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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
(Mark One) FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 33-49598
333-1024
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
UNITED ARTISTS THEATRE CIRCUIT, INC.
(exact name of registrant as specified in charter)
Maryland 13-1424080
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9110 E. Nichols Avenue, Suite 200 80112
Englewood, CO -----
- --------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (303) 792-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
----------- ------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X
---
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. N/A.
The number of shares outstanding of $1.00 par value common stock at March 21,
1997 was 100 shares.
UNITED ARTISTS THEATRE CIRCUIT, INC.
Annual Report on Form 10-K
December 31, 1996
Table of Contents
-----------------
PART I
Page
----
Item 1 - Business 3
Item 2 - Properties 10
Item 3 - Legal Proceedings 11
Item 4 - Submission of Matters to a Vote of Security Holder 11
PART II
Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters 12
Item 6 - Selected Financial Data 12
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8 - Financial Statements and Supplementary Data 20
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10- Directors and Executive Officers of the
Registrant 60
Item 11- Executive Compensation 62
Item 12- Security Ownership of Certain Beneficial Owners
and Management 65
Item 13- Certain Relationships and Related Transactions 67
PART IV
Item 14- Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 68
Signatures
PART I
Item 1. Business
- ------- --------
(a) General Development of Business
-------------------------------
United Artists Theatre Circuit, Inc. ("UATC" or the "Company"), a Maryland
corporation, was initially founded in 1926 by shareholders including Mary
Pickford, Douglas Fairbanks, Sam Goldwyn and Joe Schenck. From its founding
through its first 40 years, the Company developed its theatre operations and in
the early 1960's, through a separate subsidiary, invested in the cable
television business. In 1986, an indirect subsidiary of Tele-Communications,
Inc. ("TCI") acquired a controlling interest in the Company's then parent
company, United Artists Communications, Inc. ("UACI"), which owned both the
theatre and cable businesses. UACI subsequently changed its name in 1989 to
United Artists Entertainment Company ("UAE") in conjunction with the acquisition
of United Cable Television Corporation. In December 1991, the indirect
subsidiary of TCI acquired the remaining outstanding shares of UAE.
On May 12, 1992, an investment fund managed by Merrill Lynch Capital Partners,
Inc. ("MLCP") and certain institutional investors (the "Non-Management
Investors"), certain executives of UAE and certain members of the Company's
management formed Oscar I Corporation ("OSCAR I") to acquire all of the
outstanding shares of capital stock of the Company from TCI (the "Acquisition").
The aggregate purchase price for the Acquisition, including liabilities assumed
was approximately $543.8 million.
The Acquisition and the refinancing of UATC's then outstanding bank debt was
financed through the sale of $111.5 million of common equity of OSCAR I, the
issuance of $92.5 million of OSCAR I preferred stock to TCI, the proceeds from
$125.0 million of public debt securities ("Senior Secured Notes") and the
balance from borrowings under a new bank credit facility (the "Bank Credit
Facility").
Simultaneously with the Acquisition, the Non-Management Investors formed OSCAR
II Corporation ("OSCAR II"), a Delaware corporation, which separately acquired
from an affiliate of TCI all of the outstanding capital stock of United Artists
Realty Company ("UAR"), a Delaware corporation, and its subsidiaries for
approximately $1.0 million. UAR and its subsidiaries, United Artists Properties
I Corp. ("Prop I") and United Artists Properties II Corp. ("Prop II") were the
owners and lessors of certain operating theatre properties leased to and
operated by the Company and its subsidiaries. Certain mortgage debt of UAR,
Prop I and Prop II (approximately $142.3 million), which was secured by their
theatre properties, remained outstanding after the acquisition by OSCAR II.
On February 28, 1995, OSCAR II was merged into OSCAR I in conjunction with a
one-for-one share exchange. As a result of this merger, OSCAR II ceased to
exist and OSCAR I became the parent company of UATC and UAR.
During December 1995, as part of a sale and leaseback transaction completed by
the Company, ten theatres owned by the Company, 17 theatres owned by Prop II and
four theatres under development were sold and leased back to the Company (the
"Sale and Leaseback"). In conjunction with the Sale and Leaseback transaction,
the equipment from the Prop II theatres sold and the remaining 11 theatres owned
by Prop II were contributed to the Company. The contribution of these theatres
was accounted for in a manner similar to a pooling of interests.
As a result of the various transactions described above, the corporate structure
of OSCAR I and UATC are as follows:
OSCAR I
-------------------------------
UAR.......................... UATC
| Affiliate Leases |
| |
Prop I..........................|
3
The Company is referred to in the following discussion as the Company for
periods both before and after the Acquisition. Predecessor Corporation refers
to the Company for all periods prior to the Acquisition. Successor Corporation
refers to the Company for all periods subsequent to the Acquisition.
(b) Narrative Description of Business
---------------------------------
The Company's principal business is that of motion picture exhibition, and its
revenue is derived principally from theatre admissions and concession sales.
Other revenue is generated 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 and other miscellaneous sources.
General
- -------
The Company believes it is one of the largest theatrical exhibitors of motion
pictures in the United States in terms of number of theatres and screens
operated. As of December 31, 1996, the Company owned and operated 372 theatres
with 2,222 screens located in 26 states and Puerto Rico, and through investments
in various joint venture companies, operated 15 theatres with 79 screens in Hong
Kong, Singapore, Mexico and Argentina. As of December 31, 1996, the Company
believes it operated approximately 8.0% of screens located in North America.
The following table presents a summary of the Company's theatres which it owned
more than a 50% interest at the end of each of the last five fiscal years:
December 31,
---------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
Number of Theatres 451 421 415 408 368
Number of Screens 2,295 2,199 2,261 2,317 2,210
Average Screens per Theatre 5.1 5.2 5.4 5.7 6.0
The Company operates its theatres from its Englewood, Colorado corporate
headquarters, through three regional operating offices, and 13 district
operating offices and two geographically located film booking offices. In most
cases, the district offices are located within theatres.
Geographic positioning and operating efficiencies are key elements of the
Company's operating strategy. Geographic clustering at both the regional and
local level is important in providing the Company with access to attractive new
theatre development opportunities and in enhancing film buying and operating
efficiencies. Operating efficiencies are achieved by (i) minimizing the ratio of
theatre operating costs to patrons and revenue, largely through theatre level
expense control and the continued construction of multiplex theatres, (ii)
concentrating regional corporate operations within fewer strategic markets and
(iii) reducing the number of less efficient, non-strategic theatres.
Theatrical exhibitors depend upon strong geographic positioning to obtain the
most attractive film rental arrangements, since film bookings are negotiated on
a local, market-by-market basis. Strong geographic positioning in terms of
screen number and location enhances the attractiveness of a theatre exhibitor to
film distributors, in part due to the exhibitor's ability to influence the local
success of a film release. Depending upon area size and local demographics
(such as population density and transportation systems), an individual market
can be a state, a city or a neighborhood.
The Company's theatres are particularly focused in large and medium sized
metropolitan areas in California, southern New York (primarily New York City and
Long Island), New Jersey, Florida, Texas, eastern Pennsylvania (including
Philadelphia), Louisiana, Colorado (primarily Denver), Georgia, and certain
areas in North and South Carolina. The Company has strong positions in most of
the major metropolitan markets in these geographic areas. The states which
represent the largest geographic concentration of theatres and screens operated
accounted for approximately 57% of the Company's total theatres and screens at
December 31, 1996 and approximately 63% of the Company's total revenue for the
year ended December 31, 1996 and were as follows:
4
Total Number Total Number Percent of
of Theatres of Screens Total Revenue
------------ -------------- --------------
California 68 358 20%
New York 39 191 14
Florida 27 227 8
Texas 31 214 8
Pennsylvania 29 142 8
Louisiana 19 136 5
As set forth in the following table, almost all of the Company's theatres are
multiscreen:
Number of Screens Number of % of
per Theatres Theatres Total Screens
------------ --------- -------------
Greater than 10 22 12.3%
10 32 14.5
8 - 9 63 23.6
6 - 7 91 25.5
4 - 5 89 17.3
2 - 3 54 6.0
1 17 0.8
Multiscreen theatres allow facilities such as concession stands and restroom
facilities, and operating costs such as lease rentals, utilities and personnel,
to be spread over a larger base of screens and patrons. Multiscreen theatres
also allow for multiple showtimes of the same film and a variety of films with
differing audience appeal to be shown and provide the flexibility to shift films
to larger or smaller auditoriums depending on the popularity of the film. In
order to limit crowd congestion and to maximize the efficiency of floor and
concession staff, the starting times of films at multiscreen theatres are
staggered. The Company believes that multi-screen theatres designed with 10 to
16 screens generally provide the best balance of return on invested capital and
adequate screen numbers for patrons and film distribution companies.
The majority of the Company's theatres are located in free-standing buildings or
are "anchor" tenants in regional malls or strip-centers. The Company's
construction strategy focuses on site selection and on enhancing the theatre-
goer's experience. Each new location is selected giving consideration to the
Company's position in the particular market, the number of existing competitive
screens, growth potential of the area and, in general, a minimum threshold
population within a certain radius of the theatre. Theatres are designed for
patron comfort, including provisions for access by certain patrons and employees
with disabilities, more comfortable chairs with cupholders, analog or digital
stereo sound and increased concession selling capacity. The Company generally
constructs theatres that have a good balance between the number of auditoriums
and the size of those auditoriums. This balance will allow the Company to
provide an adequate number of screens sought by distributors as well as the
increased entertainment value to patrons afforded by larger auditoriums. In
addition to increasing the number of screens in certain locations, the Company
is also constructing theatres with stadium seating, upgraded seats and other
design features which are appropriate for the market in which the theatre is
located. While the Company (or its affiliates) owns many of its theatres, most
of them are leased through long-term operating leases. As a result of new
construction and the sale or closure of older, smaller theatres, over 20% of the
Company's screens have been constructed over the last five years.
The Company has historically financed, and plans to continue to finance, a
significant portion of the cost of construction of new theatres by entering into
long-term leases or sale and leaseback transactions. The Company's leases
generally have an initial term of 15 to 20 years with renewal options and
generally require the landlord to fund a significant portion of the up-front
construction costs. As a result, in many cases expenditures are only required
for equipment and certain tenant finishes and net capital expenditures for new
leased theatres are thereby minimized.
5
Market Strategy
- ---------------
During December 1996, subsequent to the resignation of the Company's former
Chief Executive Officer, a more focused theatre development and capital
investment strategy was initiated. As part of this strategy, the Company will
focus its capital investment activities towards developing new theatres and
renovating existing key theatres in its strategically important United States
markets and will increase its efforts to sell, close or exchange certain of its
existing theatres (in most cases smaller theatres) which are not profitable or
which are not located in geographically strategic areas. In addition, the
Company will seek to monetize certain of its international investments through a
restructuring of its joint ventures with its partners, or a sale of its
interests for cash, or in exchange for theatres located in its strategic markets
in the United States. This strategy is intended to provide a higher level of
management focus on strengthening the Company's competitive position in its
United States markets where it has existing strong operating positions. In
addition, this strategy is intended to provide increased liquidity from the
disposal of non-cash flow producing investments and theatres that are in markets
which have limited growth potential and/or which the Company does not intend to
invest the capital required to defend its position. This increased liquidity
combined with the elimination of losing or less profitable theatres will be
redeployed into the development of higher margin new theatres or used to reduce
the Company's debt.
During 1996, the Company developed and opened 15 theatres (130 screens) and
added eight new screens to three existing theatres, and sold 39 theatres (188
screens) and closed 15 theatres (57 screens) in the United States. The new
theatres are located primarily in areas where the Company has a significant
operating presence. As a result of this existing presence, a minimal amount of
incremental district and divisional overhead is expected to be incurred in order
to operate these theatres. Many of the theatres sold or closed were not
profitable or were in areas which are not part of the Company's long-term
strategic plans. In addition, as part of the Company's previous investment
strategy, during 1996, investments were made in one theatre (four screens) in
Singapore, three theatres (33 screens) in Mexico, and three theatres (six
screens) in Hong Kong.
As part of its asset redeployment efforts, the Company has initiated
conversations with its international joint venture partners regarding the sale
or restructuring of those international joint ventures and has identified 100
theatres (410 screens) in the United States which are in markets which are not
considered strategically important or are theatres which are underperforming.
During 1996, the Company sold or closed 54 theatres (245 screens) which it had
previously identified for sale. In March 1997, the Company entered into an
agreement to sell its Hong Kong investment to its partners for $17.5
million, which will result in an $11.0 million gain for financial reporting
purposes upon the consummation of the transaction.
In conjunction with its new operating strategy, the Company initiated a
corporate restructuring plan in December 1996 which is intended to provide a
higher level of focus on the Company's domestic theatrical business at a lower
annual cost. This corporate restructuring which was completed in January 1997
is projected to reduce annual general and administrative expenses by
approximately 20%. In conjunction with this corporate restructuring plan, the
Company recorded a $1.9 million restructuring charge in 1996 for severance and
other related expenses.
Revenue
- -------
Approximately 69% and 27% of the Company's revenue is derived from theatrical
admissions and concession sales, respectively. The remaining 4% of revenue is
derived primarily from on-screen advertising, electronic video games located in
theatre lobbies, theatre rentals, the rental of theatres and other miscellaneous
sources. Theatre rental revenue relates primarily to the Proteus Network(TM)
business unit which rents theatres on a networked and non-networked basis for
corporate meetings, seminars and other training/educational uses. In
conjunction with six of its recently constructed theatres, the Company has
developed multi-venued indoor entertainment centers called Starport(TM) in an
effort to attract new patrons, broaden the demographic reach of its theatres and
increase the theatre's operating cash flow.
The Company's admissions revenue is based on the level of theatrical attendance
and the mix of tickets sold. Theatre attendance is dependent primarily upon the
ability to license the most popular films. The Company's ticket prices vary
throughout the circuit depending upon such things as local competition, whether
the theatre is showing first run or second run movies, and the local economy in
which the theatre operates. Reduced ticket prices are typically charged for
senior citizens, children and matinee showings. The mix of tickets sold is
primarily related to the types of movies available to, and exhibited by, the
Company. Admissions revenue is recorded net of applicable sales taxes. The
Company utilizes local newspaper advertisements to promote its theatres and
inform its patrons of the films being played and show times for its theatres
located within the
6
newspaper's circulation area. This type of advertisement is typically paid for
by the Company. In most markets, multi-media advertisements for upcoming film
releases are paid by the film's distributor. In these markets, there is a "co-
op" arrangement whereby the exhibitors in those markets and the distributor
share in the cost of film advertisement in newspapers.
Concession sales are a very important factor with respect to the overall
profitability of a theatre. The Company's primary concession products are
varying sizes of popcorn, soft drinks, candy and certain other products such as
nachos and hot dogs. In addition, the Company also sells pizza, pretzels,
cookies, ice cream, bottled water, fruit juices and other specialty items in
many of its theatres. Popcorn, soft drinks and packaged candy are generally
sold in three or four (includes children's) sizes. Retail prices for concession
items vary by the size of the offering and are generally market sensitive.
Concession sales are recorded net of applicable sales taxes.
In an effort to further increase its concession sales, the Company has
introduced new products and initiated programs to increase the percentage of
patrons who purchase concessions and increase the amount of concessions
purchased by each patron. To assist in achieving these goals, the Company has
implemented training programs for all concession employees, remodeled concession
stands at certain existing theatres to make them more visible, attractive and
efficient, constructed new theatres with increased concession capacity, expanded
concession menus in selected locations and installed bulk candy stands in most
theatres and adopted certain seasonal and event-oriented promotional programs.
In addition, theatre managers and assistant managers are incented through
concession commission programs which represent a significant portion of their
total compensation.
Film Licensing
- --------------
The Company obtains licenses to exhibit films by directly negotiating with film
distributors on a film-by-film and theatre-by-theatre basis. Through December
31, 1996, the Company licensed films through its booking offices located in New
York, Dallas and Los Angeles. As part of its recent corporate restructuring,
the Company closed its Dallas booking office and all of the film booking
responsibilities of the Dallas office were divided on a regional basis between
the New York and Los Angeles booking offices. Individuals in the booking
offices are responsible for booking films for theatres in their assigned region.
This regional film booking structure allows the Company to maintain better
relationships with regional representatives from the various film distributors,
and provides better insight to the film tastes of patrons in each market. The
Company licenses films from all of the major and independent film distributors
and is not overly dependent on any one film distributor for film product.
The Company licenses the majority of its first run films from distributors owned
by the major and independent film production companies. Each film distributor
establishes geographic areas known as "film zones," and typically allocates each
of its films to only one theatre within each film zone. In most cases where
there is more than one exhibitor in a film zone, this allocation process is
based on long standing relationships between the distributor and exhibitor or is
done on an alternating basis. In certain very limited cases where there are
several exhibitors in a film zone, film is also allocated based on an exhibitor
bidding process. Film zones vary in size based primarily upon population
density. The Company operates in 105 film zones where it is the only exhibitor,
and thus will not have any competition with respect to licensing the film
product in those film zones.
Film licenses typically specify rental fees equal to the higher of a percentage
of (i) gross box office receipts or (ii) adjusted box office receipts. Under
the gross box office receipts formula, the film distributor receives a specified
weekly percentage of the gross box office receipts. Under the adjusted box
office receipts formula, the film distributor receives a specified percentage of
the excess of box office receipts over a periodically negotiated amount of house
expenses. In very limited cases, the Company may be required to pay a non-
refundable guarantee or make film rental advances in order to obtain certain
film licenses.
Most terms of the film licenses (and hence the film rental costs) with many film
distributors are historically finalized after exhibition of the film in a
process known as "settlement." The settlement process considers, among other
things, the actual success of a film relative to original expectations, an
exhibitor's commitment to the film, and the exhibitor's relationship with the
film distributor. The Company has historically been able to license a majority
of the motion pictures available; however, there is no guarantee that this will
continue in the future.
7
International Operations
- ------------------------
In addition to its domestic theatres, the Company has also developed theatres in
certain markets outside of the United States in conjunction with strategic
partners. The Company's international operating theatres at December 31, 1996
are summarized as follows:
Country Theatres Screens Ownership
- --------------- -------- ------- ----------
Hong Kong 7 26 50%
Singapore 2 7 50%
Mexico 3 33 50%
Argentina 3 13 25%
-- --
15 79
== ==
As all of the Company's international operations are owned 50% or less, they are
accounted for on an equity basis and as such, their revenue and expenses are not
included in the revenue and operating expenses of the Company. Generally, the
Company only invests in international theatre projects with local partners and
requires that the Company manage such theatre operations. The Company receives
a management fee based on a percentage of revenue for such management services.
During 1996 and 1995, the Company received approximately $0.7 million and $0.3
million, respectively, of management fees from its international theatres.
During 1996 and 1995, the Company received approximately $0.6 million and $1.4
million, respectively, of dividends from the Hong Kong theatres. The Company's
international operations are managed by corporate executives based in Englewood,
Colorado and limited staff based in the applicable country. In addition to the
theatres set forth above, one theatre (12 screens) in Mexico, two theatres (20
screens) in Argentina and two theatres (14 screens) in Thailand were under
construction.
As mentioned previously, the Company is currently discussing the restructuring
of its international joint ventures in an effort to monetize certain of its
investments by admitting new partners through a sale of all or a part of its
interest for cash or in exchange for theatres located in its key markets in the
United States. Subsequent to December 31, 1996, the Company signed an agreement
to sell its Hong Kong investment to its partners for $17.5 million, which will
result in an $11.0 million gain for financial reporting purposes upon the
consummation of the transaction.
Proteus Network/TM/
- -------------------
In an effort to utilize its existing theatres more effectively during periods of
low attendance (such as mornings and weekdays), the Company has developed a
business unit called the Satellite Theatre Network or Proteus Network/TM/. The
Proteus Network/TM/ rents theatre auditoriums for seminars, corporate training,
business meetings and other educational or communication uses, for product and
customer research and for other entertainment uses. Theatre auditoriums are
rented on an individual basis or on a networked basis. In order to provide the
"broadcasting" network or "teleconferencing" equipment, a network of theatres
has been created by installing high quality (high definition-like) video
projection equipment within theatres which are networked via the combination of
satellite delivery from a single or multiple location and telephonic
communication.
As of December 31, 1996, the Proteus Network/TM/ included 30 theatres with
electronic video capability and an additional 338 theatres which were being
rented for individual non-networked uses. Since the Proteus Network/TM/
operations within the theatre are managed by existing personnel, very little
incremental personnel expenditures are required. Marketing of the Proteus
Network/TM/ services is done on a national basis by staff located in Englewood,
Colorado. The Company recorded $6.0 million and $1.6 million of revenue from
the Proteus Network/TM / for the years ended December 31, 1996 and 1995,
respectively.
Starport/TM/
- ------------
The Company currently has six Starport/TM/ locations, one which opened in
September 1995 and five which opened during 1996. These existing Starport/TM/
locations range in size from 30,000 square feet to 75,000 square feet, depending
on the needs of the given development project, and consist of various
combinations of a multi-screen theatre, expanded concession and food service
venues and several themed and unthemed "high-tech" virtual reality venues,
attractions and other electronic games.
8
Seasonality
- -----------
The Company's theatrical results of operations are subject to seasonal
fluctuations in theatrical attendance which corresponds to holiday school
vacation periods and a greater availability of popular motion pictures during
the period from Memorial Day through Labor Day and during the Easter,
Thanksgiving and Christmas holidays.
Competition
- -----------
The Company's theatrical operations are subject to varying degrees of
competition with other theatre circuits and independent theatres with respect
to, among other things, licensing films, attracting patrons and obtaining new
theatre sites. Management believes that the Company is well positioned within
its industry and that the theatre exhibition industry as a whole will continue
to play a leading role in the exhibition and marketing of motion pictures and in
the entertainment industry as a whole.
Management believes that the principal competitive factors with respect to film
licensing include acceptable licensing terms, seating capacity, prestige and
location of an exhibitor's theatres, the quality of the theatre in general,
especially of projection and sound, and the exhibitor's ability and willingness
to promote the films. Management also believes that ongoing relationships with
film distribution and production companies are important in continuously
obtaining the best mix of available films.
The competition for patrons is dependent upon factors such as the availability
of popular films, the location of the theatres, the comfort and quality of the
theatres and ticket prices. Film patrons are not necessarily "brand" conscious
and generally choose a theatre to attend based on film selection, location and
quality of the theatre.
Motion pictures are generally made available through various distribution
methods at various dates after the theatrical release date. The release dates
of motion pictures in these other "distribution windows" begin four to six
months after the theatrical release date with video cassette rentals, followed
generally by off-air or cable television programming including pay-per-view, pay
television, other basic cable and broadcast network and syndicated programming.
While there can be no assurance that such trend will continue in the future,
despite the proliferation of these other distribution systems, industry theatre
admissions have increased during each of the last five years as more motion
pictures have been produced and distributed to theatres and then to the other
distribution channels. Theatrical distribution remains the cornerstone of a
film's financial success as it is the focal distribution window for the public's
evaluation of films and for motion picture promotion.
The Company competes for the public's outside-the-home leisure time and
disposable income with other forms of out-of-home entertainment, such as
sporting events, concerts and live theatre.
Government Regulation
- ---------------------
The distribution of motion pictures is regulated by federal and state anti-trust
laws and has been the subject of numerous anti-trust cases. Consent decrees
resulting from one of the most significant cases, to which the Company was not a
party, have an impact on the theatrical exhibition business. Those consent
decrees bind certain major film distributors and require the films of such
distributors to be offered and licensed to exhibitors, including the Company, on
a theatre-by-theatre basis. Consequently, the Company cannot assure itself of a
supply of films by entering into long-term agreements with major film
distributors, but must compete for its film licenses on a film-by-film and
theatre-by-theatre basis.
The federal Americans With Disabilities Act ("ADA"), and certain state statutes
among other things, require that places of public accommodation, including
theatres (both existing and newly constructed), be accessible to and that
assistive listening devices be available for use by certain patrons with
disabilities. With respect to access to theatres, the ADA may require that
certain modifications be made to existing theatres in order to make such
theatres accessible to certain theatre patrons and employees who are disabled.
The ADA requires that theatres be constructed in such a manner that persons with
disabilities have full use of the theatre and its facilities and reasonable
access to work stations. The ADA provides for a private right of action and for
reimbursement of plaintiff's attorneys' fees and expenses under certain
circumstances. The Company has established a program to review and evaluate the
Company's theatres and to make any changes which may be required by the ADA.
Although the Company's review and evaluation is on-going, management believes
that the cost of complying with the ADA will not have a material adverse affect
on the Company's financial position, liquidity or results of operations.
9
Other
- -----
The Company has not expended material amounts on research and development during
the past three years.
There is no customer or affiliated group of customers to which sales are made in
an amount which exceeds 10% of the Company's consolidated revenue.
Compliance with federal, state and local laws and regulations which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has had no material
effect upon the Company's capital expenditures, results of operations or
financial position.
As of December 31, 1996, the Company employed approximately 11,200 employees of
which approximately 1,300 were full-time. Approximately 41% of the Company's
employees (substantially all of whom are part-time employees who work in the
theatres) are paid based on the applicable state and federal minimum wage
regulations. Approximately 125 employees (primarily consisting of film
projectionists) are covered by collective bargaining agreements.
Item 2. Properties
- ------- ----------
The Company leases its executive office located in Englewood, Colorado and
certain of its regional operating and film booking offices. The following table
summarizes the theatres operated by the Company at December 31, 1996:
Total Number Total Number
of Theatres of Screens
------------ ------------
Owned and Operated Theatres:
Fee-Owned 17 67
Leased:
From Third Parties 310 1,913
From UAR and Prop I 41 230
--- -----
Total owned and leased theatres 368 2,210
Managed theatres 19 91
--- -----
Total theatres operated 387 2,301
=== =====
Of the 368 owned and operated theatres, nine theatres (30 screens) are held
through two corporations which are owned 75% by the Company and two theatres (19
screens) are held by two partnerships each of which are owned 51% by the
Company. The remaining owned and operated theatres are held directly by the
Company or its wholly-owned subsidiaries. The managed theatres include four
theatres (12 screens) located in the United States and the rest are in countries
outside of the United States and are all held by corporations owned 50% or less
by the Company.
The Company's third party leases generally have remaining terms that range from
10-20 years, and provide for options to extend for up to 20 additional years at
the Company's option. The Company expects that in the normal course of business
desirable leases that expire will be renewed or replaced by other leases. The
leases provide for minimum annual rentals and, under certain circumstances, may
require additional rentals based upon a percentage of the leased theatres'
revenue over an agreed upon breakpoint. Certain of the leases provide for
escalating minimum annual rentals during the term of the lease. The leases
typically require the Company to pay for property taxes, insurance, and certain
of the lessor's overhead costs.
The Company leases the land, building and equipment of the theatres owned by UAR
and its wholly-owned subsidiaries, Prop I and Prop II (prior to December 1995),
in accordance with two master affiliate leases. In conjunction with the Sale
and Leaseback, the Prop II master lease was canceled. The UAR and Prop I master
leases expire in 2003 and provide for options to extend the leases at the
Company's option for up to an additional ten years.
The Company owns directly or through its subsidiaries substantially all of the
theatre equipment used in its fee-owned theatres and theatres leased from
unaffiliated third parties.
10
Item 3. Legal Proceedings
- -------------------------
Connie Arnold and Annette Cupolo vs. United Artists Theatre Circuit, Inc. This
- --------------------------------------------------------------------------
action was originally filed in the Superior Court, Alameda County, California on
July 31, 1991, case number 683090-4. The complaint originally alleged that the
Predecessor Corporation violated various California statutes and engaged in
actions which violated plaintiffs' civil rights by allegedly constructing a
theatre which was not lawfully accessible to certain disabled persons. The
relief sought included injunctive relief and damages (including statutory
damages). This case was settled during August 1996.
There are other pending legal proceedings by or against the Company involving
alleged breaches of contract, torts, violations of antitrust laws and
miscellaneous other causes of action. In addition, there are other various
claims against the Company relating to certain of the leases held by the
Company. Although it is not possible to predict the outcome of these
proceedings, in the opinion of the Company's management, such legal proceedings
will not have a material adverse effect on the Company's financial position,
liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holder
- ----------------------------------------------------------
There were no matters submitted to a vote of the security holder during the
quarter ended December 31, 1996.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
The Company's common stock is held entirely by OSCAR I and there is no market
for the common stock.
The Company has not paid a cash dividend on its common stock during the past two
years. The Company is restricted by its senior credit facilities as to the
amount of dividends that it can declare and pay on its common stock.
Item 6. Selected Financial Data
- ------- -----------------------
The following table presents selected financial data relating to the Successor
Corporation's results of operations for the years ended December 31, 1996, 1995,
1994 and 1993 and the period from May 13, 1992 to December 31, 1992, and the
Predecessor Corporation's results of operations for the period from January 1,
1992 to May 12, 1992 and certain data from the Successor Corporation's balance
sheets as of December 31, 1996, 1995, 1994, 1993, and 1992 (dollars in millions,
except revenue per weighted average operating theatre):
During December 1995, the remaining 11 theatres owned by Prop II subsequent to
the Sale and Leaseback were contributed to the Company. The contribution of
these theatres has been accounted for in a manner similar to a pooling of
interests, and accordingly, the Company's financial statements have been
restated for all periods presented prior to 1996 to include these theatres for
all periods subsequent to the Acquisition as if they had been owned for all such
periods. The following table of the Company's selected financial data takes
into consideration the restatement of the Company's financial statements.
Predecessor
Successor Corporation Corporation
------------------------------------------------------------------ ----------------
Years Ended December 31, Period from Period from
----------------------------------------------- May 13, 1992 to January 1, 1992
1996 1995 1994 1993 December 31, 1992 to May 12, 1992
------- ---------- -------------- ---------- ------------------ ----------------
SUMMARY OF OPERATIONS DATA:
Revenue $677.5 648.6 623.1 643.8 415.6 211.2
====== ===== ===== ===== ========== ==========
Revenue per weighted average
operating theatre (000's) $1,707 1,578 1,498 1,473 1,421/(1)/ 1,260/(1)/
====== ===== ===== ===== ========== ==========
Depreciation and amortization $ 80.7 87.0 63.1 68.0 44.8 12.8
====== ===== ===== ===== ========== ==========
Operating income (loss) $ (7.1) (11.9) 18.5 12.2 (5.0) 13.5
====== ===== ===== ===== ========== ==========
Gain (loss) on disposition of assets $ 1.3 (13.9) (9.7) (8.7) - (2.9)
====== ===== ===== ===== ========== ==========
Net loss $(46.6) (68.9) (27.9) (31.6) (27.5) (0.1)
====== ===== ===== ===== ========== ==========
Net loss available to common
$(67.5) (87.2) (44.0) (45.6) (35.8) (0.1)
shareholder ====== ===== ===== ===== ========== ==========
CAPITAL EXPENDITURES $ 67.3 84.2 45.6 28.0 26.3 7.8
====== ===== ===== ===== ========== ==========
BALANCE SHEET DATA AT YEAR END:
Total assets $548.1 594.2 602.6 618.1 655.3
====== ===== ===== ===== ==========
Total debt $389.0 383.2 320.2 327.0 339.8
====== ===== ===== ===== ==========
Weighted Avg. Operating Screens/(2)/ 2,306 2,277 2,209 2,249 2,327 2,184
====== ===== ===== ===== ========== ==========
Weighted Avg. Operating Theatres/(2)/ 397 411 416 437 468 447
====== ===== ===== ===== ========== ==========
Weighted Avg. Operating Screen
per Operating Theatre 5.8 5.5 5.3 5.1 5.0 4.9
====== ===== ===== ===== ========== ==========
/(1)/ The amounts for the period from May 13, 1992 to December 31, 1992 and
the period from January 1, 1992 to May 12, 1992 have been annualized.
/(2)/ The operating theatres include revenue and expenses of all theatres
operated by the Company which are more than 50% owned. Weighted
average operating theatres and screens represent the number of
theatres and screens operated weighted by the number of days operated
during the period.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto. Such financial
statements provide additional information regarding the Company's financial
activities and condition.
During December 1995, the remaining 11 theatres owned by Prop II subsequent to
the Sale and Leaseback were contributed to the Company. The contribution of
these theatres has been accounted for in a manner similar to a pooling of
interests, and accordingly, the Company's financial statements have been
restated for all periods presented prior to 1996 to include these theatres for
all periods presented as if they had been owned for all of such periods. The
following discussion of the Company's results of operations takes into
consideration the restatement of the Company's financial statements.
RESULTS OF OPERATIONS
YEARS ENDED 1996, 1995 AND 1994
The following table summarizes certain operating data of the Company'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):
Years Ended Years Ended
December 31, % December 31, %
------------------------ Increase ------------------------ Increase
1996 1995 (Decrease) 1995 1994 (Decrease)
------------ ---------- ------------ ------------- --------- ----------
Operating Theatres /(1)/
Revenue:
Admissions $ 466.5 457.1 2.1 457.1 447.6 2.1
Concession sales 185.1 178.2 3.9 178.2 166.7 6.9
Other 25.9 13.3 94.7 13.3 8.8 51.1
Operating Expenses:
Film rental and advertising expenses 257.2 248.6 3.5 248.6 239.6 3.8
Direct concession costs 29.3 29.5 (0.7) 29.5 27.2 8.5
Other Operating Expenses:
Personnel expense 98.2 96.5 1.8 96.5 90.0 7.2
Occupancy expense:
Rent excluding sale and leaseback 75.2 73.7 2.0 73.7 70.3 4.8
Sale and leaseback rentals 11.6 0.5 N/M 0.5 - -
Misc. operating expenses 96.0 90.1 6.5 90.1 81.9 10.0
Weighted Avg. Operating Theatres/(2)/ 397 411 (3.4) 411 416 (1.2)
Weighted Avg. Operating Screens/(2)/ 2,306 2,277 1.3 2,277 2,209 3.1
Weighted Avg. Screens Per
Avg. Theatre 5.8 5.5 5.5 5.5 5.3 3.8
Admissions Per Weighted Avg.
Operating Theatre $1,175,063 1,112,165 5.7 1,112,165 1,075,962 3.4
Admissions Per Weighted Avg.
Operating Screen $ 202,298 200,747 0.8 200,747 202,626 (0.9)
Concession Sales Per Weighted
Avg. Operating Theatre $ 466,247 433,577 7.5 433,577 400,721 8.2
/(1)/ The operating theatres include revenue and expenses of all theatres
operated by the Company which are more than 50% owned.
/(2)/ Weighted average operating theatres and screens represent the number
of theatres and screens operated weighted by the number of days
operated during the period.
13
REVENUE FROM OPERATING THEATRES
- -------------------------------
1996 VERSUS 1995
ADMISSIONS: Admissions revenue and admissions per weighted average operating
screen increased 2.1% and 0.8%, respectively, during 1996 as compared to 1995.
These increases were primarily the result of a 2.7% increase in average ticket
prices, partially offset by a 0.6% decrease in attendance. The increase in
average ticket prices was due primarily to a decline in the number of tickets
sold for lower priced matinee shows and to an increase in ticket prices during
late 1996. The decrease in attendance for 1996 was primarily related to the
release of a fewer number of "blockbuster" films during the Summer Olympic Games
and the adverse effect of the Olympics on films which were in the market. While
Independence Day and A Time to Kill performed very well during the Olympics, the
attendance of several other films in the market during July and August appeared
to be adversely impacted. Admissions per weighted average operating theatre
increased 5.7% during 1996 as compared to 1995 primarily as a result of several
new theatres opened by the Company which have higher admissions per screen, the
sale or closure of several smaller (in terms of screens) less productive
theatres, and the average ticket prices and attendance fluctuations discussed
above.
CONCESSION SALES: Concession sales revenue increased 3.9% during 1996 as
compared to 1995 primarily as a result of a 4.5% increase in the average
concession sale per patron, partially offset by the decreased attendance
discussed above. Concession sales per weighted average operating theatre
increased 7.5% during 1996 as compared to 1995. The increases in average
concession sales per patron and concession sales per weighted average operating
theatre were primarily attributable to certain selective price increases in late
1996, the Company's increased emphasis on training, the installation of bulk
candy stands in May 1995, the renovation of concession stands at certain
existing theatres, the opening of several new theatres and the closure of
certain less efficient older, smaller theatres.
The following table sets forth the admissions and concession sales revenue for
theatres operated throughout all of 1996 and 1995 (dollars in millions):
Theatres Screens 1996 1995 % Increase
-------- ------- ------ ----- ----------
Theatres operated throughout
both periods 350 2,005
Admissions $417.6 407.4 2.5
Concession sales $163.1 157.2 3.8
This "same theatre" analysis eliminates the effect of new theatre openings,
sales or closures during 1996 or 1995.
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 Proteus Network(TM), non-
theatrical related revenue from the Starport(TM) entertainment centers and other
miscellaneous sources. Other revenue increased 94.7% (or $12.6 million) during
1996 as compared to 1995 primarily as a result of increased revenue from the
Company's on-screen advertising, Proteus Network(TM) and Starport(TM)
entertainment centers.
1995 VERSUS 1994
ADMISSIONS: Admissions revenue increased 2.1% during 1995 as compared to 1994,
primarily as a result of a 1.9% increase in total attendance and a 0.2% increase
in the average ticket price. The increase in attendance was due primarily to an
increase in the number of weighted average operating screens and an increase in
the Company's market share of films available and the admissions revenue related
to such films. This increase in market share of available films and admissions
revenue was due to an improvement in the film licensing relationships with
certain distributors and to an increase in the market share of admissions by
certain distributors with which the Company had a broader relationship. Due to
long-standing relationships and efforts to improve relationships, screen
availability and other factors, the Company's percentage share of films varies
among the various distributors. Admissions per weighted average operating
screen decreased 0.9% during 1995 primarily as a result of a 1.1% decrease in
attendance per weighted average operating screen. This decrease in attendance
per weighted average operating screen was primarily the result of a decline in
attendance per screen from many of the Company's older and smaller theatres
partially offset by attendance from newly developed theatres which on average
had smaller auditoriums than older theatres. Admissions per weighted average
operating theatre increased 3.4% primarily as a result of the new theatres
opened in late 1994 and 1995 and the sale of older, smaller (in terms of
screens) theatres. Many of the new 1995 theatres
14
were not opened until very late in the year, and as such, their effect on the
Company's operations was not significant.
CONCESSION SALES: Concession sales revenue increased 6.9% during 1995 as
compared to 1994, primarily as a result of the increased attendance discussed
above and to a 4.9% increase in the average concession sale per patron.
Concession sales per weighted average operating theatre increased 8.2% during
1995 as compared to 1994. The increases in the average concession sale per
patron and concession sales per weighted average operating theatre were
attributable to the Company's increased emphasis on training, the installation
of bulk candy stands in May 1995, the renovation of concession stands at certain
existing theatres, the opening of several new theatres and the closure of
certain less efficient theatres.
The following table sets forth the admissions and concession sales revenue for
theatres operated throughout all of both 1995 and 1994 (dollars in millions):
%
Increase
Theatres Screens 1995 1994 (Decrease)
-------- ------- ------ ----- ----------
Theatres operated throughout
both periods 376 2,086
Admissions $400.0 403.5 (0.9)
Concession sales $155.7 150.6 3.4
OTHER: Other revenue increased 51.1% (or $4.5 million) during 1995 as compared
to 1994 primarily as a result of revenue recognized from the Company initiating
a circuit-wide pre-show slide advertising program in 1995 and revenue from the
Proteus Network(TM).
EXPENSES FROM OPERATING THEATRES
- --------------------------------
FILM RENTAL AND ADVERTISING EXPENSES: Film rental and advertising expenses
increased 3.5% during 1996 as compared to 1995 and increased 3.8% during 1995 as
compared to 1994. Film rental and advertising expenses as a percentage of
admissions revenue were 55.1% for 1996, 54.4% for 1995 and 53.5% for 1994. The
1996 increase in film rental and advertising expense as a percentage of
admissions revenue relates primarily to an increase in the percentage of revenue
from higher cost "blockbuster" films released during 1996 and the absence of
many very successful lower budget films. In addition, due to an increase in the
number of films released and the effect of the Summer Olympic Games, during the
summer of 1996 several films had shorter runs with a higher percentage of their
total admissions falling during the opening weeks. The 1995 increase in film
rental and advertising expenses as a percentage of admissions revenue was
primarily due to increased film rentals on certain of 1995's very successful
summer films and to increased advertising expenses.
DIRECT CONCESSION COSTS: Direct concession costs include concession product
costs and concession promotional costs. Such costs decreased 0.7% during 1996
as compared to 1995 and increased 8.5% during 1995 as compared to 1994. Direct
concession costs as a percentage of concession sales revenue were 15.8% for
1996, 16.6% for 1995 and 16.3% for 1994. The decrease in direct concession
costs during 1996 was primarily due to the sale of advertising on popcorn and
soft drink containers which was offset against promotional expenses, partially
offset by higher concession sales revenue and costs attributable to increased
sales of bulk candy. The increase in direct concession costs during 1995 as
compared to 1994 was attributable to the higher concession sales revenue and to
the higher cost of sales associated with bulk candy.
PERSONNEL EXPENSE: Personnel expense includes the salary and wages of the
theatre manager and all theatre staff, commissions on concession sales, payroll
taxes and employee benefits. Personnel expense increased 1.8% during 1996 as
compared to 1995 and increased 7.2% during 1995 as compared to 1994. The
increase in personnel expense in 1996 is primarily attributable to the new
federal minimum wage law which went into effect on October 1, 1996 and to an
increase in the number of weighted average operating screens, offset by more
efficient theatre staffing. While the increase in the federal minimum wage
affected a large number of the Company's theatres, it had a significant impact
on the average hourly wage paid to the Company's theatre employees located in
smaller and mid-sized markets. The 1995 personnel expense increase was
primarily the result of normal annual increases in the average hourly wage paid
to part-time theatre employees and an increase in the number of weighted average
operating screens. In addition, concession sales related commissions increased
with concession sales and additional staffing was added during the summer and
holiday periods for the newly installed bulk candy stands. Personnel expense as
a percentage of total revenue declined
15
in 1996 to 14.5% as compared to 14.9% in 1995. The 1995 percentage increased
from 14.4% in 1994. The decrease in 1996 was primarily attributable to changes
in the theatre manager commission structure which focused on more efficient
staffing of theatres. The increase in 1995 was primarily attributable to an
increase in the number of staff hours related to general concession operations
and more showings of some of the more successful 1995 summer films.
OCCUPANCY EXPENSE: The Company's typical theatre lease arrangement provides for
a base rental as well as contingent rental that is a function of the level of
the theatre's revenue over an agreed upon breakpoint. Total rent expense
increased 17.0% during 1996 as compared to 1995 and increased 5.6% during 1995
as compared to 1994. The 1996 rent expense increase relates primarily to $11.1
million of incremental rent in 1996 associated with those theatres that were
part of the 1995 Sale and Leaseback and the 1996 sale and leaseback transaction
and incremental base rentals associated with newly opened theatres, partially
offset by fewer weighted average operating theatres. The 1995 rent expense
increase primarily relates to the base rentals on newly opened larger theatres
and rent associated with the 1995 Sale and Leaseback, partially offset by fewer
weighted average operating theatres. In addition, during 1996, 1995 and 1994
theatre rent expense included non-cash charges of $3.1 million, $2.0 million and
$1.5 million, respectively, relating to the effect of escalating leases which
have been "straight-lined" for accounting purposes. Excluding the rent
associated with the 1995 Sale and Leaseback and the 1996 sale and leaseback
transaction and the non-cash rent, rent expense would have increased only 6.2%
during 1996 as compared to 1995 and 5.1% during 1995 as compared to 1994.
MISCELLANEOUS OPERATING EXPENSES: Miscellaneous operating expenses include
utilities, repairs and maintenance, insurance, real estate and other taxes,
supplies and other miscellaneous operating expenses. Miscellaneous operating
expenses increased 6.5% during 1996 as compared to 1995 and increased 10.0%
during 1995 as compared to 1994. The 1996 increase relates primarily to
increased operating expenses associated with the Proteus Network(TM) and
Starport(TM) entertainment centers and normal inflationary increases. The 1995
increase relates to increased operating expenses associated with the Proteus
Network(TM), one Starport(TM) entertainment center and a $1.9 million increase
in the Company's general liability insurance reserve for adverse development of
certain claims.
The revenue and operating expenses discussed above are incurred exclusively
within the Company's theatres. The other expense discussions below reflect the
combined expenses of corporate, divisional, district and theatre operations.
GENERAL AND ADMINISTRATIVE EXPENSE AND RESTRUCTURING CHARGE
- -----------------------------------------------------------
General and administrative expense consists primarily of costs associated with
corporate theatre administrative and operating personnel, international staff,
Proteus Network(TM) sales and marketing staff and other support functions
located at the Company's corporate headquarters, two film booking and three
regional operating offices and 13 district theatre operations offices (generally
located in theatres). Such general and administrative expenses decreased $0.1
million in 1996 as compared to 1995 and increased $2.1 million in 1995 as
compared to 1994. The 1996 decrease relates primarily to $2.1 million of non-
recurring severance and litigation charges accrued in 1995, partially offset by
normal annual salary adjustments, as well as increased professional and legal
fees associated with, among other legal matters, the Connie Arnold settlement
discussed under Item 3. Legal Proceedings herein. The 1995 increase relates
-------------------------
primarily to $2.1 million of non-recurring severance and litigation charges, a
$0.5 million increase in expenses associated with the Proteus Network(TM) and
the Company's international development efforts, partially offset by higher
management fees received from international operations and lower professional
and other fees. The increase in the litigation reserve was primarily associated
with the Connie Arnold litigation and certain other legal settlements.
At the end of 1996, the Company initiated a corporate restructuring plan
intended to provided a higher level of focus on the Company's domestic
theatrical business at a lower annual cost. This corporate restructuring which
was completed in January 1997 is projected to reduce annual general and
administrative expenses by approximately 20%. In conjunction with this
corporate restructuring plan, the Company recorded a $1.9 million restructuring
charge in 1996 for severance and other related expenses.
16
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and amortization expense includes the depreciation of theatre
buildings and equipment and the amortization of theatre lease costs and certain
non-compete agreements. Depreciation and amortization decreased $6.3 million in
1996 as compared to 1995 and increased $23.9 million in 1995 as compared to
1994. The 1996 decrease was primarily due to a decline in the amount of non-
cash impairments of assets from $21.0 million in 1995 to $8.7 million in 1996,
offset by depreciation charges on the Company's new theatres opened during late
1995 and 1996. The increase in 1995 versus 1994 related primarily to the $21.0
million non-cash asset impairment. As the majority of new theatres in 1994 and
1995 opened at the end of each of those years, they did not have a significant
effect on the year in which they opened. The Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," during 1995. These non-cash charges relate to the difference
between the historical book value of individual theatres (in some cases groups
of theatres) and the net undiscounted cash flow expected to be received from the
operation or future sale of the individual theatres (or groups of theatres).
Included in depreciation and amortization expense for each of the years ending
December 31, 1996, 1995 and 1994 is a $24.0 million charge associated with
certain assets acquired as part of the Acquisition which were being amortized
over a five year life. In May 1997, such assets will be fully amortized and, as
a result, no further amortization expense will be recorded associated with those
assets subsequent to May 1997.
INTEREST, NET
- -------------
Interest, net decreased $2.3 million in 1996 as compared to 1995 and increased
$6.3 million in 1995 as compared to 1994. The 1996 decrease was primarily due
to lower market interest rates on floating rate borrowings and interest income
on the net cash proceeds from the 1995 Sale and Leaseback, offset by slightly
higher average debt balances. The 1995 increase was primarily due to higher
average debt balances, higher market interest rates on floating rate debt and
increased amortization of deferred loan costs relating to the 1995 restated Bank
Credit Facility.
GAIN (LOSS) ON DISPOSITION OF ASSETS
- ------------------------------------
During 1996, the Company recognized $1.3 million of net gains on the disposition
of assets. This net gain relates to gains and losses associated with the sale
of certain theatres (for which cash proceeds of $20.5 million were received) and
the termination of certain leases related to theatres which were closed. During
1995 and 1994, the Company incurred losses on the disposition of assets of $13.9
million and $9.7 million, respectively. These losses relate primarily to the
sale of certain theatres (for which net cash proceeds of $7.7 million and $2.9
million were received in 1995 and 1994, respectively), and the termination or
non-renewal of leases related to theatres which were closed. The theatres sold
and closed were primarily unprofitable and/or not considered part of the
Company's long-term strategic plans.
INCOME TAX EXPENSE
- ------------------
Income tax expense consists of current state and federal income taxes of the
Company's less than 80%-owned consolidated subsidiaries. At December 31, 1996,
the Company has a net operating loss carryforward of approximately $175.0
million.
NET LOSS
- --------
During 1996, the Company incurred a net loss of $46.6 million as compared to
$68.9 million in 1995. This decrease in net loss was primarily the result of
a decrease in operating loss. Despite the $11.1 million increase in
occupancy costs during 1996 associated with the sale leaseback transactions,
operating loss decreased primarily as a result of a 4.5% increase in total
operating revenue and a $6.3 million decrease in depreciation and amortization.
During 1995, the Company incurred a net loss of $68.9 million as compared to
$27.9 million in 1994. This increase in the Company's net loss was primarily
the result of a $21.0 million non-cash asset impairment associated with the
adoption of SFAS No. 121, a decrease in operating margins resulting from
increases in certain variable operating costs, additional non-cash rent charges,
additional losses on the disposition of assets, and increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996, $28.4 million of cash was provided by the
Company's operating activities. This source of cash, in addition to $7.5
million of cash provided by financing activities and $43.4 million of proceeds
from the disposition of assets, the 1996 sale and leaseback transaction and the
Sale and Leaseback escrow account were used to fund $65.8 million of net
17
capital expenditures, $19.5 million of construction costs for those theatres
included in the sale and leaseback transactions, $14.3 million of investments in
and receivables from theatre joint ventures (net of $0.6 million of
international dividends) and other investments.
Substantially all of the Company's admissions and concession sales revenue are
collected in cash. Due to the unfavorable interest rate spread between bank
facility borrowings and cash investments, the Company seeks to use all of its
available cash to repay its revolving bank borrowings and borrow under those
facilities as cash is required. The Company benefits from the fact that film
expenses (except for films that require advances or guarantees) are usually paid
15 to 45 days after the admissions revenue is collected.
The Company's results of operations and cash resources provided by operating
activities are subject to seasonal fluctuations in attendance which corresponds
to periods when there is a greater availability of popular motion pictures
during the period from Memorial Day through Labor Day and during the Easter,
Thanksgiving and Christmas holidays. During periods in which there is not an
abundant supply of successful motion pictures, the Company uses availability
under its revolving credit facilities to provide any required funding for its
working capital needs and then repays these facilities during periods of higher
attendance.
On February 28, 1995, UAR's parent company OSCAR II was merged into OSCAR I. As
a result of this merger, OSCAR II ceased to exist and OSCAR I became the parent
company of both the Company and UAR. In accordance with the terms of the
Company's Bank Credit Facility and Senior Secured Notes, the stock of UAR was
pledged as additional collateral for such borrowings. At the time of the merger,
the Company estimated that the market value of properties (primarily land,
building and equipment associated with operating theatres) owned by UAR and its
subsidiaries was significantly in excess of the mortgage and other debt held by
UAR and its subsidiaries.
Effective May 1, 1995, the Company restated its Bank Credit Facility. The Bank
Credit Facility currently provides for a $250.0 million delayed draw term loan,
$87.5 million of revolving loan and letters of credit commitments, and $12.5
million of standby letters of credit. The Bank Credit Facility reduced the
floating interest rate spreads paid by the Company and extended the average life
of the Company's bank debt by requiring semi-annual principal payments on term
loans commencing December 31, 1996, and extended the maturity date to March 31,
2002.
On December 13, 1995, the Company entered into a sale and leaseback transaction
(the "Sale and Leaseback") whereby the buildings and land underlying ten of its
operating theatres and four theatres under development were sold to (for
approximately $47.1 million), and leased back from, the 1995-A United Artists
Pass Through Trust (the "Pass Through Trust"), an unaffiliated third party. A
portion of the sale proceeds were used to pay certain transaction expenses and
repay the outstanding revolving bank debt of the Company and the remainder was
held in short-term cash investments at December 31, 1995. The proceeds related
to three of the theatres under development (approximately $14.2 million) were
initially deposited into an escrow account and were paid to the Company during
1996 after construction of the theatres was completed. The proceeds related to
one of the new theatres and a four screen addition to an existing theatre under
development (approximately $7.8 million) were deposited into the same escrow
account and are to be paid under the terms of the Sale and Leaseback to the
Company in 1997 when construction is completed.
In conjunction with the Sale and Leaseback, 17 theatres owned by Prop II were
sold and leased back to the Company. Proceeds from this sale were used to repay
the outstanding Prop II debt and pay transaction expenses and the equipment
associated with the theatres sold by Prop II and the remaining 11 theatres owned
by Prop II were contributed to the Company. The Prop II master lease with the
Company was terminated, the $12.5 million letters of credit established by the
Company to guarantee the Prop II mortgage debt were canceled and the Company's
revolving credit facility was increased by $12.5 million. The contribution of
these theatres has been accounted for in a manner similar to a pooling of
interests whereby the historical carrying value of the theatres and related
equity was contributed.
On November 8, 1996, the Company entered into a sale and leaseback transaction
whereby the buildings and land underlying three of its operating theatres and
two theatres currently under development were sold to, and leased back from, an
unaffiliated third party for approximately $21.5 million. The sales proceeds
relating to the three operating theatres (approximately $9.2 million) were used
to pay certain transaction expenses and repay outstanding debt under the Bank
Credit Facility. The sales proceeds related to the two theatres under
development (approximately $12.3 million) were deposited into an escrow account
and are to be paid under the terms of the sale and leaseback to fund
substantially all of the land and construction costs associated with the two
theatres. The lease has a term of 20 years and nine months with options to
extend for an additional 10 years.
18
The Company's investment activities are primarily focused on the development of
new theatres and renovations to existing high revenue theatres in markets where
the Company has a significant operating presence. In an effort to limit the
amount of investment exposure on any one project, the Company typically develops
theatre projects where the land and building is leased through long-term
operating leases. However, where such lease transactions are not available, the
Company will invest in the land and development of the entire theatre facility
(fee-owned) and then seek to enter into a sale and leaseback transaction after
the theatre is opened. Regardless of whether the theatre is fee-owned or
leased, in most cases the equipment and other theatre fixtures are owned by the
Company. For the year ended 1996, the Company invested approximately $67.3
million on the development of 15 new theatres (130 screens) which opened during
1996, the addition of eight screens to three existing theatres, construction on
23 theatres (247 screens) expected to open in 1997 or 1998 and renovations and
recurring maintenance to certain existing theatres. In addition, during 1996,
the Company invested in and had receivables from various joint ventures
amounting to $14.3 million which opened a four screen theatre in Singapore,
three theatres (33 screens) in Mexico and three theatres (six screens) in Hong
Kong. Two theatres (14 screens) in Thailand, two theatres (20 screens) in
Argentina and one theatre (12 screens) in Mexico are projected to open in 1997.
At December 31, 1996, the Company had entered into theatre construction and
equipment commitments aggregating approximately $106.0 million for 23 theatres
which the Company intends to open during the next two years. Such amount
relates only to projects in which the Company had executed a definitive lease
agreement and all significant lease contingencies have been satisfied. Of the
committed amount, approximately $20.1 million will be reimbursed to the Company
or paid directly from proceeds of the sale and leaseback transactions currently
held in escrow.
As part of its strategic plan, the Company intends to continue to dispose of,
through sale or lease terminations, certain of its operating theatres and real
estate which are non-strategic or underperforming. This plan involves as many
as 100 theatres (410 screens). Net proceeds from these increased disposition
efforts will be used to repay existing debt and/or redeployed into new higher
margin theatres. While there can be no assurance that such sales or lease
termination efforts will be successful, several sales and lease negotiations
have been completed and negotiations are ongoing with respect to several other
theatres and parcels of real estate. During 1996, the Company sold 39 theatres
(188 screens) and closed 15 theatres (57 screens). The theatres which were sold
provided the Company with approximately $20.5 million of net cash proceeds. The
majority of theatres which were closed were unprofitable and those that were
sold were not considered part of the Company's long-term strategic plans.
In March 1997, the Company entered into an agreement to sell its Hong Kong
investment to its partners for $17.5 million, which will result in an $11.0
million gain for financial reporting purposes upon the consummation of the
transaction.
The level of continued investing activities by the Company is dependent on,
among other factors, its on-going operating liquidity and to other sources of
liquidity. One measure commonly used in the theatrical industry to measure
operating liquidity is referred to as "Interest Coverage." Interest Coverage is
the ratio of Operating Cash Flow (operating income before depreciation,
amortization and other non-recurring or non-cash operating credits or charges)
to interest expense (excluding amortization of deferred loan costs). As
described previously, several non-recurring or non-cash operating charges were
recorded in the Consolidated Statements of Operations during 1996, 1995 and 1994
which adversely affected the Company's Operating Income for such years.
Following is a calculation of Operating Cash Flow and Interest Coverage for each
of the last three years, including a reconciliation of Operating Income to
Operating Cash Flow ($ in millions):
1996 1995 1994
------ ------ ----
Operating Income (Loss) $(7.1) (11.9) 18.5
Depreciation and Amortization 80.7 87.0 63.1
Non-Cash Rent 3.1 2.0 1.5
Severance, Litigation and Restructuring Expenses 1.9 2.1 -
----- ----- ----
Operating Cash Flow $78.6 79.2 83.1
===== ===== ====
Interest Expense $36.1 39.0 31.6
===== ===== ====
Interest Coverage Ratio 2.2 2.0 2.6
===== ===== ====
19
Despite the $11.1 million of incremental rent associated with the 1995 and 1996
sale and leaseback transactions which reduced Operating Cash Flow, the Company's
Interest Coverage Ratio increased in 1996 as a result of lower interest expense.
The lower interest expense in 1996 resulted from lower market interest rates and
stable net debt balances. The decline in the 1995 Interest Coverage relates to a
decrease in Operating Cash Flow and an increase in interest expense relating to
higher market interest rates and higher debt balances associated with increased
new theatre construction activity. In addition, the 1995 Interest Coverage
Ratio was adversely impacted because the 1995 new theatre construction was
funded (in part through debt borrowings), but the theatres were not opened until
late in the year, and thus they did not have a significant impact on the
Company's Operating Cash Flow in 1995.
As previously described, during December 1996, the Company restructured its
corporate operations and as a result projects its annual general and
administrative expenses to be reduced by approximately 20%. Assuming these
savings were reflected in the above Operating Cash Flow for 1996 on a pro forma
basis, the Interest Coverage Ratio would increase to 2.4.
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 the Company'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
reflected in the accompanying Consolidated Statements of Cash Flow. Net cash
provided by operating activities of $28.4 million, $42.0 million and $48.3
million in 1996, 1995 and 1994, respectively, reflects the net cash from the
operation of the Company which provided for the Company'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.
While amounts expended by the Company in its investing activities exceed net
cash provided by operating activities, management believes that its net cash
provided by operating activities, borrowings under its Bank Credit Facility,
contributions made by landlords under long-term lease arrangements, amounts
deposited in escrow as a result of the 1995 and 1996 sale and leaseback
transactions and the proceeds from possible asset sales and additional sale and
leaseback transactions will be sufficient to fund its capital expenditures and
other investments, debt service and other liquidity requirements for the
foreseeable future.
OTHER
The Company's results of operations are subject to seasonal fluctuations in
attendance which corresponds to holiday school vacation periods and a greater
availability of popular motion pictures during the period from Memorial Day
through Labor Day and during the Easter, Thanksgiving and Christmas holidays.
Poorly performing motion pictures and/or any significant disruption in the
production of popular motion pictures by several of the major motion picture
production companies or independent producers may have an adverse effect on the
Company's results of operations.
Inflation did not have a material impact on the Company's results of operations
during 1996, 1995 or 1994.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements of the Company and OSCAR I are filed under
this item beginning on page 22.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
- --------------------
On July 24, 1996, the Audit Committee of OSCAR I and UATC recommended to the
Board of Directors that it was in OSCAR I's and UATC's best interest to rotate
independent public accountants on a periodic basis, and as part of this policy,
that Arthur Andersen LLP be appointed as OSCAR I's and UATC's independent public
accountants to replace KPMG Peat Marwick LLP. On this same date, the Board of
Directors voted in favor of the Audit Committee's recommendation.
20
The audit report of KPMG Peat Marwick LLP on OSCAR I and subsidiaries and UATC
and subsidiaries consolidated financial statements as of and for the years ended
December 31, 1995 and 1994 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles, except as follows: KPMG Peat Marwick LLP's audit reports
on the consolidated financial statements of OSCAR I and subsidiaries and UATC
and subsidiaries as of and for the years ended December 31, 1995 and 1994
contained an explanatory paragraph stating that OSCAR I and UATC adopted the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" in 1995.
During the years ended December 31, 1995 and 1994, there were no disagreements
with KPMG Peat Marwick LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinions to the subject matter of the
disagreement.
21
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO UNITED ARTISTS THEATRE CIRCUIT, INC.:
We have audited the accompanying consolidated balance sheet of United Artists
Theatre Circuit, Inc. and subsidiaries (the "Company") as of December 31, 1996,
and the related consolidated statements of operations, stockholder's equity and
cash flow for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Artists
Theatre Circuit, Inc. and subsidiaries as of December 31, 1996 and the results
of their operations and their cash flow for the year then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 27, 1997
22
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDER
UNITED ARTISTS THEATRE CIRCUIT, INC.:
We have audited the accompanying consolidated balance sheet of United Artists
Theatre Circuit, Inc. and subsidiaries (the "Company") as of December 31, 1995,
and the related consolidated statements of operations, stockholder's equity and
cash flow for each of the years in the two-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Artists
Theatre Circuit, Inc. and subsidiaries as of December 31, 1995 and the results
of their operations and their cash flow for each of the years in the two-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in notes 4 and 13 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in 1995.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 27, 1996
23
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in Millions)
December 31,
----------------
1996 1995
------- ------
Cash and cash equivalents................................... $ 9.6 32.4
Receivables, net:
Notes................................................... 1.7 1.4
Related party (note 10)................................. 15.3 11.2
Other................................................... 29.5 22.4
------- ------
46.5 35.0
------- ------
Prepaid expenses and concession inventory................... 15.4 20.3
Investments and related receivables......................... 30.2 14.1
Property and equipment, at cost (note 13):
Land.................................................... 31.6 35.0
Theatre buildings, equipment and other.................. 395.1 370.3
------- ------
426.7 405.3
Less accumulated depreciation and amortization.......... (119.8) (99.0)
------- ------
306.9 306.3
------- ------
Intangible assets, net (notes 4 and 13)..................... 127.5 165.8
Other assets, net (notes 4 and 10).......................... 12.0 20.3
------- ------
$548.1 594.2
======= ======
Liabilities and Stockholder's Equity
- ------------------------------------
Accounts payable:
Film rentals............................................ $ 28.0 30.1
Other................................................... 51.9 58.4
------- ------
79.9 88.5
------- ------
Accrued liabilities:
Salaries and wages...................................... 9.4 9.0
Interest................................................ 5.0 6.8
Other................................................... 12.9 11.2
------- ------
27.3 27.0
------- ------
Other liabilities........................................... 24.4 21.4
Debt (note 6)............................................... 389.0 383.2
------- ------
Total liabilities....................................... 520.6 520.1
Minority interests in equity of consolidated subsidiaries... 7.0 7.0
Stockholder's Equity:
Preferred stock (note 8)................................ 170.1 149.2
Common stock (note 9)................................... - -
Additional paid-in capital.............................. 52.8 73.7
Accumulated deficit..................................... (202.5) (155.9)
Cumulative foreign currency translation adjustment...... (0.5) (0.1)
Intercompany account.................................... 0.6 0.2
------- ------
20.5 67.1
------- ------
$548.1 594.2
======= ======
See accompanying notes to consolidated financial statements.
24
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in Millions)
Years Ended December 31,
-----------------------
1996 1995 1994*
------- ------ -----
Revenue:
Admissions..................................... $466.5 457.1 447.6
Concession sales............................... 185.1 178.2 166.7
Other.......................................... 25.9 13.3 8.8
------ ----- -----
677.5 648.6 623.1
------ ----- -----
Costs and expenses:
Film rental and advertising expenses........... 257.2 248.6 239.6
Direct concession costs........................ 29.3 29.5 27.2
Other operating expenses....................... 259.4 246.2 227.5
Sale and leaseback rentals (note 2)............ 11.6 0.5 -
Affiliate lease rentals (note 10).............. 10.0 14.1 14.7
General and administrative (notes 10 and 12)... 34.5 34.6 32.5
Restructuring charge (note 11)................. 1.9 - -
Depreciation and amortization (note 13)........ 80.7 87.0 63.1
------ ----- -----
684.6 660.5 604.6
------ ----- -----
Operating income (loss)....................... (7.1) (11.9) 18.5
Other income (expense):
Interest, net (note 6):
Interest expense.............................. (36.1) (39.0) (31.6)
Amortization of deferred loan costs........... (2.2) (2.1) (1.4)
Interest income............................... 1.4 1.9 0.1
------ ----- -----
(36.9) (39.2) (32.9)
Gain (loss) on disposition of assets, net...... 1.3 (13.9) (9.7)
Share of earnings (losses) of affiliates, net.. (0.5) 0.7 0.2
Minority interests in earnings of
consolidated subsidiaries..................... (0.8) (1.2) (1.0)
Other, net..................................... (1.5) (2.0) (1.7)
------ ----- -----
(38.4) (55.6) (45.1)
------ ----- -----
Loss before income tax expense................ (45.5) (67.5) (26.6)
Income tax expense (note 14).................... (1.1) (1.4) (1.3)
------ ----- -----
Net loss...................................... (46.6) (68.9) (27.9)
Dividend on preferred stock (note 8)............ (20.9) (18.3) (16.1)
------ ----- -----
Net loss available to common stockholder...... $(67.5) (87.2) (44.0)
====== ===== =====
*Restated
See accompanying notes to consolidated financial statements.
25
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
(Amounts in Millions)
Cumulative
foreign
Additional currency Total
Preferred Common paid-in Accumulated translation Intercompany stockholder's
stock stock capital deficit adjustment account equity
--------- ------ ------- ----------- ----------- ------------ -------------
Balance at January 1, 1994*.................. $ 114.8 - 108.1 (59.1) - 4.8 168.6
Accretion of dividends on preferred stock.. 16.1 - (16.1) - - - -
Net decrease in intercompany account....... - - - - - (2.3) (2.3)
Net loss*.................................. - - - (27.9) - - (27.9)
------- ----- ----- ----- ----- ---- -----
Balance at December 31, 1994*................ 130.9 - 92.0 (87.0) - 2.5 138.4
Accretion of dividends on preferred stock.. 18.3 - (18.3) - - - -
Net decrease in intercompany account....... - - - - - (2.3) (2.3)
Foreign currency translation adjustment.... - - - - (0.1) - (0.1)
Net loss................................... - - - (68.9) - - (68.9)
------- ----- ----- ----- ----- ---- -----
Balance at December 31, 1995................. 149.2 - 73.7 (155.9) (0.1) 0.2 67.1
Accretion of dividends on preferred stock.. 20.9 - (20.9) - - - -
Net increase in intercompany account....... - - - - - 0.4 0.4
Foreign currency translation adjustment.... - - - - (0.4) - (0.4)
Net loss................................... - - - (46.6) - - (46.6)
------- ----- ----- ----- ----- ---- -----
Balance at December 31, 1996................. $ 170.1 - 52.8 (202.5) (0.5) 0.6 20.5
======= ===== ===== ===== ===== ==== =====
*Restated
See accompanying notes to consolidated financial statements.
26
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Amounts in Millions)
Years Ended December 31,
--------------------------
1996 1995 1994*
-------- ------- -------
Net cash provided by operating activities................................. $ 28.4 42.0 48.3
------- ------ ------
Cash flow from investing activities:
Capital expenditures............................................. (67.3) (84.2) (45.6)
(Increase) decrease in construction in progress, net............. 1.5 (5.1) (1.4)
Increase in receivable from sale and leaseback escrow............ (19.5) - -
Proceeds from disposition of assets.............................. 20.5 7.7 2.9
Proceeds from sale and leaseback transaction and escrow.......... 22.9 40.4 -
Cash paid for minority interest holding.......................... - (10.3) -
Investments in and receivables from theatre joint ventures, net.. (14.3) (2.3) -
Other, net....................................................... (2.5) (0.5) (3.0)
------- ------ ------
Net cash used in investing activities........................... (58.7) (54.3) (47.1)
------- ------ ------
Cash flow from financing activities:
Debt borrowings.................................................. 129.8 187.5 108.4
Debt repayments.................................................. (126.3) (127.9) (116.1)
Increase (decrease) in intercompany account...................... 0.4 (2.3) (2.0)
Increase (decrease) in cash overdraft............................ 6.2 (14.1) 13.2
Increase in related party receivables............................ (2.8) (6.7) (8.2)
Other, net....................................................... 0.2 (4.5) (0.1)
------- ------ ------
Net cash provided by (used in) financing activities............. 7.5 32.0 (4.8)
------- ------ ------
Net increase (decrease) in cash and cash equivalents............ (22.8) 19.7 (3.6)
Cash and cash equivalents:
Beginning of period.............................................. 32.4 12.7 16.3
------- ------ ------
End of period.................................................... $ 9.6 32.4 12.7
======= ====== ======
Reconciliation of net loss to net cash provided by
operating activities:
Net loss......................................................... $ (46.6) (68.9) (27.9)
Effect of leases with escalating minimum annual
rentals.......................................................... 3.1 2.0 1.5
Depreciation and amortization.................................... 80.7 87.0 63.1
(Gain) loss on disposition of assets, net........................ (1.3) 13.9 9.7
Share of (earnings) losses of affiliates, net.................... 0.5 (0.7) (0.2)
Minority interests in earnings of
consolidated subsidiaries....................................... 0.8 1.2 1.0
(Increase) decrease in receivables, prepaid expenses
and other assets, net........................................... 0.6 (3.6) (0.4)
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities, net.......................... (9.4) 11.1 1.5
------- ------ ------
Net cash provided by operating activities....................... $ 28.4 42.0 48.3
======= ====== ======
*Restated
See accompanying notes to consolidated financial statements.
27
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION
On May 12, 1992, United Artists Theatre Circuit, Inc. and substantially
all of its then existing subsidiaries (the "Company") were acquired (the
"Acquisition") by OSCAR I Corporation ("OSCAR I") from an indirect
subsidiary of Tele-Communications, Inc. ("TCI"). OSCAR I is owned by an
investment fund managed by affiliates of Merrill Lynch Capital Partners,
Inc., ("MLCP") and certain institutional investors (collectively the "Non-
Management Investors"), and certain members of the Company's management.
The purchase price was approximately $543.8 million comprised of: (i)
approximately $134.1 million of cash; (ii) $92.5 million of OSCAR I
preferred stock, and (iii) the assumption of approximately $317.2 million
of indebtedness and certain other obligations. Prior to the Acquisition,
the Company was an indirect wholly owned subsidiary of United Artists
Holdings Inc. ("UAHI"), which was a wholly-owned subsidiary of United
Artists Entertainment Company ("UAE"). On December 2, 1991, UAE became a
wholly-owned subsidiary of TCI pursuant to a merger agreement. Previously
in 1986, TCI had acquired a controlling interest in UAE's predecessor.
Simultaneously with the Acquisition, the Non-Management Investors formed
OSCAR II Corporation, a Delaware corporation ("OSCAR II"), separately
acquiring from an affiliate of TCI all of the outstanding capital stock of
United Artists Realty Company ("UAR"), a Delaware corporation and its
subsidiaries. UAR and its subsidiaries, United Artists Properties I Corp.
("Prop I") and United Artists Properties II Corp. ("Prop II") were the
owners and lessors of certain operating theatre properties leased to and
operated by the Company and its subsidiaries. Certain mortgage debt of UAR,
Prop I and Prop II, which was secured by their theatre properties, remained
outstanding after the acquisition by OSCAR II. On February 28, 1995, OSCAR
II was merged into OSCAR I effected by a one-for-one share exchange.
(2) SALE AND LEASEBACK TRANSACTIONS
On December 13, 1995, the Company entered into a sale and leaseback
transaction (the "Sale and Leaseback") whereby the buildings and land
underlying ten of its operating theatres and four theatres under
development were sold to, and leased back from, the 1995-A United Artists
Pass Through Trust (the "Pass Through Trust"), an unaffiliated third party,
for approximately $47.1 million. A portion of the sale proceeds were used
to pay certain transaction expenses and repay the outstanding revolving
bank debt of the Company and the remainder was held in short-term cash
investments at December 31, 1995. The proceeds related to three of the
theatres under development (approximately $14.2 million) were initially
deposited into an escrow account and were paid to the Company during 1996
after construction of the theatres was completed. The proceeds related to
one of the new theatres and a four screen addition to an existing theatre
under development (approximately $7.8 million) were deposited into the same
escrow account and are to be paid under the terms of the Sale and Leaseback
to the Company in 1997 when construction is completed.
The Sale and Leaseback requires the Company to lease the underlying
theatres for a period of 21 years and one month, with the option to extend
for up to an additional 10 years. The Company accounts for the lease as an
operating lease. An agreement with the Pass Through Trust requires the
maintenance of certain financial covenants by the Company.
28
UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SALE AND LEASEBACK TRANSACTIONS (CONTINUED)
On November 8, 1996, the Company entered into a sale and leaseback
transaction whereby the buildings and land underlying three of its
operating theatres and two theatres currently under development were sold
to, and leased back from an unaffiliated third party for approximately
$21.5 million. The sales proceeds relating to the three operating theatres
(approximately $9.2 million) were used to pay certain transaction expenses
and repay outstanding bank debt. The sales proceeds related to the two
theatres under development (approximately $12.3 million) were deposited
into an escrow account and are to be paid under the terms of the sale and
leaseback to fund substantially all of the land and construction costs
associated with the two theatres. The lease has a term of 20 years and
nine months with options to extend for an additional 10 years.
(3) RESTATEMENT
During December 1995, the remaining 11 theatres owned by Prop II subsequent
to the Sale and Leaseback were contributed to the Company, the Prop II
master lease was terminated, the $12.5 million letters of credit
established by the Company to guarantee the Prop II debt were canceled and
the Company's revolving credit facility was inc