AMC ENTERTAINMENT INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2004
OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-8747

AMC ENTERTAINMENT INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		43-1304369 (I.R.S. Employer Identification No.)
920 Main Kansas City, Missouri (Address of principal executive offices)		64105 (Zip Code)

(816) 221-4000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes ý No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of Each Class of Common Stock		Number of Shares Outstanding as of July 1, 2004
Common Stock, 66²/3¢ par value		34,017,161
Class B Stock, 66²/3¢ par value		3,051,597

AMC ENTERTAINMENT INC. AND SUBSIDIARIES

INDEX

		Page Number
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Statements of Operations	5
	Consolidated Balance Sheets	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 2.	Changes in Securities and Use of Proceeds	34
Item 6.	Exhibits and Reports on Form 8-K	36
	Signatures	39

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements. (Unaudited)

As discussed in its Annual Report on Form 10-K for the fifty-two weeks ended April 1, 2004, in connection with the fiscal 2004 annual audit of the AMC Entertainment Inc. consolidated financial statements, the Company, with the concurrence of its independent registered public accounting firm, determined that its financial statements for the thirteen weeks ended July 3, 2003 as previously filed needed to be restated for the following items:

Foreign deferred tax assets: The Company had previously recorded valuation allowances against deferred tax assets in foreign jurisdictions when it became clear, based on theatre impairments or other factors, that it would not be profitable in those jurisdictions. The Company has now determined that full valuation allowances should be recorded against deferred tax assets in all foreign jurisdictions when it is more likely than not that the deferred tax assets will not be realized.

Accordingly, the Company has restated its financial statements for the thirteen weeks ended July 3, 2003 to reflect additional valuation allowances on foreign deferred tax assets. The effects of such adjustments are summarized as follows:

Increase in income tax provision and net loss for the thirteen weeks ended July 3, 2003

1.25 million

Straight-line contingent rentals: Rent expense for leases with rent escalation clauses are required to be recorded on a straight-line method under certain circumstances. The Company recently determined that it has one lease that has a clause for contingent rents in which case the contingency was virtually certain to occur. Rent expense for this lease should have been recorded on the straight-line method. Accordingly, the Company has restated its financial statements for the thirteen weeks ended July 3, 2003 to reflect the straight-line method of recording the contingent portion of rent expense for this one lease. The effects of such adjustments are summarized as follows:

Increase in net loss for the thirteen weeks ended July 3, 2003

0.061 million

Additionally, amounts previously reported in Form 10-Q for fiscal year 2004 have been retroactively restated to reflect the reclassification of the results of operations for certain assets which the Company sold on December 4, 2003 that meet the criteria for discontinued operations and other reclassifications to conform to its Form 10-Q for the period ended January 1, 2004. See the Company's Form 10-K Reconciliation of Summary Quarterly Data (unaudited) as previously reported in Form 10-Q as restated in Form 10-K for additional information.

The following table sets forth the previously reported amounts and the restated amounts reflected in the accompanying Consolidated Financial Statements:

			Quarter Ended July 3, 2003
(in thousands except per share data)			As Previously Reported			As Restated
Statement of Operations data:
	Rent		$	78,151		$	78,262
	Total costs and expenses			432,799			432,910
	Earnings from continuing operations before income taxes			21,402			21,291
	Income tax provision			9,270			10,470
	Earnings from continuing operations			12,132			10,821
	Loss from discontinued operations			(330	)		(330	)
	Net earnings			11,802			10,491
	Net earnings for common shares			4,011			2,700
	Basic and diluted earnings (loss) per share of common stock:
		Earnings from continuing operations	$	0.12		$	0.08
		Loss from discontinued operations		(0.01	)		(0.01	)

	Net earnings per share		$	0.11		$	0.07

All previously reported amounts affected by the restatement that appear elsewhere in these consolidated financial statements have also been restated.

AMC ENTERTAINMENT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

				Thirteen Weeks Ended
				July 1, 2004			July 3, 2003
							(restated)
				(Unaudited)
Revenues
	Admissions			$	332,852		$	321,163
	Concessions				128,675			124,297
	Other theatre				14,959			12,418
	NCN and other				12,147			13,971

		Total revenues			488,633			471,849
Costs and Expenses
	Film exhibition costs				179,880			177,960
	Concession costs				15,449			14,334
	Theatre operating expense				104,888			107,795
	Rent				83,278			78,262
	NCN and other				10,908			12,321
	General and administrative:
		Stock-based compensation			2,636			293
		Other			14,800			11,823
	Preopening expense				433			1,042
	Theatre and other closure expense				(219	)		618
	Depreciation and amortization				31,365			28,462
	Disposition of assets and other gains				(2,295	)		—

		Total costs and expenses			441,123			432,910
	Other expense (income)
		Interest expense
			Corporate borrowings		16,007			15,494
			Capital and financing lease obligations		2,506			2,805
		Investment income			(791	)		(651	)

			Total other expense		17,722			17,648

Earnings from continuing operations before income taxes					29,788			21,291
Income tax provision					13,900			10,470

Earnings from continuing operations					15,888			10,821
Loss from discontinued operations, net of income tax benefit					—			(330	)

Net earnings				$	15,888		$	10,491

Preferred dividends and allocation of undistributed earnings					9,380			7,791

Net earnings for shares of common stock				$	6,508		$	2,700

Basic earnings per share:
	Earnings from continuing operations			$	0.18		$	0.08

	Loss from discontinued operations			$	—		$	(0.01	)

	Earnings per share			$	0.18		$	0.07

Diluted earnings per share:
	Earnings from continuing operations			$	0.17		$	0.08

	Loss from discontinued operations			$	—		$	(0.01	)

	Earnings per share			$	0.17		$	0.07

Average shares outstanding:

	Basic				36,932			36,427

	Diluted				37,608			36,687

See Notes to Consolidated Financial Statements.

AMC ENTERTAINMENT INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

			July 1, 2004			April 1, 2004
			(Unaudited)
ASSETS
Current assets:
	Cash and equivalents		$	398,735		$	333,248
	Receivables, net of allowance for doubtful accounts of $1,188 as of July 1, 2004 and $1,118 as of April 1, 2004			42,547			39,812
	Other current assets			65,032			62,676

		Total current assets		506,314			435,736
Property, net				776,344			777,277
Intangible assets, net				22,914			23,918
Goodwill				71,727			71,727
Deferred income taxes				130,784			143,944
Other long-term assets				53,335			53,932

		Total assets	$	1,561,418		$	1,506,534

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	143,711		$	107,234
	Accrued expenses and other liabilities			112,928			112,386
	Deferred revenues and income			73,660			76,131
	Current maturities of corporate borrowings and capital and financing lease obligations			2,735			2,748

		Total current liabilities		333,034			298,499
Corporate borrowings				686,498			686,431
Capital and financing lease obligations				57,434			58,533
Other long-term liabilities				182,780			182,467

		Total liabilities		1,259,746			1,225,930

Stockholders' equity:
	Series A Convertible Preferred Stock, 66²/3¢ par value; 305,548 and 299,477 shares issued and outstanding as of July 1, 2004 and April 1, 2004, respectively, (aggregate liquidation preference of $305,548 and $304,525 as of July 1, 2004 and April 1, 2004, respectively)			204			200
	Common Stock, 66²/3¢ par value; 34,117,441 and 33,889,753 shares issued as of July 1, 2004 and April 1, 2004, respectively			22,742			22,593
	Convertible Class B Stock, 66²/3¢ par value; 3,051,597 shares issued and outstanding as of July 1, 2004 and April 1, 2004			2,035			2,035
	Additional paid-in capital			475,172			469,498
	Accumulated other comprehensive loss			(2,307	)		(1,993	)
	Accumulated deficit			(194,828	)		(210,716	)
	Common Stock in treasury, at cost, 100,280 and 77,997 shares as of July 1, 2004 and April 1, 2004, respectively			(1,346	)		(1,013	)

		Total stockholders' equity		301,672			280,604

		Total liabilities and stockholders' equity	$	1,561,418		$	1,506,534

See Notes to Consolidated Financial Statements.

AMC ENTERTAINMENT INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

			Thirteen Weeks Ended
			July 1, 2004			July 3, 2003
						(restated)
			(Unaudited)
INCREASE IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net earnings			$	15,888		$	10,491
Adjustments to reconcile net earnings to net cash provided by operating activities:
	Depreciation and amortization			31,365			28,462
	Non-cash portion of stock-based compensation			2,636			293
	Non-cash portion of pension and postretirement expense			1,804			1,508
	Deferred income taxes			13,169			490
	Change in assets and liabilities:
		Receivables		(5,822	)		(8,145	)
		Other assets		(2,356	)		(9,898	)
		Accounts payable		7,485			4,019
		Accrued expenses and other liabilities		4,012			16,012
	Other, net			945			102

	Net cash provided by operating activities			69,126			43,334

Cash flows from investing activities:
	Capital expenditures			(29,143	)		(24,159	)
	Proceeds from disposition of long-term assets			19			503
	Other, net			1,118			(7,463	)

	Net cash used in investing activities			(28,006	)		(31,119	)

Cash flows from financing activities:
	Principal payments under capital and financing lease obligations			(670	)		(534	)
	Change in cash overdrafts			30,836			1,928
	Change in construction payables			(1,493	)		1,122
	Cash portion of preferred dividends			(4,193	)		—
	Proceeds from exercise of stock options			40			3,167
	Treasury stock purchases			(333	)		(379	)

	Net cash provided by financing activities			24,187			5,304

	Effect of exchange rate changes on cash and equivalents			180			(450	)

Net increase in cash and equivalents				65,487			17,069
Cash and equivalents at beginning of period				333,248			244,412

Cash and equivalents at end of period			$	398,735		$	261,481

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Cash paid during the period for:
		Interest (including amounts capitalized of $202 and $1,475)	$	2,777		$	3,257
		Income taxes paid (refunded)		(1,742	)		5,585
	Schedule of non-cash investing and financing activities:
		Preferred dividends	$	2,866		$	7,791
		Issue Common Stock related to purchase of GC Companies, Inc.		2,021			—

See Notes to Consolidated Financial Statements.

AMC ENTERTAINMENT INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

July 1, 2004
(Unaudited)

NOTE 1—BASIS OF PRESENTATION

AMC Entertainment Inc. ("AMCE") is a holding company which, through its direct and indirect subsidiaries, including American Multi-Cinema, Inc. ("AMC") and its subsidiaries, AMC Entertainment International, Inc. ("AMCEI") and National Cinema Network, Inc. ("NCN") (collectively with AMCE, unless the context otherwise requires, the "Company"), is principally involved in the theatrical exhibition business throughout North America and in China (Hong Kong), Japan, France, Portugal, Spain and the United Kingdom. The Company's North American theatrical exhibition business is conducted through AMC and AMCEI. The Company's International theatrical exhibition business is conducted through AMCEI. The Company is also involved in the business of providing on-screen advertising and other services to AMC and other theatre circuits through a wholly owned subsidiary, NCN.

The accompanying unaudited consolidated financial statements have been prepared in response to the requirements of Form 10-Q and should be read in conjunction with the Company's annual report on Form 10-K/A for the year (52 weeks) ended April 1, 2004. In the opinion of management, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company's financial position and results of operations. Due to the seasonal nature of the Company's business, results for the thirteen weeks ended July 1, 2004 are not necessarily indicative of the results to be expected for the fiscal year (52 weeks) ending March 31, 2005.

The April 1, 2004 consolidated balance sheet data was derived from the audited balance sheet, but does not include all disclosures required by generally accepted accounting principles.

Certain amounts have been reclassified from prior period consolidated financial statements to conform with the current period presentation.

NOTE 2—ACQUISITIONS

On December 19, 2003, the Company acquired certain of the operations and related assets of MegaStar Cinemas, L.L.C. ("MegaStar") for an estimated cash purchase price of $14,950,000. In connection with the acquisition, the Company assumed leases on three theatres with 48 screens in Minneapolis and Atlanta. All three of the theatres feature stadium seating and have been built since 2000. As of July 1, 2004, $1,466,000 of the estimated total purchase price was unpaid. The results of operations are included in the Consolidated Statements of Operations from December 19, 2003. The following is a summary of the allocation of the purchase price to the assets acquired from MegaStar, which is based on management estimates of fair value which could change depending on the results of an independent third party valuation study that is currently being performed:

(In thousands)
Cash and equivalents	$	40
Current assets		94
Property		6,762
Other long-term assets		84
Goodwill		11,267
Other long-term liabilities		(3,297	)

Total purchase price	$	14,950

Amounts recorded for goodwill are not subject to amortization, were recorded at the Company's North American theatrical exhibition operating segment (the reporting unit) and are expected to be deductible for tax purposes.

NOTE 3—DISCONTINUED OPERATIONS

On December 4, 2003, the Company sold its only theatre in Sweden. The Company opened its theatre in Sweden during fiscal 2001 and since that time the Company has incurred pre-tax losses of $17,210,000, including a $4,668,000 impairment charge in fiscal 2002 and a $5,591,000 loss on sale in fiscal 2004.

The operations and cash flows of the Sweden theatre have been eliminated from the Company's ongoing operations as a result of the disposal transaction and the Company does not have any significant continuing involvement in the operations of the Sweden theatre after the disposal transaction. The results of operations of the Sweden theatre have been classified as discontinued operations, and information presented for all periods reflects the new classification. The operations of the Sweden theatre were previously reported in the Company's International operating segment. Components of amounts reflected as loss from discontinued operations in the Company's Consolidated Statements of Operations are presented in the following table:

Statements of operations data:

(In thousands)			Thirteen Weeks Ended July 3, 2003
Revenues
	Admissions		$	1,025
	Concessions			284
	Other theatre			56

		Total revenues		1,365
	Expense
	Film exhibition costs			501
	Concession costs			93
	Theatre operating expense			579
	Rent			766
	General and administrative expense—other			11
	Depreciation and amortization			15

		Total costs and expenses		1,965
Loss before income taxes				(600	)
Income tax benefit				(270	)

Loss from discontinued operations			$	(330	)

NOTE 4—EARNINGS PER COMMON SHARE

Basic earnings per share is computed by dividing net earnings for common shares by the weighted-average number of common shares outstanding. The dilutive effect of Series A Convertible Preferred Stock is considered in the computation of basic earnings per common share using the "two-class method" in accordance with EITF Issue 03-6 "Participating Securities and the Two-Class Method under FASB Statement No. 128". Diluted earnings per share includes the effects of outstanding stock options, stock awards, and deferred stock units.

The Company has two classes of common stock outstanding which do not provide for different dividend rates or other preferences, other than voting rights.

The following table sets forth the computation of basic and diluted earnings per common share from continuing operations (in thousands, except per share data):

		Thirteen Weeks Ended
		July 1, 2004		July 3, 2003
				(restated)
Numerator:
	Earnings from continuing operations	$	15,888	$	10,821
	Dividends on Series A Preferred		7,059		7,791
	Amount allocated to participating preferred under the "two-class" method		2,321		—

	Earnings for common shares from continuing operations	$	6,508	$	3,030

Denominator:
	Shares for basic earnings per common share		36,932		36,427
	Stock options		149		164
	Stock awards		—		96
	Deferred stock units		527		—

	Shares for diluted earnings per common share		37,608		36,687

Basic earnings per common share from continuing operations		$	0.18	$	0.08

Diluted earnings per common share from continuing operations		$	0.17	$	0.08

During the thirteen weeks ended July 3, 2003, shares of common stock of 39,778,000 and dividends of $7,791,000 from the assumed conversion of Series A Preferred were excluded from the computation of earnings per share because they were anti-dilutive.

NOTE 5—COMPREHENSIVE EARNINGS

The components of comprehensive earnings are as follows (in thousands):

	Thirteen Weeks Ended
	July 1, 2004			July 3, 2003
				(restated)
Net earnings	$	15,888		$	10,491
Foreign currency translation adjustment		(258	)		2,190
Decrease (increase) unrealized loss on marketable equity securities		(56	)		223