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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 333-1024

UNITED ARTISTS THEATRE CIRCUIT, INC.
(Exact name of registrant as specified in its charter)

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 and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.

        The number of shares outstanding of $1.00 par value common stock at November 11, 2002 was 100 shares.

UNITED ARTISTS THEATRE CIRCUIT, INC.
Quarterly Report on Form 10-Q
September 26, 2002

TABLE OF CONTENTS

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CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS

        Certain of the matters discussed in this form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve uncertainties and other factors and the actual results and performance of United Artists Theatre Circuit, Inc. ("UATC" or the "Company") may be materially different from future results or performance expressed or implied by such statements. Cautionary statements regarding the risks associated with such forward looking statements include, without limitation, those statements included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk."

        In general, the risks and uncertainties associated with the performance of UATC relate to:

•

reduced attendance at movies generally, a reduction in the number or diversity of popular movies released or an inability to successfully license and exhibit popular films;



•

competitive pressures from other motion picture exhibitors;



•

increased costs of operation, such as increased film licensing costs, rising cost of concessions or increases in hourly wages;



•

adverse determinations in lawsuits to which we are a party or legal or regulatory actions under laws that substantially affect our business, such as the Americans with Disabilities Act;



•

reduced marketing of films by movie studios;



•

increased capital expenditures caused by a change in consumer preferences for our current megaplex format;



•

a change in the cost of attending movies relative to alternative forms of entertainment; or



•

reduced access to first run films as a result of competitors entering into a film licensing zone in which we are currently a sole exhibitor.

        The foregoing cautionary statements expressly qualify all written or oral forward-looking statements attributable to UATC.

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PART I—FINANCIAL INFORMATION
Item 1.    FINANCIAL STATEMENTS (UNAUDITED)

UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Amounts in millions, except share data)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Amounts in millions)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES

Consolidated Statement of Stockholder's Equity
(Amounts in millions)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Amounts in millions)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

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UNITED ARTISTS THEATRE CIRCUIT, INC.
AND SUBSIDIARIES
  
Notes to Condensed Consolidated Financial Statements

(1)  Chapter 11 Reorganization and Basis of Presentation

        The accompanying condensed consolidated financial statements include the accounts of United Artists Theatre Circuit, Inc. ("UATC" or the "Company") and those of all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company, without audit, has prepared the condensed consolidated balance sheets as of September 26, 2002 and January 3, 2002, the condensed consolidated statements of operations for the thirteen weeks and thirty-eight weeks ended September 26, 2002, the thirteen weeks and thirty weeks ended September 27, 2001 and the nine weeks ended March 1, 2001 and the condensed consolidated statements of cash flows for the thirty-eight weeks ended September 26, 2002, thirty weeks ended September 27, 2001 and nine weeks ended March 1, 2001 in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. 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.

        These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the audited financial statements. The results of operations for the thirteen weeks and thirty-eight weeks ended September 26, 2002 are not necessarily indicative of the operating results for the full year.

        On May 12, 1992 UATC was acquired by United Artists Theatre Company (the "Parent" or "United Artists"). In addition to owning all of the outstanding capital stock of UATC, the Parent also owns all of the outstanding capital stock of United Artists Realty Company ("UAR"). UAR and its subsidiary United Artists Properties I Corp. ("Prop I") are the owners and lessors of certain operating theatre properties leased to and operated by UATC.

        On September 5, 2000 (the "Petition Date"), UATC (as it existed before March 2, 2001, the "Predecessor Company") and certain of its subsidiaries, as well as the Parent and certain of the Parent's subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Chapter 11 Cases"), as well as a joint plan of reorganization. On January 22, 2001 the joint plan of reorganization, as amended (the "Plan"), was approved by the Court, and the Debtors declared the Plan to be effective on March 2, 2001 (the "Effective Date"). In conjunction with the reorganization, the Predecessor Company's bank credit facility, as it existed before the Petition Date (the "Pre-Petition Credit Facility"), was restructured into a restructured term credit facility (the "Term Facility") of approximately $252.1 million, and an additional $35.0 million revolving credit facility was secured.

        On March 2, 2001, UATC and its Parent adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Under fresh-start reporting, the reorganization value of UATC, which represents the fair value of all of UATC's assets (net of liabilities), was determined through negotiations between the Company's management and its pre-petition creditors and such reorganization value was allocated to the Company's assets based on their relative fair values. Liabilities, other than deferred income taxes, were also stated at their fair values. Deferred taxes were determined in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 109. Application of SOP 90-7 creates a new reporting entity having no retained earnings or accumulated deficit. The estimated reorganization value of United Artists as of March 2, 2001 was approximately $360 million, of which approximately $300 million was attributable to UATC.

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        UATC's post-reorganization balance sheet, statements of operations and statements of cash flow, which reflect the application of fresh-start reporting, have not been prepared on a consistent basis with the pre-reorganization financial statements and are not comparable in all respects to the financial statements prior to the reorganization. Accordingly, for periods prior to March 2, 2001, the assets and liabilities of UATC and the related consolidated financial statements are referred to herein as "Predecessor Company," and for periods subsequent to March 1, 2001, the assets and liabilities of UATC and the related consolidated financial statements are referred to herein as "Reorganized Company." The "Company" and "UATC" refer to both Reorganized Company and Predecessor Company.

        As a consequence of the Plan, on March 2, 2001, the Parent's consolidated capital structure consisted of approximately $252.1 million of debt under the Term Facility, convertible preferred stock with a par value of $0.1 million and a liquidation value of $57 million, 10 million shares of common stock with a par value of $0.01 per share and warrants for 5.6 million shares of common stock of the Parent with a fair value of $0.28 per warrant. The Anschutz Corporation and its subsidiaries ("TAC"), which were pre-petition senior lenders, converted 100% of their senior debt into a combination of convertible preferred stock, common stock and warrants to purchase approximately 3.7 million shares of common stock with an exercise price of $10.00 per share of the Parent, which in aggregate represented at that time approximately 54% of the fully diluted common equity of the Parent. Other senior lenders under the Pre-Petition Credit Facility received common stock in the Parent representing approximately 29% of the fully diluted common equity and subordinated lenders of the Parent received warrants to purchase 1.8 million shares of common stock with an exercise price of $10.00 per share representing approximately 7% of the fully diluted common equity, with the remaining fully diluted common stock (approximately 10%) reserved for management stock options.

        The filing of the Chapter 11 Cases by the Debtors (i) automatically stayed actions by creditors and other parties in interest to recover any claim that arose prior to the commencement of the Chapter 11 Cases, and (ii) served to accelerate, for purposes of allowance, all pre-bankruptcy filing liabilities of the Predecessor Company, whether or not those liabilities were liquidated or contingent on the Petition Date. In accordance with SOP 90-7 the following table sets forth the liabilities of the Predecessor Company subject to compromise as of March 1, 2001 (amounts in millions):

        Additional liabilities subject to compromise may arise subsequent to the Petition Date resulting from the determination by the bankruptcy court (or through agreement by the parties in interest) of allowed claims for contingencies and other disputed amounts.

        The above summary of liabilities subject to compromise excludes certain obligations existing on the Petition Date with respect to which the Predecessor Company received approval from the court to continue to service in the normal course of business. These obligations primarily include the pre-petition film licensing agreements and other amounts owing to the motion picture studios, employee compensation and other essential trade creditors.

        A settlement agreement was reached with the committee representing the unsecured creditors in the Chapter 11 Cases. As a result of this agreement and its approval through confirmation of the Plan, a pool of $5.0 million in cash and $1.1 million in payment-in-kind notes was established for distribution on a pro rata basis to the Predecessor Company's unsecured creditors. The payment-in-kind notes earn "in-kind" interest at 8% with one third of the principal payable during March 2005, one-third payable

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during March 2006 and the remaining one third, along with all accrued interest, payable during March 2007.

        The discharge of obligations subject to compromise for less than the recorded amounts resulted in an extraordinary gain on discharge of debt of $187.6 million.

        In accordance with SOP 90-7, all costs and expenses incurred in connection with the Predecessor Company's reorganization from the Petition Date to the Effective Date have been reflected as reorganization items in the accompanying consolidated statement of operations.

        Reorganization items (expenses) recorded by the Predecessor Company during the nine weeks ended March 1, 2001 consisted of the following (amounts in millions):

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

        Certain reclassifications have been made to the 2001 financial statement to conform to the 2002 presentation.

(2)  Fresh-Start Reporting

        In connection with the emergence from bankruptcy, UATC adopted fresh-start reporting in accordance with the requirements of SOP 90-7. The application of SOP 90-7 resulted in the creation of a new reporting entity.

        Under fresh-start reporting, the reorganization value of the entity has been allocated to UATC's assets and liabilities on a basis substantially consistent with purchase accounting. The fresh-start reporting adjustments, primarily related to the adjustment of UATC's assets and liabilities to fair market values, will have a significant effect on UATC's future statements of operations.

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        The effects of the reorganization and fresh-start reporting on UATC's balance sheet as of March 2, 2001 are as follows (in millions):

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(a)

To record the debt discharge and the issuance of new debt under the Term Facility of $252.1 million, and to record the settlement with the Predecessor Company's creditors.

(b)

To record the elimination of the Predecessor Company's equity and related accounts.

(c)

To record the adjustments to reflect the assets and liabilities at their fair values and to adjust the accumulated deficit to zero.

        The implementation of the Plan also resulted in, among other things, the satisfaction or disposition of various types of claims against the Predecessor Company, the assumption and rejection of certain leases and agreements, and the establishment of a new board of directors following the Effective Date, along with new employment and other arrangements with certain members of management.

(3)  Formation of Regal Entertainment Group

Exchange Transaction

        On March 8, 2002, TAC entered into an agreement to exchange its controlling interest in United Artists for common stock of Regal Entertainment Group ("REG"), resulting in REG owning over 90% of United Artists common stock. TAC also exchanged its ownership interests in two other theatre companies for common stock of REG. The management of these theatre companies has been consolidated in Knoxville, Tennessee, while management of certain ancillary businesses has been consolidated in Centennial, Colorado. As described below, the exchange transaction was consummated on April 12, 2002.

        On April 12, 2002, through a series of transactions, REG issued (1) 70,538,017 shares of Class B common stock to TAC in exchange for its controlling equity interests in Regal Cinemas Corporation ("Regal Cinemas"), United Artists, Edwards Theatres, Inc. ("Edwards") and Regal CineMedia Corporation ("RCM"), (2) 14,052,320 shares of Class B common stock to OCM Principal Opportunities Fund II, L.P. and its subsidiaries ("Oaktree's Principal Activities Group") in exchange for its contribution of capital stock of Regal Cinemas and Edwards and (3) 27,493,575 shares of Class A common stock to the other stockholders of Regal Cinemas, United Artists, Edwards and Regal CineMedia party to an exchange agreement in exchange for their capital stock of Regal Cinemas, United Artists, Edwards and RCM.

        Upon the closing of the exchange transaction, the holders of outstanding options of United Artists received replacement options to purchase 2,287,552 shares of REG Class A common stock at prices ranging from $4.44 to $12.87 per share. REG also granted to holders of United Artists warrants in exchange for their contribution to REG of outstanding warrants to purchase 3,750,000 shares of United Artists' common stock, warrants to purchase 3,928,185 shares of REG Class B common stock at $8.88 per share and warrants to purchase 296,129 shares of REG Class A common stock at $8.88 per share.

Initial Public Offering of Regal Entertainment Group

        In May 2002, REG issued 18.0 million shares of its Class A common stock in an initial public offering. The initial public offering was effected through a Registration Statement on Form S-1 (File No. 333-84096) that was declared effective by the Securities and Exchange Commission on May 8, 2002. All 18.0 million shares were sold at an initial public offering price of $19.00 per share, for an aggregate offering price of $342 million, through a syndicate of underwriters managed by Credit Suisse First Boston Corporation, Lehman Brothers Inc., Bear, Stearns & Co. Inc. and Salomon Smith Barney Inc. A portion of the proceeds from this offering was loaned by REG to the Parent to repay UATC's Term Facility, which was replaced by a note payable to the Parent, which is obligated under a substantially similar note payable to REG.

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        In August 2002, Regal Entertainment Holdings, Inc., a wholly owned subsidiary of REG ("REH"), acquired the remaining outstanding shares of common stock of United Artists held by the United Artists' minority stockholders and warrants to purchase shares of common stock of United Artists held by various institutional holders for approximately $34.0 million. Immediately prior to the acquisition, the common stock of United Artists was the only outstanding class of voting stock, of which the minority stockholders owned approximately 9.9%, and REH owned the remaining 90.1%. As a result of this transaction, United Artists became a wholly owned subsidiary of REH.

(4)  Summary of Significant Accounting Policies

        (a)    Reporting Period.    On April 12, 2002, TAC contributed its ownership of United Artists to REG in exchange for equity of REG. Following the exchange, UATC changed its fiscal year, which used to end on the Thursday closest to December 31 each year, to conform to REG's fiscal year. The company's fiscal year now ends on the first Thursday after December 25, which in certain years results in a 53-week fiscal year. The new reporting period is also based on a calendar that coincides with film playweeks. This resulted in the first quarter of 2002 containing one less week of operating results compared to the first quarter of 2001.

        (b)    Segment Information.    As a result of the items discussed in Note 3, UATC now manages its business based on one reportable segment.

        (c)    Impact of Recently Issued Accounting Standards.    In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board Opinion No. 16 (APB 16), "Business Combinations," and primarily addresses the accounting for the cost of an acquired business (i.e., the purchase price allocation), including any subsequent adjustment to its cost. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting) and supersedes APB 17, "Intangible Assets." The most significant changes made by SFAS No. 141 involve the requirement to use the purchase method of accounting for all business combinations, thereby eliminating use of the pooling-of-interests method along with the establishment of new criteria for determining whether the Company should recognize intangible assets acquired in a business combination separately from goodwill. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material impact on UATC's financial position or results of operations.

        Under SFAS No. 142, the Company can no longer amortize goodwill, reorganizational value in excess of amounts allocated to identifiable assets or indefinite lived intangible assets, and will test for impairment at least annually at the reporting unit level. Additionally, the amortization period of intangible assets with finite lives is no longer limited to 40 years. Other long-lived assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," issued in August 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets, including excess reorganization value, recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. As required by SFAS No. 142, the standard has not been retroactively applied to the results for the period prior to adoption. The Company's goodwill transitional impairment test indicates that the fair value of the reporting unit exceeds the goodwill carrying value and therefore, at this time, goodwill is not deemed to be impaired. Amortization relating to goodwill and excess reorganization value was $2.8 million, $6.8 million and $0.7 million for the thirteen weeks and thirty weeks ended September 27, 2001 and the nine weeks ended March 1, 2001, respectively. The Company will conduct its annual valuation in the fourth quarter.

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        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of the fair value of obligations associated with the retirement of long-lived assets when there is a legal obligation to incur such costs. Under SFAS No. 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises and will be amortized to expense over the life of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. UATC is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which provides clarifications of certain implementation issues with SFAS No. 121 along with additional guidance on the accounting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 and applies to all long-lived assets (including discontinued operations) and consequently amends APB 30, "Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 develops one accounting model (based on the model in SFAS No. 121) for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that entities measure long-lived assets that are to be disposed of by sale at the lower of book value or fair value less cost to sell. That requirement eliminates APB 30's requirement that discontinued operations be measured at net realizable value or that entities include under "discontinued operations" in the financial statements amounts for operating losses that have not yet occurred. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) the entity can distinguish from the rest of the entity and (2) the entity will eliminate from the ongoing operations of the entity in a disposal transaction.

        The Company adopted SFAS No. 144 in the first quarter of 2002. The adoption of SFAS No. 144 did not have a material impact on UATC's financial position and results of operations.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements including the rescission of Statement 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30 will now be used to classify those gains and losses. The provisions of SFAS No. 145 related to the rescission of Statement 4 are effective for fiscal years beginning after May 15, 2002.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force (EITF) Issue No. 94-3 (EITF 94.3), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.)" The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Retroactive application of SFAS No. 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS No. 146 should continue to be accounted for in accordance with EITF 94-3 or other applicable preexisting guidance.

        In July 2001, the American Institute of Certified Public Accountants issued Emerging Issues Task Force Topic No. D-98, which requires that equity securities, with redemption features that are not solely within the control of the issuer, be classified outside permanent equity. This guidance was effective for UATC's fourth quarter 2001 and is to be applied retroactively. The adoption of this guidance did not have a material impact on UATC's financial position or results of operations.

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(5)  Debt

        Debt is summarized as follows (amounts in millions):

(a)

The Term Facility was paid off in May 2002 with a portion of the proceeds generated from REG's initial public offering. This debt was replaced with a note payable to the Parent, which is obligated under a substantially similar note payable to REG.

(b)

The Revolving Credit Facility was terminated in July 2002.

(c)

The related party payable represents a note payable to the Parent, which is obligated under a substantially similar note payable to REG. The note payable to the Parent bears interest at a rate of 9.375% and matures in December of 2006.

(d)

Other debt includes $2.6 million of equipment lease obligations, $1.2 million of payment-in-kind notes, $0.2 million of unsecured creditor notes and $3.9 million of mortgages secured by land and buildings as of September 26, 2002 and $2.7 million of capital lease obligations, $1.1 million of payment-in-kind notes and $4.2 million of mortgages secured by land and buildings as of January 3, 2002.

(6)  Related Party Transactions

        UATC leases certain of its theatres from UAR and Prop I in accordance with two master leases (the "Master Leases"). The Master Leases provide for basic monthly or quarterly rentals and may require additional rentals, based on the revenue of the underlying theatre. In order to fund the cost of additions and/or renovations to the theatres leased by UATC from UAR or Prop I, UATC has periodically made advances to UAR. Through March 1, 2001, interest on the advances accrued at the prime rate and amounted to $0.9 million for the nine weeks ended March 1, 2001. As part of the application of fresh-start reporting the receivable was reclassified from other assets to stockholder's equity and interest no longer accrues on this account. The receivable will be reduced upon any sale of properties by UAR and Prop I, with UATC receiving the net proceeds of the sale. During the thirty-eight weeks ended September 26, 2002, the related party receivable increased by $8.5 million as the result of payment of income taxes on behalf of UAR and payment of operating expenses on behalf of RCM, partially offset by the sale of two properties during 2002.

        A management agreement will be effected between Regal Cinemas and United Artists under which Regal Cinemas will manage the day to day aspects of United Artists operations. Such agreement is expected to be finalized by the end of fiscal 2002 and will be recorded in UATC's financial statements upon effectiveness of the agreement. Had this agreement been in effect during the thirteen weeks ended September 26, 2002, United Artists would have recorded management fee expenses of approximately $4.5 million. In addition, a management agreement will be effected between United Artists and Regal CineMedia whereby Regal CineMedia will manage the ancillary revenue aspects of United Artists' theatre operations.

(7)  Income Taxes

        Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and

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operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The benefit of the Company's deferred tax asset has been reduced by a valuation allowance.

        As of January 3, 2002, the Company had available net operating loss carryforwards ("NOL carryforwards") of approximately $73.3 million with expiration commencing during 2007. Further, as a result of a statutory "ownership change" (as defined in Section 382 of the Internal Revenue Code) that occurred in 2001, the Company's ability to utilize its NOL carryforwards and certain deferred tax assets for federal income tax purposes is restricted to approximately $5 million per year. Any subsequent statutory "ownership change" could result in further limiting the Company's ability to utilize its NOL carryforwards and certain deferred tax assets.

        A provision for income taxes of $4.5 million was recorded during the thirteen weeks ended September 26, 2002. Additionally, a provision for income taxes of $12.4 million was recorded for the thirty-eight weeks ended September 26, 2002, while a provision for income taxes of $0.1 million was recorded during the thirteen week and the thirty-nine week periods ended September 27, 2001. The provision for income taxes recorded during the thirteen week and the thirty-eight week periods ended September 26, 2002 reflects an effective rate of approximately 45.0% and 44.4%, respectively. The effective rate varies from the statutory rate due to the inclusion of state income taxes and the impact of certain nondeductible restructuring expenses and minority interest. Prior to UATC emerging from Chapter 11 on March 2, 2001, UATC had no income tax expense due to the Company's ability to utilize NOL carryforwards for the pre-emergence period.

        If the Company, in future tax periods, were to recognize tax benefits attributable to tax attributes of the Company (such as NOL carryforwards), such benefit would be applied to reduce certain balance sheet assets in accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."

(8)  Restructure Costs

        Restructure costs relate to the Company's restructuring and severance plan charges associated with the combination of the Company with Regal Cinemas and Edwards. For the thirty-eight weeks ended September 26, 2002 a total of $2.7 million was recorded as restructure costs. This amount includes $2.0 million of termination benefits of which $1.5 million has been paid out to employees through September 26, 2002. Also included in this amount is $0.1 million related to estimated lease termination costs and $0.6 million that related to legal and professional fees.

(9)  Commitments and Contingencies

        UATC conducts a significant portion of its theatre and corporate operations in leased premises. These leases have non-cancelable terms expiring at various dates after January 3, 2002. Many leases have renewal options. Most of the leases provide for contingent rentals based on the revenue results of the underlying theatre and require the payment of taxes, insurance, and other costs applicable to the property. Also, certain leases contain escalating minimum rental provisions that have been accounted for on a straight-line basis over the initial term of the leases.

        UATC and UAR are parties to several sale and leaseback transactions whereby the land and buildings underlying certain theatres were sold and leased back from unaffiliated third parties pursuant to lease terms averaging 21 years with an average of two 5 year renewal options. During late 2000 and early 2001, UATC amended the largest of these sale and leaseback transactions to allow UATC to terminate the master lease with respect to obsolete properties, allow the owner trustee under the master lease to sell up to $35.0 million of those properties and pay down the underlying debt at 85% of

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par, and reduce the amount of rent paid by UATC on the master lease on a pro rata basis to the amount of debt repaid. Gains on the sale and leaseback transactions were deferred and amortized as a reduction of rent expense over the individual theatre lease terms prior to the adoption of SOP 90-7. Under fresh-start reporting, the remaining unamortized deferred gain was eliminated. Such unamortized deferred gains aggregated $19.0 million at March 1, 2001.

        The Americans with Disabilities Act of 1990 (the "ADA") and certain state statutes, among other things, require that places of public accommodation, including theatres (both existing and newly constructed), be accessible to and that assistive listening devices be available for use by certain patrons with disabilities. With respect to access to theatres, the ADA may require modifications to be made to existing theatres to make them accessible to certain theatre patrons and employees who are disabled. The ADA requires that theatres be constructed in such a manner that persons with disabilities have full use of the theatre and its facilities and reasonable access to work stations. The ADA provides for a private right of action and reimbursement of plaintiffs' attorneys' fees and expenses under certain circumstances. UATC has established a program to review and evaluate UATC theatres and to make any changes that may be required by the ADA. UATC estimates the costs to comply with these requirements will total between $2.5 million and $5.0 million.

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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations

        On September 5, 2000 (the "Petition Date") UATC (as it existed before March 2, 2001, the "Predecessor Company") and certain of its subsidiaries, as well as its parent, United Artists Theatre Company (the "Parent" or "United Artists") and certain of the Parent's subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Chapter 11 Cases"), as well as a joint plan of reorganization. On January 22, 2001 the joint plan of reorganization, as amended (the "Plan"), was approved by the Court, and the Debtors declared the Plan to be effective on March 2, 2001 (the "Effective Date). In conjunction with the reorganization, the Predecessor Company's bank credit facility as it existed before the Petition Date (the "Pre-Petition Credit Facility") was restructured into a restructured term credit facility (the "Term Facility") of approximately $252.1 million, and an additional $35.0 million revolving credit facility was secured.

        On March 2, 2001, the Reorganized Company (as defined in Note 1 to the Unaudited Condensed Consolidated Financial Statements) adopted fresh-start reporting in accordance with AICPA Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). UATC's post-reorganization balance sheet and the statement of operations, which reflect the application of fresh-start reporting, have not been prepared on a consistent basis with the pre-reorganization financial statements and are not comparable in all respects to the financial statements prior to the reorganization. For accounting purposes, the inception date of the Reorganized Company was deemed to be March 2, 2001.

        Due to the occurrence of the Effective Date on March 2, 2001 and the application of fresh-start reporting, UATC's 2001 statements of operations include information reflecting the thirty weeks ended September 27, 2001, and the nine weeks ended March 1, 2001.

        UATC's 2002 first quarter includes only twelve weeks of operations rather than thirteen, as UATC's operating and reporting calendar was adjusted to conform to the operating and reporting calendar of REG. As mentioned above, UATC's fiscal year changed from ending on the Thursday closest to December 31 each year to ending on the Thursday immediately following December 25 each year.

        In order to provide a meaningful basis of comparing the thirty-eight weeks ended September 26, 2002 and the thirty-nine weeks ended September 27, 2001 for purposes of the following tables and discussion, the operating results of the Reorganized Company for the thirty weeks ended September 27, 2001 have been combined with the operating results of Predecessor Company for the nine weeks ended March 1, 2001 (collectively referred to as "Combined Company") and are compared to the thirty-eight weeks ended September 26, 2002. Depreciation, amortization, and certain other line items included in the operating results of Combined Company are not comparable between periods as the nine weeks ended March 1, 2001 of the Predecessor Company do not include the effect of fresh-start reporting adjustments. The combining of reorganized and predecessor periods is not acceptable under accounting principles generally accepted in the United States of America.

        The following discussion and analysis of UATC's financial condition and results of operations should be read in conjunction with UATC's Unaudited Condensed Consolidated Financial Statements and related notes thereto.

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        The following table sets forth for the Reorganized and Combined Company's fiscal periods indicating the percentage of total revenues represented by certain items reflected in UATC's statements of operations:

Total Revenues

        The following table summarizes revenues and revenue-related data for the thirteen weeks and thirty-eight weeks ended September 26, 2002 and the thirteen weeks and thirty-nine weeks ended September 27, 2001 (in millions, except averages):

Thirteen weeks ended September 26, 2002 and September 27, 2001

        Admissions.    Total admissions revenues decreased $7.0 million, or 6.4%, to $103.0 million, for the thirteen weeks ended September 26, 2002, from $110.0 million for the thirteen weeks ended September 27, 2001. The decrease in admissions revenues during the thirteen weeks ended September 26, 2002 compared to the thirteen weeks ended September 27, 2001 was primarily attributable to a 8.1% decrease in attendance, partially offset by a 2.0% increase in average ticket prices. The closures of underperforming theaters during 2001 and the first nine months of 2002 contributed to the decrease in attendance for the thirteen weeks ended September 26, 2002 compared to the thirteen weeks ended September 27, 2001. However, the closure of these underperforming

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theaters resulted in the increase in average ticket prices during the thirteen weeks ended September 26, 2002 compared to the thirteen weeks ended September 27, 2001, due to these locations generally having a lower average ticket price.

        Concessions.    Total concessions revenues decreased $1.0 million, or 2.3%, to $42.4 million for the thirteen weeks ended September 26, 2002 from $43.4 million for the thirteen weeks ended September 27, 2001. The decrease in concessions revenues during the thirteen weeks ended September 26, 2002 compared to the thirteen weeks ended September 27, 2001 was primarily due to lower attendance, as previously discussed, partially offset by a 5.0% increase in the average concession sale per patron.

        Other Operating Revenues.    Total other operating revenues increased $1.1 million, or 21.2%, to $6.3 million for the thirteen weeks ended September 26, 2002 from $5.2 million for the thirteen weeks ended September 27, 2001. The increase in other operating revenues during the thirteen weeks ended September 26, 2002 compared to the thirteen weeks ended September 27, 2001 was primarily due to an increase in on-screen advertising revenues and the reclassification of certain concession rebates to other operating revenues during 2002.

Thirty-eight weeks ended September 26, 2002 and thirty-nine weeks ended September 27, 2001

        Admissions.    Total admissions revenues increased $9.7 million, or 3.4%, to $295.9 million, for the thirty-eight weeks ended September 26, 2002 from $286.2 million for the thirty-nine weeks ended September 27, 2001. The increase in admissions revenues during the thirty-eight weeks ended September 26, 2002 compared to the thirty-nine weeks ended September 27, 2001 was primarily attributable to a 3.4% increase in average ticket prices, partially offset by the absence of one week of operating results during 2002 as compared to 2001.

        Concessions.    Total concessions revenues increased $8.1 million, or 7.1%, to $122.9 million for the thirty- eight weeks ended September 26, 2002 from $114.8 million for the thirty-nine weeks ended September 27, 2001. The increase in concessions revenues during the thirty-eight weeks ended September 26, 2002 compared to the thirty-nine weeks ended September 27, 2001 was primarily due to a 6.4% increase in the average concession sale per patron, partially offset by the absence of one week of operating results during 2002 as compared to 2001.

        Other Operating Revenues.    Total other operating revenues increased $2.2 million, or 15.1%, to $16.8 million for the thirty-eight weeks ended September 26, 2002, from $14.6 million for the thirty-nine weeks ended September 27, 2001. The increase in other operating revenues during the thirty-eight weeks ended September 26, 2002 compared to the thirty-nine weeks ended September 27, 2001 was primarily due to an increase in on-screen advertising revenues and the reclassification of certain concession rebates to other operating revenues, partially offset by the absence of one week of operating results during 2002 as compared to 2001.

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Direct Theatre Costs

        The following table summarizes direct theatre costs for the thirteen weeks and thirty-eight weeks ended September 26, 2002 and the thirteen weeks and thirty-nine weeks ended September 27, 2001 (dollars in millions):