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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Numbers: 333-56985
333-56999
UNITED ARTISTS THEATRE COMPANY
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1198391
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9110 East Nichols Avenue, Suite 200
Englewood, Colorado 80112
- --------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 792-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
As of August 11, 1998, 11,551,383 share of Class A Common Stock, 142,858 share
of Class B Common Stock (including options to acquire 106,633 shares of Class B
Common Stock exercisable within 60 days of such date) and 11,902 shares of Class
C Common Stock were outstanding.
UNITED ARTISTS THEATRE COMPANY
Quarterly Report on Form 10-Q
June 30, 1998
(Unaudited)
TABLE OF CONTENTS
PART I Financial Information Page Number
-----------
Item 1. Financial Statements
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United Artists Theatre Company
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statement of Stockholders' Equity 6
Condensed Consolidated Statements of Cash Flow 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
------- ---------------------------------------
Financial Condition and Results of Operations 16
---------------------------------------------
2
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
CERTAIN OF THE MATTERS DISCUSSED IN THIS FORM 10-Q MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE UNCERTAINTIES AND OTHER FACTORS AND THE
ACTUAL RESULTS AND PERFORMANCE OF UNITED ARTISTS MAY BE MATERIALLY DIFFERENT
FROM FUTURE RESULTS OR PERFORMANCE EXPRESSED OR IMPLIED BY SUCH STATEMENTS.
CAUTIONARY STATEMENTS REGARDING THE RISKS ASSOCIATED WITH SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, WITHOUT LIMITATION, THOSE STATEMENTS INCLUDED UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." CERTAIN OF SUCH RISKS AND UNCERTAINTIES RELATE TO THE HIGHLY
LEVERAGED NATURE OF UNITED ARTISTS, THE RESTRICTIONS IMPOSED ON UNITED ARTISTS
BY CERTAIN INDEBTEDNESS, THE SENSITIVITY OF UNITED ARTISTS TO ADVERSE TRENDS IN
THE GENERAL ECONOMY, THE HIGH DEGREE OF COMPETITION IN UNITED ARTISTS' INDUSTRY,
THE VOLATILITY OF UNITED ARTISTS' QUARTERLY RESULTS AND UNITED ARTISTS'
SEASONALITY, THE DEPENDENCE OF UNITED ARTISTS ON FILMS AND DISTRIBUTORS AND ON
ITS ABILITY TO OBTAIN POPULAR MOTION PICTURES, THE CONTROL OF UNITED ARTISTS BY
AFFILIATES OF MERRILL LYNCH CAPITAL PARTNERS, INC. AND THE DEPENDENCE OF UNITED
ARTISTS ON KEY PERSONNEL, AMONG OTHERS.
ALL WRITTEN FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO UNITED ARTISTS ARE
EXPRESSLY QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
3
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
Assets
------
Current assets:
Cash and cash equivalents................................................... $ 7.9 10.8
Receivables, net............................................................ 28.6 14.4
Prepaid expenses and concessions inventory.................................. 16.0 18.4
Other assets................................................................ 0.5 0.3
---- ----
Total current assets...................................................... 53.0 43.9
Investments and related receivables.......................................... 14.7 15.4
Property and equipment, at cost (note 9):
Land........................................................................ 53.7 54.7
Theatre buildings, equipment and other...................................... 538.7 499.0
----- -----
592.4 553.7
Less accumulated depreciation and amortization (note 4)..................... (175.9) (158.4)
------ ------
416.5 395.3
Intangible assets, net (note 9).............................................. 92.1 101.5
Other assets, net (note 2)................................................... 16.0 6.9
----- -----
$ 592.3 563.0
===== =====
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Accounts payable............................................................ $ 97.6 87.1
Accrued and other liabilities............................................... 27.0 29.1
Current portion of long-term debt (notes 2 and 6)........................... 53.8 81.7
------ ------
Total current liabilities................................................. 178.4 197.9
Other liabilities............................................................ 48.6 45.9
Debt (notes 2 and 6)......................................................... 565.8 332.3
----- -----
Total liabilities......................................................... 792.8 576.1
----- -----
Minority interests in equity of consolidated
subsidiaries................................................................ 7.7 7.2
Stockholders' equity (deficit) (note 2):
Preferred stock (note 8).................................................... - 193.9
Common stock:
Class A................................................................... 0.1 0.1
Class B................................................................... - -
Class C................................................................... - -
Additional paid-in capital (note 8)......................................... 51.1 16.4
Accumulated deficit......................................................... (257.1) (228.5)
Cumulative foreign currency translation adjustment.......................... (0.3) (0.4)
Treasury stock.............................................................. (2.0) (1.8)
------ ------
Total stockholders' equity (deficit)...................................... (208.2) (20.3)
------ ------
$ 592.3 563.0
===== =====
See accompanying notes to condensed consolidated financial statements.
4
UNITED ARTISTS THEATRE COMPANY
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, 1998 June 30, 1998 June 30, 1997 June 30, 1997
------------- ------------- ------------- -------------
Revenue:
Admissions................................... $ 106.2 219.6 107.3 229.0
Concession sales............................. 44.3 90.9 44.2 91.9
Other........................................ 4.8 9.5 5.5 10.6
------ ------ ------ ------
155.3 320.0 157.0 331.5
------ ------ ------ ------
Costs and expenses:
Film rental and advertising expenses......... 59.1 120.0 60.3 126.1
Direct concession costs...................... 7.0 13.5 7.2 14.6
Other operating expenses (note 3)............ 67.4 134.0 67.4 132.9
General and administrative................... 5.8 11.2 5.9 12.5
Restructuring charge (note 12)............... - - 0.5 0.5
Depreciation and amortization (note 4)....... 12.9 26.6 15.5 33.9
Provisions for impairment (note 9)........... 7.6 7.6 8.5 8.5
------ ------ ------ ------
159.8 312.9 165.3 329.0
------ ------ ------ ------
Operating income (loss).................. (4.5) 7.1 (8.3) 2.5
Other income (expense):
Interest, net (notes 2 and 6)................ (14.9) (25.3) (11.6) (23.0)
Gain on disposition of assets (note 11)...... 0.6 0.6 11.8 11.8
Share of losses of affiliates, net........... (0.2) (0.2) (0.4) (0.9)
Minority interests in earnings of
consolidated subsidiaries.................. (0.3) (0.7) (0.2) (0.5)
Other, net................................... (1.0) (1.5) (0.6) (1.0)
------ ------ ------ ------
(15.8) (27.1) (1.0) (13.6)
------ ------ ------ ------
Loss before income tax expense
and extraordinary item................. (20.3) (20.0) (9.3) (11.1)
Income tax expense (note 10)................... (0.4) (0.7) (0.2) (0.6)
------ ------ ------ ------
Net loss before extraordinary item....... (20.7) (20.7) (9.5) (11.7)
Extraordinary item - loss on early
extinguishment of debt (note 2).............. (7.9) (7.9) - -
------ ------ ------ ------
Net loss................................. (28.6) (28.6) (9.5) (11.7)
Dividend on preferred stock (note 8)........... (2.3) (9.0) (5.9) (11.8)
------ ------ ------ ------
Net loss available to common
stockholders........................... $ (30.9) (37.6) (15.4) (23.5)
====== ======= ====== ======
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
Preferred stock stock stock paid-in Accumulated
stock Class A Class B Class C capital deficit
--------- ------- ------- ------- ---------- -----------
Balance at January 1, 1998 $ 193.9 0.1 - - 16.4 (228.5)
Accretion of dividends on
preferred stock 9.0 - - - (9.0) -
Redemption of preferred stock (202.9) - - - 43.7 -
Foreign currency translation adjustment - - - - - -
Purchase of treasury stock - - - - - -
Net loss - - - - - (28.6)
----- --- --- --- ---- -----
Balance at June 30, 1998 $ - 0.1 - - 51.1 (257.1)
===== === === === ==== =====
Cumulative
foreign currency Total
translation Treasury stockholders'
adjustment stock equity (deficit)
---------------- -------- ----------------
Balance at January 1, 1998 (0.4) (1.8) (20.3)
Accretion of dividends on
preferred stock - - -
Redemption of preferred stock - - (159.2)
Foreign currency translation adjustment 0.1 - 0.1
Purchase of treasury stock - (0.2) (0.2)
Net loss - - (28.6)
--- --- -----
Balance at June 30, 1998 (0.3) (2.0) (208.2)
=== === =====
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)
Six Months Ended
June 30,
--------------------------
1998 1997
----- -----
Net cash provided by operating activities............................................ $ 9.4 12.8
----- -----
Cash flow from investing activities:
Capital expenditures............................................................ (44.8) (37.8)
Increase in construction in progress, net....................................... (6.4) (5.2)
Increase in receivable from sale and leaseback escrow........................... (4.2) (2.1)
Proceeds from sale and leaseback escrow......................................... 1.0 7.8
Proceeds from disposition of assets............................................. 4.5 18.3
Investments in and receivables from theatre joint ventures...................... - (9.9)
Other, net...................................................................... 1.5 (0.8)
----- -----
Net cash used in investing activities......................................... (48.4) (29.7)
----- -----
Cash flow from financing activities:
Proceeds from issuance of Senior Subordinated Notes............................. 267.4 -
Debt borrowings................................................................. 437.0 71.0
Debt repayments................................................................. (381.5) (58.5)
Redemption of preferred stock................................................... (159.2) -
Repurchase of Senior Secured Notes.............................................. (128.6) -
Increase in cash overdraft...................................................... 8.0 3.8
Other, net...................................................................... (7.0) 0.1
----- -----
Net cash provided by financing activities..................................... 36.1 16.4
----- -----
Net decrease in cash.......................................................... (2.9) (0.5)
Cash and cash equivalents:
Beginning of period............................................................. 10.8 10.1
----- -----
End of period................................................................... $ 7.9 9.6
===== =====
Reconciliation of net loss to net cash provided by operating activities:
Net loss........................................................................ $ (28.6) (11.7)
Extraordinary item.............................................................. 7.9 -
Effect of leases with escalating minimum annual rentals......................... 1.8 1.7
Depreciation and amortization................................................... 26.6 33.9
Provisions for impairment....................................................... 7.6 8.5
Gain on disposition of assets................................................... (0.6) (11.8)
Share of losses of affiliates, net.............................................. 0.2 0.9
Minority interests in earnings of consolidated subsidiaries..................... 0.7 0.5
Change in assets and liabilities:
Receivables................................................................... 1.0 1.6
Prepaid expenses and concession inventory..................................... 2.4 (2.0)
Other assets.................................................................. - 1.3
Accounts payable.............................................................. (3.9) (4.3)
Accrued and other liabilities................................................. (5.7) (5.8)
----- -----
Net cash provided by operating activities................................. $ 9.4 12.8
===== =====
See accompanying notes to condensed consolidated financial statements.
7
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
(1) General Information
-------------------
United Artists Theatre Company ("United Artists") (formerly known as
OSCAR I Corporation), a Delaware corporation, was formed in February
1992 for the purpose of purchasing United Artists Theatre Circuit, Inc.
("UATC") from an affiliate of Tele-Communications, Inc. ("TCI"). United
Artists is owned by an investment fund managed by affiliates of Merrill
Lynch Capital Partners, Inc. ("MLCP") and certain institutional
investors (collectively, the "Non-Management Investors"), and certain
members of United Artists' management. On May 12, 1992, United Artists
purchased all of the outstanding common stock of UATC from an affiliate
of TCI (the "Acquisition").
In addition to its ownership of UATC, United Artists owns all of the
outstanding capital stock of United Artists Realty Company ("UAR"). UAR
and its subsidiary, United Artists Properties I Corp. ("Prop I"), are
the owners and lessors of certain operating theatre properties leased
to and operated by UATC and its subsidiaries.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) have been made in the accompanying interim
condensed consolidated financial statements which are necessary to
present fairly the financial position of United Artists and the results
of its operations. Interim results are not necessarily indicative of
the results for the entire year because of fluctuations of revenue and
related expenses resulting from the seasonality of attendance and the
availability of popular motion pictures. These financial statements
should be read in conjunction with the audited December 31, 1997
consolidated financial statements and notes thereto included as part of
UATC' Form 10-K.
(2) Recapitalization
----------------
On April 21, 1998, United Artists completed the offering of $225.0
million of its 9.75% senior subordinated notes due April 15, 2008 and
the offering of $50.0 million of its floating rate senior subordinated
notes due October 15, 2007 (collectively, the "Senior Subordinated
Notes"), and entered into a $450.0 million bank credit facility (the
"Bank Credit Facility") with a final maturity of April 21, 2007.
8
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(2) Recapitalization, continued
---------------------------
The proceeds from the offerings of the Senior Subordinated Notes and a
portion of the borrowings under the Bank Credit Facility were used to
repay the outstanding borrowings under UATC's existing bank credit
facility (the "Existing Bank Credit Facility") (approximately $272.5
million) on April 21, 1998, and to fund the redemption of United
Artists' preferred stock (approximately $159.2 million) on May 1, 1998.
Additional borrowings under the Bank Credit Facility were used to fund
the redemption of UATC's $125.0 million senior secured notes (the
"Senior Secured Notes") on May 21, 1998 at 102.875% of par value plus
accrued, but unpaid interest of approximately $0.8 million. United
Artists expects to use a portion of the Bank Credit Facility
(approximately $45.7 million) to repay certain Prop I mortgage notes
maturing on November 1, 1998.
As a result of the repayment of the Existing Bank Credit Facility and
redemption of the Senior Secured Notes, United Artists recognized an
extraordinary loss on the early extinguishment of debt during the three
months ended June 30, 1998 of approximately $7.9 million, consisting of
the $3.6 million prepayment premium on the Senior Secured Notes and
approximately $4.3 million of unamortized deferred loan costs.
(3) Sale and Leaseback
------------------
In December 1995, UATC and UAR entered into a sale and leaseback
transaction whereby the buildings and land underlying 31 of their
operating theatres and four theatres and a screen addition under
development were sold to, and leased back from, an unaffiliated third
party.
United Artists realized a net gain of approximately $12.1 million as a
result of this sale and leaseback transaction. For financial statement
purposes, this gain has been deferred and is being recognized over the
term of the lease as a reduction of rent expense.
In November 1996, UATC entered into a sale and leaseback transaction
whereby the buildings and land underlying three of its operating
theatres and two theatres under development were sold to, and leased
back from, an unaffiliated third party. At June 30, 1998, approximately
$0.5 million of sales proceeds were held in escrow pending final
construction approval.
In December 1997, UATC entered into a sale and leaseback transaction
whereby two theatres currently under development were sold to, and
leased back from, an unaffiliated third party for approximately $18.1
million. At June 30, 1998, approximately $13.5 million of the sales
proceeds were held in escrow and will be paid periodically during
construction under the terms of the sale and leaseback to fund certain
of the construction costs associated with the two theatres.
9
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(4) Change in Estimated Useful Lives
--------------------------------
During 1998, United Artists revised the estimated useful lives of
certain equipment and leasehold improvements to more closely reflect
the actual lives of these assets. The effect of this change in
estimated useful lives was to decrease depreciation and amortization
expense for the three and six months ended June 30, 1998 by
approximately $0.8 million and $1.5 million, respectively.
(5) Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash payments for interest were $22.7 million and $23.0 million for the
six months ended June 30, 1998 and 1997, respectively.
United Artists accrued $9.0 million and $11.8 million of dividends
during the six months ended June 30, 1998 and 1997, respectively, on
its preferred stock.
(6) Debt
----
Debt is summarized as follows (amounts in millions):
June 30, 1998 December 31, 1997
------------- -----------------
Bank Credit Facility (a)........................ $ 285.0 -
Senior Subordinated Notes (b)................... 275.0 -
Existing Bank Credit Facility (c)............... - 226.5
Senior Secured Notes (c)........................ - 125.0
Other (d)....................................... 10.2 10.7
UAR Promissory Notes (e)........................ 3.5 5.6
Prop I Mortgage Notes (f)....................... 45.9 46.2
------ ------
619.6 414.0
Less current portion............................. (53.8) (81.7)
------ ------
$ 565.8 332.3
====== ======
(a) The Bank Credit Facility provides for delayed draw term loans
aggregating $350.0 million (the "Term Loans") and a reducing
revolving loan and standby letters of credit aggregating $100.0
million (the "Revolving Facility"). The Term Loans consist of the
following: (i) a $70.0 million delayed draw term loan (the
"Tranche A Term Loan"), $5.0 million of which was funded at June
30, 1998 and $65.0 million of which is available on a delayed draw
basis at various dates through December 31, 1998; (ii) a $118.0
million delayed draw term loan (the "Tranche B Term Loan"), which
was fully funded at June 30, 1998; and (iii) a $162.0 million
delayed draw term loan (the "Tranche C Term Loan"), which was
fully funded at June 30, 1998.
10
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) Debt, continued
---------------
Commitments available for borrowing under the Revolving Facility
reduce semi-annually commencing December 31, 2001 through April 21,
2005. The Tranche A Term Loan requires semi-annual principal payments
commencing December 31, 1998 through June 30, 2001 of 1/2% of the
December 31, 1998 outstanding balance and then in escalating semi-
annual payments through April 21, 2005. The Tranche B Term Loan
requires semi-annual principal payments commencing December 31, 1998
through June 30, 2005 of 1/2% of the December 31, 1998 outstanding
balance and two payments of 46.5% of the December 31, 1998 outstanding
balance on December 31, 2005 and April 21, 2006. The Tranche C Term
Loan requires semi-annual principal payments commencing December 31,
1998 through June 30, 2006 of 1/2% of the December 31, 1998
outstanding balance and two payments of 46% of the December 31, 1998
outstanding balance on December 31, 2006 and April 21, 2007.
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 Bank
Credit Facility contains certain provisions that require United
Artists to maintain certain financial ratios and place limitations on,
among other things, additional indebtedness, disposition of assets and
restricted payments.
The Bank Credit Facility is guaranteed, on a joint and several basis,
by UATC and by certain of United Artists' other subsidiaries,
including UAR and, after the repayment of Prop I's mortgage notes,
will be guaranteed by Prop I. The Bank Credit Facility is secured by,
among other things, the capital stock of UATC, UAR, Prop I and certain
other subsidiaries of United Artists and UATC and by an intercompany
note of UATC to United Artists established with respect to borrowings
by UATC from United Artists.
(b) The Senior Subordinated Notes consist of $225.0 million of 9-3/4%
notes due April 15, 2008 (the "Fixed Rate Subordinated Notes") and
$50.0 million of floating rate notes due October 15, 2007 (the
"Floating Rate Subordinated Notes"). Interest on the Fixed Rate
Subordinated Notes is due semi-annually. Interest on the Floating Rate
Subordinated Notes is due quarterly and is calculated based upon the
three month LIBOR rate plus 4.375%.
The Fixed Rate Subordinated Notes may be redeemed at the option of
United Artists, in whole or in part, any time on or after April 15,
2003. The Floating Rate Subordinated Notes may be redeemed at any time
at the option of United Artists, in whole or in part, any time on or
after April 15, 1999. Upon a change of control (as defined in the
respective indentures (the "Indentures") under which the Senior
Subordinated Notes were issued), the holders of the Senior
Subordinated Notes have the right to require United Artists to
purchase all or any portion of such holders Senior Subordinated Notes
at a purchase price equal to 101% of the principal amount thereof
together with accrued and unpaid interest, if any, to the date of
purchase.
11
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) Debt, continued
---------------
The Indentures contain certain covenants that place
limitations on, among other things, the incurrence of additional
indebtedness by United Artists and any of its subsidiaries, the
payment of dividends, the redemption of capital stock, the making of
investments, the issuance of capital stock of subsidiaries, the
creation of dividend and other restrictions affecting subsidiaries,
transactions with affiliates, asset sales and certain mergers and
consolidations.
The Senior Subordinated Notes are unsecured, senior subordinated
obligations of United Artists and are subordinated in right of payment
to all existing and future senior indebtedness of United Artists
including borrowings under the Bank Credit Facility. The Fixed Rate
Subordinated Notes rank pari passu with the Floating Rate Subordinated
Notes.
(c) As discussed in Note (2), Recapitalization, the Existing Bank Credit
Facility and the Senior Secured Notes were repaid during 1998 from
proceeds of the offerings of the Senior Subordinated Notes and the
Bank Credit Facility.
(d) Other debt at June 30, 1998 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.
(e) In conjunction with the acquisitions of certain theatres prior to
1992, 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 UAR's effective borrowing rate on
the date the promissory notes were executed.
(f) The Prop I mortgage notes (the "Prop I Notes") bear interest at 11.15%
per annum. Principal and interest are payable in monthly installments,
with a lump sum payment of principal and accrued, but unpaid, interest
due on November 1, 1998. The Prop I Notes are secured by a first
mortgage on Prop I's theatre properties, an assignment of the lease
agreement with UATC, and $12.5 million of bank letters of credit. The
Indenture of Mortgage, among its other provisions, contains
limitations on the sale and/or substitution of properties and a
limitation on any additional debt incurred by Prop I other than
intercompany advances. As discussed in Note (2), Recapitalization,
additional borrowings under the Bank Credit Facility are expected to
be used to fund the remaining principal balance due on November 1,
1998 (approximately $45.7 million).
At June 30, 1998, UATC was party to interest rate cap agreements on
$100.0 million of floating rate debt which provide for a LIBOR interest
rate cap of 7-1/2% and expire at various dates through July 1999. UATC is
subject to credit risk exposure from non-performance of the counterparties
to the interest rate cap agreements. As United Artists has historically
received payments relating to such interest rate cap agreements, it does
not anticipate such non-performance in the future. United Artists amortizes
the cost of its interest rate cap agreements to interest expense over the
life of the underlying agreement. Amounts received from the counterparties
to the interest rate cap agreements are recorded as a reduction of interest
expense.
12
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) Debt, continued
---------------
At June 30, 1998, United Artists had approximately $65.0 million of unused
Tranche A Term Loan commitments and $100.0 million of Revolving Facility
commitments, $19.3 million of which has been used for the issuance of
letters of credit. When the Prop I indebtedness matures in November 1998,
$12.5 million of letters of credit will be cancelled and such amount will
be available for borrowing under the Revolving Facility. United Artists
pays commitment fees of 1/2% 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 will come from payments
by UATC to United Artists. The amount of payments by UATC to United Artists
may be limited from time to time by covenants included in the Participation
Agreement relating to the 1995 sale and leaseback.
Interest, net includes amortization of deferred loan costs of $0.2 million
and $0.5 million for the three months ended June 30, 1998 and 1997,
respectively, and $0.7 million and $1.0 million for the six months ended
June 30, 1998 and 1997, respectively. Additionally, interest, net includes
interest income of $0.4 million and $0.1 million for the three months ended
June 30, 1998 and 1997, respectively, and $0.5 million and $0.2 million for
the six months ended June 30, 1998 and 1997, respectively.
(7) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
At June 30, 1998, the fair value of United Artists' cash and cash
equivalents, outstanding borrowings under the Bank Credit Facility, the
other debt, the promissory notes, and the Prop I Notes, and interest rate
cap agreements approximated their carrying amount and the fair value of the
Senior Subordinated Notes was approximately $274.4 million.
(8) Preferred Stock
---------------
As part of the recapitalization discussed in Note (2), proceeds from the
Senior Subordinated Notes and a portion of the borrowings under the Bank
Credit Facility were used to fund the redemption of United Artists'
preferred stock on May 1, 1998. At the redemption date, the actual
redemption value of the preferred stock was approximately $159.2 million,
or approximately $43.7 million less than the carrying amount at the
redemption date. This difference has been shown as an increase in
additional paid-in capital in the accompanying financial statements.
Dividends on the preferred stock had been accrued at a 14% per annum rate
for all periods since issuance in 1992.
(9) Provisions for Impairment
-------------------------
During the three months ended June 30, 1998, United Artists recorded
non-cash charges for the impairment of its long-lived assets of
$7.6 million and, during the three months ended June 30, 1997, United
Artists recorded non-cash charges for the impairment of its long-lived
assets of $8.5 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 cash flow expected to be received from the
operation or future sale of the individual theatres (or groups of
theatres).
13
UNITED ARTISTS THEATRE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) Income Taxes
------------
Consolidated subsidiaries in which United Artists owns less than 80% file
separate federal income tax returns. The current and deferred federal and
state income taxes of such subsidiaries are calculated on a separate return
basis and are included in the accompanying condensed consolidated financial
statements of United Artists.
On February 10, 1998, United Artists filed a private letter ruling with the
Internal Revenue Service (the "IRS") requesting an extension of time to
file a Section 197 election. This election allows for the amortization of
various intangible assets over 15 years. On June 8, 1998, the IRS granted
United Artists its request and, on August 6, 1998, United Artists filed a
Section 197 election along with its amended 1993 income tax return. As
United Artists had previously been amortizing certain intangible assets
acquired as part of the Acquisition over a five year period, the effect of
the Section 197 election was to reduce United Artists' net operating loss
carryforward and to increase the basis of certain intangible assets, which
will be amortized, and provide for future tax deductions. As United Artists
had fully reserved the deferred tax asset associated with its net operating
loss carryforward, there is no financial statement impact associated with
the reduction in its net operating loss carryforward.
(11) Gain on Disposition of Assets
-----------------------------
During April 1997, United Artists sold its 50% interest in a Hong Kong
theatre company to its partners for approximately $17.5 million. This sale
resulted in a gain of $11.8 million for financial reporting purposes.
(12) Corporate Restructuring
-----------------------
At the end of 1996, United Artists initiated a corporate restructuring plan
intended to provide a higher level of focus on United Artists' domestic
theatrical business at a lower annual cost. The corporate restructuring was
substantially completed in January 1997. A restructuring charge of
$0.5 million was recorded during the three months ended June 30, 1997 for
severance and other related expenses associated with the corporate
restructuring.
(13) Commitments and Contingencies
-----------------------------
United Artists and/or its subsidiaries are involved in various pending and
threatened legal proceedings involving allegations concerning contract
breaches, torts, employment matters, environmental issues, antitrust
violations, local tax disputes, and miscellaneous other matters. In
addition, there are various claims against United Artists and/or its
subsidiaries relating to certain of the leases held by United Artists
and/or its subsidiaries. Although it is not possible to predict the outcome
of these proceedings, United Artists believes that such legal proceedings
will not have a material adverse effect on United Artists' financial
position, liquidity or results of operations.
14
UNITED ARTISTS THEATRE
COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(13) Commitments and Contingencies, continued
----------------------------------------
The Americans With Disabilities Act of 1990 (the "ADA"), and certain state
statutes among other things, require that places of public accommodation,
including theatres (both existing and newly constructed) be accessible to
and that assistive listening devices be available for use by certain
patrons with disabilities. With respect to access to theatres, the ADA may
require that certain modifications be made to existing theatres to make
such theatres accessible to certain theatre patrons and employees who are
disabled. The ADA requires that theatres be constructed in such a manner
that persons with disabilities have full use of the theatre and its
facilities and reasonable access to work stations. The ADA provides for a
private right of action and reimbursement of plaintiff's attorneys' fees
and expenses under certain circumstances. United Artists has established a
program to review and evaluate United Artists' theatres and to make any
changes that may be required by the ADA. United Artists believes that the
cost of complying with the ADA will not have a material adverse effect on
United Artists' financial position, liquidity or results of operations.
15
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.
Results of Operations
Three and Six Months Ended June 30, 1998 and 1997
The following table summarizes certain operating data of United Artists'
theatres (dollars in millions, except admissions per weighted average operating
theatre, admissions per weighted average operating screen and concession sales
per weighted average operating theatre):
Three Months Six Months
Ended June 30, % Ended June 30, %
-------------- Increase -------------- Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ---- ---- ----------
Operating Theatres(1)
Revenue:
Admissions............................... $106.2 107.3 (1.0)% 219.6 229.0 (4.1)%
Concession sales......................... 44.3 44.2 0.2 90.9 91.9 (1.1)
Other.................................... 4.8 5.5 (12.7) 9.5 10.6 (10.4)
Operating Expenses:
Film rental and advertising expenses..... 59.1 60.3 (2.0) 120.0 126.1 (4.8)
Concession costs......................... 7.0 7.2 (2.8) 13.5 14.6 (7.5)
Other Operating Expenses.................
Personnel expense...................... 23.4 23.3 0.4 46.2 46.4 (0.4)
Occupancy expense...................... 20.6 20.2 2.0 41.1 39.7 3.5
Miscellaneous operating expenses....... 23.4 23.9 (2.1) 46.7 46.8 (0.2)
Weighted Avg. Operating Theatres(2)........ 328 364 (9.9) 330 365 (9.6)
Weighted Avg. Operating Screens(2)......... 2,161 2,237 (3.4) 2,158 2,226 (3.1)
Weighted Avg. Screens Per Theatre.......... 6.6 6.1 7.2 6.5 6.1 7.2
Admissions Per Weighted Avg. Operating
Theatre..................................$323,780 294,780 9.8 665,455 627,397 6.1
Admissions Per Weighted Avg. Operating
Screen...................................$ 49,144 47,966 2.5 101,761 102,875 (1.1)
Concession Sales Per Weighted Avg
Operating Theatre........................$135,061 121,429 11.2 275,455 251,781 9.4
(1) The operating theatres include revenue and expenses of all theatres
operated by United Artists, which are more than 50% owned.
(2) Weighted average operating theatres and screens represent the number of
theatres and screens operated weighted by the number of days operated
during the period.
16
Revenue from Operating Theatres
- -------------------------------
Admissions: Admission revenue decreased 1.0% and 4.1% during the three and six
months ended June 30, 1998, respectively, as compared to the prior year periods.
The decreased admissions revenue was primarily due to decreases in attendance of
4.9% and 7.6% during the three and six months ended June 30, 1998, respectively,
partially offset by increases in the average ticket price of 4.1% and 3.8%
during the three and six months ended June 30, 1998, respectively. The decreases
in attendance for the three and six months ended June 30, 1998 were primarily
due to decreases in the weighted average operating theatres and screens and the
effect of new competitive theatre openings in certain areas. The increases in
the average ticket price for the three and six months ended June 30, 1998 were
primarily due to selective increases in ticket prices in late 1997 and the
summer of 1998, and a higher percentage of full price and adult tickets sold
during 1998. Admissions per weighted average operating theatre increased 9.8%
and 6.1% during the three and six months ended June 30, 1998, respectively, as
compared to the prior year periods. These fluctuations in admissions per
weighted average theatre were primarily due to the opening of several new
theatres which have higher admissions per theatre (4.1% and 4.3%), increased
ticket prices (3.5% and 2.8%) and the sale or closure of several smaller (in
terms of screens) less productive theatres (6.6% and 5.2%), partially offset by
the decreases in attendance (4.4% and 6.2%).
Concession Sales: Concession sales increased 0.2% and decreased 1.1% during the
three and six months ended June 30, 1998, respectively, as compared to the prior
year periods. The increase concession sales for the three months ended June 30,
1998 was primarily due to a 5.4% increase in the average concession sale per
patron, offset by the decreased attendance discussed above. The decrease in
concession sales for the six months ended June 30, 1998 was primarily due to the
decreased attendance discussed above, partially offset by a 7.1% increase in the
average concession sale per patron. Concession sales per weighted average
operating theatre increased 11.2% and 9.4% during the three and six months ended
June 30, 1998, respectively, as compared to the prior year periods. The
increases in the average concession sale per patron and concession sales per
weighted average operating theatre were primarily attributable to certain
selective price increases in late 1997 and the summer of 1998, United Artists'
increased emphasis on training, the renovation of concession stands at certain
existing theatres, the opening of several new theatres with more efficient
concession operations (4.6% and 4.9%) and sale of certain less productive
theatres (6.9% and 6.2%).
Other: Other revenue is derived primarily from on-screen advertising, electronic
video games located in theatre lobbies, theatre rentals, the rental of theatres
on a networked and non-networked basis for corporate meetings, seminars and
other training/educational uses by the Satellite Theatre Network(TM) and other
miscellaneous sources. Other revenue decreased 12.7% and 10.4% during the three
and six months ended June 30, 1998, respectively, as compared to the prior year
periods primarily due to a decrease in the number of weighted average operating
theatres, a decrease in revenue from on-screen advertising and lower sales from
entertainment center activities. United Artists is currently restructuring its
entertainment center venues in an effort to improve those operations and/or more
efficiently use that space. Options that are being considered include turning
the operations over to other operators of entertainment venues, converting that
space to theatre screens and/or returning unutilized space to landlords.
Operating Expenses from Operating Theatres
- ------------------------------------------
Film rental and advertising expenses: Film rental and advertising expenses
decreased 2.0% and 4.8% during the three and six months ended June 30, 1998,
respectively, as compared to the prior year periods, primarily as a result of
the admission revenue fluctuations discussed above. Film rental and advertising
expenses as a percentage of admissions revenue for the three months ended
June 30, 1998 and 1997 were 55.6% and 56.2%, respectively, and 54.6% and 55.1%
for the six
17
months ended June 30, 1998 and 1997, respectively. The slight decrease in film
rental and advertising expenses as a percentage of admissions revenue related
primarily to the long run during 1998 of several films released in late 1997 and
to slightly lower directory advertising expenses.
Concession costs: Concession costs include direct concession product costs and
concession promotional expenses. Such costs decreased 2.8% and 7.5%,
respectively, during the three and six months ended June 30, 1998, as compared
to the prior year periods, primarily as a result of lower cost percentages.
Concession costs as a percentage of concession sales revenue for the three
months ended June 30, 1998 and 1997 were 15.8% and 16.3%, respectively, and
14.9% and 15.9% for the six months ended June 30, 1998 and 1997, respectively.
The decrease in concession costs as a percentage of concessions revenue for the
three and six months ended June 30, 1998 was primarily due to lower promotional
expenses and the rebidding or restructuring of the product and distribution
contracts associated with many of United Artists' concession supply products.
Personnel expense: Personnel expense includes the salary and wages of the
theatre manager and all theatre staff, commissions on concession sales, payroll
taxes and employee benefits. Personnel expense increased 0.4% and decreased 0.4%
during the three and six months ended June 30, 1998, respectively, as compared
to the prior year periods. These fluctuations were primarily due to the increase
in the federal minimum wage late in 1997, which increased the average wage paid
to theatre staff by 8.6%. These wage rate increases were partially offset by the
decreases in attendance as discussed above, fewer weighted average operating
theatres and more efficient theatre staffing. Personnel expenses as a percentage
of admissions and concessions revenue was 15.5% and 15.4% for the three months
ended June 30, 1998 and 1997, respectively, and 14.9% and 14.5% for the six
months ended June 30, 1998 and 1997, respectively.
Occupancy expense: United Artists' typical theatre lease arrangement provides
for a base rental as well as contingent rentals that is a function of the
underlying theatre's revenue over an agreed upon breakpoint. Occupancy expense
increased 2.0% and 3.5% during the three and six months ended June 30, 1998,
respectively, as compared to the prior year periods, primarily due to higher
base rentals on newly opened theatres, partially offset by fewer weighted
average operating theatres, and higher property taxes. In addition, occupancy
expense includes non-cash charges relating to the effect of escalating leases
which have been "straight-lined" for accounting purposes of $0.9 million for the
three months ended June 30, 1998 and 1997, and $1.8 million and $1.7 million for
the six months ended June 30, 1998 and 1997, respectively.
Miscellaneous operating expenses: Miscellaneous operating expenses consist of
utilities, repairs and maintenance, insurance, real estate and other taxes,
supplies and other miscellaneous operating expenses. Miscellaneous operating
expenses decreased 2.1% and 0.2% during the three and six months ended June 30,
1998, respectively, as compared to the prior year periods. The 1998 decreases in
miscellaneous operating expenses were primarily due to lower insurance and
utility expenses and fewer weighted average operating theatres, partially offset
by higher real estate taxes.
The revenue and operating expenses discussed above are incurred exclusively
within United Artists' theatres. The other expense discussions below reflect the
combined expenses of corporate, divisional, district and theatre operations.
General and Administrative Expense and Restructuring Charge
- -----------------------------------------------------------
General and administrative expense consists primarily of costs associated with
corporate theatre administration and operating personnel, Satellite Theatre
Network sales and marketing staff and other support functions located at United
Artists' corporate headquarters, two film booking and three regional operating
offices and 14 district theatre operations offices (generally located in
theatres). At the end of 1996, United Artists initiated a corporate
restructuring plan intended to provide a higher level of focus on United
Artists' theatrical business at a lower annual cost. This
18
corporate restructuring was completed in January 1997. General and
administrative expense decreased $0.1 million or 1.7% and $1.3 million or 10.4%,
for the three and six months ended June 30, 1998, respectively, as compared to
the prior year periods, as certain aspects of the corporate restructuring were
not completed until later in 1997.
Depreciation and Amortization and Provisions for Impairment
- -----------------------------------------------------------
Depreciation and amortization expense includes the depreciation of theatre
buildings and equipment and the amortization of theatre lease costs and certain
non-compete agreements. Provisions for impairment relates to non-cash charges
for the difference between the historical book value of individual theatres (in
some cases groups of theatres) and the cash flow expected to be received from
the operation or future sale of the individual theatre (or groups of theatres).
Depreciation and amortization decreased $2.6 million and $7.3 million during the
three and six months ended June 30, 1998, respectively, compared to the prior
year periods primarily due to lower amortization from non-compete agreements
which were fully amortized during 1997 and changing the estimated useful lives
of certain assets during 1998, partially offset by increased depreciation
charges on United Artists' newly opened theatres. United Artists recorded
approximately $3.0 million and $9.0 million of amortization expense during the
three and six months ended June 30, 1997, respectively, on non-compete
agreements and certain other assets acquired as part of the Acquisition which
were fully amortized in May 1997. As a result, no amortization expense was
recorded during the three and six months ended June 30, 1998 on those
non-compete agreements and certain other assets acquired as part of the
Acquisition. During the three months ended June 30, 1998 and 1997, United
Artists recorded $7.6 million and $8.5 million, respectively, of non-cash
provisions for asset impairments.
Operating Income (Loss)
- -----------------------
United Artists incurred net operating losses of $4.5 million and $8.3 million
for the three months ended June 30, 1998 and 1997, respectively. The 1998
decrease in the net operating loss relates primarily to higher operating margins
and reduced general and administrative expenses, depreciation and amortization
expenses and provisions for impairments, partially offset by lower revenue.
During the six months ended June 30, 1998, United Artists generated operating
income of $7.1 million as compared to $2.5 million for the six months ended
June 30, 1997. This increase in operating income was due primarily to reduced
general and administrative expenses, depreciation and amortization expenses and
provisions for impairments, partially offset by lower revenue.
Interest
- --------
Interest expense increased $3.3 million and $2.3 million during the three and
six months ended June 30, 1998, respectively, as compared to the prior year
periods due primarily to the redemption of United Artists' preferred stock with
proceeds from the issuance of the Senior Subordinated Notes and a portion of the
borrowings under the Bank Credit Facility.
Gain on Disposition of Assets
- -----------------------------
During the three months ended June 30, 1997, United Artists sold its 50%
interest in a Hong Kong theatre company to its partners for approximately $17.5
million. This sale resulted in a gain of $11.8 million for financial reporting
purposes.
Extraordinary Item
- ------------------
As a result of the repayment of the Existing Bank Credit Facility and the Senior
Secured Notes during the three months ended June 30, 1998, United Artists
recognized an extraordinary loss on
19
the early extinguishment of debt of $7.9 million, consisting of a $3.6 million
prepayment premium on the Senior Secured Notes and approximately $4.3 million of
unamortized deferred loan costs.
Income Taxes
- ------------
On February 10, 1998, United Artists filed a private letter ruling with the
Internal Revenue Service (the "IRS") requesting an extension of time to file a
Section 197 election. This election allows for the amortization of various
intangible assets over 15 years. On June 8, 1998, the IRS granted United Artists
its request and, on August 6, 1998, United Artists filed a Section 197 election
along with its amended 1993 income tax return. As United Artists had previously
been amortizing certain intangible assets acquired as part of the Acquisition
over a five year period, the effect of the Section 197 election was to reduce
United Artists' net operating loss carryforward and to increase the basis of
certain intangible assets, which will be amortized, and provide for future tax
deductions. As United Artists had fully reserved the deferred tax asset
associated with its net operating loss carryforward, there is no financial
statement impact associated with the reduction in its net operating loss
carryforward.
Net Loss Available to Common Stockholders
- -----------------------------------------
During the three and six months ended June 30, 1998, United Artists incurred net
losses available to common stockholders of $30.9 million and $37.6 million,
respectively, compared to net losses of $15.4 million and $23.5 million for the
three and six months ended June 30, 1997, respectively. These increases in net
losses relate primarily to the extraordinary expense for the early
extinguishment of debt recorded during the three months ended June 30, 1998 and
the gain on the sale of United Artists' Hong Kong theatre investment during the
three months ended June 30, 1997. Excluding these unusual items, the net losses
available to common stockholders for the three and six month periods would have
been as follows (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Net loss available to common stockholders....... $ (30.9) (15.4) (37.6) (23.5)
Gains on disposition of assets.................. (0.6) (11.8) (0.6) (11.8)
Loss on early extinguishment of debt............ 7.9 - 7.9 -
----- ----- ----- -----
$ (23.6) (27.2) (30.3) (35.3)
===== ===== ===== =====
Liquidity and Capital Resources
For the six months ended June 30, 1998, cash provided by United Artists'
operating activities was $9.4 million. This cash provided by operating
activities, in addition to $36.1 million of cash provided by financing
activities was used to fund $48.4 million of capital expenditures and other
investing activities.
Substantially all of United Artists' admissions and concession sales revenue are
collected in cash. Due to the unfavorable interest rate spread between bank
facility borrowings and cash investments, United Artists seeks to use all of its
available cash to repay its revolving bank borrowings and borrow under those
facilities as cash is required. United Artists benefits from the fact that film
expenses (except for films that require advances or guarantees) are usually paid
15 to 45 days after the admissions revenue is collected.
On April 21, 1998, United Artists completed the offering of the $225.0 million
Fixed Rate Subordinated Notes due April 15, 2008 and the offering of the $50.0
million Floating Rate Subordinated Notes due October 15, 2007, and entered into
the $450.0 million Bank Credit Facility with a final maturity of April 21, 2007.
20
The proceeds from the offerings of the Senior Subordinated Notes and a portion
of the borrowings under the Bank Credit Facility were used to repay the
outstanding borrowings of $272.5 million under UATC's Existing Bank Credit
Facility on April 21, 1998, and to fund the redemption of United Artists'
preferred stock (approximately $159.2 million) on May 1, 1998. Additional
borrowings under the Bank Credit Facility were used to fund the redemption of
UATC's $125.0 million Senior Secured Notes on May 21, 1998 at 102.875% of par
value plus accrued but unpaid interest of $0.8 million. In addition, United
Artists expects to use a portion of the Bank Credit Facility (approximately
$45.7 million) to repay certain Prop I mortgage notes maturing on November 1,
1998.
The Bank Credit Facility consists of $100.0 million of reducing revolving loan
commitments and $350.0 million of delayed draw term loan commitments. The Bank
Credit Facility contains certain provisions that require United Artists to
maintain certain financial ratios and places limitations on, among other things,
additional indebtedness, disposition of assets and restricted payments.
The Bank Credit Facility is guaranteed, on a joint and several basis, by UATC
and by certain of United Artists' other subsidiaries, including UAR and, after
the repayment of the Prop I mortgage notes, will be guaranteed by 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 UATC and
by an intercompany note of UATC to United Artists established with respect to
borrowings by UATC from United Artists.
The Senior Subordinated Notes consist of $225.0 million of 9-3/4% notes due
April 15, 2008 (the "Fixed Rate Subordinated Notes") and $50.0 million of
floating rate notes due October 15, 2007 (the "Floating Rate Subordinated
Notes"). Interest on the Fixed Rate Subordinated Notes is due semi-annually.
Interest on the Floating Rate Subordinated Notes is due quarterly and is
calculated based upon the three month LIBOR rate plus 4.375%.
The Fixed Rate Subordinated Notes may be redeemed at the option of United
Artists, in whole or in part, any time on or after April 15, 2003. The Floating
Rate Subordinated Notes may be redeemed at any time at the option of United
Artists, in whole or in part, any time on or after April 15, 1999. Upon a change
of control (as defined in the respective indentures (the "Indentures") under
which the Senior Subordinated Notes were issued), the holders of the Senior
Subordinated Notes have the right to require United Artists to purchase all or
any portion of such holders Senior Subordinated Notes at a purchase price equal
to 101% of the principal amount thereof together with accrued and unpaid
interest, if any, to the date of purchase.
The Indentures contain certain covenants that place limitations on, among other
things, the incurrence of additional indebtedness by United Artists and any of
its subsidiaries, the payment of dividends, the redemption of capital stock, the
making of investments, the issuance of capital stock of subsidiaries, the
creation of dividend and other restrictions affecting subsidiaries, transactions
with affiliates, asset sales and certain mergers and consolidations.
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.
As a result of the repayment of the Existing Bank Credit Facility and the
redemption of the Senior Secured Notes, United Artists recognized an
extraordinary loss on the early extinguishment of debt during the three months
ended June 30, 1998 of $7.9 million, consisting of the $3.6 million prepayment
premium on the Senior Secured Notes and approximately $4.3 million of
unamortized deferred loan costs.
During December 1996, United Artists initiated a new investment strategy that
focuses on the development of new theatres and renovations (including stadium
seating retrofits) and expansions of existing high revenue theatres in the
United States where United Artists has a significant operating presence. As part
of this increased focus on its U.S. operations, United Artists restructured and
realigned its corporate overhead functions and has sold most of its
international investments. The proceeds received from the sale of international
investments and corporate overhead savings were redeployed into new theatre
developments or the renovation of existing key theatres in United Artists' core
markets and used to repay existing debt. United Artists currently has an
agreement to sell a portion of its investments in Singapore and Thailand for
$8.1 million. After the consummation of such sale, United Artists' international
investments will only include a 10.0% interest in four theatres in Singapore and
Thailand.
As part of its strategic plan, United Artists intends to continue to dispose of,
through sale or lease terminations, certain of its non-strategic or
underperforming operating theatres and real estate in the United States. Net
proceeds, if any, from these increased disposition efforts are expected to be
used to repay existing debt or to be redeployed into the renovation and/or
expansion of existing theatres and new, larger (in terms of screens), higher
margin theatres. While there can be no assurance that such sales or lease
termination efforts will be successful, negotiations are ongoing with respect to
several theatres and parcels of real estate. During the six months ended
June 30, 1998, United Artists closed or sold 13 theatres (52 screens). The
theatres that were closed were primarily smaller, older theatres that were not
part of United Artists' long term strategic plans or were underperforming.
In an effort to limit the amount of investment exposure on any one project,
United Artists typically develops theatre projects where the land and building
are leased through long-term operating leases.
21
Where such lease transactions are unavailable, however, United Artists will
invest in the land and development of the entire theatre facility (fee-owned)
and then seek to enter into a sale and leaseback transaction. Regardless of
whether the theatre is leased or fee-owned, in most cases the equipment and
other theatre fixtures are owned by United Artists. For the six months ended
June 30, 1998, United Artists invested approximately $51.2 million on the
development of five new theatres (54 screens) and two renovations which opened
during the period, construction on eight theatres (101 screens) and screen
additions or renovations to eight theatres expected to open during the remainder
of 1998 or in 1999 and recurring maintenance to certain existing theatres.
In December 1995, UATC and UAR entered into a sale and leaseback transaction
whereby the land and buildings underlying 31 of their operating theatres and
four theatres and a screen addition under development were sold to, and leased
back from an unaffiliated third party.
In November 1996, UATC entered into a sale and leaseback transaction whereby the
buildings and land underlying three of its operating theatres and two theatres
under development were sold to, and leased back from, an unaffiliated third
party. At June 30, 1998, approximately $0.5 million of sales proceeds were held
in escrow pending final construction approval.
In December 1997, UATC entered into a sale and leaseback transaction whereby two
theatres currently under development were sold to, and leased back from, an
unaffiliated third party for approximately $18.1 million. At June 30, 1998,
approximately $13.5 million of the sales proceeds were held in escrow and will
be paid under the terms of the sale and leaseback to fund certain of the
construction costs associated with the two theatres.
At June 30, 1998, United Artists had entered into construction or lease
agreements for eight new theatres (101 screens) and for screen additions or
renovations to eight existing theatres (75 screens) that United Artists intends
to open or renovate during the next two years. United Artists estimates that
capital expenditures associated with these theatres will aggregate approximately
$85.2 million. Such amounts relate only to projects in which United Artists had
executed a definitive lease and all significant lease contingencies have been
satisfied. Of the committed amount, approximately $14.0 million will be funded
from proceeds of certain sale and leaseback transactions currently held in
escrow. United Artists expects additional capital expenditures to be made as
other projects are finalized, and that as much as 60% of its future capital
expenditures will be allocated to existing key locations.
UATC is party to interest rate cap agreements on $100.0 million of floating rate
debt which provide for a LIBOR interest rate cap of 7-1/2% per annum and expire
at various dates through July 1999. The terms of the Bank Credit Facility
require United Artists to obtain interest rate hedges on a certain portion of
its indebtedness thereunder. United Artists amortizes the cost of its interest
rate cap agreements to interest expense over the life of the underlying
agreement. Amounts received from the counterparties to the interest rate cap
agreements are recorded as a reduction of interest expense.
The level of continued investing activities by United Artists is dependent on,
among other factors, its on-going operating liquidity and to other sources of
liquidity. One measure commonly used in the theatrical industry to measure
operating liquidity is referred to a "Interest Coverage." Interest Coverage is
the ratio of Operating Cash Flow (defined as EBITDA - earnings before interest,
taxes, depreciation, and amortization - plus other non-recurring or non-cash
operating credits or charges) to interest expense (excluding amortization of
deferred loan costs). Following is a calculation of Operating Cash Flow and
Interest Coverage for the three and six months ended June 30, 1998 and 1997,
including a reconciliation of Operating Income to Operating Cash Flow.
Additionally, information from the statements of cash flow is presented for the
six months ended June 30, 1998 and 1997 in the following table (dollars in
millions).
22
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Operating Income (Loss).......................... $ (4.5) (8.3) 7.1 2.5
Depreciation and Amortization.................... 12.9 15.5 26.6 33.9
Provisions for Impairment........................ 7.6 8.5 7.6 8.5
Restructuring Charge............................. - 0.5 - 0.5
Non-Cash Rent.................................... 0.9 0.9 1.8 1.7
---- ---- ---- ----
Operating Cash Flow.............................. $ 16.9 17.1 43.1 47.1
==== ==== ==== ====
Interest Expense................................. $ 15.1 11.2 25.1 22.2
==== ==== ==== ====
Interest Coverage Ratio.......................... 1.1 1.5 1.7 2.1
==== ==== ==== ====
Statement of Cash Flow Information:
Net cash provided by operating activities..... $ 9.4 12.8
Net cash used in investing activities......... (48.4) (29.7)
Net cash provided by financing activities..... 36.1 16.4
----- -----
Net cash flow................................. $ (2.9) (0.5)
===== =====
As shown above, United Artists' Interest Coverage Ratio decreased from 1.5 times
for the three months ended June 30, 1997 to 1.1 times for the three months ended
June 30, 1998, and from 2.1 times for the six months ended June 30, 1997 to 1.7
times for the six months ended June 30, 1998, primarily due to increased
interest expense associated with the redemption of the preferred stock.
Operating Cash Flow set forth above is one measure of value and borrowing
capacity commonly used in the theatrical exhibition industry and is not intended
to be a substitute for Operating Cash Flow as defined in United Artists' debt
agreements or for cash flows provided by operating activities, a measure of
performance provided herein in accordance with generally accepted accounting
principles, and should not be relied upon as such. The Operating Cash Flow as
set forth above does not take into consideration certain costs of doing business
and, as such, should not be considered in isolation to other measures of
performance.
Another measure of liquidity is net cash provided by operating activities as set
forth above. For the six months ended June 30, 1998, $9.4 million of net cash
was provided by United Artists' operating activities. This measurement shows the
net cash provided by United Artists' operations which was available for United
Artists' liquidity needs after taking into consideration certain additional
costs of doing business which are not reflected in the Operating Cash Flow
calculations discussed above.
United Artists believes that the net cash provided by operations and borrowings
available under the Bank Credit Facility will be sufficient to fund its future
cash requirements. United Artists expects that future cash requirements will
principally be for repayments of indebtedness, working capital requirements and
capital expenditures. United Artists' future operating performance and ability
to service its current indebtedness will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond United Artists' control. Additionally, UATC's ability to incur additional
indebtedness may be limited by covenants contained in the Participation
Agreement relating to the 1995 sale and leaseback discussed above.
From time to time, United Artists evaluates the value of its theatres and other
assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." To the extent
such values are less than the recorded amounts for such assets, United Artists
may recognize a non-cash charge to reflect an impairment. United Artists
23
recognized $7.6 million and $8.5 million of asset impairments during the three
months ended June 30, 1998 and 1997, respectively.
Other
United Artists' revenues are seasonal, coinciding with the timing of releases of
motion pictures by the major distributors. Generally, the most successful motion
pictures have been released during the summer extending the period from Memorial
Day to Labor Day and the holiday season extending from Thanksgiving through
year-end. The unexpected emergence of a hit film during other periods can alter
this traditional trend. The timing of such film releases can have a significant
effect on United Artists' results of operations, and the results of one quarter
are not necessarily indicative of results for the next quarter or for the same
period in the following year. The seasonality of motion picture exhibition,
however, has become less pronounced in recent years as studios have begun to
release major motion pictures somewhat more evenly throughout the year.
Year 2000
United Artists has initiated a review of its internal information systems to
insure they are functional in the Year 2000 and, although such review is still
in progress, believes that conversion requirements will not result in
significant disruption of United Artists' business operations or have a material
adverse effect on its future liquidity or results of operations. United Artists
has not extensively investigated the Year 2000 compliance of its customers,
suppliers and other third parties with whom it has business relationships, but
intends to make selected inquiries. Compliance by such third parties is
voluntary and failures could occur, in which case there is the possibility of a
material adverse effect on United Artists. However, the nature of United
Artists' business and its business relationships are not such the United Artists
considers the potential Year 2000 compliance failure of a third party with whom
it has a direct business relationship likely to have a material adverse effect
on United Artists.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"),
which establishes the standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity of
an enterprise that result from transactions and other economic events of the
period other than transactions with owners. Comprehensive income includes net
income plus other comprehensive income (other revenues, expenses, gains, and
losses that under generally accepted accounting principles bypass net income).
The effective date for SFAS No. 130 is for fiscal years beginning after December
15, 1997 and the impact on United Artists' financial position, results of
operations or cash flow for the three and six months ended June 30, 1998 and
1997 was not material.
In 1997, the American Institute of Certified Public Accountants issued Statement
of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5"),
which requires costs of start up activities to be expensed when incurred. The
effective date for SOP 98-5 is for fiscal years beginning after December 15,
1998 and the impact on United Artists' financial position, results of operations
or cash flow is not expected to be material.
24
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which establishes the standards for accounting and
reporting of derivative instruments. SFAS No. 133 will require derivative
instruments to be recorded at their fair value on the balance sheet and changes
in the derivative instrument's fair value be recognized currently in the
calculation of net income unless specific hedge accounting criteria are met. The
effective date for SFAS No. 133 is for fiscal years beginning after June 15,
1999. United Artists has not quantified the impact of adopting SFAS No. 133 on
its financial position, results of operations or cash flow and has not
determined the timing of adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in net income and comprehensive income.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED ARTISTS THEATRE COMPANY
(Registrant)
/s/ Trent J. Carman
--------------------------------------------
By: Trent J. Carman
Chief Financial Officer
Date: August 13, 1998
26