<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 July 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 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 August 9,
1999 was 100 shares.
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
QUARTERLY REPORT ON FORM 10-Q
JULY 1, 1999
(UNAUDITED)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
PART I FINANCIAL INFORMATION
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 (Deficit)................... 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................................. 25
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................... 26
</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" AND
"QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK." 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, 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. ("MLCP")
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>
July 1, 1999 December 31, 1998
------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 7.3 7.9
Receivables, net........................................................... 10.7 19.4
Prepaid expenses and concessions inventory................................. 18.4 15.0
Other assets............................................................... 0.2 0.6
------- -------
Total current assets................................................... 36.6 42.9
Investments and related receivables.......................................... 6.7 8.3
Property and equipment, at cost:
Land....................................................................... 18.4 20.6
Theatre buildings, equipment and other..................................... 556.2 538.2
------- -------
574.6 558.8
Less accumulated depreciation and amortization............................. (220.1) (200.1)
------- -------
354.5 358.7
Intangible assets, net....................................................... 76.5 81.3
Net assets of discontinued operations (note 7)............................... 3.1 3.1
Other assets, net (note 3)................................................... 75.0 73.9
------- -------
$ 552.4 568.2
------- -------
------- -------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................... $ 88.3 93.7
Accrued and other liabilities.............................................. 34.4 34.7
Current portion of long-term debt (notes 3 and 6).......................... 6.6 6.2
------- -------
Total current liabilities.............................................. 129.3 134.6
Other liabilities............................................................ 34.4 33.5
Debt (notes 3 and 6)......................................................... 401.9 370.3
Liabilities related to discontinued operations (note 7)...................... 4.1 4.9
------- -------
Total liabilities....................................................... 569.7 543.3
Minority interests in equity of consolidated subsidiaries.................... 5.6 5.6
Stockholder's equity (deficit) (note 3):
Common stock............................................................... - -
Additional paid-in capital................................................. 316.7 318.0
Accumulated deficit........................................................ (323.5) (295.3)
Cumulative foreign currency translation adjustment......................... (0.4) -
Intercompany account....................................................... (15.7) (3.4)
------- -------
Total stockholder's equity (deficit)................................... (22.9) 19.3
------- -------
$ 552.4 568.2
------- -------
------- -------
</TABLE>
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>
Thirteen Twenty-Six
Weeks Weeks Three Months Six Months
Ended Ended Ended Ended
July 1, 1999 July 1, 1999 June 30, 1998* June 30, 1998*
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Admissions................................ $ 114.3 207.7 106.2 219.6
Concession sales.......................... 46.6 83.6 44.3 90.9
Other..................................... 6.5 10.8 4.2 8.3
------ ------- ------ ------
167.4 302.1 154.7 318.8
------ ------- ------ ------
Costs and expenses:
Film rental and advertising expenses...... 64.7 116.8 59.1 120.0
Direct concession costs................... 6.4 11.1 7.0 13.5
Occupancy expense (note 4)................ 23.8 47.1 20.7 41.4
Affiliate lease rentals (note 8).......... 0.7 1.3 2.2 4.3
Other operating expenses.................. 48.1 93.5 45.9 91.1
General and administrative................ 5.7 11.7 5.6 10.9
Depreciation and amortization............. 12.5 25.8 11.7 24.5
Provisions for impairment (note 9)........ 9.2 9.2 5.3 5.3
------ ------- ------ ------
171.1 316.5 157.5 311.0
------ ------- ------ ------
Operating income (loss) from continuing
operations......................... (3.7) (14.4) (2.8) 7.8
Other income (expense):
Interest, net (notes 3 and 6)............. (8.2) (15.6) (7.3) (15.5)
Gain on disposition of assets............. 2.6 3.3 - 0.2
Share of losses of affiliates, net........ - - (0.2) (0.2)
Minority interests in earnings of
consolidated subsidiaries............... (0.6) (0.7) (0.3) (0.7)
Other, net................................ (0.4) (0.6) (1.0) (1.5)
------ ------- ------ ------
(6.6) (13.6) (8.8) (17.7)
------ ------- ------ ------
Loss from continuing operations before
income tax expense, discontinued
operations and extraordinary item..... (10.3) (28.0) (11.6) (9.9)
Income tax expense (note 10)................... - (0.2) (0.4) (0.7)
------ ------- ------ ------
Loss from continuing operations.......... (10.3) (28.2) (12.0) (10.6)
Discontinued operations (note 7)............... - - (1.2) (2.3)
------ ------- ------ ------
Net loss before extraordinary item....... (10.3) (28.2) (13.2) (12.9)
Extraordinary item - loss on early
extinguishment of debt (note 3).............. - - (7.9) (7.9)
------ ------- ------ ------
Net loss................................. (10.3) (28.2) (21.1) (20.8)
Dividend on preferred stock (note 3)........... - - (2.3) (9.0)
------ ------- ------ ------
Net loss available to common
stockholder............................ $ (10.3) (28.2) (23.4) (29.8)
------ ------- ------ ------
------ ------- ------ ------
</TABLE>
*Restated
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder's Equity (Deficit)
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Common Additional Accumulated
stock paid-in capital deficit
------ -------------------- -----------------
<S> <C> <C> <C>
Balance at January 1, 1999.......................... - 318.0 (295.3)
Dividend to Parent.................................. - (1.3) -
Net increase in intercompany account................ - - -
Foreign currency translation adjustment............. - - -
Net loss............................................ - - (28.2)
----- ----- -----
Balance at July 1, 1999............................. - 316.7 (323.5)
----- ----- -----
----- ----- -----
<CAPTION>
Cumulative Total
foreign currency Intercompany stockholder's
translation adjustment account equity (deficit)
---------------------- ------------- ----------------
<S> <C> <C> <C>
Balance at January 1, 1999.......................... - (3.4) 19.3
Dividend to Parent.................................. - - (1.3)
Net increase in intercompany account................ - (12.3) (12.3)
Foreign currency translation adjustment............. (0.4) - (0.4)
Net loss............................................ - - (28.2)
------- ------ -----
Balance at July 1, 1999............................. (0.4) (15.7) (22.9)
------- ------ -----
------- ------ -----
</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>
Twenty-Six Weeks Six Months
Ended Ended
July 1, 1999 June 30, 1998*
---------------- --------------
<S> <C> <C>
Net cash provided by (used in) operating activities.................................. $ 0.7 9.2
-------- -----
Cash flow from investing activities:
Capital expenditures............................................................ (23.5) (53.2)
Proceeds from disposition of assets............................................. 6.4 2.3
Investments in and receivables from theatre joint ventures...................... 1.8 -
Other, net...................................................................... (1.2) 1.5
-------- -----
Net cash used in investing activities......................................... (16.5) (49.4)
-------- -----
Cash flow from financing activities:
Equity contribution by Parent................................................... - 108.1
Debt borrowings................................................................. 99.0 437.0
Debt repayments................................................................. (67.0) (379.1)
Dividend to Parent.............................................................. (1.3) -
Repurchase of Senior Secured Notes.............................................. - (128.6)
Increase in intercompany account................................................ (12.6) (0.5)
Increase in cash overdraft...................................................... 0.6 8.0
Increase in related party receivables........................................... (2.1) (1.7)
Other, net...................................................................... (1.4) (6.6)
-------- -----
Net cash provided by financing activities..................................... 15.2 36.6
-------- -----
Net decrease in cash.......................................................... (0.6) (3.6)
Cash and cash equivalents:
Beginning of period............................................................. 7.9 10.6
-------- -----
End of period................................................................... $ 7.3 7.0
-------- -----
-------- -----
Reconciliation of net loss to net cash provided by (used in) operating activities:
Net loss........................................................................ $ (28.2) (20.8)
Discontinued operations......................................................... (0.8) 0.7
Extraordinary item.............................................................. - 7.9
Effect of leases with escalating minimum annual rentals......................... 2.4 1.8
Depreciation and amortization................................................... 25.8 24.5
Provisions for impairment....................................................... 9.2 5.3
Gain on disposition of assets................................................... (3.3) (0.2)
Share of losses of affiliates, net.............................................. - 0.2
Minority interests in earnings of consolidated subsidiaries..................... 0.7 0.7
Change in assets and liabilities:
Receivables................................................................... (1.3) 1.0
Prepaid expenses and concession inventory..................................... (3.4) 2.4
Other assets.................................................................. 0.9 -
Accounts payable.............................................................. - (3.8)
Accrued and other liabilities................................................. (1.3) (10.5)
-------- -----
Net cash provided by (used in) operating activities....................... $ 0.7 9.2
-------- -----
-------- -----
</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
July 1, 1999
(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 1999 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, 1998
consolidated financial statements and notes thereto included as part of
UATC's Form 10-K.
(2) CHANGE IN REPORTING PERIOD
During 1999, UATC changed its reporting period from the traditional
calendar quarter and year presentation ending on March 31, June 30,
September 30 and December 31 to a presentation ending on the Thursday
closest to the calendar quarter or year. This change was made to more
accurately reflect UATC's natural business cycle. The periods presented
in these financial statements are for the thirteen and twenty-six weeks
ended July 1, 1999 and the three and six months ended June 30, 1998.
(3) 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 (the "Fixed
Rate Subordinated Notes") and the offering of $50.0 million of its
floating rate senior subordinated notes due October 15, 2007 (the
"Floating Rate Subordinated Notes") (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 2007.
8
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(3) RECAPITALIZATION, CONTINUED
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 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% plus accrued but
unpaid interest of $0.8 million. Included in the New Bank Credit
Facility was a delayed draw term loan that was used to repay and retire
all of the Prop I mortgage notes outstanding (approximately $45.7
million on November 1, 1998).
The Parent contributed the net proceeds from the Senior Subordinated
Notes in excess of the redemption value of the Parent's preferred stock
(approximately $108.1 million) to UATC as additional common equity.
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 redemption
of the Senior Secured Notes, UATC recognized an extraordinary loss on
the early extinguishment of debt during the three and six months ended
June 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.
(4) SALE AND LEASEBACK TRANSACTIONS
In December 1995, UATC and UAR entered into a sale and leaseback
transaction (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. The 1995 Sale and Leaseback requires UATC
to lease the underlying theatres for a period of 21 years and one
month, with the option to extend for up to an additional 10 years. 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. The lease has a term of 20
years and nine months with options to extend for an additional 10
years.
In December 1997, UATC entered into a sale and leaseback transaction
whereby two theatres under development were sold to, and leased back
from, an unaffiliated third party for approximately $18.1 million.
During the thirteen weeks ended July 1, 1999, approximately $9.1
million of the sales proceeds from the escrow account were paid to
reimburse UATC for certain of the construction costs associated with
the two theatres. The lease has a term of 22 years with options to
extend for an additional 10 years.
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 $18.3 million and $19.9 for the
twenty-six weeks ended July 1, 1999 and the six months ended June 30,
1998, respectively.
UATC accrued $9.0 million of dividends during the six months ended June
30, 1998 on its preferred stock. The preferred stock was redeemed
during 1998 as part of the recapitalization (see Note 3).
During the six months ended June 30, 1998, UATC exchanged one of its
fee-owned theatre properties with Prop I in exchange for two 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>
July 1, 1999 December 31, 1998
------------- ------------------
<S> <C> <C>
New Bank Credit Facility (a)................... $ 398.5 365.3
Other (b)....................................... 10.0 11.2
------ ------
408.5 376.5
Less current portion............................ (6.6) (6.2)
------ ------
$ 401.9 370.3
------ ------
------ ------
</TABLE>
(a) The New Bank Credit Facility provides for 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 term loan (the
"Tranche A Term Loan"); (ii) a $118.0 million term loan (the
"Tranche B Term Loan"); and (iii) a $162.0 million term loan
(the "Tranche C Term Loan").
Commitments available for borrowing under the Revolving
Facility reduce semi-annually commencing January 3, 2002
through April 21, 2005. The Tranche A Term Loan requires
semi-annual principal payments commencing December 31, 1998
through June 28, 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 29, 2005 and
April 21, 2006. The Tranche C Term Loan requires semi-annual
principal payments commencing December 31, 1998 through June
29, 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 28, 2006 and April 21, 2007.
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.
10
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DEBT, CONTINUED
The New Bank Credit Facility is guaranteed, on a joint and
several basis, by UATC and by certain of the Parent's other
subsidiaries, those being UAR and 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 from UATC to the
Parent established with respect to borrowings by UATC from the
Parent.
Additionally, the New Bank Credit Facility will be secured by
mortgages on certain of UATC's and Prop I's properties.
The New Bank Credit Facility contains certain provisions that
require the Parent to maintain certain financial ratios and
places limitations on, among other things, capital
expenditures, additional indebtedness, disposition of assets
and restricted payments.
The New Bank Credit Facility includes several financial
covenants that must be complied with on a quarterly basis.
A certificate demonstrating compliance must be submitted
within 60 days subsequent to quarter end. Due primarily to
the unprecedented decline in attendance during the first
quarter of 1999, UATC believes it will not be in compliance
with certain of its existing financial covenants for the
period ending July 1, 1999. UATC is in discussion with its
banking group to obtain a waiver of amendment with respect
thereto.
(b) Other debt at July 1, 1999, 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.
At July 1, 1999, UATC was party to interest rate collar agreements on
$225.0 million of floating rate debt which provide for a LIBOR
interest rate cap ranging between 6% and 7 1/2% and LIBOR interest
rate floors ranging between 5 1/4% and 5 1/2% that expire at various
dates through August 2001. 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
various interest hedge agreements, it does not anticipate such
non-performance in the future. Amounts paid to the counterparties to
the interest collar agreements are recorded as an increase to interest
expense and amounts received from the counterparties to the interest
rate collar agreements are recorded as a reduction of interest
expense.
At July 1, 1999, the Parent had approximately $48.0 million of
Revolving Facility commitments, $3.7 million of which has been used
for the issuance of letters of credit. The Parent pays commitment fees
of 5/8% per annum on the average unused commitments.
The primary source of principal and interest payments related to the
New Bank Credit Facility and the Senior Subordinated Notes 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.
(see Note 4).
Interest, net includes amortization of deferred loan costs of $0.3
million and $0.2 million for the thirteen weeks ended July 1, 1999 and
for the three months ended June 30, 1998, respectively, and $0.5
million and $0.7 million for the twenty-six weeks ended July 1, 1999
and for the six months ended June 30, 1998 respectively. Additionally,
interest, net includes interest income of $2.3 million and $0.8
million for the thirteen weeks ended July 1, 1999
11
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DEBT, CONTINUED
and for the three months ended June 30, 1998 respectively, and $3.7
million and $1.2 million for the twenty-six weeks ended July 1, 1999
and for the six months ended June 30, 1998, respectively.
(7) DISCONTINUED OPERATIONS
During 1998, UATC established a plan to dispose of its entertainment
center business operations. Current and prior period results for the
entertainment center business operations have been classified
separately in the accompanying statements of operations as discontinued
operations.
Net assets of the discontinued operations were $3.1 million at July 1,
1999 and December 31, 1998. Liabilities related to the discontinued
operations were $4.1 million and $4.9 million at July 1, 1999 and
December 31, 1998, respectively. The net loss from discontinued
operations was $1.2 million and $2.3 million for the three and six
months ended June 30, 1998, respectively. Revenue generated by the
discontinued operations was $0.1 million and $0.3 million for the
thirteen weeks ended July 1, 1999 and the three months ended and June
30, 1998, respectively, and $0.2 million and $0.7 for the twenty-six
weeks ended July 1, 1999 and the six months ended and June 30, 1998,
respectively. Included in the net loss from discontinued operations was
interest expense of $0.4 million and $8.0 million for the three and six
months ended June 30, 1998. Interest expense was allocated to the
discontinued operations based upon the average fixed asset balance and
UATC's average borrowing rate.
(8) RELATED PARTY TRANSACTIONS
UATC leases certain of its theatres from UAR and Prop I. The leases
provide for basic monthly or quarterly rentals and may require
additional rentals, based on the revenue of the underlying theatre. The
lease arrangement with Prop I was entered into in conjunction with the
placement of mortgage debt financing in 1988. On November 1, 1998, the
mortgage debt was repaid via a term loan borrowing under the New Bank
Credit Facility (see Note 3). UATC has reflected this additional
borrowing as a long-term receivable from an affiliate. 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 $1.3
million and $0.4 million for the thirteen weeks ended July 1, 1999 and
the three months ended June 30, 1998, respectively and $2.6 million and
$0.8 million for the twenty-six weeks ended July 1, 1999 and the six
months ended June 30, 1998, respectively.
(9) PROVISIONS FOR IMPAIRMENT
During the thirteen and twenty-six weeks ended July 1, 1999, UATC
recorded non-cash charges for the impairment of its long-lived assets
of $9.2 million and, during the three and six months ended June 30,
1998, UATC recorded non-cash charges for the impairment of its
long-lived assets of $5.3 million. 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
12
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(9) PROVISION FOR IMPAIRMENT, CONTINUED
cash flow expected to be received from the operation or future sale of
the individual theatres (or groups of theatres).
(10) 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 thirteen and twenty-six weeks ended July 1, 1999 and the
three and six months ended June 30, 1998, 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.
At July 1, 1999, the Parent had a net operating loss carryforward for
federal income tax purposes of approximately $183.0 million.
The Parent's income tax returns for the years ended December 31, 1995,
1996 and 1997 are currently being audited by the IRS. The outcome of
this audit may reduce the amount of the Parent's and UATC's net
operating loss carryforward and/or change the basis (and thus future
tax depreciation) related to certain assets. The Parent and UATC
believe that the result of the audit will not have a material adverse
effect on the financial condition or results of operation.
(11) SEGMENT INFORMATION
UATC's operations are classified into two business segments; theater
operations and the Satellite Theatre Network-TM-. The Satellite Theatre
Network-TM- rents theatre auditoriums for seminars, corporate training,
business meetings and other educational or communication uses product
and consumer research and other entertainment uses. Theatre auditoriums
are rented individually or on networked basis.
The following table presents certain information relating to the
theatre operations and Satellite Theatre Network-TM- segments for the
thirteen and twenty-six weeks ended July 1, 1999 and the three and six
months ended June 30, 1998 (amounts in millions):
13
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(11) SEGMENT INFORMATION, CONTINUED
<TABLE>
<CAPTION>
Theatre Satellite
Operations Theatre Network Total
---------- --------------- -----
<S> <C> <C> <C>
FOR THE THIRTEEN WEEKS ENDED JULY 1, 1999
Revenue............................................$ 165.8 1.6 167.4
Operating income (loss)............................ (3.6) (0.1) (3.7)
Depreciation and amortization...................... 12.2 0.3 12.5
Assets............................................. 548.5 3.9 552.4
Capital expenditures............................... 5.6 - 5.6
FOR THE THREE MONTHS ENDED JUNE 30, 1998
Revenue............................................ 153.1 1.6 154.7
Operating income (loss)............................ (2.8) - (2.8)
Depreciation and amortization...................... 11.4 0.3 11.7
Assets............................................. 528.9 3.9 532.8
Capital expenditures............................... 35.6 - 35.6
FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 1999
Revenue............................................ 299.4 2.7 302.1
Operating income (loss)............................ (14.3) (0.1) (14.4)
Depreciation and amortization...................... 25.2 0.6 25.8
Assets............................................. 548.5 3.9 552.4
Capital expenditures............................... 26.3 - 26.3
FOR THE SIX MONTHS ENDED JUNE 30, 1998
Revenue............................................ 315.8 3.0 318.8
Operating income (loss)............................ 8.0 (0.2) 7.8
Depreciation and amortization...................... 23.9 0.6 24.5
Assets............................................. 528.9 3.9 532.8
Capital expenditures............................... 53.2 - 53.2
</TABLE>
(12) COMPREHENSIVE INCOME
Separate statements of comprehensive income have not been presented in
these financial statements as the only reconciling item between net
loss as reflected in the statements of operations and comprehensive
income would be the change in UATC's cumulative foreign currency
translation adjustment. For the thirteen and twenty-six weeks ended
July 1, 1999, the change in the cumulative foreign currency translation
adjustment was $(0.4) million. For the three and six months ended June
30, 1998, the change in the cumulative foreign currency translation
adjustment was $0.1 million.
14
<PAGE>
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(13) COMMITMENTS AND CONTINGENCIES
UATC is involved in various pending and threatened legal proceedings
involving allegations concerning contract breaches, torts, employment
matters, environmental issues, anti-trust 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.
The American With Disabilities Act of 1990 ("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
reimbursement of plaintiff's attorney's fees and expenses under certain
circumstances. UATC has established a program to review and evaluate
UATC's theatres and to make any changes that may be required by the
ADA. UATC believes that the cost of complying with the ADA will not
have a material adverse affect on UATC's financial position, liquidity
or results of operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During 1999, UATC changed its reporting period from the traditional calendar
quarter and year presentation ending on March 31, June 30, September 30 and
December 31 to a presentation ending on the Thursday closest to the calendar
quarter or year end. The periods presented below are for the thirteen and
twenty-six weeks ended July 1, 1999 and the three and six months ended June 30,
1998. 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.
RESULTS OF OPERATIONS
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 1, 1999 AND
THREE AND SIX MONTHS ENDED JUNE 30, 1998
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>
Thirteen Three Twenty-Six Six
Weeks Months % Weeks Months %
Ended Ended Increase Ended Ended, Increase
July 1, June 30, July 1, June 30
1999 1998 (Decrease) 1999 1998 (Decrease)
-------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Theatres (1)
Revenue:
Admissions...................................... $ 114.3 106.2 7.6% 207.7 219.6 (5.4)%
Concession sales................................ 46.6 44.3 5.2 83.6 90.9 (8.0)
Other........................................... 6.5 4.2 54.8 10.8 8.3 30.1
Operating Expenses:
Film rental and advertising expenses............ 64.7 59.1 9.5 116.8 120.0 (2.7)
Concession costs................................ 6.4 7.0 (8.6) 11.1 13.5 (17.8)
Occupancy expense............................... 24.5 22.9 7.0 48.4 45.7 5.9
Other Operating Expenses........................
Personnel expense............................ 25.3 23.4 8.1 48.4 46.2 4.8
Miscellaneous operating expenses............. 22.8 22.5 1.3 45.1 44.9 0.5
Weighted Avg. Operating Theatres(2)............... 312 328 (4.9) 313 330 (5.2)
Weighted Avg. Operating Screens(2) ............... 2,145 2,161 (0.7) 2,157 2,158 (0.1)
Weighted Avg. Screens Per Theatre................. 6.9 6.6 4.4 6.9 6.5 5.4
Admissions Per Weighted Avg. Operating
Theatre.......................................... $366,346 323,780 13.2 663,578 665,455 (0.3)
Admissions Per Weighted Avg. Operating
Screen........................................... $ 53,287 49,144 8.4 96,291 101,761 (5.4)
Concession Sales Per Weighted Avg.
Operating Theatre................................ $149,359 135,061 10.6 267,093 275,455 (3.0)
</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, admissions per weighted average operating theatre
and admissions per weighted average operating screen increased 7.6%, 13.2%, and
8.4%, respectively, during the thirteen weeks ended July 1, 1999 as compared to
the three months ended June 30, 1998. These increases were primarily due to a
1.4% increase in attendance during the period and to a 6.1% increase in the
average ticket price. Additionally, UATC closed and/or sold several
underperforming theatres which resulted in a decline in the weighted average
operating theatres and screens of 4.9% and 0.7%, respectively, during the
period. The increase in attendance during the thirteen weeks ended July 1, 1999
was primarily due to the success of several films released during the period.
Admissions revenue, admissions per weighted average operating theatre and
admissions per weighted average operating screen decreased 5.4%, 0.3% and 5.4%,
respectively, during the twenty-six weeks ended July 1, 1999 as compared to the
six months ended June 30, 1998. These decreases were primarily due a 9.9%
decrease in attendance during the period, partially offset by a 5.0% increase in
the average ticket price. The decrease in attendance during the twenty-six weeks
ended July 1, 1999 was primarily due to the short run of several films released
at the end of 1998 and a somewhat weak film release schedule during the first
four months of 1999, as compared to the unprecedented success of the film
TITANTIC during the same 1998 period. In addition to lower industry attendance
during the thirteen weeks ended April 1, 1999, certain of UATC's older theatres
were adversely impacted by new stadium theatre construction. The increases in
average ticket prices for the thirteen and twenty-six weeks ended July 1, 1999
were primarily due to certain selective ticket price increases during 1998 and
1999.
CONCESSION SALES: Concession sales increased 5.2% and decreased 8.0% during the
thirteen and twenty-six weeks ended July 1, 1999, respectively, as compared to
the three and six months ended June 30, 1998. The increase in concession sales
for the thirteen weeks ended July 1, 1999 was primarily due to a 3.7% increase
in the average concession sale per patron, and the increased attendance
discussed above. The decrease in concession sales for the twenty-six weeks ended
July 1, 1999 was primarily due to the decreased attendance discussed above,
partially offset by a 2.1% increase in the average concession sale per patron.
Concession sales per weighted average operating theatre increased 10.6% and
decreased only 3.0% during the thirteen and twenty-six weeks ended July 1, 1999,
respectively, as compared to the three and six months ended June 30, 1998. The
increases in the average concession sale per patron were primarily attributable
to certain selective price increases during 1998 and 1999, additional concession
menu items, concession improvements related to increased emphasis on sales staff
training, the opening of several new theatres with more efficient concession
operations and the sale or closure of several less productive theatres.
OTHER: Other revenue is derived primarily from on-screen advertising, revenue
generated by the Satellite Theatre Network-TM-, electronic video games located
in theatre lobbies, theatre rentals, and other miscellaneous sources. Other
revenue increased 54.8% and 30.1% during the thirteen and twenty-six weeks ended
July 1, 1999, respectively as compared to the three and six months ended June
30, 1998 primarily as a result of increases in on-screen advertising revenue.
During the thirteen and twenty-six weeks ended July 1, 1999, on-screen
advertising increased 190.8% and 145.8%, respectively. Revenue generated by the
Satellite Theatre Network-TM- increased 4.0% and decreased 9.6% during the
thirteen and twenty-six weeks ended July 1, 1999, respectively.
OPERATING EXPENSES FROM OPERATING THEATRES
FILM RENTAL AND ADVERTISING EXPENSES: Film rental and advertising expenses
increased 9.5% and decreased 2.7% during the thirteen and twenty-six weeks ended
July 1, 1999, respectively, as compared to the three and six months ended June
30, 1998, primarily as a result of the admission revenue fluctuations discussed
above. Film rental and advertising expenses as a percentage of
17
<PAGE>
admissions revenue for the thirteen weeks ended July 1, 1999 and the three
months ended June 30, 1998 were 56.6% and 55.6%, respectively, and 56.2% and
54.6% for the twenty-six weeks ended July 1, 1999 and the six months ended
June 30, 1998, respectively. The increase in film rental and advertising
expenses as a percentage of admissions revenue related primarily to higher
than average film terms associated with certain films released in May or June
and the shorter run of the films which played during the first four months of
1999. Typically, film rental as a percentage of admission revenue increases
the shorter the run of the film.
CONCESSION COSTS: Concession costs include direct concession product costs and
concession promotional expenses. Such costs decreased 8.6% and 17.8% during the
thirteen and twenty-six weeks ended July 1, 1999, respectively, as compared to
the three and six months ended June 30, 1998. Concession costs as a percentage
of concession sales revenue for the thirteen weeks ended July 1, 1999 and the
three months ended June 30, 1998 were 13.7% and 15.8%, respectively, and 13.3%
and 14.9% for the twenty-six weeks ended July 1, 1999 and the six months ended
June 30, 1998, respectively. The decrease in concession costs as a percentage of
concessions revenue for the thirteen and twenty-six weeks ended July 1, 1999 was
primarily due to lower promotional expenses and the rebidding or restructuring
of the product and distribution contracts associated with many of UATC's
concession products.
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
7.0% and 5.9% during the thirteen and twenty-six weeks ended July 1, 1999,
respectively, as compared to the three and six months ended June 30, 1998. These
increases relate to higher base rentals on newly opened theatres and additional
sale and leaseback rent, partially offset by fewer weighted average operating
theatres and lower affiliated rental expenses. In addition, occupancy expense
includes non-cash charges relating to the effect of escalating leases which have
been "straight-lined" for accounting purposes of $1.2 million and $2.4 million
for the thirteen and twenty-six weeks ended July 1, 1999, respectively, and $0.9
million and $1.8 million for the three and six months ended June 30, 1998,
respectively.
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 8.1% and 4.8% during
the thirteen weeks and twenty-six weeks ended July 1, 1999, respectively, as
compared to the three and six months ended June 30, 1998. These increases in
personnel expense were primarily due to a 2.7% and 3.7% increase in the hourly
wage rate of theatre floor staff for the thirteen and twenty-six week periods,
respectively, and to increases in janitorial and security expenses. Personnel
expenses as a percentage of admissions and concessions revenue were 15.7% and
15.5% for the thirteen weeks ended July 1, 1999 and three months ended June 30,
1998, respectively, and 16.6% and 14.9% for the twenty-six weeks ended July 1,
1999 and the six months ended June 30, 1998, respectively. The increases in
personnel expense as a percentage of admissions and concessions were primarily
attributable to the increased hourly wage rate of theatre staff and to increased
janitorial and security expenses, partially offset by the closure or sale of
several less efficient theatres and the opening of several new larger, more
efficient multiplex theatres. In addition, personnel expense as a percentage of
admissions and concessions for the twenty-six weeks ended July 1, 1999 was
negatively impacted during the thirteen weeks ended April 1, 1999 due to the
lower attendance discussed above and the fixed nature of certain expenses (i.e.,
theatres mangers' and assistant managers' salaries).
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 increased 1.3% and 0.5% during the thirteen and twenty-six weeks ended
July 1, 1999, respectively, as compared to the three and six months ended June
30, 1998. These fluctuations were primarily due to higher supplies and repair
and maintenance expenses and lower common area maintenance and utilities
expenses.
18
<PAGE>
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.
GENERAL AND ADMINISTRATIVE EXPENSE
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 regional operating offices
and 14 district theatre operations offices (generally located in theatres).
General and administrative expenses increased $0.1 million and $0.8 million for
the thirteen and twenty-six weeks ended July 1, 1999, respectively, as compared
to the three and six months ended June 30, 1998, respectively, primarily as a
result of a reduction in management fees from international theatre investments
that were sold at the end of 1998.
DEPRECIATION AND AMORTIZATION AND PROVISIONS FOR IMPAIRMENT
Depreciation and amortization includes the depreciation of theatre buildings and
equipment and the amortization of theatre lease costs and certain non-compete
agreements. Provisions for impairment relates to non-cash charges for the
difference 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).
Depreciation and amortization increased $0.8 million and $1.3 million during the
thirteen and twenty-six weeks ended July 1, 1999, respectively, compared to the
three and six months ended June 30, 1998. These increases were primarily due to
increased depreciation charges on UATC's newly opened theatres. During the
thirteen and twenty-six weeks ended July 1, 1999 and the three and six months
ended June 30, 1998, UATC recorded $9.2 million and $5.3 million, respectively,
of non-cash provisions for asset impairments associated with unprofitable
theatres.
OPERATING INCOME (LOSS)
UATC incurred net operating losses of $3.7 million and $2.8 million for the
thirteen weeks ended July 1, 1999 and the three months ended June 30, 1998,
respectively. The 1999 increase in the net operating loss relates primarily to
higher depreciation and amortization and provisions for impairment, partially
offset by higher operating margins and higher revenue. During the twenty-six
weeks ended July 1, 1999, UATC incurred an operating loss of $14.4 million as
compared to generating operating income of $7.8 million for the six months ended
June 30, 1998. This decrease in operating income was due primarily to lower
revenue, higher occupancy and operating expenses, higher depreciation and
amortization and provisions for impairment, partially offset by reduced film
rental and advertising expenses and direct concession costs.
INTEREST
Interest, net increased $0.9 million and $0.1 million during the thirteen and
twenty-six weeks ended July 1, 1999, respectively, as compared to the three and
six months ended June 30, 1998. These increases were due primarily to a higher
average debt balance and to an increase in the interest rate on the New Bank
Credit Facility.
DISCONTINUED OPERATIONS
During 1998 UATC established a plan to dispose of its entertainment center
business operations. The net loss from the discontinued operations was $1.2
million and $2.3 million for the three and six months ended June 30, 1998,
respectively. Included in the net loss from discontinued
19
<PAGE>
operations for the three months and six months ended June 30, 1998 was
interest expense of $0.5 million and $0.9 million, respectively.
EXTRAORDINARY ITEM
As a result of the repayment of the Bank Credit Facility and the redemption of
the Senior Secured Notes during the three months ended June 30, 1998, UATC
recognized an extraordinary loss on the early extinguishment of debt 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.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
During the thirteen weeks ended July 1, 1999 and the three months ended June 30,
1998, UATC incurred net losses available to the common stockholder of $10.3
million and $23.4 million, respectively. During the twenty-six weeks ended July
1, 1999 and the six months ended June 30, 1998, UATC incurred net losses
available to the common stockholder of $28.2 million and $29.8 million,
respectively. These decreases relate primarily to the increased operating
results for the thirteen weeks ended July 1, 1999, the dividends on preferred
stock and the extraordinary loss on the early extinguishment of debt recorded
during the three months ended June 30, 1998, partially offset by increased
depreciation and amortization, provisions for impairment and interest expense
for the twenty-six weeks ended July 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
For the twenty-six weeks ended July 1, 1999, $0.7 million of cash was generated
by UATC's operating activities. This operating source of cash, in addition to
$15.2 million of cash obtained through financing activities and $0.6 million of
cash balances available at December 31, 1998, was used for $16.5 million in
capital expenditures and other investing activities.
Substantially all of UATC's admissions and concession sales revenue is 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.
During May 1998, the Parent completed the offering of $225.0 million of its
9.75% Fixed Rate Subordinated Notes due April 15, 2008, and the offering of
$50.0 million of its Floating Rate 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.
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 three and six months ended June 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.
20
<PAGE>
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 part of its strategic plan, UATC intends to continue to invest very
selectively in new strategically important theatre developments within its core
markets and renovate, rebuild, and/or expand existing, well located successful
key locations. UATC will continue to dispose of, through sale or lease
terminations, certain of its non-strategic or underperforming operating theatres
and real estate.
As many of UATC's underperforming and nonstrategic theatres are nearing the
end of their lease term, located in desirable locations for other uses, or
are owned, the net utilization of cash to dispose of these locations is not
expected to be significant. 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, or
what the final cost will be, negotiations are ongoing with respect to several
theatres and parcels of real estate. During 1999 (through July 31, 1999),
UATC received $4.8 million as a result of the closure or sale of 22 theatres
(118 screens). These theatres that were closed or sold were primarily
smaller, older theatres that were not part of UATC's long term strategic
plans or were underperforming. In aggregate they had $1.4 million of negative
cash flow for the year prior to the sale or closure.
In an effort to limit the amount of investment exposure on any one project, UATC
typically develops theatre projects where both 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
twenty-six weeks ended July 1, 1999, UATC invested $12.8 million on eight
theatres (101 screens) which opened during 1998 and approximately $10.7 million
on the development of three new theatres (41 screens), one theatre (12 screens)
on an existing drive-in and renovations, expansions, and the addition of stadium
seating to five existing theatres (53 screens) opened or expected to open during
the next 12 months, as well as 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.
In December 1997, UATC entered into a sale and leaseback transaction whereby two
theatres under development were sold to, and leased back from, an unaffiliated
third party for approximately $18.1 million. Approximately $9.1 million of the
sales proceeds were paid to UATC during 1999 for reimbursement of certain of the
construction costs relating to the two theatres.
21
<PAGE>
At July 1, 1999, UATC had entered into construction or lease agreements for
three new theatres (41 screens), one theatre (12 screens) on an existing
drive-in and for the renovation, expansion and the addition of stadium seating
to one existing theatre (15 screens) that UATC intends to open during the next
12 months. UATC estimates that capital expenditures associated with these
theatres will aggregate approximately $36.0 million. Such amount relates only to
projects in which UATC had executed a definitive lease and all significant lease
contingencies have been satisfied. UATC will make additional capital
expenditures, primarily with regard to the renovation or expansion of existing
key locations. Because a significant portion of UATC's future capital spending
plans relate to the renovation and/or expansion of existing key locations as
opportunities present themselves and capital resources are available, the timing
of such commitments and expenditures are much more flexible and thus can be
matched to net cash provided by operating activities, asset sales and other
sources of capital.
UATC is party to interest rate collar agreements on $225.0 million of floating
rate debt which provide for a LIBOR interest rate cap ranging between 6% and 7
1/2% per annum and LIBOR interest rate floors ranging between 5 1/4% and 5 1/2%,
and expire at various dates through August 2001. The terms of the New Bank
Credit Facility require UATC to obtain interest rate hedges on a certain portion
of its indebtedness thereunder. Amounts paid to the counterparties to the
interest rate collar agreements are recorded as an increase to interest expense
and amounts received from the counterparties to the interest rate collar
agreements are recorded as a reduction of interest expense.
UATC believes that the net cash provided by operations in future periods and
borrowings available under the New Bank Credit Facility will be sufficient to
fund its future cash requirements. UATC expects the 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.
The New Bank Credit Facility includes several financial covenants that must
be complied with on a quarterly basis. A certificate demonstrating compliance
must be submitted within 60 days subsequent to quarter end. Due primarily to
the unprecedented decline in attendance during the first quarter of 1999,
UATC believes it will not be in compliance with certain of its existing
financial covenants for the period ending July 1, 1999. UATC is in discussion
with its banking group to obtain a waiver of amendment with respect thereto.
OTHER
UATC's revenues have been 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 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.
YEAR 2000
UATC has initiated a review of its internal information systems for potential
year 2000 transition problems. There exists the possibility that some equipment
reliant upon computer chips that have a date sensitive component will not
operate correctly after December 31, 1999 and that system failures could occur.
UATC's review encompasses this type of equipment, segmented into three broad
areas: computer based systems in UATC's theatres; computer based systems at
UATC's administrative offices; and products and services provided by outside
vendors.
COMPUTER BASED SYSTEMS IN UATC'S THEATRES: UATC's theatres utilize a number of
computerized systems that may encounter year 2000 problems. Some of the systems
that may experience year 2000 problems include the point-of-sale ("POS") system,
the projection and sound system, the energy management system and other
ancillary systems. The POS system records sales
22
<PAGE>
transactions, issues admission tickets and relays the daily operational
information to UATC's corporate computer system. UATC initiated a plan to
replace its outdated POS system in 1993. The new POS system has been tested
and is expected to be year 2000 compliant. At July 1, 1999, replacement of
UATC's POS system was approximately 80% complete. UATC expects that by
December 31, 1999 all of its operating theatres will be equipped with the new
POS system. If the new POS system were to malfunction or fail, manual backup
systems currently in place at the theatres could be utilized.
Most all of the UATC's theatres are equipped with projection and sound systems
and energy management systems that are automated. If either the projection and
sound systems or energy management systems were to malfunction or fail as a
result of a year 2000 problem, manual backup systems currently in place at the
theatres could be utilized.
Certain theatres utilize other systems that may experience a malfunction or
failure as a result of a year 2000 problem. These systems include elevators,
escalators and fire and sprinkler systems. Failure of any of these systems
should not be material to the operations of the theatres taken as a whole.
COMPUTER BASED SYSTEMS AT UATC'S ADMINISTRATIVE OFFICES: UATC's corporate
administrative offices utilize a number of computerized systems that may
encounter year 2000 problems. The most significant of these systems are the
financial information systems (i.e. general ledger, accounts payable, payroll
and management information systems), and the telecommunications systems. During
1998 UATC purchased and implemented a new general ledger and accounts payable
system. An upgrade to the existing payroll system will be implemented during
1999. These financial information systems have been tested and appear to be year
2000 compliant. A failure of any of these systems could impact the ability of
UATC to provide accurate financial information. Such failure or malfunction
could also delay payments to both vendors and employees. While manual systems of
information gathering and monetary disbursements are available, these backup
manual systems would be very expensive to utilize.
The telecommunications systems allow UATC to obtain the daily operational
information for each of its theatres and to communicate with the theatres and
all vendors and suppliers. The telecommunication systems have been tested and
appear to be year 2000 compliant.
PRODUCTS AND SERVICES PROVIDED BY OUTSIDE VENDORS: UATC is very dependent upon
products and services provided by outside vendors. Year 2000 compliance by these
vendors is voluntary and outside of the control of UATC. The major products and
services that UATC is dependent upon vendors for include film supply,
concessions inventory and utilities. If any of these vendors were to experience
year 2000 problems, UATC could experience in material and adverse consequences.
UATC has been advised by its major vendors that they expect to be year 2000
compliant.
UATC is very dependent upon the banking industry for depositing daily cash
receipts and making vendor and payroll disbursements. UATC primarily utilizes
large, national banks and generally anticipates no material and adverse year
2000 problems from them. If, however, the banking industry were to experience
year 2000 problems, UATC could experience material and adverse consequences.
Although this review is still in progress, UATC 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's cost associated with year 2000 upgrades and preventative
measures is expected to be less than $0.5 million.
23
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Emerging Issues Task Force (EITF) released No. 97-10, "The
Effect of Leasee Involvement in Asset Construction." Issue No. 97-10 is
applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when construction of
the asset is completed. In certain construction projects, UATC is responsible
for directly paying project costs that are in excess of an agreed upon amount to
be paid for by the owner-lessor. Generally, these project costs paid by UATC
include elements that are considered to be structural in nature as defined by
Issue No. 97-10. As a result, UATC believes it would be considered the owner of
these projects during construction. The consensus reached in Issue No. 97-10
applies to construction projects committed to after May 21, 1998 and also to
those projects that were committed to on May 21, 1998 if construction does not
commence by December 31, 1999. Unless UATC changes the manner in which it
contracts for the construction of theatres, UATC believes that Issue No. 97-10
will require certain of its future operating leases to be recorded as lease
financing obligations. None of the current construction commitments that UATC is
party to will need to be accounted for in accordance with Issue No. 97-10.
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." The Statement expands the
definition of derivatives and requires that derivative instruments be recorded
at fair market value on the balance sheet and changes in the fair value be
recognized in the calculation of net income unless specific hedge accounting
criteria are met. Qualifying financial instruments to which UATC is a party
include borrowings under the New Bank Credit Facility, interest rate swap
agreements and interest rate collar agreements. The effective date for SFAS No.
133 is for fiscal years beginning after June 15, 2000. UATC has not quantified
the impact of adopting SFAS No. 133 on its financial position, results of
operation 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.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Reporting on Internal Use Software"
and Statement of Position 98-5 ("SOP 98-5") "Reporting on Start-up Costs." SOP
98-1 provides guidance on accounting for the cost of computer software obtained
for internal use and requires that certain costs of internally generated
computer software be capitalized rather than expensed. SOP 98-5 requires that
entities expense the costs of start-up activities as they are incurred. The
effective date for SOP 98-1 and SOP 98-5 is for fiscal years beginning after
December 15, 1998. Adoption of SOP 98-1 and SOP 98-5 has not materially effected
UATC's consolidated financial position, results of operation or cash flow.
24
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
UATC is subject to market risk associated with changes in interest rates on its
debt obligations. UATC manages its interest rate risk through a combination of
fixed and floating rate debt obligations and by selectively entering into
interest rate cap and interest rate collar agreements. The table presented below
provides information about UATC's financial instruments that are sensitive to
changes in interest rates (amounts in millions):
<TABLE>
<CAPTION>
Expecting Maturity Date
July 1, Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt
Fixed Rate $ 3.1 2.5 0.4 0.4 0.3 3.3 10.0 10.0
Avg. Interest Rate 9.4% 9.4 7.9 7.8 7.8 7.8 8.7
Floating Rate $ 3.5 3.5 7.7 23.8 15.9 344.1 398.5 398.5
Avg. Interest Rate (1) (1) (1) (1) (1) (1) (1)
Interest Rate Collars
(notional amount) $75.0 - 150.0 - - - 225.0 (0.8)
Avg. Interest Rate
Interest Rate Cap (2) (2) (2) (2) (2) (2) (2)
Interest Rate Floor (3) (3) (3) (3) (3) (3) (3)
</TABLE>
(1) The weighted average floating interest rate at July 1, 1999 was 8.8%.
(2) The average interest rate cap was 6.5% through July 1999 and 6.0% through
August 2001.
(3) The average interest rate floor was 5.4% through July 1999 and 5.5%
through August 2001.
25
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 9, 1999, UATC filed a Form 8-K with the Securities and Exchange
Commission.
26
<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: August 9, 1999
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-01-1999
<CASH> 7,300
<SECURITIES> 0
<RECEIVABLES> 10,700
<ALLOWANCES> 0
<INVENTORY> 18,400
<CURRENT-ASSETS> 36,600
<PP&E> 574,600
<DEPRECIATION> (220,100)
<TOTAL-ASSETS> 552,400
<CURRENT-LIABILITIES> 129,300
<BONDS> 401,900
0
0
<COMMON> 0
<OTHER-SE> (22,900)
<TOTAL-LIABILITY-AND-EQUITY> 546,800
<SALES> 83,600
<TOTAL-REVENUES> 302,100
<CGS> 11,100
<TOTAL-COSTS> 316,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15,600)
<INCOME-PRETAX> (28,000)
<INCOME-TAX> (200)
<INCOME-CONTINUING> (28,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,200)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
