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 June 30, 1996
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 Numbers 33-49598
333-1024
UNITED ARTISTS THEATRE CIRCUIT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 13-1424080
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9110 East Nichols Avenue, Suite 200
Englewood, 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
--- ---
The number of shares outstanding of $1.00 par value common stock at August 9,
1996 was 100 shares.
UNITED ARTISTS THEATRE CIRCUIT, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1996
(UNAUDITED)
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
------- --------------------
UNITED ARTISTS THEATRE CIRCUIT, INC.
Condensed Consolidated Balance Sheets .................................................... 3
Condensed Consolidated Statements of Operations .......................................... 4
Condensed Consolidated Statement of Stockholder's Equity ................................. 5
Condensed Consolidated Statements of Cash Flow ........................................... 6
Notes to Condensed Consolidated Financial Statements ..................................... 7
GUARANTOR - OSCAR I CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets ................................................... 14
Condensed Consolidated Statements of Operations ......................................... 15
Condensed Consolidated Statement of Stockholders' Equity ................................ 16
Condensed Consolidated Statements of Cash Flow .......................................... 17
Notes to Condensed Consolidated Financial Statements .................................... 18
Item 2. Management's Discussion and Analysis of
------- ---------------------------------------
Financial Condition and Results of Operations ........................................ 24
---------------------------------------------
2
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
June 30, 1996 December 31, 1995
------------- -----------------
Assets
------
Cash and cash equivalents.......................... $ 19.7 32.4
Notes and other receivables, net................... 40.0 35.0
Prepaid expenses and concession inventory.......... 15.4 20.3
Investments and related receivables................ 18.0 14.1
Property and equipment, at cost:
Land.............................................. 34.0 35.0
Theatre buildings, equipment and other............ 402.4 370.3
------- ------
436.4 405.3
Less accumulated depreciation and amortization.... (110.6) (99.0)
------- ------
325.8 306.3
------- ------
Intangible assets, net............................. 149.0 165.8
Other assets, net.................................. 18.3 20.3
------- ------
$ 586.2 594.2
======= ======
Liabilities and Stockholders Equity
-----------------------------------
Accounts payable................................... $ 83.7 88.5
Accrued liabilities................................ 23.9 27.0
Other liabilities.................................. 21.5 21.4
Debt (note 5)...................................... 403.3 383.2
------- ------
Total liabilities................................. 532.4 520.1
------- ------
Minority interests in equity of consolidated
subsidiaries...................................... 7.2 7.0
Stockholders equity:
Preferred stock (note 7).......................... 159.6 149.2
Common stock...................................... - -
Additional paid-in capital........................ 63.1 73.5
Accumulated deficit............................... (176.7) (155.9)
Cumulative foreign currency
translation adjustment........................... (0.1) (0.1)
Intercompany account.............................. 0.7 0.4
------- ------
46.6 67.1
------- ------
$ 586.2 594.2
======= ======
See accompanying notes to condensed consolidated financial statements.
3
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in Millions)
(Unaudited)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1996 June 30, 1996 June 30, 1995* June 30, 1995*
-------------- -------------- -------------- --------------
Revenue:
Admissions............................... $114.9 222.2 115.0 207.9
Concession sales......................... 46.1 87.4 45.2 79.8
Other.................................... 5.3 10.1 2.7 5.2
------ ----- ----- -----
166.3 319.7 162.9 292.9
------ ----- ----- -----
Costs and expenses:
Film rental and advertising.............. 61.8 120.4 62.9 111.6
Direct concession costs.................. 7.3 13.9 7.3 12.9
Other operating expenses (note 8)........ 66.0 129.5 59.6 115.7
Affiliate lease rentals (notes 2 and 8).. 2.7 5.4 3.5 7.1
General and administrative (note 8)...... 8.4 16.7 7.9 15.8
Depreciation and amortization............ 17.5 34.0 16.2 32.0
------ ----- ----- -----
163.7 319.9 157.4 295.1
------ ----- ----- -----
Operating income (loss).................. 2.6 (0.2) 5.5 (2.2)
Other income (expense):
Interest, net (notes 5 and 8)............ (9.7) (18.0) (10.1) (19.0)
Loss on disposition of assets, net....... - - (2.3) (2.4)
Share of earnings of affiliates, net..... - - 0.1 0.3
Minority interests in earnings of
consolidated subsidiaries.............. (0.3) (0.5) (0.7) (0.7)
Other, net............................... (0.3) (1.4) (0.5) (1.2)
------ ----- ----- -----
(10.3) (19.9) (13.5) (23.0)
------ ----- ----- -----
Loss before income tax expense........... (7.7) (20.1) (8.0) (25.2)
Income tax expense (note 9)................ (0.3) (0.7) (0.5) (0.8)
------ ----- ----- -----
Net loss................................. (8.0) (20.8) (8.5) (26.0)
Dividend on preferred stock (note 7)....... (5.2) (10.4) (4.5) (9.1)
------ ----- ----- -----
Net loss available to common
stockholder............................ $(13.2) (31.2) (13.0) (35.1)
====== ===== ===== =====
*Restated
See accompanying notes to condensed consolidated financial statements.
4
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder's Equity
(Amounts in Millions)
(Unaudited)
Cumulative
foreign
Additional currency Total
Preferred Common paid-in Accumulated translation Intercompany stockholder's
stock stock capital deficit adjustment account equity
--------- ------ ---------- ----------- ----------- ------------ -------------
Balance at January 1, 1996 .... $ 149.2 - 73.5 (155.9) (0.1) 0.4 67.1
Accretion of dividends on
preferred stock ............. 10.4 - (10.4) - - - -
Net increase in intercompany - - - - - 0.3 0.3
account ......................
Net loss ...................... - - - (20.8) - - (20.8)
--------- ------ ---------- ----------- ----------- ------------ -------------
Balance at June 30, 1995 ...... $ 159.6 - 63.1 (176.7) (0.1) 0.7 46.6
========= ====== ========== =========== =========== ============ =============
See accompanying notes to condensed consolidated financial statements.
5
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Amounts in Millions)
(Unaudited)
Six Months Ended
June 30,
------------------
1996 1995*
-------- --------
Net cash provided by (used in) operating activities............... $ 11.3 (5.0)
------ -----
Cash flow from investing activities:
Capital expenditures.......................................... (44.4) (32.7)
(Increase) decrease in construction in progress, net.......... 6.6 (8.0)
Increase in receivable from sale and leaseback escrow, net.... (7.9) -
Proceeds from disposition of assets........................... 6.6 -
Cash paid for minority interest holdings...................... - (10.0)
Other, net.................................................... (5.2) (4.7)
------ -----
Net cash used in investing activities....................... (44.3) (55.4)
------ -----
Cash flow from financing activities:
Debt borrowings............................................... 55.9 97.4
Debt repayments............................................... (36.2) (34.0)
Net increase in intercompany account.......................... 0.3 0.2
Increase in cash overdraft.................................... 2.2 3.3
Increase in related party receivables......................... (1.9) (3.3)
Other, net.................................................... - (4.4)
------ -----
Net cash provided by financing activities................... 20.3 59.2
------ -----
Net decrease in cash........................................ (12.7) (1.2)
Cash and cash equivalents:
Beginning of period........................................... 32.4 12.7
------ -----
End of period................................................. $ 19.7 11.5
====== =====
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Net loss........................................................ $(20.8) (26.0)
Effect of leases with escalating minimum annual rentals......... 1.1 0.9
Depreciation and amortization................................... 34.0 32.0
Loss on disposition of assets, net.............................. - 2.4
Share of earnings of affiliates, net............................ - (0.3)
Minority interests in earnings of consolidated subsidiaries..... 0.5 0.7
(Increase) decrease in receivables, prepaid expenses and other
assets, net.................................................. 4.5 (3.0)
Decrease in account payables, accrued liabilities
and other liabilities, net.................................... (8.0) (11.7)
------ -----
Net cash provided by (used in) operating activities............. $ 11.3 ( 5.0)
====== =====
*Restated
See accompanying notes to condensed consolidated financial statements.
6
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1996
(Unaudited)
(1) General Information
-------------------
On May 12, 1992, United Artists Theatre Circuit, Inc. and substantially all
of its then existing subsidiaries (the Company) were acquired (the
Acquisition) by OSCAR I Corporation (OSCAR I) from an indirect subsidiary of
Tele-Communications, Inc. (TCI). OSCAR I is owned by an investment fund
managed by affiliates of Merrill Lynch Capital Partners, Inc. (MLCP) and
certain institutional investors (collectively the Non-Management Investors),
Mr. Stewart D. Blair (Chairman and Chief Executive Officer of the Company),
and certain other members of the Company's management. The purchase price,
including the assumption of certain liabilities, was approximately $544
million.
Simultaneously with the Acquisition, the Non-Management Investors formed
OSCAR II Corporation, a Delaware corporation (OSCAR II) and acquired from an
affiliate of TCI all of the outstanding capital stock of United Artists
Realty Company, a Delaware corporation (UAR) and its subsidiaries, United
Artists Properties I Corp. (Prop I) and United Artists Properties II Corp.
(Prop II). UAR, Prop I and Prop II were the owners and lessors of certain
operating theatre properties leased to and operated by the Company and its
subsidiaries. Certain mortgage debt of UAR, Prop I and Prop II, which was
secured by their theatre properties, remained outstanding after the
acquisition by OSCAR II. On February 28, 1995, OSCAR II was merged into
OSCAR I effected by a one-for-one share exchange.
Certain prior period amounts have been reclassified for comparability with
the 1996 presentation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made in the accompanying interim condensed
consolidated financial statements which are necessary to present fairly the
financial position of the Company and the results of its operations.
Interim results are not necessarily indicative of the results for the entire
year because of fluctuations of revenue and related expenses resulting from
the seasonality of attendance and the availability of popular motion
pictures. These financial statements should be read in conjunction with the
audited December 31, 1995 consolidated financial statements and notes
thereto included as part of the Company's Form 10-K.
(2) Sale and Leaseback
------------------
On December 13, 1995, the Company entered into a sale and leaseback
transaction (the Sale and Leaseback) whereby the buildings and land
underlying ten of its operating theatres and four theatres under
development were sold to, and leased back from, the United Artists Theatre
Circuit, Inc. 1995-A Pass Through Trust (the Pass Through Trust), an
unaffiliated third party. The proceeds related to the four theatres under
development (approximately $22.0 million) were deposited into an escrow
account and will be used by the Company to fund substantially all of the
construction costs associated with the four theatres. In addition, 17
theatres owned by Prop II were sold to the Pass Through Trust and leased
back to the Company. Through July 27, 1996, the Company had received
approximately $14.3 million from the escrow account.
7
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(2) Sale and Leaseback, continued
-----------------------------
The Sale and Leaseback requires the Company 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 Company accounts for the lease as an
operating lease. The Sale and Leaseback requires the maintenance of
certain financial covenants by the Company.
(3) Restatement
-----------
During December 1995, the remaining 11 theatres owned by Prop II subsequent
to the Sale and Leaseback were contributed to the Company, the Prop II
master lease was terminated and the $12.5 million of letters of credit
established by the Company to support the Prop II debt were canceled. The
contribution of these theatres has been accounted for in a manner similar
to a pooling of interests, and accordingly, the accompanying financial
statements have been restated to include these theatres. Separate revenue
and net income (loss) amounts for the Company and the 11 remaining Prop II
theatres for the six months ended June 30, 1995 are presented in the
following table (amounts in millions):
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
------------------- -----------------
Revenue:
Company.................. $162.9 292.8
Eleven Prop II Theatres.. - 0.1
------ -----
Combined................. $162.9 292.9
====== =====
Net income (loss):
Company.................. $ (9.1) (27.1)
Eleven Prop II Theatres.. 0.6 1.1
------ -----
Total.................... $ (8.5) (26.0)
====== =====
In addition to the contribution of the remaining theatres, the equipment in
the Prop II theatres included in the Sale and Leaseback was transferred to
the Company during December 1995.
(4) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash payments for interest were $18.5 million and $17.4 million for the six
months ended June 30, 1996 and 1995, respectively.
Cash payments by certain less than 80% owned entities for incomes taxes
were $1.2 million and $0.3 million for the six months ended June 30, 1996
and 1995, respectively.
The Company accrued $10.4 million and $9.1 million of dividends during the
six months ended June 30, 1996 and 1995, respectively, on its preferred
stock.
During the six months ended June 30, 1995, the Company incurred $2.3
million of capital lease obligations relating to new equipment.
8
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) Debt
----
Debt is summarized as follows (amounts in millions):
June 30, 1996 December 31, 1995
------------- -----------------
Bank Credit Facility (a).. $ 270.0 250.0
Senior Secured Notes (b).. 125.0 125.0
Other (c)................. 8.3 8.2
------- -----
$ 403.3 383.2
======= =====
(a) On May 1, 1995, the Company restated its existing bank credit
facility to principally provide for additional term and revolving
loan commitments, to extend the final maturity of the facility and
reduce interest rate borrowing spreads. The restated bank credit
facility (the Bank Credit Facility) provides for term loans
aggregating $250.0 million (the Term Loans), a reducing revolving
loan with commitments aggregating $87.5 million (the Revolving
Facility) and standby letters of credit aggregating $12.5 million
(the Standby Letters of Credit). Principal on the Term Loans is
payable in escalating semi-annual installments commencing December
31, 1996, with a final installment due March 31, 2002. The aggregate
commitments available for borrowing under the Revolving Facility
decline each year commencing December 31, 1997 through March 31,
2002. 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 the Company, but no less frequently than once each quarter. The
Bank Credit Facility contains certain provisions that require the
maintenance of certain financial ratios and place limitations on
additional indebtedness, disposition of assets, capital expenditures
and payment of dividends. The Bank Credit Facility is secured by the
stock of the Company, substantially all of the Company's
subsidiaries and UAR, and is guaranteed by OSCAR I and substantially
all of the Company's subsidiaries.
(b) The senior secured notes (the Senior Secured Notes) are due May 1,
2002 and require repayments prior to maturity of $31.25 million on
May 1, 2000 and on May 1, 2001. The Senior Secured Notes accrue
interest at 11 1/2% per annum, which is payable semi-annually. The
Senior Secured Notes place limitations on, among other things,
additional indebtedness, disposition of assets and payment of
dividends. The Senior Secured Notes are secured on a pari-passu
----------
basis with the Bank Credit Facility by the stock of the Company,
substantially all of the Company's subsidiaries and UAR, and are
guaranteed on a pari-passu basis with the Bank Credit Facility by
----------
OSCAR I and substantially all of the Company's subsidiaries.
(c) Other debt at June 30, 1996 consists of various term loans, mortgage
notes, capital leases and other borrowings. This other debt carries
interest rates ranging from 7% to 12%. Principal and interest are
payable at various dates through March 1, 2006.
9
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) Debt, continued
---------------
At June 30, 1996, the Company was party to interest rate cap agreements on
$125.0 million of floating rate debt which provide for a LIBOR interest
rate cap ranging between 6 1/2% and 7 1/2% and expire at various dates
through 1997. The Company is subject to credit risk exposure from non-
performance of the counterparties to the interest rate cap agreements. As
the Company has historically received payments relating to its interest
rate cap agreements, it does not anticipate such non-performance in the
future. The Company amortizes the cost of its interest rate cap agreements
to interest expense over the life of the underlying agreement. Amounts
received from the counterparties to the interest rate cap agreements are
recorded as a reduction of interest expense.
At June 30, 1996, the Company had approximately $67.5 million of unused
revolving loan commitments pursuant to the Bank Credit Facility, $2.6
million of which has been used for the issuance of letters of credit. The
Company pays commitment fees of 1/2% per annum on the average unused
revolver commitments. Subsequent to June 30, 1996, all outstanding
borrowings under the revolving loan were repaid, and as of July 31, 1996,
the Company had $84.9 million of unused revolving loan commitments.
(6) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
At June 30, 1996, the fair value of the Company's cash and cash
equivalents, outstanding borrowings under the Bank Credit Facility and
interest rate cap agreements approximated their carrying amount and the
fair value of the Senior Secured Notes was approximately $130.4 million.
(7) Preferred Stock
---------------
Concurrent with the Acquisition, the Company issued 92,500 shares of
preferred stock with a liquidation value of $92.5 million to OSCAR I. The
preferred stock is redeemable at any time at the option of the Company at
its stated liquidation value plus accrued and unpaid dividends. Dividends
accrue at a rate of 8% through December 31, 1995, 9% through December 31,
1996 and 14% thereafter, and are payable in cash or in kind through
December 31, 1996. Cash dividends are required for periods subsequent to
December 31, 1996, provided that no provisions exist in any senior debt
facility which restricts such cash payments. Currently, such restrictions
exist. Due to the perpetual nature of the preferred stock and the
escalating terms of the required dividend rates, for financial reporting
purposes, dividends have been accrued at a 14% per annum rate for all
periods since issuance. At June 30, 1996, the actual redemption value in
accordance with the terms of the preferred stock was approximately $127.9
million.
(8) Related Party Transactions
--------------------------
The Company leases certain of its theatres from UAR, Prop I and Prop II
(through December 13, 1995) in accordance with three master leases. The
master leases provide for basic monthly or quarterly rentals and may
require additional rentals, based on the revenue of the underlying theatre.
In conjunction with the Sale and Leaseback on December 31, 1995, the Prop
II master lease and letters of credit of UATC aggregating $12.5 million
which supported mortgage debt of Prop II were canceled.
10
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(8) Related Party Transactions, continued
-------------------------------------
In order to fund the cost of additions and/or renovations to the theatres
leased by the Company from UAR or Prop I, the Company has periodically made
advances to UAR. Interest on the advances accrues at the prime rate and
amounted to $0.2 million for the three months ended June 30, 1996 and 1995
and $0.5 million and $0.8 million for the six months ended June 30, 1996
and 1995, respectively.
The Company is a party to a management agreement with UAR. Such management
agreement provides for a fee to be paid to the Company in return for
certain accounting and management services. These fees are recorded as a
reduction of general and administrative expenses in the accompanying
condensed consolidated financial statements and approximated $0.2 million
and $0.3 million for the three months ended June 30, 1996 and 1995,
respectively, and $0.3 million and $0.5 million for the six months ended
June 30, 1996 and 1995, respectively.
(9) Income Taxes
------------
The Company and each of its 80% or more owned subsidiaries are included in
OSCAR Is consolidated federal income tax returns. Pursuant to a tax sharing
agreement with OSCAR I, the Company and each of its 80% or more owned
consolidated subsidiaries are allocated a portion of OSCAR I's current
federal income tax expense (benefit). Such allocations are determined as if
the Company and each of its 80% or more owned consolidated subsidiaries
were separate tax paying entities within the consolidated group. For the
three months and six months ended June 30, 1996 and 1995, the Company and
each of its 80% or more owned consolidated subsidiaries were allocated no
current federal income tax expense (benefit) pursuant to such tax sharing
agreement as a result of the groups overall net loss position.
Consolidated subsidiaries in which the Company 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 the Company.
At June 30, 1996, the Company had deferred tax assets and deferred tax
liabilities of approximately $67.8 million and $8.3 million, respectively,
relating primarily to the Company's net operating loss carry-forward and
the difference between the financial statement and income tax basis in the
Company's property and equipment. At June 30, 1996, the Company had
recorded a valuation allowance of approximately $59.5 million against the
net deferred tax asset.
(10) Commitments and Contingencies
-----------------------------
At June 30, 1996, the Company had outstanding approximately $15.1 million
of letters of credit, $12.5 million of which relates to the indebtedness of
Prop I.
11
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) Commitments and Contingencies
-----------------------------
There are pending legal proceedings by or against the Company involving
alleged breaches of contracts, torts, violations of antitrust laws, and
miscellaneous other causes of action. In addition, there are various
claims against the Company relating to certain leases held by the Company.
Although it is not possible to predict the outcome of such legal
proceedings, in the opinion of management, such legal proceedings will not
have a material adverse effect on the Company's financial position,
liquidity or results of operations.
The federal Americans With Disabilities Act of 1990 (ADA) and certain
state statutes among other things, require that places of public
accommodation, including theatres (both existing and newly constructed) be
accessible to and that assistive listening devices be available for use by
certain patrons with disabilities. With respect to access to theatres, the
ADA may require that certain modifications be made to existing theatres in
order 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 for reimbursement of
plaintiff's attorney's fees and expenses under certain circumstances. The
Company has established a program to review and evaluate the Company's
theatres and to make any changes which may be required by the ADA.
Although the Company's review and evaluation is ongoing, management
believes that the cost of complying with the ADA will not materially
adversely affect the Company's financial position, liquidity and results
of operations.
Connie Arnold and Annette Cupolo vs. United Artists Theatre Circuit, Inc.
This action was originally filed in the Superior Court, Alameda County,
California on July 31, 1991, case number 683090-4. The complaint
originally alleged that the Company violated various California statutes
and engaged in actions which violated plaintiffs' civil rights by
allegedly constructing a theatre which is not lawfully accessible to
certain disabled persons. The relief sought included injunctive relief and
damages (including statutory damages pursuant to California law). The
action was certified by the state court as a class action, although the
size of the class was not determined. The amount of statutory damages
sought would depend upon the size of the putative class. In February 1993,
the defendant removed the case to U. S. District Court for the Northern
District of California (Connie Arnold and Annette Cupolo vs. United
Artists Theatre Circuit, Inc. d/b/a/ U.A. Emery Bay; and Does 1 through
20, inclusive, case number C 93 0079 TEH). The plaintiffs then amended
their complaint to include claims similar to those made in the state court
with respect to all of the Companys owned or operated theatres in
California. The plaintiffs also added a cause of action alleging violation
of the ADA relating to accessibility for certain persons in the theatres
in California. The Company then sued, as third-party defendants, various
architects who had participated in the design or construction of certain
of the Companys theatres located in California.
In 1994 the plaintiffs and the Company, along with several other parties
named as third-party and fourth-party defendants, began a formal mediation
process supervised by the court. During the process plaintiffs and the
Company agreed to expand the ADA claims to cover all of the Companys
theatres throughout the United States and to attempt to involve the United
States Department of Justice (DOJ) in the mediation process and any
settlement which might result. The DOJ has consented to joining as a party
to the litigation and the settlement agreement.
12
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) Commitments and Contingencies
-----------------------------
The plaintiffs, the Company, the DOJ and the third and fourth-party
defendants have reached agreement as to the terms and conditions of a
settlement agreement, the effectiveness of which is subject to a number of
conditions, including approval thereof by the court after conducting one
or more hearings. The proposed settlement agreement requires, among other
things, that the Company pay certain amounts as damages and for plaintiffs
attorneys fees, as well as make certain physical modifications to its
theatres over a six year period. Such damages and attorneys fees had
previously been accrued by the Company. The third-party defendant
architects have agreed to pay a certain amount to the Company as damages.
13
OSCAR I CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
June 30, 1996 December 31, 1995
------------- -----------------
Assets
------
Cash and cash equivalents.......................... $ 19.7 32.5
Notes and other receivables, net................... 27.9 25.1
Prepaid expenses and concession inventory.......... 15.4 20.3
Investments and related receivables................ 18.0 14.1
Property and equipment, at cost:
Land.............................................. 64.7 65.8
Theatre buildings, equipment and other............ 461.2 428.2
------- ------
525.9 494.0
Less accumulated depreciation and amortization.... (119.9) (107.0)
------- ------
406.0 387.0
------- ------
Intangible assets, net............................. 149.0 165.8
Other assets, net.................................. 18.9 21.0
------- ------
$ 654.9 665.8
======= ======
Liabilities and Stockholders Equity
-----------------------------------
Accounts payable................................... $ 83.7 88.5
Accrued liabilities................................ 24.7 28.3
Other liabilities (note 2)......................... 33.5 33.7
Debt (note 4)...................................... 471.7 453.7
------- ------
Total liabilities................................. 613.6 604.2
------- ------
Minority interests in equity of consolidated
subsidiaries...................................... 7.2 7.0
Stockholders equity:
Preferred stock (note 6).......................... 159.6 149.2
Common stock:
Class A.......................................... 0.1 0.1
Class B.......................................... - -
Class C.......................................... - -
Additional paid-in capital........................ 50.7 61.1
Accumulated deficit............................... (176.2) (155.7)
Cumulative foreign currency
translation adjustment........................... (0.1) (0.1)
------- ------
34.1 54.6
------- ------
$ 654.9 665.8
======= ======
See accompanying notes to condensed consolidated financial statements.
14
s
OSCAR I CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in Millions)
(Unaudited)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
------------- ------------- ------------- -------------
Revenue:
Admissions...................... $ 114.9 222.2 115.0 207.9
Concession sales................ 46.1 87.4 45.2 79.8
Other........................... 5.5 10.7 3.0 5.8
------------- ------------- ------------- -------------
166.5 320.3 163.2 293.5
------------- ------------- ------------- -------------
Costs and expenses:
Film rental and advertising..... 61.8 120.4 62.9 111.6
Direct concession costs......... 7.3 13.9 7.3 12.9
Other operating expenses........ 66.0 129.5 59.6 115.7
General and administrative...... 8.6 17.1 8.2 16.3
Depreciation and amortization... 18.1 35.3 17.7 34.7
------------- ------------- ------------- -------------
161.8 316.2 155.7 291.2
------------- ------------- ------------- -------------
Operating income................ 4.7 4.1 7.5 2.3
Other income (expense):
Interest, net (note 4).......... (11.7) (21.9) (13.3) (26.0)
Loss on disposition of assets,
net........................... - - (2.3) (2.4)
Share of earnings (losses) of
affiliates, net............... - - 0.1 0.3
Minority interests in earnings
of consolidated subsidiaries.. (0.3) (0.5) (0.7) (0.7)
Other, net...................... (0.4) (1.5) (0.5) (1.2)
------------- ------------- ------------- -------------
(12.4) (23.9) (16.7) (30.0)
------------- ------------- ------------- -------------
Loss before income tax expense.. (7.7) (19.8) (9.2) (27.7)
Income tax expense (note 7)...... (0.3) (0.7) (0.5) (0.8)
------------- ------------- ------------- -------------
Net loss........................ (8.0) (20.5) (9.7) (28.5)
Dividend on preferred stock
(note 6)...................... (5.2) (10.4) (4.5) (9.1)
------------- ------------- ------------- -------------
Net loss available to
common stockholders........... $ (13.2) (30.9) (14.2) (37.6)
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
15
OSCAR I CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(Amounts in Millions)
(Unaudited)
Cumulative
Common Common Common Additional foreign currency Total
Preferred stock stock stock paid-in Accumulated translation stockholders'
stock Class A Class B Class C capital deficit adjustment equity
----- ------- ------- ------- ------- ------- ---------- ------
Balance at January 1, 1996.. $ 149.2 0.1 - - 61.1 (155.7) (0.1) 54.6
Accretion of dividends on
preferred stock............ 10.4 - - - (10.4) - - -
Net loss.................... - - - - - (20.5) - (20.5)
-------- -------- ------- ------- -------- ---------- --------- --------
Balance at June 30, 1996.... $ 159.6 0.1 - - 50.7 (176.2) (0.1) 34.1
======== ======== ======== ======= ======== ========== ========= =========
See accompanying notes to condensed consolidated financial statements.
16
OSCAR I CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(Amounts in Millions)
(Unaudited)
Six Months Ended
June 30,
------------------
1996 1995
-------- --------
Net cash provided by (used in) operating activities............... $ 12.5 (2.4)
Cash flow from investing activities:
Capital expenditures.......................................... (45.2) (35.8)
(Increase) decrease in construction in progress, net.......... 6.6 (8.0)
Increase in receivable from sale and leaseback escrow, net.... (7.9) -
Proceeds from disposition of assets........................... 6.6 -
Cash paid for minority interest holdings...................... - (10.0)
Other, net.................................................... (5.2) (5.6)
------ -----
Net cash used in investing activities....................... (45.1) (59.4)
------ -----
Cash flow from financing activities:
Debt borrowings............................................... 55.9 97.4
Debt repayments............................................... (38.3) (35.5)
Increase in cash overdraft.................................... 2.2 3.3
Other, net.................................................... - (4.1)
------ -----
Net cash provided by financing activities................... 19.8 61.1
------ -----
Net decrease in cash........................................ (12.8) (0.7)
Cash and cash equivalents:
Beginning of period........................................... 32.5 12.8
------ -----
End of period................................................. $ 19.7 12.1
====== =====
Reconciliation of net loss to net cash provided by (used in)
operating activities:
Net loss........................................................ $(20.5) (28.5)
Effect of leases with escalating minimum annual rentals......... 1.1 0.9
Depreciation and amortization................................... 35.3 34.7
Loss on disposition of assets, net.............................. - 2.4
Share of earnings of affiliates, net............................ - (0.3)
Minority interests in earnings of consolidated subsidiaries..... 0.5 0.7
(Increase) decrease in receivables, prepaid expenses and other
assets, net.................................................. 5.0 (0.5)
Decrease in accounts payable, accrued liabilities
and other liabilities, net.................................... (8.9) (11.8)
------ -----
Net cash provided by (used in) operating activities............. $ 12.5 ( 2.4)
====== =====
See accompanying notes to condensed consolidated financial statements.
17
OSCAR I CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1996
(Unaudited)
(1) General Information
-------------------
Oscar I Corporation, a Delaware Corporation (OSCAR I) was formed in February
1992 for the purpose of purchasing United Artists Theatre Circuit, Inc.
(UATC) from an affiliate of Tele-Communications, Inc. (TCI). OSCAR I is
owned by an investment fund managed by affiliates of Merrill Lynch Capital
Partners, Inc. (MLCP) and certain institutional investors (collectively, the
Non-Management Investors), Mr. Stewart D. Blair (Chairman and Chief
Executive Officer of UATC) and certain other members of UATCs management.
On May 12, 1992, OSCAR I purchased all of the outstanding common stock of
UATC from an affiliate of TCI (the Acquisition) for approximately $544
million.
Simultaneously with the Acquisition, the Non-Management Investors formed
OSCAR II Corporation, a Delaware corporation (OSCAR II) and acquired from an
affiliate of TCI all of the outstanding capital stock of United Artists
Realty Company, a Delaware corporation (UAR) and its subsidiaries, United
Artists Properties I Corp. (Prop I) and United Artists Properties II Corp.
(Prop II). UAR, Prop I and Prop II were the owners and lessors of certain
operating theatre properties leased to and operated by UATC and its
subsidiaries. Certain mortgage debt of UAR, Prop I and Prop II, which was
secured by their theatre properties, remained outstanding after the
acquisition by OSCAR II. On February 28, 1995, OSCAR I merged with OSCAR II.
A total of 104,933 shares of OSCAR Is common stock were exchanged for all of
the outstanding shares of OSCAR II.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made in the accompanying interim condensed
consolidated financial statements which are necessary to present fairly the
financial position of OSCAR I and the results of its operations. Interim
results are not necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the audited
December 31, 1995 consolidated financial statements and notes thereto
included as part of UATC's Form 10-K.
(2) Sale and Leaseback
------------------
On December 13, 1995, OSCAR I entered into a sale and leaseback transaction
(the Sale and Leaseback) whereby the buildings and land underlying 31 of its
operating theatres and four theatres currently under development were sold
to, and leased back from, the United Artists Theatre Circuit, Inc. 1995-A
Pass Through Trust (the Pass Through Trust), an unaffiliated third party.
The proceeds related to the four theatres under development (approximately
$22.0 million) were deposited into an escrow account and will be used by
OSCAR I to fund substantially all of the construction costs associated with
the four theatres. Through July 27, 1996, OSCAR I had received approximately
$14.3 million from the escrow account.
OSCAR I realized a net gain of approximately $12.1 million as a result of
the Sale and Leaseback. For financial statement purposes, this gain has been
deferred and will be recognized over the term of the lease as a reduction of
rent expense.
18
OSCAR I CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(3) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash payments for interest were $22.2 million and $23.9 million for the six
months June 30, 1996 and 1995, respectively.
Cash payments by certain less than 80% owned entities for income taxes were
$1.2 million and $0.3 million for the six months ended June 30, 1996 and
1995, respectively.
OSCAR I accrued $10.4 million and $9.1 million of dividends during the six
months ended June 30, 1996 and 1995, respectively, on its preferred stock.
During the six months ended June 30, 1995, OSCAR I incurred $2.3 million of
capital lease obligations relating to new equipment.
(4) Debt
----
Debt is summarized as follows (amounts in millions):
June 30, December 31,
1996 1995
---- ----
UATC Bank Credit Facility (a).. $270.0 250.0
UATC Senior Secured Notes (b).. 125.0 125.0
UATC Other (c)................. 8.3 8.2
UAR Promissory Notes (d)....... 11.9 13.8
Prop I Mortgage Notes (e)...... 56.5 56.7
------ -----
$471.7 453.7
====== =====
(a) On May 1, 1995, UATC restated its existing bank credit facility to
principally provide for additional term and revolving loan
commitments, to extend the final maturity of the facility and reduce
interest rate borrowing spreads. The restated bank credit facility
(the Bank Credit Facility) provides for term loans aggregating $250.0
million (the Term Loans), a reducing revolving loan with commitments
aggregating $87.5 million (the Revolving Facility) and standby letters
of credit aggregating $12.5 million (the Standby Letters of Credit).
Principal on the Term Loans is payable in escalating semi-annual
installments commencing December 31, 1996, with a final installment
due March 31, 2002. The aggregate commitments available for borrowing
under the Revolving Facility decline each year commencing December 31,
1997 through March 31, 2002. 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 UATC, but no less frequently than once each 90 days.
The Bank Credit Facility contains certain provisions that require the
maintenance of certain financial ratios and place limitations on
additional indebtedness, disposition of assets and payment of
dividends. The Bank Credit Facility is secured by the stock of UATC,
substantially all of UATCs subsidiaries and is guaranteed by OSCAR I
and substantially all of UATCs subsidiaries.
19
OSCAR I CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(4) Debt, continued
---------------
(b) The senior secured notes (the Senior Secured Notes) are due May 1,
2002 and require repayments prior to maturity of $31.25 million on May
1, 2000 and on May 1, 2001. The Senior Secured Notes accrue interest
at 11 1/2% per annum, which is payable semi-annually. The Senior
Secured Notes place limitations on, among other things, additional
indebtedness, disposition of assets and payment of dividends. The
Senior Secured Notes are secured on a pari-passu basis with the Bank
----------
Credit Facility by the stock of UATC, substantially all of the UATC's
subsidiaries and UAR, and are guaranteed on a pari-passu basis with
----------
the Bank Credit Facility by OSCAR I and substantially all of UATCs
subsidiaries.
(c) UATCs other debt at June 30, 1996 consists of various term loans,
mortgage notes, capital leases and other borrowings. This other debt
carries interest rates ranging from 7% to 12%. Principal and interest
are payable at various dates through March 1, 2006.
(d) In conjunction with the acquisitions of certain theatres prior to the
Acquisition, UAR issued $51.6 million of non-interest bearing
promissory notes to the sellers. Principal on the promissory notes is
due quarterly through October 1999. For financial statement purposes,
the promissory notes were discounted at UARs effective borrowing rate
on the date the promissory notes were executed.
(e) The Prop I first mortgage notes (the Prop I Notes) bear interest at
11.15% per annum. Principal and interest are payable in monthly
installments, with a lump sum payment of principal and accrued, but
unpaid, interest due on November 1, 1998. The Prop I Notes are
secured by a first mortgage on Prop Is theatre properties, an
assignment of the lease agreement with UATC, and $12.5 million of bank
letters of credit provided by UATC. The Indenture of Mortgage, among
its other provisions, contains limitations on the sale and/or
substitution of properties and a limitation on any additional debt
incurred by Prop I other than intercompany advances.
At June 30, 1996, UATC was party to interest rate cap agreements on $125.0
million of floating rate debt which provide for a LIBOR interest rate
cap ranging between 6 1/2% and 7 1/2% and expire at various dates through
1997. UATC is subject to credit risk exposure from non-performance of the
counterparties to the interest rate cap agreements. As UATC has
historically received payments relating to such interest rate cap
agreements, UATC does not anticipate such non-performance in the future.
UATC amortizes the cost of its interest rate cap agreements to interest
expense over the life of the agreement. Amounts received from the
counterparties to the interest rate cap agreements are recorded as a
reduction of interest expense.
20
OSCAR I CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(4) Debt, continued
---------------
At June 30, 1996, UATC had approximately $67.5 million of unused revolving
loan commitments pursuant to the Bank Credit Facility, $2.6 million of
which has been used for the issuance of letters of credit. UATC pays
commitment fees of 1/2% per annum on the average unused revolver
commitments. Subsequent to June 30, 1996, all outstanding borrowings under
the revolving loan were repaid, and as of July 31, 1996, OSCAR I had $84.9
million of unused revolving loan commitments.
(5) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
At June 30, 1996, the fair value of OSCAR Is cash and cash equivalents,
outstanding borrowings under the UATC Bank Credit Facility and interest
rate cap agreements approximated their carrying amount and the fair value
of the Senior Secured Notes was approximately $130.4 million.
(6) Preferred Stock
---------------
The OSCAR I preferred stock is redeemable any time at the option of OSCAR I
at its stated liquidation value plus accrued and unpaid dividends.
Dividends accrue at a rate of 8% through December 31, 1995, 9% through
December 31, 1996 and 14% thereafter, and are payable in cash or in kind
through December 31, 1996. Dividends subsequent to December 31, 1996 are
required to be paid in cash unless any senior debt facility of OSCAR I or
UATC restricts payment. Currently, such restrictions exist. The preferred
stock contains certain restrictions on, among other things, the incurrence
of additional indebtedness by OSCAR I or its subsidiaries. Due to the
perpetual nature of the preferred stock and the escalating terms of the
required dividend rates, for financial statement purposes dividends have
been accrued at a 14% per annum rate. At June 30, 1996, the actual
redemption value in accordance with the terms of the preferred stock was
approximately $127.9 million.
(7) Income Taxes
------------
Consolidated subsidiaries in which OSCAR I 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 OSCAR I.
At June 30, 1996, OSCAR I had deferred tax assets and deferred tax
liabilities of approximately $72.1 million and $11.7 million, respectively,
relating primarily to OSCAR Is net operating loss carry-forward and the
difference between the financial statement and income tax basis in OSCAR Is
property and equipment. At June 30, 1996, OSCAR I had recorded a valuation
allowance of approximately $60.4 million against the net deferred tax
asset.
21
OSCAR I CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(8) Commitments and Contingencies
-----------------------------
There are pending legal proceedings by or against OSCAR I and/or its
subsidiaries involving alleged breaches of contracts, torts, violations of
antitrust laws, and miscellaneous other causes of action. In addition,
there are various claims against OSCAR I and/or its subsidiaries relating
to certain of the leases held by OSCAR I and/or its subsidiaries. Although
it is not possible to predict the outcome of such legal proceedings, in the
opinion of management, such legal proceedings will not have a material
adverse effect on OSCAR Is financial position, liquidity or results of
operations.
The federal 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 in
order 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 for reimbursement of plaintiff's
attorneys' fees and expenses under certain circumstances. OSCAR I has
established a program to review and evaluate OSCAR Is theatres and to make
any changes which may be required by the ADA. Although OSCAR I's review and
evaluation is on-going, management believes that the cost of complying with
the ADA will not materially adversely affect OSCAR Is financial position,
liquidity or results of operations.
Connie Arnold and Annette Cupolo vs. United Artists Theatre Circuit, Inc.
This action was originally filed in the Superior Court, Alameda County,
California on July 31, 1991, case number 683090-4. The complaint originally
alleged that UATC violated various California statutes and engaged in
actions which violated plaintiffs' civil rights by allegedly constructing a
theatre which is not lawfully accessible to certain disabled persons. The
relief sought included injunctive relief and damages (including statutory
damages pursuant to California law). The action was certified by the state
court as a class action, although the size of the class was not determined.
The amount of statutory damages sought would depend upon the size of the
putative class. In February 1993, the defendant removed the case to U. S.
District Court for the Northern District of California (Connie Arnold and
Annette Cupolo vs. United Artists Theatre Circuit, Inc. d/b/a/ U.A. Emery
Bay; and Does 1 through 20, inclusive, case number C 93 0079 TEH). The
plaintiffs then amended their complaint to include claims similar to those
made in the state court with respect to all of UATCs owned or operated
theatres in California. The plaintiffs also added a cause of action
alleging violation of the ADA relating to accessibility for certain persons
in the theatres in California. UATC then sued, as third-party defendants,
various architects who had participated in the design or construction of
certain of UATCs theatres located in California.
22
OSCAR I CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(8) Commitments and Contingencies
-----------------------------
In 1994 the plaintiffs and UATC, along with several other parties named as
third-party and fourth-party defendants, began a formal mediation process
supervised by the court. During the process plaintiffs and UATC agreed to
expand the ADA claims to cover all of UATCs theatres throughout the United
States and to attempt to involve the United States Department of Justice
(DOJ) in the mediation process and any settlement which might result. The
DOJ has consented to joining as a party to the litigation and the settlement
agreement.
The plaintiffs, UATC, the DOJ and the third and fourth-party defendants have
reached agreement as to the terms and conditions of a settlement agreement,
the effectiveness of which is subject to a number of conditions, including
approval thereof by the court after conducting one or more hearings. The
proposed settlement agreement requires, among other things, that UATC pay
certain amounts as damages and for plaintiffs attorneys fees, as well as
make certain physical modifications to its theatres over a six year period.
Such damages and attorneys fees had previously been accrued by UATC. The
third-party defendant architects have agreed to pay a certain amount to UATC
as damages.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's Condensed
Consolidated Financial Statements and related notes thereto. Such financial
statements provide additional information regarding the Company's financial
activities and condition.
During December 1995, the remaining 11 theatres owned by Prop II subsequent to
the Sale and Leaseback were contributed to the Company. The contribution of
these theatres has been accounted for in a manner similar to a pooling of
interests, and accordingly, the Companys financial statements have been restated
to include these theatres as if they had been owned for all of such periods.
The following discussion of the Companys results of operations takes into
consideration the restatement of the Companys financial statements.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The following table summarizes certain operating data of the Companys theatres
(dollars in millions, except admissions per weighted average operating theatre,
admissions per weighted average operating screen and concession sales per
weighted average operating theatre):
Three Months Six Months
Ended June 30, % Ended June 30, %
----------------- Increase ----------------- Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
-------- ------- ---------- ------- -------- ------------
Operating Theatres (1)
Revenue:
Admissions............................. $ 114.9 115.0 (0.1)% 222.2 207.9 6.9%
Concession sales....................... 46.1 45.2 1.8 87.4 79.8 9.4
Other.................................. 5.3 2.7 97.7 10.1 5.2 94.9
Operating Expenses:
Film rental and advertising............ 61.8 62.9 (1.8) 120.4 111.6 7.9
Direct concession costs................ 7.3 7.3 - 13.9 12.9 8.0
Personnel expense...................... 24.1 24.1 - 47.1 45.9 2.5
Rent expense........................... 21.2 18.2 16.2 42.0 35.5 17.9
Other operating expenses............... 23.4 20.8 12.4 45.8 41.4 10.5
Weighted Avg. Operating Theatres(2)..... 403 414 (2.7) 406 415 (2.2)
Weighted Avg. Operating Screens(2)...... 2,318 2,266 2.3 2,322 2,262 2.7
Weighted Avg. Screens Per Theatre....... 5.8 5.5 5.1 5.7 5.5 4.9
Admissions Per Weighted Avg. Operating
Theatre............................... $285,176 277,862 2.6 547,355 501,048 9.2
Admissions Per Weighted Avg. Operating
Screen................................ $ 49,580 50,766 (2.3) 95,705 91,925 4.1
Concession Sales Per Weighted Average
Operating Theatre..................... $114,305 109,256 4.6 215,185 192,366 11.9
(1) The operating theatres include revenue and expenses of all theatres
operated by the Company which are more than 50% owned.
(2) Weighted average operating theatres and screens represent the number of
theatres and screens operated weighted by the number of days operated
during the period.
24
REVENUE FROM OPERATING THEATRES
- -------------------------------
ADMISSIONS: Admissions revenue and admissions per weighted average operating
screen decreased 0.1% and 2.3%, respectively, during the three months ended June
30, 1996 and increased 6.9% and 4.1%, respectively, during the six months ended
June 30, 1996 as compared to the prior year periods. The decreased admissions
revenue during the three months ended June 30, 1996 was primarily due to a
slight decrease in attendance off-set by a 1.9% increase in average ticket
prices. The increased admissions revenue during the six months ended June 30,
1996 was primarily due to a 4.9% increase in attendance and a 1.9% increase in
the average ticket price. The increase in attendance for the six months ended
June 30, 1996 was primarily due to the success of several films released during
the 1995 holidays which carried over into 1996 and to the success of several
films released during the first quarter of 1996. The increase in average ticket
prices is due primarily to a decline in the number of tickets sold for lower
priced matinee shows. Admissions per weighted average operating theatre
increased 2.6% and 9.2% during the three and six months ended June 30, 1996,
respectively, as compared to the prior year periods primarily as a result of the
attendance and average ticket price fluctuations discussed above and to the new
theatres opened by the company and the sale or closure of several smaller (in
terms of screens) theatres.
CONCESSION SALES: Concession sales increased 1.8% and 9.4% during the three
months and six months ended June 30, 1996, respectively, as compared to the
prior year periods. These increases in concession sales were primarily
attributable to increases in the average concession sale per patron of 3.9% and
4.4% during the three months and six months ended June 30, 1996, respectively,
as compared to the prior year periods in addition to the attendance fluctuations
noted above. The increases in the average concession sale per patron were
attributable to the companys increased emphasis on training, the installation of
bulk candy stands in may 1995, the renovation of concession stands at certain
existing theatres, the opening of several new theatres with more efficient
concession operations and the closure or sale of certain less efficient older
theatres.
OTHER: Other revenue is derived primarily from on-screen advertising,
electronic video games located in theatre lobbies, the rental of theatres by the
companys newly formed Proteus Network(TM) for satellite networked and non-
networked corporate meetings, seminars and other training/educational uses, non-
theatrical related revenue from the company's Starport(TM) entertainment centers
and other miscellaneous revenue. Other revenue increased 97.7% and 94.9% during
the three months and six months ended June 30, 1996, respectively, as compared
to the prior year periods primarily as a result of the companys circuit-wide
pre-show slide advertising program initiated in the middle of 1995, revenue from
the Proteus Network(TM) and revenue from the company's Starport(TM)
entertainment center in indianapolis which opened in september 1995.
OPERATING EXPENSES FROM OPERATING THEATRES
- ------------------------------------------
FILM RENTAL AND ADVERTISING EXPENSES: Film rental and advertising expenses
decreased 1.8% during the three months ended June 30, 1996 and increased 7.9%
during the six months ended June 30, 1996 as compared to the prior year periods
primarily as a result of the admissions revenue fluctuations discussed above.
Film rental and advertising expenses as a percentage of admissions revenue for
the three months ended June 30, 1996 and 1995 were 53.8% and 54.2%,
respectively, and 54.6% and 53.7% for the six months ended June 30, 1996 and
1995, respectively. The increase in film rental and advertising expenses as a
percentage of admissions revenue for the six months ended June 30, 1996 relates
primarily to an increase in the percentage of revenue from higher cost 1995
holiday films which held over into the first quarter of 1996 and a greater
number of successful films released during the first quarter of 1996.
25
DIRECT CONCESSION COSTS: Direct concession costs include direct concession
product costs and concession promotional expenses. Such expenses were constant
for the three months ended June 30, 1996 and 1995 and increased 8.0% during the
six months ended June 30, 1996 as compared to the prior year period. The
increase in direct concession costs for the six months ended June 30, 1996 was
primarily due to the increased concession sales revenue discussed above. Direct
concession costs as a percentage of concession sales revenue for the three and
six months ended June 30, 1996 were 15.9% and were 16.1% for the three and six
months ended June 30, 1995. The slight decrease in the concession cost
percentage for the three and six months ended June 30, 1996 as compared to the
prior year periods was primarily due to the sale of advertising on popcorn
containers which was offset against promotional expenses, partially offset by
higher costs attributable to increased sales of bulk candy.
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. Such expenses were constant for the three months
ended June 30, 1996 and 1995 and increased 2.5% during the six months ended June
30, 1996 as compared to the six months ended June 30, 1995. The increase in
personnel expense for the six months ended June 30, 1996 was primarily due to
the increased attendance, concession sales and Proteus Network(TM) events
discussed above, offset by more attendance sensitive theatre staffing.
Personnel expense as a percentage of total revenue declined to 14.5% and 14.7%
for the three and six months ended June 30, 1996, respectively, versus 14.8% and
15.7% for the comparable prior year periods, respectively.
RENT EXPENSE: Rent expense consists primarily of theatre base rentals as well
as contingent rentals which are a function of the underlying theatre's revenue
over an agreed upon breakpoint. Rent expense increased 16.2% and 17.9% during
the three and six months ended June 30, 1996, respectively, as compared to the
prior year periods, primarily as a result of an increase in base rentals
associated with newly opened theatres and rent associated with the sale and
leaseback, partially offset by fewer weighted average operating theatres.
Excluding the rent associated with the sale and leaseback, rent expense during
the three and six months ended June 30, 1996 increased only 7.4% and 8.9%,
respectively, as compared to prior year periods.
OTHER OPERATING EXPENSES: Other operating expenses consist of utilities, repairs
and maintenance, insurance, real estate and other taxes, supplies and other
miscellaneous operating expenses. Other operating expenses increased 12.4% and
10.5% during the three and six months ended June 30, 1996, respectively, as
compared to the prior year periods, primarily as a result of an increase in
attendance (six month period), increased pre-opening costs associated with the
theatres opened during the latter part of 1995 and during 1996, normal
inflationary increases, an increase in the number of weighted average operating
screens and expenses associated with the Proteus Network(TM).
The revenue and operating expenses discussed above are incurred exclusively
within the Company's theatres. The other expense discussions below reflect the
combined expenses of corporate, divisional, district and theatre operations.
GENERAL AND ADMINISTRATIVE EXPENSE
- ----------------------------------
General and administrative expense consists primarily of costs associated with
the Companys corporate headquarters, film booking and three general manager and
15 district theatre operations offices (generally located in theatres). Such
expenses increased $0.5 million and $0.9 million for the three and six months
ended June 30, 1996, respectively, as compared to prior year periods, primarily
as a result of normal annual salary adjustments as well increased professional
and legal fees associated with, among other legal matters, the Connie Arnold
settlement discussed below.
26
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and amortization expense includes the depreciation of theatre
buildings and equipment and the amortization of theatre lease costs and certain
non-compete agreements. Depreciation and amortization increased $1.3 million and
$2.0 million during the three and six months ended June 30, 1996, respectively
as compared to the prior year periods, primarily due to depreciation charges on
the Companys theatres opened during the latter part of 1995 and during 1996.
INTEREST
- --------
Interest expense decreased $0.4 million and $1.0 million for the three and six
months ended June 30, 1996, respectively, as compared to the prior year periods,
primarily due to lower market interest rates on floating rate borrowings,
partially offset by slightly higher average debt balances. Interest expense
includes amortization of deferred loan costs of $0.5 million and $1.1 million
for the three and six months ended June 30, 1996, respectively, and $0.5 million
and $0.9 million for the three and six months ended June 30, 1995, respectively.
Interest expense is net of interest income of $0.4 million and $0.7 million for
the three and six months ended June 30, 1996, respectively, and $0.2 million and
$0.8 million for the three and six months ended June 30, 1995, respectively.
NET LOSS
- --------
During the three and six months ended June 30, 1996, the Company incurred net
losses of $8.0 million and $20.8 million, respectively, compared to net losses
of $8.5 million and $26.0 million for the three and six months ended June 30,
1995, respectively. These lower losses relate primarily to the increase in
theatrical revenue discussed above and to increased theatrical operating
margins.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1996, $11.3 million of cash was provided by
operating activities. This operating source of cash, in addition to $20.3
million of cash provided by financing activities and cash balances available at
December 31, 1995 was used to finance $44.3 million of capital expenditures and
other investing activities.
Substantially all of the Company's admissions and concession sales revenue are
collected in cash. Due to the unfavorable interest rate spread between bank
facility borrowings and cash investments, the Company seeks to use all of its
available cash to repay its revolving bank borrowings and borrow under those
facilities as cash is required. The Company 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.
The Company's results of operations and cash resources provided by operating
activities are subject to seasonal fluctuations in attendance which corresponds
to periods when there is a greater availability of popular motion pictures
during the period from Memorial Day through Labor Day and during the Easter,
Thanksgiving and Christmas holidays. During periods in which there is not an
abundant supply of successful motion pictures, the Company uses availability
under its revolving credit facilities to provide additional funding for its
working capital needs and repays those facilities during periods of higher
attendance.
On February 28, 1995, UARs parent company, OSCAR II was merged into the Companys
parent company OSCAR I. As a result of this merger, OSCAR II ceased to exist
and OSCAR I became the parent company of both the Company and UAR. In
accordance with the terms of the Bank Credit Facility and Senior Secured Notes,
the stock of UAR was pledged as additional collateral for such borrowings. The
Company estimates the market value of properties (primarily land, building and
equipment associated with operating theatres) owned by UAR and its subsidiaries
is significantly in excess of the mortgage and other debt of UAR and its
subsidiaries.
27
Effective May 1, 1995, the Company refinanced and restated its Bank Credit
Facility to correspond with the Companys current capital and corporate structure
and its current business plan. The Bank Credit Facility provides for a $250
million delayed draw term loan, $87.5 million of revolving loan and letters of
credit commitments, and $12.5 million of standby letters of credit. The Bank
Credit Facility has reduced the floating interest rate spreads paid by the
Company and extended the average life of the Companys bank debt by requiring
semi-annual principal payments on term loans commencing December 31, 1996, and
extending the maturity date to March 31, 2002. Subsequent to June 30, 1996, all
outstanding borrowings under the revolving loan were repaid, and as of July 31,
1996, the Company had $84.9 million of unused revolving loan commitments.
On December 13, 1995, the Company entered into the Sale and Leaseback whereby
the land and buildings underlying ten of its operating theatres and four
theatres under development were sold to, and leased back from, the United
Artists Theatre Circuit, Inc. 1995-A Pass Through Trust (the Pass Through
Trust), an unaffiliated third party. The sale proceeds relating to the ten
operating theatres were used to pay certain transaction expense and repay
outstanding revolving bank debt of the Company, with the excess being held in
short term cash investments. The proceeds related to the four theatres under
development (approximately $22.0 million) were deposited into an escrow account
and will be used to fund substantially all of the construction costs associated
with the four theatres. In addition, 17 theatres owned by Prop II were sold to
the Pass Through Trust and leased back to the Company. Substantially all of the
proceeds from the Prop II sale were used to retire all of Prop IIs mortgage debt
and pay transaction expenses. Through July 27, 1996, the Company had received
approximately $14.3 million from the escrow account.
During December 1995, the remaining 11 theatres owned by Prop II were
contributed to the Company, the Prop II master lease with the Company was
terminated and the $12.5 million of letters of credit established by the Company
to guarantee the Prop II mortgage debt were canceled. The contribution of these
theatres has been accounted for in a manner similar to a pooling of interests
whereby the historical carrying value of the theatres and related equity was
contributed. In addition to the contribution of the remaining Prop II theatres,
the equipment in the 17 Prop II theatres included in the Sale and Leaseback was
contributed to the Company.
The Company is continuously looking for attractive theatre development
opportunities within the United States and certain countries outside of the
United States which have strategic significance and offer attractive returns and
growth potential. Theatres developed outside of the United States are generally
developed in conjunction with local strategic partners. In addition, in an
effort to attract additional theatre patrons and increase theatre operating
results, the Company is developing entertainment centers called Starports(TM).
The Starport(TM) entertainment centers will typically consist of a multi-plex
theatre (10 screens or more), a Showscan(TM) motion theatre, one or more virtual
reality attractions and expanded food operations. The Starports(TM) will
operate during the same periods as the theatre and require little incremental
management overhead to operate. In addition, most of the Starport(TM)
attractions outside of the multiplex theatre will be funded, owned and/or
developed jointly with the technology or equipment provider.
In an effort to limit the amount of investment exposure on any one project, the
Company typically develops theatre projects where the land and building is
leased through long-term operating leases. However, where such lease
transactions are not available, the Company will invest in the land and
development of the entire theatre facility (fee-owned) and then seek to enter
into a sale and leaseback transaction subsequent to the opening of the theatre.
Regardless of whether the theatre is fee-owned or leased, in most cases the
equipment and other theatre fixtures are owned by the Company. For the six
months ended June 30, 1996, the Company invested approximately $44.4 million in:
(i) six theatres (53 screens) which opened during 1995, (ii) 11 theatres (100
screens) which opened in 1996, (iii) additions to two existing theatres (six
screens), (iv) construction on an additional eight theatres (89 screens) and
additions to two existing theatres (8 screens) which the Company intends to open
during the remainder of 1996 or early 1997, and (v) renovations and recurring
maintenance to certain existing
28
theatres and corporate capital expenditures.
During the six months ended June 30, 1996, the Companys 50% owned Hong Kong
joint venture acquired two existing theatres (four screens) with cash held in
the ventures Hong Kong bank accounts. During the six months ended June 30,
1996, the Company received $1.1 million of dividends from the Hong Kong joint
venture. Also, $3.9 million was invested in the Companys 50% owned Argentine
and 50% owned Mexican joint ventures which was used primarily for its
construction of theatres by those joint venture companies.
At June 30, 1996, the Company had entered into theatre construction and
equipment commitments aggregating approximately $38.4 million for theatres which
the Company intends to open during the next two years. Such amount relates only
to projects in which the Company had executed a definitive lease agreement and
for which construction had started. Of the committed amount, approximately $7.7
million will be funded from the Sale and Leaseback proceeds currently held in
escrow.
During late 1995, the Company initiated a plan to increase its efforts to
dispose of, through sale or lease terminations, certain of its operating
theatres and real estate which are not considered part of its long-term
strategic plans. This increased emphasis on the disposal of non-strategic or
underperforming theatres and/or real estate is expected to involve as many as
108 theatres (407 screens). Net proceeds from these increased disposition
efforts will be used to repay existing debt and/or redeployed into new higher
margin theatres. While there can be no assurance that such sales or lease
termination efforts will be successful, several sales and lease terminations
have been completed and negotiations are on-going with respect to several other
theatres and pieces of real estate. For the twelve months ended June 30, 1996,
the Company had sold 18 theatres (96 combined screens) and two pieces of real
estate which had been identified for disposal and closed 16 theatres (59
screens).
Management believes its cash balances, cash flow from operations, borrowings
under its Bank Credit Facility, the proceeds from asset sales and the proceeds
from the Sale and Leaseback held in escrow will be sufficient to fund its debt
service, capital expenditures and other investments, and other liquidity
requirements for the foreseeable future.
OTHER
Congress recently passed legislation to increase the federal minimum hourly wage
paid to hourly wage employees over a two year period. As a significant portion
of the Companys theatre employees are paid the federal minimum hourly wage, this
recent legislation will increase the aggregate average hourly wage paid by the
Company. However, as such new legislation includes a lower 90 day training wage
provision (existing rates) which will reduce its effects for seasonal employees,
and theatre staffing levels and/or ticket pricing policies may be changed, the
effect of such legislation is not expected to have a material adverse affect on
the Companys results of operations, liquidity or financial position.
Due to the Companys current reliance on the supply of successful motion
pictures, any extended period of poorly performing motion pictures and/or any
significant disruption in the production of quality motion pictures by the major
motion picture production companies or independent producers may have an adverse
affect on the Company's results of operations.
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 in order 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 use of the theatre and its facilities and
reasonable access to work stations. The ADA provides for a private right of
action and for
29
reimbursement of plaintiff's attorney's fees and expenses under certain
circumstances. The Company has established a program to review and evaluate the
Company's theatres and to make changes which may be required by the ADA.
Although the Company's review and evaluation is on-going, management believes
that the cost of complying with the ADA will not materially adversely affect the
Company's financial position, liquidity and results of operations.
Connie Arnold and Annette Cupolo vs. United Artists Theatre Circuit, Inc. This
action was originally filed in the Superior Court, Alameda County, California on
July 31, 1991, case number 683090-4. The complaint originally alleged that the
Company violated various California statutes and engaged in actions which
violated plaintiffs' civil rights by allegedly constructing a theatre which was
not lawfully accessible to certain disabled persons. The relief sought included
injunctive relief and damages (including statutory damages pursuant to
California law). The action was certified by the state court as a class action,
although the size of the class was not determined. The amount of statutory
damages sought would depend upon the size of the putative class. In February
1993, the defendant removed the case to U. S. District Court for the Northern
District of California (Connie Arnold and Annette Cupolo vs. United Artists
Theatre Circuit, Inc. d/b/a/ U.A. Emery Bay; and Does 1 through 20, inclusive,
case number C 93 0079 TEH). The plaintiffs then amended their complaint to
include claims similar to those made in the state court with respect to all of
the Companys owned or operated theatres in California. The plaintiffs also
added a cause of action alleging violation of the ADA relating to accessibility
for certain persons in the theatres in California. The Company then sued, as
third-party defendants, various architects who had participated in the design or
construction of certain of the Companys theatres located in California. In 1994
the plaintiffs and the Company, along with several other parties named as third-
party and fourth-party defendants, began a formal mediation process supervised
by the court. During the process plaintiffs and the Company agreed to expand
the ADA claims to cover all of the Companys theatres throughout the United
States and to attempt to involve the United States Department of Justice (DOJ)
in the mediation process and any settlement which might result. The DOJ has
consented to joining as a party to the litigation and the settlement agreement.
The plaintiffs, the Company, the DOJ and the third and fourth-party defendants
have reached agreement as to the terms and conditions of a settlement agreement,
the effectiveness of which is subject to a number of conditions, including
approval thereof by the court after conducting one or more hearings. The
proposed settlement agreement requires, among other things, that the Company pay
certain amounts as damages and for plaintiffs attorneys fees, as well as make
certain physical modifications to its theatres over a six year period. Such
damages and attorneys fees had previously been accrued by the Company. In
addition, the third-party defendant architects have agreed to pay a certain
amount to the Company as damages.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED ARTISTS THEATRE CIRCUIT, INC.
(Registrant)
/S/ Kurt C. Hall
-------------------------------
BY: Kurt C. Hall
Executive Vice President
and Chief Financial Officer
Date: August 12, 1996
31