Edmonton, Alberta. The suit originally sought damages in
excess of $CAN25 million, but the plaintiff voluntarily amended its claim of
damages to approximately $CAN4.5 million (approximately $US3.1 million). The
Company has answered the plaintiff's claim denying its allegations, asserting
numerous defenses and seeking dismissal with costs.
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 March 30, 2000.
12
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 2000 FISCAL 1999
----------------------- -----------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter............................... $19 1/4 $14 $23 3/4 $16 13/16
Second Quarter.............................. 19 12 3/16 19 7/8 11 1/4
Third Quarter............................... 13 15/16 8 9/16 21 1/16 10 3/4
Fourth Quarter.............................. 11 5/16 5 20 3/16 13 9/16
STOCK OWNERSHIP
On May 12, 2000, there were 497 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, under these provisions of the Notes due 2009 and the
Notes due 2011, the Company is prohibited from paying dividends or purchasing
capital stock. 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 compliance with
debt covenants, 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 in respect of its Common
Stock.
13
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED(1)(6)
---------------------------------------------------------------------
MARCH 30, APRIL 1, APRIL 2, APRIL 3, MARCH 28,
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) 2000 1999 1998 1997 1996
- --------------------------------------------------- ---------- ---------- -------- -------- ---------
STATEMENT OF OPERATIONS DATA:
Total revenues................................. $1,166,942 $1,023,456 $850,750 $751,664 $657,526
Film exhibition costs.......................... 417,736 358,437 299,926 258,809 227,780
Concession costs............................... 50,726 48,687 42,062 36,748 30,417
Theatre operating expense...................... 290,072 260,145 219,593 189,908 158,833
Rent........................................... 198,762 165,370 106,383 80,061 64,813
Other.......................................... 44,619 30,899 25,782 18,354 13,805
General and administrative..................... 47,407 52,321 47,860 52,422 48,750
Preopening expense............................. 6,795 2,265 2,243 2,414 573
Theatre closure expense(4)..................... 16,661 2,801 -- -- --
Restructuring charge........................... 12,000 -- -- -- --
Depreciation and amortization.................. 95,974 89,221 70,117 52,572 42,087
Impairment of long-lived assets................ 5,897 4,935 46,998 7,231 1,799
(Gain) loss on disposition of assets........... (944) (2,369) (3,704) 84 222
---------- ---------- -------- -------- --------
Total costs and expenses....................... 1,185,705 1,012,712 857,260 698,603 589,079
Operating income (loss)........................ (18,763) 10,744 (6,510) 53,061 68,447
Interest expense............................... 62,703 38,628 35,679 22,022 28,828
Investment income.............................. 219 1,368 1,090 856 7,052
---------- ---------- -------- -------- --------
Earnings (loss) before income taxes and cumulative
effect of an accounting change and extraordinary
item......................................... (81,247) (26,516) (41,099) 31,895 46,671
Income tax provision........................... (31,900) (10,500) (16,600) 12,900 19,300
---------- ---------- -------- -------- --------
Earnings (loss) before cumulative effect of an
accounting change and extraordinary item..... (49,347) (16,016) (24,499) 18,995 27,371
Cumulative effect of an accounting change(2)... (5,840) -- -- -- --
Extraordinary item(3).......................... -- -- -- -- (19,350)
---------- ---------- -------- -------- --------
Net earnings (loss)............................ $ (55,187) $ (16,016) $(24,499) $ 18,995 $ 8,021
========== ========== ======== ======== ========
Preferred dividends............................ -- -- 4,846 5,907 7,000
---------- ---------- -------- -------- --------
Net earnings (loss) for common shares.......... $ (55,187) $ (16,016) $(29,345) $ 13,088 $ 1,021
========== ========== ======== ======== ========
Net earnings (loss) per share before cumulative
effect of an accounting change and extraordinary
item:
Basic........................................ $ (2.10) $ (.69) $ (1.59) $ .75 $ 1.23
Diluted...................................... (2.10) (.69) (1.59) .74 1.15
Net earnings (loss) per share:
Basic........................................ $ (2.35)(2) $ (.69) $ (1.59) $ .75 $ .06(3)
Diluted...................................... (2.35) (.69) (1.59) .74 .34
Average shares outstanding:
Basic........................................ 23,469 23,378 18,477 17,489 16,513
Diluted...................................... 23,469 23,378 18,477 17,784 23,741
BALANCE SHEET DATA (AT PERIOD END):
Cash, equivalents and investments............ $ 119,305 $ 13,239 $ 9,881 $ 24,715 $ 10,795
Total assets................................. 1,188,805 975,730 795,780 719,055 483,458
Corporate borrowings......................... 754,105 561,045 348,990 315,072 126,150
Capital and financing lease obligations...... 68,506 48,575 54,622 58,652 62,022
Stockholders' equity......................... 58,669 115,465 139,455 170,012 158,918
14
YEARS ENDED(1)(6)
---------------------------------------------------------------------
MARCH 30, APRIL 1, APRIL 2, APRIL 3, MARCH 28,
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) 2000 1999 1998 1997 1996
- --------------------------------------------------- ---------- ---------- -------- -------- ---------
OTHER FINANCIAL DATA:
Capital expenditures......................... $ 274,932 $ 260,813 $389,217 $253,380 $120,796
Proceeds from sale/leasebacks and financing lease
obligations................................ 98,313 -- 283,800 -- --
Adjusted EBITDA(5)........................... 117,620 107,597 109,144 115,362 113,128
OPERATING DATA (AT PERIOD END):
Number of megaplexes operated................ 80 60 44 19 5
Number of megaplex screens operated.......... 1,782 1,335 987 379 98
Number of multiplexes operated............... 131 173 185 209 221
Number of multiplex screens operated......... 1,121 1,400 1,455 1,578 1,621
Screens per theatre circuit wide............. 13.8 11.7 10.7 8.6 7.6
- --------------------------
(1) Fiscal 1997 consists of 53 weeks. All other fiscal years have 52 weeks.
(2) Fiscal 2000 includes a $5,840 cumulative effect of an accounting change (net
of income tax benefit of $4,095) which reduced earnings per share by $.25
per common share.
(3) 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.
(4) Theatre closure expense relates to actual and estimated lease exit costs on
multiplex theatres.
(5) Represents net earnings (loss) plus interest, income taxes, depreciation and
amortization and adjusted for restructuring charge, 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; (ix) changes in real estate, zoning and tax laws; and (x) unforeseen
changes in operating requirements. 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.
15
OPERATING RESULTS
YEARS (52 WEEKS) ENDED MARCH 30, 2000 AND APRIL 1, 1999
52 WEEKS ENDED 52 WEEKS ENDED
(DOLLARS IN THOUSANDS) MARCH 30, 2000 APRIL 1, 1999 % CHANGE
- ---------------------- -------------- -------------- ---------
REVENUES
North America theatrical exhibition
Admissions.......................................... $ 714,340 $ 630,242 13.3%
Concessions......................................... 319,725 300,374 6.4
Other theatre....................................... 28,709 20,841 37.8%
---------- ---------- -----
1,062,774 951,457 11.7%
International theatrical exhibition
Admissions.......................................... 48,743 31,919 52.7
Concessions......................................... 10,130 6,973 45.3
Other theatre....................................... 1,304 925 41.0
---------- ---------- -----
60,177 39,817 51.1
On-screen advertising and other....................... 43,991 32,182 36.7
---------- ---------- -----
Total revenues.................................... $1,166,942 $1,023,456 14.0%
========== ========== =====
COST OF OPERATIONS
North America theatrical exhibition
Film exhibition costs............................... $ 392,414 $ 341,523 14.9%
Concession costs.................................... 47,218 46,434 1.7
Theatre operating expense........................... 272,886 249,916 9.2
Rent................................................ 183,214 157,282 16.5
Preopening expense.................................. 5,392 1,783 *
Theatre closure expense............................. 16,661 2,801 *
---------- ---------- -----
917,785 799,739 14.8
International
Film exhibition costs............................... 25,322 16,914 49.7
Concession costs.................................... 3,508 2,253 55.7
Theatre operating................................... 17,186 10,229 68.0
Rent................................................ 15,548 8,088 92.2
Preopening expense.................................. 1,403 482 *
---------- ---------- -----
62,967 37,966 65.9
On-screen advertising and other....................... 44,619 30,899 44.4
General and administrative............................ 47,407 52,321 (9.4)
Restructuring charge.................................. 12,000 -- --
Depreciation and amortization......................... 95,974 89,221 7.6
Impairment of long-lived assets....................... 5,897 4,935 19.5
Gain on disposition of assets......................... (944) (2,369) (60.2)
---------- ---------- -----
Total costs and expenses.......................... $1,185,705 $1,012,712 17.1%
========== ========== =====
- ------------------------
* Percentage change in excess of 100%.
REVENUES. Total revenues increased 14.0% during the year (52 weeks) ended
March 30, 2000 compared to the year (52 weeks) ended April 1, 1999.
16
North America theatrical exhibition revenues increased 11.7% from the prior
year. Admissions revenues increased 13.3% due to a 13.4% increase in average
ticket price. The increase in average ticket prices was due to a strategic
initiative implemented by the Company to selectively increase ticket and
concession prices and to the growing number of megaplexes (theatres with
predominantly stadium style seating) in the Company's theatre circuit, which
yield higher average ticket prices than multiplexes (theatres generally without
stadium-style seating). Attendance at multiplexes decreased due to the closure
or sale of 42 multiplexes with 279 screens since April 1, 1999 and a 14.6%
decrease in attendance at comparable multiplexes (theatres opened before fiscal
1999). The decline in attendance at comparable multiplexes was related 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. Attendance at megaplexes increased as a result of the
addition of 15 new megaplexes with 342 screens since April 1, 1999. Attendance
at comparable megaplexes decreased 1.3%, due to a decline in the popularity of
film product during the year (52 weeks) ended March 30, 2000 as compared with
the prior year. Concessions revenues increased 6.4% due to a 6.5% increase in
average concessions per patron. The increase in average concessions per patron
was attributable to selective price increases and the increasing number of
megaplexes in the Company's theatre circuit, where concession spending per
patron is higher than in multiplexes.
International theatrical exhibition revenues increased 51.1% from the prior
year. Admissions revenues increased 52.7% due to an increase in attendance from
the addition of 4 new megaplexes with a total of 78 screens since April 1, 1999.
Attendance at comparable megaplexes decreased 11.4% due to a decline in the
popularity of film product in Japan in the current year as compared with the
prior year and competition from new theatrical exhibitors in Japan. Concession
revenues increased 45.3% due primarily to the increase in total attendance.
International revenues were positively impacted by a weaker U.S. dollar,
although this did not contribute materially to consolidated net loss.
On-screen advertising and other revenues increased 36.7% from the prior year
due to increased sales of rolling stock advertising at the Company's on-screen
advertising business.
COSTS AND EXPENSES. Total costs and expenses increased 17.1% during the
year (52 weeks) ended March 30, 2000 compared to the year (52 weeks) ended
April 1, 1999.
North America theatrical exhibition costs and expenses increased 14.8% from
the prior year. Film exhibition costs increased 14.9% due to higher admissions
revenues and an increase in the percentage of admissions paid to film
distributors. As a percentage of admissions revenues, film exhibition costs were
54.9% in the current year as compared with 54.2% in the prior year. The increase
in film exhibition costs as a percentage of admissions revenues was primarily
due to STAR WARS EPISODE I: THE PHANTOM MENACE, a film whose audience appeal led
to higher than normal film rental terms. Concession costs increased 1.7% due to
the increase in concessions revenues offset by a decrease in concession costs as
a percentage of concessions revenues. As a percentage of concessions revenues,
concession costs were 14.8% in the current year compared with 15.5% in the prior
year, due to the concession price increases. As a percentage of revenues,
theatre operating expense was 25.7% in the current year as compared to 26.3% in
the prior year. Rent expense increased 16.5% due to the higher number of screens
in operation and the growing number of megaplexes in the Company's theatre
circuit, which generally have higher rent per screen than multiplexes. During
the year, the Company incurred $16,661,000 of theatre closure expenses primarily
comprised of expected payments to landlords to terminate leases related to the
closure of 35 multiplexes with 242 screens. The Company closed these theatres as
a result of negative operating cash flows which were not expected to improve in
the future. The Company anticipates that it will incur approximately $8 to
10 million of costs related to the closure of up to 175 screens in fiscal 2001.
The Company anticipates similar screen closures and expense in fiscal 2002.
International theatrical exhibition costs and expenses increased 65.9% from
the prior year. Film exhibition costs increased 49.7% primarily due to higher
admission revenues, offset by a decrease in the
17
percentage of admissions paid to film distributors. Rent expense increased 92.2%
and theatre operating expense increased 68.0% from the prior year, due to the
increased number of screens in operation. International theatrical exhibition
costs and expenses were negatively impacted by a weaker U.S. dollar, although
this did not contribute materially to consolidated net loss.
On-screen advertising and other costs and expenses increased 44.4% due
primarily to an increase in costs associated with the increased sales of rolling
stock advertising at the Company's on-screen advertising business. The Company
anticipates that these costs as a percentage of the related advertising revenues
will decline as sales of rolling stock advertising continue to grow.
General and administrative expenses decreased 9.4% from the prior year due
to cost savings associated with the consolidation of the Company's divisional
operations discussed below. The Company also incurred $2.5 million of
non-recurring relocation costs related to this consolidation. As a percentage of
total revenues, recurring general and administrative expenses declined from 5.1%
in the prior year to 3.8% in the current year.
On September 30, 1999, the Company recorded a restructuring charge of
$12,000,000 ($7,200,000 after tax or $.31 per share) related to the
consolidation of its three U.S. divisional operations offices into its corporate
headquarters and a decision to discontinue direct involvement with
pre-development activities associated with certain retail/entertainment projects
conducted through its wholly-owned subsidiary, Centertainment, Inc. Included in
this total are severance and other employee related costs of $5,300,000, lease
termination costs of $700,000 and the write-off of capitalized pre-development
costs of $6,000,000. As a result of the restructuring, the Company realized
general and administrative expense reductions of approximately $5.5 million in
fiscal 2000 and anticipates it will realize approximately $15 million of
incremental savings in fiscal 2001. Unforeseen changes in operating requirements
and other factors referred to in the first paragraph of this Item 7 could cause
actual general and administrative expense reductions to differ materially from
anticipated reductions.
Depreciation and amortization increased 7.6%, or $6,753,000, during the year
(52 weeks) ended March 30, 2000. This increase was caused by an increase in
depreciation of $12,930,000 related to the Company's new theatres, which was
partially offset by a $8,728,000 decrease in amortization due to a change in
accounting for start-up activities.
During the fourth quarter of the current year, the Company recognized a
non-cash impairment loss of $5,897,000 ($3,479,000 after tax, or $.15 per share)
on 13 multiplexes with 111 screens in 6 states (primarily Florida, Michigan and
Louisiana) including a loss of $690,000 associated with one theatre that was
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,
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.
During the fourth quarter of fiscal 1999, 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.
Gain on disposition of assets decreased from a gain of $2,369,000 in the
prior year to a gain of $944,000 during the current year. Current year results
include a gain on the sale of real estate held for investment and gains related
to the sales of the real estate assets associated with two multiplex theatres.
Prior year results include gains related to the sales of real estate assets
associated with three multiplex theatres.
18
INTEREST EXPENSE. Interest expense increased 62.3% during the year (52
weeks) ended March 30, 2000 compared to the prior year, due to an increase in
average outstanding borrowings and interest rates. The increase in average
interest rates was primarily due to the issuance of $225,000,000 of 9 1/2%
Senior Subordinated Notes due 2011 on January 27, 1999.
INCOME TAX PROVISION. The provision for income taxes decreased to a benefit
of $31,900,000 during the current year from a benefit of $10,500,000 in the
prior year. The effective tax rate was 39.3% for the current year compared to
39.6% for the previous year.
NET EARNINGS. Net earnings decreased during the year (52 weeks) ended
March 30, 2000 to a loss of $55,187,000 from a loss of $16,016,000 in the prior
year. Net loss per share was $2.35 compared to a loss of $.69 in the prior year.
Current year results include the cumulative effect of an accounting change of
$5,840,000 (net of income tax benefit of $4,095,000) and a restructuring charge
of $12,000,000 ($7,200,000 net of income tax benefit of $4,800,000), which
reduced earnings per share by $.25 and $.31, respectively, for the year (52
weeks) ended March 30, 2000.
19
OPERATING RESULTS
YEARS (52 WEEKS) ENDED APRIL 1, 1999 AND APRIL 2, 1998
52 WEEKS ENDED 52 WEEKS ENDED
(DOLLARS IN THOUSANDS) APRIL 1, 1999 APRIL 2, 1998 % CHANGE
- ---------------------- -------------- -------------- --------
REVENUES
North America theatrical exhibition
Admissions.............................................. $ 630,242 $530,653 18.8%
Concessions............................................. 300,374 251,025 19.7
Other theatre........................................... 20,841 16,052 29.8
---------- -------- -----
951,457 797,730 19.3
International theatrical exhibition
Admissions.............................................. 31,919 22,918 39.3
Concessions............................................. 6,973 4,992 39.7
Other theatre........................................... 925 59 *
---------- -------- -----
39,817 27,969 42.4
On-screen advertising and other........................... 32,182 25,051 28.5
---------- -------- -----
Total revenues........................................ $1,023,456 850,750 20.3%
========== ======== =====
COST OF OPERATIONS
North America theatrical exhibition
Film exhibition costs................................... $ 341,523 287,516 18.8%
Concession costs........................................ 46,434 40,109 15.8
Theatre operating expense............................... 249,916 213,413 17.1
Rent.................................................... 157,282 100,928 55.8
Preopening expense...................................... 1,783 2,243 (20.5)
Theatre closure expense................................. 2,801 -- --
---------- -------- -----
799,739 644,209 24.1
International
Film exhibition costs................................... 16,914 12,410 36.3
Concession costs........................................ 2,253 1,953 15.4
Theatre operating....................................... 10,229 6,180 65.5
Rent.................................................... 8,088 5,455 48.3
Preopening expense...................................... 482 -- --
---------- -------- -----
37,966 25,998 46.0
On-screen advertising and other........................... 30,899 25,782 19.8
General and administrative................................ 52,321 47,860 9.3
Depreciation and amortization............................. 89,221 70,117 27.2
Impairment of long-lived assets........................... 4,935 46,998 (89.5)
Gain on disposition of assets............................. (2,369) (3,704) (36.0)
---------- -------- -----
Total costs and expenses.............................. $1,012,712 $857,260 18.1%
========== ======== =====
REVENUES. Total revenues increased 20.3% during the year (52 weeks) ended
April 1, 1999 compared to the year (52 weeks) ended April 2, 1998.
North America theatrical exhibition revenues increased 19.3% from the prior
year. Admissions revenues increased 18.8% due to a 14.9% increase in attendance
and a 3.4% increase in average ticket price. Attendance at megaplexes increased
as a result of the addition of 13 new megaplexes with 300 screens since
April 2, 1998, offset by a 3.5% decrease in attendance at comparable megaplexes
(theatres opened before fiscal 1998). Attendance at multiplexes decreased due to
a 11.7% decrease in attendance at
20
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 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 to the growing number of megaplexes in the
Company's theatre circuit, which yield higher average ticket prices than
multiplexes. Concessions revenues increased 19.7% due to the increase in total
attendance and a 4.1% increase in average concessions per patron. The increase
in average concessions per patron was attributable to price increases and the
increasing number of megaplexes in the Company's theatre circuit, where
concession spending per patron is higher than in multiplexes.
International theatrical exhibition revenues increased 42.4% from the prior
year. Admissions revenues increased 39.3% due to an increase in attendance from
the addition of 3 new megaplexes with a total of 51 screens since April 2, 1998.
Attendance at comparable megaplexes increased 7.7%. Concession revenues
increased 39.7% due to the increase in total attendance. International revenues
were negatively impacted by a stronger U.S. dollar, although this did not
contribute materially to consolidated net loss.
On-screen advertising and other revenues increased 28.5% 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 for the Company's
on-screen advertising business.
COSTS AND EXPENSES. Total costs and expenses increased 18.1% during the
year (52 weeks) ended April 1, 1999 compared to the year (52 weeks) ended
April 2, 1998.
North America theatrical exhibition costs and expenses increased 24.1% from
the prior year. Film exhibition costs increased 18.8% due to higher admissions
revenues. As a percentage of admissions revenues, film exhibition costs were
54.2% in the current year and in the prior year. Concession costs increased
15.8% due to increase in concessions revenues offset by a decrease in concession
costs as a percentage of concessions revenues. As a percentage of concessions
revenues, concession costs were 15.5% in the current year compared with 16.0% in
the prior year. As a percentage of revenues, theatre operating expense was 26.3%
in the current year as compared to 26.8% in the prior year. Rent expense
increased 55.8% due to the higher number of screens in operation and 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"). During the year (52 weeks) ended April 1,
1999, the Company incurred $2,801,000 of theatre closure expense related to
multiplex closures.
International theatrical exhibition costs and expenses increased 46.0% from
the prior year. Film exhibition costs increased 36.3% due to higher admission
revenues, offset by a decrease in the percentage of admissions paid to film
distributors. Rent expense increased 48.3% and theatre operating expense
increased 65.5% from the prior year, due to the increased number of screens in
operation. International theatrical exhibition costs and expenses were
positively impacted by a stronger U.S. dollar, although this did not contribute
materially to consolidated net loss.
On-screen advertising and other costs and expenses increased 19.8% 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 expenses increased 9.3% during the year (52
weeks) ended April 1, 1999. As a percentage of total revenues, general and
administrative expenses declined from 5.6% in the prior year to 5.1% in the
current year.
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
21
Company's expansion plan, which is partially offset by lower depreciation and
amortization as a result of the reduced carrying amounts of impaired multiplex
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.
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.
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.
INTEREST EXPENSE. Interest expense increased 8.3% 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.
INCOME TAX PROVISION. The provision for income taxes increased 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.
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 $89,027,000, $67,167,000 and $91,322,000 in
fiscal years 2000, 1999 and 1998, respectively.
The Company continues to expand its North American and International theatre
circuits. During the current fiscal year, the Company opened 19 megaplexes with
420 screens and began operating one theatre with 30 screens pursuant to a joint
venture agreement. In addition, the Company closed 42 multiplexes with 279
screens and returned 3 screens to the landlord at an existing megaplex for
conversion to
22
alternative use, resulting in a circuit total of 80 megaplexes with 1,782
screens and 131 multiplexes with 1,121 screens as of March 30, 2000.
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 2000, 17 new theatres with 372 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 master lease agreements, in
fiscal 2000 and 1999 for up to $21,200,000 and $25,000,000, respectively, of
equipment necessary to fixture certain theatres. The master lease agreements
have an initial term of six years and include early termination and purchase
options. The Company classifies these leases as operating leases.
As of March 30, 2000, the Company had construction in progress of
$78,681,000 and reimbursable construction advances (amounts due from developers
on leased theatres) of $10,955,000. The Company had two megaplexes in the U.S.
with a total of 49 screens, one megaplex in Canada with 22 screens and one
megaplex in Japan with 16 screens under construction on March 30, 2000. During
the fifty-two weeks ended March 30, 2000, the Company had capital expenditures
of $274,932,000. The Company expects that the net cash requirements for capital
expenditures in 2001 will approximate $90 to 120 million. Included in these
amounts are projections of the expected proceeds from the sales of real estate
assets which the Company plans to place into sale and leaseback or other
comparable financing programs. The Company expects proceeds from sale and
leaseback transactions of up to $30 million for fiscal 2001. Consummation of
sale and leaseback or other comparable financing programs is dependent upon
favorable market conditions.
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 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 March 30, 2000, the Company had outstanding borrowings of $330,000,000
under the Credit Facility at an average interest rate of 8.7% per annum, and
approximately $85,000,000 was available for borrowing under the Credit Facility.
The Company's available borrowings under the Credit Facility and existing cash
balances provide the Company with approximately $204,000,000 in available funds
as of March 30, 2000.
23
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 sales 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
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 March 30, 2000, the Company was in compliance with all
financial covenants relating to the Credit Facility, the Notes due 2009 and the
Notes due 2011. However, as of such date, under provisions of the Notes due 2009
and the Notes due 2011, the Company is currently prohibited from incurring
additional indebtedness other than additional borrowings under the Credit
Facility and other permitted indebtedness, as defined in the Indentures, and
paying dividends or making distributions in respect of its capital stock.
During fiscal 1998, the Company sold the real estate assets associated with
13 megaplex theatres, including seven theatres opened during fiscal 1998, to
Entertainment Properties Trust ("EPT"), a real estate investment trust, for an
aggregate purchase price of $283,800,000. Proceeds from the Sale and Lease Back
Transactions 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. During
fiscal 2000, the Company sold the building and improvements associated with one
of its megaplex theatres to EPT for proceeds of $17,600,000 under terms similar
to the above Sale and Leaseback Transactions. The Company has granted an option
to EPT to acquire the land at this megaplex theatre for the cost to the Company.
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 March 30, 2000, the
Company had four open megaplexes 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 received from sale and leaseback transactions, expected
reimbursements from developers and the available commitment amount under its
Credit Facility will be sufficient to fund operations and planned capital
expenditures for the next 12 months. However, the performance of films licensed
by the Company and unforeseen changes in operating requirements could affect the
Company's ability to continue its expansion plan as well as comply with certain
financial covenants in the Credit Facility.
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.
24
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 $97 million as of March 30, 2000 and estimates that it must
generate at least $248 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 loss before income taxes and cumulative effect of
an accounting change for financial statement purposes with taxable income (loss)
for income tax purposes:
(ESTIMATED)
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
(DOLLARS IN THOUSANDS) MARCH 30, 2000 APRIL 1, 1999 APRIL 2, 1998
- ---------------------- -------------- -------------- --------------
Loss before income taxes and cumulative effect of
an accounting change............................ $(81,247) $(26,516) $(41,099)
Cumulative effect of an accounting change......... (9,935) -- --
Reserve for future dispositions................... 15,289 (421) (202)
Depreciation and amortization..................... (7,902) (17,790) (11,309)
Gain on disposition of assets..................... (4,657) -- 16,471
Gain on sale to EPT............................... (1,258) (1,247) 16,238
Impairment of long-lived assets................... (4,187) 3,542 41,540
Foreign corporation activity...................... 5,779 4,274 --
Other............................................. 12,013 4,807 354
-------- -------- --------
Taxable income (loss), before special deductions
and net operating loss carrybacks............... $(76,105) $(33,351) $ 21,993
======== ======== ========
The Company's foreign subsidiaries have net operating loss carryforwards in
Portugal, Spain and the United Kingdom aggregating $9.7 million, $0.3 million of
which may be carried forward indefinitely and the balance of which expires from
2004 through 2007. The Company's Federal income tax loss carryforward of
$76.1 million expires in 2020. The Company's state income tax loss carryforwards
of $106.6 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 2001, $48 million; 2002,
$24 million; 2003, $17 million; 2004, $30 million; 2005, $52 million;
thereafter, $153 million.
YEAR 2000
The Company has not experienced, nor does it anticipate that it will
experience, any material information technology or embedded systems disruptions
or failures associated with the Year 2000, or any Year 2000 related performance
issues of its material business partners.
25
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, two theatres in
Spain and one in France. These 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
In April of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), REPORTING ON THE COSTS OF
START-UP ACTIVITIES. SOP 98-5 requires costs of start-up activities to be
expensed when incurred. The Company previously capitalized such costs and
amortized them over a two-year period. The Company adopted this statement in
fiscal 2000, which resulted in a cumulative effect adjustment to the Company's
results of operations and financial position of $5,840,000 (net of tax benefit
of $4,095,000).
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 which was amended by Statement of
Financial Accounting Standards No. 138 issued in June 2000. 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, 2000. The statement will become effective for the Company in
fiscal 2002. 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.
During fiscal 1999, the Emerging Issues Task Force ("EITF") released Issue
No. 97-10, THE EFFECT OF LESSEE INVOLVEMENT IN ASSET CONSTRUCTION. Issue
No. 97-10 is applicable to entities involved on behalf of an owner-lessor with
the construction of an asset that will be leased to the lessee when construction
of the asset is completed. Historically, the Company has been responsible for
the construction of leased theatres and for paying project costs that were in
excess of an agreed upon amount to be reimbursed from the developer. Issue
No. 97-10 requires the Company to be considered the owner (for accounting
purposes) of these types of projects during the construction period. As a
result, the Company has recorded $31,055,000 as a financing lease obligation on
its Balance Sheet related to these types of projects. The consensus reached in
Issue
26
No. 97-10 applies to construction projects committed to after May 21, 1998 and
also to those projects that were committed to on May 21, 1998 if construction
did not commence by December 31, 1999.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 draws upon the existing accounting rules and explains those
rules, by analogy, to other transactions that the existing rules do not
specifically address. The Company has reviewed its revenue recognition policies
and will make a final evaluation of the impact, if any, of SAB 101 after
additional guidance is made public by the SEC staff. Additionally, SAB 101
requires that gains and losses on sale of assets be recorded as a component of
operating income. The Company's practice has been to classify these gains and
losses as other income and expense. The Company has reclassified gains of
$944,000, $2,369,000 and $3,704,000 from other income and expense to be included
as a component of operating income in fiscal 2000, 1999 and 1998, respectively.
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 8.7% per annum, a 100 basis point
increase in market interest rates would increase interest expense and decrease
earnings before income taxes by approximately $3.3 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
Canada, Portugal, Spain, France, Japan and China (Hong Kong) 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 currently intend to repatriate funds from the operations
of its Asian 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 $2.6 million and
$11.1 million, respectively.
27
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 Audit Committee of the Board of Directors (consisting solely of
Directors from outside the Company) reviews the process involved in the
preparation of the Company's annual audited financial statements, and in this
regard meets (jointly and separately) with the independent accountants,
management and internal auditors to review matters relating to financial
reporting and accounting procedures and policies, the adequacy of internal
controls and the scope and results of the audit performed by the independent
accountants.
/s/ Craig R. Ramsey
Senior Vice President, Finance
Chief Financial Officer and
Chief Accounting Officer
28
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
AMC ENTERTAINMENT INC.
KANSAS CITY, MISSOURI
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of AMC
Entertainment Inc. and subsidiaries (the "Company") at March 30, 2000 and
April 1, 1999, and the results of their operations and their cash flows for each
of the three fiscal years in the period ended March 30, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
May 31, 2000
29
CONSOLIDATED STATEMENTS OF OPERATIONS
AMC ENTERTAINMENT INC.
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 30, 2000 APRIL 1, 1999 APRIL 2, 1998
- ------------------------------------- -------------- -------------- --------------
Revenues
Admissions............................................ $ 763,083 $ 662,161 $553,571
Concessions........................................... 329,855 307,347 256,017
Other theatre......................................... 30,013 21,766 16,111
Other................................................. 43,991 32,182 25,051
---------- ---------- --------
Total revenues...................................... 1,166,942 1,023,456 850,750
Expenses
Film exhibition costs................................. 417,736 358,437 299,926
Concession costs...................................... 50,726 48,687 42,062
Theatre operating expense............................. 290,072 260,145 219,593
Rent.................................................. 198,762 165,370 106,383
Other................................................. 44,619 30,899 25,782
Gener