<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, 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: 333-56985
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 11, 1999, 11,551,383 shares of Class A Common Stock, 331,533
shares of Class B Common Stock (including options to acquire 299,158 shares
of Class B Common Stock exercisable within 60 days of such date) and 4,342
shares of Class C common Stock were outstanding.
<PAGE>
UNITED ARTISTS THEATRE COMPANY
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1999
(UNAUDITED)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
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 (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 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" AND "QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK." 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, 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. ("MLCP") AND THE DEPENDENCE OF UNITED
ARTISTS ON KEY PERSONNEL, AMONG OTHERS.
ALL WRITTEN OR ORAL 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, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 6.5 8.2
Receivables, net............................................ 13.7 19.4
Prepaid expenses and concession inventory................... 24.6 15.0
Other assets................................................ 0.2 0.7
------ -----
Total current assets...................................... 45.0 43.3
Investments and related receivables........................... 3.8 8.3
Property and equipment, at cost:
Land........................................................ 40.9 44.0
Theatre buildings, equipment and other...................... 609.4 592.5
----- -----
650.3 636.5
Less accumulated depreciation and amortization.............. (244.3) (216.4)
------- -------
406.0 420.1
Intangible assets, net........................................ 65.6 81.3
Net assets of discontinued operations (note 7)................ 3.4 3.4
Other assets, net (note 3).................................... 23.7 22.7
----- -------
$ 547.5 579.1
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................ $ 64.3 93.9
Accrued and other liabilities............................... 44.6 40.7
Current portion of long-term debt (notes 3 and 6)........... 6.7 8.5
----- -------
Total current liabilities................................. 115.6 143.1
Other liabilities (note 4).................................... 56.6 48.3
Debt (notes 3 and 6).......................................... 702.2 645.4
Liabilities attributable to discontinued operations (note 7).. 3.7 4.9
------ ------
Total liabilities......................................... 878.1 841.7
Minority interests in equity of consolidated subsidiaries..... 5.7 5.6
Stockholders' equity (deficit) (note 3):
Common stock:
Class A................................................... 0.1 0.1
Class B................................................... - -
Class C................................................... - -
Additional paid-in capital.................................. 51.1 51.1
Accumulated deficit......................................... (385.4) (317.5)
Treasury stock.............................................. (2.1) (1.9)
-------- -------
Total stockholders' equity (deficit)..................... (336.3) (268.2)
------- -------
$ 547.5 579.1
===== =====
</TABLE>
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>
Thirteen Weeks Thirty-Nine Weeks Three Months Nine Months
Ended Ended Ended Ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenue:
Admissions............................... $ 125.2 332.9 127.9 347.5
Concession sales......................... 49.5 133.1 53.0 143.9
Other.................................... 5.5 16.6 3.1 11.9
-------- ------- -------- -------
180.2 482.6 184.0 503.3
-------- ------- -------- -------
Costs and expenses:
Film rental and advertising expenses..... 69.6 186.4 70.0 190.0
Direct concession costs.................. 6.7 17.8 7.3 20.8
Occupancy expense (note 4) .............. 23.3 69.9 21.7 62.8
Other operating expenses................. 48.5 142.0 49.2 140.6
General and administrative............... 5.4 17.2 5.9 17.1
Depreciation and amortization............ 13.8 41.0 13.3 39.1
Provisions for impairment (note 9)....... 16.1 25.9 11.8 19.4
-------- ------- -------- -------
183.4 500.2 179.2 489.8
-------- ------- -------- -------
Operating income (loss) from continuing
operations......................... (3.2) (17.6) 4.8 13.5
Other income (expense):
Interest, net (notes 3 and 6)............ (17.1) (49.1) (15.3) (39.8)
Gain on disposition of assets............ 0.8 4.3 - 0.6
Share of losses of affiliates, net....... - - (0.1) (0.3)
Minority interests in earnings of
consolidated subsidiaries.............. (0.2) (0.9) (0.4) (1.1)
Other, net............................... (3.5) (4.1) (1.4) (2.9)
-------- ------- -------- -------
(20.0) (49.8) (17.2) (43.5)
-------- ------- -------- -------
Loss from continuing operations before
income tax expense, discontinued
operations and extraordinary item.... (23.2) (67.4) (12.4) (30.0)
Income tax expense (note 8)................ (0.2) (0.5) (0.2) (0.9)
-------- ------- -------- -------
Loss from continuing operations.......... (23.4) (67.9) (12.6) (30.9)
Discontinued operations (note 7)........... - - (13.0) (15.4)
-------- ------- -------- -------
Loss before extraordinary item........... (23.4) (67.9) (25.6) (46.3)
Extraordinary item - loss on early
extinguishment of debt (note 3).......... - - - (7.9)
-------- ------- -------- -------
Net loss............................... (23.4) (67.9) (25.6) (54.2)
Dividend on preferred stock (note 3)....... - - - (9.0)
-------- ------- -------- -------
Net loss available to
common stockholders.................... $ (23.4) (67.9) (25.6) (63.2)
======== ======= ======== =======
</TABLE>
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 Total
stock stock stock paid-in Accumulated Treasury stockholders'
Class A Class B Class C Capital Deficit Stock Equity (Deficit)
------- ------- ------- ---------- ------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999......... $ 0.1 - - 51.1 (317.5) (1.9) (268.2)
Purchase of treasury stock......... - - - - - (0.2) (0.2)
Net loss........................... - - - - (67.9) - (67.9)
------ ------ ------ ------ ------ --------- ---------
Balance at September 30, 1999 ..... $ 0.1 - - 51.1 (385.4) (2.1) (336.3)
====== ====== ====== ====== ====== ========= =========
</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>
Thirty-Nine Weeks Nine Months
Ended Ended
September 30,1999 September 30, 1998
----------------- ------------------
<S> <C> <C>
Net cash provided by (used in) operating activities.......................... $(21.8) 29.5
------ ------
Cash flow from investing activities:
Capital expenditures....................................................... (40.5) (81.1)
Increase in receivable from sale and leaseback............................. (0.5) (7.1)
Proceeds from disposition of assets........................................ 8.7 3.5
Proceeds from sale and leaseback transaction............................... 5.4 1.0
Investment in and receivables from theatre joint ventures.................. 5.6 -
Early lease termination payments........................................... (2.2) (1.0)
Other, net................................................................. (1.6) (3.5)
------ ------
Net cash used in investing activities.................................... (25.1) (88.2)
------ ------
Cash flow from financing activities:
Proceeds from issuance of Senior Subordinated Notes........................ - 265.9
Debt borrowings............................................................ 129.0 508.0
Debt repayments............................................................ (74.0) (427.2)
Redemption of preferred stock.............................................. - (159.2)
Repurchase of Senior Secured Notes......................................... - (128.6)
Increase (decrease) in cash overdraft...................................... (4.9) 4.3
Other, net................................................................. (4.9) (6.8)
------ ------
Net cash provided by financing activities................................ 45.2 56.4
------ ------
Net decrease in cash..................................................... (1.7) (2.3)
Cash and cash equivalents:
Beginning of period........................................................ 8.2 10.8
------ ------
End of period.............................................................. $ 6.5 8.5
====== ======
Reconciliation of net loss to net cash provided by (used in) operating
activities:
Net loss................................................................... $(67.9) (54.2)
Discontinued operations.................................................... (1.2) 12.9
Extraordinary item......................................................... - 7.9
Effect of leases with escalating minimum annual rentals.................... 3.6 2.7
Depreciation and amortization.............................................. 41.0 39.1
Provisions for impairment.................................................. 25.9 19.4
Gain on disposition of assets.............................................. (4.3) (0.6)
Share of losses of affiliates, net......................................... - 0.3
Minority interests in earnings of consolidated subsidiaries................ 0.9 1.1
Change in assets and liabilities:
Receivables.............................................................. (0.6) 0.8
Prepaid expenses and concession inventory................................ (7.3) (2.1)
Other assets............................................................. 4.7 0.7
Accounts payable......................................................... (17.8) 0.2
Accrued and other liabilities............................................ 1.2 1.3
------ ------
Net cash provided by (used in) operating activities...................... $(21.8) 29.5
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(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.
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, 1998
consolidated financial statements and notes thereto included as part of
United Artists' Form 10-K.
(2) CHANGE IN REPORTING PERIOD
During 1999, United Artists 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. This change was
made to more accurately reflect United Artists' natural business cycle.
The periods presented in these financial statements are for the
thirteen and thirty-nine weeks ended September 30, 1999 and the three
and nine months ended September 30, 1998.
(3) 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 (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 2005.
8
<PAGE>
UNITED ARTISTS THEATRE COMPANY
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 to fund the redemption of United Artists' preferred stock
(approximately $159.2 million) and the redemption of UATC's $125
million senior secured notes (the "Senior Secured Notes") at 102.875%
of par value plus accrued but unpaid interest of approximately $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).
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.
(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. 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. 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 thirty-nine weeks ended September 30, 1999, approximately
$9.2 million of the sales proceeds were received from the escrow
account 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.
During 1999, UATC and UAR entered into three separate sale and
leaseback transactions on one existing theatre and two theatres
currently under construction. Total proceeds from the sale and
leaseback transactions will be approximately $19.1 million. During the
thirty-nine weeks ended September 30, 1999, UAR received approximately
$5.4 million of the sales proceeds.
9
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(4) SALE AND LEASEBACK TRANSACTIONS, CONTINUED
The leases have terms ranging from 20 to 25 years with options to
extend for an additional 20 to 23 years.
(5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $41.9 million and $32.6 million for the
thirty-nine weeks ended September 30, 1999 and the nine months ended
September 30, 1998 respectively.
United Artists accrued $9.0 million of dividends during the nine months
ended September 30, 1998 on its preferred stock. The preferred stock
was redeemed during 1998 as part of the recapitalization (see Note 3).
(6) DEBT
Debt is summarized as follows (amounts in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
New Bank Credit Facility (a).................... $ 424.5 365.3
Senior Subordinated Notes (b)................... 275.0 275.0
Other (c)....................................... 9.4 13.6
---------- --------
708.9 653.9
Less current portion............................ (6.7) (8.5)
---------- --------
$ 702.2 645.4
========== ========
</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 and Tranche C
Term Loans require semi-annual principal payments commencing
December 31, 1998 through December 30, 2004 of 1/2% of the
December 31, 1998 outstanding balance and a final payment of
93 1/2% of the December 31, 1998 outstanding balance on April
21, 2005.
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.
10
<PAGE>
UNITED ARTISTS THEATRE COMPANY
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, 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 United
Artists and by an intercompany note from UATC to United
Artists established with respect to borrowings by UATC from
United Artists. Additionally, the New Bank Credit Facility is
secured by mortgages on certain of United Artists' properties.
The New Bank Credit Facility contains provisions that require
United Artists to maintain certain financial ratios and places
limitations on, among other things, capital expenditures,
additional indebtedness, disposition of assets and restricted
payments.
(b) The Senior Subordinated Notes consist of $225.0 million of the
9.75% Fixed Rate Subordinated Notes and $50.0 million of 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 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.
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) Other debt at September 30, 1999 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.
11
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DEBT, CONTINUED
At September 30, 1999, United Artists was party to interest rate collar
agreements on $150.0 million of floating rate debt which provide for a
LIBOR interest rate cap of 6% and a LIBOR interest rate floor of
approximately 5 1/2%, expiring 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 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 cap agreements are recorded as a
reduction of interest expense.
At September 30, 1999, United Artists had approximately $18.0 million
of Revolving Facility commitments, $2.7 million of which has been used
for the issuance of letters of credit. United Artists pays commitment
fees of 5/8% per annum on the average unused commitments. As of October
15, 1999, United Artists had borrowed $15.0 million of the remaining
unused commitments under the Revolving Facility to fund the October 15,
1999 interest payments on the Senior Subordinated Notes. After this
borrowing, $0.3 million of unused commitments were available under the
Revolving Facility.
The primary source of principal and interest payments related to the
New Bank Credit Facility and the Senior Subordinated Notes comes 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 4).
Interest, net includes amortization of deferred loan costs of $0.6
million and $0.2 million for the thirteen weeks ended September 30,
1999 and the three months ended September 30, 1998, respectively and
$1.5 million and $0.9 million for the thirty-nine weeks ended September
30, 1999 and the nine months ended September 30, 1998, respectively.
Additionally, interest, net includes interest income of $0.1 million
for the thirteen weeks ended September 30, 1999 and the three months
ended September 30, 1998 and $1.2 million and $0.6 million for the
thirty-nine weeks ended September 30, 1999 and for the nine months
ended September 30, 1998, respectively.
(7) DISCONTINUED OPERATIONS
During 1998, United Artists 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 and liabilities related to
the discontinued operations were $3.4 million and $3.7 million at
September 30, 1999, and $3.4 million and $4.9 million at December 31,
1998, respectively. The net loss from discontinued operations was $13.0
million and $15.4 million for the three and nine months ended September
30, 1998,
12
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(7) DISCONTINUED OPERATIONS, CONTINUED
respectively. Revenue generated by the discontinued operations was $0.1
million for the three months ended September 30, 1998 and $0.2 million
and $0.8 million for the thirty-nine weeks ended September 30, 1999 and
the nine months ended September 30, 1998, respectively. Included in the
net loss from discontinued operations was interest expense of $0.4
million and $1.2 for the three and nine months ended September 30,
1998, respectively. Interest expense was allocated to the discontinued
operations based upon the average fixed asset balance and United
Artists' average borrowing rate.
(8) 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.
At September 30, 1999, United Artists had a net operating loss
carryforward for federal income tax purposes of approximately $183.0
million.
United Artists' 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 United Artists' net operating
loss carryforward and/or change the basis (and thus future tax
depreciation) related to certain assets. United Artists believes that
the result of the audit will not have a material adverse effect on its
financial condition or results of operation.
(9) PROVISIONS FOR IMPAIRMENT
United Artists recorded non-cash charges for the impairment of its
long-lived assets of $16.1 million and $25.9 million during the
thirteen and thirty-nine weeks ended September 30, 1999, respectively,
and $11.8 million and $19.4 million during the three and nine months
ended September 30, 1998, 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).
(10) SEGMENT INFORMATION
United Artists' operations are classified into two business segments;
theatre 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 a networked basis.
13
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) SEGMENT INFORMATION, CONTINUED
The following table presents certain information relating to the
theatre operations and Satellite Theatre Network-TM- segments for the
thirteen and thirty-nine weeks ended September 30, 1999 and the three
and nine months ended September 30, 1998 (amounts in millions):
<TABLE>
<CAPTION>
Theatre Satellite
Operations Theatre Network Total
---------- --------------- -------
<S> <C> <C> <C>
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 30, 1999
Revenue................................................... $ 179.1 1.1 180.2
Operating income (loss)................................... (3.2) - (3.2)
Depreciation and amortization............................. 13.5 0.3 13.8
Assets.................................................... 543.6 3.9 547.5
Capital expenditures...................................... 16.2 - 16.2
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenue................................................... 183.8 0.2 184.0
Operating income (loss)................................... 5.7 (0.9) 4.8
Depreciation and amortization............................. 13.0 0.3 13.3
Assets.................................................... 575.6 3.9 579.5
Capital expenditures...................................... 33.8 - 33.8
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1999
Revenue................................................... 478.8 3.8 482.6
Operating income (loss)................................... (17.5) (0.1) (17.6)
Depreciation and amortization............................. 40.1 0.9 41.0
Assets.................................................... 543.6 3.9 547.5
Capital expenditures...................................... 41.0 - 41.0
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue................................................... 500.1 3.2 503.3
Operating income (loss)................................... 14.6 (1.1) 13.5
Depreciation and amortization............................. 38.2 0.9 39.1
Assets.................................................... 575.6 3.9 579.5
Capital expenditures...................................... 88.2 - 88.2
</TABLE>
(11) COMPREHENSIVE INCOME
Separate statements of comprehensive income have not been presented in
these financial statements as there are no comprehensive income items
that are not reflected in the statements of operations.
14
<PAGE>
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(12) 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,
anti-trust 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 the
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 affect on
United Artists' 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, United Artists 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 thirty-nine weeks ended September 30, 1999 and the three and
nine months ended September 30, 1998. 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.
RESULTS OF OPERATIONS
THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1999 AND
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
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>
Thirteen Three Thirty-Nine Nine
Weeks Months Weeks Months
Ended Ended Ended Ended
----- ----- ----- -----
September 30, % September 30, %
------------- Increase ------------- Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating Theatres (1)
Revenue:
Admissions...................................... $125.2 127.9 (2.1)% 332.9 347.5 (4.2)%
Concession sales................................ 49.5 53.0 (6.6) 133.1 143.9 (7.5)
Other........................................... 5.5 3.1 77.4 16.6 11.9 39.5
Operating Expenses:
Film rental and advertising expenses............ 69.6 70.0 (0.6) 186.4 190.0 (1.9)
Concession costs................................ 6.7 7.3 (8.2) 17.8 20.8 (14.4)
Occupancy expense............................... 23.3 21.7 7.4 69.9 62.8 11.3
Other Operating Expenses........................
Personnel expense............................ 25.0 25.0 - 73.4 71.2 3.1
Miscellaneous operating expenses............. 23.5 24.2 (2.9) 68.6 69.4 (1.2)
Weighted Avg. Operating Theatres(2)............... 303 320 (5.3) 310 326 (4.9)
Weighted Avg. Operating Screens(2) ............... 2,095 2,145 (2.3) 2,136 2,152 (0.7)
Weighted Avg. Screens Per Theatre................. 6.9 6.7 3.2 6.9 6.6 4.4
Admissions Per Weighted Avg. Operating
Theatre.......................................... 413,201 399,688 3.4 1,073,871 1,065,951 0.7
Admissions Per Weighted Avg. Operating
Screen........................................... 59,761 59,627 0.2 155,852 161,478 (3.5)
Concession Sales Per Weighted Avg.
Operating Theatre................................ 163,366 165,625 (1.4) 429,355 441,411 (2.7)
</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.
16
<PAGE>
REVENUE FROM OPERATING THEATRES
ADMISSIONS: Admissions revenue decreased 2.1% during the thirteen weeks ended
September 30, 1999 as compared to the three months ended September 30, 1998.
This decrease was primarily due to a 7.2% decrease in attendance, partially
offset by a 5.5% increase in the average ticket price. The attendance decline
during the thirteen weeks ended September 30, 1999 was primarily due to the
sale and/or closure of several underperforming theatres and the opening of
new stadium seating theatres in certain of the markets where United Artists
operates. The number of weighted average operating theatres and screens
decreased during the thirteen weeks ended September 30, 1999 by 5.3% and
2.3%, respectively. Admissions per weighted average theatre and screen
increased increased 3.4% and 0.2%, respectively, during the thirteen weeks
ended September 30, 1999. Admissions revenue decreased 4.2% during the
thirty-nine weeks ended September 30, 1999 as compared to the nine months
ended September 30, 1998. This decrease was primarily due to an 8.9% decrease
in attendance, partially offset by a 5.2% increase in the average ticket
price. The attendance decline during the thirty-nine weeks ended September
30, 1999 was due to United Artists closing and/or selling several
underperforming theatres during the period, the short run of several films
released at the end of 1998 and a weak film release schedule during the first
four months of 1999, as compared to the unprecedented success of the film
TITANIC during the same 1998 period and the adverse impact of new stadium
seating theatre construction. The number of weighted average operating
theatres and screens decreased 4.9% and 0.7%, respectively, during the
thirty-nine weeks ended September 30, 1999. Admissions per weighted average
operating theatre increased 0.7% while admissions per weighted average
operating screen decreased 3.5% during the thirty-nine weeks ended September
30, 1999. The increases in the average ticket prices during the thirteen and
thirty-nine weeks ended September 30, 1999 were due to an increase in the
percentage of adult, non-matinee tickets sold and certain selective ticket
price increases during 1998 and early 1999.
CONCESSION SALES: Concession sales decreased 6.6% and 7.5% during the
thirteen and thirty-nine weeks ended September 30, 1999, respectively, as
compared to the three and nine months ended September 30, 1998. These
decreases in concession sales were primarily due to the decreased attendance
discussed above, partially offset by increases in the average concession
sales per patron of 0.6% and 1.5% for the thirteen and thirty-nine weeks
ended September 30, 1999, respectively. While concession sales growth was
adversely impacted by film mix (fewer children's and action films),
improvements were realized as a result of 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 77.4% and 39.5% during the thirteen and thirty-nine
weeks ended September 30, 1999, respectively, as compared to the three and
nine months ended September 30, 1998 primarily as a result of increases in
on-screen advertising revenue. During the thirteen and thirty-nine weeks
ended September 30, 1999, on-screen advertising increased 89.8% and 124.2%,
respectively. Revenue generated by the Satellite Theatre Network-TM-
increased 464.1% and 21.3% during the thirteen and thirty-nine weeks ended
September 30, 1999, respectively.
OPERATING EXPENSES FROM OPERATING THEATRES
FILM RENTAL AND ADVERTISING EXPENSES: Film rental and advertising expenses
decreased 0.6% and 1.9% during the thirteen and thirty-nine weeks ended
September 30, 1999, respectively, as compared to the three and nine months
ended September 30, 1998, primarily as a result of the decrease in admissions
revenue discussed above. Film rental and advertising expenses as a percentage
of admissions revenue for the thirteen weeks ended September 30, 1999 and the
three months ended September 30, 1998 were 55.6% and 54.7%, respectively, and
56.0% and 54.7% for the thirty-nine
17
<PAGE>
weeks ended September 30, 1999 and the nine months ended September 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 highly anticipated films released in May
and June and the shorter run of certain films. 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 8.2% and 14.4%
during the thirteen and thirty-nine weeks ended September 30, 1999,
respectively, as compared to the three and nine months ended September 30,
1998. Concession costs as a percentage of concession sales revenue for the
thirteen weeks ended September 30, 1999 and the three months ended September
30, 1998 were 13.5% and 13.8%, respectively, and 13.4% and 14.5% for the
thirty-nine weeks ended September 30, 1999 and the nine months ended
September 30, 1998, respectively. The decrease in concession costs as a
percentage of concessions revenue for the thirteen and thirty-nine weeks
ended September 30, 1999 was primarily due to the rebidding or restructuring
of the product and distribution contracts associated with many of United
Artists' concession products.
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 7.4% and 11.3% during the thirteen and thirty-nine weeks
ended September 30, 1999, respectively, as compared to the three and nine
months ended September 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. 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 $3.6 million for the thirteen and thirty-nine weeks ended
September 30, 1999, respectively, and $0.9 million and $2.7 million for the
three and nine months ended September 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. Despite a 3.3% increase in the floor
staff hourly rates, personnel expense remained constant during the thirteen
weeks ended September 30, 1999 as compared to the three months ended
September 30, 1998. The 3.1% increase in personnel expense during the
thirty-nine weeks ended September 30, 1999, as compared to the nine months
ended September 30, 1998 related primarily to a 3.5% increase in the average
hourly rate. 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 thirty-nine weeks ended September 30, 1999 was negatively impacted by the
lower attendance during the first four months of 1999 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 decreased 2.9% and 1.2% during the thirteen and thirty-nine weeks
ended September 30, 1999, respectively, as compared to the three and nine
months ended September 30, 1998. These fluctuations were primarily due to
lower insurance, supplies, repair and maintenance expenses, common area
maintenance and utilities expenses, partially offset by higher expenses
associated with in-theatre advertising and the Satellite Theatre Network-TM- .
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.
18
<PAGE>
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 United Artists' corporate headquarters, two film booking and
regional operating offices and 14 district theatre operations offices
(generally located in theatres). General and administrative expenses
decreased $0.5 million, or 8.5%, during the thirteen weeks ended September
30, 1999 as compared to the three months ended September 30, 1998 due
primarily to reduced personnel and travel and entertainment expenses. General
and administrative expenses increased $0.1 million for the thirty-nine weeks
ended September 30, 1999 as compared to the nine months ended September 30,
1998, 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 $0.5 million and $1.9
million during the thirteen and thirty-nine weeks ended September 30, 1999,
respectively, as compared to the three and nine months ended September 30,
1998. These increases were primarily due to increased depreciation charges on
United Artists' newly opened theatres. United Artists recorded non-cash
provisions for asset impairments associated with unprofitable theatres of
$16.1 million and $25.9 million during the thirteen and thirty-nine weeks
ended September 30, 1999 respectively, and $11.8 million and $19.4 million
during the three and nine months ended September 30, 1998, respectively.
OPERATING INCOME (LOSS)
United Artists incurred an operating loss of $3.2 million during the thirteen
weeks ended September 30, 1999 as compared to generating operating income of
$4.8 million for the three months ended September 30, 1998. During the
thirty-nine weeks ended September 30, 1999, United Artists incurred an
operating loss of $17.6 million as compared to generating operating income of
$13.5 million for the nine months ended September 30, 1998. These 1999
decreases in operating income were due primarily to lower revenue, higher
occupancy and operating expenses, higher depreciation and amortization
expenses and provisions for impairment.
INTEREST
Interest, net increased $1.8 million and $9.3 million during the thirteen and
thirty-nine weeks ended September 30, 1999, respectively, as compared to the
three and nine months ended September 30, 1998. These increases were due
primarily to an increase in the interest rate on the New Bank Credit Facility
and a higher average debt balance associated with the redemption of United
Artists' preferred stock as a part of the May 1998 recapitalization.
DISCONTINUED OPERATIONS
During 1998 United Artists established a plan to dispose of its entertainment
center business operations. 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. Included in the net loss from discontinued operations
for the three months and nine months ended September 30, 1998 was interest
expense of $0.4 million and $1.2 million, respectively.
19
<PAGE>
EXTRAORDINARY ITEM
As a result of the repayment of the Bank Credit Facility and the redemption
of 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 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 September 30, 1999 and the three months ended
September 30, 1998, United Artists incurred net losses available to common
stockholders of $23.4 million and $25.6 million, respectively. This decrease
relates primarily to the loss from discontinued operations recorded during
the three months ended September 30, 1998, partially offset by decreased
operating income and increased interest expense during the thirteen weeks
ended September 30, 1999. During the thirty-nine weeks ended September 30,
1999 and the nine months ended September 30, 1998, United Artists incurred
net losses available to common stockholders of $67.9 million and $63.2
million, respectively. This increase relates primarily to reduced operating
results for the thirteen weeks ended April 1, 1999, increased depreciation
and amortization expense, and provisions for impairment, partially offset by
the dividends on preferred stock, the extraordinary loss on the early
extinguishment of debt, and the loss from discontinued operations recorded
during the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the thirty-nine weeks ended September 30, 1999, $21.8 million of cash was
used in United Artists' operating activities. This operating use of cash, in
addition to $25.1 million of cash used for capital expenditures and other
investing activities, was provided by $45.2 million of financing activities
and $1.7 million of the cash balances available at December 31, 1998.
Substantially all of United Artists' admissions and concession sales revenue
is 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.
During May 1998, United Artists 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, 2005.
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.
20
<PAGE>
As part of its strategic plan, United Artists 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. United Artists 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 United Artists 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. United Artists is in
the process of disposing of 47 operating theatres (307 screens) and 37 closed
theatres or under utilized parcels of real estate. For the twelve months
ended September 30, 1999, these theatres generated $11.9 million of negative
EBITDA (earnings before interest, taxes, depreciation and amortization).
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 September 30, 1999, United Artists received approximately $8.7
million of proceeds as a result of the sale or early lease buyouts associated
with eight theatres (39 screens) and disbursed approximately $2.2 million as
early lease termination payments relating to five theatres (38 screens).
Additionally, seven theatres (44 screens) were closed, the leases on four
theatres (18 screens) expired and one theatre (eight screens) was subleased
to another theatre operator. The theatres that were closed or sold were
primarily smaller, older theatres that were not part of United Artists' long
term strategic plans or were underperforming. In aggregate, these theatres
generated approximately $4.5 million of negative EBITDA for the twelve months
prior to the sale or closure.
In an effort to limit the amount of investment exposure on any one project,
United Artists typically develops theatre projects where both 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 thirty-nine weeks ended
September 30, 1999, United Artists invested $11.3 million on eight theatres
(101 screens) which opened during 1998 and approximately $29.7 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. Additionally, United Artists received $5.4 million of
proceeds from a 1999 sale and leaseback transaction.
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.
21
<PAGE>
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 $9.2
million of the sales proceeds were paid to UATC during 1999 for reimbursement
of certain of the construction costs relating to the two theatres.
During 1999, UATC and UAR entered into three separate sale and leaseback
transactions on one existing theatre and two theatres currently under
construction. Total proceeds from the sale and leaseback transactions will be
approximately $19.1 million. During the thirty-nine weeks ended September 30,
1999, UAR received approximately $5.4 million of the sales proceeds. The
leases have terms ranging from 20 to 25 years with options to extend for an
additional 20 to 23 years.
At September 30, 1999, United Artists had entered into construction or lease
agreements for one new theatre (16 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 United Artists
intends to open during the next 12 months. United Artists estimates that
capital expenditures associated with these theatres will aggregate
approximately $39.3 million. Approximately $6.7 million relating to these
theatres had been spent through September 30, 1999 and $9.7 million will be
received from a sale and leaseback transaction. Such amount relates only to
projects in which United Artists had executed a definitive lease and all
significant lease contingencies have been satisfied. United Artists will make
additional capital expenditures for ongoing maintenance and with regard to
the renovation or expansion of existing key locations as opportunities
present themselves and capital resources are available. Because a significant
portion of United Artists' future capital spending plans relate to the
renovation and/or expansion of existing key locations, 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.
United Artists is party to interest rate collar agreements on $150.0 million
of floating rate debt which provide for a LIBOR interest rate cap of 6% per
annum and LIBOR interest rate floors of approximately 5 1/2%, expiring at
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. 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.
At the September 30, 1999, United Artists had $15.3 million of unused
commitments under the Revolving Facility. As of October 15, 1999, United
Artists had borrowed $15.0 million of the remaining unused commitments under
the Revolving Facility to fund the October 15, 1999 interest payments on the
Senior Subordinated Notes. After this borrowing, $0.3 million of unused
commitments were available under the Revolving Facility.
United Artists believes that the net cash provided by operations in future
periods, proceeds from asset sales and sale leaseback transactions will be
sufficient to fund its future cash requirements. United Artists expects the
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 indebtedness will be subject
to the success of motion pictures released in the future, future economic
conditions and to financial, business and other factors, many of which are
beyond United Artists' control. Additionally, United Artists' ability to
incur additional indebtedness may be limited by covenants contained in the
Participation Agreement relating to the 1995 Sale and Leaseback discussed
above.
OTHER
United Artists' 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
22
<PAGE>
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.
YEAR 2000
United Artists 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. United Artists' review encompasses this type of
equipment, segmented into three broad areas: computer based systems in United
Artists' theatres; computer based systems at United Artists' administrative
offices; and products and services provided by outside vendors.
COMPUTER BASED SYSTEMS IN UNITED ARTISTS' THEATRES: United Artists' 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
transactions, issues admission tickets and relays the daily operational
information to United Artists' corporate computer system. United Artists
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
September 30, 1999, replacement of United Artists' POS system was
approximately 95% complete. United Artists expects that by December 31, 1999
all of its operating theatres will be year 2000 compliant. If the POS system
were to malfunction or fail, manual backup systems currently in place at the
theatres could be utilized.
Most all of the United Artists' theatres are equipped with projection and
sound systems and energy management systems which 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 UNITED ARTISTS' ADMINISTRATIVE OFFICES: United
Artists' 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 United Artists purchased and
implemented a new general ledger and accounts payable system. An upgrade to
the existing payroll system, including human resources information, payroll
checks and theatre time clocks, is approximately 90% completed. 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
United Artists 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 United Artists 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: United Artists is very
dependent upon products and services provided by outside vendors. Year 2000
compliance by these vendors is voluntary and
23
<PAGE>
outside of the control of United Artists. The major products and services
that United Artists is dependent upon vendors for include film supply,
concessions inventory and utilities. If any of these vendors were to
experience year 2000 problems, United Artists could experience material and
adverse consequences. United Artists has been advised by its major vendors
that they expect to be year 2000 compliant.
United Artists is very dependent upon the banking industry for depositing
daily cash receipts and making vendor and payroll disbursements. United
Artists 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, United Artists could
experience material and adverse consequences.
Although this review is still in progress, United Artists 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' cost associated with year
2000 upgrades and preventative measures is expected to be less than $0.5
million.
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, United Artists
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 United Artists include elements that are considered to
be structural in nature as defined by Issue No. 97-10. As a result, United
Artists 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 United Artists changes the manner in
which it contracts for the construction of theatres, United Artists believes
that Issue No. 97-10 will require certain of its future operating leases to
be recorded as lease financing obligations. United Artists believes that none
of its current construction commitments 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 United
Artists 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. United Artists 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 United Artists' consolidated financial position, results
of operation or cash flow.
24
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
United Artists is subject to market risk associated with changes in interest
rates on its debt obligations. United Artists 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 United
Artists' financial instruments that are sensitive to changes in interest
rates (amounts in millions):
<TABLE>
<CAPTION>
Expected Maturity Date
September 30, Fair
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Total Indebtedness
Fixed Rate $3.2 1.9 0.4 0.4 0.4 228.1 234.4 54.4
Avg. Interest Rate 9.4% 9.2 7.8 7.8 7.8 9.7 9.7
Floating Rate $3.5 3.5 7.7 35.8 53.8 370.2 474.5 358.0
Avg. Interest Rate (1) (1) (1) (1) (1) (1) (1)
Interest Rate Collars
(notional amount) - 150.0 - - - - 150.0 0.3
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 September 30, 1999 was
10.0%.
(2) The average interest rate cap is 6.0% through August 2001.
(3) The average interest rate floor is 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 September 29, 1999, United Artists 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 COMPANY
(Registrant)
/S/ TRENT J. CARMAN
---------------------------------------
By: Trent J. Carman
Chief Financial Officer
Date: November 11, 1999
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,500
<SECURITIES> 0
<RECEIVABLES> 13,700
<ALLOWANCES> 0
<INVENTORY> 24,600
<CURRENT-ASSETS> 45,000
<PP&E> 650,300
<DEPRECIATION> (244,300)
<TOTAL-ASSETS> 547,500
<CURRENT-LIABILITIES> 115,600
<BONDS> 702,200
0
0
<COMMON> 100
<OTHER-SE> (336,200)
<TOTAL-LIABILITY-AND-EQUITY> 541,800
<SALES> 133,100
<TOTAL-REVENUES> 482,600
<CGS> 17,800
<TOTAL-COSTS> 500,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (49,100)
<INCOME-PRETAX> (67,400)
<INCOME-TAX> (500)
<INCOME-CONTINUING> (67,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,900)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
