Registration Number 333-1024
Rule 424 (b)(3)
PROSPECTUS SUPPLEMENT
Dated: August 18, 1998
to the Prospectus, Dated July 15, 1997
of
UNITED ARTISTS THEATRE CIRCUIT, INC.
Form of prospectus is attached hereto
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 Number: 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, 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__________
----------
The number of shares outstanding of $1.00 par value common stock at August 11,
1998 was 100 shares.
UNITED ARTISTS THEATRE CIRCUIT, INC.
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 CIRCUIT, INC.
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statement of Stockholder's 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 15
----------------------------------------------
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 UATC 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 UATC, THE
RESTRICTIONS IMPOSED ON UATC BY CERTAIN INDEBTEDNESS, THE SENSITIVITY OF UATC TO
ADVERSE TRENDS IN THE GENERAL ECONOMY, THE HIGH DEGREE OF COMPETITION IN UATC'S
INDUSTRY, THE VOLATILITY OF UATC'S QUARTERLY RESULTS AND UATC'S SEASONALITY, THE
DEPENDENCE OF UATC ON FILMS AND DISTRIBUTORS AND ON ITS ABILITY TO OBTAIN
POPULAR MOTION PICTURES, THE CONTROL OF UATC BY AFFILIATES OF MERRILL LYNCH
CAPITAL PARTNERS, INC. AND THE DEPENDENCE OF UATC ON KEY PERSONNEL, AMONG
OTHERS.
ALL WRITTEN FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO UATC ARE EXPRESSLY
QUALIFIED BY THE FOREGOING CAUTIONARY STATEMENTS.
3
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Millions)
(Unaudited)
June 30, 1998 December 31, 1997
-------------- ------------------
Assets
------
Current assets:
Cash and cash equivalents................................ $ 7.0 10.6
Receivables, net......................................... 28.6 14.4
Prepaid expenses and concessions inventory............... 16.0 18.4
Other assets............................................. 0.5 0.3
------- -------
Total current assets.................................... 52.1 43.7
Investments and related receivables....................... 14.7 15.4
Property and equipment, at cost (note 10):
Land..................................................... 25.5 26.0
Theatre buildings, equipment and other................... 481.4 440.4
------- -------
506.9 466.4
Less accumulated depreciation and amortization (note 4).. (161.3) (145.1)
------- -------
345.6 321.3
Intangible assets, net (note 10).......................... 92.1 101.5
Other assets, net (note 2)................................ 28.3 24.1
------- -------
$ 532.8 506.0
======= =======
Liabilities and Stockholder's Equity (Deficit)
- ----------------------------------------------------------
Current liabilities:
Accounts payable......................................... $ 97.6 87.0
Accrued and other liabilities............................ 21.3 28.6
Current portion of long-term debt (notes 2 and 6)........ 5.7 32.3
------- -------
Total current liabilities............................... 124.6 147.9
Other liabilities......................................... 33.3 30.2
Debt (notes 2 and 6)...................................... 289.5 329.9
------- -------
Total liabilities....................................... 447.4 508.0
------- -------
Minority interests in equity of consolidated
subsidiaries............................................. 7.7 7.2
Stockholder's equity (deficit) (note 2):
Preferred stock (note 8)................................. - 193.9
Common stock (note 8).................................... - -
Additional paid-in capital (note 8)...................... 331.0 29.0
Accumulated deficit...................................... (251.1) (230.3)
Cumulative foreign currency translation adjustment....... (0.3) (0.4)
Intercompany account..................................... (1.9) (1.4)
------- ------
Total stockholder's equity (deficit).................... 77.7 (9.2)
------- ------
$ 532.8 506.0
======= ======
See accompanying notes to condensed consolidated financial statements.
4
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, 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.................................... 4.5 9.0 5.1 9.9
------ ----- ----- -----
155.0 319.5 156.6 330.8
------ ----- ----- -----
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 67.6 133.2
Affiliate lease rentals (note 9)......... 2.2 4.3 2.4 4.9
General and administrative (note 9)...... 5.6 10.9 5.8 12.2
Restructuring charge (note 13)........... - - 0.5 0.5
Depreciation and amortization (note 4)... 12.2 25.2 14.8 32.5
Provisions for impairment (note 10)...... 5.3 5.3 8.5 8.5
------ ----- ----- -----
158.8 313.2 167.1 332.5
------ ----- ----- -----
Operating income (loss).............. (3.8) 6.3 (10.5) (1.7)
Other income (expense):
Interest, net (notes 2, 6 and 9)......... (7.8) (16.4) (9.3) (18.6)
Gain on disposition of assets (note 12).. 0.2 0.2 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............................... (0.9) (1.4) (0.4) (1.0)
------ ----- ----- -----
(9.0) (18.5) 1.5 (9.2)
------ ----- ----- -----
Loss before income tax expense
and extraordinary item............. (12.8) (12.2) (9.0) (10.9)
Income tax expense (note 11)............... (0.4) (0.7) (0.2) (0.6)
------ ----- ----- -----
Net loss before extraordinary item... (13.2) (12.9) (9.2) (11.5)
Extraordinary item - loss on early
extinguishment of debt (note 2).......... (7.9) (7.9) - -
------ ----- ----- -----
Net loss............................. (21.1) (20.8) (9.2) (11.5)
Dividend on preferred stock (note 8)....... (2.3) (9.0) (5.9) (11.8)
------ ----- ----- -----
Net loss available to common
stockholder........................ $(23.4) (29.8) (15.1) (23.3)
====== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
5
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder's Equity
(Amounts in Millions)
(Unaudited)
Cumulative
foreign
currency Total
Preferred Common Additional Accumulated translation Intercompany stockholder's
stock stock paid-in capital deficit adjustment account equity
--------- ------ --------------- ----------- ----------- ------------ -------------
Balance at January 1, 1998................. $ 193.9 - 29.0 (230.3) (0.4) (1.4) (9.2)
Accretion of dividends on
preferred stock.......................... 9.0 - (9.0) - - - -
Equity contribution........................ - - 108.1 - - - 108.1
Conversion of preferred stock.............. (202.9) - 202.9 - - - -
Net increase in intercompany account....... - - - - - (0.5) (0.5)
Foreign currency translation adjustment.... - - - - 0.1 - 0.1
Net loss................................... - - - (20.8) - - (20.8)
-------- --- --------- -------- -------- ------- -------
Balance at June 30, 1998................... $ - - 331.0 (251.1) (0.3) (1.9) 77.7
======== === ========= ======== ======== ======= =======
See accompanying notes to condensed consolidated financial statements.
6
UNITED ARTISTS THEATRE CIRCUIT, INC.
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................................. $ 9.2 11.6
------- -----
Cash flow from investing activities:
Capital expenditures.................................................... (43.6) (37.3)
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..................................... 2.3 18.3
Investments in and receivables from theatre joint ventures.............. - (9.9)
Other, net.............................................................. 1.5 (0.7)
------- -----
Net cash used in investing activities.................................. (49.4) (29.1)
------- -----
Cash flow from financing activities:
Equity contribution by Parent........................................... 108.1 -
Debt borrowings......................................................... 437.0 71.0
Debt repayments......................................................... (379.1) (56.1)
Repurchase of Senior Secured Notes...................................... (128.6) -
Increase in intercompany account........................................ (0.5) (0.3)
Increase in cash overdraft.............................................. 8.0 3.8
Increase in related party receivables................................... (1.7) (0.9)
Other, net.............................................................. (6.6) (0.1)
------- -----
Net cash provided by financing activities.............................. 36.6 17.4
------- -----
Net decrease in cash................................................... (3.6) (0.1)
Cash and cash equivalents:
Beginning of period..................................................... 10.6 9.6
------- -----
End of period........................................................... $ 7.0 9.5
======= =====
Reconciliation of net loss to net cash provided by operating activities:
Net loss................................................................ $ (20.8) (11.5)
Extraordinary item...................................................... 7.9 -
Effect of leases with escalating minimum annual rentals................. 1.8 1.7
Depreciation and amortization........................................... 25.2 32.5
Provisions for impairment............................................... 5.3 8.5
Gain on disposition of assets........................................... (0.2) (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 1.3
Prepaid expenses and concession inventory.............................. 2.4 (2.0)
Other assets........................................................... - 1.1
Accounts payable....................................................... (3.8) (4.3)
Accrued and other liabilities.......................................... (10.5) (5.3)
------- -----
Net cash provided by operating activities........................... $ 9.2 11.6
======= =====
See accompanying notes to condensed consolidated financial statements.
7
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
(1) General Information
-------------------
On May 12, 1992, United Artists Theatre Circuit, Inc. and substantially all
of its then existing subsidiaries ("UATC") were acquired (the
"Acquisition") by United Artists Theatre Company (the "Parent") (formerly
known as OSCAR I Corporation). The Parent is owned by an investment fund
managed by affiliates of Merrill Lynch Capital Partners, Inc. ("MLCP"),
certain institutional investors and certain members of UATC's management.
In addition to owning all of the outstanding capital stock of UATC, the
Parent also 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.
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 UATC 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's Form 10-K.
(2) Recapitalization
----------------
On April 21, 1998, the Parent 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.
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 the Parent's 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 $0.8 million.
The Parent 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.
8
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(2) Recapitalization, continued
---------------------------
The net proceeds from the offering of the Senior Subordinated Notes in
excess of the redemption value of the Parent's preferred stock
(approximately $108.1 million) was contributed to UATC as additional common
equity by the Parent. Additionally, UATC's preferred stock (which was held
by the Parent) was converted into additional common equity.
As a result of the repayment of the Existing Bank Credit Facility and the
redemption of the Senior Secured Notes, UATC 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.
(3) Sale and Leaseback
------------------
In December 1995, UATC and UAR entered into a sale and leaseback 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.
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.
(4) Change in Estimated Useful Lives
--------------------------------
During 1998, UATC 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 $19.9 million and $19.6 million for the six
months ended June 30, 1998 and 1997, respectively.
9
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) Supplemental Disclosure of Cash Flow Information, continued
-----------------------------------------------------------
UATC 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.
During the six months ended June 30, 1998, UATC exchanged one of its fee-
owned theatre properties with Prop I in exchange for one of Prop I's fee-
owned theatre properties and a $1.1 million note.
(6) Debt
----
Debt is summarized as follows (amounts in millions):
June 30, 1998 December 31, 1997
-------------- ------------------
Parent Bank Credit Facility (a).... $285.0 -
Existing Bank Credit Facility (b).. - 226.5
Senior Secured Notes (b)........... - 125.0
Other (c).......................... 10.2 10.7
------ -----
295.2 362.2
Less current portion............... (5.7) (32.3)
------ -----
$289.5 329.9
====== =====
(a) The Parent 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.
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.
10
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) Debt, continued
---------------
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 Parent,
but no less frequently than once each 90 days. The Parent Bank Credit
Facility contains certain provisions that require the Parent to
maintain certain financial ratios and places limitations on, among
other things, additional indebtedness, disposition of assets and
restricted payments.
The Parent Bank Credit Facility is guaranteed, on a joint and several
basis, by UATC and by certain of the Parent's 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 the Parent and UATC and by an intercompany note
of UATC to the Parent established with respect to borrowings by UATC
from the Parent.
(b) As discussed in Note (2), Recapitalization, the Existing Bank Credit
Facility and the Senior Secured Notes were repaid during 1998 from
proceeds of the Bank Credit Facility.
(c) 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.
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 UATC has historically received payments
relating to its interest rate cap agreements, it 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 underlying
agreement. Amounts received from the counterparties to the interest rate
cap agreements are recorded as a reduction of interest expense.
At June 30, 1998, the Parent 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. The Parent pays
commitment fees of 1/2% per annum on the average unused commitments.
11
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) Debt, continued
---------------
The primary source of principal and interest payments related to the Bank
Credit Facility will come from payments by UATC to the Parent. The amount
of payments by UATC to the Parent 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 $0.8 million and $0.6 million for the three months ended
June 30, 1998 and 1997, respectively, and $1.2 million and $1.0 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 UATC's cash and cash equivalents,
outstanding borrowings under the Bank Credit Facility and other debt, and
interest rate cap agreements approximated their carrying amount.
(8) Preferred Stock
---------------
As part of the recapitalization discussed in Note (2), the UATC preferred
stock (which was held by the Parent) was converted into additional common
equity. At the May 1, 1998 conversion date, the carrying amount of the
preferred stock was approximately $202.9 million. Dividends on the
preferred stock had been accrued at a 14% per annum rate for all periods
since issuance in 1992.
(9) Related Party Transactions
--------------------------
UATC leases certain of its theatres from UAR and Prop I. The leases provide
for basic monthly or quarterly rentals and may require additional rentals,
based on the revenue of the underlying theatre.
Standby letters of credit totaling $12.5 million have been issued under the
Parent Bank Credit Facility to support certain indebtedness of Prop I.
In order to fund the cost of additions and/or renovations to the theatres
leased by UATC from UAR or Prop I, UATC has periodically made advances to
UAR. Interest on the advances accrues at the prime rate and amounted to
$0.3 million and $0.4 million for the three months ended June 30, 1998 and
1997, respectively, and $0.6 million and $0.7 million for the six months
ended June 30, 1998 and 1997, respectively.
UATC is a party to a management agreement with UAR. Such management
agreement provides for a fee to be paid to UATC 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 for the
three months ended June 30, 1998 and 1997, and $0.4 million and $0.3
million for the six months ended June 30, 1998 and 1997, respectively.
12
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(10) Provisions for Impairment
-------------------------
During the three months ended June 30, 1998, UATC recorded non-cash charges
for the impairment of its long-lived assets of $5.3 million and, during the
three months ended June 30, 1997, UATC 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).
(11) Income Taxes
------------
UATC and each of its 80% or more owned subsidiaries are included in the
Parent's consolidated federal income tax returns. Pursuant to a tax sharing
agreement with the Parent, UATC and each of its 80% or more owned
consolidated subsidiaries are allocated a portion of the Parent's current
federal income tax expense (benefit). Such allocations are determined as if
UATC and each of its 80% or more owned consolidated subsidiaries were
separate tax paying entities within the consolidated group. For the three
and six months ended June 30, 1998 and 1997, UATC 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 group's overall net loss position.
Consolidated subsidiaries in which UATC 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 UATC.
On February 10, 1998, the Parent 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
the Parent its request and, on August 6, 1998, the Parent filed a Section
197 election along with its amended 1993 income tax return. As the Parent
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 the Parent's net operating loss carryforward and to
increase the basis of certain intangible assets, which will be amortized,
and provide for future tax deductions. As the Parent 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.
(12) Gain on Disposition of Assets
-----------------------------
During April 1997, UATC 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.
13
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(13) Corporate Restructuring
-----------------------
At the end of 1996, UATC initiated a corporate restructuring plan intended
to provide a higher level of focus on UATC's 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.
(14) Commitments and Contingencies
-----------------------------
At June 30, 1998, UATC had outstanding approximately $19.9 million of
letters of credit, $12.5 million of which relates to the indebtedness of
Prop I.
UATC is 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
UATC relating to certain of the leases held by UATC. Although it is not
possible to predict the outcome of these proceedings, UATC believes that
such legal proceedings will not have a material adverse effect on UATC's
financial position, liquidity or results of operations.
The Americans With Disabilities Act of 1990 (the "ADA"), and certain state
statutes among other things, require that places of public accommodation,
including theatres (both existing and newly constructed) be accessible to
and that assistive listening devices be available for use by certain
patrons with disabilities. With respect to access to theatres, the ADA may
require that certain modifications be made to existing theatres to make
such theatres accessible to certain theatre patrons and employees who are
disabled. The ADA requires that theatres be constructed in such a manner
that persons with disabilities have full use of the theatre and its
facilities and reasonable access to work stations. The ADA provides for a
private right of action and for reimbursement of plaintiff's attorneys'
fees and expenses under certain circumstances. UATC has established a
program to review and evaluate UATC's theatres and to make any changes
which may be required by the ADA. UATC believes that the cost of complying
with the ADA will not materially adversely effect UATC's financial
position, liquidity or results of operations.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of UATC's financial condition and results
of operations should be read in conjunction with UATC's Condensed Consolidated
Financial Statements and related notes thereto. Such financial statements
provide additional information regarding UATC's 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 UATC's 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, Increase Ended June 30, 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...................................... 4.5 5.1 (11.8) 9.0 9.9 (9.1)
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..................... 22.9 22.6 1.3 45.7 44.8 2.0
Miscellaneous operating expenses...... 23.3 24.1 (3.3) 46.4 46.9 (1.1)
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 UATC, 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.
15
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, UATC's 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 11.8% and
9.1% 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. UATC 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 months ended June 30, 1998 and 1997, respectively. The slight decrease
in film rental and
16
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 UATC's 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: UATC's 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
1.3% and 2.0% 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 3.3% and 1.1% 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 UATC's theatres. The other expense discussions below reflect the
combined expenses of corporate, divisional, district and theatre operations.
17
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 UATC's
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, UATC initiated a corporate restructuring plan intended to
provide a higher level of focus on UATC's theatrical business at a lower annual
cost. This corporate restructuring was completed in January 1997. General and
administrative expense decreased $0.2 million or 3.4% and $1.3 million or 10.7%,
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 UATC's newly opened theatres. UATC 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, UATC recorded $5.3 million
and $8.5 million, respectively, of non-cash provisions for asset impairments.
OPERATING INCOME (LOSS)
- -----------------------
UATC incurred net operating losses of $3.8 million and $10.5 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, UATC had operating income of $6.3 million as
compared to an operating loss of $1.7 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 decreased $1.5 million and $2.2 million during the three and
six months ended June 30, 1998, respectively, as compared to the prior year
periods due primarily to lower average debt balances.
18
GAIN ON DISPOSITION OF ASSETS
- -----------------------------
During the three months ended June 30, 1997, UATC 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, UATC recognized an
extraordinary loss on 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, the Parent 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 the Parent its request
and, on August 6, 1998, the Parent filed a Section 197 election along with its
amended 1993 income tax return. As the Parent 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 the Parent's net
operating loss carryforward and to increase the basis of certain intangible
assets, which will be amortized, and provide for future tax deductions. As the
Parent 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 STOCKHOLDER
- ----------------------------------------
During the three and six months ended June 30, 1998, UATC incurred net losses
available to common stockholder of $23.4 million and $29.8 million,
respectively, compared to net losses of $15.1 million and $23.3 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 UATC's Hong Kong theatre investment during the three
months ended June 30, 1997. Excluding these unusual items, the net losses
available to common stockholder 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 stockholder.......... $(23.4) (15.1) (29.8) (23.3)
Gains on disposition of assets.................... (0.2) (11.8) (0.2) (11.8)
Loss on early extinguishment of debt.............. 7.9 - 7.9 -
---- ---- ---- ----
$(15.7) (26.9) (22.1) (35.1)
==== ==== ==== ====
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, cash provided by UATC's operating
activities was $9.2 million. This cash provided by operating activities, in
addition to $36.6 million of cash provided by financing activities was used to
fund $49.4 million of capital expenditures and other investing activities.
19
Substantially all of UATC's admissions and concession sales revenue are
collected in cash. Due to the unfavorable interest rate spread between bank
facility borrowings and cash investments, UATC seeks to use all of its available
cash to repay its revolving bank borrowings and borrow under those facilities as
cash is required. UATC 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, the Parent 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, and
entered into the $450.0 million Bank Credit Facility with a final maturity of
April 21, 2007.
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 the Parent's 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, the Parent 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 net proceeds from the offerings of the Senior Subordinated Notes in excess
of the redemption value of the Parent's preferred stock (approximately $108.1
million) was contributed to UATC as additional common equity by the Parent.
Additionally, UATC's preferred stock (which was held by the Parent) was
converted into additional common equity.
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 the Parent 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 the Parent's 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 the Parent and UATC and by an
intercompany note of UATC to the Parent established with respect to borrowings
by UATC from the Parent.
As a result of the repayment of the Existing Bank Credit Facility and the
redemption of the Senior Secured Notes, UATC 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, UATC 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 UATC has a significant operating presence. As part of this increased
focus on its U.S. operations, UATC 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 UATC's core markets and used to repay existing debt.
UATC 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,
UATC's
20
international investments will only include a 10.0% interest in four theatres in
Singapore and Thailand.
As part of its strategic plan, UATC 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, UATC
closed or sold 13 theatres (52 screens). The theatres that were closed were
primarily smaller, older theatres that were not part of UATC's long term
strategic plans or were underperforming.
In an effort to limit the amount of investment exposure on any one project, UATC
typically develops theatre projects where the land and building are leased
through long-term operating leases. Where such lease transactions are
unavailable, however, UATC 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 UATC. For the six
months ended June 30, 1998, UATC invested approximately $50.0 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, UATC 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 UATC intends to open or renovate
during the next two years. UATC estimates that capital expenditures associated
with these theatres will aggregate approximately $85.2 million. Such amounts
relate only to projects in which UATC 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. UATC 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 the Parent to obtain interest rate hedges on a certain portion of its
indebtedness thereunder. UATC amortizes the cost of its interest rate cap
agreements
21
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 UATC 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).
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------
1998 1997 1998 1997
---- ---- ----- ----
Operating Income (Loss)........................... $(3.8) (10.5) 6.3 (1.7)
Depreciation and Amortization..................... 12.2 14.8 25.2 32.5
Provisions for Impairment......................... 5.3 8.5 5.3 8.5
Restructuring Charge.............................. - 0.5 - 0.5
Non-Cash Rent..................................... 0.9 0.9 1.8 1.7
---- ---- ---- ----
Operating Cash Flow............................... $14.6 14.2 38.6 41.5
==== ==== ==== ====
Interest Expense.................................. $ 8.4 9.4 16.9 18.6
==== ==== ==== ====
Interest Coverage Ratio........................... 1.7 1.5 2.3 2.2
==== ==== ==== ====
Statement of Cash Flow Information:
Net cash provided by operating activities...... $ 9.2 11.6
Net cash used in investing activities.......... (49.4) (29.1)
Net cash provided by financing activities...... 36.6 17.4
---- ----
Net cash flow.................................. $ (3.6) (0.1)
==== ====
As shown above, UATC's Interest Coverage Ratio increased from 1.5 times for the
three months ended June 30, 1997 to 1.7 times for the three months ended June
30, 1998, primarily due to increased Operating Cash Flow and decreased interest
expense. UATC's Interest Coverage Ratio increased from 2.2 times for the six
months ended June 30, 1997 to 2.3 times for the six months ended June 30, 1998,
despite decreased Operating Cash Flow primarily as a result of a reduction in
interest expense.
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 UATC's or the Parent's
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, $9.2 million of net cash
was provided by UATC's operating activities. This measurement shows the net
cash provided by UATC's operations which was available for UATC's liquidity
needs after taking into consideration certain additional costs of doing business
which are not reflected in the Operating Cash Flow calculations discussed above.
22
UATC 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. UATC expects that future cash requirements will principally be
for repayments of indebtedness, working capital requirements and capital
expenditures. UATC's 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 UATC's 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, UATC 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, UATC may recognize a non-
cash charge to reflect an impairment. UATC recognized $5.3 million and $8.5
million of asset impairments during the three months ended June 30, 1998 and
1997, respectively.
OTHER
UATC's 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 UATC's 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
UATC 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 UATC's business operations or have a material adverse effect on its future
liquidity or results of operations. UATC 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 UATC. However, the
nature of UATC's business and its business relationships are not such the UATC
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 UATC.
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 UATC's financial position, results of
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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 UATC's financial position, results of operations or cash
flow is not expected to be material.
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. UATC 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.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED ARTISTS THEATRE CIRCUIT, INC.
(Registrant)
/S/ Trent J. Carman
---------------------------------------------
BY: Trent J. Carman
Chief Financial Officer
Date: August 13, 1998
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