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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 1999
COMMISSION FILE NUMBERFor the fiscal year ended December 28, 2000
Commission file number 333-52943
REGAL CINEMAS, INC.
(EXACT NAME(Exact name of registrant as specified in its charter)
Tennessee 62-1412720
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NUMBER)
OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1412720
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
7132 COMMERCIAL PARK DRIVE
KNOXVILLE, TENNESSEE 37918
(Address of principal executive offices) (Zip Code)
INCORPORATION OR ORGANIZATION)
7132 Mike Campbell Drive
Knoxville, Tennessee 37918
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (865) 922-1123
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Shares of common stock, no par value per share, outstanding on March 29, 2000,28, 2001
were 216,873,501216,282,348.
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REGAL CINEMAS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
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Item 1. Business.................................................... 3Business
The Company................................................. 3Company 2
Recapitalization and Financing.............................. 4Financing 3
Business Strategy........................................... 4Strategy 5
Industry Overview...........................................Overview 6
Theatre Operations..........................................Operations 7
Seasonality.................................................Seasonality 9
Film Licensing..............................................Distribution 9
Complementary Concepts......................................Film Licensing 10
Competition................................................. 10Competition 11
Management Information Systems.............................. 11
Employees................................................... 11
Regulation.................................................. 11Systems 12
Employees 12
Regulation 12
Risk Factors................................................ 12Factors 13
Item 2. Properties.................................................. 14Properties 15
Item 3. Legal Proceedings...........................................Proceedings 15
Item 4. Submission of Matters to a Vote of Security-Holders.........Security-Holders 15
PART II 15
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 15Matters 16
Item 6. Selected Financial Data..................................... 15Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................Operations 17
Overview....................................................Overview 17
BackgroundThe Company and the Industry 17
Results of Regal......................................... 17
Result of Operations........................................ 17Operations 19
Fiscal Years Ended December 28, 2000 and December 30, 1999 20
Fiscal Years Ended December 30, 1999 and December 31, 1998........................................................ 18
Fiscal Years Ended December 31, 1998 and January 1, 1998.... 1921
Impairment and Other Disposal Charges....................... 20Charges 22
Liquidity and Capital Resources............................. 20Resources 23
Inflation; Economic Downturn................................ 22Downturn 25
New Accounting Pronouncements............................... 23
Recent Accounting Pronouncements Not Yet Adopted............ 2325
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 23Risk 26
Item 8. Financial Statements and Supplemental Data.................. 25Data 28
Independent Auditors' Report................................ 26
Report of Independent Accountants........................... 2729
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 45Disclosures 51
PART III 46
Item 10. Directors and Executive Officers of the Registrant.......... 46Registrant 51
Composition of the Board of Directors....................... 49Directors 54
Item 11. Executive Compensation...................................... 49Compensation 54
Directors' Compensation..................................... 50Compensation 55
Employment Agreements....................................... 50Agreements 56
Compensation Committee Interlocks and Insider Participation............................................... 51Participation 56
Item 12. Security Ownership of Certain Beneficial Owners and Managements................................................. 51Managements 57
Item 13. Certain RelationshipRelationships and Related Transactions............... 52Transactions 58
PART IV 53
Item 14. Exhibits, Financial StatementStatements Schedules and Reports on Form 8-K.................................................... 538-K 59
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REGAL CINEMAS, INC.
PART I
ITEM 1. BUSINESS
THE COMPANY
Regal Cinemas, Inc. ("Regal" or the "Company") is the largest motion picture
exhibitor in the United States based upon the number of screens in operation. At
December 30, 1999,28, 2000, the Company operated 430391 theatres, with an aggregate of 4,4134,328
screens in 32 states. Since its inception in November 1989, the Company has
achieved substantial growth in revenues and net income before interest expense, income
taxes, depreciation and amortization, other income or expense, extraordinary
items, and non-recurring charges, impairment charges, and other theatre closing
costs including loss on disposal of operating assets ("EBITDA"). As a result of
the Company's focus on enhancing revenues, operating efficiently and strictly
controlling costs, the Company has achieved what management believes are among
the highest EBITDA margins in the domestic motion picture exhibition industry.
For the five-year period ended December 30, 1999, the Company had compound
annual growth rates in revenues and EBITDA of 35.4% and 33.9% respectively.
The Company operates primarily multiplex theatres and has an average of 10.311.1
screens per location, which management believes is among the highest in the
industry and which compares favorably to an average of approximately 8.18.6 screens
per location for the five largest North American motion picture exhibitors at
September 30, 1999.June 1, 2000. The Company develops, acquires and operates multiplex theatres
primarily in mid-sized metropolitan markets and suburban growth areas of larger
metropolitan markets, predominantly in the eastern and northwestern United
States. The Company seeks to locate theatres in markets that it believes
are underscreened or served by older theatre facilities. The Company also seeks
to locate each theatre where it will be the sole or
leading exhibitor within a particular geographic film licensing zone. Management
believes that at December 30, 1999,28, 2000, approximately 80.2%85% of the Company's screens
were located in film licensing zones in which the Company was the sole
exhibitor.
The Company continually upgradeshas historically upgraded its theatre circuit by opening new
theatres, adding new screens to existing theatres and selectively closing or
disposing of under-performing multiplexes.theatres. The Company has also grown by acquiring
eleven theatre circuits during the last seven years. From its inception through
December 30, 1999,28, 2000, the Company has grown by acquiring 287233 theatres with 2,2331,905
screens (net of subsequently closed locations), developed 143developing 158 new theatres with
2,0272,255 screens and adding 153168 screens to existing theatres. This strategy has
served to establish and enhance the Company's presence in selected geographic
markets. In addition, as a result of this strategy, the Company enjoys one of
the most modern asset bases in the industry with 42%44.3% of its circuit having
been built since 1997. The Company projects that at the end of fiscal 2000 approximately
48% of the circuit will have been built since 1997. Approximately 40%44.0% of the Company's screens are in
theatres with 15 or more screens.
At December 30, 1999,As a whole, the film exhibition industry is in a period of transition. Over the
past several years, film exhibition companies, including the Company, had 16embarked
on aggressive programs of rapidly building state of the art theatre complexes
(complete with amenities such as stadium seating and digital stereo
surround-sound) in an effort to increase overall industry attendance. However,
these aggressive new building strategies generated significant competition in
once stable markets and rendered many theatres obsolete more rapidly than
anticipated. This effect, together with 242the fact that many of the now obsolete
theatres are leased under long-term commitments, produced an oversupply of
screens under construction and 15 new
screens under constructionthroughout the exhibition industry at three existing theatres. In addition,a rate much quicker than the
industry could effectively handle. The industry overcapacity coupled with
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declining national box office attendance during 2000 severely impacted the
operating results of the Company had entered into leases in connection withand many of its planscompetitors.
The exhibition industry continues to develop an additional 16
theatres with 241 screens.
On August 26, 1998,report severe liquidity concerns, defaults
under credit facilities, renegotiations of financial covenants, as well as many
recently announced bankruptcy filings.
These industry dynamics have severely affected the Company, acquired Act III Cinemas, Inc. ("Act
III"), thenwhich has
experienced deteriorating operating results over the ninth largest motion picture exhibitorlast fiscal year.
Additionally, because the Company has funded its expansion efforts over the past
several years primarily from borrowings under its credit facilities, the
Company's leverage has grown significantly over this time. Consequently, since
the fourth quarter of 2000, the Company has been in the United States
based on numberdefault of screenscertain financial
covenants contained in operation (the "Act III Merger")its Senior Credit Facilities and its Equipment Financing
(as these terms are defined below).
At the timeAs a result of the Act III Merger, Act III operated 130 theatres, with an aggregatedefault, the administrative agent under the Company's Senior
Credit Facilities delivered payment blockage notices to the Company and the
indenture trustee of 835
screens, strategically locatedits 9-1/2% Senior Subordinated Notes due 2008 (the "Regal
Notes") and its 8-7/8% Senior Subordinated Debentures due 2010 (the "Regal
Debentures") prohibiting the payment by Regal of the semi-annual interest
payments of approximately $28.5 million and $8.9 million due to the holders of
the notes on December 1, 2000 and December 15, 2000, respectively. As a result
of the interest payment defaults, the Company is also in concentrated areas throughoutdefault of the
Pacific
Northwest, Texasindentures related to the Regal Notes and Nevada.Regal Debentures Accordingly, the
holders of the Company's Senior Credit Facilities and the indenture trustee for
the Regal Notes and Regal Debentures have the right to accelerate the maturity
of all of the outstanding indebtedness under the respective agreements, which
together totals approximately $1.82 billion. The Company does not have the
ability to fund or refinance the accelerated maturity of this indebtedness.
The Company has acquired ten otherengaged financial advisers and is currently evaluating a
longer-term financial plan to address various restructuring alternatives and
liquidity requirements. The financial plan will provide for the closure of
under-performing theatre circuits
duringsites, potential sales of non-strategic assets and a
potential restructuring, recapitalization or a bankruptcy reorganization of the
last five years, including Cobb Theatres, Georgia State Theatres and
Litchfield Theatres. These acquisitions have enabled the Company to become a
leading operator in certain of its markets and to improve its market
concentration in the eastern and northwestern United States. Through the
integration of these acquisitions, the Company has achieved economies of scale
by consolidating purchasing, operating and other administrative functions.
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4Company.
RECAPITALIZATION AND FINANCING
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P. ("KKR") and
an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") merged
with and into the Company (the Regal Merger)"Regal Merger"), with the Company continuing as
the surviving corporation. The consummation of the Regal Merger resulted in a
recapitalization (the Recapitalization)"Recapitalization") of the Company. In the
Recapitalization, existing holders of the Company's common stock (the Common
Stock)"Common
Stock") received cash for their shares of Common Stock, and KKR, Hicks Muse, DLJ
Merchant Banking Partners II, L.P. and affiliated funds (DLJ)("DLJ") and certain
members of the Company's management acquired the Company. In addition, in
connection with the Recapitalization, the Company canceled options and
repurchased warrants held by certain directors, management and employees of the
Company (the Option/"Option/Warrant Redemption)Redemption"). The aggregate purchase price paid to
effect the Regal Merger and the Option/Warrant Redemption was approximately $1.2
billion.
The Regal Merger was financed by an offering (the "Original Note Offering") of
$400.0 million aggregate principal amount of 9 1/2% Senior
SubordinatedRegal Notes, due 2008 (the "Original Notes"), initial borrowings of
$375.0 million under the Company's current senior credit facility (as amended,
the "Senior Credit Facilities") and $776.9 million in proceeds from the
investment by KKR, Hicks Muse, DLJ and management in the
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Company (the "Equity Investment"). The proceeds of the Original Note Offering,
the initial borrowing under the Senior Credit Facilities and the Equity
Investment (collectively, the "Financing") were used: (i) to fund the cash
payments required to effect the Regal Merger and the Option/Warrant Redemption;
(ii) to repay and retire the Company's then existing senior credit facilities;
(iii) to repurchase all of the Company's then existing senior subordinated
notes; and (iv) to pay related fees and expenses. The Financing, the Regal
Merger, the Recapitalization and the transactions contemplated thereby,
including but not limited to, the application of the proceeds of the Financing,
are referred to herein as the "Transactions."
The Company's Senior Credit Facilities provide for borrowings of up to $1,008.8$1,005.0
million in the aggregate, consisting of $500.0 million under a revolving credit
facility (the "Revolving Credit Facility") and $508.8$505.0 million, in the aggregate,
under three separate term loan facilities. As of December 30,
1999,28, 2000, the Company
had approximately $128.5 millionfully drawn all available for borrowingfunds under the Senior Credit Facilities.
On August 26, 1998, the Company acquired Act III Cinemas, Inc. ("Act III"), then
the ninth largest motion picture exhibitor in the United States based on number
of screens in operation (the "Act III Merger"). At the time of the Act III
Merger, Act III operated 130 theatres, with an aggregate of 835 screens,
strategically located in concentrated areas throughout the Pacific Northwest,
Texas and Nevada.
On August 26, 1998, in connection with the Act III Merger, the Company amended
its Senior Credit Facilities and borrowed $383.3 million thereunder to repay Act
III's then existing bank borrowings and two senior subordinated promissory
notes, each in the aggregate principal amount of $75.0 million, which were owned
by KKR and Hicks Muse. The repayment of Act III's bank borrowings and promissory
notes, together with the Act III Merger, are referred to herein as the "Act III
Combination."
On November 10, 1998, the Company issued an additional $200.0 million aggregate
principal amount of 9 1/2% Senior SubordinatedRegal Notes due 2008 (the
"Tack-On Notes") under the same indenture governing the Originalfirst
series of Regal Notes. The proceeds of thethis offering of the Tack-OnRegal Notes (the "Tack-On Offering") were
used to repay and retire portions of the Senior Credit Facilities. The Original Notes
and the Tack-On Notes are collectively referred to herein as the "Regal Notes."
On December 16, 1998, the Company issued $200.0 million aggregate principal
amount of 8 7/8% Senior Subordinated Debentures due 2010 (the "Regal
Debentures").Regal Debentures. The proceeds of the offering of the Regal Debentures
(the "Debenture Offering") were used to repay all of the then outstanding
indebtedness under the Revolving Credit Facility and the excess was used for
working capital purposes.
The Company currently is in default of certain financial covenants contained in
the Senior Credit Facilities and its $19.5 million equipment financing agreement
("Equipment Financing") . Additionally, the Company is in default of the
indentures related to the Regal Notes and the Regal Debentures. The Company
reclassified all debt outstanding under the Credit Facilities, the Equipment
Financing, the Regal Notes and the Regal Debentures from long-term debt to
current debt on the Company's financial statements because of non-compliance
with the related agreements. See Note 7 of the Notes to Consolidated Financial
Statements.
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BUSINESS STRATEGY
Operating Strategy
Management believes that the following are the key elements of the Company's
operating strategy:
New Multiplex Theatres: Management believes that the Company's
multiplex theatres promote increased attendance per location and maximize
operating efficiencies through reduced labor costs and improved utilization of
theatre capacity. The Company's multiplex theatres enable it to offer a diverse
selection of films, stagger movie starting times, increase
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flexibility in determining the number of weeks that a film will run and the size
of the auditorium in which it is shown and more efficiently serve patrons from
common concessions and other support facilities. The Company further believes
that the developmentits base of multiplex theatres allows it to achieve an optimal relationship
between the number of screens (generally 14 to 18) and the size of the
auditoriums (100 to 500 seats). The Company's multiplex theatres are designed to
increase the profitability of the theatres by maximizing the revenue per square
foot generated by the facility and reducing the cost per square foot of
constructing and operating the theatres.
Asset Base.Base: The Company maintains one of the most modern circuits in
the industry with 42%44.3% of its circuit having been built since 1997. Additionally,
the Company projects that at the end of fiscal 2000 approximately 48% of the
circuit will have been built since 1997. Management
believes that the modern asset base provides the Company with a competitive
advantage as consumers continue to chosechoose theatres based on the movie going
experience. The Company believes that the newer theatres enhance the movie going
experience.
Disposition Efforts.Efforts: Management has increased the focus on the
disposition of under-performing locations. The Company plans to close between
175 and 200closed 328 screens in both54
theatres during the 2000 and in 2001.fiscal year. Management believes the acceleration of
screen closures will mitigate the erosion of its older theatres.theatres, increase cash
flow by eliminating negative cash flow sites and increase traffic at newer sites
by redirecting patrons to these sites. The Company has developed specific action
plans to aggressively bring under-performing theatres off-line including subleasing certain locations,
selling
ownedfee properties and working with existing landlords to terminate certain leases.
Management believes thatThe Company's restructuring plan includes the cost associated with the
dispositionclosure of the under-performing sites will be insignificantan additional 900 to
1,000 screens in the 20002001 fiscal year.
Cost Control.Control: The Company's cost control programs have resulted in
EBITDA margins, which management believes are among the highest in the motion
picture exhibition industry. Management's focus on cost control extends from a
theatre's initial development to its daily operation. Management believes that
it is able to reduce construction and operating costs by designing prototype
theatres adaptable to a variety of locations and by actively supervising all
aspects of construction. In addition, throughThrough the use of detailed management reports, the
Company closely monitors labor scheduling, concession yields and other
significant operating expenses. A significant component of theatre management's
compensation is based on controlling operating expenses at the theatre level.
Revenue Enhancements.Enhancements: The Company strives to enhance revenue growth
through: (i) the addition of specialty cafes within certain theatre lobbies
serving non-traditional concessions; (ii) the sale of screen slide and rolling
stock advertising time prior to scheduled movies; (iii) the marketing and
advertising of certain theatres in its circuit; (iv) the addition of
state-of-the-art video arcades; and (v) the rental of theatres to organizations
during non-peak hours. Increasing ancillary revenue is a key focus for the
Company's management in fiscal 2000.2001. The Company believes that in addition to
the items mentioned, there are opportunities with the Internet for additional
ticket sales/advertising revenues.
Patron Satisfaction/Quality Control.Control: The Company emphasizes patron
satisfaction by providing convenient locations, comfortable seating, spacious
neon-enhanced lobby and concession areas and a wide variety of film selections.
The Company's theatre complexes feature clean, modern auditoriums with high
quality projection and digital stereo surround-sound
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systems. As of December 30,
1999,28, 2000, approximately 64%50.1% of the Company's theatres
were equipped with digital surround-sound systems. Stadium seating (seating with
an elevation between rows to provide unobstructed viewing as well as other
amenities to enhance the movie-going experience) has been shown to be preferred
by movie patrons. Presently, the Company has 48%51.8% of its screens with stadium seating. The Company
is adding stadium seating to certain of its existing theatres and all of its
newly constructed theatres feature stadium
seating. The Company believes that all of these features serve to enhance its
patrons' movie-going experience and help build patron loyalty. In addition, the
Company promotes patron loyalty through specialized marketing programs for its
theatres and feature films. To maintain quality and consistency within the
Company's theatres, the Company conducts regular inspections of each theatre and
operates a mystery shopper program.
Integration of Acquisitions.Acquisitions: The Company has acquired 11 theatre
circuits during the last sixseven years. Management believes that acquisitions
provide the opportunity for the Company to increase revenue growth while
realizing operating efficiencies through the integration of operations. In this
regard, the Company believes it has achieved cost savings through the
consolidation of its purchasing function, the centralization of certain other
operating functions and the uniform application of the most successful cost
control strategies of the Company and its acquisition targets.
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Centralized Corporate Decision Making/Decentralized Operations.Operation: The
Company centralizes many of its functions through its corporate office,
including film licensing, concessions purchasing, marketing and new theatre construction
and design.real estate. The
Company also devotes significant resources to training its theatre managers.
These managers are responsible for most aspects of a theatre's day-to-day
operations and implement cost controls at the theatre level, including the close
monitoring of payroll, concession and advertisingother theatre level expenses.
Marketing. The Company actively markets its theatres through grand
opening promotions, including VIP preopening parties, newspaper and radio
advertising, television commercials in certain markets and promotional
activities, such as live music, spotlights and skydivers, which frequently
generate media coverage. The Company also utilizes special marketing programs
for specific films and concession items. The Company seeks to develop patron
loyalty through a number of marketing programs such as a free summer children's
film series, cross-promotion ticket redemptions and promotions within local
communities.
Performance-Based Compensation Packages.Packages: The Company maintains an
incentive program for its corporate personnel, district managers and theatre
managers that links employees' compensation to profitability. The Company
believes that its incentive program which consists of cash bonuses, purchased
stock and stock options, aligns the employees' interests with those
of the Company's shareholders.
INDUSTRY OVERVIEW
The domestic motion picture exhibition industry is currently comprised
of approximately 548480 exhibitors (in the U.S. and Canada), 155159 of which operate
ten or more total screens. Based on the June 1, 19992000 listing of exhibitors in
the National Association of Theatre Owners 1999-2000 Encyclopedia of Exhibition,
the five largest exhibitors (based on the number of screens) operated
approximately 42%43.2% of the total screens in operation, with Regal operating
more
than 10%12.9% of the total screens. From 19881989 through 1998,1999, the number of screens in
operation in the United States increased from approximately 23,000 to
approximately 34,000,37,000, and admissions revenues increased from approximately $4.6$5.0
billion to approximately $6.9$7.5 billion. The motion picture exhibition industry
continueshas continued to grow despite the emergence of competing film distribution
channels.
Since 1991, the industry has experienced significant growth with attendance
increasing at a 3.3% compound annual rate. This growth is principally attributed to an increase in the supply of
first-run, big budget films, increased investment in advertising and promotion
by studios, the investment by leading exhibitors in appealing, modern multiplex
theatres to replace aging locations and the moderate price of movies relative to other out-of-home entertainment
options.increases in box office ticket prices.
In an effort to realize greater operating efficiencies, operators of
multi-theatre circuits have emphasized the development of larger multiplexmegaplex
complexes. Typically, multiplexes have six or more screens per theatre, although
in some instances megaplexes may have as many as 30 screens in a single theatre.
The multi-screenmegaplex format provides numerous benefits for theatre operators, including
allowing facilities (concession stands and restrooms) and operating costs (lease
rentals, utilities and personnel) to be spread over a larger base of screens and
patrons.
Multiplexes6
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Megaplexes have varying seating capacities (typically from 100 to 500 seats)
that allow for multiple show times of the same film and a variety of films with
differing audience appeal to be shown, and provide the flexibility to shift
films to larger or smaller auditoriums depending on their popularity. To limit
crowd congestion and maximize the efficiency of floor and concession staff, the
starting times of films at multiplexes are staggered.
The
trendHowever, for all of developing large multiplexthe benefits of operating megaplex theatres, the
industry-wide strategy of aggressively building megaplexes greatly increased the
construction cost per screen of building new theatres, generated significant
competition in once stable markets and rendered many theatres obsolete more
rapidly than anticipated. This effect, together with the theatrefact that many of these
now obsolete theatres are leased under long-term commitments, produced an
oversupply of screens throughout the exhibition industry favors larger, well-capitalized companies, creating an environment for new
constructionat a rate much quicker
than the industry could effectively handle. The industry overcapacity coupled
with declines in national box office attendance during 2000 severely impacted
the operating results of the Company and consolidation. Many smaller theatre owners who operate older
cinemas without state-of-the-art stadium seatingmany of its competitors. Additionally,
because the Company's expansion efforts over the past several years have been
funded primarily from borrowings under its Senior Credit Facilities, the
Company's leverage has grown significantly over this time period. As a result,
the Company is currently in default of its Senior Credit Facilities, Equipment
Financing, Regal Notes and projection and sound
equipment mayRegal Debentures. Each of these lenders has the right
to accelerate the maturity of all outstanding indebtedness under its respective
agreements, which totals approximately $1.82 billion. The Company does not have
the capital required to maintain or upgrade their
circuits. The growth of the number of screens, strong domestic consumer demand
and growing foreign theatrical and domestic and foreign ancillary revenue
opportunities have led to an increase in the volume of major film releases. The
greater number of screens has allowed films to be produced for and marketed to
specific audience segments (e.g., horror films for teenagers) without using
capacity required for mainstream product.
The greater number of screens has also prompted distributors to
increase promotion of new films. Not only are there more films in the market at
any given time, but the multiplex format allows for much larger simultaneous
national theatrical release. In prior years, a studio might have released 1,000
prints of a major film, initially releasing the film only
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in major markets, and gradually releasing it in smaller cities and towns
nationwide. Today, studios might release over 4,000 prints of a major film and
can open it nationally in one weekend. These national openings have made
up-front promotion of films critical to attract audiences and stimulate
word-of-mouth advertising.
Motion pictures are generally made available through various
distribution methods at various dates after the theatrical release date. The
release dates of motion pictures in these other distribution windows begin four
to six months after the theatrical release date with video rentals, followed
generally by off-air or cable television programming including pay-per-view
services, pay television, other basic cable and broadcast network syndicated
programming. These distribution windows have given producers the ability to generate a greater portionfund or refinance the accelerated maturity of a film's revenues through channels other than
theatrical release. This increased revenue potential after a film's initial
domestic release has enabled major studios and certain independent producers to
increase film production and theatrical advertising. The additional
non-theatrical revenue has also permitted producers to incur higher individual
film production and marketing costs. The total cost of producing a picture
averaged approximately $52.7 million in 1998 compared with approximately $18.1
million in 1988, while the average cost to advertise and promote a picture
averaged approximately $25.3 million in 1998 as compared with $8.5 million in
1988. These higher costs have further enhanced the importance of a large
theatrical release. Distributors strive for a successful opening run at the
theatre to establish a film and substantiate the film's revenue potential both
internationally and through other distribution windows. The value of home video
and pay cable distribution agreements frequently depends on the success of a
film's theatrical release. Furthermore, the studios' revenue-sharing percentage
and ability to control whom views the product within each of the distribution
windows generally declines as one moves farther from the theatrical release
window. As theatrical distribution remains the cornerstone of a film's financial
success, it is the primary distribution window for the public's evaluation of
films and motion picture promotion.
Management expects that the overall supply of films will remain
constant, although there can be no assurance that this will occur. There has
been an increase in the number of distributors and reissues of films as well as
an increase in films made by independent producers. From January 1994 through
December 1998, the number of large budget films and the level of marketing
support provided by the production companies has increased, as evidenced by the
increase in average production costs and average advertising costs per film of
approximately 53.6% and 57.5%, respectively.indebtedness.
THEATRE OPERATIONS
The Company is the largest motion picture exhibitor in the United
States based upon the number of screens in operation. The Company develops,
acquires and operates primarily multiplex theatres in mid-size metropolitan
markets and suburban growth areas of larger metropolitan markets predominately
in the eastern and northwestern United States.
Multiplex theatres enable the Company to offer a wide selection of
films attractive to a diverse group of patrons residing within the drawing area
of a particular theatre complex. Varied auditorium seating capacities within the
same theatre enable the Company to exhibit films on a more cost effective basis
for a longer period of time by shifting films to smaller auditoriums to meet
changing attendance levels. In addition, operating efficiencies are realized
through the economies of having common box office, concession, projection, lobby
and rest room facilities, which enable the Company to spread certain costs, such
as payroll, advertising and rent, over a higher revenue base. Staggered movie
starting times also reduce staffing requirements and lobby congestion and
contribute to more desirable parking and traffic flow patterns.
The Company has designed prototype theatres, adaptable to a variety of
locations, which management believes result in construction and operating cost
savings. The Company's multiplex theatre complexes, which typically contain
auditoriums ranging from 100 to 500 seats each, feature wall-to-wall screens,
digital stereo surround-sound, multi-station concessions, computerized ticketing
systems, plush stadium seating with cup holders and retractable arm rests,
neon-enhanced interiors and exteriors and video game areas adjacent to the
theatre lobby.
The Company's real estate department includes leasing and site
selection, construction supervision and property management. By utilizing a
network of contingent real estate brokers, the Company is able to service a wide
geographic region without incurring incremental staffing costs. The Company also
closely monitors the construction of its theatres to ensure that they will open
on time and remain on budget. The property management department ensures that
ongoing occupancy costs are reviewed for accuracy and compliance with the terms
of the lease.
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In addition to leasing and site selection, the Company's central
corporate office coordinates film buying, concession purchasing, advertising and
financial and accounting activities.
The Company's theatre operations are under the supervision of its Chief
Operating Officer and are divided into four geographic divisions, each of which
is headed by a Vice President supervising several district theatre supervisors.
The district theatre supervisors are responsible for implementing Company
operating policies and supervising the managers of the individual
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theatres, who are responsible for most of the day-to-day operations of the
Company's theatres. The Company seeks theatre managers with experience in the
motion picture exhibition industry and requires all new managers to complete a
training program at designated training theatres. The program is designed to
encompass all phases of theatre operations, including the Company's philosophy,
management strategy, policies, procedures and operating standards.
Management closely monitors the Company's operations and cash flowrevenues
through daily reports generated from computerized box office terminals located
in each theatre. These reports permit the Company to maintain an accurate and
immediate count of admissions by film title and show times and provide
management with the information necessary to effectively and efficiently manage
the Company's theatre operations. Additionally, daily payroll data is input at
in-theatre terminals which allows the regular monitoring of payroll expenses. In
addition, the Company has a quality assurance program to maintain clean,
comfortable and modern facilities. Management believes that operating a theatre
circuit consisting primarily of modern multiplex theatres also enhances the
Company's ability to license commercially successful films from distributors. To
maintain quality and consistency within the Company's theatre circuit, the
district managers regularly inspect each theatre and the Company operates a
mystery shopper program, which involves unannounced visits by unidentified
customers who report on the quality of service, film presentation and
cleanliness at individual theatres. The Company has an incentive compensation
program for theatre level management, which rewards managers for controlling
theatre level operating expenses while complying with the Company's operating
standards.
In addition to revenues from box office admissions, the Company
receives revenues from concession sales and, to a lesser extent, video games
located adjacent to the theatre lobby. Concession sales constituted 27.5%27.4% of
total revenues for fiscal 1999.2000. The Company emphasizes prominent and appealing
concession stations designed for rapid and efficient service. Although popcorn,
candy and soft drinks remain the best selling concession items, the Company's
theatres offer a wide range of concession choices. The Company continually seeks
to increase concession sales through optimizing product mix, introducing special
promotions from time to time and training employees to cross sell products. In
addition to traditional concession stations, select existing theatres and theatres currently
under development feature
specialty concession cafes serving items such as cappuccino, fruit juices,
cookies and muffins, soft pretzels and yogurt. Management negotiates directly
with manufacturers for many of its concession items to ensure adequate supplies
and to obtain competitive prices.
The Company relies upon advertisements, including movie schedules
published in newspapers and via the Internet, to inform its patrons of film
selections and show times. Newspaper advertisements are typically displayed in a
single grouping for all of the Company's theatres located in a newspaper's
circulation area. Multimedia advertising campaigns for major film releases are
organized and financed primarily by the film distributors.
The Company actively markets its theatres through grand opening
promotions, including VIP preopening parties, newspaper and radio
advertising, television commercials in certain markets and certain promotional
activities such as
live music, spotlights and skydivers, which frequently generate media coverage. The Company also utilizes
special marketing programs for specific films and concession items. The Company
seeks to develop patron loyalty through a number of marketing programs such as
free summer children's film series, cross-promotion ticket redemptions and
promotions within local communities.
As of December 30, 1999,28, 2000, the Company operated 4328 theatres with an
aggregate of 263158 screens, which exhibit second-run movies and charge lower
admission prices (typically $1.00 to
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$2.00). These movies are the same high quality features shown at all of the
Company's theatres. The terminology second-run is an industry term for the
showing of movies after the film has been shown for varying periods of time at
other theatres. The Company believes that the increased attendance resulting
from lower admission prices and the lower film rental costs of second-run movies
compensate for the lower admission prices and slightly higher operating costs as
a percentage of admission revenues at the Company's discount theatres. The
design, construction and equipment in the Company's discount theatres are of the
same high quality as its
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first-run theatres. The Company's discount theatres generate theatre level cash
flows similar to the Company's first-run theatres.
SEASONALITY
The Company's revenues are usually seasonal, coinciding with the timing
of releases of motion pictures by the major distributors. Generally, the most
marketable motion pictures are released during the summer and the Thanksgiving
through year-end holiday season. The unexpected emergence of a hit film during
other periods can alter the traditional trend. The timing of movie releases can
have a significant effect on the Company's results of operations, and the
results of one quarter are not necessarily indicative of results for the next
quarter. The seasonality of motion picture exhibition, however, has become less
pronounced in recent years as studios have begun to release major motion
pictures somewhat more evenly throughout the year.
FILM DISTRIBUTION
Motion pictures are generally made available through various
distribution methods at various dates after the theatrical release date. The
release dates of motion pictures in these other distribution windows begin four
to six months after the theatrical release date with pay-per-view services,
followed generally video rentals and by off-air or cable television programming
including pay television, other basic cable and broadcast network syndicated
programming. These distribution windows have given producers the ability to
generate a greater portion of a film's revenues through channels other than
theatrical release. This increased revenue potential after a film's initial
domestic release has enabled major studios and certain independent producers to
increase film production and theatrical advertising. The additional
non-theatrical revenue has also permitted producers to incur higher individual
film production and marketing costs. The total cost of producing a picture
averaged approximately $51.5 million in 1999 compared with approximately $23.5
million in 1989, while the average cost to advertise and promote a picture
averaged approximately $24.5 million in 1999 as compared with $9.2 million in
1989. These higher costs have further enhanced the importance of a large
theatrical release. Distributors strive for a successful opening run at the
theatre to establish a film and substantiate the film's revenue potential both
internationally and through other distribution windows. The value of home video
and pay cable distribution agreements frequently depends on the success of a
film's theatrical release. Furthermore, the studios' revenue-sharing percentage
and ability to control whom views the product within each of the distribution
windows generally declines as one moves farther from the theatrical release
window. As theatrical distribution remains the cornerstone of a film's financial
success, it is the primary distribution window for the public's evaluation of
films and motion picture promotion.
Management expects that the overall supply of films will remain
constant during the 2001 fiscal year, although there can be no assurance that
this will occur. There has been an increase in the number of distributors and
reissues of films as well as an increase in films made by independent producers.
From January 1995 through December 1999, the number of large budget films and
the level of marketing support provided by the production companies has
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increased, as evidenced by the increase in average production costs and average
advertising costs per film of approximately 50.1% and 39.1%, respectively.
FILM LICENSING
The Company licenses films from distributors on a film-by-film and
theatre-by-theatre basis. The Company negotiates directly with film
distributors. Prior to negotiating for a film license, the Company evaluates the
prospects for upcoming films. Criteria considered for each film include cast,
director, plot, performance of similar films, estimated film rental costs and
expected Motion Picture Association of America rating. Successful licensing
depends greatly upon the exhibitor's knowledge of trends and historical film
preferences of the residents in markets served by each theatre, as well as on
the availability of commercially successful motion pictures.
Films are licensed from film distributors owned by major film
production companies and from independent film distributors that generally
distribute films for smaller production companies. Film distributors typically
establish geographic film licensing zones and allocate each available film to
one theatre within that zone. Film zones generally encompass a radius of three
to five miles in metropolitan and suburban markets, depending primarily upon
population density. As of December 30, 1999,28, 2000, the Company believes that
approximately 80.2%85% of its screens were located in film licensing zones in which
such theatres were the sole exhibitors, permitting the Company to exhibit many
of the most commercially successful films in these zones.
In film zones where the Company is the sole exhibitor, the Company
obtains film licenses by selecting a film from among those offered and
negotiating directly with the distributor. In film zones where there is
competition, a distributor will either require the exhibitors in the zone to bid
for a film or will allocate its films among the exhibitors in the zone. When
films are licensed under the allocation process, a distributor will select an
exhibitor, who then negotiates film rental terms directly with the distributor.
Over the past several years, distributors have generally used the
allocation rather than bidding process to license their films. When films are
licensed through a bidding process, exhibitors compete for licenses based upon
economic terms. The Company currently does not bid for films in any of its
markets, although it may be required to do so in the future. Although the
Company predominantly licenses first-run films, if a film has substantial
remaining potential following its first-run, the Company may license it for a
second-run. Film distributors establish second-run availability on a national or
market-by-market basis after the release from first-run theatres.
Film licenses entered into in either a negotiated or bidding process
typically specify rental fees based on the higher of a gross receipts formula or
a theatre admissions revenue formula. Under a gross receipts formula, the
distributor receives a specified percentage of box office receipts, with the
percentage declining over the term of the film run. First-run film rental fees
may begin at up to 70% of admission revenues and gradually decline to as low as
30% over a period of four weeks or more. Second-run film rental fees typically
begin at 35% of admission revenues and often decline to 30% after the first
week. Under a theatre admissions revenue formula, the distributor receives a
specified percentage of the excess of admission revenues over a negotiated
allowance for theatre expenses. In addition, the Company is occasionally
required to pay non-refundable guarantees of film rental fees or to make
refundable advance payments of film rental fees or both in order to obtain a
license for a film. Rental fees actually paid by the Company
generally are adjusted subsequent to the exhibition of a film in a process known
as settlement. The commercial success of a film relative to original distributor
expectations is the primary factor
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taken into account in the settlement process;
secondarily, the past performance of other films in a
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specific theatre is a factor.process. To date, the settlement process
has not resulted in material adjustments in the film rental fees accrued by the
Company.
The Company's business is dependent upon the availability of marketable
motion pictures, its relationships with distributors and its ability to obtain
commercially successful films. Many distributors provide quality first-run
movies to the motion picture exhibition industry; however, according to industry
reports, eight10 distributors accounted for approximately 94%92% of industry admission
revenues during 1997,1999, and 4649 of the top 50 grossing films. No single distributor
dominates the market. Disruption in the production of motion pictures by the
major studios and/or independent producers, the lack of commercial success of
motion pictures or the Company's inability to otherwise obtain motion pictures
for exhibition would have a material adverse effect upon the Company's business.
The Company licenses films from each of the major distributors and believes that
its relationships with distributors are good. From year to year, the revenues
attributable to individual distributors will vary widely depending upon the
number and quality of films each distributes. The Company believes that in 19992000
no single distributor accounted for more than 17%12% of the films licensed by the
Company.
COMPLEMENTARY CONCEPTS
IMAX(R) 3-D Theatres. The Company has signed an agreement to include
IMAX(R) 3-D theatres in ten new multiplex theatre projects over a five-year
period, ending in 2004, the first of which opened in Chicago in November 1998.
Management believes that the Company's theatres with IMAX(R) 3-D, which will
contain highly automated projection systems and specialized sound systems, will
draw higher traffic levels than theatres without them, allow the Company to
attract patrons during non-peak hours and expand its customer base in certain
markets. During 1999 IMAX theatres were opened at the Mall of Georgia (Atlanta,
GA), Transit Center (Williamsville, NY), and New Rochelle City (New Rochelle,
NY) locations.
FunScapes(TM). To complement the Company's theatre development, the
Company operates its FunScapes(TM) entertainment complexes in certain locations
which are designed to increase both the drawing radius for patrons and patron
spending by offering a wider array of entertainment options at a single
destination. As of December 30, 1999, the Company operated eight FunScapes(TM)
in Chesapeake, Virginia; Rochester, New York; Syracuse, New York; Brandywine,
Delaware; Fort Lauderdale, Florida (2); Nashville, Tennessee and Knoxville,
Tennessee. The Company currently has no plans to develop additional
FunScapes(TM). The $6.0 million to $10.0 million estimated cost of construction
of an entertainment center is comparable to the cost of constructing the
adjacent theatre complex. Each complex includes a nine to 16 screen theatre and
a 50,000 to 70,000 square foot family entertainment center, which generally
features a 36-hole, tropical-themed miniature golf course, a children's soft
play and exercise area, laser tag, video batting cages, a video golf course,
virtual reality games, a high-tech video arcade and party rooms. A food court
connects the theatres to the entertainment center and features nationally
recognized brand name pizza, taco, sandwich, and dessert restaurants. Each
theatre and entertainment center totals approximately 95,000 to 140,000 square
feet and management believes the facility is a comprehensive entertainment
destination.
The Company continues to explore its strategic alternatives with
respect to all of its FunScapes(TM) locations, and currently expects that
certain of these locations will be subleased during the next fiscal year.
Otherwise, the Company intends to pursue other alternatives including closing
certain of these locations. In the fourth quarter of 1999, management recorded
an impairment charge of $22.1 million ($13.6 million after tax) with respect to
the FunScapes(TM) locations.
COMPETITION
The motion picture exhibition industry is fragmented and highly
competitive, particularly in film licensing, attracting patrons and finding new
theatre sites. Theatres operated by national and regional circuits and by
smaller independent exhibitors compete with the Company's theatres. The motion
picture industry has rapidly expanded the number of U.S.screensU.S. screens over the past
several years as theatre companies have upgraded their theatre circuits. The
industry growth has resulted in declines in margins and returns on invested
capital as older theatres suffer due to increased competition from newer
multiplexes.
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The Company believes that the rate of industry screen growth is slowing
as many of the exhibitors are curtailing expansion plans for the 2000 and 2001 fiscal
years.year. Management believes that as competitive building declines and as older
screens are aggressively closed the competitive framework significantly improves for the
Company and other exhibitors with modern circuits.
The Company believes that the competitive factors in the motion
picture exhibition industry include: licensing terms; the seating capacity,
location and reputation of an exhibitor's theatres; the quality of projection
and sound equipment at the theatres; and the exhibitor's ability and willingness
to promote the films.
However, in those areas where real estate is readily available, there
are few barriers preventing competing companies from opening theatres near one
of the Company's existing theatres, which may have a material adverse effect on
the Company's theatre. In addition, competitors have built or are planning to
build theatres in certain areas in which the Company operates, which may result
in excess capacity in such areas and adversely affect attendance and pricing at the
Company's theatres in such areas.
In addition, alternative motion picture exhibition delivery systems,
including cable television, video disks and cassettes, satellite and
pay-per-view services exist for the exhibition of filmed entertainment in
periods after the theatrical release. The expansion of such delivery systems
(such as video on demand) could have a material adverse effect upon the
Company's business and results of operations. The Company also competes for the
public's leisure time and disposable income with all forms of entertainment,
including sporting events, concerts, live theatre and restaurants.
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MANAGEMENT INFORMATION SYSTEMS
The Company has a significant commitment to its management information
systems, some of which have been developed internally. The point of sale
terminals within each theatre providesprovide comprehensive information to the corporate
office each morning. These daily management reports address all aspects of
theatre operations, including concession sales, fraud detection and film
booking. Payroll information is gathered daily from theatres through the use of
automated time keeping systems, enabling a daily comparison of actual to budgeted
labor for each theatre. The Company's systems allow it to properly schedule and
manage its hourly workforce. A corporate help desk is also available to monitor and
resolve any processing problems that might arise in the theatres.
EMPLOYEES
As of December 30, 1999,28, 2000, the Company employed 17,24915,159 persons. Of the
Company's employees, 369305 were corporate personnel, 2,9791,830 were theatre management
personnel and the remainder hourly theatre personnel. Film projectionists at
nine of the Company's theatres in the Seattle, Washington; Las Vegas, Nevada;
Nashville, Tennessee; and Cleveland and Youngstown, Ohio markets are represented
by the International Alliance of Theatrical Stage Employees and Moving Picture
Machine Operators of the United States and Canada ("IATSE"). Certain other
employees of the Company in the State of Washington are also represented by the
IATSE. The Company's collective bargaining agreements with the IATSE expire over
various periods through March 2000.3, 2002. The Company's expansion into new markets
may increase the number of employees represented by unions. The Company
considers its employee relations to be good.
REGULATION
The distribution of motion pictures is in large part regulated by
federal and state antitrust laws and has been the subject of numerous antitrust
cases. The Company has never been a party to any of such cases, but the manner
in which it can license films is subject to consent decrees resulting from these
cases. Consent decrees bind certain major film distributors and require the
films of such distributors to be offered and licensed to exhibitors, including
the Company, on a theatre-by-theatre basis. Consequently, exhibitors cannot
assure themselves of a supply of films by entering long-term arrangements with
major distributors, but must negotiate for licenses on a film-by-film and
theatre-by-theatre basis.
The Company's 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.
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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, an award of damages to private litigants
and additional capital expenditures to remedy such noncompliance. The Company
believes that it is in substantial compliance with all current applicable
regulations relating to accommodations for the disabled. The Company intends to
comply with future regulations in this regard, and the Company does not
currently anticipate that compliance will require the Company to expend
substantial funds.
The Company's theatre operations are also subject to federal, state and
local laws governing such matters as wages, working conditions, citizenship,
health and sanitation requirements and
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licensing. At December 30, 1999,28, 2000, approximately 30.5%7.7% of the Company's employees
were paid at the federal minimum wage and, accordingly, the minimum wage largely
determines the Company's labor costs for those employees.
RISK FACTORS
This Form 10-K 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. All statements other than
statements of historical facts included in this Form 10-K, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" may constitute
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed in the following risk factors (the "Cautionary
Statements"). All forward-looking statements are expressly qualified in their
entirety by the Cautionary Statements.
Continuation Under our Current Capital Structure
As disclosed in "Recapitalization and Financing," the Company is
currently in default of its Senior Credit Facilities, Equipment Financing ,
Regal Notes and Regal Debentures. Each of these lenders has the right to
acclerate the maturity of all outstanding indebtedness under its respective
agreements, which totals $1.82 billion. Currently, the Company does not have the
ability to fund or refinance the accelerated maturity of this indebtedness. The
Company has engaged financial advisers and is currently evaluating a long-term
financial plan to address various restructuring alternatives. The financial plan
will provide for the closure of under-performing theatres, potential sales of
non-strategic assets and a potential restructuring, recapitalization or a
bankruptcy reorganization of the Company. Because of the potential restructuring
alternatives, doubt exists about the Company's ability to continue operating
under its existing capital structure.
In addition, the uncertainty regarding the eventual outcome of the
Company's restructuring, and the effect of other unknown adverse factors, could
threaten the Company's existence as a going concern. Continuing on a going
concern basis is dependent upon, among other things, the success of the
Company's financial plan, continuing to license popular motion pictures,
maintaining the support of key vendors and key landlords, retaining key
personnel and the continued slowing of construction within the theatre
exhibition industry along with financial, business, and other factors, many of
which are beyond the Company's control.
We Depend on Motion Picture Production and Performance and on Our Relationship
with Film Distributors
The Company's ability to operate successfully depends upon a number of
factors, the most important of which are the availability and appeal of motion
pictures, our ability to license motion pictures and the performance of such
motion pictures in our markets. We mostly license first-run motion pictures.
Poor performance of, or any disruption in the production of or our access to,
these motion pictures could hurt our business and results of operations. Because
film distributors usually release films that they anticipate will be the most
successful during the summer and
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holiday seasons, poor performance of these films or disruption in the release of
films during such periods could hurt our results for those particular periods or
for any fiscal year.
Our business also depends on maintaining good relations with the major
film distributors that license films to our theatres. A deterioration in our
relationship with any of the nineten major film distributors could affect our
ability to get commercially successful films and, therefore, could hurt our
business and results of operations. See Business"Business - Film Licensing."
In addition, in times of recession, attendance levels experienced by
motion picture exhibitors may be adversely effected. For example, revenues
declined for the industry in 1990 and 1991.
We Operate in a Competitive Environment
The motion picture exhibition industry is very competitive. Theatres
operated by national and regional circuits and by smaller independent exhibitors
compete with our theatres. Many of our competitors have been around longer than
we have and may be better established in some of our existing and future
markets.
In areas where real estate is readily available, competing companies
are able to open theatres near one of ours, which may severely affect our
theatre. Competitors have also built or are planning to build theatres in
certain areas in which we 12
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operate, which may result in excess capacity in such
areas and hurt attendance
and pricing at our theatres in such areas. Filmgoers are generally
not brand conscious and usually choose a theatre based on the films showing
there.
Management believes that the industry is working towards
rationalization of the overbuilding as many of the exhibitors are curtailing
expansion plans for the 2000 and 2001 fiscal years.year. If the overbuilding does not subside,
the Company remains at risk for increased erosion of its older theatre base.
In addition, there are many other ways to view movies once the movies
leave the theatre, including cable television, video disks and cassettes,
satellite and pay-per-view services. Creating new ways to watch movies (such as
video on demand) could hurt our business and results of operations. We also
compete for the public's leisure time and disposable income with all forms of
entertainment, including sporting events, concerts, live theatre and
restaurants. See Business"Business - Competition."
We Depend on Our Senior Management
Our success depends upon the continued contributions of our senior
management, including Michael L. Campbell, our Chairman, President and Chief
Executive Officer. We currently have employment contracts with Mr. Campbell and
our Chief Operating Officer but wewhich expire in May 2001. We only maintain key-man
life insurance for Mr. Campbell. If we lost the services of Mr. Campbell it
could hurt our business and
development.business. See Item"Item 11. Executive Compensation-Employment
Agreements."
Our Quarterly Results of Operations Fluctuate
Our revenues are usually seasonal because of the way the major film
distributors release films. Generally, the most marketable movies are released
during the summer and the Thanksgiving through year-end holiday season. An
unexpected hit film during other periods can
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alter the traditional trend. The timing of movie releases can have a significant
effect on our results of operations, and our results one quarter are not
necessarily the same as results for the next quarter. The seasonality of our
business, however, has lessened as studios have begun to release major motion
pictures somewhat more evenly throughout the year. See Management's"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We Have Substantial Indebtedness, Lease Commitments and Leverage
We have a large amount of debt. As of December 30, 1999, we had
approximately $1,683.6 million of long term debt, $21.3 million of capital lease
obligations and $74.7 million of lease financing arrangements outstanding, with
approximately $128.5 million available for future borrowings under our Senior
Credit Facilities. In addition, we may incur more debt in the future, for things
such as building liquidity reserves, and funding acquisitions as part of our
growth strategy.
Our high degree of leverage could have negative consequences for us,
including, but not limited to, the following: (i) we will have to repay our
debt, which would reduce funds available for operations and future business
opportunities and increase our vulnerability to bad general economic and
industry conditions and competition; (ii) our ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate or other purposes, may be limited; (iii) our leveraged
position and the provisions in our indentures and Senior Credit Facilities could
limit our ability to compete, as well as our ability to expand, including
through acquisitions, and to make capital improvements; and (iv) our ability to
refinance our debt in order to pay it when it matures or upon a change of
control may be adversely affected. In addition, some of the debt under our
Senior Credit Facilities bears interest at floating rates which makes our
operating results sensitive to fluctuations in interest rates. There can be no
guarantee that our future cash flow will be sufficient to meet our obligations
and commitments, and any such insufficiency could hurt our business.
For the twelve-month period ended December 30, 1999, our interest
expense was approximately $132.2 million. The Company has also executed certain
lease agreements for the operation of theatres not yet constructed. As of
December 30, 1999, the total future minimum rental payments under the terms of
these leases approximate $568.3 million to be paid over 20 to 30 years.
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Financing Commitments
The Company has obtained commitments from certain third parties that
provide for an additional $60 million of financing. The Company anticipates
closing such transactions during the first and second quarters of fiscal 2000.
While management believes that this additional financing will close during the
first and second quarters of fiscal 2000, there can be no guarantee such
financing will occur.
There Is No Guarantee We Will Be Able to Service Our Debt
Our ability to make scheduled payments on our debt, or to refinance our
debt depends on our performance, which may be subject to economic, financial,
competitive and other factors beyond our control. Based upon our current
operations and anticipated growth, we believe that future cash flow from
operations, together with the available borrowings under our Senior Credit
Facilities, will be adequate to meet our anticipated needs for capital
expenditures, interest payments and scheduled principal payments. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." There can be no guarantee,
however, that our business will continue to generate sufficient cash flow from
operations in the future to service our debt and make necessary capital
expenditures. If this should occur, we may be required to refinance all or a
portion of our debt, to sell assets or to obtain additional financing. There can
be no guarantee that any such refinancing would be possible, that any assets
could be sold (or, if sold, of the timing of such sales and the amount of
proceeds realized therefrom) or that additional financing could be obtained on
acceptable terms, if at all.
We Are Subject to Restrictive Debt Covenants
Our indentures and our Senior Credit Facilities contain certain
covenants that restrict, among other things, our ability to incur additional
debt, pay dividends or make certain types of payments, enter into certain
transactions with affiliates, merge or consolidate with any other person or sell
all or substantially all of our assets. In addition, the Senior Credit
Facilities contain other limitations including restrictions on us prepaying
debt, and also require us to maintain specified financial ratios. Our ability to
comply with these financial ratios can be affected by events beyond our control
and there can be no guarantee that we will meet those tests. A breach of any of
these provisions could result in a default under the Senior Credit Facilities,
which would allow the lenders to declare all amounts outstanding thereunder
immediately due and payable. If we were unable to pay those amounts, the lenders
could proceed against the collateral securing that debt. If the amounts
outstanding under the Senior Credit Facilities were accelerated, there can be no
guarantee that the assets of the Company would be sufficient to repay the amount
in full.
Hicks Muse and KKR Effectively Control the Company
Each of Hicks Muse and KKR currently owns approximately 46.1%46.2% of the
Company. Therefore, if they vote together, Hicks Muse and KKR have the power to
elect a majority of the directors of the Company and exercise control over our
business, policies and affairs. We have a stockholders agreement with KKR and
Hicks Muse that requires us to obtain the approval of the board designees of
each of Hicks Muse and KKR before the Board of Directors may act. The
stockholders agreement, however, does not contain any "deadlock" resolution
mechanisms.
ITEM 2. PROPERTIES
As of December 30, 1999,28, 2000, the Company operated 293266 of its 430391 theatres
pursuant to lease agreements, owned the land and buildings for 9062 theatres and
operated 4763 locations pursuant to ground leases. Of the 430391 theatres operated by
the Company as of December 30, 1999, 28728, 2000, 233 were acquired as existing theatres and
143158 have been developed by the Company.
The majority of the Company's leased theatres are subject to lease
agreements with original terms of 20 years or more and, in most cases, renewal
options for up to an additional ten years. These leases provide for minimum
annual rentals and the renewal options generally provide for increased rent.
Under certain conditions, further rental payments may be
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15 based on a percentage
of revenues above specified amounts. A significant majority of the leases are
net leases, which require the Company to pay the cost of insurance, taxes and a
portion of the lessor's operating costs.
The Company's corporate office is located in approximately 96,450
square feet of space in Knoxville, Tennessee, which the Company acquired in
1994. The Company believes that these facilities are adequate for its
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time theThe Company is presently involved in routine litigation andvarious legal proceedings arising
in the ordinary course of business.its business operations, including personal injury
claims, employment matters and contractual disputes . During fiscal 2000, the
Company also became a defendant in a number of claims arising from its decision
to close theatre locations or to cease construction of theatres on sites for
which the Company purportedly had a contractual obligation to lease such
property. The Company doesbelieves it has adequately provided for the settlement of
such contractual disputes. Management believes any additional liability with
respect to the above proceedings will not have any
litigation that management believes is likelybe material in the aggregate to have a material adverse effect
upon the
Company.Company's consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the shareholders during the
fourth quarter ended December 30, 1999.28, 2000.
15
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.MATTERS
There is no established public trading market for the Company's Common
Stock. At March 29, 2000,28, 2001, there were approximately 238126 holders of record of the
Company's Common Stock.
The Company has not declared or paid a cash dividend on its Common
Stock. It is the present policy of the Board of Directors to retain all earnings
to support operations and to finance expansion.operations. The Company is restricted from the payment of cash
dividends under its Senior Credit Facilities and the indentures governing its
senior subordinated debt.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data set forth below as of and for each of the
five fiscal years in the period ended December 28, 2000 was derived from the
audited consolidated financial statements of the Company. The selected
historical consolidated financial data of the Company as of and for the years
ended December 30, 1999 and December 31, 1998 were derived from the consolidated
financial statements for each of the three fiscal years and the notes thereto of the Company,periods ended
December 28, 2000, which have been audited by Deloitte & Touche LLP, independent auditors, whose report has beenare included
herein.elsewhere in this report. The selected historical consolidated financial data of the
Company as of and for the years ended January 1, 1998, January 2, 1997 and
December 28, 1995 were derived from the consolidated financial statements and
the notes thereto of the Company, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The consolidated statements
of income, changes in shareholders' equity and of cash flows for the year ended
January 1, 1998 and notes thereto appears elsewhere herein. The
PricewaterhouseCoopers LLP report on the fiscal year 1995 and 1996 financial
statements is based in part on the report of other independent auditors. The
selected historical consolidated financial data set forth below should be
read in conjunction with, and are qualified in their entirety by, "Management'sManagement's
Discussion and Analysis of Financial Condition and Results of Operations"Operations and the
consolidated financial statements of the Company and the related notes thereto
included elsewhere herein:
15
16
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(IN MILLIONS, EXCEPT FOR PERCENTAGES, RATIOS, DECEMBER 28, DECEMBER 30 DECEMBER 31 JANUARY 1 JANUARY 2
DECEMBER 28
AND OPERATING DATA) 2000 1999 1998 1998 1997 1995
----------- ----------- ----------- ----------- -----------
Revenue:
Admissions $ 767.1 $ 690.5 $ 462.8 $ 325.1 $ 266.0
$ 213.4
Concessions 310.2 285.7 202.4 137.2 110.2
87.3
Other operating revenues 53.4 60.9 41.8 21.3 14.9 8.3
----------- ----------- ----------- ----------- -----------
Total revenues 1,130.7 1,037.1 707.0 483.6 391.1 309.0
Operating expenses:
Film rental and advertising costs 421.6 384.9 251.3 178.2 145.2 115.4
Cost of concessions and other 49.0 44.3 31.7 21.1 17.1
11.4
Theatre operating expenses 446.4 377.7 241.7 156.5 127.7
105.7
General and administrative expenses 37.6 32.1 20.4 16.6 16.6 14.8
----------- ----------- ----------- ----------- -----------
Total costs and expenses 954.6 839.0 545.1 372.4 306.6 247.3
----------- ----------- ----------- ----------- -----------
Sub-total 176.1 198.1 161.9 111.2 84.5 61.7
----------- ----------- ----------- ----------- -----------
Depreciation and amortization 95.7 80.8 52.4 30.5 24.7
19.4
Merger expenses -- -- -- 7.8 1.6 1.2
Recapitalization expenses -- -- 65.7 -- -- --
Theatre closing costs (1) 55.8 4.3 -- -- -- --
Loss on disposal of operating assets (2) 20.9 16.8 .9 --0.9 -- --
Loss on impairment of assets (3) 113.7 98.6 67.9 5.0 -- --
----------- ----------- ----------- ----------- -----------
Operating income (loss) (110.0) (2.4) (25.0) 67.9 58.2 41.1
----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest expense 178.5 132.2 59.3 14.0 12.8
10.3
Interest income (2.8) (0.7) (1.5) (0.8) (0.6)
--
Other 0.0 0.0 1.0 0.4 (0.7) 0.7
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item (285.7) (133.9) (83.8) 54.3 46.7 30.1
Benefit from (provision for) income taxes (80.8) 45.4 22.2 (19.1) (20.8) (12.2)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item (366.5) (88.5) (61.6) 35.2 25.9 17.9
Extraordinary item:
Loss on extinguishment of debt, net of
applicable taxesTaxes 0.0 0.0 11.9 10.0 0.8 0.4
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (366.5) $ (88.5) $ 73.5(73.5) $ 25.2 $ 25.1 $ 17.5
=========== =========== =========== =========== ===========
OPERATING AND OTHER FINANCIAL DATA (4):
Cash flow provided (used) by operating
activities $ (3.6) $ 92.7 $ 45.1 $ 64.0 $ 67.5
$ 40.0
Cash flow used in investing activities $ 62.3 $ 435.9 $ 296.2 $ 202.3 $ 131.1
$ 112.6
Cash flow provided by financing activities $ 144.2 $ 363.2 $ 253.4 $ 139.6 $ 72.2
$ 69.8
EBITDA (5) $ 176.2 $ 198.1 $ 161.9 $ 111.2 $ 84.5 61.7
EBITDAR (5) $ 338.0 $ 332.0 $ 248.3 $ 164.9 $ 125.9 96.2
EBITDA margin (6) 15.6% 19.1% 22.9% 23.2% 21.7%
20.0%
EBITDAR margin (6) 29.9% 32.0% 35.1% 34.1% 32.4%
31.1%
Theatre locations 391 430 403 256 223
206
Screens 4,328 4,413 3,573 2,306 1,899
1,616
Average screens per location 11.1 10.3 8.9 9.0 8.5
7.8
Attendance (in thousands) 143,086 141,043 102,702 76,331 65,530
55,091
Average ticket price $ 5.36 $ 4.90 $ 4.51 $ 4.26 $ 4.06
$ 3.87
Average concessions per patron $ 2.17 $ 2.03 $ 1.97 $ 1.80 $ 1.68
$ 1.58
BALANCE SHEET DATA:
Cash and cash equivalents $ 118.8 $ 40.6 $ 20.6 $ 18.4 $ 17.1
$ 7.0
Total assets $ 1,991.1 $ 2,080.4 $ 1,662.0 $ 660.6 $ 488.8
$ 349.0
Long-term obligations (including current
maturities) $ 1,998.5 $ 1,779.7 $ 1,341.1 $ 288.6 $ 144.6
$ 188.5
Shareholders' equity (deficit) $ (252.4) $ 114.2 $ 202.5 $ 306.6 $ 279.3 $ 109.0
16
1718
(1) Reflects the non-cash charge for lease termination costs.
(2) Reflects the non-cash write off of under-performing locations, net of
proceeds from sales of certain owned theatre sites as well as the
non-cash write-off of certain costs to develop sites now discontinued.
(3) Reflects non-cash charges for the impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of, which the Company adopted in 1995.of.
(4) Operating theatres and screens represent the number of theatres and
screens operated at the end of the period.
(5) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization, other income or expense, extraordinary
items, non-recurring charges, impairment charges, and non-recurring charges.other theatre
closing costs including loss on disposal of operating assets. EBITDAR
represents EBITDA before rent expense. While EBITDA and EBITDAR are not
intended to represent cash flow from operations as defined by GAAP and
should not be considered as indicators of operating performance or
alternatives to cash flow (as measured by GAAP) as a measure of
liquidity, they are included herein to provide additional information
with respect to the ability of the Company to meet its future debt
service, capital expenditure, rental and working capital requirements.
(6) Defined as EBITDA and EBITDAR as a percentage of total revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following analysis of the financial condition and results of
operations of Regal should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein.
BACKGROUND OF REGALTHE COMPANY AND THE INDUSTRY
Regal Cinemas, Inc. ("Regal" or the "Company") is the largest motion
picture exhibitor in the United States based upon the number of screens in
operation. At December 28, 2000, the Company operated 391 theatres, with an
aggregate of 4,328 screens in 32 states. Since its inception in November 1989,
the Company has achieved significant growth in revenues and net income before interest
expense, income taxes, depreciation and amortization, other income or expense,
extraordinary items, non-recurring charges, impairment charges, and other
theatre closing costs including loss on disposal of operating assets ("EBITDA").
As a result of the Company's focus on enhancing revenues, operating efficiently
and strictly controlling costs, the Company has
17
19
achieved what management believes are among the highest EBITDA margins in the
domestic motion picture exhibition industry.
The Company operates primarily multiplex theatres and has an average of 11.1
screens sinceper location, which management believes is among the highest in the
industry and which compares favorably to an average of approximately 8.6 screens
per location for the five largest North American motion picture exhibitors at
September 30, 2000. The Company develops, acquires and operates multiplex
theatres primarily in mid-sized metropolitan markets and suburban growth areas
of larger metropolitan markets, predominantly in the eastern and northwestern
United States. The Company seeks to locate each theatre where it will be the
sole or leading exhibitor within a particular geographic film licensing zone.
Management believes that at December 28, 2000, approximately 85% of the
Company's screens were located in film licensing zones in which the Company was
the sole exhibitor.
The Company has historically upgraded its formation in November 1989.theatre circuit by opening new
theatres, adding new screens to existing theatres and selectively closing or
disposing of under-performing theatres. The Company has also grown by acquiring
eleven theatre circuits during the last seven years. From its inception through
December 30, 1999, Regal28, 2000, the Company has acquired 287grown by acquiring 233 theatres with 2,2331,905
screens developed 143(net of subsequently closed locations), developing 158 new theatres with
2,0272,255 screens and added 153 newadding 168 screens to existing theatres. Theatres developed
byThis strategy has
served to establish and enhance the Company's presence in selected geographic
markets. In addition, as a result of this strategy, the Company typically generate positiveenjoys one of
the most modern asset bases in the industry with 44.3% of its circuit having
been built since 1997. Approximately 44.0% of the Company's screens are in
theatres with 15 or more screens.
As a whole, the film exhibition industry is in a period of transition. Over the
past several years, film exhibition companies, including the Company, embarked
on aggressive programs of rapidly building state of the art theatre level cash flow withincomplexes
(complete with amenities such as stadium seating and digital stereo
surround-sound) in an effort to increase overall industry attendance. However,
these aggressive new building strategies generated significant competition in
once stable markets and rendered many theatres obsolete more rapidly than
anticipated. This effect, together with the first six months following commencementfact that many of operationthe now obsolete
theatres are leased under long-term commitments, produced an oversupply of
screens throughout the exhibition industry at a rate much quicker than the
industry could effectively handle. The industry overcapacity coupled with
declining national box office attendance during 2000 severely impacted the
operating results of the Company and reachmany of its competitors.
The exhibition industry continues to report severe liquidity concerns, defaults
under credit facilities, renegotiations of financial covenants, as well as many
recently announced bankruptcy filings. These industry dynamics have severely
affected the Company, which has experienced deteriorating operating results over
the last fiscal year. Additionally, because the Company has funded its expansion
efforts over the past several years primarily from borrowings under its credit
facilities, the Company's leverage has grown significantly over this time.
Consequently, since the fourth quarter of 2000, the Company has been in default
of certain financial covenants contained in its Senior Credit Facilities and its
Equipment Financing.
As a mature levelresult, the administrative agent under the Company's Senior Credit
Facilities delivered payment blockage notices to the Company and the indenture
trustee of attendance within onethe Regal Notes and the Regal Debentures prohibiting the payment by
Regal of the semi-annual interest payments of approximately $28.5 million and
$8.9 million due to three years following commencementthe holders of operation.
Theatre closingsthe notes on December 1,
18
20
2000 and December 15, 2000, respectively. As a result of the interest payment
defaults, the Company is also in default of its indentures related to the Regal
Notes and Regal Debentures. Accordingly, the holders of the Company's Senior
Credit Facilities and the indenture trustee have had no significant effect on the operationsright to accelerate the
maturity of Regal.all of the outstanding indebtedness under the respective agreements,
which together totals approximately $1.82 billion. The Company does not have the
ability to fund or refinance the accelerated maturity of this indebtedness.
The Company has engaged financial advisers and is currently evaluating a
longer-term financial plan to address various restructuring alternatives and
liquidity requirements. The financial plan will provide for the closure of
under-performing theatre sites, potential sales of non-strategic assets and a
potential restructuring, recapitalization or a bankruptcy reorganization of the
Company.
RESULTS OF OPERATIONS
The Company's revenues are generatedgenerates revenue primarily from admissions and
concession sales. Additional revenues are generated by electronic video games
located adjacent to the lobbies of certain of the Company's theatres, and by
on-screen
advertisements, and rebates from concessioncertain of its vendors and revenues from the
Company's eight entertainment centers which are adjacent to theatre complexes.. Direct theatre costs
consist of film rental and advertising costs, costs of concessions and theatre
operating expenses. Film rental costs are related to the popularity of a film
and the length of time since the film's release and generally decline as a
percentage of admission revenues the longer a film has been shown. Because
certain concession items, such as fountain drinks and popcorn, are purchased in
bulk and not pre-packaged for individual servings, the Company is able to
improve its margins by negotiating volume discounts. Theatre operating expenses
consist primarily of theatre labor and occupancy costs. At December 30, 1999,28, 2000,
approximately 30.5%7.7% of the Company's employees were paid at the federal minimum
wage and, accordingly, the minimum wage largely determines the Company's labor
costs for those employees. Future increases in minimum wage requirements or
legislation requiring additional employer funding of health care, among other
things, may increase theatre operating expenses as a percentage of total
revenues.
1719
1821
The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items reflected in the
Company's consolidated statements of operations.
December 28, December 30, December 31,
January 1,2000 1999 1998
1998
-------------------- -------------------- ------------------------- ------ ------
Revenues:
Admissions 67.8% 66.6% 65.5%
67.2%
Concessions 27.5 27.5 28.6 28.4
Other operating revenue 4.7 5.9 5.9
4.4
-------------------- -------------------- ------------------------- ------ ------
Total revenues 100.0 100.0 100.0
Operating expenses:
Film rental and advertising costs 37.3 37.1 35.5 36.8
Cost of concessions and other 4.3 4.3 4.5 4.4
Theatre operating expense 39.5 36.4 34.2 32.4
General and administrative 3.3 3.1 2.9 3.4
Depreciation and amortization 8.5 7.8 7.4
6.3
Merger expenses - - 1.6
Recapitalization expenses --- -- 9.3 -
Theatre closing costs 4.9 .4 - ---
Loss on disposal of operating assets 1.8 1.6 - ---
Loss on impairment of assets 10.1 9.5 9.6
1.0
-------------------- -------------------- ------------------------- ------ ------
Total operating expenses 109.7 100.2 103.4 85.9
Other income (expense):
Interest expense (15.8) (12.7) (8.4)
(2.9)
Interest income .2 0.1 0.2
0.2
Other --- -- (0.3)
(0.1)
Income (loss)------ ------ ------
Loss before taxes and extraordinary item (25.3) (12.8) (11.9)
11.3
ProvisionBenefit (provision) for income taxes: (7.1) 4.4 3.1
4.0
Income (loss)------ ------ ------
Loss before extraordinary item (32.4) (8.4) (8.8) 7.3
Extraordinary item:
Loss on extinguishment of debt --- -- (1.6)
(2.1)
-------------------- -------------------- ------------------------- ------ ------
Net Income (loss)loss (32.4)% (8.4)% (10.4)%
5.2%
==================== ==================== ========================= ====== ======
FISCAL YEARS ENDED DECEMBER 28, 2000 AND DECEMBER 30, 1999
Total Revenues. Total revenues increased in 2000 by 9.0% to $1,130.7
million from $1,037.1 million in 1999. This increase was attributable primarily
to increased ticket prices. Box office ticket prices averaged $5.36 during 2000,
which was 9.4% higher than the $4.90 average ticket price in 1999. Average
concession per patron were also higher in 2000 ($2.17) versus 1999 ($2.03). The
higher prices per patron increased revenue by $84.6 million. Also, the slight
increase in year over year admissions of 2.0 million patrons contributed $14.2
million of the revenue increase. Such increases were partially offset by
declines in other operating revenues.
Direct Theatre Costs. Direct theatre costs in 2000 increased by 13.6%
to $916.9 million from $806.9 million in 1999. Direct theatre costs as a
percentage of total revenues increased to 81.1% in 2000 from 77.8% in 1999. The
increase in direct theatre costs, as a percentage of total revenues was
primarily attributable to increased film and advertising costs ($36.7 million),
occupancy and rent ($41.6 million), and other operating expenses ($13.9
million). The increases are primarily due to additional theatres as the Company
averaged 4,371 screens in 2000 versus 3,993 screens in 1999.
20
22
General and Administrative Expenses. General and administrative
expenses increased in 2000 by 17.0% to $37.6 million from $32.1 million in 1999.
As a percentage of total revenues, general and administrative expenses increased
to 3.3% in 2000 from 3.1% in 1999. The increase was due to approximately $6.0
million in additional legal and professional fees relating to the Company's
restructuring efforts.
Depreciation and Amortization. Depreciation and amortization expense
increased in 2000 by 18.5% to $95.7 million from $80.8 million in 1999. The
increase is due to the additional depreciation resulting from the Company's
expansion efforts offset by the effects of asset write-offs due to theatre
closings and impairment.
Operating Loss. Operating loss for 2000 increased to $110.0 million, or
9.7% of total revenues, from $2.4 million, or 0.2% of total revenues, in 1999.
The increased loss is primarily due to the $70.7 million increase in theatre
closing costs, loss on disposals of assets, and impairment charges over 1999.
Before the $190.4 million and $119.7 million of nonrecurring expenses for 2000
and 1999, respectively, operating income was 7.1% and 11.3% of total revenues
for 2000 and 1999, respectively. The decrease is due to increased direct theatre
costs, depreciation, and amortization.
Interest Expense. Interest expense increased in 2000 by 35.1% to $178.6
million from $132.2 million in 1999. The increase was due to higher average
borrowings as well as higher interest rates.
Income Taxes. The provision from income taxes for the 2000 fiscal year
was $80.8 million as compared to a benefit of $45.4 million in 1999. The
difference is primarily due to the establishment of a valuation allowance
against the Company's deferred tax assets.
Net Loss. Net loss in 2000 increased to $366.5 million from $88.5
million in 1999.
FISCAL YEARS ENDED DECEMBER 30, 1999 AND DECEMBER 31, 1998
Total Revenues. Total revenues increased in 1999 by 46.7% to $1,037.1
million from $707.0 million in 1998. This increase was attributable primarily to
the net addition of 840 screens in 1999 and also reflects a full year of
revenues for the Act III theatres as compared to the partial year results in
1998 (835 screens were added August 26, 1998 as a result of the Act III merger).merger.)
The $330.1 million increase for 1999 includes a $51.3 million decrease in
revenues resulting from a decline in same store revenues, $175.7 million
increase attributable to theatres acquired by the Company, and a $205.6 million
increase attributable to new theatres constructed by the Company. Average ticket
prices increased 8.6% during the period, reflecting an overall increase in
ticket prices and a greater proportion of newer theatres with higher ticket
prices in 1999 than in the same period in 1998. Average concession sales per
customer increased 3.0% for the period, reflecting the greater proportion of
newer theatres with higher concession prices and, to a lesser extent, an
increase in concession prices.
Direct Theatre Costs. Direct theatre costs in 1999 increased by 53.8%
to $806.9 million from $524.7 million in 1998. Direct theatre costs as a
percentage of total revenues increased to 77.8% in 1999 from 74.2% in 1998. The
increase in direct theatre costs as a percentage of total revenues was primarily
attributable to a $53 million increase in occupancy and promotional costs due to
theatre property additions associated with the Company's newly constructed
theatres efforts. Additional increases are due to a full year of costs for the
Act III theatres as compared to a partial year in 1998. The increase also
reflects higher film rental cost due primarily to film rental costs associated
with "Star Wars - The Phantom Menace."
1821
1923
General and Administrative Expenses. General and administrative
expenses increased in 1999 by 57.4% to $32.1 million from $20.4 million in 1998,
representing increased administrative costs associated with the 1999 theatre
openings and projects under construction. The increase also reflects additional
costs related to the Act III merger included in the Company's results subsequent
to the Act III merger. As a percentage of total revenues, general and
administrative expenses increased to 3.1% in 1999 from 2.9% in 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased in 1999 by 54.2% to $80.8 million from $52.4 million in 1998. This
increase was primarily the result of theatre property additions associated with
the Company's newly constructed theatres and the Act III merger.
Operating Loss. Operating loss for 1999 decreased by 90.0% to $2.4
million, or 0.2% of total revenues, from $25.0 million, or 3.5% of total
revenues, in 1998. Before the $119.7 million and $134.5 million of nonrecurring
expenses for 1999 and 1998, respectively, operating income was 11.3% and 15.5%
of total revenues for 1999 and 1998, respectively.
Interest Expense. Interest expense increased in 1999 by 122.9% to
$132.2 million from $59.3 million in 1998. The increase was due to higher
average borrowings outstanding associated with the recapitalization of the
Company, the Act III merger and the Company's expansion efforts.
Income Taxes. The benefit from income taxes for the 1999 fiscal year
increased to $45.4 million from $22.2 million compared to FYfiscal year 1998. The
effective tax rate was 33.9% in the 1999 fiscal year as compared to 26.4% in the
comparable 1998 period. The 1999 period reflected certain goodwill amortization
costs whichthat were not deductible for tax purposes. Additionally, the 1998 fiscal
year reflected certain nondeductible recapitalization expenses. Both periods
also differ due to the inclusion of state income taxes.
Net Loss. Net loss in 1999 increased by 20.4% to $88.5 million from
$73.5 million in 1998. Before nonrecurring expenses and extraordinary items, net
(loss) income was $(14.9) million and $29.6 million for 1999 and 1998,
respectively, reflecting a 150.3% decrease.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND JANUARY 1, 1998
Total Revenues. Total revenues increased in 1998 by 46.2% to $707.0
million from $483.6 million in 1997. This increase was due to a 35% increase in
attendance attributable primarily to the net addition of 1,267 screens in 1998.
Of the $223.4 million increase for 1998, $70.3 million represents an increase in
same store revenues, $93.6 million was attributed to theatres acquired by the
Company during 1998, and $59.5 million was attributed to new theatres
constructed by the Company during 1998. Average ticket prices increased 5.9%
during the period, reflecting an increase in ticket prices and a greater
proportion of larger market theatres in 1998 than in the same period in 1997.
Average concession sales per customer increased 9.4% for the period, reflecting
both an increase in consumption and, to a lesser extent, an increase in
concession prices.
Direct Theatre Costs. Direct theatre costs in 1998 increased by 47.5%
to $524.7 million from $355.8 million in 1997. Direct theatre costs as a
percentage of total revenues increased to 74.2% in 1998 from 73.6% in 1997. The
increase of direct theatre costs as a percentage of total revenues relates
primarily to increases in operating costs associated with the company's
expansion efforts primarily attributable to higher theatre operating expense as
a percentage of total revenues.
General and Administrative Expenses. General and administrative
expenses increased in 1998 by 22.6% to $20.4 million from $67.0 million in 1997,
representing administrative costs associated with the 1998 theatre openings and
projects under construction. As a percentage of total revenues, general and
administrative expenses decreased to 2.9% in 1998 from 3.4% in 1997.
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20
Depreciation and Amortization. Depreciation and amortization expense
increased in 1998 by 71.6% to $52.4 million from $30.5 million in 1997. This
increase was primarily the result of theatre property additions associated with
the Company's expansion efforts.
Operating Income (Loss). Operating income (loss) for 1998 decreased by
136.8% to $(25.0) million, or (3.5)% of total revenues, from $67.9 million, or
14.0% of total revenues, in 1997. Before the $134.5 million and $12.7 million of
nonrecurring expenses for 1998 and 1997, respectively, operating income was
15.5% and 16.7% of total revenues for 1998 and 1997, respectively.
Interest Expense. Interest expense increased in 1998 by 324.8% to $59.3
million from $14.0 million in 1997. The increase was primarily due to higher
average borrowings outstanding.
Income Taxes. The provision for income taxes decreased in 1998 by
215.9% to $(22.2) million from $19.1 million in 1997. The effective tax rate was
26.4% in 1998 as compared to 35.2% in 1997 due primarily to certain merger and
recapitalization expenses, which were not deductible for tax purposes.
Net Income (Loss). Net income (loss) in 1998 decreased by 392.1% to
$(73.5) million from $25.2 million in 1997. Before nonrecurring merger expenses
and extraordinary items, net income was $29.6 million and $41.4 million for 1998
and 1997, respectively, reflecting a 28.5% decrease.
IMPAIRMENT AND OTHER DISPOSAL CHARGESCHARGES.
The Company periodically reviews the carrying value of long-lived
assets, including goodwill, for impairment based on expected future cash flows.
Such reviews are performed as part of the Company's budgeting process and are
performed on an individual theatre level, the lowest level of identifiable cash
flows. Factors considered in management's estimate of future theatre cash flows
include historical operating results over complete operating cycles as well as
the current and anticipated future impact of competitive openings in individual
markets.
Management uses the results of this analysis to determine whether
impairment has occurred. The resulting impairment loss is measured as the amount
by which the carrying value of the asset exceeds fair value, which is estimated
using discounted cash flows. Discounted cash flows also include estimated
proceeds for the sale of owned properties in the instances where management
intends to sell the location. This analysesanalysis resulted in the recording of a
$98.6$113.7 million and a $67.9$98.6 million impairment charge during the Company's fourth
quarters ofin fiscal 2000 and 1999,
and 1998, respectively.
22
24
Additionally, the Company's management team began an extensive analysiscontinually evaluates the status of
the Company's under-performing locations. Consequently, the Company decided to
close or relocate a number of existing theatre locations as well as discontinue
plans to develop certain sites. As a result,During 2000, the $16.8Company recorded $20.9 million
represents a non cash
write offas the net loss on disposal of fixed assets, net of proceeds from salesthese locations as well as the write-off of
certain owned
properties.costs incurred to develop sites, where the Company has discontinued
development. In conjunction with certain of these closed sites,locations, the Company has a
reserve for lease termination costs of $4.3$41.4 million whichat December 28, 2000. This
reserve for lease termination costs was initially established at December 30,
1999 and represents management's best estimate of the potential costs for
exiting these leases and are based on analyses of the properties, correspondence
with the landlord, exploratory discussions with potential sublesseessub lessees and
individual market conditions. Management does not
believe the costs to exit underperforming theatre sites will be significant in
fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's revenues are derived from cash box
office receipts and concession sales, while film rental fees are ordinarily paid
to distributors 15 to 45 days following receipt of admission revenues. The
Company thus has an operating cash "float" which partially finances its
operations, reducing the Company's needs for external sources of working
capital.sales.
The Company's capital requirements have historically arisen principally
in connection with acquisitions of existing theatres, new theatre openings and
the addition of screens to existing theatres and have been financed with debt
and to a lesser extent internally generated cash. The Company's Senior Credit
Facilities provide for borrowings of up to $1,008.8$1,005.0 million in the aggregate,
consisting of the Revolving Credit Facility, which permits the Company to borrow
up to $500.0 million on a 20
21
revolving basis and $508.8$505.0 million, in the aggregate,
of term loan borrowings under three separate term loan facilities. As of
December 30, 1999,28, 2000, the Company had $128.5 million ofexhausted its capacity available under the
Revolving Credit Facility.
Under the Senior Credit Facilities, the Company is required to comply with
certain financial and other covenants. The loans under the Senior Credit Facilities bear
interest at either a base rate (referred to as "Base Rate Loans") or adjusted
LIBO rate (referred to as "LIBOR Rate Loans") plus, in each case, an applicable
margin determined depending upon the Company's Total Leverage Ratio (as defined
in the Senior Credit Facilities).
On May 9, 1997, the Company completed the purchase of assets consisting
of an existing five theatres with 32 screens, four theatres with 52 screens
under development, and a seven screen addition to an existing theatre from Magic
Cinemas LLC, an independent theatre company with operations in New Jersey and
Pennsylvania. The consideration paid was approximately $24.5 million in cash.
On July 31, 1997, Regal consummated the acquisition of the business
conducted by Cobb Theatres (the "Cobb Theatres Acquisition"). The aggregate
consideration paid by the Company was 17,593,083 shares of its Common Stock. The
acquisition has been accounted for as a pooling of interests. Regal recognized
certain one time charges totaling approximately $5.4 million (net of tax) in its
quarter ended October 2, 1997, relating to merger expenses and severance
payments. In connection with the Cobb Theatres Acquisition, Regal assumed
approximately $110 million of liabilities, including $85 million of outstanding
Senior Secured Notes (the "Cobb Notes"). The Company has repurchased all but
$70,000 principal amount of the Cobb Notes. Regal initially financed the
purchase price of the Cobb Notes with borrowings under a short-term credit
facility (the "Bank Tender Facility"). Regal recognized an extraordinary charge
totaling approximately $10.0 million (net of tax) in its quarter ended October
2, 1997, relating to the purchase of the Cobb Notes.
On September 24, 1997, Regal consummated the offering of $125 million
aggregate principal amount of 8 1/2% Senior Subordinated Notes due October 1,
2007 (the "Old Regal Notes"). A portion of the proceeds from such offering were
used to repay amounts borrowed under the Bank Tender Facility. The balance of
the proceeds were used to repay amounts outstanding under the Company's former
bank revolving credit facility.
On November 14, 1997, the Company completed the purchase of assets
consisting of an existing 10 theatres with 78 screens from Capitol Industries,
Inc. (known as RC Theatres), an independent theatre company with operations in
Virginia. The consideration paid was approximately $24.0 million in cash.
On May 27, 1998, an affiliate of KKR and an affiliate of Hicks Muse
merged with and into the Company, with the Company continuing as the surviving
corporation. The consummation of the Regal Merger resulted in a recapitalization
of the Company. In the Recapitalization, the Company's existing holders of
Common Stock received cash for their shares of Common Stock, and KKR, Hicks
Muse, DLJ and certain members of the Company's management acquired the Company.
In addition, in connection with the Recapitalization, the Company canceled
options and repurchased warrants held by certain directors, management and
employees of the Company. The aggregate purchase price paid to effectaffect the Regal
Merger and the Option/Warrant Redemption was approximately $1.2 billion.
In connection with the Recapitalization, the Company made an offer to
purchase (the Tender Offer) all $125.0 million aggregate principal amount of the
Old8 1/2% Senior Subordinated Notes due October 1, 2007 (the "Old Regal Notes.Notes"). In
conjunction with the Tender Offer, the Company also solicited consents to
eliminate substantially all of the covenants contained in the indenture relating
to the Old Regal Notes. The purchase price paid by the Company for the Old Regal
Notes was approximately $139.5 million, including a premium of approximately
$14.5 million.
On May 27, 1998, the Company issued the Originalfirst series of Regal Notes.
The net proceeds from the sale of the Original Notes,this issuance, initial borrowings of $375.0 million under
the Company's Senior Credit Facilities and $776.9 million in proceeds from the
Equity Investment were used: (i) to
23
25
fund the cash payments required to effect the Regal Merger and the
Option/Warrant Redemption; (ii) to repay and retire the Company's then existing
senior credit facilities; (iii) to repurchase the Old Regal Notes; and (iv) to
pay related fees and expenses.
21
22
On August 26, 1998, the Company acquired Act III. In the Act III
Merger, Act III became a wholly owned subsidiary of the Company and each share
of Act III's outstanding common stock was converted into the right to receive
one share of the Company's Common Stock. In connection with the Act III Merger,
the Company amended its Senior Credit Facilities and borrowed $383.3 million
thereunder to repay Act III's then existing bank borrowings and two senior
subordinated promissory notes, each in the aggregate principal amount of $75.0
million, which were owned by KKR and Hicks Muse.
On November 10, 1998, the Company issued Tack-Ona second series of Regal Notes
for $200 million
under the same indenture governing the Original Notes.million. The proceeds of the
Tack-On Offeringthis issuance were used to repay and retire
portions of the Senior Credit Facilities.
On December 16, 1998, the Company issued the Regal Debentures for $200
million. The proceeds of the Debenture Offering were used to repay all of the
then outstanding indebtedness under the Revolving Credit Facility and the excess
was used for working capital purposes.
Interest payments on the Regal Notes and the Regal Debentures and
interest payments and amortization with respect to the Senior Credit Facilities
represent significant liquidity requirements for the Company. The Company had
interest expense of approximately $132.2$178.6 million for the twelve-month period
ended December 30, 1999.28, 2000. In addition, for 1999,2000, the amount paid under the
Company's non-cancelable operating leases was $129.9$156.5 million.
At December 30, 1999,28, 2000, the Company had 162 new theatres with 24230 screens
and 15 screens at three existing locations
under construction. The Company intends to develop approximately 32040 screens
during 2000.2001. The Company expects that the capital expenditures in connectionassociated with
its development plannew theatres will aggregate approximately $200.0$7.4 million during 2000, of which, as of December 30,
1999, the Company had approximately $200.0 million in contractual commitments
for expenditures. The Company believes that its capital needs for completion of
theatre construction and development for at least the next 12 months will be
satisfied by available credit under the Senior Credit Facilities, internally
generated cash flow and available cash.
During the first quarter of fiscal 2000, the Company has obtained
commitments from lenders totaling approximately $60 million. Such commitments
provide for financings in the form of sale-leaseback financing and secured
financings. Such transactions are expected to close during the first and second
quarters of fiscal 2000.
Based on the current level of operations and anticipated future growth
(both internally generated as well as through acquisitions), the Company
anticipates that its cash flow from operations, together with borrowings under
the Senior Credit Facilities and additional financing should be sufficient to
meet its anticipated requirements for working capital, capital expenditure,
interest payments and scheduled principal payments. The Company's future
operating performance and ability to service or refinance the Regal Notes, the
Regal Debentures and to extend or refinance the Senior Credit Facilities will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.2001.
The Regal Notes, Regal Debentures and Senior Credit Facilities impose
certain restrictions on the Company's ability to make capital expenditures and
limit the Company's ability to incur additional indebtedness. Such restrictions
could limit the Company's ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of business or
acquisition opportunities. The covenants contained in the Senior Credit
Facilities and/or the indentures governing the Regal Notes and the Regal
Debentures also, among other things, limit the ability of the Company to dispose
of assets, repay indebtedness or amend other debt instruments, pay
distributions, enter into sale and leaseback transactions, make loans or
advances and make acquisitions. Currently, under terms of the indentures
governing the Regal Notes and Regal Debentures, the Company is prohibited from
incurring additional indebtedness (as defined in such indentures).
Since the fourth quarter of 2000, the Company has been in default of
certain financial covenants contained in its Senior Credit Facilities and its
Equipment Financing. As a result of the defaults, the administrative agent under
the Company's Senior Credit Facilities delivered payment blockage notices to the
Company and the indenture trustee of its Regal Notes and its Regal Debentures
prohibiting the payment by Regal of the semi-annual interest payments of
approximately $28.5 million and $8.9 million due to the holders of the notes on
December 1, 2000 and December 15, 2000, respectively. As a result of the
interest payment default, the
24
26
Company is also in default of the indentures related to the Regal Notes and
Regal Debentures. Accordingly, the holders of the Company's Senior Credit
Facilities and the indenture trustee for the Regal Notes and Regal Debentures
have the right to accelerate the maturity of all of the Company's outstanding
indebtedness under the respective agreements, which together totals
approximately $1.82 billion. The Company does not have the ability to fund or
refinance the accelerated maturity of this indebtedness.
The Company has engaged financial advisers and is currently evaluating
a longer-term financial plan to address various restructuring alternatives and
liquidity requirements. The financial plan will provide for the closure of
under-performing theatre sites, potential sales of non-strategic assets and a
potential restructuring, recapitalization or a bankruptcy reorganization of the
Company. Because of the potential restructuring alternatives, substantial doubt
exists about the Company's ability to continue operating under its existing
capital structure.
In addition, the uncertainty regarding the eventual outcome of the
Company's restructuring, and the effect of other unknown adverse factors, could
threaten the Company's existence as a going concern. Continuing on a going
concern basis is dependent upon, among other things, the success of the
Company's financial plan, continuing to license popular motion pictures,
maintaining the support of key vendors and key landlords, retaining key
personnel and the continued slowing of construction within the theatre
exhibition industry along with financial, business and other factors, many of
which are beyond the Company's control.
The Company anticipates it will incur significant legal and
professional fees, and other restructuring costs, due to the ongoing
restructuring of its business.
INFLATION; ECONOMIC DOWNTURN
The Company does not believe that inflation has had a material impact
on its financial position or results of operations. In times of recession,
attendance levels experienced by motion picture exhibitors may be adversely
affected. For example, revenues declined for the industry in 1990 and 1991.
22
23
NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements - Emerging Issues Task Force
(EITF) Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction,
is applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when construction of
the asset is completed. The consensus reached in Issue No. 97-10 applies to
construction projects committed to after May 21, 1998 and to those projects that
were committed to on May 21, 1998 if construction did not commence by December
31, 1999. Issue 97-10 has required the Company to be considered the owner (for
accounting purposes) of these types of projects during the construction period
as well as when construction of the asset is completed. Subsequent to the
issuance of Issue 97-10, the Company did not amend the leasing arrangements whichthat
were historically recorded as off-balance sheet operating leases as such
amendments would have changed the economics of the lease agreements. Management
believes a change in the economics of the lease would have been unfavorable to
the Company. Therefore, the Company is required to record such leases as lease
financing arrangements (capital leases). The application of the provisions of
EITF Issue No. 97-10 did not result in the
recording of any leases or capital leases in 1998 but did resultresulted in the recording of approximately $74.7$83.3 and $75.5
million of such leases as capital leases in 2000 and 1999, with no significantrespectively.
During the fourth quarter of 2000, the Company adopted SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which provides guidance for applying generally accepted accounting principles to
selected revenue recognition issues. The adoption of SAB No. 101 did not have a
material effect on the results of operations for 1999.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTEDCompany's consolidated financial statements.
25
27
Accounting Pronouncements Not Yet Adopted - In June 1998,
theStatement of Financial Accounting Standards Board issued Statement
No.133,Standard ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
Statement will requireActivities was issued, and was subsequently
amended by SFAS Nos. 137 and 138. These statements specify how to report and
account for derivative instruments and hedging activities, thus requiring the
Company to recognize all derivatives onrecognition of those items as assets or liabilities in the balance
sheetstatement of
financial position and measure them at fair value. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations or
financial position. The Company will adopt this Statement duringadopted these
statements in the first quarter of fiscal 2001. The adoption of these statements
did not have a material effect on the Company's consolidated financial
statements (see note 14 of the Consolidated Financial Statements).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With certain instruments entered into for other than trading purposes,
the Company is subject to market risk exposure related to changes in interest
rates. As of December 30, 1999,28, 2000, the Company has in place a $1,008.8$1,005.0 million bank
credit facility whose various components mature during 2005 through 2007. A
portion of that facility, a $500.0 million revolver, bears interest at a
percentage point spread from either the base rate or LIBOR both based on the
Company's total leverage ratio. As of December 30, 1999,28, 2000, the Company had $370.0$495.0
million outstanding under the revolver at interest rates ranging from 7.49%9.00% to
8.43%10.50%. The remaining portion of the bank credit facility is $508.8$505.0 million in
term loans.
Borrowings under the Term A Loan or the Revolving Credit Facility can
be made at the Base Rate plus a margin of 0% to 1%, or the LIBOR Rate, plus
.625% to 2.25%, both depending on the Total
Leverage Ratio. The Base Rate on revolving loans is the rate established by the
Administrative Agent in New York as its base rate for dollars loaned in the
United States. The LIBOR Rate is based on the length of the loan. The
outstanding balance under the Term A Loan was $237.6$235.2 million at December 30, 199928,
2000 with $2.4 million due annually through 2004 and the balance due in 2005.
Borrowings under the Term B Loan can be made at the Base Rate plus a
margin of 0.75% to 1.25% or the LIBOR Rate plus 2.0% to 2.5%, both depending on the Total Leverage Ratio. The outstanding
balance under the Term B Loan was $137.5 million at December 30, 199928, 2000 with the
balance due in 2006.
Borrowings under the Term C Loan can be made at the Base Rate plus a
margin of 1.0% to 1.5% or the LIBOR Rate plus 2.25% to 2.75%, both depending on the Total Leverage Ratio. The outstanding
balance under the Term C Loan was $133.7$132.3 million at December 30, 199928, 2000 with $1.35
million due annually through 2006, and the balance due in 2007.
The weighted average interest rates through the expected maturity dates
for the Company's term loans and revolving credit facility are 8.56%10.27% and
8.35%10.70%, respectively, based on the Company's current spread of 2.25%1.00% for the
revolver and 2.25%1.0% to 2.75%1.5% for the term loans. While changes in the LIBOR rateBase Rate
would affect the cost of funds borrowed in the future, the Company believes the
effect, if any, of reasonably possible near term changes in interest rates on
the Company's consolidated financial position, results of operations, or cash
flows would not be material.
The fair market value of the outstanding credit
obligations under the bank credit facility approximate the facility's carrying
value due to the variable interest rates in place as of December 30, 1999.
2326
2428
The Company has $200.0 million in senior subordinated debentures due
December 15, 2010, with interest payable semiannually at 8.875%. Debentures are
redeemable, in whole or in part, at the option of the Company at any time on or
after December 15, 2003, at the redemption prices (expressed as percentages of
the principal amount thereof) set forth below together with accrued and unpaid
interest to the redemption date, if redeemed during the 12 month period
beginning on December 15 of the years indicated:
REDEMPTION
REDEMPTION
YEAR PRICE
---- -----
2003 104.438%
2004 103.328%
2005 101.219%
2006 101.109%
2007 and thereafter 100.000%
The Company has $600 million in senior subordinated notes due June 1,
2008, with interest payable semiannually at 9.5%. Notes are redeemable, in whole
or in part, at the option of the Company at any time on or after June 1, 2003,
at the redemption prices (expressed as percentages of the principal amount
thereof) set forth below together with accrued and unpaid interest to the
redemption date, if redeemed during the 12 month period beginning on June 1 of
the years indicated:
REDEMPTION
REDEMPTION
YEAR PRICE
---- -----
2003 104.750%
2004 103.167%
2005 101.583%
2006 and thereafter 100.000%
The fair market value of the outstanding senior subordinated debt as of
December 30, 199928, 2000 was $608.0$56.0 million based on quoted market prices as of that date.
As of December 30, 1999,In September 1998, the Company had entered into interest rate swap
agreements ranging from fivewith five-year terms to seven years forhedge a portion of the management ofCredit Facilities
variable interest rate exposure. Asrisk. On September 22, 2000, the Company monetized the
value of December 30, 1999, suchall of these contracts for approximately $8.6 million. The gain
realized from the termination of the swap agreements had effectively converted
$270 millionhas been deferred and will
be amortized as a credit to interest expenses over the remaining original term
of LIBOR floating rate debt to fixed rate obligations with interest
rates ranging from 5.32% to 7.32%these swap agreements (through September 2003). Regal continually monitors its positionThe current portion of this
gain is included in accrued expenses and the credit ratinglong-term portion in other
liabilities. The fair value of the interest swap counterparty. The fair values ofCompany's remaining interest rate swap, agreements are estimated basedwhich
matures on quotes from dealers of these
instruments and represent the estimated amounts the Company would expect to
(pay) or receive to terminate the agreements.March 21, 2002, is ($0.3) million. The fair value of the Company's
interest rate swap agreements at December 30, 1999 was $11.7 million.
2427
2529
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 26
Report of PricewaterhouseCoopers LLP, Independent Accountants 2729
Consolidated Balance Sheets at December 28, 2000 and December 30, 1999 and December 31, 1998 2830
Consolidated Statements of Operations for the years ended December 28, 2000,
December 30, 1999 and December 31, 1998 and January 1, 1998 2931
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 28, 2000, December 30, 1999 and December 31, 1998 and January 1, 1998 3032
Consolidated Statements of Cash Flows for the years ended December 28, 2000,
December 30, 1999 and December 31, 1998 and January 1, 1998 3133
Notes to Consolidated Financial Statements 3234
2528
2630
INDEPENDENT AUDITORS' REPORT
Board of Directors
Regal Cinemas, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheetsheets of Regal Cinemas,
Inc. and subsidiaries (the Company) as of December 30, 199928, 2000 and December 31,
1998,30,
1999, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three years then ended.in the period ended
December 28, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.audits.
We conducted our auditaudits in accordance with auditing standards generally accepted
auditing standards.in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Regal Cinemas, Inc. and subsidiaries as of
December 30, 1999 and December 31, 1998, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 8, 2000
Nashville, Tennessee
26
27
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Regal Cinemas, Inc.
We have audited the accompanying consolidated balance sheets of Regal Cinemas,
Inc. and Subsidiaries (the Company) as of January 2, 1997 and January 1, 1998,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended January
1, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the acquisition of Cobb Theatres, L.L.C. which has been
accounted for as pooling of interests as described in Note 1 to the consolidated
financial statements. We did not audit the financial statements of Cobb
Theatres, L.L.C. for 1995 and 1996. Such statements reflect aggregate total
assets constituting 23% in 1996 and aggregate total revenues constituting 34%
and 31% in 1995 and 1996, respectively, of the related consolidated totals.
Those statements were audited by other auditors, whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Cobb
Theatres, L.L.C. is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Regal Cinemas, Inc.
and Subsidiariessubsidiaries as of January 2, 1997December 28, 2000 and January 1, 1998,December 30, 1999, and the consolidated results
of theirits operations and theirits cash flows for each of the three years in the period
ended January 1, 1998,December 28, 2000 in conformity with accounting principles generally
accepted accounting principles.in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's deteriorating operating
results, shareholders' equity deficiency, and defaults under its financing
arrangements raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments to reflect the
possible future effects on recoverability and classification of assets or the
amounts and classification of liabilities that might result from the outcome of
this uncertainty.
/s/ PricewaterhouseCoopersDELOITTE & TOUCHE LLP
PricewaterhouseCoopers LLP
Knoxville,February 20, 2001
Nashville, Tennessee
February 6, 1998
2729
2831
REGAL CINEMAS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 199928, 2000 AND DECEMBER 31, 199830, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 28, DECEMBER 30,
DECEMBER 31,
ASSETS2000 1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,604118,834 $ 20,62140,604
Accounts receivable 1,473 2,752 3,161
Reimbursable construction advances 10,221 20,250
8,643
Inventories 6,092 5,050 4,014
Prepaid and other current assets 22,690 18,283 11,455
Assets held for sale 3,808 9,670 --
Deferred income tax asset -- 633 1,271
----------- -----------
Total current assets 163,118 97,242 49,165
PROPERTY AND EQUIPMENT:
Land 87,491 113,516 111,854
Buildings and leasehold improvements 1,119,677 999,012
650,313
Equipment 453,320 453,751 368,792
Construction in progress 8,195 75,879 94,610
----------- -----------
1,668,683 1,642,158 1,225,569
Accumulated depreciation and amortization (246,850) (185,409) (139,643)
----------- -----------
Total property and equipment, net 1,421,833 1,456,749 1,085,926
GOODWILL, net of accumulated amortization of $31,080 and
$20,952, and
$10,170, respectively 365,227 398,567 439,842
DEFERRED INCOME TAX ASSET -- 86,075 37,538
OTHER ASSETS 40,950 41,576 47,989
----------- -----------
TOTAL ASSETS $ 2,080,2091,991,128 $ 1,660,4602,080,209
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 6,5371,823,683 $ 6,5246,537
Accounts payable 55,753 101,152 65,592
Accrued expenses 148,559 56,701 43,118
----------- -----------
Total current liabilities 2,027,995 164,390 115,234
LONG-TERM OBLIGATIONS, less current maturities:
Long-term debt 3,709 1,679,217 1,313,219
Capital lease obligations 17,790 19,722 21,323
Lease financing arrangements 153,350 74,199 --
OTHER LIABILITIES 40,669 28,521 8,077
----------- -----------
Total liabilities 2,243,513 1,966,049 1,457,853
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:EQUITY (DEFICIT):
Preferred stock, no par; 100,000,000 shares authorized,
none issued and outstanding -- --
Common stock, no par; 500,000,000 shares authorized;
216,282,348 issued and outstanding in 2000; 216,873,501
issued and outstanding in 1999; 216,491,565
issued and outstanding in 19981999 196,804 199,778 197,427
Loans to shareholders (3,414) (6,388)
(4,140)
Retained earnings (deficit)deficit (445,775) (79,230) 9,320
----------- -----------
Total shareholders' equity (deficit) (252,385) 114,160 202,607
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,991,128 $ 2,080,209 $ 1,660,460
=========== ===========
See notes to consolidated financial statements
28statements.
30
2932
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999, AND DECEMBER 31, 1998 AND JANUARY 1, 1998
(IN THOUSANDS)
DECEMBER 28, DECEMBER 30, DECEMBER 31,
JANUARY 1,2000 1999 1998 1998
----------- ----------- --------------------
REVENUES:
Admissions $ 767,108 $ 690,469 $ 462,826
$ 325,118
Concessions 310,234 285,707 202,418 137,173
Other operating revenue 53,379 60,895 41,783
21,305
----------- ----------- --------------------
Total revenues 1,130,721 1,037,071 707,027 483,596
OPERATING EXPENSES:
Film rental and advertising costs 421,594 384,894 251,345 178,173
Cost of concessions and other 48,962 44,276 31,657 21,072
Theatre operating expenses 446,391 377,702 241,720 156,588
General and administrative expenses 37,593 32,134 20,355 16,609
Depreciation and amortization 95,734 80,787 52,413
30,535
MergerRecapitalization expenses -- -- 7,789
Recapitalization expenses -- 65,755 --
Theatre closing costs 55,802 4,269 -- --
Loss on disposal of operating assets 20,893 16,826 861 --
Loss on impairment of assets 113,734 98,587 67,873
4,960
----------- ----------- --------------------
Total operating expenses 1,240,703 1,039,475 731,979
415,726
----------- ----------- --------------------
OPERATING INCOME (LOSS)LOSS (109,982) (2,404) (24,952)
67,870
----------- ----------- --------------------
OTHER INCOME (EXPENSE):
Interest expense (178,559) (132,162) (59,301)
(13,959)
Interest income 2,821 659 1,506
816
Other -- -- (1,081) (407)
----------- ----------- -----------
INCOME (LOSS)---------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM(285,720) (133,907) (83,828) 54,320
BENEFIT FROM (PROVISION FOR) INCOME TAXES (80,825) 45,357 22,170
(19,121)
----------- ----------- -----------
INCOME (LOSS)---------
LOSS BEFORE EXTRAORDINARY ITEM (366,545) (88,550) (61,658) 35,199
EXTRAORDINARY ITEM:
Loss on extinguishment of debt, net of applicable taxes -- -- (11,890) (10,020)
----------- ----------- --------------------
NET INCOME (LOSS)LOSS $ (366,545) $ (88,550) $ (73,548)
$ 25,179
=========== =========== ====================
See notes to consolidated financial statements.
2931
3033
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999, AND DECEMBER 31, 1998 AND JANUARY 1, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON PREFERRED LOANS TO RETAINED
STOCK STOCK SHAREHOLDERS EARNINGS TOTAL
----------- ----------- ----------- -------------------- ------- --------- -----------
BALANCE, JANUARY 2, 19971, 1998 $ 221,613223,707 $ -- $ -- $ 57,68982,868 $ 279,302
Issuance of 844,614 shares upon
exercise of stock options and
restricted stock awards 723 -- -- -- 723
Income tax benefits related to
exercised stock options 1,306 -- -- -- 1,306
Stock option amortization 65 -- -- -- 65
Net income -- -- -- 25,179 25,179
----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 1, 1998 223,707 -- -- 82,868 306,575
Purchase and retirement of 223,937,974
shares of common stock related to the
Recapitalization (1,119,690) -- -- -- (1,119,690)
Issuance of 2,630,556 shares of
Common stock related to the
Recapitalization 13,153 -- -- -- 13,153
Issuance of 15,277 shares of Series A
Convertible Preferred Stock related
to the Recapitalization -- 763,820 -- -- 763,820
Conversion of 15,277 shares of Series A
Convertible Preferred Stock to
152,763,973 shares of
common stock 763,820 (763,820) -- -- --
Issuance of 60,383,388 shares of common
stock and 5,195,598 options to purchase
the Company's common stock related to
the acquisition of Act III 312,157 -- -- -- 312,157
Issuance of 808,313 shares of common
stock in exchange for shareholder loans 4,212 -- (4,140) -- 72
Stock option amortization 68 -- -- -- 68
Net loss -- -- -- (73,548) (73,548)
----------- ----------- ----------- -------------------- ------- --------- -----------
BALANCE, DECEMBER 31, 1998 $ 197,427 $ -- $ (4,140)$(4,140) $ 9,320 $ 202,607
Issuance of 120,000 shares of common
stock upon exercise of stock options 600 -- -- -- 600
Issuance of 569,500 shares of common
stock in exchange for shareholder loans 2,848 -- (2,848) -- --
Repurchase and cancellation of 307,564
shares of common stock (1,097) -- 600 -- (497)
Net loss -- -- -- (88,550) (88,550)
----------- ----------- ----------- -------------------- ------- --------- -----------
BALANCE, DECEMBER 30, 1999 $ 199,778 $ -- $ (6,388)$(6,388) $ (79,230) $ 114,160
Cancellation of 591,153
shares of common stock (2,974) -- 2,974 -- --
Net loss -- -- -- (366,545) (366,545)
----------- --------- ------- --------- -----------
BALANCE, DECEMBER 28, 2000 $ 196,804 $ -- $(3,414) $(445,775) $ (252,358)
=========== =========== =========== ==================== ======= ========= ===========
See notes to consolidated financial statements.
3032
3134
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999, AND DECEMBER 31, 1998 AND JANUARY 1, 1998
(IN THOUSANDS)
DECEMBER 28, DECEMBER 30, DECEMBER 31,
JANUARY 1,2000 1999 1998
1998
----------- -------------------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)loss $(366,545) $ (88,550) $ (73,548)
$ 25,179
Adjustments to reconcile net income (loss)loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 95,734 80,787 52,413 30,535
Non-cash loss on extinguishment of debt -- -- 4,975 2,575
Loss on impairment of assets 113,734 98,587 67,873 4,960
Loss on disposal of operating assets 20,893 16,826 861 --
Theatre closing costs 55,802 4,269 -- --
Deferred income taxes 86,708 (47,899) (29,771) 1,293
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable 1,279 409 3,585
(1,899)
Inventories (1,042) (1,036) (118) (135)
Prepaids and other current assets (4,407) (6,304) (3,373)
2,150
Accounts payable (45,399) 22,352 13,054 2,881
Accrued expenses and other liabilities 39,601 13,248 9,132
(3,579)
----------- -------------------- --------- -----------
Net cash (used in) provided by operating activities (3,642) 92,689 45,083 63,960
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (148,751) (435,768) (286,363) (178,099)
Proceeds from sale of fixed assets 75,791 8,875 1,731
--
IncreaseDecrease (increase) in reimbursable construction advances 10,029 (11,607) (5,761)
--
Increase (decrease) in goodwill and other assets 626 2,618 (5,829)
(24,198)
----------- -------------------- --------- -----------
Net cash used in investing activities (62,305) (435,882) (296,222) (202,297)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term obligations 177,000 390,000 1,329,800 358,418
Payments on long-term obligations (41,426) (26,927) (688,653) (214,460)
Deferred financing costs -- -- (45,137) (5,127)
Proceeds from issuance of stock, net -- -- 774,691
Proceeds from interest rate swap terminations 8,603 -- --
Purchase and retirement of common stock -- (497) (1,117,407) --
Exercise of warrants, options and stock
compensation expense -- 600 68
788
----------- -------------------- --------- -----------
Net cash provided by financing activities 144,177 363,176 253,362
139,619
----------- -------------------- --------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 78,230 19,983 2,223 1,282
CASH AND EQUIVALENTS, beginning of period 40,604 20,621 18,398
17,116
----------- -------------------- --------- -----------
CASH AND EQUIVALENTS, end of period $ 118,834 $ 40,604 $ 20,621
$ 18,398
=========== ==================== ========= ===========
See notes to consolidated financial statements.
3133
3235
REGAL CINEMAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999 AND DECEMBER 31, 1998 AND JANUARY 1, 1998
1. THE COMPANY AND RECAPITALIZATIONINDUSTRY CONSIDERATIONS
Regal Cinemas, Inc. and its wholly owned subsidiaries (the Company"Company" or
Regal)"Regal") operate multi-screen motion picture theatres principally
throughout the eastern and northwestern United States.
The film exhibition industry continues to face severe financial
challenges due primarily to the rapid building of state of the art
theatre complexes that resulted in an unanticipated oversupply of
screens. The aggressive new build strategies generated significant
competition in certain once stable markets and rendered many older
theatres obsolete more rapidly than anticipated. This effect, together
with the fact many of the now obsolete theatres are leased under
long-term commitments, produced an oversupply of screens throughout the
exhibition industry at a rate much quicker than the industry could
effectively handle. This industry overcapacity coupled with declines in
national box office attendance during 2000 has negatively affected the
operating results of the Company and many of its competitors. The
exhibition industry continues to report severe liquidity concerns,
defaults under credit facilities, renegotiations of financial
covenants, as well as several announced bankruptcy filings.
These industry dynamics have severely affected the Company, which
continues to experience deteriorating operating results and a deficit
in shareholders' equity at December 28, 2000. Additionally, because the
Company has funded expansion efforts over the past several years
primarily from borrowings under its credit facilities, the Company's
leverage has grown significantly over this time. Consequently, since
the fourth quarter of 2000, the Company has been in default of certain
financial covenants contained in its Senior Credit Facilities and its
equipment financing agreement ("Equipment Financing") As a result of
the default, the administrative agent under the Company's Senior Credit
Facilities delivered payment blockage notices to the Company and the
indenture trustee of its 9-1/2% Senior Subordinated Notes due 2008 (the
"Regal Notes") and its 8-7/8% Senior Subordinated Debentures due 2010
(the "Regal Debentures") prohibiting the payment by Regal of the
semi-annual interest payments of approximately $28.5 million and $8.9
million due to the holders of the notes on December 1, 2000 and
December 15, 2000, respectively. As a result of the interest payment
defaults, the Company is also in default of the indentures related to
Regal Notes and Regal Debentures. Accordingly, the holders of the
Company's Senior Credit Facilities and the indenture trustee for the
Regal Notes and Regal Debentures have the right to accelerate the
maturity of all of the outstanding indebtedness under the respective
agreements, which together totals approximately $1.82 billion. The
Company does not have the ability to fund or refinance the accelerated
maturity of this indebtedness.
34
36
The Company has engaged financial advisers and is currently evaluating
a long-term financial plan to address various restructuring
alternatives and liquidity requirements. The financial plan will
provide for the closure of under-performing theatre sites, potential
sales of non-strategic assets and a potential restructuring,
recapitalization or a bankruptcy reorganization of the Company. In
light of the Company's current financial condition, substantial doubt
exists about the Company's ability to continue operating under its
existing capital structure.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, the Company has experienced deteriorating
operating results and has a shareholders' equity deficiency as of
December 28, 2000. As discussed above, the Company is also in default
of financial covenants under its financing arrangements and does not
have the ability to fund or refinance the resulting accelerated
maturity of its indebtedness. These factors among others raise
substantial doubt about the Company's ability to continue as a going
concern for a reasonable period of time. These financial statements do
not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or liabilities that may
result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Regal and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
from the consolidated financial statements.
FISCAL YEAR - The Company maintains its accounting records on a 52 week
fiscal year with four thirteen week quarters. The fiscal months of
March, June, August, and November consist of five weeks while all other
months consist of four.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents. At December 28, 2000 and December 30, 1999, the
Company held approximately $107.0 million and $29.1 million,
respectively, in temporary cash investments in the form of certificates
of deposit and variable rate investment accounts with major financial
institutions.
INVENTORIES - Inventories consist of concession products and theatre
supplies and are stated on the basis of first-in, first-out (FIFO)
cost, which is not in excess of net realizable value.
START-UP COSTS - Start up costs of a new theatre are expensed as
incurred.
REIMBURSABLE CONSTRUCTION ADVANCES - Reimbursable construction advances
consist of amounts due from landlords to fund a portion of the
construction costs of new theatres that are to be operated by the
Company pursuant to lease agreements. The landlords repay the amounts
either during construction on a percentage of completion basis, or upon
completion of the theatre.
35
37
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Repairs and maintenance are charged to expense as incurred. Gains and
losses from disposition of property and equipment are included in
income and expense when realized. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives
as follows:
Buildings and leaseholds 20-30 years
Equipment 5-20 years
Included in property and equipment is $188.0 million and $126.5 million
of assets accounted for under capital leases and lease financing
arrangements as of December 28, 2000 and December 30, 1999,
respectively. Amortization is provided using the straight-line method
over the shorter of the lease terms or the estimated useful lives noted
above.
Interest is capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 34, Capitalization of Interest.
Capitalized interest was $5.4 million, $11.5 million, and $6.2 million
for fiscal years 2000, 1999 and 1998, respectively.
GOODWILL - Goodwill, which represents the excess of acquisition costs
over the net assets acquired in business combinations, has been
allocated to the individual theatres acquired and is amortized on the
straight-line method. Goodwill generated from the acquisition of Act
III Cinemas, Inc. (see note 4) is amortized over a 40 year period, all
other goodwill is amortized over a 25-30 year period.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived
assets, including allocated goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying amounts of the
assets may not be fully recoverable. If the sum of the expected future
cash flows, undiscounted and without interest charges, is less than the
carrying amount of the asset, an impairment charge is recognized in the
amount by which the carrying value of the assets exceeds its fair
market value. Assets are evaluated for impairment on an individual
theatre basis, which management believes is the lowest level for which
there are identifiable cash flows. The fair value of assets is
determined using the present value of the estimated future cash flows
or the expected selling price less selling costs for assets expected to
be disposed of.
DEBT ACQUISITION COSTS (INCLUDED IN OTHER ASSETS) - Debt acquisition
costs are deferred and amortized over the terms of the related
agreements.
INCOME TAXES - Deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
DEFERRED REVENUE (INCLUDED IN OTHER LIABILITIES) - Deferred revenue
relates primarily to vendor rebates. Rebates are recognized in the
accompanying financial statements as earned.
36
38
DEFERRED RENT (INCLUDED IN OTHER LIABILITIES) - Rent expense is
recognized on a straight-line basis after considering the effect of
rent escalation provisions resulting in a level monthly rent expense
for each lease over its term.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
INTEREST RATE SWAPS - Interest rate swaps are entered into as a hedge
against interest exposure of variable rate debt. The differences to be
paid or received on swaps are included in interest expense. The fair
value of the Company's interest rate swap agreements is based on dealer
quotes. These values represent the amounts the Company would receive or
pay to terminate the agreements taking into consideration current
interest rates.
STOCK-BASED COMPENSATION - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to adopt the
fair value method of accounting for stock-based employee compensation.
The Company has chose to continue to account for stock-based employee
compensation in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations (see Note 9).
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
SEGMENTS - The Company manages its business based on one reportable
segment.
LEASE FINANCING ARRANGEMENT - Emerging Issues Task Force (EITF) Issue
No. 97-10, The Effect of Lessee Involvement in Asset Construction, is
applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when
construction of the asset is completed. The consensus reached in Issue
No. 97-10 applies to construction projects committed to after May 21,
1998 and to those projects that were committed to on May 21, 1998 if
construction did not commence by December 31, 1999. Issue 97-10 has
required the Company to be considered the owner (for accounting
purposes) of these types of projects during the construction period as
well as when construction of the asset is completed. Therefore, as
discussed in Note 7, the Company is required to record such leases as
lease financing arrangements (capital leases). The application of the
provisions of EITF Issue No. 97-10 resulted in the recording of
approximately $83.3 million and $75.5 million of such leases as capital
leases in 2000 and 1999, respectively. The application of the
provisions of EITF Issue No. 97-10 has resulted in payments of $16.3
million in 2000 and $2.1 million in 1999 that would have been shown as
rent expense absent this pronouncement.
NEW ACCOUNTING STANDARDS - During the fourth quarter of 2000, the
Company adopted SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, which provides guidance for
applying generally accepted accounting principles to selected revenue
recognition issues. The adoption of SAB No. 101 did not have a material
effect on the Company's consolidated financial statements.
In June 1998, Statement of Financial Accounting Standard (SFAS) No.
133, Accounting for Derivative Instruments and Hedging
37
39
Activities was issued, and was subsequently amended by SFAS Nos. 137
and 138. These statements specify how to report and account for
derivative instruments and hedging activities, thus requiring the
recognition of those items as assets or liabilities in the statement of
financial position and measure them at fair value. The Company adopted
these statements in the first quarter of fiscal 2001. The adoption of
these statements did not have a material effect on the Company's
consoldiated financial statements (see Note 14).
3. MERGER AND RECAPITALIZATION
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
(KKR) and an affiliate of Hicks, Muse, Tate & Furst Incorporated (Hicks
Muse) merged with and into Regal Cinemas, Inc., with the Company
continuing as the surviving corporation of the Merger (the Merger). The
Merger and related transactions have been recorded as a
recapitalization (the Recapitalization). In the Recapitalization, the
Company's existing shareholders received cash for their shares of
common stock. In addition, in connection with the Recapitalization, the
Company canceled options and repurchased warrants held by certain
former directors, management and employees of the Company (the
Option/Warrant Redemption). The aggregate amount paid to effect the
Merger and the Option/Warrant Redemption was approximately $1.2
billion.
The net proceeds of a $400 million senior subordinated note offering,
initial borrowings of $375.0 million under senior credit facilities and
the proceeds of $776.9 million from the investment by KKR, Hicks Muse,
DLJ Merchant Banking Partners II, L.P. and affiliated funds (DLJ) and
management in the Company were used: (i) to fund the cash payments
required to effect the Merger and the Option/Warrant Redemption; (ii)
to repay and retire the Company's existing senior credit facilities;
(iii) to repurchase the Company's existing 8.5% senior subordinated
notes;notes (Regal Notes); and (iv) to pay related fees and expenses. Upon
consummation of the Merger, KKR owned $287.3 million of the Company's
equity securities, Hicks Muse owned $437.3 million of the Company's
equity securities and DLJ owned $50.0 million of the Company's equity
securities. Each investor received securities consisting of a
combination of the Company's common stock, no par value (Common Stock),
and the Company's Series A Convertible Preferred Stock, no par value
(Convertible Preferred Stock), which was converted into Common Stock on
June 3, 1998. To equalize KKR's and Hicks Muse's investments in the
Company at $362.3 million each, Hicks Muse exchanged $75.0 million of
Convertible Preferred Stock, with KKR for $75.0 million of common stock
of Act III Cinemas, Inc. (Act III). As a result of the Recapitalization
and the Act III Merger (see Note 3)4), KKR and Hicks Muse each ownedown
approximately 46.3% of the Company's Common Stock, with DLJ, management
and other minority holders owning the remainder.
During 1998, nonrecurring costs of approximately $65.7 million,
including approximately $41.9 million of compensation costs, were
incurred in connection with the Recapitalization. Financing costs of
approximately $34.2 million were incurred and classified as deferred
financing costs which will be amortized over the lives of the new debt
facilities (see Note 5)7). Of the total Merger and
38
40
Recapitalization costs above, an aggregate of $19.5 million was paid to
KKR and Hicks Muse.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Regal and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
from the consolidated financial statements.
FISCAL YEAR - The Company maintains its accounting records on a 52 week
fiscal year ending on the Thursday nearest December 31, with each
quarter consisting of 13 weeks.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents. At December 30, 1999 and December 31, 1998,
32
33
the Company held approximately $29.1 million and $20.0 million,
respectively, in temporary cash investments in the form of certificates
of deposit and variable rate investment accounts with major financial
institutions.
INVENTORIES - Inventories consist of concession products and theatre
supplies and are stated on the basis of first-in, first-out (FIFO)
cost, which is not in excess of net realizable value.
START-UP COSTS - Start up costs of a new theatre are expensed as
incurred.
REIMBURSABLE CONSTRUCTION ADVANCES - Reimbursable construction advances
consist of amounts due from landlords to fund a portion of the
construction costs of new theatres that are to be operated by the
Company pursuant to lease agreements. The landlords repay the amounts
either during construction on a percentage of completion basis, or upon
completion of the theatre.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Repairs and maintenance are charged to expense as incurred. Gains and
losses from disposition of property and equipment are included in
income and expense when realized. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives
as follows:
Buildings and leaseholds 20-30 years
Equipment 5-20 years
Interest is capitalized in accordance with Statement of Financial
Accounting Standards No. 34, Capitalization of Interest. Capitalized
interest was $11.5 million, $6.2 million, and $2.6 million for fiscal
years 1999, 1998 and 1997, respectively.
GOODWILL - Goodwill, which represents the excess of acquisition costs
over the net assets acquired in business combinations, is amortized on
the straight-line method over periods ranging from 25 to 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived
assets, including goodwill, for impairment whenever events or changes
in circumstances indicate that the carrying amounts of the assets may
not be fully recoverable. If the sum of the expected future cash flows,
undiscounted and without interest charges, is less than the carrying
amount of the asset, an impairment charge is recognized in the amount
by which the carrying value of the assets exceeds it fair market value.
Assets are evaluated for impairment on an individual theatre basis,
which management believes is the lowest level for which there are
identifiable cash flows. The fair value of assets is determined using
the present value of the estimated future cash flows or the expected
selling price less selling costs for assets expected to be disposed of.
DEBT ACQUISITION COSTS (INCLUDED IN OTHER ASSETS) - Debt acquisition
costs are deferred and amortized over the terms of the related
agreements.
INCOME TAXES - Deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
DEFERRED REVENUE (INCLUDED IN OTHER LIABILITIES) - Deferred revenue
relates primarily to vendor rebates. Rebates are recognized in the
accompanying financial statements as earned.
DEFERRED RENT (INCLUDED IN OTHER LIABILITIES) - Rent expense is
recognized on a straight-line basis after considering the effect of
rent escalation provisions resulting in a level monthly rent expense
for each lease over its term.
33
34
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
INTEREST RATE SWAPS - Interest rate swaps are entered into as a hedge
against interest exposure of variable rate debt. The differences to be
paid or received on swaps are included in interest expense. The fair
value of the Company's interest rate swap agreements is based on dealer
quotes. These values represent the amounts the Company would receive or
pay to terminate the agreements taking into consideration current
interest rates.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
SEGMENTS - The Company manages it business based on one reportable
segment.
NEW ACCOUNTING STANDARDS - Emerging Issues Task Force (EITF) Issue No.
97-10, The Effect of Lessee Involvement in Asset Construction, is
applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when
construction of the asset is completed. The consensus reached in Issue
No. 97-10 applies to construction projects committed to after May 21,
1998 and to those projects that were committed to on May 21, 1998 if
construction did not commence by December 31, 1999. Issue 97-10 has
required the Company to be considered the owner (for accounting
purposes) of these types of projects during the construction period as
well as when construction of the asset is completed. Therefore, as
discussed in Note 5, the Company is required to record such leases as
lease financing arrangements (capital leases). The application of the
provisions of EITF Issue No. 97-10 did not result in the recording of
any leases or capital leases in 1998, but did result in the recording
of approximately $74.7 million of such leases as capital leases in
1999, with no significant effect on the results of operations for 1999.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED - In June 1998, the
Financial Accounting Standards Board issued Statement No.133,
Accounting for Derivative Instruments and Hedging Activities. The
Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its
results of operations or financial position. The Company will adopt
this Statement during the first quarter of fiscal 2001.
RECLASSIFICATIONs - Certain reclassifications have been made to the
1998 financial statements to conform to the 1999 presentation.
3.4. ACQUISITIONS
On August 26, 1998, the Company acquired Act III Cinemas, Inc. (the Act
III Merger). The total purchase cost was approximately $312.2 million,
representing primarily the value of 60,383,388 shares of the Company's
common stock issued to acquire all of Act III's outstanding common
stock and the value of 5,195,598 options of the Company issued for Act
III options. In connection with the Act III Merger, the Company also
amended its credit facilities and borrowed $383.3 million thereunder to
repay Act III's borrowings and accrued interest under Act III's
existing credit facilities and two senior subordinated notes totaling
$150.0 million.
34
35
The Act III Merger has been accounted for as a purchase, applying the
applicable provisions of Accounting Principles Board Opinion No. 16.
The allocation of the purchase price as of December 30, 199928, 2000 is as
follows:
(IN THOUSANDS)
Property and equipment $ 343,694
Long-term debt assumed (411,337)
Net working capital acquired (18,541)
Excess purchase cost over fair value of net assets acquired 398,341
----------------------
Total purchase cost $ 312,157
======================
The above allocation of purchase cost has been allocated to the
acquired assets and liabilities of Act III based on estimates of fair
value as of the closing date.
The following pro forma unaudited fiscal year results of operations
data give effect to the Act III Merger and the Recapitalization (Note
1)3) as if they had occurred as of January 3, 1997:
(IN THOUSANDS) 1998
1997
------------- ----------------------
(IN THOUSANDS)
Revenues $ 897,459
$ 738,668
Loss before extraordinary itemsitem $ (67,571) (18,601)
Net loss $ (79,407) (28,621)
On July 31, 1997,5. SALE - LEASEBACK TRANSACTIONS
During the third quarter of fiscal 2000, the Company issued 17,593,083 sharescompleted
sale-leaseback transactions involving 15 of its Common
Stock for allowned theatres. Under
the terms of the outstanding common stocktransaction, the land and related improvements of Cobb Theatres. This
merger hasthe
theateres were sold for $45.2 million and have been leased back for an
initial lease term of 20 years. The leases include specified renewal
options for up to 20 additional years and have been accounted for as
a poolingoperating leases. Rent expense during the initial term will be
approximately $5.0 million annually. The gain on the sale of interests$2.1
million will be amortized over the initial lease term of 20 years and
accordingly, 1997 consolidated financial statements were restated to
include the results of operations of Cobb Theatres.
Separate results of the combining entities for fiscal year 1997 are as
follows:
1997
-------------
(IN THOUSANDS)
Revenues:
Regal $ 402,445
Cobb Theatres, L.L.C. and Tricob Partnership
(through July 31 for 1997) 81,151
-------------
$ 483,596
=============
Net income (loss):
Regal $ 27,940
Cobb Theatres, L.L.C. and Tricob Partnership
(through July 31 for 1997) (2,761)
-------------
$ 25,179
=============
In addition to the acquisition of Act III and the Cobb Theatre mergers
described above, the Company completed the purchase of 19 theatres with
169 screens during fiscal year 1997. The theatres were purchased for
consideration of approximately $48.5 million cash. These transactions
were accounted for using the purchase method of accounting and,
accordingly, the purchase prices have been allocated at fair value to
the separately identifiable assets (principally property and equipment,
and leasehold improvements) of the respective theatre locations, with
the remaining balance allocated to goodwill.
35will offset rent expense.
39
36
The following unaudited pro forma results of operations data assume the
individual fiscal 1997 acquisitions referred to above occurred as of
the beginning of the fiscal year:
(IN THOUSANDS) 1997
-------------
Revenues $ 503,722
Operating income 70,108
Income before extraordinary item 36,564
Net income applicable to common stock 26,544
4.41
6. IMPAIRMENT OF LONG-LIVED ASSETS
ASSET IMPAIRMENT - As stated in Note 2, the Company periodically
reviews the carrying value of long-lived assets, including allocated
goodwill, for impairment based on expected future cash flows. Such
reviews are performed as part of the Company's budgeting process and
are performed on an individual theatre level, the lowest level of
identifiable cash flows. Factors considered in management's estimate of
future theatre cash flows include historical operating results over
complete operating cycles, as well as the current and anticipated future impactimpacts of
competitive openings in individual markets.markets, and anticipated sales or
dispositions of theatres.
Management uses the results of this analysis to determine whether
impairment has occurred. The resulting impairment loss is measured as
the amount by which the carrying value of the asset exceeds fair value,
which is estimated using discounted cash flows. Discounted cash flows
also include estimated proceeds for the sale of owned properties in the
instances where management intends to sell the location. This analysis
has resulted in the following impairment losses being recognized:
2000 1999 1998
1997
------------- ------------- --------------------- ------- -------
(IN THOUSANDS)
(IN THOUSANDS)
Write-down of theatre property and equipment $ 46,460 $ 22,617 $ 4,96091,490 $46,460 $22,617
Write-down of FunScape property and equipment 564 22,017 36,950 -
Write-off of goodwill 21,680 30,110 8,306
-
------------- ------------- --------------------- ------- -------
Total $ 98,587 $ 67,873 $ 4,960
============ ============ ============$113,734 $98,587 $67,873
======== ======= =======
THEATRE CLOSING AND LOSS ON DISPOSAL COSTS - During 1999, theThe Company's management
team began an extensive analysiscontinually evaluates the status of the Company's under-performing
locations. Consequently,During 2000, the Company decided to close or relocate a
number of theatre locations as well as discontinue plans to build new
theatres in certain markets. The Company recorded $16.8$20.9 million as the net
loss on disposal of these locations as well as the write-off of certain
costs incurred to develop sites, which have now been
discontinued.where the Company has discontinued
development. In conjunction with certain closed or abandoned locations,
the Company has a reserve for lease termination and related costs of
$4.3$41.4 million has also been recorded.at December 28, 2000. This reserve for lease termination costswas initially
established at December 30, 1999 and represents management's best
estimate of the potential costs for exiting these leases and are based
on analyses of the properties, correspondence with the landlord,
exploratory discussions with potential sublesseessub lessees and individual
market conditions.
Theatre properties owned byThe following is the activity in this reserve during 2000:
(IN THOUSANDS)
Beginning balance, December 30, 1999 $ 4,269
Rent and other termination payments (14,967)
Additional closing and termination costs 56,124
Revision of prior estimates (3,963)
--------
Ending balance, December 28, 2000 $ 41,463
========
The Company which were closed during the
1999 fiscal year are classified as assets held for salehas made decisions subsequent to December 28, 2000 to close
additional theatres in conjunction with its restructuring program.
These closures will result in additional theatre closing and loss on
the
accompanying December 30, 1999 balance sheet. Such assets are recorded
at the estimated net realizable value of the individual locations.
36disposal costs being recognized in 2001.
40
37
5.42
7. LONG-TERM OBLIGATIONS
Long-term obligations at December 30, 199928, 2000 and December 31, 1998,30, 1999,
consists of the following:
DECEMBER 30,28, DECEMBER 31,30,
(IN THOUSANDS) 2000 1999
1998----------- -----------
$600,000 of the Company's senior subordinated notes due June 1, 2008,
with interest payable semiannually at 9.5%. Notes are redeemable, in
whole or in part, at the option of the Company's senior subordinated notes dueCompany at any time on or after
June 1, 2008,
with interest payable semiannually at 9.5%. Notes are redeemable, in
whole or in part,2003, at the optionredemption prices (expressed as percentages of the
Company at any timeprincipal amount thereof) set forth below together with accrued and
unpaid interest to the redemption date, if redeemed during the 12 month
period beginning on or after June 1 2003, at the redemption prices (expressed as percentages of the
principal amount thereof) set forth below together with accrued and
unpaid interest to the redemption date, if redeemed during the 12 month
period beginning on June 1 of the years indicated:
REDEMPTION
YEAR PRICE
2003 104.750%
2004 103.167%
2005 101.583%
2006 and thereafter 100.000% $ 600,000 $ 600,000
$200,000 of the Company's senior subordinated debentures due December
15, 2010, with interest payable semiannually at 8.875%. Debentures are
redeemable, in whole or in part, at the option of the Company at any
time on or after December 15, 2003, at the redemption prices (expressed
as percentages of the principal amount thereof) set forth below
together with accrued and unpaid interest to the redemption date, if
redeemed during the 12 month period beginning on December 15 of the
years indicated:
REDEMPTION
YEAR PRICE
2003 104.750%
2004 103.328%
2005 101.219%
2006 101.109% 2007 and thereafter 100.000%
$ 200,000 $ 200,000
2007 100.000%
Term Loans 505,000 508,750 512,500
Revolving credit facility 495,000 370,000
-
Other 4,877 4,757Equipment financing note payable, payable in varying quarterly
installments through April 1, 2005, including interest at LIBOR
plus 3.25% (9.93% at December 28, 2000), collateralized by related
equipment 19,500 --
Capital lease obligations, 11.5% to 14.0%, maturing in various
installments through 2024 19,597 21,311
23,809Other 4,270 4,877
Lease financing arrangements, 11.5%, maturing in
various installments through 20192020 155,165 74,737
-
------------- ----------------------- -----------
1,998,532 1,779,675 1,341,066
Less current maturities (1,823,683) (6,537)
(6,524)
------------- ----------------------- -----------
Total long-term obligations $ 174,849 $ 1,773,138
$ 1,334,542
============= ======================= ===========
3741
3843
CREDIT FACILITIES - In connection with the Merger and Recapitalization
(Note 1)(see Note 3), the Company entered into credit facilities provided by a
syndicate of financial institutions. In August 1998, December 1998, and
March 1999, such credit facilities were amended. Such credit facilities
(the Credit Facilities) now include a $500.0 million Revolving Credit
Facility (including the availability of Revolving Loans, Swing Line
Loans, and Letters of Credit) and three term loan facilities: Term A,
Term B, and Term C (the Term Loans). The Company must pay an annual
commitment fee ranging from 0.2% to 0.425%, depending on the Company's
Total Leverage Ratio, as defined in the Credit Facilities, of the
unused portion of the Revolving Credit Facility. The Revolving Credit
Facility expires in June 2005. At December 30, 1999,28, 2000, there were $370.0$495.0
million in outstanding borrowings under the Revolving Credit Facility.
Borrowings under the Term A Loan or the Revolving Credit Facility can
be made at the Base Rate plus a margin of 0% to 1%, or the LIBOR Rate,
plus .625% to 2.25%, both depending on the
Total Leverage Ratio. The Base Rate on revolving loans is the rate
established by the Administrative Agent in New York as its base rate
for dollars loaned in the United States. The LIBOR Rate is based on the length of loan. The
outstanding balance under
the Term A Loan was $235.2 million at December 28, 2000 and $237.6
million at December 30, 1999 and $240.0 million at December 31, 1998 with $2.4 million due annually through
2004 and the balance due in 2005.
Borrowings under the Term B Loan can be made at the Base Rate plus a
margin of 0.75% to 1.25% or the LIBOR Rate plus 2.0% to 2.5%, both depending on the Total Leverage Ratio. The
outstanding balance under the Term B Loan was $137.5 million at
December 30, 199928, 2000 and December 31, 199830, 1999 with the balance due in 2006.
Borrowings under the Term C Loan can be made at the Base Rate plus a
margin of 1.0% to 1.5% or the LIBOR Rate plus 2.25% to 2.75%, both depending on the Total Leverage Ratio. The
outstanding balance under the Term C Loan was $132.3 million at
December 28, 2000 and $133.7 million at December 30, 1999 and $135.0
million at December 31, 1998 with $1.35
million due annually through 2006, and the balance due in 2007.
A pledge of the stock of the Company's domestic subsidiaries
collateralizes the Credit Facilities. The Company's direct and indirect
U.S. subsidiaries guarantee payment obligations under certain of the
Credit Facilities.
The Credit Facilities contain customary covenants and restrictions on
the Company's ability to issue additional debt, pay dividends or engage
in certain activities and include customary events of default. In
addition, the Credit Facilities specify that the Company must meet or
exceed defined interest coverage ratios and must not exceed defined
leverage ratios.
42
44
Since the fourth quarter of 2000, the Company has been in default of
certain financial covenants contained in its Credit Facilities and its
equipment financing term note. As a result, the administrative agent
under the Company's Credit Facilities delivered payment blockage
notices to the Company and the indenture trustee of the Regal Notes and
the Regal Debentures prohibiting the payment by Regal of the
semi-annual interest payments of approximately $28.5 million and $8.9
million due to the holders of the notes on December 1, 2000 and
December 15, 2000, respectively. As a result of the interest payment
defaults, the Company is also in default of its indenture agreements
related to the Regal Notes and Regal Debentures. Accordingly, the
holder of the Company's Credit Facilities and the indenture trustee
have the right to accelerate the maturity of all of the outstanding
indebtedness under the respective agreements, which together totals
approximately $1.82 billion. The Company wasdoes not have the ability to
fund or refinance the accelerated maturity of this indebtedness.
Accordingly, the Company has classified the Credit Facilities,
Equipment Financing, Regal Notes and Regal Debentures as current
liabilities in compliance with such covenantsthe accompanying balance sheet as of December 30, 1999.
The Credit Facilities are collateralized by a pledge of the stock of
the Company's domestic subsidiaries. The Company's payment obligations
under the Credit Facilities are guaranteed by its direct and indirect
U.S. subsidiaries.28, 2000.
LEASE FINANCING ARRANGEMENTS - As discussed in Note 2, the Emerging
Issues Task Force (EITF) released in fiscal 1998, Issue No. 97-10, The
Effect of Lessee Involvement in Asset Construction. Issue No. 97-10 is
applicable to entities involved on behalf of an owner-lessor with the
construction of an asset that will be leased to the lessee when
construction of the asset is completed. Issue No. 97-10 requires the
Company be considered the owner (for accounting purposes) of these
types of projects during the construction period as well as when the
construction of the asset is completed. Therefore, the Company has
recorded such leases as lease financing arrangements on the
accompanying balance sheet.
As Issue 97-10 applies to construction
projects committed to after May 21, 1998, the majority of the Company's
construction projects for leased theatre sites in the 2000 fiscal year
will be reported as on balance sheet financing.
38
39
MATURITIES OF LONG TERM OBLIGATIONS ---
The Company's long term debt, capital lease obligations, and lease
financing arrangements are scheduled to mature as follows (in
thousands):
LEASE
LONG-TERM CAPITAL FINANCING
(IN THOUSANDS) DEBT LEASES ARRANGEMENTARRANGEMENTS TOTAL
---- ---------- ---------- ------------------ ------------ ----------
20002001 $1,820,061 $ 4,4101,807 $ 1,589 $ 538 $ 6,537
2001 4,192 1,976 609 6,7771,815 $1,823,683
2002 4,239 2,313 683 7,235490 2,312 2,009 4,811
2003 4,290 2,670 766 7,726541 2,669 2,256 5,466
2004 4,345597 3,082 1,015 8,4422,697 6,376
2005 659 3,558 3,465 7,682
Thereafter 1,662,151 9,681 71,126 1,742,9581,422 6,169 142,923 150,514
---------- -------- ---------- ----------
---------- ----------
$1,683,627$1,823,770 $ 21,31119,597 $ 74,737 $1,779,675155,165 $1,998,532
========== ================== ========== ==========
TENDER OFFER - In connection with the Recapitalization, the Company
commenced a tender offer for all of the Company's 8.5% senior
subordinated notes (Regal Notes) and a consent solicitation in order to
effect certain changes in the related indenture. Upon completion of the
tender offer, holders had tendered and given consents with respect to
100% of the outstanding principal amount of the Regal Notes. In
addition, the Company and the trustee executed a
43
45
supplement to such indenture, effecting the proposed amendments whichthat
included, among other things, the elimination of all financial
covenants for the Regal Notes. On May 27, 1998, the Company paid, for
each $1,000 principal amount, $1,116.24 for the Regal Notes tendered
plus, in each case, accrued and unpaid interest of $13.22. Regal
financed the purchase price of the Regal Notes with funds from the
Recapitalization.
EXTRAORDINARY LOSS - In 1998, the Company recognized a loss of $11.9
million, net of income taxes of $7.6 million, for the write-off of
deferred financing costs and prepayment penalties incurred in
connection with redeeming the Regal Notes as well as for the write-off
of deferred financing costs related to the Company's previous credit
facility. In 1997, the Company refinanced debt of acquired companies,
and recognized aSuch loss on extinguishment of debt of $10.0 million (net
of applicable income taxes). Such losses areis reported as an extraordinary lossesloss in the
accompanying financial statements
6.8. COMMITMENTS AND CONTINGENCIES
LEASES - LeasesThe majority of leases entered into by the Company, prior to the issuance of
EITF 97-10 (see Note 5),
principally for theatres, are accounted for as operating leases. The
Company, at its option, can renew a substantial portion of the leases
at defined or then fair rental rates for various periods. Certain
leases for Company theatres provide for contingent rentals based on
revenues. Minimum rentals payable under all noncancelable operating
leases with terms in excess of one year as of December 30, 1999,28, 2000, are
summarized for the following fiscal years:
(IN THOUSANDS)
2000 $ 147,976
2001 154,561147,407
2002 154,195146,012
2003 154,202146,289
2004 154,385146,802
2005 145,791
Thereafter $2,002,4741,771,657
39
40
Rent expense under such operating leases amounted to $158.2 million,
$130.3 million, $80.9 million, and $52.6$80.9 million for fiscal years 2000, 1999 1998 and 1997,1998,
respectively. Contingent rent expense was $3.6 million, $2.8$3.6 million,
and $1.0$2.8 million for fiscal years 2000, 1999, 1998, and 1997,1998, respectively.
The Company has also entered into certain lease agreements for the
operation of theatres not yet constructed. The scheduled completion of
construction for these theatre openings is at various dates during
fiscal 2000 and 2001. As of December 30, 1999,28, 2000, the total future minimum rental
payments under the terms of these leases approximate $568.3$34.2 million to
be paid over 2015 to 3020 years.
CONTINGENCIES - From time to time, theThe Company is presently involved in various legal
proceedings arising in the ordinary course of its business operations,
such asincluding personal injury claims, employment matters and contractual
disputes. During fiscal 2000, the Company also became a defendant in a
number of claims arising from its decision to close theatre locations
or to cease construction of theatres on sites for which the Company
purportedly had a contractual obligation to lease such property. The
Company believes it has adequately provided for the settlement of such
contractual disputes. Management believes that the Company's potentialany additional liability with
respect
44
46
to suchthe above proceedings iswill not be material in the aggregate to the
Company's consolidated financial position, results of operations or
cash flows.
7.9. CAPITAL STOCK AND STOCK OPTION PLANS
COMMON STOCK - Effective May 27, 1998, the Recapitalization date, the
Company effected a stock split in the form of a stock dividend
resulting in a price per share of $5.00, which $5.00 per share is
equivalent to the $31.00 per share consideration paid in the Merger.
The Company's common shares issued and outstanding throughout the
accompanying financial statements and notes reflect the retroactive
effect of the Recapitalization stock split.
EARNINGS PER SHARE - Earnings per share information is not presented
herein as the Company's shares do not trade in a public market.
PREFERRED STOCK - The Company currently has 100,000,000 shares of
preferred stock authorized with none issued. The Company may issue the
preferred shares from time to time in such series having such
designated preferences and rights, qualifications and limitations as
the Board of Directors may determine.
STOCK OPTION PLANS - Prior to the Recapitalization, the Company had
three employee stock option plans under which certain employees were
granted options to purchase shares of the Company's common stock. All
such options issued under these plans became fully vested upon
consummation of the Recapitalization, and all participants either
received cash for the difference between the per share price inherent
in the Recapitalization and the exercise price of their options, or
retained their existing options. In addition, certain key members of
management were issued options under a newly formed 1998 Stock Purchase
and Option Plan for Key Employees of Regal Cinemas, Inc. (the "Plan").
40
41
Under the Plan, the Board of Directors of the Company may award stock
options to purchase up to 30,000,000 shares of the Company's common
stock. Grants or awards under the Plan may take the form of purchased
stock, restricted stock, incentive or nonqualified stock options or
other types of rights as specified in the Plan.
WEIGHTED
AVERAGE OPTIONS
AVERAGESHARES EXERCISABLE
EXERCISE AT
SHARES
PRICE YEAR END
----------- ---------------- --------
Under option at January 2, 1997 19,713,260 $2.28 349,246
Options granted in 1997 6,057,400 $4.55
Options exercised in 1997 (698,139) $0.88
Options canceled in 1997 (449,500) $3.70
-----------
Under option at January 1, 1998 24,623,021 $2.86$ 2.86 3,574,945
Options granted in 1998 14,419,334 $4.34$ 4.34
Options exercised in 1998 -- --
-----------
Options canceled or redeemed in 1998 (20,316,730) $2.84$ 2.84
-----------
Under option at December 31, 1998 18,725, 625 $3.76$ 3.76 8,021,889
Options granted in 1999 1,692,609 $5.00$ 5.00
Options exercised in 1999 (120,000) $5.00$ 5.00
Options canceled or redeemed in 1999 (3,742,404) $3.72$ 3.72
-----------
Under option at December 30, 1999 16,455,830 $3.78$ 3.78 9,027,781
===========Options granted in 2000 -- --
Options exercised in 2000 -- --
Options canceled or redeemed in 2000 (1,652,818) $ 3.78
-----------
Under option at December 28, 2000 14,803,012 $ 3.78 9,920,444
45
47
Options OutstandingOPTIONS OUTSTANDING Options Exercisable
------------------------------------------------------- -------------------------------------------------------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Contractual Exercise ExcercisableExercisable Exercise
Price at 12/30/9928/00 Life Price at 12/30/9928/00 Price
------------------------------------------------------- --------------------------------- ----------- ---- ----- ----------- -----
$0.34-$0.62 1,562,820 5.1 $0.5358 1,562,820 $0.5358
$1.58-$3.67 3,931,243 5.3 $2.0680 3,931,243 $2.0680
$4.03-$5.00 10,961,767 8.4 $4.8542 3,533,718 $4.5477$0.34 - $0.62 1,403,311 4.1 $0.5370 1,403,311 $0.5370
$1.58 - $3.67 3,541,095 4.3 $2.0525 3,541,095 $2.0525
$4.03 - $5.00 9,858,606 7.4 $4.8603 4,976,038 $4.7231
---------- ---------
16,455,830 9,027,78114,803,012 9,920,444
========== =========
Prior to the Recapitalization, the Company also had the 1993 Outside
Directors' Stock Option Plan (the 1993 Directors' Plan). Directors'
stock options for the purchase of 186,000 shares at an exercise price
of $4.40 were granted during 1997. All such options became fully vested
and were redeemed for cash at the date of the Recapitalization. In
addition, the Company, prior to the Recapitalization, had issued
warrants to purchase 982,421 shares of the Company's common stock at an
exercise price of $.20 per share. The warrants were redeemed for cash
at the date of the Recapitalization.
Regal has elected to continue following Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock option
plans and its outside directors' plan rather thanHad the alternative fair
value accounting provided for under FASB Statement 123, Accounting for
Stock-Based Compensation (Statement 123). Under APB 25, because the
exercise price of the Company's employee and director stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized in the accompanying financial
statements.
Pro forma information regarding net income is required by Statement
123, and has been determined as if the Company has accounted for its
stock options under the fair value method of that Statement. The fair
value for the employee and directors options granted during fiscal
years 1999, 1998 and 1997, was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.92% for 1999 grants, 5.0% to
5.9% for 1998 grants, 5.90% to 6.68% for 1997 grants; with an
inconsequential volatility factor in 1999 and 1998 due to the Company's
Recapitalization (Note 1) and a volatility factor of the expected
market price of the Company's common stock of 33.7% for 1997. The 1999
pricing model assumptions used a weighted average expected life of 10
years for employee options. The 1998 and 1997 pricing model assumptions
used a weighted average expected life of 5 years for employee options
and 7 years for outside director options. The weighted average grant
date fair value of options granted under these plans been recognized
in fiscal years 1999, 1998 and 1997,
was $2.24, $ .96, and $1.85 per share, respectively.
41
42
For purposes of pro forma disclosures,accordance with SFAS No. 123 as compensation expense on a
straight-line basis over the estimated fair valuevesting period of the options is amortized to expense overgrant, the options' vesting periods.Company's
net loss would have been recorded in the amounts indicated below:
(IN THOUSANDS) 2000 1999 1998
--------- -------- --------
Net Loss:
As Reported $(366,545) $(88,550) $(73,548)
Pro Forma (368,769) (91,204) (59,423)
The pro forma results do not purport to indicate the effects on
reported net income for recognizing compensation expense which arethat is
expected to occur in future years. The Company's pro forma information for 1999,
1998, and 1997 option grants is as follows:
(IN THOUSANDS) 1999 1998 1997
------------- ------------- -------------
Pro forma net income (loss) $ (91,204) $ (59,423) $ 22,883
============= ============== ==============
The 1998 pro forma net loss reflects
an adjustment for the intrinsic value of the options redeemed at the
Recapitalization date that were issued prior to the Company's adoption
of the disclosure provisions of Statement 123. Such options had
intrinsic value prior to the Recapitalization date and therefore the
value of these options has been excluded from the amount of
compensation costs reflected in the 1998 pro forma net loss.
8.The fair value for the employee and directors options granted during
fiscal years 2000, 1999 and 1998, was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates of 5.9% for 1999
grants, and 5.0% to 5.9% for 1998 grants and an
46
48
inconsequential volatility factor in 2000, 1999 and 1998 due to the
Company's Recapitalization (Note 3). The 1999 pricing model used a
weighted average expected life of 10 years for employee options. The
1998 pricing model assumptions used a weighted average expected life of
5 years for employee options and 7 years for outside director options.
The weighted average grant date fair value of options granted in fiscal
years 1999, and 1998, was $ 2.24, and $.96 per share, respectively.
There were no options granted in fiscal year 2000.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Significant components of the Company's net deferred tax asset
(liability) consisted of the following atat:
(IN THOUSANDS) 2000 1999
1998
------------- ---------------------- --------
Deferred tax assets:
Net operating loss carryforward $ 49,697107,378 $ 25,76649,697
Excess of tax basis over book basis for leases 5,786 4,960 5,032
Accrued expenses 27,626 6,878 4,515
Interest expense deferred under IRC 163(j) 2,267 2,161
2,742Favorable leases 476 --
Excess of tax basis over book basis of certain assets 42,263 24,990 336
AMT credit carryforward 1,316 527
162
Other 4,509 1,371
2,750
------------- ---------------------- --------
191,621 90,584
Valuation allowance (182,846) --
--------- --------
Deferred tax assets 8,775 90,584 41,303
Deferred tax liabilities:
Excess of book basis over tax basis of certain
intangible assets (5,150) (2,640)
(1,709)
Other (3,625) (1,236)
(785)
------------- ----------------------- --------
Deferred tax liabilities (8,775) (3,876)
(2,494)
-------------- ----------------------- --------
Net deferred tax asset $ -- $ 86,708
$ 38,809
============= ====================== ========
The Company provided no valuation allowance against deferred tax assets
recorded as of December 30, 1999 and1999; however, the Company did record a valuation
allowance against deferred tax assets as of December 31, 1998,28, 2000 totaling
approximately $182.8 million, as management believes that it is "morebecame more
likely than not"not during 2000 that allthe net deferred assetstax asset will not be
fully realizablerealized in future tax periods.
At December 30, 1999,28, 2000, the Company and certain of its subsidiaries have
various federal and state net operating loss (NOL) carryforwards
available to offset future taxable income. The Company has
approximately $127.0$254.5 million of NOL carryforwards, in the aggregate,
for federal purposes. Portions of the federal NOL are subjectpurposes that begin to utilization limitations. However, the deferred tax asset related to the
federal NOL is expected to be fully realized as such losses do not
begin expiring untilexpire in the 2009 tax year.
Furthermore, a substantial portionAdditionally, the Company has approximately $340.2 million of the federal NOL does not expire
until 2018. The Company also has NOL
carryforwards for state purposes.
The deferred tax asset related to the state NOL is expected to be fully
realized as well.purposes. At December 30, 1999,28, 2000, the Company
has an approximate
$0.5approximately $1.3 million of alternative
42
43 minimum tax credit
carryforwardcarryforwards
47
49
available to reduce future federal income tax liabilities. Under
current Federalfederal income tax law,taw, the alternative minimum tax credit can
be carried forward indefinitely. However, management believes it is
more likely than not that the deferred tax assets relative to the NOLs
and the alternative minimum tax credits will not be realized in future
tax periods.
The components of the provision for (benefit from) income taxes for
income from continuing operations for each of the three fiscal years
were as follows:
(IN THOUSANDS) 2000 1999 1998
1997
------------- ------------- ---------------------- -------- --------
Current $ -(5,883) $ --- $ 17,828--
Deferred (96,138) (45,357) (22,170)
3,602
DecreaseIncrease in deferred income tax
valuation allowance - - (2,309)
------------- ------------- --------------182,846 -- --
--------- -------- --------
Total income tax provision (benefit) $ (45,357) $ (22,170) $ 19,121
============== ============== =============80,825 $(45,357) $(22,170)
========= ======== ========
Extraordinary losses are presented net of related tax benefits.
Therefore, the 1997 income tax provision and the 1998 income tax benefit in the above table exclude tax
benefits of $6.2 million and
$7.6 million respectively, on extraordinary losses related to expenses
incurred in the extinguishment of debt and the write-off of debt
financing costs related to the debt. The $2.3$182.8 million decreaseincrease in
the valuation allowance in 1997for 2000 primarily reflects the change in the
assessment of the likelihood of utilization of the net operating loss
carryforwardsdeferred tax
assets of athe Company subsidiary subsequent to the merger of such
subsidiary with Regal.and its subsidiaries.
A reconciliation of the provision for (benefit from) for income taxes
as reported and the amount computed by multiplying the income before
income taxes and extraordinary item by the U.S. federal statutory rate
of 35% was as follows:
(IN THOUSANDS) 2000 1999 1998
1997
------------- ------------- ---------------------- -------- --------
Provision (benefit)Benefit computed at federal statutory
income tax rate $ (46,868) $ (29,340) $ 19,012$(100,002) $(46,868) $(29,340)
State and local income taxes, net of federal benefit (12,763) (2,029) (2,425) 2,161
Merger expenses - non deductible --- -- 8,268 257
Goodwill amortization 3,414 3,481 1,221
-
DecreaseGoodwill impairment 7,102 -- --
Increase in valuation allowance - - (2,309)182,846 -- --
Other 228 59 106
-
-------------- ------------- ---------------------- -------- --------
Total income tax provision (benefit) $ (45,357) $ (22,170) $ 19,121
============== ============== =============80,825 $(45,357) $(22,170)
========= ======== ========
9.11. RELATED PARTY TRANSACTIONS
Regal paid $1.2 million and $0.6 million in 1997 and 1998,
respectively, for legal services provided by a law firm, a member of
which served as a director of the Company through May of 1998.
Cobb Theatres leased office and warehouse facilities from a related
party. The related rent expense amounted to approximately $0.2 million
in 1997.
Cobb Theatres had an agreement with a corporation owned by a related
party, to provide aircraft services. The fees for such services
amounted to approximately $0.3 million for 1997.
In connection with the Recapitalization, the Company entered into a
management agreement with KKR and Hicks Muse pursuant to which the
Company has paidincurred $1.0 million of management feesfee expense during
each of the
fiscal 2000, 1999 and 1998 years.1998. Additionally, the Recapitalization costs
included in the accompanying 1998 financial statement include an
aggregate of $19.5 million of fees paid to KKR and Hicks Muse.
4348
44
10.50
Regal paid $0.6 million in 1998 for legal services provided by a law
firm, a member of which served as a director of the Company through May
of 1998.
12. CASH FLOW INFORMATION
(IN THOUSANDS) 2000 1999 1998
1997
------------- ------------- ---------------------- -------- --------
Supplemental information on cash flows:
Interest paid $ 128,909138,541 $128,909 $ 59,745 $ 14,486
Income taxes paid (refunds received), net (215) (4,884) 4,656 10,001
NONCASH TRANSACTIONS:
2000:
Pursuant to EITF 97-10 the Company recorded lease financing
arrangements and net assets of $83.3 million during fiscal 2000.
The Company retired 591,153 shares of common stock valued at $3.0
million in exchange for canceling notes receivable from certain
shareholders.
1999:
Pursuant to EITF 97-10, the Company recorded lease financing
arrangements and net assets of $75.5 million during the fourth quarter
of 1999.
The Company issued 569,500 shares of common stock valued at $2.8
million in exchange for notes receivables from certain shareholders.
The Company cancelled 119,964 shares of common stock and the related
notes receivable valued at $.6 million from certain shareholders.
1998:
Regal issued 60,383,388 shares of common stock and certain options to
purchase shares of the Company's common stock valued at approximately
$312.2 million and assumed debt of approximately $411.3 million as
consideration for assets purchased from Act III (Note 3)4).
Regal issued 808,313 shares of common stock valued at approximately
$4.2 million in exchange for notes receivables from certain
shareholders.
In connection with the Recapitalization, 456,549 shares of common stock
valued at approximately $2.2 million held by certain of the Company's
senior management were reinvested in the Company.
1997:
Regal recognized income tax benefits relating to exercised stock
options totaling $1.3 million.
11.13. EMPLOYEE BENEFIT PLANS
The Company sponsors employee benefit plans under section 401(k) of the
Internal Revenue Code for the benefit of substantially all full-time
employees.
49
51
The Company made discretionary contributions of approximately $508,000,
$426,000, $319,000, and $291,000$319,000 to the plans in 2000, 1999 1998 and 1997,1998,
respectively. Employees become eligible on the firstare immediately eligible; however, there is an
age requirement of the month after they have 1,000 hours of service. If they do not have
1,000 hours of service in the initial 12-month period (which begins
with their hire date), the subsequent 12-month periods for monitoring
eligibility are based on the plan year (calendar year). A minimum age
of 21 also applies.
12.21.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each
class of financial instrument are as follows:
Cash and equivalents, accounts receivable, accounts payable: The
carrying amounts approximate fair value because of the short maturity
of these instruments.
Long term debt, excluding capital lease obligations and lease financing
arrangements: The carrying amountsfair value of the Company's term loans and the
revolving credit facility approximate fair value becauseare estimated based on market prices as of
the 44
45Company's fiscal year end for the Company's senior credit facility,
which consists of the Company's term loans and revolving credit
facility. The associated interest rates are based on floating rates
identified by reference to market rates.rates and are assumed to approximate
fair value. The fair values of the Company's senior subordinated notes
and debentures and other debt obligations are estimated based on quoted market prices for the same or similar issues or on the current
rates offered to the Company for debtthese
issuances as of the same remaining maturities.Company's fiscal year end. The fair value of the
Company's other debt obligations are based on recent financing
transactions for similar debt issuances and carrying value approximates
fair value. The carrying amounts and fair values of long-term debt,
including its current maturities at December 28, 2000 and December 30,
1999 and December 31, 1998 consists of the following:
(IN THOUSANDS) 2000 1999
1998
------------- ----------------------- ----------
Carrying amount $ 1,683,627 $ 1,317,257$1,823,770 $1,683,627
Fair value $ 1,491,627 $ 1,338,257779,770 $1,491,627
Interest rate swaps: As of December 30, 1999 and December 31,In September 1998, the Company had entered into
interest rate swap agreements ranging fromfor five year terms to seven years forhedge a portion of
the management ofCredit Facilities variable interest rate exposure.risk. On September 22,
2000, the Company monetized the value of all of these contracts for
approximately $8.6 million. As the Company had accounted for these
swaps as interest rate hedges, the gain realized from the sale has been
deferred and will be amortized as a credit to interest expenses over
the remaining original term of December 30, 1999 and December 31, 1998, such agreements had
effectively converted $270 millionthese swaps (through September 2003).
The current portion of LIBOR floating rate debt to fixed
rate obligations with interest rates ranging from 5.32% to 7.32%. Regal
continually monitors its positionthis gain is included in accrued expenses and
the credit ratinglong-term portion in other liabilities. The fair value of the
interest
swap counterparty. The fair values ofCompany's remaining interest rate swap agreements are
estimated basedwhich matures on quotes from dealersMarch 21, 2002
is $(.3) million as of these instruments and
represent the estimated amounts the Company would expect to (pay) or
receive to terminate the agreements.December 28, 2000. The fair value of the
Company's interest rate swap agreements at December 30, 1999 and December 31,
1998 werewas $11.7
million and $(3.2) million, respectively.million.
50
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company engaged Deloitte & Touche LLP (Deloitte & Touche) as its
new independent accountants as of September 9, 1998. Prior to such date, the
Company did not consult with Deloitte & Touche regarding (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or (ii) any matter that was either the subject of a disagreement (as
defined in paragraph 304(a)(1)(iv) and the related instructions to Item 304) or
a reportable event (as describeddefined in paragraph 304(a)(1)(v)).
45
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are the current directors and executive officers
of the Company. Certain information relating to the directors and executive
officers, which has been furnished to the Company by the individuals named, is
set forth below.
NAME AGE POSITION
---- --- --------
Michael L. Campbell 4647 Chairman, President, Chief Executive Officer and Director
Gregory W. Dunn 4041 Executive Vice President and Chief Operating Officer
Amy Miles 33 Senior34 Executive Vice President, Chief Financial Officer, and Treasurer
Peter B. Brandow 3940 Senior Vice President, General Counsel, and Secretary
Robert J. Del Moro 4041 Senior Vice President, Chief Purchasing Officer
Denise K. Gurin 4849 Senior Vice President, Head Film Buyer
J.E. Henry 5152 Senior Vice President, Chief Information Officer, Management
Information Systems
Mike Levesque 4142 Senior Vice President, Operations
Ron Reid 5859 Senior Vice President, Construction
Raymond L. Smith 3637 Senior Vice President, Human Resources Counsel
R. Keith Thompson 38 Senior Vice President, Real Estate and Construction
Phillip J. Zacheretti 40Richard Westerling 49 Senior Vice President, Marketing and Advertising
Joseph Y. Bae 2829 Director
Joseph E.Joe Colonnetta 3839 Director
David Deniger 5556 Director
Henry R. Kravis 55 Director
Michael J. Levitt 4156 Director
John R. Muse 4950 Director
Alexander Navab, Jr. 3435 Director
Paul E. Raether 5354 Director
Lawrence D. Stuart, Jr. 56 Director
Michael L. Campbell founded the Company in November 1989 and has served
as Chairman of the Board, President and Chief Executive Officer since inception.
Prior thereto, Mr. Campbell was the Chief Executive Officer of Premiere Cinemas
Corporation ("Premiere"), which he co-founded in 1982, and served in such
capacity until Premiere was sold in October 1989. Mr. Campbell serves as
Chairman of the National Association of Theatre Owners in addition to serving on
theits Executive Committee of the Board of Directors of the National Association of
Theatre Owners.Directors.
51
53
Gregory W. Dunn has served as Executive Vice President and Chief
Operating Officer since 1995. From 1991 to 1995, Mr. Dunn was Vice President,
Marketing and Concessions. From 1989 to 1991, Mr. Dunn was the Purchasing 46
47
and
Operations Manager for Goodrich Quality Theaters, a Grand Rapids, Michigan based
theatre chain. From 1986 to 1989, he was a film buyer for Tri-State Theatre
Service, Inc.
Amy Miles has served as SeniorExecutive Vice President, Chief Financial
Officer, and Treasurer since January of 2000. From April 1999 to 2000, Ms. MilesPrior thereto, she was Senior Vice
President of Finance.Finance since joining the Company in April 1999. From 1998 to 1999,
she was a Senior Manager with Deloitte & Touche. From 1989 to 1998, Ms. Miles
was with PriceWaterhouseCoopers, LLC.
Peter B. Brandow has served as Senior Vice President, General Counsel
and Secretary since February 2000. Prior thereto, he served as Vice President,
General Counsel and Secretary since joining the Company in February 1999. From
September 1989 to January 1999, Mr. Brandow was an Associate at Simpson Thacher
& Bartlett.
Robert J. Del Moro has served as Senior Vice President, Purchasing,
Chief Purchasing Officer, since September of 1998. From 1997 to 1998, Mr. Del
Moro was Vice President, Food Service for the Company. From 1996 to 1997, Mr.
Del Moro was Vice President, Entertainment Centers and Food Service. From 1995
to 1996, Mr. Del Moro was Vice President, Marketing and Concession. From 1994 to
1995, Mr. Del Moro was Director, Theatre Promotions and Concession.
Denise K. Gurin has served as Senior Vice President, Head Film Buyer
since September of 1998. From 1997 to 1998, Ms. Gurin was Vice-President, Head
Film Buyer. From 1995 to 1997, Ms. Gurin was Senior Vice President, Film and
Marketing for Mann Theatres, a Los Angeles, California based theatre chain
("Mann Theatres"). From 1992 to 1995, Ms. Gurin was a film buyer for Mann
Theatres. From 1983 to 1992, Ms. Gurin was a film buyer for AMC Theatres, with
her last five years as Senior Vice President, Head Film Buyer for the West
Division.
J.E. Henry has served as Senior Vice President, Chief Information
Officer, Management Information Systems since September of 1998. From 1996 to
1998, Mr. Henry was Vice President, Management Information Systems. From 1994 to
1996, Mr. Henry served as Director of Management Information Systems.
Mike Levesque has served as Senior Vice President, Operations since
January of 1999. From 1996 to 1999, Mr. Levesque was Vice President, Operations
- - Northern Region. From 1995 to 1996, Mr. Levesque served as Director of
Marketing. During 1995, Mr. Levesque was a District Manager for the Eastern
Region, and from 1994 to 1995, Mr. Levesque was a theatre general manager. Prior
to joining Regal Cinemas, Mr. Levesque was employed by United Artists Theatres,
Inc. for sixteen years.
Ronald Reid has served as Senior Vice President, Construction since
joining the Company in May,1999. Prior thereto, he was the Executive Vice
President and Chief Operating Officer at Silver Cinemas from August, 1996 to
May, 1999. Prior to that, Mr. Reid was Vice President of Construction,
Purchasing and International Shipping at Cinemark from November, 1987 to August,
1996.
Raymond L. Smith has served as Senior Vice President, Human Resources
Counsel since July 1999. Prior thereto, he served as Vice President, Human
Resources Counsel since joining the Company in April 1998. From January 1995 to
April 1998, he was a partner of the law firm of
52
54
Pitt, Fenton & Smith. From May 1989 to January 1995, he was a senior associate
at Rodgers,Rogers, Fuller & Pitt.
R. Keith Thompson has served as Senior Vice President, Real Estate and
Construction since February 1993. Prior thereto, he served as Vice President,
Finance since joining the Company in 1991. From June 1984 to July 1991, Mr.
Thompson was a Vice President of Corporate Lending at PNC Commercial
Corporation.
Phillip J. ZacherettiRichard S. Westerling has served as Senior Vice President, Marketing
and Advertising since August of 1998. Duringjoining the Company in April 2000. From 1998 Mr. Zacherettito 2000, he
was the Senior Vice President, Film Marketing and during 1997 Mr. Zacheritti was Directorfor AMC Theatres, Inc. Prior to
1998, he held the position of Marketing.
From 1989 through 1996, Mr. Zacheretti was DirectorVice President of Marketing for Cinemark
USA,at AMC Entertainment,
Inc., a Plano, Texas based theatre chain. where he had worked in various capacities since 1976.
Joseph Y. Bae became Director of the Company in February 2000. He has
been an executive of KKR since 1996. From 1994 to 1996, Mr. Bae was an
investment banker at Goldman Sachs & Co. He is also a director of Shoppers Drug
Mart Limited.
47
48
Joe CollonnettaColonnetta became a Director of the Company in December 1999. Mr.
CollonnettaColonnetta has served as a principal of Hicks Muse since January 1999. From 1995
to 1998, Mr. CollonnettaColonnetta served as a Managing Principal of a management affiliate
of Hicks Muse. From 1994 to 1995, Mr. CollonnettaColonnetta was the Chief Executive Officer
of Triangle FoodService. From 1989 to 1994, Mr. CollonnettaColonnetta was the Chief
Financial Officer of TRC, Inc. Mr. CollonnettaColonnetta is also a director of Home
Interiors & Gifts, Inc., Cooperative Computing, Inc., Minsa, S.A., Belding
Sports, and The Grand Union Company.
David Deniger became a directorDirector of the Company upon the closing of the
Regal Merger. Mr. Deniger is a Managing Director and principal of Hicks Muse.
Mr. Deniger is also General Partner, President and CEO of Olympus Real Estate
Corporation. Prior to forming Olympus Real Estate Corporation with Hicks Muse,
Mr. Deniger was a founder and served as President and Chief Executive Officer of
GE Capital Realty Group, Inc. (GECRG), a wholly owned subsidiary of General
Electric Capital Corporation ("GE Capital"), organized to underwrite, acquire
and manage real estate equity investments made by GE Capital and its
co-investors. Prior to forming GECRG, Mr. Deniger was President and CEO of FGB
Realty Advisors, a wholly owned subsidiary of MacAndrews & Forbes Financial
Service Group. Mr. Deniger also serves as a director of the Arnold Palmer Golf
Management Company, Olympus Real Estate Corporation and Park Plaza
International. Effective January 2001, Mr. Deniger resigned as a member of the
Board of Directors.
Henry R. Kravis became a directorDirector of the Company upon the closing of
the Regal Merger. He is a managing member of the limited liability company which
serves as the general partner of KKR. He is also a director of Accuride
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Bruno's, Inc., Evenflo & Spalding Holdings Corporation, The Gillette Company,
IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreational Group,
Inc., Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois Group, Inc.,
PRIMEDIA, Inc., Randall's Food Markets, Inc., Reltec Corporation, Sotheby's
Holdings, Inc., Union Texas Petroleum Holdings, Inc. and World Color Press, Inc.
Michael J. Levitt became a director of the Company upon the closing of
the Regal Merger. Mr. Levitt is a Partner of Hicks Muse. Before joining Hicks
Muse, Mr. Levitt was a Managing Director and Deputy Head of Investment Banking
with Smith Barney Inc. from 1993 through 1995. From 1986 through 1993, Mr.
Levitt was with Morgan Stanley & Co. Incorporated, most recently as a Managing
Director responsible for the New York based Financial Enterpreneurs Group. Mr.
Levitt also serves as a director of Capstar Broadcasting Corporation, Chancellor
Media Corporation, Group MVS, S.A. de C.V., International Home Foods, Inc., LIN
Television Corporation and Sunrise Television Corp.
John R. Muse became a directorDirector of the Company upon the closing of the
Regal Merger. Mr. Muse is Chief Operating Officer and co-founder of Hicks Muse.
Prior to the formation of Hicks Muse in 1989, Mr. Muse headed the
investment/merchant banking activities of Prudential Securities for the
southwestern region of the United States from 1984 to 1989. Prior to joining
Prudential Securities, Mr. Muse served as Senior Vice President and a director
of Schneider, Bernet & Hickman, Inc. in Dallas from 1979 to 1983 and was
responsible for the company's investment banking activities. Mr. Muse is a
director of Arena Brands Holding Corp, Arnold Palmer Golf Management Company,
Glass's Information Services, International Home Foods, Inc., LIN Television
Corporation, Lucchese, Inc., Olympus Real Estate Corporation, Suiza Foods
Corporation and Sunrise Television Corp.
53
55
Alexander Navab, Jr. became a directorDirector of the Company upon the closing
of the Regal Merger. He has beenis a directorPartner of KKR since 1999 and has been an executive ofExecutive at KKR and a limited partner of KKR Associates
since 1993. He is also a director of Borden Inc., Birch Telecom Inc., CAIS
Internet Inc., KSL Recreation Group Inc., Intermedia Communications, NewSouth
Communications and Zhone Technologies.
Paul E. Raether became a Director of the Company in December 1999.
Since January 1996, he has been a member of the limited liability company which
serves as the general partner of KKR. Mr. Raether has been a general partner of
KKR Associates, L.P. since prior to 1995 and was a general partner of KKR from
prior to 1995 to December 1995. Mr. Raether is also a director of IDEX
Corporation, KSL Recreation Corporation and Shoppers Drug Mart.
48
49Lawrence D. Stuart, Jr. became a Director of the Company in 2000. He
has been a Partner of Hicks, Muse, Tate & Furst, Inc. since 1995. At Hicks Muse,
Mr. Stuart coordinates all aspects of negotiating and closing the firm's
leveraged acquisition transactions and managing the firm's relationships with
professional service firms. Prior to joining Hicks Muse, Mr. Stuart had served
for over 20 years as the principal outside legal counsel for the investment
firms and portfolio companies led by Mr. Hicks. From 1989 to 1995, Mr. Stuart
was the managing partner of the Dallas office of Weil, Gotshal & Manges LLP.
Prior thereto, he was a managing partner at Johnson & Gibbs, where he was
employed from 1973 to 1989. Prior to joining Johnson & Gibbs, he was employed at
Rain, Harrell, Emery, Young & Doke. Mr. Stuart serves as a director of Microten,
Home Interiors & Gifts, Inc., and several of the Firm's portfolio companies.
Effective January 2001, Mr. Stuart resigned as a member of the Board of
Directors.
COMPOSITION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company consists of nine members,
including four directors designated by KKR and four directors designated by
Hicks Muse. Directors of the Company are elected annually by the stockholders to
serve during the ensuing year or until their respective successors are duly
elected and qualified.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information as to annual, long-term or
other compensation during the last three fiscal years for the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers who were serving as executive officers at the end of fiscal 19992000 whose
salary and bonus exceeded $100,000 during fiscal 1999:2000 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------------------------------------------------------------- ----------------
SECURITIES
FISCAL SALARY BONUS UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($)(1) OPTIONS/SARS(#)
----- ----------------- ------ ------- ------- ------------------------
Michael L. Campbell 1999 526,350 --2000 547,060 150,000 --
Chairman, President & Chief Executive 1999 526,350 -- --
Officer 1998 402,000 500,000 3,631,364
1997 241,500 671,941 190,000
Gregory W. Dunn 1999 372,278 --2000 351,004 75,000 --
Executive Vice President & Chief 1999 336,278 -- --
Operating Officer 1998 252,000 219,213 413,255
Officer 1997 125,000 135,000 60,000
Neal Rider(2) 1999 193,106 --Amy Miles 2000 242,637 90,000 --
Executive Vice President, & Chief 1999 110,494 50,000 --
Financial 1998 -- -- --
Officer 1997and Treasurer 1998 -- -- --
Denise Gurin 1999 210,0002000 227,929 40,000 --
Senior Vice President, Head Film Buyer 1999 219,437 40,000 --
1998 43,700 108,763 164,251
1997 -- 10,000 139,500
R. Keith Thompson 1999 211,194 --Peter Brandow 2000 194,970 55,000 --
Senior Vice President, Real Estate &General Counsel 1999 104,969 35,000 --
and Secretary 1998 145,000 101,175 227,687
Development 1997 110,000 70,000 40,000-- -- --
- ----------
(1) Reflects cash bonus earned and paid in fiscal 2000, and cash bonus
earned in 1999, 1998 and 1997,1998 respectively, and paid the following fiscal
year.
(2) As of January 2000, Mr. Rider was no longer employed by the Company.54
56
During the 2000 and 1999 fiscal year,years, the Company did not grant options to the
named executive officers.
49
50
The following table summarizes certain information with respect to
stock options exercised by the Named Executive Officers pursuant to the
Company's Stock Option Plans.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL 19992000 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS HELD AT OPTIONS HELD AT
AT DECEMBER 30 199928, 2000 DECEMBER 30 199928, 2000 (1)
(#) ($)
----------------------------------------------------------------------------------------------- ---------------------------
SHARES NET
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ----------- ----------- ------------- ----------- -------------
Michael L. Campbell -- -- 2,759,119 2,784,046 7,176,4973,606,437 1,936,728 -- --
Gregory W. Dunn -- -- 595,080 316,829 1,878,087691,506 220,403 -- Neal Rider(2)--
Amy Miles -- -- -- -- -- --
Denise Gurin -- -- 177,825 125,926 124,155 --
R. Keith Thompson216,150 87,601 -- --
325,889 174,537 1,034,649Peter Brandow -- -- -- -- -- --
- ------------
(1) Reflects the market value of the underlying security at exercise, $5.00,
minus the average exercise price.
(2) As of January 2000, Mr. Rider was no longer employed by the Company.exercise.
DIRECTORS' COMPENSATION
Each director of the Company who is not also an officer or employee of
the Company receives a fee of $40,000 per year. Directors of the Company are
entitled to reimbursement of
55
57
their reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the Board of Directors of the Company or committees
thereof.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs.
Campbell and Dunn pursuant to which they respectively serve as Chief Executive
Officer and Chief Operating Officer of the Company. The terms of the employment
agreements commenced upon the closing of the Regal Merger and continue for three
years.expire on May 28,
2001. The employment agreements provide for initial base salaries of $500,000
and $325,000 per year for Messrs. Campbell and Dunn, respectively. Messrs.
Campbell and Dunn are entitled to receive annual target bonuses of 140% and
100%, respectively, of their base salaries based upon the achievement by the
Company of certain EBITDA and other performance targets set by the Board of
Directors of the Company. The employment agreements also provide that the
Company will supply Messrs. Campbell and Dunn with other customary benefits
generally made available to other senior executives of the Company. Each of the
employment agreements also contains a noncompetition and no-raid provision
pursuant to which each of Messrs. Campbell and Dunn has agreed, subject to
certain exceptions, that during the term of his employment agreement and for one
year thereafter, he will not compete with the Company or its theatre affiliates
and will not solicit or hire certain employees of the Company. Each of the
employment agreements also contains severance provisions providing for the
termination of employment of Messrs. Campbell and Dunn by the Company under
certain circumstances in which Messrs. Campbell and Dunn will be entitled to
receive severance payments equal to the greater of (i) two times their
respective annual base salaries and (ii) the balance of their respective base
salaries over the then-remaining employment term, in either case payable over 24
months (or if longer, the remaining balance of the employment term) and
continuation of health, life, disability and other similar welfare plan
benefits.
50
51In December 2000, the Company established a management retention
program for fiscal 2001 which, among other things, provides a severance plan for
the Company's corporate employees. Pursuant to the severance plan, participants
are entitled severance payments in the amounts established by the Company's
Board of Directors if such participant is involuntarily terminated without cause
or resigns for good reason (as such terms are defined in the plan). The amounts
payable to the Named Executive Officers under the severance plan, assuming
involuntarily termination of such officers without cause or resigns for good
reason as of January 1, 2001, were as follows: Mr. Campbell - at Mr. Campbell's
election, $2,486,700 or the amount provided him under his employment contract;
Mr. Dunn - at Mr. Dunn's election, $1,105,625 or the amount provided him under
his employment contract; Ms. Miles - $937,500; Ms. Gurin - $291,975; and Mr.
Brandow - $781,250.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1999,2000, the Compensation Committee was comprised of Messrs.
Levitt, Muse, and Navab. None of these persons has at any time been an officer
or employee of the Company or its subsidiaries. Mr. Clifton S. RobbinsMichael J. Levitt served on
the Compensation Committee until his resignation in DecemberAugust of 1999,2000, when he was
replaced by Mr. Raether.Stuart.
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58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of shares of the Common Stock as of March 29, 1999,28, 2001, by (i) each person
who is known to the Company to own beneficially more than 5% of the Common
Stock; (ii) each director of the Company; (iii) the Named Executive Officers of
the Company; and (iv) all directors and executive officers of the Company as a
group. Unless noted otherwise, the address for each executive officer is in the
care of the Company at 7132 Commercial ParkMike Campbell Drive, Knoxville, Tennessee 37918.
Amount and
Name and Address of Nature of Beneficial Percent
Beneficial Owners Ownership (1) of Class
----------------- ------------- --------
5% STOCKHOLDERS:
Hicks Muse Parties (2) 100,000,000 46.1%46.2%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court
Suite 1600
Dallas, Texas 75201
KKR 1996 GP L.L.C. (3) 100,000,000 46.1%46.2%
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
Suite 4200
New York, New York 10019
OFFICERS AND DIRECTORS:
Joseph Y. Bae - *
Joe Colonnetta - *
David Deniger - *
Henry R. Kravis - *
Michael J. Levitt - *
John R. Muse - *
Alexander Navab, Jr. - *
Paul E. Raether -
Lawrence D. Stuart, Jr. - *
Michael L. Campbell 4,062,987 1.1%4,900,305 2.3%
Gregory W. Dunn 691,506787,932 *
Neal Rider -Amy Miles -- *
Denise Gurin 246,150284,475 *
R. Keith Thompson 379,009Peter Brandow -- *
*
All directors and executive officers as a group 6,256,155 2.9%
(156,813,579 3.2%
(19 persons)
- ------------------------
*Indicates* Indicates ownership of less than one percent of the Company's
outstanding Common Stock.
(1) Pursuant to the rules of the Securities and Exchange Commission,
certain shares of the Company's Common Stock which a beneficial owner
has the right to acquire within 60 days of March 30, 200028, 2001 pursuant to
the exercise of stock options or warrants are deemed to be outstanding
for the purpose of computing the percentage ownership of such owner but
are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes shares owned of record by Regal Equity Partners, L.P. (Regal
Partners), a limited partnership whose sole general partner is
TOH/Ranger, LLC (Ranger LLC). Mr. Hicks is the sole member and director
of Ranger LLC and, accordingly, may be deemed to be the beneficial
owner of the Common Stock held directly or indirectly by Regal
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Partners. John R. Muse, Charles W. Tate, Jack D. Furst, Lawrence D.
Stuart, Jr. and Michael J. Levitt are officers of Ranger LLC and as
such may be deemed to share with Mr. Hicks the power to vote or dispose
of the Common Stock held by Regal Partners. Each of Messrs. Hicks,
Muse, Tate, Furst, Stuart and Levitt disclaims beneficial ownership of
the Common Stock not respectively owned of record by him.
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(3) KKR 1996 GP L.L.C. is the sole general partner of KKR Associates 1996
L.P. KKR Associates 1996 L.P., a limited partnership, is the sole
general partner of KKR 1996 Fund L.P., a limited partnership formed at
the direction of KKR, and possesses sole voting and investment power
with respect to such shares. KKR 1996 GP L.L.C. is a limited liability
company, the managing members of which are Henry R. Kravis and George
R. Roberts, and the other members of which are Robert I. MacDowell,
Paul E. Raether, Michael W. Michelson, Michael T. Tokarz, James H.
Greene, Jr., Perry Golkin, Scott M. Stuart, and Edward A. Gilhuly.Gilhuly, Johannes
Huthe, Todd A. Fisher, Alexander Navab, Jr. and Neil A. Richardson.
Messrs. Kravis, Navab and Raether are directors of the Company. Mr. Alexander Navab, Jr. is a limited partner of
KKR Associates 1996 L.P. and is also a director of the Company. Each of
such individuals may be deemed to share beneficial ownership of the
shares shown as beneficially owned by KKR 1996 GP L.L.C. Each of such
individuals disclaims beneficial ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary description of the principal terms of the
following agreements and is subject to and qualified in its entirety by
reference to the full text of such agreements, which are filed as exhibits to
this Form 10-K.
KKR/HICKS MUSE STOCKHOLDERS AGREEMENT
Concurrently with the consummation of the Regal Merger, the Company
entered into a stockholder agreement with Hicks Muse and KKR (the KKR/"KKR/Hicks
Muse Stockholders Agreement)Agreement"). Among other things, the KKR/Hicks Muse
Stockholders Agreement provides that each of Hicks Muse and KKR has the right to
appoint an equal number of directors to the Board of Directors of the Company,
subject to maintaining specified ownership thresholds. The number of directors
appointed by KKR and Hicks Muse together shall constitute a majority of the
Board of Directors. The KKR/Hicks Muse Stockholders Agreement further provides
that Hicks Muse and KKR will amend the Company's bylaws to provide that no
action may be validly taken at a meeting of the Board of Directors unless a
majority of the Board of Directors, a majority of the directors designated by
Hicks Muse and a majority of the directors designated by KKR have approved such
action.
The KKR/Hicks Muse Stockholders Agreement provides that neither Hicks
Muse nor KKR may transfer its shares of Common Stock to a person other than its
respective affiliates for a period of five years following the closing date of
the Regal Merger. In addition, the KKR/Hicks Muse Stockholders Agreement
provides KKR and Hicks Muse with certain registration rights and limits the
ability of either KKR or Hicks Muse to separately acquire motion picture
exhibition assets in excess of a specified amount without first offering the
other the right to participate in such acquisition opportunity.
DLJ STOCKHOLDERS AGREEMENT
Concurrently with the consummation of the Regal Merger, the Company,
Hicks Muse, KKR and DLJ entered into a stockholders agreement (the DLJ"DLJ
Stockholders Agreement)Agreement"). Under the DLJ Stockholders Agreement, DLJ has the
right to participate pro rata in certain sales of Common Stock by KKR and Hicks
Muse, and KKR and Hicks Muse have the right to require DLJ to participate pro
rata in certain sales by KKR and Hicks Muse. The DLJ Stockholders Agreement also
grants DLJ stockholders certain registration and preemptive rights.
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CERTAIN FEES
Each of KKR and Hicks Muse received a fee for negotiating the
Recapitalization and arranging the financing therefor, plus the reimbursement of
their respective expenses in connection therewith, and from time to time, each
of KKR and Hicks Muse may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR and Hicks Muse have agreed to
render management, consulting and financial services to the Company for an
aggregate annual fee of $1.0 million.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
The following Financial Statements of Regal Cinemas, Inc. and
subsidiaries are included in Part II, Item 8.
Independent Auditors' Report
Report of Independent Accountants
Consolidated Balance Sheets at December 28, 2000 and
December 30, 1999.
Consolidated Statements of Operations for the years ended
December 28, 2000, December 30, 1999, and December
31, 1998.
Consolidated Statements of OperationsChanges in Shareholders'
Equity (Deficit) for the years ended
December 30, 1999, December 31, 1998 and
January 1, 1998.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended28, 2000, December 30, 1999, and
December 31, 1998 and January 1, 1998.
Consolidated Statements of Cash Flows foror the years
ended December 28, 2000, December 30, 1999,
and December 31, 1998 and
January 1, 1998.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules - Not applicable.
3. Exhibits:
Exhibit
Number Description
------ -----------
2.1 -- Agreement and Plan of Merger, dated as of January 19, 1998, by
and among Regal Cinemas, Inc., Screen Acquisition Corp. and
Monarch Acquisition Corp. (1)
2.2 -- Agreement and Plan of Merger, dated as of January 19,August 20, 1998, by
and among Regal Cinemas, Inc., Screen
Acquisition Corp. and Monarch Acquisition Corp. (1)
2.2 -- Agreement and Plan of Merger, dated as of August 20,
1998, by and among Regal Cinemas, Inc., Knoxville Acquisition Corp. and
Act III Cinemas, Inc. (2)
3.1 -- Amended and Restated Charter of the Registrant. (3)
3.2 -- Restated Bylaws of the Registrant. (4)
4.1 -- Specimen Common Stock certificate. (4)
4.2 -- Article 5 of the Registrant's Amended and Restated Charter
(included in the Amended and Restated Charter filed as Exhibit
3.1 hereto).
4.3 -- Indenture, dated as of May 27, 1998, by and between Regal
Cinemas, Inc. and IBJ Whitehall Bank & Trust Company (formerly
IBJ Schroder Bank & Trust Company). (5)
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4.4 -- Form of Regal Cinemas, Inc. 9 1/9-1/2% Senior Subordinated Note
due June 1, 2008 (contained in Indenture filed as Exhibit 4.3
hereto).
4.5 -- Indenture, dated as of December 16, 1998, by and between Regal
Cinemas, Inc. and IBJ Whitehall Bank & Trust Company (IBJ
Schroder Bank & Trust Company) (HSBC as successor trustee). (6)
4.6 -- Form of Regal Cinemas, Inc. 8 7/8-7/8% Senior Subordinated
Debenture due December 15, 2010 (contained in the Indenture filed
as Exhibit 4.5 hereto).
10.1 -- Employment Agreement, dated as of May 27, 1998, by and between
Regal Cinemas, Inc. and Michael L. Campbell. (5)
10.2 -- Employment Agreement, dated as of May 27, 1998, by and between
Regal Cinemas, Inc. and Gregory W. Dunn. (5)
10.3 -- Severance Agreement and General Release, dated as of September
30, 1998, by and between Regal Cinemas, Inc. and Lewis Frazer
III. (9)
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10.4 -- Credit Agreement, dated as of May 27, 1998, by and between
Regal Cinemas, Inc., its subsidiaries and the lenders named
therein. (5)
10.4-1 -- First Amendment, dated as of August 26, 1998, by and between
Regal Cinemas, Inc., its subsidiaries and the lenders named
therein. (3)
10.4-2 -- Second Amendment, dated as of December 31, 1998, by and
between Regal Cinemas, Inc., its subsidiaries and the lenders
named therein. (7)
10.4-3 -- Third Amendment, dated as of March 3, 1999, by and between
Regal Cinemas, Inc., and its subsidiaries and the lenders named
therein. *(10)
10.5 -- 1993 Employee Stock Incentive Plan. (4)
10.6 -- Regal Cinemas, Inc. Participant Stock Option Plan. (4)
10.7 -- Regal Cinemas, Inc. Employee Stock Option Plan. (4)
10.8 -- 1998 Stock Purchase and Option Plan for Key Employees of Regal
Cinemas, Inc. (8)
10.9 -- Form of Management Stockholder's Agreement. (8)
10.10 -- Form of Non-Qualified Stock Option Agreement. (8)
10.11 -- Form of Sale Participation Agreement. (8)
10.12 -- Form of Registration Rights Agreement. (8)
10.13 -- Stockholders' Agreement, dated as of May 27, 1998, by and
among Regal Cinemas, Inc., KKR 1996 Fund, L.P., KKR Partners II,
L.P. and Regal Equity Partners, L.P. (3)
10.14 -- Stockholders' and Registration Rights Agreement, dated as of
May 27, 1998, by and among Regal Cinemas, Inc., KKR 1996 Fund,
L.P., KKR Partners II, L.P., Regal Equity Partners, L.P. and the
DLJ signatories thereto. (3)
21 -- Subsidiaries.*
23.1 -- Consent of Deloitte & Touche LLP. *
23.2 -- Consent of PricewaterhouseCoopers LLP.*
27 -- Financial Data Schedule (for SEC use only).*
- -----------------
* Filed herewith.
(1) Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 20, 1998.
(2) Incorporated by reference to the Registrant's Current Report on Form
8-K dated September 1, 1998.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Registration No. 333-64399.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration No. 33-62868.
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(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 2, 1998.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Registration No. 333-69943.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-4/A, Registration No. 333-69931.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 333-52943.
(9) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
(10) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 30, 1999.
(b) During the fourth quarter of fiscal 1998 ended December 31, 1998, the
Registrant filed a Current Report on Form 8-K/A on September 23, 1998,
reporting changes in the Registrant's Certifying Accountant.
54During the fourth quarter of fiscal 2000 ended December 28, 2000, the
Registrant filed Current Reports of Form 8-K on December 1, 2000 and
December 15, 2000, reporting the administrative agents under the
Company's Senior Credit Facilities delivered payment blockage notices
to the Company and the indebture trustee prohibiting the payment by
Regal of semi-annual interest payments to the holders of Regal Notes
and Regal Debentures.
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5563
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REGAL CINEMAS, INC.
Dated: March 29, 200028, 2001 By: /s/ Michael L. Campbell
----------------------------------------
Michael L. Campbell, Chairman, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael L. Campbell Chairman of the Board, March 29, 2000
-----------------------28, 2001
- ------------------------------------ President, Chief Executive
Michael L. Campbell Officer and Director (Principal
Executive Officer)
/s/ Amy Miles SeniorExecutive Vice President, Chief March 29, 2000
-------------28, 2001
- ------------------------------------ Financial Officer and Treasurer
Amy Miles (Principal Financial and
Accounting Officer)
/s/ Joseph Y. Bae Director March 29, 2000
------------------28, 2001
- ------------------------------------
Joseph Y. Bae
/s/Director March __, 2001
- ------------------------------------
Joe Colonnetta Director March 29, 2000
------------------
Joe Colonnetta
/s/ David Deniger Director March 29, 2000
-----------------
David Deniger
/s/ Henry R. Kravis Director March 29, 2000
-------------------28, 2001
- ------------------------------------
Henry R. Kravis
/s/ Michael J. Levitt Director March 29, 2000
---------------------
Michael J. Levitt
Director March 29, 2000
----------------__, 2001
- ------------------------------------
John R. Muse
/s/ Alexander Navab, Jr. Director March 29, 2000
------------------------28, 2001
- ------------------------------------
Alexander Navab, Jr.
/s/ Paul E. Raether Director March 29, 2000
-------------------28, 2001
- ------------------------------------
Paul E. Raether
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SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d)15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
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