GC Companies, Inc.

27 Boylston Street
Chestnut Hill, Massachusetts 02167
U.S.A
(617) 278-5600
Fax: (617) 277-2787
(800) 325-6027
Web site: http://www.generalcinema.com

Public Company
Incorporated: 1922 as Philip Smith Theatrical Enterprises Employees: 7,200
Sales: $447 million (1997)
Stock Exchanges: New York
Ticker Symbol: OCX
SICs: 7832 Motion Picture Theaters, Except Drive-ins; 6799 Investors, Not Elsewhere Classified

Although it invests in industries as diverse as optical superstores and cable television operators, GC Companies, Inc., considers its core business to be that of General Cinema Theaters, one of the leading movie exhibitors in the United States. As of 1997, General Cinema Theatres operated 175 theaters in 24 states in the United States, and 5 theaters in Mexico and Argentina. Having closed dozens of unproductive theaters in the mid-1990s, the company was expanding in the late 1990s—both internationally and through the construction of domestic multiplexes.

Company Origins

Philip Smith founded the precursor to GC Companies in 1922 when he bought the National Theater in Boston. The 23-year-old businessman was familiar with the infant movie industry: his father had owned two silent movie theaters in New York a couple of decades earlier, and his uncle, Serge Smith, had created one of the biggest movie studios in France. Although the National Theater was shabby and unprofitable when he purchased it, Philip Smith saw its potential. He immediately dropped ticket prices from 25 cents to 10 cents, and then developed an exhibition schedule that featured a variety of movies with several show times. This innovative plan not only helped restore the National Theater’s profitability, but it soon became the industry standard. Smith named his new project Philip Smith Theatrical Enterprises.

The success of the National Theater led Smith to purchase 11 more theaters in the Boston area by 1925. Smith had created and was operating the Boston area’s first independent exhibition circuit. However, the Depression forced Smith to cut back his burgeoning chain: in an effort to weather the hard times, Smith sold nine of his theaters.

By 1935, however, the Depression had ended and Smith was ready to expand once again. He took advantage of the boom in automobile ownership by opening drive-in theaters in Detroit and Cleveland. Described as the first successful drive-ins in the United States, Smith’s newest twist on the exhibition circuit incorporated oversized screens and advanced speaker systems. Some of Smith’s drive-ins could accommodate as many as 2,000 cars per show. To reflect the changed geographic focus of his enterprise, Smith called his new business Midwest. The drive-ins were dubbed Midwest Drive-In Theaters, as the circuit expanded into Illinois and other neighboring states by the 1940s. By the 1950s, the company had built 53 drive-in theaters throughout the United States, all of which were modestly profitable.

Mall Theaters in the 1950s

Smith was well aware of the fact that box office receipts in large urban movie houses were dwindling rapidly because of the rise of television and a reluctance on the part of suburban dwellers to travel into the city for entertainment. Throughout the 1950s population growth in the cities of the United States had been predominantly in their suburbs. More people lived farther from the central city and its movie houses than ever before. In the late 1940s, 90 million Americans viewed a film every week; the money they spent amounted to $1.7 billion in 1948. By 1958, the average weekly movie attendance was down to 39.6 million, and box office receipts had slipped below $1.2 billion.

Once again Smith led the movie exhibition industry with another innovative idea. He decided in 1951 to open a theater in a newly-constructed suburban shopping center—the suburban equivalent of “downtown.” The first shopping center-based movie theater in the nation, the new Massachusetts theater benefitted from the free mall parking. The mall increasingly became the equivalent of a town square, acting as the center for both shopping and entertainment, and business boomed for Midwest. Soon, the mutually-beneficial relationship between retail stores and movie theaters was too promising for Midwest’s competitors to resist. Of the approximately 180 indoor theaters built in 1961 and 1962, one-third were in shopping malls. To reflect the shifting focus of its operations, the company was renamed General Cinema Corporation in 1964. By 1970, the company was the largest shopping center theater chain in the country.

Philip Smith viewed the company’s prosperity in the 1950s as an invitation to move into new industries. In an interview with the Boston Sunday Post in 1956, Smith explained his desire to diversify the company’s holdings: “You have it good in one line and then something happens and you have to change.” To protect the company from a potential downturn in the cinema industry, Smith opened a chain of restaurants called Richard’s Drive-Ins, and a series of coffee shops called Amy Joe’s Pancake Houses. Late in the decade, General Cinema also opened several bowling alleys.

Diversification in the 1960s–1980s

In 1960 the company went public on the New York Stock Exchange, although Smith retained a controlling interest. The next year, Philip Smith died, and his son Richard became chief executive officer. Richard oversaw a period of great diversification and expansion for the company. In the late 1960s the firm began acquiring bottling franchises, including a Pepsi bottling operation it purchased in 1968 for less than $20 million. Soon, General Cinema was the largest independent bottler in the United States, in addition to its theater operations. The company also expanded within its traditional industry. It acquired the Mann Theatres Chain of Minneapolis for $6.6 million in cash and notes in 1970. Two years later, the company purchased an interest in 47 indoor theaters located in Louisiana and Florida from Loews Corporation for nearly $16 million.

General Cinema’s bottling division prospered throughout the 1970s, but in 1979, Herb Paige, the head of the division, was accused of embezzling millions of dollars from the company and was forced to resign. He later spent two years in prison, and in the mid-1980s, was reportedly ordered by a judge to pay General Cinema over $26 million in damages.

Despite this isolated difficulty, General Cinema was known for its efficient and dependable management team. Richard Smith had a reputation for hiring businessmen with proven talent for solving financial, legal, and managerial problems. Two of his most notable “finds” were Robert J. Tarr and J. Atwood Ives. Tarr, who arrived at the company in 1976 after a career as an investment banker at Paine Webber, was named president and chief operating officer in 1985. Ives, who also joined the company after a stint at Paine Webber, became chairman and chief financial officer in 1985. These appointments seemed to signify Smith’s plan to change General Cinema’s reputation from that of a one-man company to that of a company in which decisions were made collectively among top executives. Yet it was hard to downplay Smith’s own business acumen. According to one investor, “You’re not really betting on soft drinks or movies. You’re betting that Dick Smith is going to make another smart deal.”

In fact, General Cinema was doing remarkably well in Smith’s hands. Fiscal 1985 marked the 12th consecutive year, and the 24th out of its 25 years as a public company, in which General Cinema posted record operating results. Throughout the 1980s the beverage division, rather than the theater operation, was the strongest cash generator; it accounted for more than 70 percent of the company’s annual operating earnings.

General Cinema’s forays into the larger marketplace also proved rewarding. With its characteristic low profile, the company began purchasing stock in Heublein Inc. Attempting to thwart a perceived takeover by General Cinema, Heublein was finally forced to seek a higher-priced bid from another company. The result—Smith sold his holdings in Heublein for a significant profit.

In 1984 General Cinema diversified into yet another industry with the purchase of a controlling interest in Carter Hawley Hale, which was at the time the tenth largest clothing retailer in the United States, with Bergdorf Goodman and Neiman-Marcus under its control. Prior to the purchase by General Cinema, the Los Angeles-based Carter found its market share eroding in the competitive environment of California, and was soon confronted with an unwanted takeover bid from a clothing store chain. To prevent that, Carter Hawley Hale issued one million shares of preferred stock, which General Cinema purchased for $300 million. This provided General Cinema with a 37 percent interest in Carter, and helped Carter avoid a full-blown takeover. Furthermore, General Cinema’s interest in Carter actually caused Carter’s share value to increase dramatically, despite the fact that the company’s profits were well below what had been expected on Wall Street.

Company Perspectives:

When it comes to entertainment, nothing matches the thrill of watching a film in a state of the art General Cinema theatre. General Cinema’s roots in movie exhibition go back to 1922, when company founder Philip Smith opened his first theater in Boston. Since then, General Cinema has become one of the most respected leaders and innovators in the industry—known for our service, creativity and use of new technologies. Today, General Cinema Theatres is the core business of GC Companies, Inc. We continue to build exciting new theatres, both in the U.S. and overseas, under the vision of the Smith family, who remain an integral part of the company.

Reorganization in 1990s

After having built up its bottling division over the previous two decades, General Cinema sold it in 1989 for $1.75 billion. With the vast influx of cash, the company went shopping. In 1991 it purchased the well-known but financially-ailing publishing company Harcourt Brace Jovanovich for $1.5 billion. Saddled with debt, Harcourt saw the buyout as a new lease on life. “Instead of owing $2 billion in debt, it’s gone away,” CEO Peter Jovanovich said to Publishers Weekly, “Our balance sheet is healthy and HBJ will grow, maybe even make some acquisitions.” General Cinema increased HBJ’s budget for 1992 by 10 percent over the 1991 budget, to help the publisher invest in new authors and books.

Two years later, in 1993, General Cinema Corporation split itself in two portions. Harcourt General took the publishing business and the controlling interest in the Neiman-Marcus Group. The movie theater division became GC Companies, Inc., in which the Smith family retained a 28 percent controlling interest.

In the mid-1990s, GC Companies initiated a plan to weed out unproductive theaters. In 1994 the company sold a group of 14 theaters with a total of 61 screens for $14 million. The company also sold or closed several other theaters that year, reducing its holdings by 37 theaters and 133 screens. Although the loss of these theaters led to a drop in patronage and revenue, net earnings actually rose that year to $13.6 million, an occurrence which was indicative of the profitability problems the divested theaters had been causing. The following year the company sold or closed an additional 12 theaters, with 31 screens, continuing the decline in patronage. Also hurt by a net investment loss of $2.3 million, GC Companies saw a decline in net earnings to $8.7 million. Over the next couple of years, the company continued to sell or close unproductive theaters. Revenues held almost steady through 1996 and 1997 and, combined with substantial investment income, net earnings rose to $17.2 million and $14.8 million respectively.

In addition to dumping unprofitable theaters, GC Companies sought productive new theater ventures. Amidst an industry atmosphere of almost frenzied building of multiplex and mega-plex theaters with up to 30 screens in each theater, GCC was cautiously expanding in the United States. It began constructing state-of-the-art megaplexes in areas where they would have the greatest impact—namely highly-populated urban and suburban areas. The new megaplexes featured amenities not found in traditional movie theaters, such as sit-down cafes for patrons to enjoy before and after viewing a movie, auditoriums with their own cafes for seat-side service, “loveseats,” gourmet foods and coffees, and even liquor. Part of this strategy included selling well-known brands at the concession stands; in 1998 GCC had associations with Starbucks, Pepsi, Taco Bell, and Pizzeria Uno. The $250-million expansion plan included the construction of over 300 new screens by 1999.

New Ventures in the Late 1990s

In late 1997 GC Companies announced an alliance with the Sundance Institute to build theaters dedicated to exhibiting independent films. What megaplexes are to the Hollywood blockbuster, the new Sundance Cinemas were to be to the independent film. “Sundance Cinemas is the logical extension of our efforts over the past 18 years,” said actor Robert Redford, Sundance Institute founder, in a statement quoted in Variety. “I also believe filmgoers are starved for new ideas, voices and visions. By joining with General Cinema, we hope to create a unique circuit that will bring audiences across the country together with the work of independent filmmakers.” According to GCC chairman Paul Del Rossi, the theaters would be built in metropolitan areas or college towns and would feature six to ten screens. Each screen would provide bigger-than-usual, more comfortable seating for 75 to 200 people. The new cinemas would not show mainstream Hollywood movies—only independent films, including documentaries and experimental works.

GC Companies moved into another new area in 1997, expanding for the first time outside the United States. The company spent $36 million to acquire five theaters in Mexico and Argentina from United Artists Theater Circuit. Committed to even greater expansion in Central and South America, GCC enjoyed an immediate presence in the region due to the acquisition of the theaters. Construction on some additional theaters in Mexico was completed in 1998. The company hoped to ride a boom in movie theater construction in Central and South America, with plans to expand not only in Mexico and Argentina, but also into Brazil. “We consider ourselves the best in the country in service and design,” Carlos Walther, president and CEO of the new GC Mexico said in Variety. “We have the aggressiveness to become the largest chain in Mexico.” The company planned to show predominantly U.S. films, although Walther said good Mexican and South American films would also be featured.

Celebrating its 75 years of exhibiting movies in 1998, GC Companies seemed solidly positioned in the competitive market of movie exhibition. It was combining cautious construction of the popular new luxury multiplexes in the United States—where analysts were warning of overcapacity—with rapid expansion in markets outside of the United States, where rundown theaters and newly loosened price restrictions combined with unparalleled demand to create tremendous opportunities for U.S. exhibitors.