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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 29, 2011

 

Commission file number: 033-49598

 


 

UNITED ARTISTS THEATRE CIRCUIT, INC.

(Exact name of Registrant as Specified in its Charter)

 

Maryland

 

13-1424080

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

7132 Regal Lane
Knoxville, TN

 

37918

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: 865-922-1123

 


 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes o No x

 

The number of shares outstanding of $1.00 par value common stock at November 14, 2011 was 100 shares.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

Financial Information

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets

3

 

Unaudited Condensed Consolidated Statements of Operations

4

 

Unaudited Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

Item 4.

Controls and Procedures

18

 

 

 

PART II

Other Information

19

 

 

 

Item 1.

Legal Proceedings

19

 

 

 

Item 1A.

Risk Factors

19

 

 

 

Item 4.

[Removed and Reserved]

19

 

 

 

Item 6.

Exhibits

19

 

 

 

Signatures

 

20

 

2



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

September 29, 2011

 

December 30, 2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

47.4

 

$

52.4

 

Receivables

 

0.4

 

1.3

 

Prepaid expenses, concession inventory and other current assets

 

5.0

 

1.2

 

Deferred income tax asset

 

0.4

 

2.1

 

Total current assets

 

53.2

 

57.0

 

Property and equipment:

 

 

 

 

 

Land

 

3.3

 

3.3

 

Buildings, leasehold improvements and equipment

 

131.2

 

130.8

 

Total property and equipment

 

134.5

 

134.1

 

Accumulated depreciation and amortization

 

(93.6

)

(88.9

)

Total property and equipment, net

 

40.9

 

45.2

 

Goodwill

 

7.1

 

7.1

 

Other non-current assets

 

3.9

 

2.9

 

Total assets

 

$

105.1

 

$

112.2

 

Liabilities and Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

6.4

 

$

8.3

 

Accrued expenses and other

 

4.0

 

6.7

 

Current portion of debt obligations

 

0.2

 

0.2

 

Total current liabilities

 

10.6

 

15.2

 

Other non-current liabilities

 

1.2

 

0.9

 

Non-current deferred revenue

 

24.5

 

24.8

 

Long-term debt, less current portion

 

1.1

 

1.3

 

Deferred income tax liability

 

19.3

 

21.7

 

Total liabilities

 

56.7

 

63.9

 

Equity:

 

 

 

 

 

Preferred stock, $1.00 par value; 500,000 shares authorized, no shares issued and outstanding at September 29, 2011 and December 30, 2010

 

 

 

Common stock, $1.00 par value; 1,000 shares authorized, 100 shares issued and outstanding at September 29, 2011 and December 30, 2010

 

 

 

Additional paid-in capital

 

93.2

 

93.2

 

Retained earnings

 

41.2

 

35.6

 

Related party receivables

 

(86.2

)

(80.7

)

Total stockholder’s equity of United Artists Theatre Circuit, Inc.

 

48.2

 

48.1

 

Noncontrolling interest

 

0.2

 

0.2

 

Total equity

 

48.4

 

48.3

 

Total liabilities and equity

 

$

105.1

 

$

112.2

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

UNITED ARTISTS THEATRE CIRCUIT, INC.

AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)

 

 

 

Quarter Ended
September 29, 2011

 

Quarter Ended
September 30, 2010

 

Three Quarters
Ended
September 29, 2011

 

Three Quarters
Ended
September 30, 2010

 

Revenues:

 

 

 

 

 

 

 

 

 

Admissions

 

$

41.0

 

$

39.2

 

$

110.2

 

$

115.4

 

Concessions

 

15.3

 

14.4

 

41.4

 

43.1

 

Other operating revenues

 

1.8

 

1.7

 

5.2

 

5.1

 

Total revenues

 

58.1

 

55.3

 

156.8

 

163.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Film rental and advertising costs

 

21.2

 

19.8

 

55.9

 

58.9

 

Cost of concessions

 

2.0

 

2.1

 

5.5

 

6.1

 

Other theatre operating expenses

 

21.6

 

22.3

 

62.8

 

67.6

 

Sale and leaseback rentals

 

3.8

 

3.7

 

11.3

 

11.2

 

General and administrative expenses

 

1.8

 

1.6

 

4.7

 

4.9

 

Depreciation and amortization

 

2.0

 

2.4

 

7.2

 

7.4

 

Net loss (gain) on disposal and impairment of operating assets

 

 

(0.1

)

 

2.6

 

Total operating expenses

 

52.4

 

51.8

 

147.4

 

158.7

 

Income from operations

 

5.7

 

3.5

 

9.4

 

4.9

 

Other expense (income):

 

 

 

 

 

 

 

 

 

Interest expense (income), net

 

 

 

 

 

Total other expense (income), net

 

 

 

 

 

Income before income taxes

 

5.7

 

3.5

 

9.4

 

4.9

 

Provision for income taxes

 

2.3

 

1.3

 

3.7

 

1.9

 

Net income

 

3.4

 

2.2

 

5.7

 

3.0

 

Noncontrolling interest, net of tax

 

 

 

(0.1

)

 

Net income attributable to controlling interest

 

$

3.4

 

$

2.2

 

$

5.6

 

$

3.0

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



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UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Three Quarters
Ended
September 29, 2011

 

Three Quarters
Ended
September 30, 2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

5.7

 

$

3.0

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

7.2

 

7.4

 

Net loss on disposal and impairment of operating assets

 

 

2.6

 

Deferred income tax benefit

 

(1.2

)

(2.2

)

Effect of leases with escalating minimum annual rentals

 

(0.8

)

(0.9

)

Change in operating assets and liabilities:

 

 

 

 

 

Receivables

 

0.9

 

0.6

 

Prepaid expenses and concession inventory

 

(3.8

)

(3.6

)

Accounts payable

 

(1.9

)

(6.2

)

Deferred revenue

 

(0.3

)

(0.3

)

Accrued expenses and other liabilities

 

(2.2

)

(4.2

)

Net cash provided by (used in) operating activities

 

3.6

 

(3.8

)

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(3.1

)

(3.1

)

Proceeds from disposition of assets, net

 

0.1

 

 

Distributions to partnership

 

(0.1

)

(0.1

)

Net cash used in investing activities

 

(3.1

)

(3.2

)

Cash flows from financing activities:

 

 

 

 

 

Debt payments

 

(0.2

)

(0.2

)

Increase in related party receivables

 

(5.3

)

(5.6

)

Net cash used in financing activities

 

(5.5

)

(5.8

)

Net decrease in cash and cash equivalents

 

(5.0

)

(12.8

)

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

52.4

 

59.8

 

End of period

 

$

47.4

 

$

47.0

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

UNITED ARTISTS THEATRE CIRCUIT, INC.

AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

September 29, 2011 and September 30, 2010

 

(1)   The Company and Basis of Presentation

 

United Artists Theatre Company (the “Parent” or “United Artists”), a Delaware corporation, is the parent company of United Artists Theatre Circuit, Inc. (“we,” “us,” “our,” the “Company” or “UATC”) and United Artists Realty Company (“UAR”), which is the parent company of United Artists Properties I Corp. (“Prop I”). UATC leases certain theatres from Prop I. The terms UATC and the Company shall be deemed to include the respective subsidiaries of such entity when used in discussions included herein regarding the current operations or assets of such entity.

 

The accompanying consolidated financial statements include the accounts of the Company and those of all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

UATC operated 543 screens in 62 theatres in 18 states as of September 29, 2011. As of September 30, 2010, UATC operated 547 screens in 63 theatres in 18 states.  The Company formally operates on a 52-week fiscal year with each quarter generally consisting of 13 weeks, unless otherwise noted.  The Company’s fiscal year ends on the first Thursday after December 25, which in certain years results in a 53-week fiscal year.  As of September 29, 2011, the Company managed its business under one reportable segment: theatre exhibition operations.

 

The Company became a subsidiary of Regal Entertainment Group (“REG” or “Regal”) on April 12, 2002, in conjunction with an exchange transaction in which REG, through its wholly owned subsidiary Regal Entertainment Holdings, Inc. (“REH”), also acquired Edwards Theatres, Inc. (“Edwards”) and Regal Cinemas Corporation (“Regal Cinemas”). REG is controlled by Anschutz Company (“Anschutz”), which indirectly controlled each of us, Edwards, Regal Cinemas and United Artists prior to REG’s acquisition of us and them in the exchange transaction. On August 17, 2005, REH contributed the stock of United Artists to Regal Cinemas, Inc. (“RCI”). As a result, United Artists and its subsidiaries became subsidiaries of RCI.

 

In connection with Regal’s acquisition of its subsidiaries, RCI, an indirect subsidiary of Regal, agreed to manage all aspects of the theatre operations of UATC and its subsidiaries and make all business decisions on behalf of UATC pursuant to a management agreement.  In certain markets where UATC operates theatres, RCI also operates theatres.

 

For a discussion of the series of events leading to the formation of REG and other significant transactions which have occurred through December 30, 2010, please refer to Notes 1 and 2 to the consolidated financial statements included in Part II, Item 8 of our annual report on Form 10-K, filed on March 21, 2011 with the Securities and Exchange Commission (“SEC”) (File No. 033-49598) for the fiscal year ended December 30, 2010 (the “2010 Audited Consolidated Financial Statements”).  For a summary of our significant accounting policies, please refer to Note 3 to the 2010 Audited Consolidated Financial Statements.

 

The Company has prepared the unaudited condensed consolidated balance sheet as of September 29, 2011 and the unaudited condensed consolidated statements of operations and cash flows for the quarter and three quarters ended September 29, 2011 and September 30, 2010 in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made. The December 30, 2010 unaudited condensed consolidated balance sheet information is derived from the 2010 Audited Consolidated Financial Statements. These unaudited condensed consolidated financial statements should be read in conjunction with the 2010 Audited Consolidated Financial Statements and notes thereto. The results of operations for the quarter and three quarters ended September 29, 2011 are not necessarily indicative of the operating results that may be achieved for the full 2011 fiscal year.

 

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Net income and total comprehensive income are the same for all periods presented.

 

(2)   Debt Obligations

 

Debt obligations are summarized as follows (amounts in millions):

 

 

 

September 29, 2011

 

December 30, 2010

 

Debt obligations(a)

 

$

1.3

 

$

1.5

 

Less current portion

 

(0.2

)

(0.2

)

Long-term debt, less current portion

 

$

1.1

 

$

1.3

 

 


(a)                                  Debt obligations include $1.3 million and $1.5 million of capital lease obligations as of September 29, 2011 and December 30, 2010, which have an interest rate of 10.0%, maturing in 2016.

 

(3)   Related Party Transactions

 

Management Agreement

 

RCI manages all aspects of the theatre operations of UATC and its subsidiaries pursuant to the terms of a management agreement, which includes all of its cash collections, cash disbursements and other cash management functions. During each of the quarters ended September 29, 2011 and September 30, 2010, UATC recorded management fee expenses of approximately $1.8 million and $1.6 million, respectively, related to this agreement. During the three quarters ended September 29, 2011 and September 30, 2010, UATC recorded management fee expenses of approximately $4.7 million and $4.9 million, respectively, related to this agreement. Such fees have been recorded in the accompanying unaudited condensed consolidated statements of operations as a component of “General and administrative expenses.”

 

Related-Party Receivables

 

The related-party receivables balance of $80.7 million as of December 30, 2010 was comprised of approximately $9.8 million related to advances made to Prop I to fund additions and/or renovations to theatres leased from Prop I and approximately $70.9 million related to intercompany transactions and cash management.  The related party receivables balance of $86.2 million as of September 29, 2011 continued to be comprised of the $9.8 million receivable from Prop I and approximately $76.4 million related to intercompany transactions and cash management.

 

UATC leases three theatres from Prop I in accordance with a master lease (the “Prop I Master Lease”). The Prop 1 Master Lease commenced in 1988 with an original base term of 15 years and in 2003 UATC exercised a 10 year renewal extension of the lease. The Prop I Master Lease provides for basic monthly or quarterly rentals and may require additional rentals, based on the revenue of the underlying theatre. In order to fund the cost of additions and/or renovations to the theatres leased by UATC from Prop I, UATC made advances to Prop I prior to becoming a wholly owned subsidiary of REG in 2002.  Since 2002, UATC has not funded any additions and/or renovations for these properties and does not expect to make any advances to Prop 1 in future periods. The Prop I portion of the related-party receivable balance ($9.8 million at September 29, 2011 and December 30, 2010) will be reduced upon any sale of the three properties by Prop I, with UATC receiving the net proceeds of the sale. The fair value of each of the three locations is evaluated periodically using the expected selling price less selling costs for each property.  Management’s estimates (Level 3 inputs as described in ASC Topic 820, Fair Value Measurements and Disclosures) are based on recent market transactions and current real estate values within each market.  The Company has no current intention to market or sell the properties at this time, but believes that the fair market value of the three properties will be sufficient to substantially recover the current receivable from Prop I.

 

The increase in the related-party receivables balance of $5.5 million during the three quarters ended September 29, 2011 was due primarily to the timing of intercompany cash collections and disbursements particularly with respect to (1) the redemption of gift cards and discount tickets at UATC theatres that were sold by a subsidiary of RCI, Regal CineMedia (“RCM”) and (2) cash received by RCI for various revenue items, such as on-line ticket sales and rebates from vendor marketing programs, for UATC’s share of the revenues for such items. RCI (or RCM) receives the cash for these items,

 

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revenue is recorded by UATC and a corresponding intercompany receivable is created, which is payable by RCI (or RCM) to UATC.  Increases in the intercompany receivable recorded by UATC could continue to occur in future periods as long as the above described cash management activities continue as usual.  As of September 29, 2011, management believes the intercompany receivable is fully collectable.

 

Digital Cinema Implementation Partners, LLC Transactions

 

On February 12, 2007, Regal, along with AMC Entertainment, Inc. (“AMC”) and Cinemark, Inc. (“Cinemark”), formed a joint venture company known as Digital Cinema Implementation Partners, LLC, a Delaware limited liability company (“DCIP”), to create a financing model and establish agreements with major motion picture studios for the implementation of digital cinema in our theatres. Each of Regal, AMC and Cinemark has an equal voting interest in DCIP. On March 10, 2010, DCIP executed definitive agreements and related financing transactions in connection with the conversion to digital projection. Concurrent with closing, RCI entered into a master equipment lease agreement (the “Master Lease”) and other related agreements (collectively, the “Digital Cinema Agreements”) with Kasima, LLC, a wholly-owned subsidiary of DCIP. Subsequent to the execution of the Digital Cinema Agreements, UATC distributed its existing digital projection systems with a net book value of approximately $2.7 million to RCI.

 

DCIP funds the cost of conversion to digital projection principally through the collection of virtual print fees from motion picture studios and equipment lease payments from participating exhibitors, including Regal. In accordance with the Master Lease, RCI will sublease (the “Sublease”) the digital projection systems to UATC under a twelve-year term with ten one-year fair value renewal options. The Master Lease also contains a fair value purchase option.  Under the Master Lease and the Sublease, UATC pays RCI annual minimum rent of $1,000 per digital projection system from the effective date of the agreement through the end of the lease term and is, upon certain conditions described below, subject to incremental annual rent of $2,000 per digital projection system beginning at six and a half years from the effective date of the agreement through the end of the lease term.  In the event that the junior capital raised by DCIP in the initial financing transactions remains outstanding at any time on or after the date that is six and a half years after the closing date of March 2010, the holders of the related notes will have the right to require Regal and other participating exhibitors to make incremental minimum rent payments of $2,000 per digital projection system per year through the earlier of the end of the lease term or until such notes are repaid.  UATC considers both the $1,000 minimum rental and the incremental minimum rental payment of $2,000 per digital projection system to be minimum rents and accordingly has recorded such rents on a straight-line basis in its consolidated financial statements. UATC is also subject to various types of other rent if such digital projection systems do not meet minimum performance requirements as outlined in the Master Lease and the Sublease. Certain of the other rent payments are subject to either a monthly or an annual maximum. UATC accounts for the Sublease as an operating lease for accounting purposes. During the three quarters ended September 29, 2011 and September 30, 2010, the Company incurred total rent of approximately $0.4 million and $0.1 million, respectively, associated with the leased digital projection systems.

 

During June 2011, we completed our deployment of 3D compatible digital projection systems across our circuit.  The Company has accelerated depreciation of its owned 35 mm film projection equipment that is scheduled to be replaced with leased digital projection systems, with such depreciation occurring over the expected deployment schedule since the Company plans to dispose of such equipment prior to the end of its useful life. To that end, during the three quarters ended September 29, 2011 and September 30, 2010, the Company recorded approximately $0.5 million and $0.6 million, respectively, of accelerated depreciation related to such 35mm film projection equipment.  As of September 29, 2011, we operated 331 screens outfitted with digital projection systems, 257 of which are digital 3D capable.

 

National CineMedia, LLC Transactions

 

Pursuant to the Company’s management agreement with RCI, RCI, through an agreement with National CineMedia, LLC (“National CineMedia”), provides all on-screen and lobby advertising and event services to UATC.

 

In connection with the completion of the initial public offering, or IPO, of National CineMedia Inc.’s (“NCM Inc.”) common stock, RCI amended and restated its existing exhibitor services agreement (“ESA”) with National CineMedia, whereby in exchange for its pro rata share of the IPO proceeds, RCI agreed to a modification of National CineMedia’s payment obligation under the ESA.  The modification extended the term of the ESA to 30 years, provided National CineMedia with a five-year right of first refusal beginning one year prior to the end of the term and changed the basis upon

 

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which RCI is paid by National CineMedia from a percentage of revenues associated with advertising contracts entered into by National CineMedia to a monthly theatre access fee.  Also, with respect to any on-screen advertising time provided by us to our beverage concessionaire, RCI is required to purchase such time from National CineMedia at a negotiated rate.

 

As a result of the ESA amendment and related modification payment, RCI recognizes various types of other revenue from National CineMedia, including per patron and per digital screen theatre access fees, net of payments for on-screen advertising time provided to the Company’s beverage concessionaire, other National CineMedia revenue and amortization of upfront ESA modification fees utilizing the units of revenue amortization method.

 

The Company’s portion of these revenues are presented as a component of “Other operating revenues” in the Company’s unaudited condensed consolidated financial statements and consist of the following amounts (in millions):

 

 

 

Quarter Ended
September 29, 2011

 

Quarter Ended
September 30, 2010

 

Three Quarters
Ended
 September 29, 2011

 

Three Quarters
Ended
September 30, 2010

 

Theatre access fees per patron

 

$

0.3

 

$

0.3

 

$

0.9

 

$

0.9

 

Theatre access fees per digital screen

 

0.1

 

0.1

 

0.3

 

0.3

 

Other NCM revenue

 

0.1

 

0.1

 

0.1

 

0.1

 

Amortization of ESA modification fees

 

0.1

 

0.1

 

0.3

 

0.3

 

Payments for beverage concessionaire advertising

 

(0.3

)

(0.3

)

(0.8

)

(0.8

)

Total

 

$

0.3

 

$

0.3

 

$

0.8

 

$

0.8

 

 

(4)   Sale—Leaseback Transactions

 

In December 1995, UATC entered into a sale and leaseback transaction whereby 31 owned properties were sold to and leased back from an unaffiliated third party. In conjunction with the transaction, the buyer of the properties issued publicly traded pass-through certificates. In connection with this sale and leaseback transaction, UATC entered into a Participation Agreement that requires UATC to comply with various covenants, including limitations on indebtedness, restricted payments, transactions with affiliates, guarantees, issuance of preferred stock of subsidiaries and subsidiary distributions, transfer of assets and payment of dividends. As of September 29, 2011, 12 theatres were subject to the sale leaseback transaction and approximately $27.9 million in principal amount of pass-through certificates were outstanding.

 

(5)   Income Taxes

 

The provision for income taxes of $2.3 million and $1.3 million for the quarters ended September 29, 2011 and September 30, 2010, respectively, reflect effective tax rates of approximately 40.4% and 37.1%, respectively.  The provision for income taxes of $3.7 million and $1.9 million for the three quarters ended September 29, 2011 and September 30, 2010, respectively, reflect effective tax rates of approximately 39.4% and 38.8%, respectively. The effective tax rates for the quarters and three quarters ended September 29, 2011 and September 30, 2010 reflect the impact of certain non-deductible expenses.

 

In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. The Company maintains a valuation allowance against deferred tax assets of $3.2 million as of September 29, 2011 and December 30, 2010 as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management’s determination of the Company’s ability to realize these deferred tax assets will result in a decrease in the provision for income taxes.

 

The Company files income tax returns in the U.S. federal jurisdiction and certain state jurisdictions as part of the REG income tax filings and files separate income tax returns in various other state jurisdictions as well.  REG and the Company are no longer subject to U.S. federal income tax examinations by taxing authorities for years before 2007, and with limited exceptions, are no longer subject to state income tax examinations for years before 2006.  However, the taxing

 

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authorities still have the ability to review the propriety of tax attributes created in closed tax years if such tax attributes are utilized in an open tax year.

 

REG maintains an investment in National CineMedia, a pass-through entity for federal income tax purposes. The IRS is currently examining National CineMedia’s 2007 and 2008 income tax returns and, as of September 29, 2011, has proposed an adjustment related to the characterization of cash received by National CineMedia’s founding members, including REG and the Company, at or around the time of NCM Inc.’s IPO. Management is currently evaluating the proposed adjustment and believes it is reasonably possible that an increase in unrecognized tax benefits related to this position may be necessary within the next twelve months. The amount of such increase is not reasonably estimable as of September 29, 2011.

 

(6)   Litigation and Contingencies

 

Our theatres must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such properties are “public accommodations” and/or “commercial facilities” as defined by the ADA. Compliance with the ADA requires that public accommodations “reasonably accommodate” individuals with disabilities and that new construction or alterations made to “commercial facilities” conform to accessibility guidelines unless “structurally impracticable” for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of injunctive relief, fines, awards of damages to private litigants and additional capital expenditures to remedy such non-compliance.

 

In addition, we, from time to time, receive letters from the state officials in states where we operate theatres regarding investigation into the accessibility of our theatres to persons with visual impairments or the deaf and hard of hearing.  In addition, on July 20, 2010, the Department of Justice (“DOJ”) issued Advance Notice of Proposed Rulemaking concerning the provision of closed captioning and descriptive audio within the theatre environment.  Significantly, this is the first time the DOJ has stated that while open captioning may not be required by the ADA, closed captioning is so required. We believe we provide the members of the visually and hearing impaired communities with reasonable access to the movie-going experience but are further evaluating our options in the digital format and potential compliance issues related to same.

 

We believe that we are in substantial compliance with all current applicable regulations relating to accommodations for the disabled. We intend to comply with future regulations in this regard and except as set forth above, we do not currently anticipate that compliance will require us to expend substantial funds.  Our theatre operations are also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship, health and sanitation and environmental protection requirements.  We believe that we are in substantial compliance with all relevant laws and regulations.

 

The Company and its subsidiaries are also presently involved in various legal proceedings arising in the ordinary course of its business operations, including, but not limited to, personal injury claims, employment and contractual matters. The Company believes it has adequately provided for the litigation or settlement of such matters. Management believes any additional liability with respect to these claims and disputes will not be material in the aggregate to the Company’s consolidated financial position, results of operations or cash flows.

 

(7)   Recent Accounting Pronouncements

 

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements, (“ASU 2010-06”). This Update provides a greater level of disaggregated information and enhanced disclosures about valuation techniques and inputs to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 and became effective for the Company as of April 1, 2010 except for certain disclosure requirements.  Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years and became effective for the Company as of the beginning of fiscal 2011.

 

In June 2011, the FASB issued new guidance under ASC Topic 220, Presentation of Comprehensive Income, to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of

 

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comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied retrospectively. Because this guidance impacts presentation only, it will have no effect on our financial condition, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (“ASU 2011-08”), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company does not expect the adoption of ASU 2011-08 to have a material effect on its consolidated financial results.

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).   All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words.  These forward-looking statements involve risks and uncertainties.  Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” contained in our annual report on Form 10-K filed on March 21, 2011 with the SEC (File No. 033-49598) for the Company’s fiscal year ended December 30, 2010.  The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.

 

Overview and Basis of Presentation

 

UATC operated 543 screens in 62 theatres in 18 states as of September 29, 2011. As of September 30, 2010, UATC operated 547 screens in 63 theatres in 18 states. The theatres we operate are managed by RCI, a wholly owned subsidiary of Regal, pursuant to a management arrangement described below. The Company formally operates on a 52-week fiscal year (ending on the first Thursday after December 25 each year) with each quarter generally consisting of 13 weeks, unless otherwise noted.  The Company manages its business under one reportable segment: theatre exhibition operations.

 

We generate revenues primarily from admissions and concession sales. Additional revenues are generated by our vendor marketing programs, our relationship with National CineMedia pursuant to its arrangements with RCI and various other activities in our theatres. Film rental costs depend on a variety of factors, including the prospects of a film, the popularity and box office revenues of a film, and such film rental costs generally increase as the admissions revenues generated by a film increase. Because we purchase certain concession items, such as fountain drinks and popcorn, in bulk and not pre-packaged for individual servings, we are able to improve our margins by negotiating volume discounts. Other operating expenses consist primarily of theatre labor and occupancy costs.

 

The Company’s revenues are usually seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, motion picture studios release the most marketable motion pictures during the summer and holiday seasons. The unexpected emergence or continuance of a “hit” film during other periods can alter the traditional pattern. The timing of movie releases can have a significant effect on the Company’s results of operations, and the results of one fiscal quarter are not necessarily indicative of the results for the next or any other fiscal quarter. The seasonality of motion picture exhibition, however, has become less pronounced as motion picture studios are releasing motion pictures somewhat more evenly throughout the year. The Company does not believe that inflation has had a material impact on its financial position or results of operations.

 

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For a summary of industry trends as well as other risks and uncertainties relevant to the Company, see “Business-Industry Overview and Trends” and “Risk Factors” contained in our annual report on Form 10-K for the fiscal year ended December 30, 2010 and “Results of Operations” below.

 

Critical Accounting Estimates

 

For a discussion of accounting policies that we consider critical to our business operations and the understanding of our results of operations and affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” contained in our annual report on Form 10-K for the fiscal year ended December 30, 2010 and incorporated by reference herein.  As of September 29, 2011, there were no significant changes in our critical accounting policies or estimation procedures.

 

Significant Events

 

For a discussion of other significant operating, financing and investing transactions which have occurred through December 30, 2010, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 30, 2010.

 

During June 2011, we completed our deployment of 3D compatible digital projection systems across our circuit. As of September 29, 2011, we operated 331 screens outfitted with digital projection systems, 257 of which are digital 3D capable (approximately 47% of our total screens). We expect all of our screens to be outfitted with digital projection systems by late 2012 or early 2013.

 

We believe the installation of 3D digital projection systems allow us to offer our patrons premium 3D movies and all-digital format experiences that we believe generate incremental revenue and cash flows for the Company. We remain optimistic regarding the benefits of digital cinema primarily as it relates to future potential associated with 3D film product and other 3D content and are pleased to see continued support of 3D and IMAX® film product by the major motion picture studios.

 

Results of Operations

 

Based on our review of industry sources, domestic box office revenues for the time period that corresponds to UATC’s third fiscal quarter of 2011 were estimated to have increased by approximately seven percent in comparison to the third quarter of 2010. The industry’s box office results were positively impacted by strong attendance from premium format pictures during the third quarter of 2011, including Harry Potter and the Deathly Hallows: Part 2 and Transformers: Dark of the Moon and the commercial appeal of the overall film slate during the quarter.

 

The following table sets forth the percentage of total revenues represented by certain items included in our unaudited condensed consolidated statements of operations for the quarter ended September 29, 2011 (“Q3 2011 Period”), the quarter ended September 30, 2010 (“Q3 2010 Period”), the three quarters ended September 29, 2011 (“Fiscal 2011 Period”) and the three quarters ended September 30, 2010 (“Fiscal 2010 Period”):

 

 

 

Q3 2011 Period

 

Q3 2010 Period

 

Fiscal 2011 Period

 

Fiscal 2010 Period

 

Revenues:

 

 

 

 

 

 

 

 

 

Admissions

 

70.6

%

70.9

%

70.3

%

70.6

%

Concessions

 

26.3

 

26.0

 

26.4

 

26.3

 

Other operating revenues

 

3.1

 

3.1

 

3.3

 

3.1

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Film rental and advertising costs

 

36.5

 

35.8

 

35.7

 

36.0

 

Cost of concessions

 

3.4

 

3.8

 

3.5

 

3.7

 

Other theatre operating expenses

 

37.3

 

40.3

 

40.0

 

41.3

 

Sale and leaseback rentals

 

6.5

 

6.7

 

7.2

 

6.9

 

General and administrative expenses

 

3.1

 

3.0

 

3.0

 

3.0

 

Depreciation and amortization

 

3.4

 

4.3

 

4.6

 

4.5

 

Net loss (gain) on disposal and impairment of operating assets

 

 

(0.2

)

 

1.6

 

Total operating expenses

 

90.2

 

93.7

 

94.0

 

97.0

 

Income from operations

 

9.8

%

6.3

%

6.0

%

3.0

%

 

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Total Revenues

 

The following table summarizes revenues and revenue-related data for the Q3 2011 Period, the Q3 2010 Period, the Fiscal 2011 Period and the Fiscal 2010 Period (in millions, except averages):

 

 

 

Q3 2011 Period

 

Q3 2010 Period

 

Fiscal 2011 Period

 

Fiscal 2010 Period

 

Admissions

 

$

41.0

 

$

39.2

 

$

110.2

 

$

115.4

 

Concessions

 

15.3

 

14.4

 

41.4

 

43.1

 

Other operating revenues

 

1.8

 

1.7

 

5.2

 

5.1

 

Total revenues

 

$

58.1

 

$

55.3

 

$

156.8

 

$

163.6

 

Attendance

 

4.7

 

4.5

 

12.6

 

13.4

 

Average ticket price(1)

 

$

8.72

 

$

8.71

 

$

8.75

 

$

8.61

 

Average concessions revenues per patron(2)

 

$

3.26

 

$

3.20

 

$

3.29

 

$

3.22

 

 


(1)           Calculated as admissions revenue/attendance.

(2)           Calculated as concessions revenue/attendance.

 

Q3 2011 Period Compared to Q3 2010 Period and the Fiscal 2011 Period Compared to the Fiscal 2010 Period

 

Admissions

 

During the Q3 2011 Period, total admissions revenues, driven by a 4.4% increase in attendance, increased $1.8 million, or 4.6%, to $41.0 million, from $39.2 million in the Q3 2010 Period.  We believe that our attendance is primarily dependent upon the commercial appeal of content released by the major motion picture studios.  The Q3 2011 Period increase in attendance was primarily attributable to strong attendance from premium format pictures during the Q3 2011 Period, including Harry Potter and the Deathly Hallows: Part 2 and Transformers: Dark of the Moon and the commercial appeal of the overall film slate during the Q3 2011 Period as compared to that of the Q3 2010 Period. For the Q3 2011 Period, the average ticket price increased 0.1% due to the success of premium-priced films exhibited during the Q3 2011 Period.

 

Total admissions revenues decreased $5.2 million during the Fiscal 2011 Period, or 4.5%, to $110.2 million, from $115.4 million in the Fiscal 2010 Period primarily due to a 6.0% decrease in attendance, partially offset by a 1.6% increase in average ticket prices. The Fiscal 2011 Period decline in attendance was primarily attributable to the overall lack of appeal to our patrons of the films exhibited in our theatres during the Fiscal 2011 Period as compared to the films exhibited during the Fiscal 2010 Period, which included the record-breaking performances of Avatar and Alice in Wonderland and strong attendance from other top tier releases such as Iron Man 2 and Toy Story 3.  In addition, the continued aging of our theatres (approximately 49% of our screens are located in older, sloped floor multiplexes) contributed to the decline in the Fiscal 2011 Period attendance.  The primary driver of the increase in our Fiscal 2011 Period average ticket price was an increase in the percentage of our admissions revenues generated by premium-priced films exhibited during the Fiscal 2011 Period and selective price increases identified during our ongoing periodic pricing reviews (which include analysis of various factors such as general inflationary trends and local market conditions).

 

Concessions

 

Total concessions revenues increased $0.9 million, or 6.3%, to $15.3 million in the Q3 2011 Period, from $14.4 million in the Q3 2010 Period. During the Fiscal 2011 Period, total concessions revenues decreased $1.7 million, or 3.9%, to $41.4 million, from $43.1 million in the Fiscal 2010 Period.  Average concessions revenues per patron during the Q3 2011 Period increased 1.9%, to $3.26, from $3.20 for the Q3 2010 Period and increased 2.2%, to $3.29 during the Fiscal

 

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2011 Period, from $3.22 in the Fiscal 2010 Period. The increase in total concessions revenues during the Q3 2011 Period was attributable to the aforementioned increase in attendance during the period coupled with an increase in average concessions revenues per patron. The decrease in total concessions revenues during the Fiscal 2011 Period was attributable to the aforementioned decrease in attendance during the period, partially offset by an increase in average concessions revenues per patron. The increase in average concessions revenues per patron for the Q3 2011 Period and the Fiscal 2011 Period was primarily a result of increases in popcorn and beverage sales volume during the Q3 2011 Period and the Fiscal 2011 Period, selective price increases effected subsequent to the end of the Q3 2010 Period and to a lesser extent, the impact of expanded concession menu items offered in certain of our theatres during such periods.

 

Other Operating Revenues

 

During the Q3 2011 Period, other operating revenues increased $0.1 million, or 5.9%, to $1.8 million, from $1.7 million in the Q3 2010 Period. Total other operating revenues increased $0.1 million, or 2.0%, to $5.2 million for the Fiscal 2011 Period, from $5.1 million for the Fiscal 2010 Period.  Included in other operating revenues are the theatre access fees paid by National CineMedia (net of payments for onscreen advertising time provided to our beverage concessionaire), revenues from our vendor marketing programs, arcade game and other theatre revenues. The increase in other operating revenues during the Q3 2011 Period was primarily driven by increases in arcade game and other theatre revenues (including our summer kids programs) and increased revenues associated with our vendor marketing programs. The increase in other operating revenues during the Fiscal 2011 Period was primarily driven by increases in arcade game and other theatre revenues, partially offset by slight decreases in revenues from our vendor marketing programs.

 

Operating Expenses

 

The following table summarizes certain operating expenses for the Q3 2011 Period, the Q3 2010 Period, the Fiscal 2011 Period and the Fiscal 2010 Period (dollars in millions):

 

 

 

Q3 2011 Period

 

Q3 2010 Period

 

Fiscal 2011 Period

 

Fiscal 2010 Period

 

 

 

$

 

% of
Revenues

 

$

 

% of
Revenues

 

$

 

% of
Revenues

 

$

 

% of
Revenues

 

Film rental and advertising costs(1)

 

21.2

 

51.7

 

19.8

 

50.5

 

55.9

 

50.7

 

58.9

 

51.0

 

Cost of concessions(2)

 

2.0

 

13.1

 

2.1

 

14.6

 

5.5

 

13.3

 

6.1

 

14.2

 

Other theatre operating expenses(3)

 

21.6

 

37.3

 

22.3

 

40.3

 

62.8

 

40.0

 

67.6

 

41.3

 

Sale and leaseback rentals(3)

 

3.8

 

6.5

 

3.7

 

6.7

 

11.3

 

7.2

 

11.2

 

6.9

 

General and administrative expenses(3)

 

1.8

 

3.1

 

1.6

 

3.0

 

4.7

 

3.0

 

4.9

 

3.0

 

 


(1)           Percentage of revenues calculated as a percentage of admissions revenues.

(2)           Percentage of revenues calculated as a percentage of concessions revenues.

(3)           Percentage of revenues calculated as a percentage of total revenues.

 

Film Rental and Advertising Costs

 

Film rental and advertising costs as a percentage of admissions revenues increased to 51.7% during the Q3 2011 Period from 50.5% in the Q3 2010 Period and for the Fiscal 2011 Period, decreased to 50.7% from 51.0% in the Fiscal 2010 Period. The increase in film rental and advertising costs as a percentage of box office revenues during the Q3 2011 Period was primarily attributable to a higher percentage of box office revenues generated by the top tier films exhibited during the Q3 2011 Period, including Harry Potter and the Deathly Hallows: Part 2 and Transformers: Dark of the Moon.  The decrease in film rental and advertising costs as a percentage of box office revenues during the Fiscal 2011 Period was primarily attributable to higher film costs associated with the success of Avatar and other top tier films exhibited during the Fiscal 2010 Period.

 

Cost of Concessions

 

During the Q3 2011 Period, cost of concessions decreased $0.1 million, or 4.8%, to $2.0 million, from $2.1 million in the Q3 2010 Period.  Cost of concessions decreased $0.6 million, or 9.8%, to $5.5 million during the Fiscal 2011 Period, from $6.1 million in the Fiscal 2010 Period. Cost of concessions as a percentage of concessions revenues for the Q3 2011 Period was approximately 13.1%, compared to 14.6% during the Q3 2010 Period.  For the Fiscal 2011 Period, cost of concessions as a percentage of concessions revenues was approximately 13.3% compared to 14.2% for the Fiscal 2010

 

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Period.  The decrease in cost of concessions as a percentage of concessions revenues during the Q3 2011 Period and the Fiscal 2011 Period was primarily related to increases in popcorn and beverage sales volume and selective price increases effected subsequent to the end of the Q3 2010 Period.

 

Other Theatre Operating Expense

 

Other theatre operating expenses decreased $0.7 million, or 3.1%, to $21.6 million in the Q3 2011 Period, from $22.3 million in the Q3 2010 Period.  During the Fiscal 2011 period, other theatre operating expenses decreased $4.8 million, or 7.1%, to $62.8 million, from $67.6 million in the Fiscal 2010 Period.  The decrease in other theatre operating expenses during the Q3 2011 Period was attributable to savings in theatre-level payroll and other non-rent occupancy costs, partially offset by increased costs associated with higher premium format film revenues.  The decrease in other theatre operating expenses during the Fiscal 2011 Period was attributable to savings in theatre-level payroll, other non-rent occupancy costs and lower contingent rent.

 

Sale and Leaseback Rentals

 

Sale and leaseback expenses of $3.8 million for the Q3 2011 Period increased slightly by $0.1 million, or 2.7%, from $3.7 million during the Q3 2010 Period.  During the Fiscal 2011 Period, sale and leaseback expenses of $11.3 million increased slightly by $0.1 million, or 0.9%, from $11.2 million during the Fiscal 2010 Period.  See Note 4 — “Sale-Leaseback Transactions” for further discussion of sale and leaseback transactions.

 

General and Administrative Expenses

 

During the Q3 2011 Period, general and administrative expenses increased $0.2 million, or 12.5%, to $1.8 million, from $1.6 million in the Q3 2010 Period. General and administrative expenses decreased $0.2 million, or 4.1%, to $4.7 million during the Fiscal 2011 Period, from $4.9 million in the Fiscal 2010 Period.  Included in general and administrative expenses are management fees associated with the management agreement between RCI and UATC under which RCI manages the theatre operations of UATC.  The increase in general and administrative expenses during the Q3 2011 Period was due to the increase in management fee costs incurred resulting from the increase in total revenues during the Q3 2011 Period.  The decrease in general and administrative expenses during the Fiscal 2011 Period was due to the decrease in management fee costs incurred resulting from the decrease in total revenues during the Fiscal 2011 Period.  As a percentage of total revenues, general and administrative expenses increased to 3.1% during the Q3 2011 Period, from 3.0% in the Q3 2010 Period.  As a percentage of total revenues, general and administrative expenses of 3.0% for the Fiscal 2011 Period were consistent with that of the Fiscal 2010 Period.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $0.4 million, or 16.7%, to $2.0 million for the Q3 2011 Period, from $2.4 million in the Q3 2010 Period.  During the Fiscal 2011 Period, depreciation and amortization expense decreased $0.2 million, or 2.7%, to $7.2 million, from $7.4 million in the Fiscal 2010 Period.  The decrease in depreciation and amortization expense during the Q3 2011 Period and the Fiscal 2011 Period was primarily due to a reduction in depreciation related to the replacement of owned 35mm film projectors with leased digital projection systems and a greater number of fully depreciated fixed assets during the Q3 2011 Period and Fiscal 2011 Period as compared to the Q3 2010 Period and Fiscal 2010 period.

 

Net Loss (gain) on Disposal and Impairment of Operating Assets

 

Net loss on disposal and impairment of operating assets decreased $2.6 million, to zero in the Fiscal 2011 Period, from a $2.6 million loss in the Fiscal 2010 Period. The decrease in net loss on disposal and impairment of operating assets during the Fiscal 2011 Period was primarily attributable to the satisfaction of remaining lease obligations related to the closure of an underperforming theatre during the Fiscal 2010 Period.

 

Income from Operations

 

During the Q3 2011 Period, income from operations increased $2.2 million, or 62.9%, to $5.7 million, from $3.5 million in the Q3 2010 Period.  Income from operations increased $4.5 million, or 91.8%, to $9.4 million during the Fiscal

 

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2011 Period, from $4.9 million in the Fiscal 2010 Period. The net increase in income from operations during the Q3 2011 Period as compared to the Q3 2010 Period was primarily attributable to the increase in total revenues coupled with reductions in certain variable operating expense line items described above.  The net increase in income from operations during the Fiscal 2011 Period as compared to the Fiscal 2010 Period was primarily attributable to a reduction in certain variable operating expense line items described above and a lower loss on disposal and impairment of operating assets, partially offset by the decrease in total revenues.

 

Income Taxes

 

The provision for income taxes of $2.3 million and $1.3 million for the Q3 2011 Period and the Q3 2010 Period, respectively, reflect effective tax rates of approximately 40.4% and 37.1%, respectively.  The provision for income taxes of $3.7 million and $1.9 million for the Fiscal 2011 Period and the Fiscal 2010 Period, respectively, reflect effective tax rates of approximately 39.4% and 38.8%, respectively. The effective tax rates for all periods presented reflect the impact of certain non-deductible expenses.

 

Net Income Attributable to Controlling Interest

 

During the Q3 2011 Period, net income attributable to controlling interest totaled $3.4 million, which represents an increase of $1.2 million, from net income attributable to controlling interest of $2.2 million in the Q3 2010 Period.  Net income attributable to controlling interest for the Fiscal 2011 Period was $5.6 million, which represents an increase of $2.6 million, from net income attributable to controlling interest of $3.0 million in the Fiscal 2010 Period.  The increase in net income attributable to controlling interest for the Q3 2011 Period and the Fiscal 2011 Period was primarily attributable to an increase in operating income described above, partially offset by an increase in income taxes described above.

 

Liquidity and Capital Resources

 

On a consolidated basis, we expect our primary uses of cash to be for operating expenses, capital expenditures, investments, general corporate purposes related to corporate operations and debt services.  The principal sources of liquidity are cash generated from operations and cash on hand.

 

Operating Activities

 

Our revenues are generated principally through admissions and concessions sales with proceeds received in cash or via credit cards at the point of sale. Our operating expenses are primarily related to film and advertising costs, rent and occupancy, and payroll. Film costs are ordinarily paid to distributors within 30 days following receipt of admissions revenues and the cost of the Company’s concessions are generally paid to vendors approximately 30 to 35 days from purchase. Our current liabilities generally include items that will become due within 12 months.  In addition, from time to time, we may use cash from operations to fund dividends to our Parent in excess of net income attributable to controlling interest and cash flows from operating activities less cash flows from investing and other financing activities.  As a result, at any given time, our balance sheet may reflect a working capital deficit.

 

Net cash flows provided by operating activities increased by approximately $7.4 million to approximately $3.6 million for the Fiscal 2011 Period from approximately $3.8 million of net cash used in operating activities for the Fiscal 2010 Period.  The increase was caused by a $1.0 million increase in net income excluding non-cash items coupled with a positive fluctuation in working capital activity of approximately $6.4 million.  Working capital activity was primarily impacted by positive fluctuations in accounts payable activity (primarily film rental liabilities) during the Fiscal 2011 Period as compared to the Fiscal 2010 Period and positive fluctuations in accrued expenses and other liabilities activity during such periods.  The positive fluctuation in accounts payable activity was primarily due to lower attendance and box office revenue at our theaters during the latter part of fourth quarter of 2010 as compared to latter part of the fourth quarter of December 2009 coupled with the timing of certain film payments during the Fiscal 2011 Period and the Fiscal 2010 Period.  The positive fluctuation in accrued expenses and other liabilities activity during the Fiscal 2011 Period as compared to the Fiscal 2010 Period was primarily related to a reduction in reserves associated with lease termination costs for closed theatres during the Fiscal 2010 Period.

 

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Investing Activities

 

Our capital requirements have historically arisen principally in connection with retrofitting existing theatres, upgrading the Company’s theatre facilities and replacing equipment. We fund the cost of capital expenditures through internally generated cash flows and cash on hand.

 

The Company has a formal and intensive review procedure for the authorization of capital projects, with the most important financial measure of acceptability for a discretionary non-maintenance capital project being whether its projected discounted cash flow return on investment meets or exceeds the Company’s internal rate of return targets.  We currently expect capital expenditures for theatre expansion, upgrading and equipment replacements to be in the range of approximately $4.0 million to $8.0 million in fiscal year 2011.

 

On March 10, 2010, DCIP executed definitive agreements and related financing transactions in connection with the conversion to digital projection. DCIP’s financing raised $660.0 million, consisting of $445.0 million in senior bank debt, $135.0 million in additional junior capital and approximately $80.0 million in equity contributions (consisting of cash and existing digital projection systems) from Regal, AMC and Cinemark.  Concurrent with closing, RCI entered into the Master Lease and other Digital Cinema Agreements with Kasima, LLC, a wholly-owned subsidiary of DCIP. Subsequent to the execution of the Digital Cinema Agreements, UATC distributed its existing digital projection systems with a net book value of approximately $2.7 million to RCI. Each of Regal, AMC and Cinemark has an equal voting interest in DCIP.

 

DCIP’s initial financing described above, coupled with a second round of financing completed in March 2011 (which consisted of a new $220.0 million term loan facility), is expected to substantially cover the cost of conversion to digital projection for our entire circuit. DCIP funds the cost of conversion to digital projection principally through the collection of virtual print fees from motion picture studios and equipment lease payments from participating exhibitors, including Regal.  We bear operating and maintenance costs with respect to digital projection systems in our theatres, which is relatively comparable to what we currently spend on our conventional film projectors. We expect to outfit all of our screens with digital projection systems by late 2012 or early 2013. As of September 29, 2011, we operated 331 screens outfitted with digital projection systems, 257 of which are digital 3D capable.

 

During June 2011, we completed our deployment of 3D compatible digital projection systems across our circuit. We believe the installation of 3D digital projection systems allows us to offer our patrons premium 3D movies and all-digital format experiences that we believe generate incremental revenue and cash flows for the Company. We remain optimistic regarding the benefits of digital cinema primarily as it relates to future potential associated with 3D film product and other 3D content and are pleased to see continued support of 3D and IMAX® film product by the major motion picture studios.

 

Net cash flows used in investing activities totaled approximately $3.1 million for the Fiscal 2011 Period compared to cash flows used in investing activities of approximately $3.2 million for the Fiscal 2010 Period.  The $0.1 million decrease in cash flows used in investing activities during the Fiscal 2011 Period, as compared to the Fiscal 2010 Period, was primarily attributable to an increase in the proceeds from the disposition of assets during the Fiscal 2011 Period.

 

Financing Activities

 

Net cash flows used in financing activities were approximately $5.5 million for the Fiscal 2011 Period compared to cash flows used in financing activities of approximately $5.8 million for the Fiscal 2010 Period.  The net decrease in cash flows used in financing activities during the Fiscal 2011 Period as compared to the Fiscal 2010 Period of $0.3 million was attributable to the incremental change in the related party receivable (described further in Note 3 — “Related Party Transactions”) during the Fiscal 2011 Period as compared to the Fiscal 2010 Period.

 

Contractual Cash Obligations and Commitments

 

For a summary of our contractual cash obligations and commitments and off-balance sheet arrangements as of December 30, 2010, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Cash Obligations and Commitments” contained in our annual report on Form 10-K for the fiscal year ended December 30, 2010 and incorporated by reference herein.  As of September 29, 2011, there were no material

 

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changes outside the ordinary course of our business in our contractual cash obligations and commitments.  We believe that the amount of cash and cash equivalents on hand and cash flow expected from operations will be adequate for the Company to execute its business strategy and meet anticipated requirements for lease obligations, capital expenditures, working capital and debt service for the next 12 months.

 

Recent Accounting Pronouncements

 

For a discussion of the recent accounting pronouncements relevant to our operations, please refer to the information provided under Note 7 – “Recent Accounting Pronouncements” of our notes to the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 (Financial Statements) of this Form 10-Q, which information is incorporated by reference herein.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

UATC’s market risk is confined to interest rate exposure of its debt obligations that bear interest based on floating rates. As of September 29, 2011, the Company maintained no debt obligations bearing floating interest rates.

 

Item 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive, principal financial and principal accounting officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of September 29, 2011, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of September 29, 2011, our disclosure controls and procedures were effective.

 

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

Information required to be furnished by us under this Part II, Item 1 (Legal Proceedings) is incorporated by reference to Note 6 – “Litigation and Contingencies” of our notes to the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 (Financial Statements) of this quarterly report on Form 10-Q.

 

Item 1A. RISK FACTORS

 

There have been no material changes from risk factors as previously disclosed in our annual report on Form 10-K for the fiscal year ended December 30, 2010, filed with the SEC on March 21, 2011 (File No. 033-49598).

 

Item 4. [REMOVED AND RESERVED]

 

Item 6. EXHIBITS

 

Exhibit 
Number

 

Description

31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer

101

 

Financial statements from the quarterly report on Form 10-Q of United Artists Theatre Circuit, Inc. for the quarter ended September 29, 2011, filed on November 14, 2011, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

UNITED ARTISTS THEATRE CIRCUIT, INC.

 

 

 Date: November 14, 2011

By:

/s/  AMY E. MILES

 

 

Amy E. Miles

President

(Principal Executive Officer)

 

 

 

Date: November 14, 2011

By:

/s/  DAVID H. OWNBY

 

 

David H. Ownby

Vice President and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit 
Number

 

Description

 

 

 

31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer

101

 

Financial statements from the quarterly report on Form 10-Q of United Artists Theatre Circuit, Inc. for the quarter ended September 29, 2011, filed on November 14, 2011, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements tagged as blocks of text.

 

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