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 March 30, 2000
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, CO 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 May 1, 2000, 11,551,383 shares of Class A Common Stock, 419,783 shares of
Class B Common Stock (including options to acquire 387,408 shares of Class B
Common Stock exercisable within 60 days of such date) and 4,342 shares of Class
C Common Stock were outstanding.
UNITED ARTISTS THEATRE COMPANY
QUARTERLY REPORT ON FORM 10-Q
MARCH 30, 2000
(UNAUDITED)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER
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ITEM 1. FINANCIAL STATEMENTS
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 ...............................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................................................26
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................................................27
2
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 AND UNITED ARTISTS' SEASONALITY,
THE DEPENDENCE OF UNITED ARTISTS ON FILMS AND DISTRIBUTORS AND ON ITS ABILITY TO
OBTAIN POPULAR MOTION PICTURES, THE CONTROL OF UNITED ARTISTS BY THE MERRILL
LYNCH CAPITAL APPRECIATION FUND II AND THE DEPENDENCE OF UNITED ARTISTS ON KEY
PERSONNEL, AMONG OTHERS. ADDITIONALLY, UNITED ARTISTS' ABILITY TO SUCCESSFULLY
IMPLEMENT ITS BUSINESS AND OPERATING STRATEGY MAY BE DEPENDENT UPON REORGANIZING
ITS CAPITAL STRUCTURE AS DISCUSSED HEREIN.
THE FOREGOING CAUTIONARY STATEMENTS EXPRESSLY QUALIFY ALL WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO UNITED ARTISTS.
3
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
MARCH 30, 2000 DECEMBER 30, 1999
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 7.7 16.0
Receivables, net ............................................... 7.2 6.6
Prepaid expenses and concession inventory....................... 20.3 16.5
Other assets.................................................... 0.3 2.3
----- -----
Total current assets......................................... 35.5 41.4
Investments and related receivables............................... 3.3 3.5
Property and equipment, at cost:
Land............................................................ 37.7 37.8
Theatre buildings, equipment and other.......................... 632.6 625.6
----- -----
670.3 663.4
Less accumulated depreciation and amortization.................. (265.9) (257.4)
------- -------
404.4 406.0
Intangible assets, net............................................ 56.5 57.8
Other assets, net................................................. 25.8 25.6
------ -------
$ 525.5 534.3
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................ $ 75.0 78.5
Accrued and other liabilities................................... 78.9 62.0
Current portion of long-term debt (notes 2 and 5)............... 716.7 717.0
----- -----
Total current liabilities.................................... 870.6 857.5
Other liabilities (note 3)........................................ 56.9 58.1
Debt (notes 2 and 5).............................................. 4.5 4.6
Liabilities related to discontinued operations (note 8)........... 2.4 2.4
------- -------
Total liabilities............................................ 934.4 922.6
Minority interests in equity of consolidated
subsidiaries................................................. 5.9 5.8
Stockholders' equity (deficit):
Common stock:
Class A...................................................... 0.1 0.1
Class B...................................................... - -
Class C...................................................... - -
Additional paid-in capital...................................... 51.1 51.1
Accumulated deficit............................................. (463.9) (444.8)
Unrealized holding gain......................................... - 1.6
Treasury stock.................................................. (2.1) (2.1)
---------- --------
Total stockholders' equity (deficit)......................... (414.8) (394.1)
------- -------
$ 525.5 534.3
===== =====
See accompanying notes to condensed consolidated financial statements.
4
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in Millions)
(Unaudited)
Thirteen Weeks Ended
March 30, 2000 April 1,1999
-------------- ------------
Revenue:
Admissions........................................................ $ 85.3 93.4
Concession sales.................................................. 35.1 37.0
Other............................................................. 5.1 4.5
------- -------
125.5 134.9
----- -----
Costs and expenses:
Film rental and advertising expenses.............................. 45.1 52.1
Direct concession costs........................................... 4.2 4.7
Occupancy expense (note 3)........................................ 21.5 23.0
Other operating expenses.......................................... 41.9 45.5
General and administrative........................................ 5.3 6.0
Depreciation and amortization..................................... 11.7 13.8
Impairment and lease exit costs (note 7).......................... 1.8 0.4
----- --------
131.5 145.5
----- -----
Operating loss from continuing operations......................... (6.0) (10.6)
Other income (expense):
Interest, net (notes 2 and 5)..................................... (19.2) (15.4)
Gain on disposition of assets..................................... 5.6 0.7
Minority interests in earnings of consolidated subsidiaries....... (0.5) (0.1)
Other, net........................................................ 0.9 (0.2)
---- ------
(13.2) (15.0)
------ ------
Loss from continuing operations before
income tax expense............................................. (19.2) (25.6)
Income tax benefit (expense) (note 9).................................. 0.1 (0.2)
---- ------
Net loss available to common stockholders......................... $ (19.1) (25.8)
====== =======
See accompanying notes to condensed consolidated financial statements.
5
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
(Amounts in Millions)
(Unaudited)
Common Common Common Additional Unrealized Total
stock stock stock paid-in Accumulated holding Treasury stockholders'
Class A Class B Class C capital deficit gain stock equity (deficit)
----------- --------- -------- --------- ------------ -------- --------- ---------------
Balance at December 31, 1999.... $ 0.1 - - 51.1 (444.8) 1.6 (2.1) (394.1)
Unrealized holding gain......... - - - - - (1.6) - (1.6)
Net loss........................ - - - - (19.1) - - (19.1)
----------- --------- -------- --------- ------------ -------- --------- ---------------
Balance at March 30, 2000 ...... $ 0.1 - - 51.1 (463.9) - (2.1) (414.8)
----------- --------- -------- --------- ------------ -------- --------- ---------------
----------- --------- -------- --------- ------------ -------- --------- ---------------
See accompanying notes to condensed consolidated financial statements.
6
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Amounts in Millions)
(Unaudited)
Thirteen Weeks Ended
March 30,2000 April 1, 1999
------------- -------------
Net cash provided by (used in) operating activities.......................... $ 1.9 (21.0)
--- ------
Cash flow from investing activities:
Capital expenditures.................................................... (10.6) (21.3)
Proceeds from disposition of assets, net................................ 7.4 4.4
Other, net.............................................................. 0.2 1.5
----- -----
Net cash used in investing activities................................ (3.0) (15.4)
----- ------
Cash flow from financing activities:
Debt borrowings......................................................... - 53.0
Debt repayments......................................................... (0.4) (12.8)
Increase (decrease) in cash overdraft................................... (6.4) (4.4)
Other, net.............................................................. (0.4) (1.6)
----- ------
Net cash provided (used) by financing activities..................... (7.2) 34.2
----- -----
Net decrease in cash................................................. (8.3) (2.2)
Cash and cash equivalents:
Beginning of period..................................................... 16.0 8.2
---- ---
End of period........................................................... $ 7.7 6.0
=== ===
Reconciliation of net income (loss) to net cash used in operating activities:
Net income (loss)............................................................ $ (19.1) (25.8)
Discontinued operations...................................................... - (0.6)
Effect of leases with escalating minimum annual rentals...................... 1.2 1.2
Depreciation and amortization................................................ 11.7 13.8
Gain on disposition of assets, net........................................... (5.6) (0.7)
Minority interests in earnings of consolidated subsidiaries.................. 0.5 0.1
Change in assets and liabilities:
Receivables............................................................. 0.2 (0.1)
Prepaid expenses and concession inventory............................... (3.8) (5.4)
Other assets............................................................ (0.3) 0.7
Accounts payable........................................................ 5.7 (7.2)
Accrued and other liabilities........................................... 11.4 3.0
------- ------
Net cash provided by (used in) operating activities.................. $ 1.9 (21.0)
======= ======
See accompanying notes to condensed consolidated financial statements.
7
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 30, 2000
(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 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.
(2) GOING CONCERN
The accompanying financial statements have been prepared assuming
United Artists will continue as a going concern. United Artists has
incurred recurring losses from operations and has an accumulated
deficit of $463.9 million as of March 30, 2000, which raises
substantial doubt about its ability to continue as a going concern. As
more fully discussed in Note 5, United Artists has a secured credit
facility which provides for term loans and a revolving loan (the "Bank
Credit Facility"), which aggregated $437.7 million as of March 30,
2000. United Artists was in default under certain covenants of the Bank
Credit Facility as of March 30, 2000. Under the terms of the Bank
Credit Facility, the lenders may exercise such remedies as are
permitted by the credit agreement, including, without limitation,
acceleration of the outstanding principal balance.
In addition to the Bank Credit Facility, United Artists has a $275.0
million subordinated credit facility (the "Senior Subordinated Notes").
On April 15, 2000, an interest payment of $12.3 million was due from
United Artists to the holders of the Senior Subordinated Notes. On or
about April 12, 2000, the senior secured lenders under the Bank Credit
Facility notified the holders of the Senior Subordinated Notes
8
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(2) GOING CONCERN, CONTINUED
of a default under the Bank Credit Facility and blocked payment of the
Senior Subordinated Notes for up to 180 days (the "Block Period"). As a
result, United Artists did not make that payment when due.
United Artists is currently in negotiations with its Bank Credit
Facility lenders regarding a debt/equity recapitalization plan. Should
a plan be successfully negotiated with the senior secured lenders,
United Artists will present that plan to the holders of the Senior
Subordinated Notes. There can be no assurance that the senior secured
lenders and the holders of the Senior Subordinated Notes will agree to
such a recapitalization plan. If the holders of the Senior Subordinated
Notes have not consented to a recapitalization plan prior to the
expiration of the Block Period, the holders of the Senior Subordinated
Notes may then attempt to exercise any remedies available to them,
including, without limitation, acceleration of the indebtedness. A
financial and corporate reorganization of United Artists is likely
whether or not a consensual debt restructuring agreement can be reached
with the lenders under the Bank Credit Facility and the holders of the
Senior Subordinated Notes.
(3) 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
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. The lease has a term of
22 years with options to extend for an additional 10 years.
During 1999, UATC and UAR entered into two separate sale and leaseback
transactions. Proceeds of $5.4 million were received for the sale of
one existing theatre. The lease has a term of 20 years, with options to
extend for up to 20 additional years. A $4.0 million transaction on a
theatre that opened in September 1999 is still pending.
9
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest were $13.2 million and $9.8 million for the
thirteen weeks ended March 30, 2000 and April 1, 1999, respectively.
(5) DEBT
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 of UATC and UAR's
properties. As of March 30, 2000, United Artists was in default of
certain covenants of its Bank Credit Facility. In addition, 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 on or about April 12, 2000 and blocked payment of the Senior
Subordinated Notes for up to 180 days. As a result, United Artists did
not make the interest payments of approximately $12.3 million due April
15, 2000 on its Senior Subordinated Notes. After the expiration of any
applicable 30-day grace period, United Artists will be in default of
its obligations to the holders of the Senior Subordinated Notes. As a
result of the existing default under the Bank Credit Facility (and
certain cross-default provisions in United Artists' other debt), United
Artists has classified its Bank Credit Facility and Senior Subordinated
Notes outstanding at March 30, 2000 and December 30, 1999, as current.
Debt is summarized as follows (amounts in millions):
MARCH 30, 2000 DECEMBER 30, 1999
-------------- -----------------
Bank Credit Facility (a).............. $ 437.7 437.7
Senior Subordinated Notes (b)......... 275.0 275.0
Other (c)............................. 8.5 8.9
---- ------
721.2 721.6
Less current portion.................. (716.7) (717.0)
-------- ----------
$ 4.5 4.6
=== ===
(a) The 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 aggregate term loan balance at
March 30, 2000 was $437.7 million. 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
10
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) DEBT, CONTINUED
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. There is no credit available to United Artists under
the Bank Credit Facility.
Borrowings under the Bank Credit Facility provide for interest
to be accrued at varying rates depending on the ratio of
indebtedness to annualized operating cash flow, as defined.
Interest is payable at varying dates depending on the type of
rate selected by United Artists, but no less frequently than
once each 90 days. The weighted average interest rate at March
30, 2000 was 10.3%.
The Bank Credit Facility is guaranteed, on a joint and several
basis, by UATC, UAR and Prop I. The 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.
The 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. Additionally, the Bank Credit Facility is secured by
mortgages on certain of United Artists subsidiaries'
properties.
(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 any time at the option of United Artists, in
whole or in part, any time on or after April 15, 1999. Upon a
change of control (as defined in the respective indentures
(the "Indentures") under which the Senior Subordinated Notes
were issued), the holders of the Senior Subordinated Notes
have the right to require United Artists to purchase all or
any portion of such holders Senior Subordinated Notes at a
purchase price equal to 101% of the principal amount thereof
together with accrued and unpaid interest, if any, to the date
of purchase.
The Indentures contain certain covenants that place
limitations on, among other things, the incurrence of
additional indebtedness by United Artists and any of its
subsidiaries, the payment of dividends, the redemption of
capital stock, the making of investments, the issuance of
capital stock of subsidiaries, the creation of dividend and
other restrictions affecting subsidiaries, transactions with
affiliates, asset sales and certain mergers and
consolidations.
11
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) DEBT, CONTINUED
The Senior Subordinated Notes are unsecured, senior
subordinated obligations of United Artists and are
subordinated in right of payment to all existing and future
senior indebtedness of United Artists including borrowings
under the Bank Credit Facility. The Fixed Rate Subordinated
Notes rank PARI PASSU with the Floating Rate Subordinated
Notes.
(c) Other debt at March 30, 2000 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.
At March 30, 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 collar agreements.
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 March 30, 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.
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 may be limited from time to time by covenants included
in the Participation Agreement relating to the 1995 Sale and Leaseback.
Interest, net includes amortization of deferred loan costs of $0.7
million and $0.4 million for the thirteen weeks ended March 30, 2000
and April 1, 1999, respectively. Additionally, interest, net includes
interest income of $0.1 million and $0.2 million for the thirteen weeks
ended March 30, 2000 and April 1, 1999, respectively.
(6) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of United Artists'
financial instruments at March 30, 2000 are summarized as follows
(amounts in millions):
12
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Carrying Estimated
Amount Fair Value
------ ----------
Bank Credit Facility and Other Debt................ $ 446.2 304.0
===== =====
Senior Subordinated Notes.......................... $ 275.0 11.0
===== ====
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 March 30, 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
March 30, 2000.
Interest Rate Cap Agreements: The fair value of United Artists'
interest rate cap agreements were reset in February 2000, and has a
nominal fair market value.
(7) IMPAIRMENTS AND LEASE EXIT COSTS
The following table shows the detailed components of the expenses in
the impairments and lease exit costs:
Thirteen Weeks Ended
March 30, 2000 April 1, 1999
-------------- -------------
Asset impairments............... $ 0.4 0.4
Lease exit costs................ 1.4 -
--- ------
$ 1.8 0.4
=== ===
IMPAIRMENTS
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 thirteen weeks ended
March 30, 2000 and April 1, 1999, United Artists recorded non-cash
charges for the impairment of its long-lived assets of $0.4 million.
These non-cash charges relate to the difference between the historical
book value of the individual theatres (in some cases groups of
theatres) and the undiscounted cash flow expected to be received from
the operation or future sale of the individual theatres (or groups of
theatres).
EXIT COSTS
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
to dispose of 55 operating theatres (371 screens) and 12 properties and
exit 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
13
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(7) IMPAIRMENTS, LEASE EXIT COSTS AND OTHER, CONTINUED
facilitate negotiations of lease terminations with landlords. As a
result, United Artists recorded estimated lease termination costs of
$17.9 million in fourth quarter of 1999. During the 13 weeks ended
March 30, 2000, United Artists added 18 theatres (93 screens), closed
16 theatres (110 screens), terminated leases on two properties and sold
two parcels of real estate. Set forth below is a summary of the plan
activity during the thirteen weeks ended March 30, 2000:
OPERATING NON-THEATRE CLOSED TOTAL
THEATRES PROPERTIES THEATRES PROPERTIES
-------- ---------- -------- ----------
Balance at 12/30/99 55 12 18 85
Properties added to plan 18 - - 18
Theatre closures (16) - 16 -
Lease terminations/asset sales - (2) (2) (4)
--- --- --- ---
Balance at 03/30/00 57 10 32 99
== == == ==
Activity in the reserve account for the thirteen weeks ended March 30,
2000 is summarized as follows:
RESERVE FOR LEASE TERMINATION COST OPERATING THEATRES CLOSED THEATRES
---------------------------------- ------------------ ---------------
Balance at December 30, 1999 $17.9 $6.2
Payments (0.2) (0.6)
Adjustment of estimates (0.7) (0.7)
Theatre closures (8.4) 8.4
Additional reserve 1.8 1.8
--- ---
Balance at March 30, 2000 $10.4 $15.1
==== ====
(8) DISCONTINUED OPERATIONS
During 1998, United Artists established a plan to dispose of its
entertainment center business operations. Liabilities of the
discontinued operations were $2.4 million at March 30, 2000, related to
estimated costs necessary to terminate three remaining leases and
settle remaining litigation related to the entertainment centers.
(9) 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 March 30, 2000, United Artists had a net operating loss carryforward
for federal income tax purposes of approximately $283.9 million.
14
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(9) INCOME TAXES, CONTINUED
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.
(10) SEGMENT INFORMATION
United Artists' operations are classified into three business segments;
Theatre Operations, In-Theatre Advertising and the Satellite Theatre
Network-TM- ("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 ended March 30, 2000 and April 1, 1999 (amounts in
millions):
THEATRE IN-THEATRE
OPERATIONS ADVERTISING STN TOTAL
---------- ----------- --- -----
FOR THE THIRTEEN WEEKS ENDED MARCH 30, 2000
Revenue............................ $122.6 2.0 0.9 125.5
Operating income (loss)............ (8.0) 1.7 0.3 (6.0)
Depreciation and amortization...... 11.6 0.1 - 11.7
Assets............................. 520.1 1.5 3.9 525.5
Capital expenditures............... 10.6 - - 10.6
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 1999
Revenue............................ $132.3 1.5 1.1 134.9
Operating income (loss)............ (11.8) 1.2 - (10.6)
Depreciation and amortization...... 13.4 0.1 0.3 13.8
Assets............................. 571.6 1.6 3.9 577.1
Capital expenditures............... 21.3 - - 21.3
(11) COMPREHENSIVE INCOME
Separate statements of comprehensive income have not been presented in
these financial statements as the only reconciling item between net
loss as reflected in the statements of operations and comprehensive
income would be the change in United Artists' unrealized holding gain.
For the thirteen weeks ended March 30, 2000, the change in unrealized
holding gain was $1.6 million.
15
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, 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of United Artists' financial condition and
results of operations should be read in conjunction with United Artists'
Condensed Consolidated Financial Statements and related notes thereto. Such
financial statements provide additional information regarding United Artists'
financial activities and condition.
United Artists continues to face liquidity problems caused by its significant
debt burden. United Artists' EBITDA has been, and absent recapitalization and
restructuring, its EBITDA in the future is projected to be insufficient to
support the current debt balances and related interest obligations. United
Artists' independent public accountants included in their report on United
Artists' consolidated financial statements for the fiscal year ended December
30, 1999 an explanatory paragraph that describes the significant uncertainty
about United Artists' ability to continue as a going concern due to recurring
losses and insufficient liquidity, and that United Artists' financial statements
do not reflect any adjustment that might result from the outcome of this
uncertainty.
Due to a lack of operating liquidity, in February 2000, United Artists initiated
discussions with the senior secured lenders under its Bank Credit Facility
regarding a recapitalization plan. If a recapitalization plan is approved by its
senior secured lenders, United Artists intends to initiate discussions with the
holders of the Senior Subordinated Notes with respect to that recapitalization
plan. There can be no assurance that such negotiations will be successful and
even if successful, implementation of the recapitalization plan may require
additional actions with respect to the reorganization of United Artists. United
Artists is in default under its Bank Credit Facility and Senior Subordinated
Notes, and in the absence of forbearance and conclusion of a successful
recapitalization and restructuring, the senior secured lenders and Senior
Subordinated Noteholders may seek to exercise their remedies, including
acceleration of indebtedness. In the absence of a recapitalization and
restructuring, management will not be able to implement its business plan as
expressed throughout this document and its annual report filed on Form 10-K, and
United Artists will have to explore other alternatives to reorganize United
Artists.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 30, 2000 AND APRIL 1, 1999
The following table summarizes certain operating data of United Artists'
theatres(1) (dollars in millions):
Thirteen Weeks Ended % Increase
March 30, 2000 April 1, 1999 (Decrease)
------------- -------------- -----------
Revenue:
Admissions...................................... $ 85.3 93.4 (8.7)%
Concession sales................................ 35.1 37.0 (5.1)
Other........................................... 5.1 4.5 13.3
Operating expenses:
Film rental and advertising expenses............ 45.1 52.1 (13.4)
Concession costs................................ 4.2 4.7 (10.6)
Occupancy expense............................... 21.5 23.0 (6.5)
Other operating expenses:
Personnel expense............................ 21.4 23.1 (7.4)
Miscellaneous operating expenses............. 20.5 22.4 (8.5)
(1) The operating theatres include revenue and expenses of all theatres
operated by United Artists that are more than 50% owned.
17
THEATRE OPERATIONS SEGMENT
THIRTEEN WEEKS ENDED MARCH 30, 2000 AND APRIL 1, 1999
The following table summarizes certain operating data of United Artists'
Theatres Operations Segment(1) for the thirteen weeks ended March 30, 2000 and
April 1, 1999 (dollars in millions, except admissions per weighted average
operating theatre, admissions per weighted average operating screen and
concession sales per weighted average operating theatre):
Thirteen Weeks Ended % Increase
March 30, 2000 April 1, 1999 (Decrease)
-------------- ------------ ----------
Revenue:
Admissions...................................... $ 85.3 93.4 (8.7)%
Concession sales................................ 35.1 37.0 (5.1)
Other........................................... 2.2 1.9 15.8
Operating expenses:
Film rental and advertising expenses............ 45.1 52.1 (13.4)
Concession costs................................ 4.2 4.7 (10.6)
Occupancy expense............................... 21.5 23.0 (6.5)
Other operating expenses:
Personnel expense............................ 21.4 23.1 (7.4)
Miscellaneous operating expenses............. 19.8 21.7 (8.8)
Weighted avg. operating theatres(2)............... 272 315 (13.7)
Weighted avg. operating screens(2)................ 1,949 2,167 (10.1)
Weighted avg. screens per avg. theatre............ 7.2 6.9 4.2
Admissions per weighted avg.
operating theatre............................... $313,603 296,508 5.8
Admissions per weighted avg.
operating screen................................ $43,766 43,101 1.5
Concession sales per weighted avg.
operating theatre............................... $129,044 117,460 9.9
(1) The operating theatres include revenue and expenses of all theatres
operated by United Artists that are more than 50% owned.
(2) Weighted average operating theatres and screens represent the number of
theatres and screens operated weighted by the number of days operated
during the period.
REVENUE FROM OPERATING THEATRES
ADMISSIONS: Admissions revenue decreased 8.7% during the thirteen weeks ended
March 30, 2000 as compared to the thirteen weeks ended April 1, 1999. This
decrease was primarily due to a 13.3% decrease in attendance, partially offset
by a 5.4% increase in the average ticket price. The attendance decline during
the thirteen weeks ended March 30, 2000 was primarily due to the closure and/or
sale of numerous under-performing theatres, partially offset by the opening of
three new theatres, resulting in a 13.7% and 10.1% decline in United Artists'
weighted average operating theatres and screens, respectively. In addition,
there has been an adverse impact on attendance at certain of United Artists'
older theatres due to the opening of new stadium seating theatres by United
Artists' competitors in certain markets. The increase in the average ticket
price was primarily due to selective increases in ticket prices during the
summer and holiday periods of 1999. Admissions revenue per weighted average
operating theatre and screen increased 5.8% and 1.5%, respectively, during the
thirteen weeks ended March 30, 2000 as compared to the thirteen weeks ended
April 1, 1999 reflecting the closure of under-performing theatres and price
increases.
18
CONCESSION SALES: Concession sales revenue decreased 5.1% during the thirteen
weeks ended March 30, 2000 as compared to the thirteen weeks ended April 1,
1999, as a result of the decreased attendance discussed above, partially offset
by a 9.5% increase in average concession sales per patron. Concession sales per
weighted average operating theatre increased 9.9% during the thirteen weeks
ended March 30, 2000 as compared to April 1, 1999. The increase in concession
sales per patron and concession sales per weighted average operating theatre
related primarily to:
- Certain selective price increases during 1999,
- Additional concession menu items,
- Increased emphasis on sales staff training,
- The opening of new theatres with more efficient concession operations and
the closure or sale of older, smaller theatres with less efficient
concession operations.
OTHER: Other theatre operations segment revenue is derived primarily from
electronic video games located in theatre lobbies, theatre screening and
commercial rentals, and other miscellaneous sources. Despite the reduction in
theatres, other revenue increased 15.8% for the thirteen weeks ended March
30, 2000 as compared to the thirteen weeks ended April 1, 1999 primarily due
to $0.3 million received in February 2000 as reimbursement for lost revenues
related to a property condemnation at one theatre, partially offset by lower
commercial rental income.
OPERATING EXPENSES FROM OPERATING THEATRES
FILM RENTAL AND ADVERTISING EXPENSES: Film rental and advertising expenses
decreased 13.4% during the thirteen weeks ended March 30, 2000 as compared to
the thirteen weeks ended April 1, 1999, primarily as a result of the decrease in
admissions revenue discussed above. Film rental and advertising expenses as a
percentage of admissions revenue were 52.9% and 55.8% for the thirteen weeks
ended March 30, 2000 and April 1, 1999, respectively. The decrease in film
rental and advertising expenses as a percentage of admissions revenue related
primarily to the longer run of several films which played during the thirteen
weeks ended March 30, 2000 and the film mix. Typically, film rental as a
percentage of admissions revenue decreases the longer the run of the film.
CONCESSION COSTS: Concession costs include direct concession product costs and
concession promotional expenses. Such costs decreased 10.6% during the thirteen
weeks ended March 30, 2000 as compared to the thirteen weeks ended April 1,
1999, primarily as a result of the decrease in concession sales revenue
discussed above. Concession costs as a percentage of concession sales revenue
decreased to 12.0% from 12.7% for the thirteen weeks ended March 30, 2000 and
April 1, 1999, respectively, due to price reductions from certain concession
vendors, as well as the effect of certain selective concession price increases
discussed above.
OCCUPANCY EXPENSE: United Artists' typical theatre lease arrangement provides
for a base rental as well as contingent rentals that are a function of the
underlying theatre's revenue over an agreed upon breakpoint. Occupancy expense
decreased 6.5% during the thirteen weeks ended March 30, 2000 as compared to the
thirteen weeks ended April 1, 1999. This decrease is related to the the closure
of several under-performing operating theatres, partially offset by base rentals
on newly opened theatres. Occupancy expense for the thirteen weeks ended March
30, 2000 and April 1, 1999 includes $1.2 million of non-cash charges relating to
the effect of escalating leases which have been "straight-lined" for accounting
purposes.
PERSONNEL EXPENSE: Personnel expense includes the salary and wages of the
theatre manager and all theatre staff, commissions on concession sales, payroll
taxes and employee benefits. Personnel expense decreased 7.4% during the
thirteen weeks ended March 30, 2000 as compared to the thirteen weeks ended
April 1, 1999. This decrease in personnel expense was primarily due to more
efficient staffing and a reduction in the number of operating theatres,
partially offset by a 3.0%
19
increase in hourly wages. The increase in hourly wage relates primarily to wage
competition among retailers and the low unemployment rate. Despite the increase
in hourly wage, personnel expense as a percentage of admissions and concessions
revenue increased only slightly to 17.8% from 17.7% for the thirteen weeks ended
March 30, 2000 and April 1, 1999, respectively, due to increased pricing and
closure of under-performing theatres.
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 8.8% during the thirteen weeks ended March 30, 2000 as
compared to the thirteen weeks ended April 1, 1999, primarily as a result of
closure of several under-performing theatres and the related decline in repair
and maintenance, supply, insurance, pre-opening advertising and common area
maintenance expenses, partially offset by higher real estate taxes at certain
theatres.
THEATRES TARGETED FOR DISPOSITION
During 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 to dispose of 55
operating theatres (371 screens) and exit leases covering 18 closed theatres.
During the thirteen weeks ended March 30, 2000, United Artists closed 16 of the
theatres (110 screens) identified within the plan of divestiture. Additionally,
two leases were terminated and 18 theatres (93 screens) was added to the plan.
Set forth below is a summary of the plan activity during the thirteen weeks
ended March 30, 2000:
OPERATING NON-THEATRE CLOSED TOTAL
THEATRES PROPERTIES THEATRES PROPERTIES
--------- ----------- -------- ----------
Balance at 12/30/99 55 12 18 85
Properties added to plan 18 - - 18
Theatre Closures (16) - 16 -
Lease terminations/asset sales - (2) (2) (4)
--- --- --- ---
Balance at 03/30/00 57 10 32 99
== == == ==
Set forth below are the revenue and expenses, included within the theatre
operation segment information discussed above, for the theatres and properties
included in the disposition plan at March 30, 2000 and April 1, 1999 (in
millions):
Thirteen Weeks Ended
March 30, 2000 April 1, 1999
-------------- -------------
Revenue:
Admissions $ 8.9 13.7
Concession sales 3.6 5.5
Other 0.4 0.5
--- ----
Total revenue 12.9 19.7
---- ----
Expenses:
Film rental and advertising expenses 3.9 5.7
Concession costs 0.5 0.8
Occupancy expense 3.2 5.1
Other operating expenses:
Personnel expense 3.4 4.7
Misc. operating expenses 3.9 6.3
--- ----
Total expenses 14.9 22.6
---- ----
Revenue less expenses: $ (2.0) (2.9)
===== =====
20
IN-THEATRE ADVERTISING SEGMENT
THIRTEEN WEEKS ENDED MARCH 30, 2000 AND APRIL 1, 1999
The following table summarizes operating revenue and expenses of United Artists'
In-Theatre Advertising segment for the thirteen weeks ended March 30, 2000 and
April 1, 1999 (dollars in millions):
Thirteen Weeks Ended % Increase
March 30, 2000 April 1, 1999 (DECREASE)
-------------- ------------- ----------
Revenue:
Other........................................... $ 2.0 1.5 33.3%
Operating expenses:
Other operating expenses:
Miscellaneous operating expenses............. 0.1 0.1 -
ADVERTISING REVENUE: United Artists sells advertising including rolling stock
commercials, intermission slides, intermission music, lobby monitor advertising
and entertainment, coupon distribution and customer sampling. Revenues are
primarily contingent upon the success of the sales efforts, as well as upon the
location of theatres and attendance at the theatres. In-Theatre Advertising
revenue increased 33.3% during the thirteen weeks ended March 30, 2000 as
compared to the thirteen weeks ended April 1, 1999. This increase was primarily
due to a 3 1/2 year national advertising contract with one customer which began
in November of 1999.
ADVERTISING EXPENSES: Expenses associated with In-Theatre Advertising include
supplies, professional services, freight, projection repair and other
miscellaneous expenses. These expenses remained constant during the thirteen
weeks ended March 30, 2000 as compared with the thirteen weeks ended April 1,
1999.
SATELLITE THEATRE NETWORK-TM- SEGMENT
THIRTEEN WEEKS ENDED MARCH 30, 2000 AND APRIL 1, 1999
The following table summarizes operating revenue and expenses of United Artists'
Satellite Theatre Network-TM- segment for the thirteen weeks ended March 30,
2000 and April 1, 1999 (dollars in millions):
Thirteen Weeks Ended % Increase
March 30, 2000 April 1, 1999 (decrease)
-------------- ------------- -----------
Revenue:
Other........................................... $ 0.9 1.1 (18.2)%
Operating expenses:
Other operating expenses:
Miscellaneous operating expenses............. 0.6 0.6 -
STN REVENUE: The Satellite Theatre Network-TM- ("STN") rents theatre auditoriums
for seminars, corporate training, business meetings, educational or
communication uses, product and customer research and other entertainment uses.
Theatre auditoriums are rented individually or on a networked basis. Revenues
decreased 18.2% during the thirteen weeks ended March 30, 2000 as compared to
the thirteen weeks ended April 1, 1999. The reduction in revenue was due
primarily to 14 fewer satellite seminars during the thirteen weeks ended March
30, 2000 as compared to the thirteen weeks ended April 1, 2000. Five events
scheduled for the first quarter of 2000 were rescheduled for later during 2000.
21
STN EXPENSES: Expenses associated with the STN remained constant for the
thirteen weeks ended March 30, 2000 as compared to the thirteen weeks ended
April 1, 1999, due to the fixed nature of the selling and administrative costs
associated with STN.
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.
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, In-Theatre Advertising personnel and
other support functions located at United Artists' corporate headquarters, two
film booking and regional operating offices and 13 district theatre operations
offices (generally located in theatres). General and administrative expenses
decreased $0.7 million, or 11.7%, for the thirteen weeks ended March 30, 2000 as
compared to the thirteen weeks ended April 1, 1999, primarily as a result of the
merger of two operating district offices, a reduction in corporate personnel,
and lower travel and entertainment, utility and postage expenses, partially
offset by higher professional fees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes the depreciation of theatre
buildings and equipment and the amortization of theatre lease costs.
Depreciation and amortization decreased $2.1 million during the thirteen weeks
ended March 30, 2000 as compared to the thirteen weeks ended April 1, 1999. The
decrease is primarily due to a large number of theatre closures and the effect
of asset impairments during 1999 and 2000, partially offset by increased
depreciation charges from newly opened theatres.
OPERATING LOSS
During the thirteen weeks ended March 30, 2000 and April 1, 1999, United Artists
incurred operating losses of $6.0 million and $10.6 million, respectively. This
decrease in operating loss relates primarily to higher concession and film
margins and lower operating expenses resulting from the closure of
under-performing operating theatres.
INTEREST, NET
Interest, net increased $3.8 million for the thirteen weeks ended March 30, 2000
as compared to the thirteen weeks ended April 1, 1999 due primarily to a higher
average debt balance and to an increase in the interest rate on the Bank Credit
Facility.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
During the thirteen weeks ended March 30, 2000 and April 1, 1999 United
Artists incurred net losses available to common stockholders of $19.1 million
and $25.8 million, respectively. This decrease in the net loss relates
primarily to increased operating income and gains on sale of assets and
investments partially offset by higher interest expense. United Artists sold
various non-strategic or under-performing theatres and real estate for a gain
of $1.9 million. Additionally, a stock investment was sold at a gain of $3.6
million.
22
LIQUIDITY AND CAPITAL RESOURCES
For the thirteen weeks ended March 30, 2000 net cash provided by operating
activities was $1.9 million. This net cash provided by operating activities
and $8.3 million of the cash balances at December 30, 1999 was used to fund
$3.0 million of capital expenditures and other investing activities and
reduce outstanding debt (including cash overdrafts) by $7.2 million. United
Artists has no availability under its credit facilities and is not in
compliance with certain covenants of its Bank Credit Facility.
On April 15, 2000, an interest payment of $12.3 million was due from United
Artists to the holders of United Artists $275.0 million of Senior Subordinated
Notes. 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
that payment when due.
United Artists is currently in negotiations with its Bank Credit Facility
lenders regarding a debt/equity recapitalization plan. Should a plan be
successfully negotiated with the senior secured lenders, United Artists will
present that plan to the holders of the Senior Subordinated Notes. There can be
no assurance that the senior secured lenders and the holders of the Senior
Subordinated Notes will agree to such a recapitalization plan prior to the
expiration of the Block Period, the holders of the Senior Subordinated Notes may
then attempt to exercise remedies available to them, including, without
limitation, acceleration of the indebtedness. A financial and corporate
reorganization of United Artists is likely whether or not a consensual debt
restructuring agreement can be reached with the lenders under the Bank Credit
Facility and the holders of the Senior Subordinated Notes.
Substantially all of United Artists' admissions and concession sales revenue is
collected in cash. 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.
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
of UATC and UAR's owned real estate. For the year ended December 30, 1999,
United Artists was in default of certain covenants of its Bank Credit Facility.
As a result of the existing default under the Bank Credit Facility (and certain
cross-default provisions in United Artists' other debt), United Artists has
classified most of its debt outstanding at March 30, 2000 and December 30, 1999,
as current.
During late 1997, several of United Artists' competitors initiated expansion
programs to aggressively build new stadium seating megaplexes in a effort to
gain market share. As a result of this unprecedented increase in capital
spending by other operators, several of United Artists' older, smaller
non-stadium theatres were adversely impacted. In response to this market
condition, United Artists has been aggressively seeking to defend its key market
positions and dispose of those theatres that were underperforming and could not
compete effectively.
In 1999, as the capital spending by its competitors peaked, 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 to dispose of 55 operating theatres (371 screens)
and exit leases covering 18 closed theatres. Eighteen theatres (93 screens) were
added to the plan during the thirteen weeks ended March 30, 2000. For the
thirteen weeks ended March 30, 2000 these theatres generated $2.0 million of
negative EBITDA (earnings before interest, taxes, depreciation and amortization
plus other non-recurring or non-cash operating credits or changes). While there
can be no assurance that such sales or lease termination efforts will be
23
successful, or what the final cost will be, negotiations are ongoing with
respect to several theatres. During the thirteen weeks ended March 30, 2000,
United Artists closed 16 theatres (110 screens) and terminated two leases that
were identified in the divestiture plan. United Artists has disbursed
approximately $0.2 million in early lease termination payments for those two
theatres leases (14 screens). United Artists has reached agreement with several
other landlords with respect to the termination of theatre leases and is in the
process of documenting those agreements. The theatres that were closed were
primarily smaller, older theatres that were under-performing or not part of
United Artists' long-term strategic plans.
In response to the increasing competitive environment and limited capital
resources, United Artists continued to focus its investment activities on
defending its key market positions and significantly curtailed its capital
spending to only the most strategically important projects. During the thirteen
weeks ended March 30, 2000 approximately $6.0 million was invested in one
theatre (15 screens plus an IMAX) in the Philadelphia market. The 15 screens
have been opened and the IMAX is expected to open in May 2000. Additionally,
United Artists invested approximately $4.6 million to pay costs associated with
three new theatres (37 screens) which opened in 1999 and for recurring capital
maintenance.
A significant portion of United Artists' capital expenditures over the past
several years has been funded by sale and leaseback transactions. Following is a
summary of the various 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 under
development were sold to, and leased back from, an unaffiliated third
party. The 1995 Sale and Leaseback requires United Artists 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 United Artists required United Artists to enter into a
Participation Agreement that requires United Artists to comply with
certain covenants including limitations on indebtedness and
restrictions on payments.
In November 1996, United Artists 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, United Artists 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, United Artists entered into two separate sale and
leaseback transactions. Proceeds of $5.4 million were received for the
sale of one existing theatre. The lease has a term of 20 years, with
options to extend for up to 20 additional years. A $4.0 million
transaction on a theatre that opened in September 1999 is still
pending.
At March 30, 2000, United Artists had entered into construction or lease
agreements for one new theatre (15 screens plus an IMAX). The majority of this
project opened in April 2000 and capital expenditures during 2000 will aggregate
approximately $8.8 million, including $0.3 million of equipment transferred from
closed theatres. While other projects are at various stages of lease
negotiations or plan development, this is the only project for which United
Artists has executed a definitive lease and all significant lease contingencies
have been satisfied. United Artists expects
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additional capital expenditures for ongoing maintenance and with regard to the
renovation, expansion or replacement 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. Therefore, they can be
matched to net cash provided by operating activities, asset sales and other
sources of capital.
At March 30, 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. 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 and cap agreements are recorded as a reduction of interest
expense.
United Artists believes that unless a recapitalization plan is completed, the
net cash provided by operations and proceeds from asset sales and sale-leaseback
transactions may not be sufficient to fund its future cash requirements. United
Artists expects that future cash requirements will principally be for interest
and repayments of indebtedness, operating 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
which are released, future economic conditions, the sale of non-core assets 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000 and earlier
application is encouraged. United Artists has not yet quantified the impact, if
any, of adopting SFAS No. 133 on its financial statements and has not determined
the timing of or method of adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
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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 agreements. The table presented
below provides information about United Artists' financial instruments that are
sensitive to changes in interest rates (amounts in millions):
Expected Maturity Date
March 30, Fair
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Total Indebtedness
Fixed Rate $3.4 1.0 0.4 0.4 0.4 227.9 233.5 17.5
Avg. Interest Rate 9.4% 8.9 7.8 7.8 7.8 9.7 9.7
Floating Rate $3.5 10.4 30.7 46.3 58.8 338.0 487.7 297.5
Avg. Interest Rate (1) (1) (1) (1) (1) (1) (1)
Interest Rate Caps
(notional amount) $150.0 - - - - - 150.0 (3)
Avg. Interest Rate
Interest Rate Cap (2) (2) (2) (2) (2) (2) (2)
(1) The weighted average floating interest rate at March 30, 2000 was 10.3%.
(2) The average interest rate cap was 7.5% through December 31, 2000.
(3) The fair market value of the Interest Rate Cap is nominal.
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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
None.
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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/ Kurt C. Hall
------------------------------
BY: Kurt C. Hall
Chief Financial Officer
Date: May 4, 2000
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