<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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: 333-1024
UNITED ARTISTS THEATRE CIRCUIT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-1424080
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9110 East Nichols Avenue, Suite 200
Englewood, Colorado 80112
- ---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 792-3600
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
The number of shares outstanding of $1.00 par value common stock at November 12,
1998 was 100 shares.
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
(UNAUDITED)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
UNITED ARTISTS THEATRE CIRCUIT, INC.
Condensed Consolidated Balance Sheets............................... 4
Condensed Consolidated Statements of Operations..................... 5
Condensed Consolidated Statement of Stockholder's Equity............ 6
Condensed Consolidated Statements of Cash Flow...................... 7
Notes to Condensed Consolidated Financial Statements................ 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............... 16
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN THIS FORM 10-Q MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE UNCERTAINTIES AND OTHER FACTORS AND THE
ACTUAL RESULTS AND PERFORMANCE OF UATC MAY BE MATERIALLY DIFFERENT FROM
FUTURE RESULTS OR PERFORMANCE EXPRESSED OR IMPLIED BY SUCH STATEMENTS.
CAUTIONARY STATEMENTS REGARDING THE RISKS ASSOCIATED WITH SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE STATEMENTS
INCLUDED UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS." CERTAIN OF SUCH RISKS AND UNCERTAINTIES RELATE TO
THE HIGHLY LEVERAGED NATURE OF UATC, THE RESTRICTIONS IMPOSED ON UATC BY
CERTAIN INDEBTEDNESS, THE SENSITIVITY OF UATC TO ADVERSE TRENDS IN THE
GENERAL ECONOMY, THE HIGH DEGREE OF COMPETITION IN UATC'S INDUSTRY, THE
VOLATILITY OF UATC'S QUARTERLY RESULTS AND UATC'S SEASONALITY, THE DEPENDENCE
OF UATC ON FILMS AND DISTRIBUTORS AND ON ITS ABILITY TO OBTAIN POPULAR MOTION
PICTURES, THE CONTROL OF UATC BY AFFILIATES OF MERRILL LYNCH CAPITAL
PARTNERS, INC. AND THE DEPENDENCE OF UATC ON KEY PERSONNEL, AMONG OTHERS.
ALL WRITTEN FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO UATC ARE EXPRESSLY
QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
3
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997*
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 6.9 10.6
Receivables, net............................................ 17.7 14.4
Prepaid expenses and concession inventory................... 21.5 18.4
Other assets................................................ 0.7 0.3
------- ------
Total current assets..................................... 46.8 43.7
Investments and related receivables........................... 14.6 15.4
Property and equipment, at cost (note 10):
Land........................................................ 25.2 26.0
Theatre buildings, equipment and other...................... 556.9 485.2
------- ------
582.1 511,2
Less accumulated depreciation and amortization (note 4)..... (241.2) (203.6)
------- ------
340.9 307.6
Intangible assets, net (note 10).............................. 88.8 101.5
Net assets of discontinued operations (note 11)............... 1.6 13.7
Other assets, net (note 2).................................... 28.6 24.1
------- ------
$ 521.3 506.0
------- ------
------- ------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................ $ 70.8 87.0
Accrued and other liabilities............................... 22.7 28.6
Current portion of long-term debt (notes 2 and 6)........... 5.7 32.3
------- ------
Total current liabilities................................ 99.2 147.9
Other liabilities............................................. 40.9 30.2
Debt (notes 2 and 6).......................................... 316.4 329.9
------- ------
Total liabilities........................................ 456.5 508.0
------- ------
Minority interests in equity of consolidated subsidiaries..... 5.6 7.2
Stockholder's equity (deficit) (note 2):
Preferred stock (note 8).................................... - 193.9
Common stock (note 8)....................................... - -
Additional paid-in capital (note 8)......................... 331.0 29.0
Accumulated deficit......................................... (267.6) (230.3)
Cumulative foreign currency translation adjustment.......... - (0.4)
Intercompany account........................................ (4.2) (1.4)
------- ------
Total stockholder's equity (deficit)..................... 59.2 (9.2)
------- ------
$ 521.3 506.0
------- ------
------- ------
</TABLE>
* Restated
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 1998 September 30, 1998 September 30, 1997* September 30, 1997*
------------------ ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Revenue:
Admissions................................ $ 127.9 347.5 131.5 360.5
Concession sales.......................... 53.0 143.9 52.8 144.7
Other..................................... 2.9 11.2 4.5 12.9
------- ------ ------ ------
183.8 502.6 188.8 518.1
------ ------ ------ ------
Costs and expenses:
Film rental and advertising expenses...... 70.0 190.0 74.9 201.0
Direct concession costs................... 7.3 20.8 8.2 22.8
Other operating expenses (note 3)......... 71.1 203.6 70.5 201.9
Affiliate lease rentals (note 9).......... 2.1 6.4 2.4 7.3
General and administrative (notes 9
and 14)................................. 5.8 16.7 5.8 17.7
Restructuring charge (note 14)............ - - - 0.5
Depreciation and amortization (note 4).... 12.6 37.1 12.5 44.3
Provisions for impairment (note 10)....... 10.6 15.8 7.0 15.5
------ ------ ------ ------
179.5 490.4 181.3 511.0
------ ------ ------ ------
Operating income from continuing
operations.............................. 4.3 12.2 7.5 7.1
Other income (expense):
Interest, net (notes 2, 6 and 9).......... (6.4) (22.0) (9.4) (27.3)
Gain on disposition of assets (note 13)... - 0.2 6.2 18.0
Share of losses of affiliates, net........ (0.1) (0.3) - (0.9)
Minority interests in earnings of
consolidated subsidiaries............... (0.4) (1.1) (0.3) (0.8)
Other, net................................ (1.2) (2.6) (0.5) (1.5)
------ ------ ------ ------
(8.1) (25.8) (4.0) (12.5)
------ ------ ------ ------
Income (loss) from continuing operations
before income tax expense and discontinued
operations.............................. (3.8) (13.6) 3.5 (5.4)
Income tax expense (note 12)................ (0.2) (0.9) (0.4) (1.0)
------ ------ ------ ------
Income (loss) from continuing operations.. (4.0) (14.5) 3.1 (6.4)
Discontinued operations (note 11)........... (12.5) (14.9) (1.4) (3.4)
------ ------ ------ ------
Income (loss) before extraordinary item... (16.5) (29.4) 1.7 (9.8)
Extraordinary item - loss on early
extinguishment of debt (note 2)......... - (7.9) - -
------ ------ ------ ------
Net income (loss)........................... (16.5) (37.3) 1.7 (9.8)
Dividend on preferred stock (note 8)........ - (9.0) (6.0) (17.8)
------ ------ ------ ------
Net loss available to common
stockholder.............................. $(16.5) (46.3) (4.3) (27.6)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
* Restated
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder's Equity
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
foreign currency Total
Preferred Common Additional Accumulated translation Intercompany stockholder's
stock stock paid-in capital deficit adjustment account equity
--------- ------ --------------- ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998........... $193.9 - 29.0 (230.3) (0.4) (1.4) (9.2)
Accretion of dividends on
preferred stock.................... 9.0 - (9.0) - - - -
Equity contribution.................. - - 108.1 - - - 108.1
Conversion of preferred stock........ (202.9) - 202.9 - - - -
Net change in intercompany account... - - - - - (2.8) (2.8)
Foreign currency translation
adjustment......................... - - - - 0.4 - 0.4
Net loss............................. - - - (37.3) - - (37.3)
------- ------ ------ ------- ----- ----- -----
Balance at September 30, 1998........ $ - - 331.0 (267.6) - (4.2) 59.2
------- ------ ------ ------- ----- ----- -----
------- ------ ------ ------- ----- ----- -----
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997*
---- -----
<S> <C> <C>
Net cash provided by operating activities........................... $29.6 27.9
----- -----
Cash flow from investing activities:
Capital expenditures.............................................. (65.9) (51.3)
Increase in construction in progress, net......................... (14.9) (5.9)
Increase in receivable from sale and leaseback escrow............. (7.1) (8.3)
Proceeds from sale and leaseback escrow........................... 1.0 14.0
Proceeds from disposition of assets, net.......................... 2.3 49.0
Investment in and receivables from theatre joint ventures......... - (18.3)
Other, net........................................................ (4.3) (0.3)
----- -----
Net cash used in investing activities........................... (88.9) (21.1)
----- -----
Cash flow from financing activities:
Equity contribution by Parent..................................... 108.1 -
Debt borrowings................................................... 508.0 109.9
Debt repayments................................................... (424.6) (116.3)
Repurchase of Senior Secured Notes................................ (128.6) -
Net change in intercompany account................................ (2.8) (2.0)
Increase (decrease) in cash overdraft............................. 4.3 (1.2)
Increase in related party receivables............................. (2.0) (0.1)
Other, net........................................................ (6.8) (0.3)
----- -----
Net cash provided by (used in) financing activities............. 55.6 (10.0)
----- -----
Net decrease in cash............................................ (3.7) (3.2)
Cash and cash equivalents:
Beginning of period............................................... 10.6 9.6
----- -----
End of period..................................................... $ 6.9 6.4
----- -----
----- -----
Reconciliation of net loss to net cash provided by operating
activities:
Net loss.......................................................... $(37.3) (9.8)
Non-cash expenses associated with discontinued operations......... 12.4 1.1
Extraordinary item................................................ 7.9 -
Effect of leases with escalating minimum annual rentals........... 2.7 2.6
Depreciation and amortization..................................... 37.1 44.3
Provisions for impairment......................................... 15.8 15.5
Gain on disposition of assets, net................................ (0.2) (18.0)
Share of losses of affiliates, net................................ 0.3 0.9
Minority interests in earnings of consolidated subsidiaries....... 1.1 0.8
Change in assets and liabilities:
Receivables...................................................... 0.8 3.7
Prepaid expenses and concession inventory........................ (2.1) (2.7)
Other assets..................................................... - 2.2
Accounts payable................................................. 0.3 (11.4)
Accrued and other liabilities.................................... (9.2) (1.3)
----- -----
Net cash provided by operating activities...................... $29.6 27.9
----- -----
----- -----
</TABLE>
* Restated
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) GENERAL INFORMATION
On May 12, 1992, United Artists Theatre Circuit, Inc. and substantially
all of its then existing subsidiaries ("UATC") were acquired (the
"Acquisition") by United Artists Theatre Company (the "Parent")
(formerly known as OSCAR I Corporation). The Parent is owned by an
investment fund managed by affiliates of Merrill Lynch Capital Partners,
Inc. ("MLCP"), certain institutional investors and certain members of
UATC's management.
In addition to owning all of the outstanding capital stock of UATC, the
Parent also owns all of the outstanding capital stock of United Artists
Realty Company ("UAR"). UAR and its subsidiary United Artists Properties
I Corp. ("Prop I") are the owners and lessors of certain operating
theatre properties leased to and operated by UATC.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made in the accompanying interim condensed
consolidated financial statements, which are necessary to present fairly
the financial position of UATC and the results of its operations.
Interim results are not necessarily indicative of the results for the
entire year because of fluctuations of revenue and related expenses
resulting from the seasonality of attendance and the availability of
popular motion pictures. These financial statements should be read in
conjunction with the audited December 31, 1997 consolidated financial
statements and notes thereto included as part of UATC's Form 10-K.
(2) RECAPITALIZATION
On April 21, 1998, the Parent completed the offering of $225.0 million
of its 9.75% senior subordinated notes due April 15, 2008 and the
offering of $50.0 million of its floating rate senior subordinated notes
due October 15, 2007 (collectively, the "Senior Subordinated Notes"),
and entered into a $450.0 million bank credit facility (the "New Bank
Credit Facility") with a final maturity of April 21, 2007.
The proceeds from the offerings of the Senior Subordinated Notes and a
portion of the borrowings under the New Bank Credit Facility were used
to repay the outstanding borrowings under UATC's existing bank credit
facility (the "Bank Credit Facility") (approximately $272.5 million),
and to fund the redemption of the Parent's preferred stock
(approximately $159.2 million) and the redemption of UATC's $125.0
million senior secured notes (the "Senior Secured Notes") at 102.875% of
par value plus accrued, but unpaid interest of $0.8 million.
As part of the Recapitalization, a delayed draw term loan facility was
included as part of the New Bank Credit Facility in order to facilitate
the repayment of certain Prop I mortgage upon their maturity. On
November 1, 1998, approximately $45.7 million of this delayed draw
facility was used to repay and retire these Prop I mortgage notes. See
Note (6), Debt.
8
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(2) RECAPITALIZATION, CONTINUED
The net proceeds from the offering of the Senior Subordinated Notes in
excess of the redemption value of the Parent's preferred stock
(approximately $108.1 million) was contributed to UATC as additional
common equity by the Parent. Additionally, UATC's preferred stock (which
was held by the Parent) was converted into additional common equity.
As a result of the repayment of the Bank Credit Facility and the
redemption of the Senior Secured Notes, UATC recognized an
extraordinary loss on the early extinguishment of debt during the nine
months ended September 30, 1998 of approximately $7.9 million,
consisting of the $3.6 million prepayment premium on the Senior Secured
Notes and approximately $4.3 million of unamortized deferred loan costs.
(3) SALE AND LEASEBACK
In December 1995, UATC and UAR entered into a sale and leaseback (the
"1995 Sale and Leaseback") whereby the buildings and land underlying 27
of their operating theatres and four theatres and a screen addition
under development were sold to, and leased back from, an unaffiliated
third party. In conjunction with the 1995 Sale and Leaseback, the buyer
of the properties issued certain publicly traded bonds. The lease of the
properties by UATC required UATC to enter into a Participation Agreement
that requires UATC to comply with certain covenants including
limitations on indebtedness and restrictions on payments.
In November 1996, UATC entered into a sale and leaseback transaction
whereby the buildings and land underlying three of its operating
theatres and two theatres under development were sold to, and leased
back from, an unaffiliated third party. At September 30, 1998,
approximately $0.5 million of sales proceeds were held in escrow pending
final construction approval.
In December 1997, UATC entered into a sale and leaseback transaction
whereby two theatres currently under development were sold to, and
leased back from, an unaffiliated third party for approximately $18.1
million. At September 30, 1998, approximately $13.5 million of the sales
proceeds were held in escrow and will be paid periodically during
construction under the terms of the sale and leaseback to fund certain
of the construction costs associated with the two theatres.
(4) CHANGE IN ESTIMATED USEFUL LIVES
During 1998, UATC revised the estimated useful lives of certain
equipment and leasehold improvements to more closely reflect the actual
lives of these assets. The effect of this change in estimated useful
lives was to decrease depreciation and amortization expense for the
three and nine months ended September 30, 1998 by approximately $0.7
million and $2.2 million, respectively.
9
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $27.3 million and $23.9 million for the
nine months ended September 30, 1998 and 1997, respectively.
UATC accrued $9.0 million and $17.8 million of dividends during the nine
months ended September 30, 1998 and 1997, respectively, on its preferred
stock.
During the nine months ended September 30, 1998, UATC exchanged one of
its fee-owned theatre properties with Prop I in exchange for one of Prop
I's fee-owned theatre properties and a $1.1 million note.
(6) DEBT
Debt is summarized as follows (amounts in millions):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
New Bank Credit Facility (a).......... $311.0 -
Bank Credit Facility (b).............. - 226.5
Senior Secured Notes (b).............. - 125.0
Other (c)............................. 11.1 10.7
------ -----
322.1 362.2
Less current portion.................. (5.7) (32.3)
------ -----
$316.4 329.9
------ -----
------ -----
</TABLE>
(a) The New Bank Credit Facility provides for delayed draw term
loans aggregating $350.0 million (the "Term Loans") and a
reducing revolving loan and standby letters of credit
aggregating $100.0 million (the "Revolving Facility"). The Term
Loans consist of the following: (i) a $70.0 million delayed
draw term loan (the "Tranche A Term Loan"), $5.0 million of
which was funded at September 30, 1998 and $65.0 million of
which is available on a delayed draw basis at various dates
through December 31, 1998; (ii) a $118.0 million delayed draw
term loan (the "Tranche B Term Loan"), which was fully funded
at September 30, 1998; and (iii) a $162.0 million delayed draw
term loan (the "Tranche C Term Loan"), which was fully funded
at September 30, 1998.
Commitments available for borrowing under the Revolving
Facility reduce semi-annually commencing December 31, 2001
through April 21, 2005. The Tranche A Term Loan requires
semi-annual principal payments commencing December 31, 1998
through June 30, 2001 of 1/2% of the December 31, 1998
outstanding balance and then in escalating semi-annual payments
through April 21, 2005. The Tranche B Term Loan requires
semi-annual principal payments commencing December 31, 1998
through June 30, 2005 of 1/2% of the December 31, 1998
outstanding balance and two payments of 46.5% of the December
31, 1998 outstanding balance on December 31, 2005 and April 21,
2006. The Tranche C Term Loan requires semi-annual principal
payments commencing December 31, 1998 through June 30, 2006 of
1/2% of the December 31, 1998 outstanding balance and two
payments of 46% of the December 31, 1998 outstanding balance on
December 31, 2006 and April 21, 2007.
10
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DEBT, CONTINUED
Borrowings under the New Bank Credit Facility provide for
interest to be accrued at varying rates depending on the ratio
of indebtedness to annualized operating cash flow, as defined.
Interest is payable at varying dates depending on the type of
rate selected by the Parent, but no less frequently than once
each 90 days.
The New Bank Credit Facility is guaranteed, on a joint and
several basis, by UATC and by certain of the Parent's other
subsidiaries, including UAR and, after the repayment of Prop
I's mortgage notes, will be guaranteed by Prop I. The New Bank
Credit Facility is secured by, among other things, the capital
stock of UATC, UAR, Prop I and certain other subsidiaries of
the Parent and UATC and by an intercompany note of UATC to the
Parent established with respect to borrowings by UATC from the
Parent.
The New Bank Credit Facility contains certain provisions that
require the Parent to maintain certain financial ratios and
places limitations on, among other things, additional
indebtedness, disposition of assets and restricted payments.
(b) As discussed in Note (2), Recapitalization, the Bank Credit
Facility and the Senior Secured Notes were repaid during 1998
from proceeds of the Senior Subordinated Notes and the New Bank
Credit Facility.
(c) Other debt at September 30, 1998 consists of various term
loans, mortgage notes, capital leases and other borrowings.
This other debt carries interest rates ranging from 7% to 12%.
Principal and interest are payable at various dates through
March 1, 2006.
As discussed in Note (2), Recapitalization, additional commitments under
the Tranche A Term Loan were designated for the retirement of the Prop I
mortgage notes that matured on November 1, 1998. On November 1, 1998,
approximately $45.7 million of borrowings under the Tranche A Term Loan
were used to retire the Prop I mortgage notes and $12.5 million of
letters of credit were cancelled.
At September 30, 1998, UATC was party to interest rate cap agreements on
$75.0 million of floating rate debt, which provide for a LIBOR interest
rate cap of 7 1/2% and expire in July 1999. UATC is subject to credit
risk exposure from non-performance of the counterparties to the interest
rate cap agreements. As UATC has historically received payments relating
to its interest rate cap agreements, it does not anticipate such
non-performance in the future. UATC amortizes the cost of its interest
rate cap agreements to interest expense over the life of the underlying
agreement. Amounts received from the counterparties to the interest rate
cap agreements are recorded as a reduction of interest expense.
At September 30, 1998, the Parent had approximately $65.0 million of
unused Tranche A Term Loan commitments and $74.0 million of Revolving
Facility commitments, $18.0 million of which has been used for the
issuance of letters of credit. When the Prop I indebtedness matured on
November 1, 1998, $12.5 million of letters of credit were cancelled and
such amount increased the available borrowings under the Revolving
Facility. The Parent pays commitment fees of 1/2% per annum on the
average unused commitments.
11
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DEBT, CONTINUED
The primary source of principal and interest payments related to the New
Bank Credit Facility will come from payments by UATC to the Parent. The
amount of payments by UATC to the Parent may be limited from time to
time by covenants included in the Participation Agreement relating to
the 1995 Sale and Leaseback.
Interest, net includes amortization of deferred loan costs of $0.2
million and $0.5 million for the three months ended September 30, 1998
and 1997, respectively, and $0.9 million and $1.5 million for the nine
months ended September 30, 1998 and 1997, respectively. Additionally,
interest, net includes interest income of $0.5 million and $0.4 million
for the three months ended September 30, 1998 and 1997, respectively,
and $1.7 million and $1.4 million for the nine months ended September
30, 1998 and 1997, respectively.
(7) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1998, the fair value of UATC's cash and cash
equivalents, outstanding borrowings under the New Bank Credit Facility
and other debt, and interest rate cap agreements approximated their
carrying amount.
(8) PREFERRED STOCK
As part of the recapitalization discussed in Note (2), Recapitalization,
the UATC preferred stock (which was held by the Parent) was converted
into additional common equity. At the May 1, 1998 conversion date, the
carrying amount of the preferred stock was approximately $202.9 million.
Dividends on the preferred stock had been accrued at a 14% per annum
rate for all periods since issuance in 1992 rather than the stated rate
of 8% through December 31, 1995, 9% through December 31, 1996 and 14%
thereafter.
(9) RELATED PARTY TRANSACTIONS
UATC leases certain of its theatres from UAR and UAR's wholly-owned
subsidiary United Artists Properties I Corporation ("Prop I"). The
leases provide for basic monthly or quarterly rentals and may require
additional rentals, based on the revenue of the underlying theatre.
Standby letters of credit totaling $12.5 million were issued under the
New Bank Credit Facility to support certain indebtedness of Prop I.
These letters of credit were cancelled on November 1, 1998 when the
Prop I mortgage notes matured.
In order to fund the cost of additions and/or renovations to the
theatres leased by UATC from UAR or Prop I, UATC has periodically made
advances to UAR. Interest on the advances accrues at the prime rate and
amounted to $0.4 million and $0.3 million for the three months ended
September 30, 1998 and 1997, respectively, and $1.0 million for the nine
months ended September 30, 1998 and 1997.
UATC is a party to a management agreement with UAR. Such management
agreement provides for a fee to be paid to UATC in return for certain
accounting and management services. These fees are recorded as a
reduction of general and administrative expenses in the accompanying
condensed consolidated financial statements and approximated $0.2 and
$0.1 million for the three months ended September 30, 1998 and 1997,
respectively, and $0.4 million for the nine months ended September 30,
1998 and 1997.
12
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) IMPAIRMENT OF ASSETS
UATC recorded non-cash charges for the impairment of its long-lived
assets of $10.6 million and $15.8 million during the three and nine
months ended September 30, 1998, respectively, and $7.0 million
and $15.5 million during the three and nine months ended September 30,
1997, respectively. These non-cash charges relate to the difference
between the historical book value of the individual theatres (in some
cases groups of theatres) and the cash flow expected to be received from
the operation or future sale of the individual theatres (or groups of
theatres).
(11) DISCONTINUED OPERATIONS
Subsequent to the third quarter of 1998, UATC established a plan to
dispose of its entertainment center business segment. Current and
prior period results for the entertainment center business segment
have been classified separately in the accompanying statements of
operations as discontinued operations.
Net assets of the discontinued operations were $1.6 million and $13.7
million at September 30, 1998 and December 31, 1997, respectively.
Revenue generated by the discontinued operations was $0.1 million and
$0.8 million for the three and nine months ended September 30, 1998,
respectively, and $0.4 million and $1.9 million for the three and nine
months ended September 30, 1997, respectively. Interest expense
allocated to the discontinued operations was $0.4 million and $1.2
million for the three and nine months ended September 30, 1998,
respectively, and $0.3 million and $1.0 million for the three and nine
months ended September 30, 1997, respectively. Additionally, included in
the net loss from discontinued operations for the three and nine months
ended September 30, 1998 is $9.7 million of non-cash provisions for
asset impairments.
(12) INCOME TAXES
UATC and each of its 80% or more owned subsidiaries are included in the
Parent's consolidated federal income tax returns. Pursuant to a tax
sharing agreement with the Parent, UATC and each of its 80% or more
owned consolidated subsidiaries are allocated a portion of the Parent's
current federal income tax expense (benefit). Such allocations are
determined as if UATC and each of its 80% or more owned consolidated
subsidiaries were separate tax paying entities within the consolidated
group. For the three months and nine months ended September 30, 1998 and
1997, UATC and each of its 80% or more owned consolidated subsidiaries
were allocated no current federal income tax expense (benefit) pursuant
to such tax sharing agreement as a result of the group's overall net
loss position.
Consolidated subsidiaries in which UATC owns less than 80% file separate
federal income tax returns. The current and deferred federal and state
income taxes of such subsidiaries are calculated on a separate return
basis and are included in the accompanying condensed consolidated
financial statements of UATC.
13
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(12) INCOME TAXES, CONTINUED
On February 10, 1998, the Parent filed a private letter ruling with the
Internal Revenue Service (the "IRS") requesting an extension of time to
file a Section 197 election. This election allows for the amortization
of various intangible assets over 15 years. On June 8, 1998, the IRS
granted the Parent its request and, on August 6, 1998, the Parent filed
a Section 197 election along with its amended 1993 income tax return. As
the Parent had previously been amortizing certain intangible assets
acquired as part of the Acquisition over a five year period, the effect
of the Section 197 election was to reduce the Parent's net operating
loss carryforward and to increase the basis of certain intangible
assets, which will be amortized, and provide for future tax deductions.
As the Parent had fully reserved the deferred tax asset associated with
its net operating loss carryforward, there is no financial statement
impact associated with the reduction in its net operating loss
carryforward.
(13) GAIN ON DISPOSITION OF ASSETS
During April 1997, UATC sold its 50% interest in a Hong Kong theatre
company to its partners for approximately $17.5 million and, during
September 1997, UATC sold its theatre investments in Mexico and
Argentina for approximately $25.0 million. During the nine months ended
September 30, 1997, UATC sold various non-strategic or underperforming
theatres for net cash proceeds of approximately $6.5 million.
(14) CORPORATE RESTRUCTURING
At the end of 1996, UATC initiated a corporate restructuring plan
intended to provide a higher level of focus on UATC's domestic
theatrical business at a lower annual cost. The corporate restructuring
was substantially completed in January 1997. A restructuring charge of
$0.5 million was recorded during the nine months ended September 30,
1997 for severance and other related expenses associated with the
corporate restructuring.
(15) COMMITMENTS AND CONTINGENCIES
At September 30, 1998, UATC had outstanding approximately $18.0
million of letters of credit, $12.5 million of which relates to the
indebtedness of Prop I.
UATC is involved in various pending and threatened legal proceedings
involving allegations concerning contract breaches, torts, employment
matters, environmental issues, antitrust violations, local tax disputes
and miscellaneous other matters. In addition, there are various claims
against UATC relating to certain of the leases held by UATC. Although it
is not possible to predict the outcome of these proceedings, UATC
believes that such legal proceedings will not have a material adverse
effect on UATC's financial position, liquidity or results of operations.
14
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(15) COMMITMENTS AND CONTINGENCIES, CONTINUED
The Americans With Disabilities Act of 1990 (the "ADA"), and certain
state statutes among other things, require that places of public
accommodation, including theatres (both existing and newly constructed)
be accessible to and that assistive listening devices be available for
use by certain patrons with disabilities. With respect to access to
theatres, the ADA may require that certain modifications be made to
existing theatres to make such theatres accessible to certain theatre
patrons and employees who are disabled. The ADA requires that theatres
be constructed in such a manner that persons with disabilities have full
use of the theatre and its facilities and reasonable access to work
stations. The ADA provides for a private right of action and for
reimbursement of plaintiff's attorneys' fees and expenses under certain
circumstances. UATC has established a program to review and evaluate
UATC's theatres and to make any changes which may be required by the
ADA. UATC believes that the cost of complying with the ADA will not
materially adversely effect UATC's financial position, liquidity or
results of operations.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of UATC's financial condition and results
of operations should be read in conjunction with UATC's Condensed Consolidated
Financial Statements and related notes thereto. Such financial statements
provide additional information regarding UATC's financial activities and
condition. The following discussion contains forward-looking statements and such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those discussed. UATC undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrences of unanticipated events.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following table summarizes certain operating data of UATC's theatres
(dollars in millions, except admissions per weighted average operating theatre,
admissions per weighted average operating screen and concession sales per
weighted average operating theatre):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, % September 30, %
------------- Increase ------------- Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating Theatres (1)
Revenue:
Admissions.................................... $ 127.9 131.5 (2.7)% 347.5 360.5 (3.6)%
Concession sales............................. 53.0 52.8 0.4 143.9 144.7 (0.6)
Other........................................ 2.9 4.5 (35.6) 11.2 12.9 (13.2)
Operating Expenses:
Film rental and advertising expenses......... 70.0 74.9 (6.5) 190.0 201.0 (5.5)
Concession costs............................. 7.3 8.2 (11.0) 20.8 22.8 (8.8)
Other Operating Expenses:
Personnel expense........................... 25.0 24.7 1.2 71.2 71.1 0.1
Occupancy expense........................... 24.0 23.2 3.4 69.7 68.0 2.5
Miscellaneous operating expenses............ 24.2 25.0 (3.2) 69.1 70.1 (1.4)
Weighted Avg Operating Theatres(2)............ 320 354 (9.6) 326 362 (9.9)
Weighted Avg Operating Screens(2)............. 2,145 2,213 (3.1) 2,152 2,222 (3.2)
Weighted Avg Screens Per Avg Theatre.......... 6.7 6.3 7.2 6.6 6.1 7.5
Admissions Per Weighted Avg
Operating Theatre........................... $399,688 371,469 7.6 1,065,951 995,856 7.0
Admissions Per Weighted Avg
Operating Screen............................ $ 59,627 59,422 0.4 161,478 162,241 (0.5)
Concession Sales Per Weighted Avg
Operating Theatre........................... $165,625 149,153 11.0 441,411 399,724 10.4
</TABLE>
(1) The operating theatres include revenue and expenses of all theatres
operated by UATC which are more than 50% owned.
(2) Weighted average operating theatres and screens represent the number of
theatres and screens operated weighted by the number of days operated
during the period.
16
<PAGE>
REVENUE FROM OPERATING THEATRES
ADMISSIONS: Admission revenue decreased 2.7% and 3.6%, during the three and nine
months ended September 30, 1998, respectively, as compared to the prior year
periods. The decreased admissions revenue was primarily due to decreases in
attendance of 7.1% and 7.4% during the three and nine months ended September 30,
1998, respectively, partially offset by increases in the average ticket price of
4.7% and 4.1% during the three and nine months ended September 30, 1998,
respectively. The decreases in attendance for the three and nine months ended
September 30, 1998 were primarily due to decreases in the weighted average
operating theatres and screens, and the effect of new competitive theatre
openings in certain areas. The increases in the average ticket price for the
three and nine months ended September 30, 1998 were primarily due to selective
increases in ticket prices in late 1997 and the summer of 1998, and a higher
percentage of full price and adult tickets sold during 1998. Admissions per
weighted average operating theatre increased 7.6% and 7.0% during the three and
nine months ended September 30, 1998, respectively, as compared to the prior
year periods. These fluctuations in admissions per weighted average theatre were
primarily due to the opening of several new theatres which have higher
admissions per theatre (6.7% and 5.7%), increased ticket prices (3.4% and 3.0%),
and the sale or closure of several smaller (in terms of screens) less productive
theatres (6.2% and 8.0%), partially offset by the decreases in attendance (9.2%
and 9.3%).
CONCESSION SALES: Concession sales increased 0.4% and decreased 0.6% during the
three and nine months ended September 30, 1998, respectively, as compared to the
prior year periods. The increase in concession sales for the three months ended
September 30, 1998 was primarily due to an 8.0% increase in the average
concession sale per patron, offset by the decreased attendance discussed above.
The decrease in concession sales for the nine months ended September 30, 1998
was primarily due to the decreased attendance discussed above, offset by a 7.4%
increase in the average concession sale per patron. Concession sales per
weighted average operating theatre increased 11.0% and 10.4% during the three
and nine months ended September 30, 1998, respectively, as compared to the prior
year periods. The increases in the average concession sale per patron and
concession sales per weighted average operating theatre were primarily
attributable to certain selective price increases during late 1997 and the
summer of 1998, United Artists increased emphasis on training, the renovation of
concession stands at certain existing theatres, and the opening of several new
theatres with more efficient concession operations (3.7% and 4.2%) and sales or
closure of certain less productive theatres (6.4% and 6.3%).
OTHER: Other revenue is derived primarily from on-screen advertising, electronic
video games located in theatre lobbies, theatre rentals, the rental of theatres
on a networked and non-networked basis for corporate meetings, seminars and
other training/educational uses by the Satellite Theatre Network-TM-, and other
miscellaneous sources. Other revenue decreased 35.6% and 13.2% during the three
and nine months ended September 30, 1998, respectively, as compared to the prior
year periods primarily due to a decrease in the number of weighted average
operating theatres, a decrease in revenue from on-screen advertising, and lower
sales from the Satellite Theatre Network-TM-.
OPERATING EXPENSES FROM OPERATING THEATRES
FILM RENTAL AND ADVERTISING EXPENSES: Film rental and advertising expenses
decreased 6.5% and 5.5% during the three and nine months ended September 30,
1998, respectively, as compared to the prior year periods. Film rental and
advertising expenses as a percentage of admissions revenue for the three months
ended September 30, 1998 and 1997 were 54.7% and 57.0%, respectively, and 54.7%
and 55.8% for the nine months ended September 30, 1998 and 1997, respectively.
The decrease in film rental and advertising expenses as a percentage of
admissions revenue for the three and nine months ended September 30, 1998
related primarily to the longer run of several films released during late 1997
17
<PAGE>
and during 1998. Typically, film rental as a percentage of admissions revenue
increases when a higher percentage of a film's total admissions is collected in
the opening weeks of a film's run.
CONCESSION COSTS: Concession costs include direct concession product costs and
concession promotional expenses. Such costs decreased 11.0% and 8.8% during the
three and nine months ended September 30, 1998, respectively, as compared to the
prior year periods. Concession costs as a percentage of concession sales revenue
for the three months ended September 30, 1998 and 1997 were 13.8% and 15.5%,
respectively, and 14.5% and 15.8% for the nine months ended September 30, 1998
and 1997, respectively. The decrease in concession costs as a percentage of
concessions revenue for the three and nine months ended September 30, 1998 was
primarily due to the rebidding or restructuring of the product and distribution
contracts associated with many of United Artists' concession supply products and
slightly lower promotional expenses.
PERSONNEL EXPENSE: Personnel expense includes the salary and wages of the
theatre manager and all theatre staff, commissions on concession sales, payroll
taxes and employee benefits. Personnel expense increased 1.2% and 0.1% during
the three and nine months ended September 30, 1998, respectively, as compared to
the prior year periods. These increases were primarily due to an increase in the
federal minimum wage in late 1997, which increased the average wage paid to
theatre staff by 8.3% and 8.5% for the three and nine months ended September 30,
1998, respectively, as compared to the prior year periods. These wage rate
increases were partially offset by the decreases in attendance as discussed
above, fewer weighted average operating theatres and more efficient theatre
staffing. Personnel expenses as a percentage of admissions and concessions
revenue was 13.8% and 13.4% for the three months ended September 30, 1998 and
1997, respectively, and 14.5% and 14.1% for the nine months ended September 30,
1998 and 1997, respectively.
OCCUPANCY EXPENSE: UATC's typical theatre lease arrangement provides for a base
rental as well as contingent rentals that is a function of the underlying
theatre's revenue over an agreed upon breakpoint. Occupancy expense increased
3.4% and 2.5% during the three and nine months ended September 30, 1998,
respectively, as compared to the prior year periods, primarily due to the base
rentals on newly opened theatres, partially offset by fewer weighted average
operating theatres. In addition, occupancy expense includes non-cash charges
relating to the effect of escalating leases which have been "straight-lined" for
accounting purposes of $0.9 million for the three months ended September 30,
1998 and 1997, and $2.7 million and $2.6 million for the nine months ended
September 30, 1998 and 1997, respectively.
MISCELLANEOUS OPERATING EXPENSES: Miscellaneous operating expenses consist of
utilities, repairs and maintenance, insurance, real estate and other taxes,
supplies and other miscellaneous operating expenses. Miscellaneous operating
expenses decreased 3.2% and 1.4% during the three and nine months ended
September 30, 1998, respectively, as compared to the prior year periods. The
1998 decreases in miscellaneous operating expenses were primarily due to lower
expenses associated with the Satellite Theatre Network-TM-, reductions in
utility and insurance costs and fewer weighted average operating theatres,
partially offset by higher repairs and maintenance and supplies expense and real
estate taxes.
The revenue and operating expenses discussed above are incurred exclusively
within UATC's theatres. The other expense discussions below reflect the combined
expenses of corporate, divisional, district and theatre operations outside of
the theatres.
18
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE AND RESTRUCTURING CHARGE
General and administrative expense consists primarily of costs associated with
corporate theatre administration and operating personnel, Satellite Theatre
Network-TM- sales and marketing staff and other support functions located at
UATC's corporate headquarters, two film booking and three regional operating
offices and 14 district theatre operations offices (generally located in
theatres). At the end of 1996, UATC initiated a corporate restructuring plan
intended to provide a higher level of focus on UATC's theatrical business at a
lower annual cost. This corporate restructuring was completed in January 1997.
General and administrative expense decreased $1.0 million or 5.6% for the nine
months ended September 30, 1998, as compared to the prior year period, as
certain aspects of the corporate restructuring were not completed until later in
1997.
DEPRECIATION AND AMORTIZATION AND PROVISIONS FOR IMPAIRMENT
Depreciation and amortization expense includes the depreciation of theatre
buildings and equipment and the amortization of theatre lease costs and certain
non-compete agreements. Depreciation and amortization increased $0.1 million and
decreased $7.2 million during the three and nine months ended September 30,
1998, compared to the prior year periods primarily due to lower amortization
from non-compete agreements which were fully amortized during 1997 and changing
the estimated useful lives of certain assets during 1998, partially offset by
increased depreciation charges on newly opened theatres. UATC recorded
approximately $9.0 million of amortization expense during the nine months ended
September 30, 1998 on non-compete agreements and certain other assets acquired
as part of the acquisition which were fully amortized in May 1997. As a result,
no amortization expense was recorded during the three months ended September 30,
1998 or 1997 or the nine months ended September 30, 1998 on those non-compete
agreements and certain other assets acquired as a part of the Acquisition.
Provisions for impairment relates to non-cash charges for the differences
between the historical book value of individual theatres (in some cases
groups of theatres) and the cash flow expected to be received from the
operation or future sale of the individual theatre (or groups of theatres).
UATC recorded non-cash provisions for asset impairments of $10.6 million and
$15.8 million during the three and nine months ended September 30, 1998,
respectively, and $7.0 million and $15.5 million during the three and nine
months ended September 30, 1997, respectively.
OPERATING INCOME
During the three months ended September 30, 1998 and 1997, United Artists
generated operating income of $4.3 million and $7.5 million, respectively. This
$3.2 million decrease in operating income relates primarily to the $3.6 million
increase in the provisions for impairment, partially offset by higher operating
margins. During the nine months ended September 30, 1998 and 1997, United
Artists generated operating income of $12.2 million and $7.1 million,
respectively. This increase in operating income was primarily due to lower
depreciation and amortization and general and administrative expenses.
INTEREST
Interest expense decreased $3.0 million and $5.3 million during the three and
nine months ended September 30, 1998, respectively, as compared to the prior
year periods due primarily to lower average debt balances.
19
<PAGE>
GAIN ON DISPOSITION OF ASSETS
During April 1997, UATC sold its interest in Hong Kong for approximately $17.5
million and, during September 30, 1997, UATC sold its theatre investments in
Mexico and Argentina for approximately $25.0 million.
DISCONTINUED OPERATIONS
Subsequent to the third quarter of 1998, UATC established a plan to dispose
of its entertainment center business segment. The net loss from the
discontinued operations was $12.5 million and $14.9 million for the three and
nine months ended September 30, 1998, respectively, and $1.4 million and $3.4
million for the three and nine months ended September 30, 1997, respectively.
Included in the net loss from discontinued operations is interest expense of
$0.4 million and $1.2 million for the three and nine months ended September
30, 1998, respectively, and $0.3 million and the $1.0 million for the three
and nine months ended September 30, 1997, respectively. Additionally,
included in the net loss from discontinued operations for the three and nine
months ended September 30, 1998 is $9.7 million of non-cash provisions for
asset impairments.
EXTRAORDINARY ITEM
As a result of the repayment of the Bank Credit Facility and the Senior
Secured Notes during the nine months ended September 30, 1998, UATC
recognized an extraordinary loss on the early extinguishment of debt of $7.9
million, consisting of a $3.6 million prepayment premium on the Senior
Secured Notes and approximately $4.3 million of unamortized deferred loan
costs.
INCOME TAXES
On February 10, 1998, the Parent filed a private letter ruling with the Internal
Revenue Service (the "IRS") requesting an extension of time to file a Section
197 election. This election allows for the amortization of various intangible
assets over 15 years. On June 8, 1998, the IRS granted the Parent its request
and, on August 6, 1998, the Parent filed a Section 197 election along with its
amended 1993 income tax return. As the Parent had previously been amortizing
certain intangible assets acquired as part of the Acquisition over a five year
period, the effect of the Section 197 election was to reduce the Parent's net
operating loss carryforward and to increase the basis of certain intangible
assets, which will be amortized, and provide for future tax deductions. As the
Parent had fully reserved the deferred tax asset associated with its net
operating loss carryforward, there is no financial statement impact associated
with the reduction in its net operating loss carryforward.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
During the three and nine months ended September 30, 1998, UATC incurred net
losses available to common stockholders of $16.5 million and $46.3 million,
respectively, compared to net losses of $4.3 million and $27.6 million for the
three and nine months ended September 30, 1997, respectively. These increases in
net losses relate primarily to the discontinuance of entertainment center
operations, the extraordinary expense for the early extinguishment of debt
recorded during the nine months ended September 30, 1998, the provisions for
impairment and the gain on the disposition of assets during the nine months
ended September 30, 1997. Excluding these unusual items, the net losses
available to common stockholders for the three and nine month periods would have
declined as follows (dollars in millions):
20
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss available to common stockholders..... $(16.5) (4.3) (46.3) (27.6)
Provisions for impairment..................... 10.6 7.0 15.8 15.5
Gains on disposition of assets................ - (6.2) (0.2) (18.0)
Discontinued operations....................... 12.5 1.4 14.9 3.4
Loss on early extinguishment of debt.......... - - 7.9 -
------ ---- ----- -----
$ 6.6 (2.1) (7.9) (26.7)
------ ---- ----- -----
------ ---- ----- -----
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, cash provided by UATC's operating
activities increased by $1.7 million versus the nine months ended September 30,
1997 to $29.6 million. This cash provided by operating activities, in addition
to $55.6 million of cash provided by financing activities was used to fund $88.9
million of capital expenditures and other investing activities.
Substantially all of UATC's admissions and concession sales revenue are
collected in cash. Due to the unfavorable interest rate spread between bank
facility borrowings and cash investments, UATC seeks to use all of its available
cash to repay its revolving bank borrowings and borrow under those facilities as
cash is required. UATC benefits from the fact that film expenses (except for
films that require advances or guarantees) are usually paid 15 to 45 days after
the admissions revenue is collected.
On April 21, 1998, the Parent completed the offering of $225.0 million of its
9.75% senior subordinated notes due April 15, 2008 and the offering of $50.0
million of its floating rate senior subordinated notes due October 15, 2007, and
entered into the $450.0 million New Bank Credit Facility with a final maturity
of April 21, 2007.
The proceeds from the offerings of the Senior Subordinated Notes and a portion
of the borrowings under the New Bank Credit Facility were used to repay the
outstanding borrowings of $272.5 million under UATC's Bank Credit Facility and
to fund the redemption of the Parent's preferred stock (approximately $159.2
million) and the redemption of UATC's $125.0 million Senior Secured Notes at
102.875% of par value plus accrued but unpaid interest of $0.8 million.
The net proceeds from the offerings of the Senior Subordinated Notes in excess
of the redemption value of the Parent's preferred stock (approximately $108.1
million) was contributed to UATC as additional common equity by the Parent.
Additionally, UATC's preferred stock (which was held by the Parent) was
converted into additional common equity.
The Prop I mortgage notes were repaid on November 1, 1998 by borrowings under
the Tranche A Term Loan.
As a result of the repayment of the Bank Credit Facility and the redemption
of the Senior Secured Notes, UATC recognized an extraordinary loss on the
early extinguishment of debt during the nine months ended September 30, 1998
of $7.9 million, consisting of the $3.6 million prepayment premium on the
Senior Secured Notes and approximately $4.3 million of unamortized deferred
loan costs.
During December 1996, UATC initiated a new investment strategy that focuses on
the development of new theatres and renovations (including stadium seating
retrofits) and expansions of existing high
21
<PAGE>
revenue theatres in the United States where UATC has a significant operating
presence. As part of this increased focus on its U.S. operations, UATC
restructured and realigned its corporate overhead functions and has sold most
of its international investments. The proceeds received from the sale of
international investments and corporate overhead savings were redeployed into
new theatre developments or the renovation of existing key theatres in UATC's
core markets and used to repay existing debt. UATC currently has an agreement
to sell a portion of its investments in Singapore and Thailand for $6.5
million. After the consummation of such sale, UATC's international
investments will only include a 10.0% interest in four theatres in Singapore
and Thailand.
As part of its strategic plan, UATC intends to continue to dispose of, through
sale or lease terminations, certain of its non-strategic or underperforming
operating theatres and real estate in the United States. Net proceeds, if any,
from these increased disposition efforts are expected to be used to repay
existing debt or to be redeployed into the renovation and/or expansion of
existing theatres and new, larger (in terms of screens), higher margin theatres.
While there can be no assurance that such sales or lease termination efforts
will be successful, negotiations are ongoing with respect to several theatres
and parcels of real estate. During the nine months ended September 30, 1998,
UATC closed or sold 25 theatres (101 screens). The theatres that were closed
were primarily smaller, older theatres that were not part of UATC's long term
strategic plans or were underperforming.
In an effort to limit the amount of investment exposure on any one project,
UATC typically develops theatre projects where the land and building are
leased through long-term operating leases. Where such lease transactions are
unavailable, however, UATC will invest in the land and development of the
entire theatre facility (fee-owned) and then seek to enter into a sale and
leaseback transaction. Regardless of whether the theatre is leased or
fee-owned, in most cases the equipment and other theatre fixtures are owned
by UATC. For the nine months ended September 30, 1998, UATC invested
approximately $79.8 million on five theatres (52 screens) which opened in
1997, the development of six new theatres (64 screens), two renovations and a
screen addition (6 screens) to an existing theatre which opened during the
period, construction on 10 theatres (119 screens) and screen additions,
stadium seating or renovations to four theatres (52 screens) expected to open
during the remainder of 1998 or in 1999 and recurring maintenance to certain
existing theatres.
In December 1995, UATC and UAR entered into the 1995 Sale and Leaseback
whereby the land and buildings underlying 27 of their operating theatres and
four theatres and a screen addition under development were sold to, and
leased back from an unaffiliated third party. In conjunction with the 1995
Sale and Leaseback, the buyer of the properties issued certain publicly
traded bonds. The lease of the properties by UATC required UATC to enter into
a Participation Agreement that requires UATC to comply with certain covenants
including limitations on indebtedness and restricted payments.
In November 1996, UATC entered into a sale and leaseback transaction whereby the
buildings and land underlying three of its operating theatres and two theatres
under development were sold to, and leased back from, an unaffiliated third
party. At September 30, 1998, approximately $0.5 million of sales proceeds were
held in escrow pending final construction approval.
In December 1997, UATC entered into a sale and leaseback transaction whereby two
theatres currently under development were sold to, and leased back from, an
unaffiliated third party for approximately $18.1 million. At September 30, 1998,
approximately $13.5 million of the sales proceeds were held in escrow and will
be paid periodically under the terms of the sale and leaseback to fund certain
of the construction costs associated with the two theatres.
22
<PAGE>
At September 30, 1998, UATC had entered into construction or lease agreements
for 10 new theatres (119 screens) and for screen additions, stadium seating
or renovations to four existing theatres (52 screens) that UATC intends to
open or renovate during the next two years. UATC estimates that capital
expenditures associated with these theatres will aggregate approximately
$96.1 million. Such amounts relate only to projects in which UATC had
executed a definitive lease and all significant lease contingencies have been
satisfied. Of the committed amount, approximately $14.0 million will be
funded from proceeds of certain sale and leaseback transactions currently
held in escrow. UATC expects additional capital expenditures to be made as
other projects are finalized, and that a significant portion of its future
capital expenditures will be allocated to the renovation and the addition of
stadium seating and new screens to existing key locations.
UATC is party to interest rate cap agreements on $75.0 million of floating
rate debt which provide for a LIBOR interest rate cap of 7-1/2% per annum and
expire in July 1999. The terms of the New Bank Credit Facility require the
Parent to obtain interest rate hedges on a certain portion of its
indebtedness thereunder. UATC amortizes the cost of its interest rate cap
agreements to interest expense over the life of the underlying agreement.
Amounts received from the counterparties to the interest rate cap agreements
are recorded as a reduction of interest expense.
The level of continued investing activities by UATC is dependent on, among other
factors, its on-going operating liquidity and to other sources of liquidity. One
measure commonly used in the theatrical industry to measure operating liquidity
is referred to a "Interest Coverage." Interest Coverage is the ratio of
Operating Cash Flow (defined as EBITDA - earnings before interest, taxes,
depreciation, and amortization - plus other non-recurring or non-cash operating
credits or charges) to interest expense (excluding amortization of deferred loan
costs). Following is a calculation of Operating Cash Flow and Interest Coverage
for the three and nine months ended September 30, 1998 and 1997, including a
reconciliation of Operating Income to Operating Cash Flow. Additionally,
information from the statements of cash flow is presented for the nine months
ended September 30, 1998 and 1997 in the following table (dollars in millions).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Income..................................... $ 4.3 7.5 12.2 7.1
Depreciation and Amortization........................ 12.6 12.5 37.1 44.3
Provisions for Impairment............................ 10.6 7.0 15.8 15.5
Restructuring Charge................................. - - - 0.5
Non-Cash Rent........................................ 0.9 0.9 2.7 2.6
----- ----- ----- -----
Operating Cash Flow.................................. $28.4 27.9 67.8 70.0
----- ----- ----- -----
----- ----- ----- -----
Interest Expense..................................... $ 6.7 9.3 22.8 27.2
----- ----- ----- -----
----- ----- ----- -----
Interest Coverage Ratio.............................. 4.2 3.0 3.0 2.6
----- ----- ----- -----
----- ----- ----- -----
Statement of Cash Flow Information:
Net cash provided by operating activities......... $29.6 27.9
Net cash used in investing activities............. (88.9) (21.1)
Net cash provided (used in) by financing
activities...................................... 55.6 (10.0)
----- -----
Net cash flow..................................... $(3.7) (3.2)
----- -----
----- -----
</TABLE>
As shown above, UATC's Interest Coverage Ratio increased from 3.0 times for the
three months ended September 30, 1997 to 4.2 times for the three months ended
September 30, 1998, primarily due to increased Operating Cash Flow and decreased
interest expense. UATC's Interest Coverage Ratio
23
<PAGE>
increased from 2.6 times for the nine months ended September 30, 1997 to 3.0
times for the nine months ended September 30, 1998, despite decreased
Operating Cash Flow primarily as a result of a reduction in interest expense.
Operating Cash Flow set forth above is one measure of value and borrowing
capacity commonly used in the theatrical exhibition industry and is not intended
to be a substitute for Operating Cash Flow as defined in UATC's or the Parent's
debt agreements or for cash flows provided by operating activities, a measure of
performance provided herein in accordance with generally accepted accounting
principles, and should not be relied upon as such. The Operating Cash Flow as
set forth above does not take into consideration certain costs of doing business
and, as such, should not be considered in isolation to other measures of
performance.
Another measure of liquidity is net cash provided by operating activities as set
forth above. For the nine months ended September 30, 1998, $29.6 million of net
cash was provided by UATC's operating activities. This compares to $27.9 million
of net cash provided by operating activities for the nine months ended September
30, 1997. This measurement shows the net cash provided by UATC's operations
which was available for UATC's liquidity needs after taking into consideration
certain additional costs of doing business which are not reflected in the
Operating Cash Flow calculations discussed above.
UATC believes that the net cash provided by operations, certain asset sales of
non-strategic theatres and under-utilized real estate and borrowings available
under the New Bank Credit Facility will be sufficient to fund its future cash
requirements. UATC expects that future cash requirements will principally be for
repayments of indebtedness, working capital requirements and capital
expenditures. UATC's future operating performance and ability to service its
current indebtedness will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond UATC's control.
Additionally, UATC's ability to incur additional indebtedness may be limited by
covenants contained in the Participation Agreement relating to the 1995 Sale and
Leaseback discussed above.
OTHER
UATC's revenues are seasonal, coinciding with the timing of releases of motion
pictures by the major distributors. Generally, the most successful motion
pictures have been released during the summer extending the period from Memorial
Day to Labor Day and the holiday season extending from Thanksgiving through
year-end. The unexpected emergence of a hit film during other periods can alter
this traditional trend. The timing of such film releases can have a significant
effect on UATC's results of operations, and the results of one quarter are not
necessarily indicative of results for the next quarter or for the same period in
the following year. The seasonality of motion picture exhibition, however, has
become less pronounced in recent years as studios have begun to release major
motion pictures somewhat more evenly throughout the year.
YEAR 2000
Year 2000 issues result from the inability of computer programs or equipment
to accurately calculate, store or use a date subsequent to December 31, 1999.
The erroneous date can be interpreted in a number of different ways;
typically the year 2000 is interpreted as the year 1900. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions
or engage in similar normal business. Similar issues exist in embedded
computer chips which operated many common and specialized machines.
UATC has recently converted its core financial software system. UATC has
substantially completed a review of its other internal information systems to
insure they are functional in the Year 2000, and, although such review is
still in progress, believes that conversion requirements will not result in
significant disruption of UATC's business operations or have a material
adverse effect on its future liquidity or results of operations. UATC
believes that the potential impact, if any, of these less critical systems
not being Year 2000 compliant will at most require employees to manually
complete otherwise automated tasks or calculations and it should not impact
UATC's ability to conduct business.
UATC is in the process of investigating the Year 2000 compliance of its
customers, suppliers and other third parties with whom it has business
relationships. Compliance by such third parties is voluntary and failures
could occur, in which case there is the possibility of a material adverse
effect on UATC. However, the nature of UATC's business and its business
relationships are not such that UATC considers the potential Year 2000
compliance failure of a third party with whom it has a direct business
relationship likely to have a material adverse effect on UATC.
UATC also relies on non-information technology systems, such as office
telephones, facsimile machines, air conditioning, heating, elevators in its
leased offices, which may have embedded technology such as micro controllers.
Some of these systems are outside of the UATC's control to assess or remedy.
A failure of one of these items might adversely impact UATC's business but in
management's opinion would not create a material disruption.
24
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"),
which establishes the standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity of
an enterprise that result from transactions and other economic events of the
period other than transactions with owners. Comprehensive income includes net
income plus other comprehensive income (other revenues, expenses, gains, and
losses that under generally accepted accounting principles bypass net income).
The effective date for SFAS No. 130 is for fiscal years beginning after December
15, 1997 and the impact on UATC's financial position, results of operations or
cash flow for the three and nine months ended September 30, 1998 and 1997 was
not material.
In 1997, the American Institute of Certified Public Accountants issued Statement
of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5"),
which requires costs of start up activities to be expensed when incurred. The
effective date for SOP 98-5 is for fiscal years beginning after December 15,
1998 and the impact on UATC's financial position, results of operations or cash
flow is not expected to be material.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which establishes the standards for accounting and
reporting of derivative instruments. SFAS No. 133 will require derivative
instruments to be recorded at their fair value on the balance sheet and changes
in the derivative instrument's fair value be recognized currently in the
calculation of net income unless specific hedge accounting criteria are met. The
effective date for SFAS No. 133 is for fiscal years beginning after June 15,
1999. UATC has not quantified the impact of adopting SFAS No. 133 on its
financial position, results of operations or cash flow and has not determined
the timing of adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in net income and comprehensive income.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED ARTISTS THEATRE CIRCUIT, INC.
(Registrant)
/s/ Trent J. Carman
----------------------------------
By: Trent J. Carman
Chief Financial Officer
Date: November 12, 1998
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,900
<SECURITIES> 0
<RECEIVABLES> 17,700
<ALLOWANCES> 0
<INVENTORY> 21,500
<CURRENT-ASSETS> 46,800
<PP&E> 582,100
<DEPRECIATION> 241,200
<TOTAL-ASSETS> 521,300
<CURRENT-LIABILITIES> 99,200
<BONDS> 316,400
0
0
<COMMON> 0
<OTHER-SE> 59,200
<TOTAL-LIABILITY-AND-EQUITY> 515,700
<SALES> 143,900
<TOTAL-REVENUES> 502,600
<CGS> 20,800
<TOTAL-COSTS> 490,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> (13,600)
<INCOME-TAX> 900
<INCOME-CONTINUING> (14,500)
<DISCONTINUED> (14,900)
<EXTRAORDINARY> (7,900)
<CHANGES> 0
<NET-INCOME> (37,300)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
