UNITED ARTISTS THEATRE COMPANY

AND SUBSIDIARIES

UNITED ARTISTS THEATRE COMPANY

AND SUBSIDIARIES

United Artists Theatre Company ("United Artists" or the "Company") (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 Merrill Lynch Capital Appreciation Fund II and certain institutional investors (collectively, the "Non-Management Investors"), and certain members of UATC's 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 2000 presentation.

In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made in the accompanying interim condensed consolidated financial statements that 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 30, 1999 consolidated financial statements and notes thereto included as part of United Artists' Form 10-K.

On September 5, 2000, the Company and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.  Therefore, the Debtors are operating their businesses as debtors-in-possession, subject to the jurisdiction of the bankruptcy court.  The Chapter 11 Cases are being jointly administered for procedural purposes only under Case No. 00-3514 (SLR).

On September 5, 2000, the Debtors also filed with the bankruptcy court a proposed joint plan of reorganization (the "Plan") which is available for review.  Under the terms of certain lock-up agreements and as reflected in the Plan, certain lenders under the Bank Credit Facility (as discussed in more detail in Note 7) would have 72.5% of the borrowings aggregating approximately $348.0 million under the Bank Credit Facility re-instated, and would also receive common equity.  The Company's largest pre-petition lender with approximately $92.0 million under its Bank Credit Facility, E.N. Investment Company (a wholly-owned subsidiary of The Anschutz Corporation (together with E.N. Investment Company, "TAC")) would receive a combination of convertible preferred and common equity and warrants to purchase common stock at a $10.00 per share strike price.  Holders of the Company's Senior Subordinated Notes (the "Notes", as more fully described in Note 7) will receive warrants to acquire common stock of the Company at a $10.00 per share strike price, allowing for ownership of up to 6.7% of the Company should all warrants be exercised.  Other unsecured creditors would share in a pool of $2.5 million in cash.  Subsequent to recapitalization, "TAC" will own securities representing approximately 55% of the fully diluted ownership of the Company.  TAC has also provided a $25.0 million debtor-in-possession credit facility (the "DIP Facility") to the Company as more fully described in Note 3.  Holders of the Company's existing common stock would not receive any distribution under the Plan and such shares would be cancelled.  The bankruptcy court has scheduled a confirmation hearing on the Plan on January 22, 2001.

UNITED ARTISTS THEATRE COMPANY

As debtors-in-possession, the Debtors are authorized to operate in the ordinary course of business, but may not engage in transactions outside the ordinary course of business without approval of the bankruptcy court.  As of the petition date, actions to collect pre-petition indebtedness have been stayed and other pre-petition contractual obligations may not be enforced against the Debtors.  In addition, the Debtors may reject executory contracts and unexpired leases, and parties affected by these rejections may file claims with the bankruptcy court in accordance with procedures set by the bankruptcy court and the Bankruptcy Code.  The bankruptcy court has set November 15, 2000 as the bar date for filing proofs of claim against the Debtors.

On September 6, 2000, and in conjunction with its Plan, the Company presented, among others, the following "First Day" motions, which the bankruptcy court approved:

On September 25, 2000, final approval was granted to allow the Company to draw on the entire $25.0 million DIP Facility, which provides additional financing to pay, among other things: employee salaries and benefits, post-petition and certain pre-petition obligations of vendors, interest, fees, and other costs due under the Bank Credit Facility and the DIP Facility, professional fees, and permitted capital expenditures.

As permitted under the Bankruptcy Code and approved by the bankruptcy court, the Debtors have elected to reject certain real estate leases.  The Debtors have not yet completed their review of all pre-petition contracts and leases for assumption or rejection.  The Debtors will continue their analysis, and may assume or reject additional leases and other executory contracts.  For the thirty-nine weeks ended September 28, 2000, the Company has recorded a charge to income of $15.2 million relating to rejected leases.

The accompanying consolidated interim financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business.  However, the uncertainty regarding the eventual outcome of the reorganization cases of the Debtors, and the effect of other unknown adverse factors, could threaten the Debtors' existence as going concerns.  Continuing on a going concern basis is dependent upon, among other things, the confirmation of a plan of reorganization, the success of future business operations, and the generation of sufficient cash from operations and financing sources to meet the Debtors' obligations.  The accompanying condensed consolidated interim financial statements do not reflect (a) adjustments that may be necessary to present the realizable value of assets on a liquidation basis, (b) aggregate pre-petition liability amounts that may be allowed for claims or contingencies, or their status or priority, (c) the effect of any changes to the Debtors' capital structure or in their business operations as the result of a confirmed plan of reorganization, or (d) adjustments to the carrying value of assets or liability amounts that may be necessary as the result of actions by the bankruptcy court.

UNITED ARTISTS THEATRE COMPANY

All costs and expenses associated with the Company's restructuring efforts incurred prior to the petition filing date have been reflected as pre-petition restructure expenses.  Such expenses consisted principally of professional fees paid to representatives of the Debtors, and professional fees incurred by the Company's lenders under the Bank Credit Facility and the holders of the Notes.

All costs and expenses incurred in connection with the Company's reorganization since the petition filing date through September 28, 2000 have been reflected as reorganization items in the accompanying consolidated statements of operations.  Through such date, the reorganization items consisted primarily of charges of $16.3 million resulting from the elimination of deferred loan costs relating to debt subject to compromise and $1.1 million for professional fees and other costs related to the Company's restructuring.

On September 25, 2000, the bankruptcy court gave final approval of the Company's DIP Facility, providing for borrowings of up to $25.0 million.  The DIP Facility is being provided by The Anschutz Corporation.  The DIP Facility provides additional funding for the Company's operating expenses, including employee salaries and benefits, payments to vendors, interest and certain other payments under the Bank Credit Facility and the DIP Facility, professional fees and permitted capital expenditures.  Under the terms of the DIP Facility, the revolving funds are available until the earliest of (i) June 5, 2001, (ii) the date on which the Plan becomes effective, or (iii) the date on which the commitment under the DIP Facility shall terminate or be reduced to zero under its terms.  Draws made under the DIP Facility bear interest at a rate equal to 3.25% above the 30-day LIBOR rate at the time of the draw.  The Company is required to pay a commitment fee of 0.5% on the unused portion of the DIP Facility.  The DIP Facility contains financial covenants requiring the maintenance of minimum cumulative Operating Cash Flow (as defined) and limiting capital expenditures, as well as negative covenants limiting additional indebtedness, liens and sales of assets.  At September 28, 2000, United Artists had $10.0 million of availability under its DIP Facility.

The Company is in final negotiations with a commercial bank for a commitment for a $35.0 million secured revolving credit facility to be made available after the Debtor's emergence from Chapter 11.  Proceeds of the facility would be used to repay borrowings under the Company's DIP Facility, for working capital, and for general corporate purposes. 

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 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.  Several of its properties included in the 1995 Sale and Leaseback have been determined by UATC be obsolete for theatre use.  UATC is currently in discussions with the owners of the properties with respect to acquiring certain of those obsolete properties with the proceeds from a simultaneous sale to third parties or through an exchange for another property.

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.  The lease has a term of 22 years with options to extend for an additional 10 years.

During 1999, UAR entered into one sale and leaseback transaction wherein proceeds of $5.4 million were received for the sale of one existing theatre, which was then leased to UATC.  The lease has a term of 20 years, with options to extend for up to 20 additional years.

Cash payments for interest were $36.7 million and $41.9 million for the thirty-nine weeks ended Sept. 28, 2000 and Sept. 30, 1999, respectively.

In March 1999 and September 1999, United Artists finalized the second and third amendments to its Bank Credit Facility with its lenders, including an advancement of the maturity date for part of the agreement, an increase in the LIBOR borrowing spread and additional loan security through mortgages on certain UATC and UAR properties.  On or about April 12, 2000 the senior secured lenders under the Bank Credit Facility notified the holders of the Senior Subordinated Notes of a default under the Bank Credit Facility and blocked payment of the Senior Subordinated Notes for up to 180 days.  As a result, United Artists did not make interest payments aggregating approximately $13.6 million through September 28, 2000 on its Senior Subordinated Notes.  As a result of the existing defaults under the Bank Credit Facility and Senior Subordinated Notes (and certain cross-default provisions in United Artists' other debt), United Artists classified its Bank Credit Facility and Senior Subordinated Notes outstanding at December 30, 1999 as current.

As a result of the Company's Chapter 11 filing as previously discussed in Note 2, substantially all of the Company's debt as of the Petition Date, including amounts due under the Bank Credit Facility and the Senior Subordinated Notes, are classified at September 28, 2000 as liabilities subject to compromise.  The Company and lenders holding 98.08% of the total principal amount and 83.3% in number of outstanding claims under the Bank Credit Facility and holders of 73.6% of the outstanding principal value of the Senior Subordinated Notes have entered into lock-up agreements which require those lenders to vote in favor of the Plan.  Moreover, the remaining lenders under the Bank Credit Facility have given irrevocable voting instructions to their agent to act in accordance with those lenders who have signed the lock-up agreements.  The terms of the lock-up agreements as they pertain to the Plan are further described in Note 2.  Until the Company emerges from Chapter 11, the Company is required to remain current on interest payments under the Bank Credit Facility, and no interest payments will be made on the Senior Subordinated Notes.

Debt is summarized as follows (amounts in millions):

At September 28, 2000, United Artists was party to 7.5% interest rate cap agreements on $150.0 million of floating rate debt, expiring at December 31, 2000.  Prior to February 25, 2000, United Artists was party to interest rate collar agreements on $150.0 million of floating rate debt which provided for a LIBOR interest rate cap of 6% and LIBOR interest rate floors of approximately 5 1/2%. United Artists sold that collar for $1.4 million and reset the cap agreements.  The $1.4 million gain has been deferred and will be recorded as a reduction to interest expense over the original term of the interest rate collars.  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 collar agreements are recorded as a reduction of interest expense.

At September 28, 2000, United Artists had approximately $2.7 million of Revolving Facility commitments, all 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.  Should these letters of credit be called, they will be included in liabilities subject to compromise.

The primary source of principal and interest payments related to the 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 in order to service the Senior Subordinated Notes may be limited from time to time by covenants included in the Participation Agreement relating to the 1995 Sale and Leaseback.

UNITED ARTISTS THEATRE COMPANY

Interest, net includes amortization of deferred loan costs of $0.7 million and $0.6 million for the thirteen weeks ended Sept. 28, 2000 and Sept. 30, 1999, respectively and $2.0 million and $1.5 million for the thirty-nine weeks ended Sept. 28, 2000 and Sept. 30, 1999, respectively.  Additionally, interest, net includes interest income of $0.1 million for the thirteen weeks ended Sept. 30, 1999, and $0.2 million and $1.2 million for the thirty-nine weeks ended Sept. 28, 2000 and Sept. 30, 1999, respectively.  As discussed in Note 2, the remaining deferred loan costs on debt subject to compromise were written off as a Reorganization item subsequent to the petition filing date.

Certain claims against the Company in existence prior to the filing of the petitions for relief under Chapter 11 of the Bankruptcy Code are stayed while the Company is operating their businesses as debtors-in-possession. These pre-petition claims are reflected in the September 28, 2000 balance sheet as "liabilities subject to compromise". Liabilities subject to compromise consist of the following (in millions):

Additional liabilities subject to compromise may arise subsequent to the petition filing date resulting from rejection of executory contracts, including leases, and from the determination by the bankruptcy court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts.

The carrying amount and estimated fair value of United Artists' financial instruments at September 28, 2000 are summarized as follows (amounts in millions):

Bank Credit Facility and Other Debt:  The carrying amount of United Artists' borrowings under the Bank Credit Facility is based upon quoted market prices at September 28, 2000.  Other debt approximates fair value.

Senior Subordinated Notes:  The fair value of United Artists' Senior Subordinated Notes is estimated based upon quoted market prices at September 28, 2000.

Interest Rate Cap Agreements:  The fair value of United Artists' interest rate cap agreements is nominal.

The following table shows the detailed components of the expenses in the asset impairment, lease exit, and restructure costs (amounts in millions):

United Artists accounts for its long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."  For the thirty-nine weeks ended September 28, 2000 and September 30, 1999, United Artists recorded non-cash charges for the impairment of its long-lived assets of $35.0 million and $25.9 million, 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 undiscounted cash flow expected to be received from the operation or future sale of the individual theatres (or groups of theatres).

During 2000 and 1999, United Artists continued to implement a strategy intended to identify and divest of under-performing and non-strategic theatres and properties.  In December 1999, management formalized a plan initiated in 1997 to dispose of under-performing leased properties and under-utilized real estate. The plan included 55 operating theatres (371 screens), 12 other properties, and leases covering 18 closed theatres.  The exit plan is focused on lease termination negotiations and there are no other significant actions necessary to complete the plan.  In December 1999, United Artists hired a consultant to facilitate negotiations of lease terminations with landlords.  As part of the disposition plan United Artists recorded estimated lease termination costs of $17.9 million in fourth quarter of 1999.  During the thirty-nine weeks ended September 28, 2000 United Artists added 52 theatres (311 screens) to its plan, closed 51 theatres (313 screens), renegotiated 4 leases (53 screens), and terminated leases or sold parcels or real estate on a total of fourteen locations.  Set forth below is a summary of the plan activity during the thirty-nine weeks ended September 28, 2000:

Included in the 48 operating theatres are ten theatres which are owned and twelve locations leased under the sale and leaseback transactions discussed in Note 5.  The remainder are leased properties which are being further evaluated and/or are the subject of lease renegotiations, and it is likely that certain of these leases will be rejected as part of the Chapter 11 reorganization, if such leases are not renegotiated so as to allow for profitable operations for the foreseeable future.

Activity in the reserve account for the thirty-nine weeks ended September 28, 2000 is summarized as follows (amounts in millions):

As more fully discussed in Note 2 and Note 7, United Artists has negotiated a debt/equity recapitalization plan with its Bank Credit Facility lenders and Senior Subordinated Note holders as part of its Plan.  Costs incurred related to this restructuring, exclusive of those amounts incurred subsequent to the petition date which are classified as Reorganization items in the accompanying statement of operations, were $6.0 million for the thirty-nine weeks ended September 28, 2000.

During 1998, United Artists established a plan to dispose of its entertainment center business operations.  Liabilities of the discontinued operations were $2.2 million at September 28, 2000, related to estimated costs necessary to terminate three remaining leases and settle remaining litigation related to the entertainment centers.  These liabilities are included within liabilities subject to compromise.

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.

The Internal Revenue Service recently concluded an audit of the Company's tax returns for the years ended December 31, 1995, 1996 and 1997.  As a result of the audit, the Company's net operating loss carry-forward was adjusted. Through December 30, 1999, United Artists had a net operating loss carry forward for federal income tax purposes of approximately $250.9 million.

Notes to Condensed Consolidated Financial Statements, continued

United Artists' operations are classified into three business segments; Theatre Operations, In-Theatre Advertising and the Satellite Theatre NetworkÔ ("STN").  STN 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.  In-Theatre Advertising sells various advertising within its theatres and on its web page.

The following table presents certain information relating to the Theatre Operations, In-Theatre Advertising and STN segments for the thirteen weeks and the thirty-nine weeks ended September 28, 2000 and September 30, 1999 (amounts in millions):

UNITED ARTISTS THEATRE COMPANY

Notes to Condensed Consolidated Financial Statements, continued

Separate statements of comprehensive income have not been presented in these financial statements as the only reconciling item between net loss as reflected in the statements of operations and comprehensive income would be the change in United Artists' unrealized holding gain.  For the thirty-nine weeks ended September 28, 2000, the change in unrealized holding gain was $1.6 million.

Set forth below are condensed consolidating financial statements of the Company as of and for the thirteen and thirty-nine weeks ended September 28, 2000.  Such financial statements present the financial position and results of operations of the Debtors, as well as the entities not in reorganization.  The financial position and results of operations of the Debtors are shown on a combined basis under the caption entitled "Entities in Reorganization".  The financial position and results of operations of subsidiaries not in Reorganization are shown separately under the caption entitled "Entities Not in Reorganization".  Eliminations in consolidation are shown under the caption entitled "Eliminations".

UNITED ARTISTS THEATRE COMPANY

Notes to Condensed Consolidated Financial Statements, continued

UNITED ARTISTS THEATRE COMPANY

Notes to Condensed Consolidated Financial Statements, continued

UNITED ARTISTS THEATRE COMPANY

Notes to Condensed Consolidated Financial Statements, continued

UNITED ARTISTS THEATRE COMPANY

Notes to Condensed Consolidated Financial Statements, continued

UNITED ARTISTS THEATRE COMPANY

Notes to Condensed Consolidated Financial Statements, continued

(16)    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.  Substantially all of these proceedings and claims have been stayed as a result of the Chapter 11 filings.  Although it is not possible to predict the outcome of these proceedings, if United Artists' restructuring efforts are unsuccessful and judgements against United Artists are obtained in such proceedings, there could result a material adverse effect of United Artists' financial position, liquidity and 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.  If United Artists is unsuccessful in its efforts to reorganize its capital structure, it may be unable to comply with the ADA and the settlement agreement in the Connie Arnold case.  Failure to comply with the ADA and the settlement agreement in the Connie Arnold case may have a material adverse effect on United Artists ' financial position, liquidity and results of operations.