<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: 333-56985
333-56999
UNITED ARTISTS THEATRE COMPANY
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1198391
- ------------------------------- -------------------------
(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
----- -----
As of November 12, 1998, 11,551,383 shares of Class A Common Stock, 139,058
shares of Class B Common Stock (including options to acquire 103,133 shares of
Class B Common Stock exercisable within 60 days of such date) and 11,902 shares
of Class C common Stock were outstanding.
<PAGE>
UNITED ARTISTS THEATRE COMPANY
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
(UNAUDITED)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1. FINANCIAL STATEMENTS
UNITED ARTISTS THEATRE COMPANY
Condensed Consolidated Balance Sheets.........................4
Condensed Consolidated Statements of Operations...............5
Condensed Consolidated Statement of Stockholders' 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
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 UNITED ARTISTS 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 UNITED ARTISTS, THE RESTRICTIONS IMPOSED ON UNITED ARTISTS
BY CERTAIN INDEBTEDNESS, THE SENSITIVITY OF UNITED ARTISTS TO ADVERSE TRENDS IN
THE GENERAL ECONOMY, THE HIGH DEGREE OF COMPETITION IN UNITED ARTISTS' INDUSTRY,
THE VOLATILITY OF UNITED ARTISTS' QUARTERLY RESULTS AND UNITED ARTISTS'
SEASONALITY, THE DEPENDENCE OF UNITED ARTISTS ON FILMS AND DISTRIBUTORS AND ON
ITS ABILITY TO OBTAIN POPULAR MOTION PICTURES, THE CONTROL OF UNITED ARTISTS BY
AFFILIATES OF MERRILL LYNCH CAPITAL PARTNERS, INC. AND THE DEPENDENCE OF UNITED
ARTISTS ON KEY PERSONNEL, AMONG OTHERS.
ALL WRITTEN FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO UNITED ARTISTS ARE
EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
3
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997*
------------------ ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 8.5 10.8
Receivables, net................................................... 17.7 14.4
Prepaid expenses and concession inventory.......................... 21.5 18.4
Other assets....................................................... 0.5 0.3
------ -----
Total current assets............................................. 48.2 43.9
Investments and related receivables.................................. 14.6 15.4
Property and equipment, at cost (note 9):
Land ............................................................ 52.6 54.7
Theatre buildings, equipment and other............................. 621.5 548.0
----- -----
674.1 602.7
Less accumulated depreciation and amortization (note 4)............ (264.7) (222.0)
------- -------
409.4 380.7
Intangible assets, net (note 9)...................................... 88.8 101.5
Net assets of discontinued operations (note 10)...................... 1.8 14.6
Other assets, net (note 2)........................................... 16.7 6.9
----- ------
$ 579.5 563.0
----- -----
----- -----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................... $ 70.8 87.1
Accrued and other liabilities...................................... 34.3 29.1
Current portion of long-term debt (notes 2 and 6).................. 53.8 81.7
------ ------
Total current liabilities........................................ 158.9 197.9
Other liabilities.................................................... 56.0 45.9
Debt (notes 2 and 6)................................................. 592.5 332.3
----- -----
Total liabilities.................................................. 807.4 576.1
Minority interests in equity of consolidated subsidiaries............ 5.6 7.2
Stockholders' equity (deficit) (note 2):
Preferred stock (note 8)........................................... - 193.9
Common stock:
Class A..................................................... 0.1 0.1
Class B..................................................... - -
Class C..................................................... - -
Additional paid-in capital (note 8)................................ 51.1 16.4
Accumulated deficit................................................ (282.7) (228.5)
Cumulative foreign currency translation adjustment................. - (0.4)
Treasury stock..................................................... (2.0) (1.8)
-------- -------
Total stockholder's equity (deficit)............................ (233.5) (20.3)
------- ------
$ 579.5 563.0
----- -----
----- -----
</TABLE>
* Restated
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
UNITED ARTISTS THEATRE COMPANY
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 ....................................... 3.1 11.9 4.8 13.9
----- ----- ----- -----
184.0 503.3 189.1 519.1
----- ----- ----- -----
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)............. 70.9 203.4 70.6 201.7
General and administrative.................... 5.9 17.1 5.9 18.1
Restructuring charge (note 13)................ - - - 0.5
Depreciation and amortization (note 4)........ 13.3 39.1 13.0 46.2
Provisions for impairment (note 9)............ 11.8 19.4 7.2 15.7
----- ----- ----- -----
179.2 489.8 179.8 506.0
----- ----- ----- -----
Operating income from continuing operations 4.8 13.5 9.3 13.1
Other income (expense):
Interest, net (notes 2 and 6)................. (15.3) (39.8) (11.6) (33.9)
Gain on disposition of assets (note 12)....... - 0.6 8.2 20.0
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.................................... (1.4) (2.9) (0.5) (1.5)
----- ----- ------ -----
(17.2) (43.5) (4.2) (17.1)
------ ------ ----- ------
Income (loss) from continuing operations
before income tax expense and
discontinued operations................... (12.4) (30.0) 5.1 (4.0)
Income tax expense (note 11).................... (0.2) (0.9) (0.4) (1.0)
----- ----- ------ -----
Income (loss) from continuing operations...... (12.6) (30.9) 4.7 (5.0)
Discontinued operations (note 10)............... (13.0) (15.4) (1.4) (3.4)
------ ------ ----- -----
Income (loss) before extraordinary item....... (25.6) (46.3) 3.3 (8.4)
Extraordinary item - loss on early
extinguishment of debt (note 2)............... - (7.9) - -
------ ----- ----- -----
Net income (loss)........................... (25.6) (54.2) 3.3 (8.4)
Dividend on preferred stock (note 8)............ - (9.0) (6.0) (17.8)
------ ----- ----- ------
Net loss available to
common stockholders......................... $ (25.6) (63.2) (2.7) (26.2)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
* Restated
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
(Amounts in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Common Common Common Additional
Preferred stock stock stock paid-in
stock Class A Class B Class C capital
----------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1998................... $ 193.9 0.1 - - 16.4
Accretion of dividends
on preferred stock................ 9.0 - - - (9.0)
Redemption of
preferred stock................... (202.9) - - - 43.7
Foreign currency
translation adjustment............ - - - - -
Purchase of
treasury stock.................... - - - - -
Net loss.......................... - - - - -
----- ----- ----- ----- ----
Balance at
September 30, 1998................ $ - 0.1 - - 51.1
----- ----- ----- ----- ----
----- ----- ----- ----- ----
<CAPTION>
Cumulative
foreign currency Total
Accumulated translation Treasury stockholders'
deficit adjustment Stock equity (deficit)
----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at
January 1, 1998................... (228.5) (0.4) (1.8) (20.3)
Accretion of dividends
on preferred stock................ - - -
Redemption of
preferred stock................... - - - (159.2)
Foreign currency
translation adjustment............ - 0.4 0.4
Purchase of
treasury stock.................... - - (0.2) (0.2)
Net loss.......................... (54.2) - - (54.2)
------- ----- ----- -------
Balance at
September 30, 1998................ (282.7) - (2.0) (233.5)
------- ----- ----- -------
------- ----- ----- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
UNITED ARTISTS THEATRE COMPANY
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........................................... $ 29.5 29.2
---- ----
Cash flow from investing activities:
Capital expenditures.............................................................. (67.2) (52.7)
(Increase) decrease 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.......................................... 4.5 59.5
Investment in and receivables from theatre joint
ventures........................................................................ - (18.3)
Other, net........................................................................ (4.5) 0.1
----- -----
Net cash used in investing activities........................................... (88.2) (11.6)
----- -----
Cash flow from financing activities:
Proceeds from issuance of Senior Subordinated Notes............................... 265.9 -
Debt borrowings................................................................... 508.0 109.9
Debt repayments................................................................... (427.2) (127.3)
Redemption of preferred stock..................................................... (159.2) -
Repurchase of Senior Secured Notes................................................ (128.6) -
Increase (decrease) in cash overdraft............................................. 4.3 (1.2)
Other, net........................................................................ (6.8) (2.0)
---- ----
Net cash provided by (used in) financing activities............................. 56.4 (20.6)
---- -----
Net decrease in cash............................................................ (2.3) (3.0)
Cash and cash equivalents:
Beginning of period............................................................... 10.8 10.1
---- ----
End of period..................................................................... $ 8.5 7.1
---- ----
---- ----
Reconciliation of net loss to net cash provided by
operating activities:
Net loss.......................................................................... $ (54.2) (8.4)
Non-cash expenses associated with discontinued
operations........................................................................ 12.9 1.1
Extraordinary item................................................................ 7.9 -
Effect of leases with escalating minimum annual rentals........................... 2.7 2.6
Depreciation and amortization..................................................... 39.1 46.2
Provisions for impairment......................................................... 19.4 15.7
Gain on disposition of assets, net................................................ (0.6) (20.0)
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...................................................................... 0.7 3.0
Accounts payable.................................................................. 0.2 (11.4)
Accrued and other liabilities..................................................... 1.3 (2.3)
---- ----
Net cash provided by operating activities....................................... $ 29.5 29.2
---- ----
---- ----
</TABLE>
* Restated
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) GENERAL INFORMATION
United Artists Theatre Company ("United Artists") (formerly known as OSCAR
I Corporation), a Delaware corporation, was formed in February 1992 for
the purpose of purchasing United Artists Theatre Circuit, Inc. ("UATC")
from an affiliate of Tele-Communications, Inc. ("TCI"). United Artists is
owned by an investment fund managed by affiliates of Merrill Lynch Capital
Partners, Inc. ("MLCP") and certain institutional investors (collectively,
the "Non-Management Investors"), and certain members of United Artists'
management. On May 12, 1992, United Artists purchased all of the
outstanding common stock of UATC from an affiliate of TCI (the
"Acquisition").
In addition to its ownership of UATC, United Artists 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 and its subsidiaries.
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 United Artists 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, United Artists 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 United Artists' 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 approximately $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 notes 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 COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(2) RECAPITALIZATION, CONTINUED
As a result of the repayment of the Bank Credit Facility and redemption
of the Senior Secured Notes, United Artists 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
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. United Artists realized a net gain of
approximately $12.1 million as a result of this sale and leaseback
transaction. For financial statement purposes, this gain has been deferred
and is being recognized over the term of the lease as a reduction of rent
expense. 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, United Artists 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 COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $32.6 million and $29.0 million for the
nine months ended September 30, 1998 and 1997, respectively.
United Artists 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.
(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 -
Senior Subordinated Notes (b)........... 275.0 -
Bank Credit Facility (c)................ - 226.5
Senior Secured Notes (c)................ - 125.0
Other (d)............................... 14.6 16.3
Prop I Mortgage Notes (e)............... 45.7 46.2
----- -----
646.3 414.0
Less current portion (53.8) (81.7)
------ ------
$ 592.5 332.3
----- -----
----- -----
</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 COMPANY
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 United Artists, 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 United Artists' 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 United Artists and UATC and by
an intercompany note of UATC to United Artists established with
respect to borrowings by UATC from United Artists.
The New Bank Credit Facility contains certain provisions that
require United Artists to maintain certain financial ratios and
place limitations on, among other things, additional indebtedness,
disposition of assets and restricted payments.
(b) The Senior Subordinated Notes consist of $225.0 million of 9.75%
notes due April 15, 2008 (the "Fixed Rate Subordinated Notes") and
$50.0 million of floating rate notes due October 15, 2007 (the
"Floating Rate Subordinated Notes"). Interest on the Fixed Rate
Subordinated Notes is due semi-annually. Interest on the Floating
Rate Subordinated Notes is due quarterly and is calculated based
upon the three month LIBOR rate plus 4.375%.
The Fixed Rate Subordinated Notes may be redeemed at the option of
United Artists, in whole or in part, any time on or after April 15,
2003. The Floating Rate Subordinated Notes may be redeemed at any
time at the option of United Artists, in whole or in part, any time
on or after April 15, 1999. Upon a change of control (as defined in
the respective indentures (the "Indentures") under which the Senior
Subordinated Notes were issued), the holders of the Senior
Subordinated Notes have the right to require United Artists to
purchase all or any portion of such holders Senior Subordinated
Notes at a purchase price equal to 101% of the principal amount
thereof together with accrued and unpaid interest, if any, to the
date of purchase.
The Indentures contain certain covenants that place limitations on,
among other things, the incurrence of additional indebtedness by
United Artists and any of its subsidiaries, the payment of
dividends, the redemption of capital stock, the making of
investments, the issuance of capital stock of subsidiaries, the
creation of dividend and other restrictions affecting subsidiaries,
transactions with affiliates, asset sales and certain mergers and
consolidations.
11
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DEBT, CONTINUED
The Senior Subordinated Notes are unsecured, senior subordinated
obligations of United Artists and are subordinated in right of
payment to all existing and future senior indebtedness of United
Artists including borrowings under the New Bank Credit Facility.
The Fixed Rate Subordinated Notes rank PARI PASSU with the Floating
Rate Subordinated Notes.
(c) As discussed in Note (2), Recapitalization, the Bank Credit Facility
and the Senior Secured Notes were repaid during 1998 from proceeds
of the offerings of the Senior Subordinated Notes and the New Bank
Credit Facility.
(d) Other debt at September 30, 1998 consists of various term loans,
mortgage notes, capital leases, seller notes 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.
(e) The Prop I mortgage notes (the "Prop I Notes") bear interest at
11.15% per annum. Principal and interest are payable in monthly
installments, with a lump sum payment of principal and accrued, but
unpaid, interest due on November 1, 1998. The Prop I Notes are
secured by a first mortgage on Prop I's theatre properties, an
assignment of the lease agreement with UATC, and $12.5 million of
bank letters of credit. The Indenture of Mortgage, among its other
provisions, contains limitations on the sale and/or substitution of
properties and a limitation on any additional debt incurred by Prop
I other than intercompany advances. 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, United Artists was party to interest rate
cap agreements on $225.0 million of floating rate debt which
provide for a LIBOR interest rate cap ranging between 6.0% and
7.5% and expire at various dates through August 2001. United
Artists is subject to credit risk exposure from non-performance
of the counterparties to the interest rate cap agreements. As
United Artists has historically received payments relating to
such interest rate cap agreements, it does not anticipate such
non-performance in the future. United Artists 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, United Artists 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. United Artists
pays commitment fees of 1/2% per annum on the average unused
commitments.
12
<PAGE>
UNITED ARTISTS THEATRE COMPANY
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 and the Senior Subordinated Notes will come from
payments by UATC to United Artists. The amount of payments by UATC to
United Artists may be limited from time to time by covenants included in
the Participation Agreement relating to the 1995 Sale and Leaseback. See
Note (3), 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 $0.1 million and $0.2 million for the three
months ended September 30, 1998 and 1997, respectively, and $0.6 million
and $0.4 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 United Artists' cash and cash
equivalents, outstanding borrowings under the New Bank Credit Facility,
the other debt, the promissory notes, and the Prop I Notes, and interest
rate cap agreements approximated their carrying amount and the fair value
of the Senior Subordinated Notes was approximately $257.0 million.
(8) PREFERRED STOCK
As part of the recapitalization discussed in Note (2), Recapitalization,
proceeds from the Senior Subordinated Notes and a portion of the
borrowings under the New Bank Credit Facility were used to fund the
redemption of United Artists' preferred stock on May 1, 1998. At the
redemption date, the actual redemption value of the preferred stock was
approximately $159.2 million. The carrying amount of the preferred stock
at the redemption date was approximately $43.7 million more than the
redemption value as dividends 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. This difference has been shown as an increase in additional
paid-in capital in the accompanying financial statements.
(9) PROVISIONS FOR IMPAIRMENT
United Artists recorded non-cash charges for the impairment of its
long-lived assets of $11.8 million and $19.4 million during the three and
nine months ended September 30, 1998, respectively, and $7.2 million and
$15.7 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).
13
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) DISCONTINUED OPERATIONS
Subsequent to the third quarter of 1998, United Artists 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 $1.8 million and $14.6
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 $10.2
million of non-cash provisions for asset impairments.
(11) INCOME TAXES
Consolidated subsidiaries in which United Artists 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 United Artists.
On February 10, 1998, United Artists 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 United Artists its request and, on August 6, 1998, United Artists
filed a Section 197 election along with its amended 1993 income tax
return. As United Artists 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 United
Artists' net operating loss carryforward and to increase the basis of
certain intangible assets, which will be amortized, and provide for future
tax deductions. As United Artists 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.
(12) GAIN ON DISPOSITION OF ASSETS
During April 1997, United Artists sold its 50% interest in a Hong Kong
theatre company to its partners for approximately $17.5 million and,
during September 1997, United Artists sold its theatre investments in
Mexico and Argentina for approximately $25.0 million. During the nine
months ended September 30, 1997, United Artists sold various non-strategic
or underperforming theatres for net cash proceeds of approximately $17.0
million.
14
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(13) CORPORATE RESTRUCTURING
At the end of 1996, United Artists initiated a corporate restructuring
plan intended to provide a higher level of focus on United Artists'
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.
(14) COMMITMENTS AND CONTINGENCIES
United Artists and/or its subsidiaries are 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 United Artists and/or its
subsidiaries relating to certain of the leases held by United Artists
and/or its subsidiaries. Although it is not possible to predict the
outcome of these proceedings, United Artists believes that such legal
proceedings will not have a material adverse effect on United Artists'
financial position, liquidity or results of operations.
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 reimbursement of plaintiff's attorneys' fees
and expenses under certain circumstances. United Artists has established a
program to review and evaluate United Artists' theatres and to make any
changes that may be required by the ADA. United Artists believes that the
cost of complying with the ADA will not have a material adverse effect on
United Artists' 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 United Artists' financial condition and
results of operations should be read in conjunction with United Artists'
Condensed Consolidated Financial Statements and related notes thereto. Such
financial statements provide additional information regarding United Artists'
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. United Artists 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 United Artists'
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.................................... 3.1 4.8 (35.4) 11.9 13.9 (14.4)
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.................... 21.7 20.6 5.3 62.8 60.3 4.2
Miscellaneous operating expenses..... 24.2 25.3 (4.3) 69.4 70.3 (1.3)
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 United Artists 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.
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
16
<PAGE>
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 35.4% and 14.4% 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
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
17
<PAGE>
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 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: United Artists' 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 5.3% and 4.2% 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 4.3% and 1.3% 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 slightly higher repairs and maintenance and supplies
expenses and real estate taxes.
The revenue and operating expenses discussed above are incurred exclusively
within United Artists' theatres. The other expense discussions below reflect the
combined expenses of corporate, divisional, district and theatre operations
outside of the theatres.
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
United Artists' 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, United Artists initiated a corporate
restructuring plan intended to provide a higher level of focus on United
Artists' theatrical business at a lower annual cost. This corporate
restructuring was completed in January 1997. General and administrative expense
decreased $1.0 million or 5.5%, for
18
<PAGE>
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 $0.3 million and
decreased $7.1 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. United Artists recorded
approximately $9.0 million of amortization expense during the nine months ended
September 30, 1997 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).
United Artists recorded non-cash provisions for asset impairment of $11.8
million and $19.4 million during the three and nine months ended September
30, 1998, respectively, and $7.2 million and $15.7 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 $4.8 million and $9.3 million, respectively. This
$4.5 million decrease in operating income relates primarily to the $4.6 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 $13.5 million and $13.1 million,
respectively. This increase in operating income was primarily due to lower
depreciation and amortization expenses and general and administrative expense,
partially offset by the $3.7 million increase in the provisions for impairment.
INTEREST
Interest expense increased $3.7 million and $5.9 million during the three and
nine months ended September 30, 1998, respectively as compared to the prior year
periods due primarily to the redemption of United Artists' preferred stock with
proceeds from the issuance of the Senior Subordinated Notes and a portion of the
borrowings under the New Bank Credit Facility.
GAIN ON DISPOSITION OF ASSETS
During April 1997, United Artists sold its 50% interest in a Hong Kong theatre
company to its partners for approximately $17.5 million and during September
1997, United Artists sold its theatre investments in Mexico and Argentina for
approximately $25.0 million. In addition, various non-strategic or
underperforming operating theatres and real estate assets were sold for net cash
proceeds of approximately $6.5 million.
19
<PAGE>
DISCONTINUED OPERATIONS
Subsequent to the third quarter of 1998, United Artists established a plan to
dispose of its entertainment center business segment. The net loss from the
discontinued operations was $13.0 million and $15.4 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 $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 $10.2 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, United Artists
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, United Artists 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 United Artists
its request and, on August 6, 1998, United Artists filed a Section 197 election
along with its amended 1993 income tax return. As United Artists 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
United Artists' net operating loss carryforward and to increase the basis of
certain intangible assets, which will be amortized, and provide for future tax
deductions. As United Artists 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, United Artists
incurred net losses available to common stockholders of $25.6 million and $63.2
million, respectively, compared to net losses of $2.7 million and $26.2 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):
<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....... $ (25.6) (2.7) (63.2) (26.2)
Provisions for asset impairment................. 11.8 7.2 19.4 15.7
Gain on disposition of assets................... - (8.2) (0.6) (20.0)
Discontinued operations......................... 13.0 1.4 15.4 3.4
Loss on early extinguishment of debt............ - - 7.9 -
----- ----- ------ ------
$ (0.8) (2.3) (21.1) (27.1)
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, cash provided by United Artists'
operating activities increased by $0.3 million versus the nine months ended
September 30, 1997 to $29.5 million. This cash provided by operating activities,
in addition to $56.4 million of cash provided by financing activities was used
to fund $88.2 million of capital expenditures and other investing activities.
Substantially all of United Artists' admissions and concession sales revenue are
collected in cash. Due to the unfavorable interest rate spread between bank
facility borrowings and cash investments, United Artists seeks to use all of its
available cash to repay its revolving bank borrowings and borrow under those
facilities as cash is required. United Artists 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, United Artists completed the offering of the $225.0 million
Fixed Rate Subordinated Notes due April 15, 2008 and the offering of the $50.0
million 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 United Artists' 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, United Artists 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.
On November 1, 1998, borrowings of approximately $45.7 million under the
Tranche A Term Loan were used to repay and retire the Prop I mortgage notes.
At September 30, 1998, the Prop I mortgage notes make up $45.7 million of the
$53.8 million of current portion of long term debt. The annual interest
savings attributable to the differential interest rates on the 11.15% Prop I
mortgage notes and the current borrowing rate of approximately 8.0% on the
Tranche A Term Loan will be approximately $1.5 million.
During December 1996, United Artists initiated a new investment strategy that
focuses on the development of new theatres and renovations (including stadium
seating retrofits) and expansions of existing high revenue theatres in the
United States where United Artists has a significant operating presence. As
part of this increased focus on its U.S. operations, United Artists has
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 United
Artists' core markets and used to repay existing debt. United Artists
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, United
Artists' international investments will only include a 10.0% interest in four
theatres in Singapore and Thailand.
As part of its strategic plan, United Artists 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 development of
21
<PAGE>
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, United Artists closed
or sold 25 theatres (101 screens). The theatres that were closed were primarily
smaller, older theatres that were not part of United Artists' long term
strategic plans or were underperforming.
In an effort to limit the amount of investment exposure on any one project,
United Artists typically develops theatre projects where the land and
building are leased through long-term operating leases. Where such lease
transactions are unavailable, however, United Artists 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 United Artists. For the nine months ended September 30,
1998, United Artists invested approximately $81.1 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 which 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.
At September 30, 1998, United Artists 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
United Artists intends to open or renovate during the next two years. United
Artists estimates that capital expenditures associated with these theatres
will aggregate approximately $96.1 million. Such amounts relate only to
projects in which United Artists 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. United Artists 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.
United Artists is party to interest rate cap agreements on $225.0 million of
floating rate debt which provide for a LIBOR interest rate cap ranging between
6.0% and 7.5% per annum and expire at various
22
<PAGE>
dates through August 2001. The terms of the New Bank Credit Facility require
United Artists to obtain interest rate hedges on a certain portion of its
indebtedness thereunder. United Artists 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 United Artists 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............................... $ 4.8 9.3 13.5 13.1
Depreciation and Amortization.................. 13.3 13.0 39.1 46.2
Provisions for Impairment...................... 11.8 7.2 19.4 15.7
Restructuring Charge........................... - - - 0.5
Non-Cash Rent.................................. 0.9 0.9 2.7 2.6
---- ---- ---- ----
Operating Cash Flow............................ $ 30.8 30.4 74.7 78.1
---- ---- ---- ----
---- ---- ---- ----
Interest Expense............................... $ 15.2 11.3 39.5 32.8
----- ---- ----- -----
----- ---- ----- -----
Interest Coverage Ratio........................ 2.0 2.7 1.9 2.4
----- --- ------ -----
----- --- ------ -----
Statement of Cash Flow Information:
Net cash provided by operating activities... $ 29.5 29.2
Net cash used in investing activities....... (88.2) (11.6)
Net cash provided by (used in) financing
activities................................ 56.4 (20.6)
----- ------
Net cash flow............................... $ (2.3) (3.0)
----- ------
----- ------
</TABLE>
As shown above, United Artists' Interest Coverage Ratio decreased from 2.7 times
for the three months ended September 30, 1997 to 2.0 times for the three months
ended September 30, 1998, and from 2.4 times for the nine months ended September
30, 1997 to 1.9 times for the nine months ended September 30, 1998, primarily
due to increased interest expense associated with the redemption of the
preferred stock.
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 United Artists' 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.
23
<PAGE>
Another measure of liquidity is net cash provided by operating activities as set
forth above. For the nine months ended September 30, 1998, $29.5 million of net
cash was provided by United Artists' operating activities. This compares to
$29.2 of net cash provided by operating activities for the nine months ended
September 30, 1997. This measurement shows the net cash provided by United
Artists' operations which was available for United Artists' liquidity needs
after taking into consideration certain additional costs of doing business which
are not reflected in the Operating Cash Flow calculations discussed above.
United Artists 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 Bank Credit Facility will be sufficient to fund its future
cash requirements. United Artists expects that future cash requirements will
principally be for repayments of indebtedness, working capital requirements and
capital expenditures. United Artists' 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 United Artists' control. Additionally, UATC's ability to incur or
guarantee additional indebtedness may be limited by covenants contained in the
Participation Agreement relating to the 1995 Sale and Leaseback discussed above.
OTHER
United Artists' 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 United Artists' 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.
United Artists has recently converted its core financial software system.
United Artists 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 United Artists'
business operations or have a material adverse effect on its future liquidity
or results of operations. United Artists 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 United Artists' ability to conduct
business.
United Artists 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 United Artists. However, the nature of United Artists' business and
its business relationships are not such that United Artists 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
United Artists.
United Artists 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 United Artists' control
to assess or remedy. A failure of one of these items might adversely impact
United Artists' business but in management's opinion would not create a
material disruption.
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
24
<PAGE>
bypass net income). The effective date for SFAS No. 130 is for fiscal years
beginning after December 15, 1997 and the impact on United Artists' 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 United Artists' 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. United Artists 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 COMPANY
(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> 8,500
<SECURITIES> 0
<RECEIVABLES> 17,700
<ALLOWANCES> 0
<INVENTORY> 21,500
<CURRENT-ASSETS> 48,200
<PP&E> 674,100
<DEPRECIATION> 264,700
<TOTAL-ASSETS> 579,500
<CURRENT-LIABILITIES> 158,900
<BONDS> 592,500
0
0
<COMMON> 100
<OTHER-SE> (233,600)
<TOTAL-LIABILITY-AND-EQUITY> 573,900
<SALES> 143,900
<TOTAL-REVENUES> 503,300
<CGS> 20,800
<TOTAL-COSTS> 489,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,800
<INCOME-PRETAX> (30,000)
<INCOME-TAX> 900
<INCOME-CONTINUING> (30,900)
<DISCONTINUED> (15,400)
<EXTRAORDINARY> (7,900)
<CHANGES> 0
<NET-INCOME> (54,200)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
