1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file numberFOR THE FISCAL YEAR ENDED DECEMBER 30, 1999
COMMISSION FILE NUMBER 333-52943
REGAL CINEMAS, INC.
(Exact name of registrant as specified in its charter)(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TennesseeTENNESSEE 62-1412720
(State or other jurisdiction (I.R.S.(IRS employer identification number)
of incorporation or organization)
7132 Commercial Park Drive
Knoxville, TennesseeCOMMERCIAL PARK DRIVE
KNOXVILLE, TENNESSEE 37918
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423)(865) 922-1123
Securities registered pursuant to Section 12(b) of the Act: NoneNONE
Securities registered pursuant to Section 12(g) of the Act: NoneNONE
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/[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 31, 1999,29, 2000,
were 216,672,105.216,873,501
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REGAL CINEMAS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PagePAGE
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PART I .........................................................................................................13
Item 1. Business........................................................................................1Business.................................................... 3
The Company.........................................................................................1Company................................................. 3
Recapitalization and Financing......................................................................2Financing.............................. 4
Business Strategy...................................................................................3Strategy........................................... 4
Industry Overview...................................................................................5Overview........................................... 6
Theatre Operations..................................................................................6
Seasonality.........................................................................................8Operations.......................................... 7
Seasonality................................................. 9
Film Licensing......................................................................................8Licensing.............................................. 9
Complementary Concepts..............................................................................9
Competition........................................................................................10Concepts...................................... 10
Competition................................................. 10
Management Information Systems.....................................................................10
Employees..........................................................................................11
Regulation.........................................................................................11Systems.............................. 11
Employees................................................... 11
Regulation.................................................. 11
Risk Factors.......................................................................................11Factors................................................ 12
Item 2. Properties.....................................................................................16Properties.................................................. 14
Item 3. Legal Proceedings..............................................................................16Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security-Holders............................................16Security-Holders......... 15
PART II ........................................................................................................1715
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................17Matters......................................... 15
Item 6. Selected Financial Data........................................................................18Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................................20
Overview...........................................................................................20Operations................................... 17
Overview.................................................... 17
Background of Regal................................................................................20
ResultsRegal......................................... 17
Result of Operations..............................................................................20
Loss on Impairment of Assets.......................................................................21Operations........................................ 17
Fiscal Years Ended December 30, 1999 and December 31,
1998........................................................ 18
Fiscal Years Ended December 31, 1998 and January 1, 1998...........................................22
Fiscal Years Ended January 1, 19981998.... 19
Impairment and January 2, 1997.............................................22Other Disposal Charges....................... 20
Liquidity and Capital Resources....................................................................23Resources............................. 20
Inflation; Economic Downturn.......................................................................26
Year 2000-State of Readiness.......................................................................26Downturn................................ 22
New Accounting Pronouncements......................................................................27Pronouncements............................... 23
Recent Accounting Pronouncements Not Yet Adopted............ 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................29Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data....................................................30Supplemental Data.................. 25
Independent Auditors' Report................................ 26
Report of Independent Accountants........................... 27
Item 9. Changes inIn and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................................................53Disclosure.................................... 45
PART III ........................................................................................................5446
Item 10. Directors and Executive Officers of the Registrant.........................................54Registrant.......... 46
Composition of the Board of Directors....................... 49
Item 11. Executive Compensation.....................................................................57Compensation...................................... 49
Directors' Compensation..................................... 50
Employment Agreements....................................... 50
Compensation Committee Interlocks and Insider
Participation............................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................61Managements................................................. 51
Item 13. Certain RelationshipsRelationship and Related Transactions.............................................62Transactions............... 52
PART IV ........................................................................................................6453
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................64
i8-K.................................................... 53
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SIGNATURES.......................................................................................................66
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT ...............................................................................67
INDEX TO EXHIBITS................................................................................................68
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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 31, 1998,30, 1999, the Company operated 403430 theatres, with an
aggregate of 3,5734,413 screens in 3032 states. The Company operates primarily
multiplex theatres and has an average of 8.9 screens per location, which
management believes is among the highest in the industry and which compares
favorably to an average of approximately 7.4 screens per location for the five
largest North American motion picture exhibitors at May 1, 1998. Since its inception in November 1989,
the Company has achieved substantial growth in revenues and in net income before
interest expense, income taxes, depreciation and amortization, other income or
expense, extraordinary items and non-recurring charges ("EBITDA"). As a result
of the Company's focus on enhancing revenues, operating efficiently and strictly
controlling costs, the Company has increased
its EBITDA margins, achievingachieved what management believes are among
the highest EBITDA margins in the domestic motion picture exhibition industry.
For the five yearfive-year period ended December 31, 1998,30, 1999, the Company had compound
annual growth rates in revenues and EBITDA of 27.0%35.4% and 37.4% respectively,33.9% respectively.
The Company operates primarily multiplex theatres and has an average of
10.3 screens per location, which management believes is among the Company's EBITDA
margins increased from 15.4%highest in the
industry and which compares favorably to 22.9%.an average of approximately 8.1 screens
per location for the five largest North American motion picture exhibitors at
September 30, 1999. 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
31, 1998,30, 1999, approximately 74%80.2% of the Company's screens were located in film
licensing zones in which the Company was the sole exhibitor.
The Company continually upgrades its theatre circuit by opening new
theatres, adding new screens to existing theatres and selectively closing or
disposing of under-performing multiplexes. From its inception through December
31, 1998,30, 1999, the Company has grown by acquiring a net of 314287 theatres with 2,3262,233 screens
constructing 89(net of subsequently closed locations), developed 143 new theatres with 1,1582,027
screens and adding 89153 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% of its circuit having been built
since 1997. The Company anticipatesprojects that its future growthat the end of fiscal 2000 approximately
48% of the circuit will result largely fromhave been built since 1997. Approximately 40% of the
development of newCompany's screens are in theatres the addition of new screens to existing
theatres and strategic acquisitions of other theatre circuits.with 15 or more screens. At December 31,
1998,30, 1999,
the Company had 4216 new theatres with 647242 screens under construction and 5115 new
screens under construction at eightthree existing theatres. In addition, the Company
had entered into leases in connection with its plans to develop an additional 5216
theatres with 819241 screens. The Company has historically achieved
substantial returns on invested capital for newly built theatres.
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. The Company has acquired ten other theatre circuits
during 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 (or, in the case of
the recently completed Act III Merger, is beginning to realize) economies of scale
by consolidating purchasing, operating and other administrative functions.
The Company continues to consider strategic acquisitions of complementary
theatres or theatre companies. In addition, the Company may enter into joint
ventures, which could serve as a platform for both domestic and international
expansion.3
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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
Subordinated 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 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
$1,012.5$1,008.8 million in the aggregate, consisting of $500.0 million under a
revolving credit facility (the "Revolving Credit Facility") and $512.5$508.8 million,
in the aggregate, under three separate term loan facilities. As of December 31,
1998,30,
1999, the Company had approximately $493.5$128.5 million available for borrowing under
the Senior Credit Facilities.
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 Subordinated Notes due 2008 (the
"Tack-On Notes") under the same indenture governing the Original Notes. The
proceeds of the offering of the Tack-On 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"). 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.
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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.Theatres: Management believes that the Company's
multiplex theatres promote increased attendance 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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management's 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 development 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. The Company maintains one of the most modern circuits in
the industry with 42% 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 chose theatres based on the movie going experience. The Company
believes that the newer theatres enhance the movie going experience.
Disposition Efforts. Management has increased the focus on the
disposition of under-performing locations. The Company plans to close between
175 and 200 screens in both 2000 and in 2001. Management believes the
acceleration of screen closures will mitigate the erosion of its older theatres.
The Company has developed specific action plans to aggressively bring
under-performing theatres off-line including subleasing certain locations,
selling owned properties and working with existing landlords to terminate
certain leases. Management believes that the cost associated with the
disposition of the under-performing sites will be insignificant in the 2000
fiscal year.
Cost Control. The Company's cost control programs have resulted in an
increase in its
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, through 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. 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. 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. 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 systems. As of December 31,
1998,30,
1999, approximately 83%64% 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% of its screens with stadium seating. The Company
is adding stadium seating to certain of its existing theatres and expects that all of its
newly constructed theatres will 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"mystery shopper
program.
Integration of Acquisitions. The Company has acquired 11 theatre
circuits during the last fivesix 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 (or, in the case of the recently
completed Act III Merger, believes it will achieve) cost savings through the
consolidation of its purchasing function, the centralization of certain other
operating
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control strategies of the Company and its acquisition targets.
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Centralized Corporate Decision Making/Decentralized Operations. The
Company centralizes many of its functions through its corporate office,
including film licensing, concessions purchasing and new theatre construction
and design. 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 advertising expenses.
Marketing. The Company actively markets its theatres through grand
opening promotions, including "VIP"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. 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.
Growth Strategy
Management believes that the following are the key elements of the
Company's growth strategy:
Develop New Multiplex Theatres in Existing and Target Markets. The
Company develops multiplex theatres with generally 14 to 18 screens, in its
existing markets, in other mid-sized metropolitan markets and in suburban growth
areas of larger metropolitan markets in the United States. Management seeks to
locate its theatres in areas that are underscreened or that are served by older
theatre facilities. The Company seeks to identify new geographical markets that
present opportunities for expansion and growth and, when identified, targets
these geographical markets for future development. At December 31, 1998, the
Company had 42 new theatres with 647 screens under construction. In addition,
the Company has entered into leases in connection with its plans to develop an
additional 52 theatres with 819 screens.
Add New Screens and Upgrade Existing Theatres. To enhance profitability
and to maintain competitiveness at existing theatres, the Company continues to
add screens and upgrade its existing theatres, including by adding stadium
seating to certain existing theatres. The Company believes that by adding
screens and upgrading its facilities it can leverage the favorable location of
certain of its theatres and thereby improve its operating margins at those
theatres. At December 31, 1998, the Company had 51 new screens under
construction at eight existing theatre facilities and anticipates that it will
add a total of 90 to 100 screens to certain of its existing theatres by the end
of 1999. The addition of screens to existing theatres is designed not to disrupt
operations at the theatres.
Acquire Theatres. While management believes that a significant portion
of its future growth will come through the development of new theatres, the
Company will continue to consider strategic acquisitions of complementary
theatres or theatre companies. In addition, the Company may enter into joint
ventures, which could serve as a platform for both domestic and international
expansion. On August 26, 1998, the Company acquired Act III, then the ninth
largest motion picture exhibitor in the United States based on number of screens
in operation. The Company currently has no letters of intent or other written
agreements for any specific acquisitions or joint ventures.
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INDUSTRY OVERVIEW
The domestic motion picture exhibition industry is currently comprised
of approximately 402548 exhibitors 145(in the U.S. and Canada), 155 of which operate
ten or more total screens. Based on the MayJune 1, 19981999 listing of exhibitors in
the National Association of Theatre Owners 1998-991999-2000 Encyclopedia of Exhibition,
the five largest exhibitors (based on the number of screens) operated
approximately 36%42% of the total screens in operation, with no one exhibitorRegal operating more
than 10% of the total screens. From 19871988 through 1997,1998, the number of screens in
operation in the United States increased from approximately 23,000 to
approximately 32,000,34,000, and admissions revenues increased from approximately $4.3$4.6
billion to approximately $6.4$6.9 billion. The motion picture exhibition industry
continues 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.
In an effort to realize greater operating efficiencies, operators of
multi-theatre circuits have emphasized the development of larger multiplex
complexes. Typically, multiplexes have six or more screens per theatre, although
in some instances multiplexesmegaplexes may have as many as 30 screens in a single theatre.
The multi-screen 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. Multiplexes 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
trend of developing large multiplex theatres in the theatre exhibition industry
favors larger, better capitalizedwell-capitalized companies, creating an environment for new
construction and consolidation. Many smaller theatre owners who operate older
cinemas without state-of-the-art stadium seating and projection and sound
equipment may 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"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 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 5
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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 and distributing a picture
averaged approximately $52.7 million in 1998 compared with approximately $17.5$18.1
million in 1986,1988, while the average cost to advertise and promote a picture
averaged approximately $22.1$25.3 million in 19971998 as compared with $5.4$8.5 million in
1986.1988. 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 whowhom 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 continue to
increase,remain
constant, although there can be no assurance that any such increasethis will occur. There has also
been an increase in the number of major studiosdistributors and reissues of films as well as
an increased popularity ofincrease 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 59.3%57.5%, respectively.
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 6
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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 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 flow
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"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 video games located adjacent to the
theatre lobby. Concession sales constituted 28.6%27.5% of total revenues for fiscal
1998.1999. 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"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. 7
11
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 31, 1998,30, 1999, the Company operated 3643 theatres with an
aggregate of 222263 screens, which exhibit second-run movies and charge lower
admission prices (typically $1.00 to $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 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 31, 1998,30, 1999, the Company believes that
approximately 74%80.2% 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
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12 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 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. 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, eight distributors accounted for approximately 94% of industry
admission revenues during 1997, and 46 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 19981999 no single distributor accounted for more than 21%17%
of the films licensed by the Company, or films producing more than 21% of the
Company's admission revenues.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 the next five
years,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 31, 1998,30, 1999, the Company operated eight FunScapes(TM)
in Chesapeake, Virginia; Rochester, New York; Syracuse, New York; Brandywine,
Delaware; Fort Lauderdale, Florida;Florida (2); Nashville, Tennessee and Knoxville,
Tennessee. The Company currently has one FunScapes(TM) under construction and
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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 is currently exploringcontinues to explore its strategic alternatives with
respect to all of its FunScapes(TM) locations, other than the one in Knoxville,
Tennessee, and currently expects that
certain of these locations will be soldsubleased during the next fiscal year.
Otherwise, the Company intends to pursue other alternatives including but not limited to, subleasingclosing
certain of these locations. In the fourth quarter of 1998,1999, management recorded
an impairment charge of $36.9$22.1 million ($22.513.6 million after tax) with respect to
thosethe 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. ManyThe motion
picture industry has rapidly expanded the number of U.S.screens over the Company's competitorspast
several years as theatre companies have beenupgraded their theatre circuits. The
industry growth has resulted in existence longer than the Company hasdeclines in margins and may
be better established in some of its existing and future markets.returns on invested
capital as older theatres suffer due to increased competition from newer
multiplexes.
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The Company believes that the principalrate of industry screen growth is slowing
as many of the exhibitors are curtailing expansion plans for the 2000 and 2001
fiscal years. 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.
InHowever, 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 subsequent toafter 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.
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 provideprovides 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 10
14
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 31, 1998,30, 1999, the Company employed 12,000 persons, of which
1,551 were full-time and 10,449 were part-time employees.17,249 persons. Of the
Company's employees, 334369 were corporate personnel, 1,8152,979 were theatre management
personnel and the remainder were 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. 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 into 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 licensing. At December 31, 1998,30, 1999,
approximately 38.7%30.5% 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
11
15 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.
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 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 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 nine major film distributors could affect our
ability to get commercially successful films and, therefore, could hurt our
business and results of operations. See "BusinessBusiness - 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 Have Significant Expansion Plans
The Company's growth strategy involves constructing new multiplex
theatres and adding new screens to certain of our existing theatres. We seek to
locate our theatres in markets that we believe are underscreened or that are
served by older theatre facilities. At December 31, 1998, we had 42 new theatres
with 647 screens under construction and 51 new screens under construction at
eight existing theatres. We intend to develop approximately 700 to 800 screens
during 1999. During 1999, we expect to spend approximately $375.0 million in
connection with new theatre construction or renovations to existing theatres. We
expect to get this money from cash generated from operations, asset sale
proceeds and borrowings under our Senior Credit Facilities. There is no
guarantee, however, that we will generate enough cash flow from operations or
proceeds from asset sales or that our future borrowing capacity under our Senior
Credit Facilities will be enough to cover our anticipated spending. In addition,
we intend to continue our expansion plans over the next several years. Any
future theatre development may require financing in addition to cash generated
from operations, asset sale proceeds and borrowings under the Senior Credit
Facilities. There is no guarantee that such additional financing will be
available on reasonable terms, or at all.
Our ability to open theatres and complete screen expansions on a timely
and profitable basis is subject to many factors, some of which are beyond our
control. There is significant competition in the United States for site
locations from both theatre companies and other businesses. There is no
guarantee that we will be able to acquire attractive theatre sites, negotiate
acceptable lease terms and build theatres and complete screen expansions on a
timely and cost-effective basis. There is also no guarantee that we will be able
to hire, train and retain skilled managers and personnel. Finally, there can be
no assurance that we will achieve our planned expansion or that our new theatres
will achieve targeted levels of profitability.
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There Are Risks Associated with Our Acquisitions
Our growth strategy may also involve us acquiring additional theatres
and/or theatre companies. There is substantial competition for attractive
acquisition candidates. There is no guarantee that we will be able to
successfully acquire quality theatres or theatre companies or be able to
integrate their operations into ours. There is also no guarantee that future
acquisitions will not affect our operating results, particularly right after an
acquisition while we are in the process of integrating operations. Moreover, our
strategy involves increasing net revenue while reducing operating expenses.
Although we believe that this plan is reasonable, there is no guarantee that we
will be able to carry out our plans without delay or that our plan will result
in the increased profitability, cost savings or other benefits we expected. In
addition, the integration of acquired companies requires substantial attention
from our senior management, which may limit the amount of time available to be
devoted to our day-to-day operations or to our growth strategy. Finally,
expansion of our theatre circuit can be risky if we do not effectively manage
such growth and if we have to incur additional debt in connection with such
acquisitions.
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.
We believe that the principal competitive factors in our industry are:
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. Failure to compete
well in any of these categories could hurt our business and results of
operations.
In areas where real estate is readily available, competing companies
are able to open theatres near one of ours, which may affect our theatre.
Competitors have also built or are planning to build theatres in certain areas
in which we
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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. 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 "BusinessBusiness - 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 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. See "ItemItem 11. Executive Compensation-Employment Agreements."
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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 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'sManagement'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 31, 1998,30, 1999, we had
approximately $1.34 billion$1,683.6 million of indebtednesslong term debt, $21.3 million of capital lease
obligations and $74.7 million of lease financing arrangements outstanding, with
approximately $493.5$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 future construction and 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 monthtwelve-month period ended December 31, 1998,30, 1999, our interest
expense was approximately $59.3 million, which would increase to $115.0 million
on a pro forma basis for such period assuming that the Transactions, the Act III
Combination, the Tack-On Offering and the Debenture Offering occurred at the
beginning of fiscal 1998. For 1998, the amount we paid under our non-cancelable
operating leases was $82.0 million, which would increase to $94.9 million on a
pro forma basis for such period assuming that the Transactions, the Act III
Combination, the Tack-On Offering and the Debenture Offering occurred at the
beginning of fiscal 1998.$132.2 million. The Company has also entered intoexecuted certain
lease agreements for the operation of theatres not yet constructed. As of
December 31,
1998,30, 1999, the total future minimum rental payments under the terms of
these leases approximates $1.9 billionapproximate $568.3 million to be paid over 1520 to 2030 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'sManagement'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,
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18 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 46.3%46.1% 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 whichthat requires us to obtain the approval of the board designees of
each of Hicks Muse and KKR before the Board of Directors may take any action.act. The
stockholders agreement, however, does not contain any "deadlock" resolution
mechanisms.
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ITEM 2. PROPERTIES
As of December 31, 1998,30, 1999, the Company operated 256293 of its 403430 theatres
pursuant to lease agreements, owned the land and buildings for 10090 theatres and
operated 47 locations pursuant to ground leases. Of the 403430 theatres operated by
the Company as of December 31, 1998, 31430, 1999, 287 were acquired as existing theatres and
89143 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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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 70,00096,450
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 the Company is involved in routine litigation and
proceedings in the ordinary course of business. The Company does not have any
litigation that management believes is likely to have a material adverse effect
upon the Company.
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 31, 1998.
16
2030, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
There is no established public trading market for the Company's Common
Stock. At March 30, 1999,29, 2000, there were approximately 141238 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. The Company is restricted from
the payment of cash dividends under its Senior Credit Facilities and the
indentures governing its senior subordinated debt.
17
21
ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data set forth below werewas derived
from the consolidated financial statements of the Company. The selected
historical consolidated financial data of the Company as of and for the yearyears
ended December 30, 1999 and December 31, 1998 were derived from the consolidated
financial statements and the notes thereto of the Company, which have been
audited by Deloitte & Touche LLP, independent auditors, whose report has been
included herein. The selected historical consolidated financial data of the
Company as of and for the years ended December 29, 1994, December 28, 1995,January 1, 1998, January 2, 1997 and
January 1,
1998December 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 balance sheets at January 2, 1997 and
January 1, 1998 and the related consolidated statements
of income, changes in shareholders' equity and of cash flows for the three yearsyear ended
January 1, 1998 and notes thereto appearappears 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 report of other independent auditors
with respect to the fiscal year 1996 financial statements appears elsewhere
herein. The
selected historical consolidated financial data set forth below should be read
in conjunction with, and are qualified in their entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and notes thereto included
elsewhere herein.herein:
15
16
FISCAL YEAR ENDED
-------------------------------------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1997 1998 1998
----------- ----------- ----------- ----------- -----------CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(IN MILLIONS, EXCEPT FOR PERCENTAGES, RATIOS, DECEMBER 30 DECEMBER 31 JANUARY 1 JANUARY 2 DECEMBER 28
AND OPERATING DATA) 1999 1998 1998 1997 1995
----------- ----------- ----------- ----------- -----------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Admissions $ 185.2690.5 $ 213.4462.8 $ 325.1 $ 266.0 $ 325.1 $ 462.8213.4
Concessions 74.7285.7 202.4 137.2 110.2 87.3 110.2 137.2 202.4
Other operating revenues 5.160.9 41.8 21.3 14.9 8.3 14.9 21.3 41.8
----------- ----------- ----------- ----------- -----------
Total revenues 265.01,037.1 707.0 483.6 391.1 309.0 391.1 483.6 707.0
Operating expenses:
Film rental and advertising costs 101.0384.9 251.3 178.2 145.2 115.4 145.2 178.2 251.3
Cost of concessions and other 9.944.3 31.7 21.1 17.1 11.4 17.1 21.1 31.7
Theatre operating expenses 92.9377.7 241.7 156.5 127.7 105.7 127.7 156.5 241.7
General and administrative expenses 14.1 14.832.1 20.4 16.6 16.6 20.414.8
----------- ----------- ----------- ----------- -----------
Total costs and expenses 217.9839.0 545.1 372.4 306.6 247.3 306.6 372.4 545.1
----------- ----------- ----------- ----------- -----------
Sub-total 47.1198.1 161.9 111.2 84.5 61.7
84.5 111.2 161.9----------- ----------- ----------- ----------- -----------
Depreciation and amortization 13.680.8 52.4 30.5 24.7 19.4 24.7 30.5 52.4
Merger expenses 5.1-- -- 7.8 1.6 1.2
1.6 7.8Recapitalization expenses -- Recapitalization expenses65.7 -- -- --
Theatre closing costs (1) 4.3 -- -- -- --
65.7Loss on disposal of operating assets (2) 16.8 .9 -- -- --
Loss on impairment of assets (1)(3) 98.6 67.9 5.0 -- -- -- 5.0 67.9
----------- ----------- ----------- ----------- -----------
Operating income (loss) 28.4(2.4) (25.0) 67.9 58.2 41.1
58.2 67.9 (24.1)----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest expense 7.2132.2 59.3 14.0 12.8 10.3 12.8 14.0 59.3
Interest income (0.7) (1.5) (0.8) (0.6) --
-- (0.6) (0.8) (1.5)
Other --0.0 1.0 0.4 (0.7) 0.7 (0.7) 0.4 1.9
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item 21.2(133.9) (83.8) 54.3 46.7 30.1
46.7 54.3 (83.8)
(ProvisionBenefit from (provision for) benefit from income taxes (8.5)45.4 22.2 (19.1) (20.8) (12.2) (20.8) (19.1) 22.2
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item 12.7(88.5) (61.6) 35.2 25.9 17.9 25.9 35.2 (61.7)
Extraordinary item:
Loss on extinguishment of debt, net
of applicable taxes 1.80.0 11.9 10.0 0.8 0.4 0.8 10.0 11.9
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 10.9(88.5) $ 17.573.5 $ 25.2 $ 25.1 $ 25.2 $ (73.6)17.5
=========== =========== =========== =========== ===========
OPERATING AND OTHER FINANCIAL DATA(4)DATA (4):
Cash flow provided by operating activities $ 36.592.7 $ 40.045.1 $ 64.0 $ 67.5 $ 64.0 $ 44.240.0
Cash flow used in investing activities $ 106.4435.9 $ 112.6296.2 $ 202.3 $ 131.1 $ 202.3 $ 295.4112.6
Cash flow provided by financing activities $ 63.5363.2 $ 69.8253.4 $ 139.6 $ 72.2 $ 139.669.8
EBITDA (5) 198.1 161.9 111.2 84.5 61.7
EBITDAR (5) $ 253.4
EBITDA (2) $ 47.1 $ 61.7 $ 84.5 $ 111.2 $ 161.9
EBITDAR (2) $ 79.6 $332.0 248.3 164.9 125.9 96.2 $ 125.9 $ 164.9 $ 242.8
EBITDA margin (3) 17.8 % 20.0 % 21.7 % 23.2 % 22.9 %(6) 19.1% 22.9% 23.2% 21.7% 20.0%
EBITDAR margin (3) 30.0 % 31.1 % 32.4 % 34.4 % 34.3 %(6) 32.0% 35.1% 34.1% 32.4% 31.1%
Theatre locations 195430 403 256 223 206
223 256 403
Screens 1,3974,413 3,573 2,306 1,899 1,616 1,899 2,306 3,573
Average screens per location 7.210.3 8.9 9.0 8.5 7.8 8.5 9.0 8.9
Attendance (in thousands) 49,690141,043 102,702 76,331 65,530 55,091 65,530 76,331 102,702
Average ticket price $ 3.734.90 $ 3.874.51 $ 4.26 $ 4.06 $ 4.26 $ 4.513.87
Average concessions per patron $ 1.502.03 $ 1.581.97 $ 1.80 $ 1.68 $ 1.80 $ 1.971.58
BALANCE SHEET DATA:
Cash and cash equivalents $ 9.940.6 $ 7.020.6 $ 18.4 $ 17.1 $ 18.4 $ 20.67.0
Total assets $ 252.62,080.4 $ 349.01,662.0 $ 660.6 $ 488.8 $ 660.6 $ 1,662.0349.0
Long-term obligations (including current
maturities) $ 117.51,779.7 $ 188.51,341.1 $ 288.6 $ 144.6 $ 288.6 $ 1,341.1188.5
Shareholders' equity $ 88.1114.2 $ 109.0202.5 $ 306.6 $ 279.3 $ 306.6 $ 202.5109.0
1816
2217
(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.
(2)(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 and non-recurring charges. 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.
(3)(6) Defined as EBITDA and EBITDAR as a percentage of total revenue.
(4) Operating theatres and screens represent the number of theatres and screens
operated at the end of the period.
19
23
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.
Regal
consummated the acquisitions of Georgia State Theatres, Inc. ("GST") and Cobb
Theatres, L.L.C. and entities through which Cobb Theatres, L.L.C. and Tricob
Partnership, an entity controlled by Cobb Theatres, L.L.C. members, conducted
their business (collectively, "Cobb Theatres"), on May 30, 1996 and July 31,
1997, respectively. These two acquisitions have been accounted for as poolings
of interests. On August 26, 1998, the Company consummated the acquisition of Act
III, which has been accounted for under the purchase method.
BACKGROUND OF REGAL
Regal has achieved significant growth in theatres and screens since its
formation in November 1989. From its inception through December 31, 1998,30, 1999, Regal
has acquired 314287 theatres with 2,3262,233 screens, developed 89143 new theatres with
1,1582,027 screens and added 89153 new screens to existing theatres. Theatres developed
by the Company typically generate positive theatre level cash flow within the
first six months following commencement of operation and reach a mature level of
attendance within one to three years following commencement of operation.
Theatre closings have had no significant effect on the operations of Regal.
RESULTS OF OPERATIONS
The Company's revenues are generated 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, rebates from concession 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 released.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 31, 1998,30, 1999, approximately 38.7%30.5% 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.
2017
2418
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.
-----------------------------------------------------
January 2,December 30, December 31, January 1,
December 31,
19971999 1998 1998
--------------- -------------- -------------------------------------- -------------------- -------------------
Revenues:
Admissions.............................................. 68.0%Admissions 66.6% 65.5% 67.2%
65.5%
Concessions............................................. 28.2Concessions 27.5 28.6 28.4 28.6
Other operating revenue................................. 3.8revenue 5.9 5.9 4.4
5.9
--------------- -------------- ------------------------------------- -------------------- -------------------
Total revenues..........................................revenues 100.0 100.0 100.0
Operating expenses:
Film rental and advertising costs.......................costs 37.1 35.5 36.8 35.5
Cost of concessions and other...........................other 4.3 4.5 4.4 4.4 4.5
Theatre operating expenses.............................. 32.7expense 36.4 34.2 32.4 34.2
General and administrative.............................. 4.2administrative 3.1 2.9 3.4 2.9
Depreciation and amortization...........................amortization 7.8 7.4 6.3
6.3 7.4
Merger expenses......................................... 0.4expenses - - 1.6
--
Recapitalization expense................................ -- --expenses - 9.3 -
Theatre closing costs .4 - -
Loss on disposal of operating assets 1.6 - -
Loss on impairment of assets............................ --assets 9.5 9.6 1.0
9.6
--------------- -------------- ------------------------------------- -------------------- -------------------
Total operating expenses.............................. 85.1expenses 100.2 103.4 85.9 103.4
Other income (expense):
Interest expense........................................ (3.3)expense (12.7) (8.4) (2.9)
(8.4)
Interest income.........................................income 0.1 0.2 0.2
0.2
Other................................................... 0.2Other - (0.3) (0.1) (0.3)
--------------- -------------- -----------------
Income (loss) before taxes and extraordinary item....... 12.0item (12.8) (11.9) 11.3 (11.9)
Provision for income taxes................................. 5.4taxes: 4.4 3.1 4.0 3.1
--------------- -------------- -----------------
Income (loss) before extraordinary item................. 6.6item (8.4) (8.8) 7.3 (8.8)
Extraordinary item:
Loss on extinguishment of debt.......................... (0.2)debt - (1.6) (2.1)
(1.6)
--------------- -------------- ------------------------------------- -------------------- -------------------
Net incomeIncome (loss).......................................... 6.4% 5.2% (8.4)% (10.4)% =============== ============== =================5.2%
==================== ==================== ===================
LOSS ON IMPAIRMENT OF ASSETS
Generally,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 most marketable motion pictures are releasednet 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).
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 summerperiod, reflecting an overall increase in
ticket prices and a greater proportion of newer theatres with higher ticket
prices in 1999 than in the Thanksgiving through year-end holiday season. However, duringsame period in 1998. Average concession sales per
customer increased 3.0% for the fourth
quarterperiod, reflecting the greater proportion of
fiscal 1998,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 financial resultsCompany's newly constructed
theatres efforts. Additional increases are due to a full year of certain theatre locations were
significantly less than expectedcosts for the
Act III theatres as compared to a partial year in 1998. The increase also
reflects higher film rental cost due primarily to lower than expectedfilm rental costs associated
with "Star Wars - The Phantom Menace."
18
19
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
attendance duringopenings and projects under construction. The increase also reflects additional
costs related to the fourth quarter. The Company believes the declineAct III merger included in the fourth quarter attendance at theseCompany'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 principally11.3% 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 heightened
competition from newer multiplexes operating in proximity to these theatres. As
a result,higher
average borrowings outstanding associated with the recapitalization of the
Company, revised its estimates of future cash flowsthe Act III merger and the Company's expansion efforts.
Income Taxes. The benefit from its
theatres and determined thatincome taxes for the 1999 fiscal year
increased to $45.4 million from $22.2 million compared to FY 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 locations had become impaired. Therefore,
the Company adjusted the carrying value of long-lived assets, including
goodwill to their estimated fair market value based on discounted cash flows
and recognized an impairment loss of $31 million ($18.9 million after tax) on
these locations.amortization
costs which were not deductible for tax purposes. Additionally, the Company determined that the carrying value of
seven of the FunScapes(TM) locations was impaired based on estimates of future
cash flows. An additional impairment charge of $36.9 million ($22.5 million
after tax) relative1998 fiscal
year reflected certain nondeductible recapitalization expenses. Both periods
also differ due to the carrying valueinclusion of fixed assets at these locationsstate income taxes.
Net Loss. Net loss in 1999 increased by 20.4% to $88.5 million from
$73.5 million in 1998. Before nonrecurring expenses and extraordinary items, net
(loss) income was recorded based on the estimated selling price less selling costs. The Company
intends to sell these FunScapes(TM) locations during the next fiscal year.
21
25$(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 was attributed to
theatres previously operated by the Company,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 wasrelates
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 $16.6$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.
19
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
135.5%136.8% to $(24.1)$(25.0) million, or (3.4)(3.5)% of total revenues, from $67.9 million, or
14.0% of total revenues, in 1997. Before the $133.6$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.
FISCAL YEARS ENDED JANUARY 1,IMPAIRMENT AND OTHER DISPOSAL CHARGES
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 analyses resulted in the recording of a $98.6
million and a $67.9 million impairment charge during the Company's fourth
quarters of fiscal 1999 and 1998, AND JANUARY 2, 1997
Total Revenues. Total revenues increased in 1997 by 23.6% to $483.6
million from $391.1 million in 1996. This increase was due to a 16.5% increase
in attendance attributable primarily torespectively.
Additionally, the net additionCompany's management team began an extensive analysis
of 407 screens in 1997.
Of the $92.5 million increase for 1997, $30.3 million was attributed to theatres
previously operated byunder-performing locations. Consequently, the Company $23.5decided to close or
relocate a number of existing theatre locations as well as discontinue plans to
develop certain sites. As a result, the $16.8 million was attributed to theatres
acquired byrepresents a non cash
write off of fixed assets, net of proceeds from sales of certain owned
properties. In conjunction with certain of these closed sites, a reserve for
lease termination costs of $4.3 million which represents management's best
estimate of potential costs for exiting these leases and are based on analyses
of the Company during 1997, and $38.7 million was attributed to new
theatres constructed by the Company during 1997. Average ticket prices increased
4.9% during the period, reflecting an increase in ticket prices and a greater
22
26
proportion of larger market theatres in 1997 than in the same period in 1996.
Average concession sales per customer increased 6.8% 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 1997 increased by 22.7%
to $355.8 million from $290.0 million in 1996. Direct theatre costs as a
percentage of total revenues decreased to 73.6% in 1997 from 74.2% in 1996. The
decrease of direct theatre costs as a percentage of total revenues was primarily
attributable to lower concession costs as a percentage of total revenues.
General and Administrative Expenses. General and administrative
expenses increased in 1997 by 0.2% to $16.6 million from $16.5 million in 1996,
representing administrative costs associatedproperties, correspondence with the 1997landlord, exploratory discussions
with potential sublessees and individual market conditions. Management does not
believe the costs to exit underperforming theatre openings and
projects under construction. As a percentage of total revenues, general and
administrative expenses decreased to 3.4%sites will be significant in
1997 from 4.2% in 1996.
Depreciation and Amortization. Depreciation and amortization expense
increased in 1997 by 23.6% to $30.5 million from $24.7 million in 1996. This
increase was primarily the result of theatre property additions associated with
the Company's expansion efforts.
Operating Income. Operating income for 1997 increased by 16.6% to $67.9
million, or 14.0% of total revenues, from $58.2 million, or 14.9% of total
revenues, in 1996. Before the $12.7 million and $1.6 million of nonrecurring
merger expenses for 1997 and 1996, respectively, operating income was 16.7% and
15.3% of total revenues.
Interest Expense. Interest expense increased in 1997 by 8.7% to $14.0
million from $12.8 million in 1996. The increase was primarily due to higher
average borrowings outstanding.
Income Taxes. The provision for income taxes decreased in 1997 by 8.2%
to $19.1 million from $20.8 million in 1996. The effective tax rate was 35.2% in
1997 as compared to 44.7% in 1996 as each period reflected certain merger
expenses which were not deductible for tax purposes and 1997 reflected a $2.3
million benefit associated with a deferred tax asset valuation allowance
adjustment related to Cobb Theatres.
Net Income. Net income in 1997 increased by .5% to $25.2 million from
$25.1 million in 1996. Before nonrecurring merger expenses and extraordinary
items, net income was $41.4 million and $27.0 million for 1997 and 1996,
respectively, reflecting a 53.2% increase.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.
The Company's capital requirements have 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 equity
(including equity issued in connection with acquisitions and public offerings),
debt and
internally generated cash. The Company's Senior Credit Facilities provide for
borrowings of up to $1,012.5$1,008.8 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 $512.5$508.8 million, in the aggregate, of term loan borrowings
under three separate term loan facilities. As of December 31, 1998,30, 1999, the Company
had $493.5$128.5 million of capacity
23
27 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 LIBORLIBO 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 June 10, 1996, the Company completed a public offering of 26,737,500
shares of the Company's Common Stock at $4.97 per share. The total proceeds to
the Company from the offering were approximately $126.5 million, net of the
underwriting discount and other expenses of $6.5 million and were used to repay
amounts outstanding under the Company's then existing revolving credit facility.
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.
At January 1, 1998, the Company anticipated that it would spend $225
million to $250 million to develop and renovate theatres during 1998, of which
the Company had approximately $131.6 million in contractual commitments for
expenditures. The actual capital expenditures for fiscal 1998 approximated
$289.5 million.
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, 24
28
management and
employees of the Company. The aggregate purchase price paid to effect 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")Tender Offer) all $125.0 million aggregate principal amount of the
Old Regal 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 Original Notes. The net
proceeds from the sale of the Original Notes, 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 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 the Tack-On Notes in the
amount offor $200 million
under the same indenture governing the Original Notes. The proceeds of the
Tack-On Offering were used to repay and retire portions of the Senior Credit
Facilities.
On December 16, 1998, the Company issued the Regal Debentures in the
amount offor $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 $59.3$132.2 million for the twelve monthtwelve-month period
ended December 31, 1998.30, 1999. In addition, for 1998,1999, the amount paid under the
Company's non-cancelable operating leases was $82.0$129.9 million.
At December 31, 1998,30, 1999, the Company had 4216 new theatres with 647242 screens
and 5115 screens at eightthree existing locations under construction. The Company
intends to develop approximately 700 to 800320 screens during 1999.2000. The Company expects
that the capital expenditures in connection with its development plan will
aggregate approximately $375.0$200.0 million during 1999,2000, of which, as of December 31, 1998,30,
1999, the Company had approximately $300.0$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 6 to 12 months will be
satisfied by available credit under the Senior Credit Facilities, internally
generated cash flow and available cash including any excess cashcash.
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 proceedsform of sale-leaseback financing and secured
financings. Such transactions are expected to close during the Debenture Offering.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
25
29 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.
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.
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.
YEAR 2000 - STATE OF READINESS
Potential Impact on the Company. The failure of information technology
("IT") and embedded, or "non-IT" systems, because of the Year 2000 issue or
otherwise could adversely affect the Company's operations. If not corrected,
many computer-based systems and theatre equipment, such as air conditioning
systems and fire and sprinkler systems, could encounter difficulty
differentiating between the year 1900 and the year 2000 and interpreting other
dates, resulting in system malfunctions, corruption of date or system failure.
Additionally, the Company relies upon outside third parties ("business
partners") to supply many of the products and services that it needs in its
business. Such products include films which it exhibits and concession products
which it sells. Attendance at the Company's theatres could be severely impacted
if one or more film producers are unable to produce new films because of Year
2000 issues. The Company could suffer other business disruptions and loss of
revenues if any other types of material business partners fail to supply the
goods or services necessary for the Company's operations.
IT Systems. The Company utilizes a weighted methodology to evaluate the
readiness of its corporate and theatre level IT systems. For this purpose,
corporate and theatre system types include commercial off-the-shelf software,
custom in-house developed software, ticketing system software, concession system
software and hardware systems such as workstations and servers. The Company has
weighted each corporate and theatre system based on its overall importance to
the organization. The Company's readiness is evaluated in terms of a five-phase
process utilized in the Year 2000 strategic plan (the "Plan") with appropriate
weighting given to each phase based on its relative importance to IT system Year
2000 readiness. The phases may generally be described as follows: (i) develop
company-wide awareness; (ii) inventory and assess internal systems and business
partners and develop contingency plans for systems that cannot be renovated;
(iii) renovate critical systems and contact material business partners; (iv)
validate and test critical systems, analyze responses from critical business
partners and develop contingency plans for non-compliant partners; and (v)
implement renovated systems and contingency plans. The Company has placed a high
level of importance on its corporate and theatre software systems and a lesser
degree of importance on its hardware systems when evaluating Year 2000
readiness. As a result, the Company has focused more of its initial efforts
toward Year 2000 readiness with respect to its software systems than it has with
respect to its hardware systems. Additionally, the Company believes that the
assessment, validation and testing and implementation phases are the most
important phases in the Plan.
2622
30
Based on the weighting methodology described above, the Company has
assessed all of its corporate IT systems and, as of December 31, 1998, has
renovated 95% of those systems that require renovation as a result of the Year
2000 issue. In the aggregate, as of December 31, 1998, 75% of the Company's
corporate IT systems have been tested and verified as being Year 2000 ready. The
percentage of corporate IT systems that has been tested and verified as being
Year 2000 ready assumes that a significant component of commercial-off-the-shelf
software, the Global Software, Inc. financial applications, is Year 2000 ready.
This system was warranted to be Year 2000 ready when purchased. Although the
Company has plans to test and verify Global Software, Inc.'s financial
applications to validate that the implementation is in fact Year 2000 ready, it
does not believe that it has a significant risk with respect to such software.
Based on the weighting methodology described above, the Company has
also assessed all of its theatre IT systems and, as of December 31, 1998, has
renovated 75% of those systems that require renovation as a result of the Year
2000 issue. In the aggregate, as of December 31, 1998, 75% of the Company's
theatre IT systems have been tested and verified as being Year 2000 ready.
Overall, the Company has assessed the Plan with respect to IT systems
as being 90% complete as of December 31, 1998. Although, no assurance can be
given, the Company does not believe that it has material exposure to the Year
2000 issue with respect to its internal IT systems.
Non-IT Systems. The Company is in the process of identifying and
assessing potential Year 2000 readiness risks associated with its non-IT systems
and with systems of its business partners. Based on budgeted and expended
personnel hours, assessment of the Company's non-IT systems and with systems of
its business partners was substantially complete as of December 31, 1998.
Costs. Although a definitive estimate of costs associated with required
modifications to address the Year 2000 issue cannot be made until the Company
has at least completed the assessment phase of the Plan, management presently
does not expect such costs to be material to the Company's results of
operations, liquidity or financial condition. The total amount expended from
January 1, 1996 through December 31, 1998 was approximately $100,000. Based on
information presently known, the total amount expected to be expended on the
Year 2000 effort for IT systems is approximately $2,500,000, primarily comprised
of software upgrades and replacement costs, internal personnel hours and
consulting costs. To date, the Year 2000 effort has been funded primarily from
the existing IT budget.
Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Statements." In addition to the factors listed therein
which could cause actual results to be different from those anticipated, the
following special factors could affect the Company's ability to be Year 2000
ready: (i) the Company's ability to implement the Plan; (ii) cooperation and
participation by business partners; (iii) the availability and cost of trained
personnel and the ability to recruit and retain them; and (iv) the ability to
locate all system coding requiring correction.23
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the
Emerging Issues Task Force ("EITF") released
EITF(EITF) Issue No. 97-10, The Effect of Lessee
Involvement in Asset Construction.
The EITF addresses howConstruction, is applicable to entities involved on behalf
of an entity (lessee) that is involvedowner-lessor with the construction of an asset that will be leased to the
entity subsequently plans to leaselessee when construction is
completed should determine whether it should be considered the owner of that
asset during the construction period. The Task Force reached a consensus that a
lessee should be considered the owner of a real estate project during the
construction period if the lessee has substantially all of the construction
period risk. As the Company's construction project agreements are currently
structured, management believes the Company
27
31
would be considered the owner of certain pending construction projects. As a
result, management believes the Company may be requiredasset is completed. The consensus reached in
Issue No. 97-10 applies to reflect these lease
agreements as on balance sheet financing transactions. The EITF is applicable to
all construction projects committed to subsequent toafter May 21, 1998
and to all
constructionthose projects that were committed to on May 21, 1998 if construction doesdid
not commence prior toby December 31, 1999. TheIssue 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 which 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 currently pursuing various
alternatives includingrequired to
record such leases as lease financing arrangements (capital leases). The
application of the amendment of certain existing construction project
agreements. The Company is in the process of evaluating the impactprovisions 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 its consolidated financial position,the results of operations and cash
flows.
Onfor 1999.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133,No.133, Accounting for Derivative and Financial Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
establishes a new model for accounting forActivities. The
Statement will require the Company to recognize all derivatives and hedging activities
based on these fundamental principles: (i) derivatives represent assets and
liabilities that should be recognized at fair value on the balance sheet; (ii)
derivative gains and losses do not represent liabilities or assets and,
therefore, should not be reported on the balance
sheet as deferred credits or
deferred debits; and (iii) special hedge accounting should be provided only for
transactions that meet certain specified criteria, which include a requirementat fair value. The Company does not anticipate that the change in the fair valueadoption of the derivative be highly effective in
offsetting the change in the fair valuethis
Statement will have a significant effect on its results of operations or
cash flows of the hedged item. This
Statement is effective for fiscal years beginning after June 15, 1999.financial position. The Company will adopt this Statement during the first
quarter of fiscal 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With certain instruments entered into for other than trading purposes,
the Company is currently evaluatingsubject to market risk exposure related to changes in interest
rates. As of December 30, 1999, the effectCompany has in place a $1,008.8 million bank
credit facility whose various components mature during 2005 through 2007. A
portion of that SFAS No. 133 will havefacility, 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 consolidated financial statements.
During fiscal 1998,total leverage ratio. As of December 30, 1999, the American InstituteCompany had $370.0
million outstanding under the revolver at interest rates ranging from 7.49% to
8.43%. The remaining portion of Certified Public
Accountants issued Statementthe bank credit facility is $508.8 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 Position 98-1, Accounting0% 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 million at December 30, 1999 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, 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
$133.7 million at December 30, 1999 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 Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1")Company's term loans and SOP
98-5, Reportingrevolving credit facility are 8.56% and 8.35%,
respectively, based on the CostsCompany's current spread of Start-up Activities ("SOP 98-5"). SOP 98-1
requires companies2.25% for the revolver
and 2.25% to capitalize certain internal-use software costs once
certain criteria are met. SOP 98-5 requires costs2.75% for the term loans. While changes in the LIBOR rate would
affect the cost of start-up activities to be
expensed when incurred. Management does not believe that adoptionfunds borrowed in the future, the Company believes the
effect, if any, of these
statements will not have the material impactreasonably possible near term changes in interest rates on
the Company's consolidated financial position, results of operations, or cash
flows.
28
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity.flows would not be material. The table below provides information aboutfair market value of the Company's derivative financial instruments and other financial instruments
that are sensitiveoutstanding credit
obligations under the bank credit facility approximate the facility's carrying
value due to changes inthe variable interest rates includingin place as of December 30, 1999.
23
24
The Company has $200.0 million in senior subordinated debentures due December
15, 2010, with interest rate swapspayable 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 debt obligations. For debt obligations,unpaid
interest to the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.redemption date, if redeemed during the 12 month period
beginning on December 15 of the years indicated:
REDEMPTION
YEAR PRICE
---- -----
2003 104.438%
2004 103.328%
2005 101.219%
2006 101.109%
2007 and thereafter 100.000%
The Company's fixed rate obligations consist primarily ofCompany 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 $200 millionunpaid 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%
The fair market value of the outstanding senior subordinated debentures duedebt as of December
15, 2010. For30, 1999 was $608.0 million based on quoted market prices as of that date.
As of December 30, 1999, the Company had entered into interest rate swaps,swap
agreements ranging from five to seven years for the table presents
notional amounts and weighted averagemanagement of interest rate
exposure. As of December 30, 1999, such agreements had effectively converted
$270 million of LIBOR floating rate debt to fixed rate obligations with interest
rates by expected (contractual)
maturity dates. Notional amountsranging from 5.32% to 7.32%. Regal continually monitors its position and
the credit rating of the interest swap counterparty. The fair values of interest
rate swap agreements are used to calculate the contractual payments
to be exchanged under the contract. Weighted average variable rates areestimated based on implied forward rates inquotes from dealers of these
instruments and represent the yield curveestimated amounts the Company would expect to
(pay) or receive to terminate the agreements. The fair value of the Company's
interest rate swap agreements at the reporting date.
($'s in thousands)
DEBT OBLIGATIONS:
Fiscal Year Ending
1999 2000 2001 2002
Long-term Debt:
Fixed Rate................. $804,469 $804,070 $803,629 $803,143
Average interest rate.... 9.34% 9.34% 9.34% 9.34%
Variable Rate.............. 509,500 507,400 504,850 502,300
Average interest rate... 5.44% 5.67% 5.78% 5.89%
INTEREST RATE DERIVATIVES:
Interest Rate Swaps:
Variable to Fixed........... $270,000 $270,000 $270,000 $270,000
Average pay rate......... 5.48% 5.48% 5.48% 5.48%
Average receive rate..... 5.44% 5.67% 5.78% 5.89%
Fiscal Year Ending
2003 Thereafter Fair Market Value at
December 31, 1998
Long-term Debt:
Fixed Rate................. $802,606 $801,955 $825,757
Average interest rate.... 9.345% --
Variable Rate.............. 499,750 497,200 $512,500
Average interest rate... 6.00% --
INTEREST RATE DERIVATIVES:
Interest Rate Swaps:
Variable to Fixed........... $250,000 -- $(3,160)
Average pay rate......... 5.34% --
Average receive rate..... 6.00% --
29December 30, 1999 was $11.7 million.
24
3325
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Index to Financial Statements
Independent Auditors' Report 26
Report of Independent Auditors..................................................................31
Report of Coopers & Lybrand L.L.P., Independent Accountants.....................................32
Report of Ernst & YoungPricewaterhouseCoopers LLP, Independent Auditors...............................................33Accountants 27
Consolidated Balance Sheets at January 1, 1998December 30, 1999 and December 31, 1998............................341998 28
Consolidated Statements of Operations for the years ended January 2, 1997,December 30, 1999
December 31, 1998 and January 1, 1998 and December 31, 1998...................................................3529
Consolidated Statements of Shareholders' Equity for the years ended
January 2, 1997,December 30, 1999, December 31, 1998 and January 1, 1998 and December 31, 1998..................................3630
Consolidated Statements of Cash Flows for the years ended January 2, 1997,December 30, 1999,
December 31, 1998 and January 1, 1998 and December 31 1998...................................................37
Notes to Consolidated Financial Statements......................................................38Statements 32
3025
3426
INDEPENDENT AUDITORS' REPORT
Board of Directors
Regal Cinemas, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheet of Regal Cinemas,
Inc. and subsidiaries (the "Company")Company) as of December 30, 1999 and December 31,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the yearyears then ended. 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, 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 yearyears then ended in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 16, 19998, 2000
Nashville, Tennessee
3126
3527
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")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 Subsidiaries as
of January 2, 1997 and January 1, 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
January 1, 1998, in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Coopers & Lybrand L.L.P.PricewaterhouseCoopers LLP
Knoxville, Tennessee
February 6, 1998
3227
36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cobb Theatres, L.L.C.
We have audited the consolidated balance sheet of Cobb Theatres, L.L.C. as of
December 31, 1996 and the related consolidated statements of operations, changes
in members equity and cash flows for the year then ended (not presented
separately herein). 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cobb Theatres,
L.L.C. at December 31, 1996 and the consolidated results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
July 2, 1997
33
37
REGAL CINEMAS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 199828
REGAL CINEMAS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS, OF DOLLARS, EXCEPT SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------
JANUARY 1,
DECEMBER 30, DECEMBER 31,
ASSETS 19981999 1998
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 18,39840,604 $ 20,621
Accounts receivable 4,7912,752 3,161
Reimbursable construction advances 20,250 8,643
Inventories 2,1595,050 4,014
Prepaid and other current assets 8,801 12,99918,283 11,455
Assets held for sale 9,670 --
Deferred income tax asset --633 1,271
----------- -----------
Total current assets 34,149 42,06697,242 49,165
PROPERTY AND EQUIPMENT:
Land 53,955113,516 111,854
Buildings and leasehold improvements 366,323999,012 650,313
Equipment 211,465453,751 368,792
Construction in progress 46,529 103,25375,879 94,610
----------- -----------
678,272 1,234,2121,642,158 1,225,569
Accumulated depreciation and amortization (112,927)(185,409) (139,643)
----------- -----------
Total property and equipment, net 565,345 1,094,5691,456,749 1,085,926
GOODWILL, net of accumulated amortization of $5,026$20,952 and
$10,170, respectively 52,619398,567 439,842
DEFERRED INCOME TAX ASSET --86,075 37,538
OTHER ASSETS 8,53741,576 47,989
----------- -----------
TOTAL ASSETS $ 660,6502,080,209 $ 1,662,0041,660,460
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debtobligations $ 3066,537 $ 6,524
Accounts payable 38,982101,152 65,592
Accrued expenses 13,739 44,73456,701 43,118
----------- -----------
Total current liabilities 53,027 116,850164,390 115,234
LONG-TERM DEBT,OBLIGATIONS, less current maturities 288,277 1,334,542maturities:
Long-term debt 1,679,217 1,313,219
Capital lease obligations 19,722 21,323
Lease financing arrangements 74,199 --
OTHER LIABILITIES 12,77128,521 8,077
----------- -----------
Total liabilities 354,075 1,459,4691,966,049 1,457,853
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par; 100,000,000 shares authorized,
none issued and outstanding -- --
Common stock, no par; 500,000,000 shares authorized;
223,903,849216,873,501 issued and outstanding in 1997; 216,552,1051999; 216,491,565
issued and outstanding in 1998 223,707199,778 197,427
Loans to shareholders -- (4,212)(6,388) (4,140)
Retained earnings 82,868(deficit) (79,230) 9,320
----------- -----------
Total shareholders' equity 306,575 202,535114,160 202,607
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 660,6502,080,209 $ 1,662,0041,660,460
=========== ===========
See notes to consolidated financial statements.
34statements
28
3829
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1999, DECEMBER 31, 1998 AND JANUARY 1, 1998
(IN THOUSANDS)
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 2, 1997,DECEMBER 30, DECEMBER 31, JANUARY 1,
1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------------------------------------
January 2, January 1, December 31,
19971999 1998 1998
--------- --------- -------------------- ----------- -----------
REVENUES:
Admissions $ 266,003690,469 $ 462,826 $ 325,118
$ 462,826
Concessions 110,237285,707 202,418 137,173 202,418
Other operating revenue 14,89060,895 41,783 21,305
41,783
--------- --------- -------------------- ----------- -----------
Total revenues 391,1301,037,071 707,027 483,596 707,027
OPERATING EXPENSES:
Film rental and advertising costs 145,247384,894 251,345 178,173 251,345
Cost of concessions and other 17,06644,276 31,657 21,072 31,657
Theatre operating expenses 127,706377,702 241,720 156,588 241,720
General and administrative expenses 16,58132,134 20,355 16,609 20,355
Depreciation and amortization 24,69580,787 52,413 30,535 52,413
Merger expenses 1,639-- -- 7,789 --
Recapitalization expenses -- 65,755 --
65,755Theatre closing costs 4,269 -- --
Loss on disposal of operating assets 16,826 861 --
Loss on impairment of assets --98,587 67,873 4,960
67,873
--------- --------- -------------------- ----------- -----------
Total operating expenses 332,9341,039,475 731,979 415,726
731,118
--------- --------- -------------------- ----------- -----------
OPERATING INCOME (LOSS) 58,196(2,404) (24,952) 67,870
(24,091)
--------- --------- -------------------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (12,844)(132,162) (59,301) (13,959) (59,301)
Interest income 619659 1,506 816
1,506
Other 676-- (1,081) (407)
(1,942)
--------- --------- -------------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 46,647(133,907) (83,828) 54,320
(83,828)BENEFIT FROM (PROVISION FOR) BENEFIT FROM INCOME TAXES (20,830)45,357 22,170 (19,121)
22,170
--------- --------- -------------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 25,817(88,550) (61,658) 35,199 (61,658)
EXTRAORDINARY ITEM:
Loss on extinguishment of debt, net of applicable taxes (751)-- (11,890) (10,020)
(11,890)
--------- --------- -------------------- ----------- -----------
NET INCOME (LOSS) 25,066 25,179$ (88,550) $ (73,548)
GST DIVIDENDS (229) -- --
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 24,837 $ 25,179
$ (73,548)
========= ========= ==================== =========== ===========
See notes to consolidated financial statements.
3529
3930
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1999, DECEMBER 31, 1998 AND JANUARY 1, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON PREFERRED LOANS TO RETAINED
STOCK STOCK SHAREHOLDERS EARNINGS TOTAL
----------- ------------------- ----------- ----------- -----------
BALANCE, DECEMBER 28, 1995JANUARY 2, 1997 $ 74,591221,613 $ -- $ -- Payment of GST dividends and
partnership distributions -- -- --
Issuance of 31,097,594 shares of common
stock, net of offering costs 140,651 -- --
Issuance of 2,838,922 shares upon exercise of
stock options and restricted stock awards 1,177 -- --
Income tax benefits related to exercised stock options 5,017 -- --
Conformation of Cobb Theatres fiscal year -- -- --
Stock option amortization 177 -- --
Net income -- -- --
----------- -------- -----------
BALANCE, JANUARY 2, 1997 221,613 -- --$ 57,689 $ 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
commonCommon 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 -- (4,212)(4,140) -- 72
Stock option amortization 68 -- -- -- 68
Net loss -- -- -- (73,548) (73,548)
----------- ------------------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 197,427 $ -- $ (4,212)
=========== ======== ===========
RETAINED
EARNINGS TOTAL
----------- -----------
BALANCE, DECEMBER 28, 1995(4,140) $ 34,4299,320 $ 109,020
Payment of GST dividends and
partnership distributions (263) (263)202,607
Issuance of 31,097,594120,000 shares of common
stock net of offering costs -- 140,651
Issuance of 2,838,922 shares upon exercise of stock options and restricted stock awards600 -- 1,177
Income tax benefits related to exercised stock options -- 5,017
Conformation of Cobb Theatres fiscal year (1,543) (1,543)
Stock option amortization -- 177
Net income 25,066 25,066
----------- -----------
BALANCE, JANUARY 2, 1997 57,689 279,302600
Issuance of 844,614 shares upon exercise of stock
options and restricted stock awards -- 723
Income tax benefits related to exercised stock options -- 1,306
Stock option amortization -- 65
Net income 25,179 25,179
----------- -----------
BALANCE, JANUARY 1, 1998 82,868 306,575
Purchase and retirement of 223,937,974
shares of common stock related to the
Recapitalization -- (1,119,690)
Issuance of 2,630,556 shares of common stock
related to the Recapitalization -- 13,153
Issuance of 15,277 shares of Series A
Convertible Preferred Stock related to the
Recapitalization -- 763,820
Conversion of 15,277 shares of Series A
Convertible Preferred Stock to 152,763,973 shares of
common stock -- --
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
Issuance of 808,313569,500 shares of common
stock in exchange for shareholder loans 2,848 -- (2,848) -- --
Stock option amortizationRepurchase and cancellation of 307,564
shares of common stock (1,097) -- 68600 -- (497)
Net loss (73,548) (73,548)-- -- -- (88,550) (88,550)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 199830, 1999 $ 9,320199,778 $ 202,535-- $ (6,388) $ (79,230) $ 114,160
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
3630
4031
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1999, DECEMBER 31, 1998 AND JANUARY 1, 1998
(IN THOUSANDS)
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 2, 1997,DECEMBER 30, DECEMBER 31, JANUARY 1,
1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
19971999 1998 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 25,066(88,550) $ 25,179(73,548) $ (73,548)25,179
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 24,69580,787 52,413 30,535 52,413
Non-cash loss on extinguishment of debt 751-- 4,975 2,575 4,975
Loss on impairment of assets 98,587 67,873 4,960
Loss on disposal of operating assets 16,826 861 --
4,960 67,873Theatre closing costs 4,269 -- --
Deferred income taxes 4,112(47,899) (29,771) 1,293 (29,771)
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable (1,182)409 3,585 (1,899)
3,585
Inventories (365)(1,036) (118) (135) (118)
Prepaids and other current assets 4,521(6,304) (3,373) 2,150 (3,373)
Accounts payable 10,87822,352 13,054 2,881 13,054
Accrued expenses and other liabilities (946)13,248 9,132 (3,579) 9,132
----------- ----------- -----------
Net cash provided by operating activities 67,53092,689 45,083 63,960 44,222
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures net (124,068)(435,768) (286,363) (178,099)
(289,532)Proceeds from sale of fixed assets 8,875 1,731 --
Increase in reimbursable construction advances (11,607) (5,761) --
Increase in goodwill and other assets (7,077)2,618 (5,829) (24,198) (5,829)
----------- ----------- -----------
Net cash used in investing activities (131,145)(435,882) (296,222) (202,297) (295,361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 161,500obligations 390,000 1,329,800 358,418 1,329,800
Payments on long-term debt (211,623)obligations (26,927) (688,653) (214,460) (688,653)
Deferred financing costs -- (45,137) (5,127) (5,127) (45,137)
Proceeds from issuance of stock, net 126,763 -- 774,691 --
Purchase and retirement of common stock (497) (1,117,407) -- -- (1,117,407)
Exercise of warrants, options and stock
compensation expense 1,177600 68 788 68
GST dividends paid (500) -- --
Partnership distribution (34) -- --
----------- ----------- -----------
Net cash provided by financing activities 72,156363,176 253,362 139,619 253,362
----------- ----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 8,54119,983 2,223 1,282 2,223
CASH AND EQUIVALENTS, beginning of period 8,57520,621 18,398 17,116 18,398
----------- ----------- -----------
CASH AND EQUIVALENTS, end of period $ 17,11640,604 $ 18,39820,621 $ 20,62118,398
=========== =========== ===========
See notes to consolidated financial statements.
3731
4132
REGAL CINEMAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1997,DECEMBER 30, 1999, DECEMBER 31, 1998 AND JANUARY 1, 1998 AND DECEMBER 31, 1998
1. THE COMPANY AND RECAPITALIZATION
Regal Cinemas, Inc. and its wholly owned subsidiaries (the "Company"Company or
"Regal") operatesRegal) operate multi-screen motion picture theatres principally
throughout the eastern and northwestern United States.
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
("KKR")(KKR) and an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse")(Hicks
Muse) merged with and into Regal Cinemas, Inc., with the Company
continuing as the surviving corporation of the Merger (the "Merger")Merger). The
Merger and related transactions have been recorded as a
recapitalization (the "Recapitalization")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/Option/Warrant Redemption")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")(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; 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")(Common Stock),
and the Company's Series A Convertible Preferred Stock, no par value
("Convertible(Convertible Preferred Stock")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")(Act III). As a result of the Recapitalization
and the Act III Merger (see Note 3), KKR and Hicks Muse each ownowned
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). Of the total Merger and 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. Prior to
the merger with Regal, Cobb Theatres, L.L.C. and Tricob Partnership, an
entity controlled by the members of Cobb Theatres, L.L.C., collectively
referred to as
38
42
"Cobb Theatres", formerly operated and reported on a fiscal year ended
August 31. Cobb Theatres' fiscal year 1996 financial statements were
conformed to Regal's fiscal year end and the accompanying consolidated
statement of changes in shareholders' equity reflects a charge directly to
retained earnings representing a net loss incurred by Cobb Theatres for
the period from September 1, 1995 through December 31, 1995.
All
significant intercompany accounts and transactions have been eliminated
from the consolidated financial statements.
FISCAL YEAR - The Company formally operates withmaintains its accounting records on a 52 week
fiscal year ending on the Thursday closest tonearest December 31.31, 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 January 1, 1998December 30, 1999 and December 31, 1998,
32
33
the Company held approximately $12,549,000$29.1 million and $19,559,000,$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 AND LEASE COSTS (INCLUDED IN OTHER ASSETS) - Debt acquisition and lease
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.
39
43
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.
NEW ACCOUNTING STANDARDSSEGMENTS - During fiscal 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of An Enterprise and Related Information. SFAS 130 requires
disclosure of comprehensive income and its components in a company's
financial statements and the adoption of this standard had no impact on
the Company's financial position or results of operations. SFAS 131
requires disclosures of segment information in a company's financial
statements. The Company manages it business based on the basis of one reportable
segment.
See Note 1 for a brief descriptionNEW 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 Company's businessasset is completed. The consensus reached in Issue
No. 97-10 applies to construction projects committed to after May 21,
1998 and geographic locations.
RECLASSIFICATIONSto 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
1996
and 19971998 financial statements to conform to the 19981999 presentation.
3. ACQUISTIONSACQUISITIONS
On August 26, 1998, the Company acquired Act III Cinemas, Inc. (the "ActAct
III Merger")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.
PreliminaryThe allocation of the purchase price as of December 31, 199830, 1999 is as
follows:
40
44
(IN THOUSANDS)
Property plant and equipment $ 343,694
Long-term debt assumed (411,337)
Net working capital acquired (17,167)(18,541)
Excess purchase cost over fair value of net assets acquired 396,967
---------398,341
-------------
Total purchase cost $ 312,157
======================
The above allocation of purchase cost has been preliminarily allocated to the
acquired assets and liabilities of Act III based on estimates of fair
value as of the closing date.
Such estimates were based on valuations and
studies which are not yet complete. Therefore, the above allocation of
purchase price may change when such studies are completed.
The following pro forma unaudited fiscal year results of operations
data givesgive effect to the Act III Merger and the Recapitalization (Note
1) as if they had occurred as of January 3, 1997:
1998 1997
1998
(IN THOUSANDS)------------- -------------
(IN THOUSANDS)
Revenues $ 738,668897,459 $ 897,459738,668
Loss before extraordinary items (67,571) (18,601) (67,517)
Net loss (79,407) (28,621) (79,407)
On July 31, 1997, the Company issued 17,593,083 shares of its Common
Stock for all of the outstanding common stock of Cobb Theatres. Additionally, on
May 30, 1996, the Company issued 8,743,302 shares of its Common Stock for
all of the outstanding common stock of Georgia State Theatres ("GST").
Such mergers haveThis
merger has been accounted for as poolingsa pooling of interestinterests and,
accordingly, these1997 consolidated financial statements have beenwere restated
for all periods to
include the results of operations and financial
positions of Cobb Theatres and GST.Theatres.
Separate results of the combining entities for the fiscal years 1996 andyear 1997 are as
follows:
1996 1997
-------------
(IN THOUSANDS)
Revenues:
Regal $267,064 $402,445$ 402,445
Cobb Theatres, L.L.C. and Tricob Partnership
(through July 31 for 1997) 119,357 81,151
GST (through May 30 for 1996) 4,709 --
-------- --------
$391,130 $483,596
======== ========-------------
$ 483,596
=============
Net income (loss):
Regal $ 29,935 $ 27,940
Cobb Theatres, L.L.C. and Tricob Partnership
(through July 31 for 1997) (4,959) (2,761)
GST (through May 30 for 1996) 90 --
-------- --------
$ 25,066-------------
$ 25,179
======== =====================
41
45
In addition to the 1998 acquisition of Act III and the GST and 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.
35
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 1996:year:
1996 1997
(IN THOUSANDS) 1997
-------------
Revenues $415,680 $503,722$ 503,722
Operating income 62,533 70,108
Income before extraordinary item 28,463 36,564
Net income applicable to common stock 27,483 26,544
4. IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of the 1998 fiscal year, the financial results
of certain theatre locations were significantly less than expected due
primarily to lower than expected theatre attendance during the fourth
quarter as a result of heightened competition from the increased number of
newer multiplexes operating throughout the industry.ASSET IMPAIRMENT - As a result,stated in Note 2, the Company revised its estimates of future cash flows from its theatre
locations and determined thatperiodically
reviews the carrying value of a numberlong-lived assets, including goodwill,
for impairment based on expected future cash flows. Such reviews are
performed as part of locations
had become impaired. Therefore the Company adjustedCompany'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 long-lived assets, including goodwill, to theirasset exceeds fair value,
which is estimated fair market
value based onusing discounted cash flows. Discounted cash flows
and recognized an impairment lossalso include estimated proceeds for the sale of $31.0 million ($18.9 million after tax) on these locations. Such
impairment charge included a writedown of property and equipment of $23.7
million and a writeoff of goodwill of $7.3 million. Additionally,owned properties in the
Company determined that the carrying value of seven Funscapes(TM)
locations was impaired based on estimates of future cash flows. An
additional impairment charge of $36.9 million ($22.5 million after tax)
relative to the net book value of fixed assets at these locations was
recorded based on the estimated selling price less selling costs. The
Companyinstances where management intends to sell the location. This analysis
has resulted in the following impairment losses being recognized:
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
Write-down of theatre property and equipment $ 46,460 $ 22,617 $ 4,960
Write-down of FunScape property and equipment 22,017 36,950 -
Write-off of goodwill 30,110 8,306 -
------------- ------------- -------------
Total $ 98,587 $ 67,873 $ 4,960
============ ============ ============
THEATRE CLOSING AND LOSS ON DISPOSAL COSTS - During 1999, the Company's
management team began an extensive analysis of under-performing
locations. Consequently, 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 million as the
net loss on disposal of these Funscapes(TM) locations as well as the write-off of
certain costs incurred to develop sites which have now been
discontinued. In conjunction with certain closed locations, a reserve
for lease termination costs of $4.3 million has also been recorded.
This reserve for lease termination costs 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 sublessees and individual market
conditions.
Theatre properties owned by the Company which were closed during the
next
fiscal year.
During the1999 fiscal year 1997,are classified as assets held for sale on the
Company recognized a non-cash loss on
impairmentaccompanying December 30, 1999 balance sheet. Such assets are recorded
at the estimated net realizable value of assets of $4.9 million dollars ($3.0 million after tax)
principally related to declines in cash flows for certain theatres located
in markets experiencing declining box office results.
42the individual locations.
36
4637
5. LONG-TERM DEBTOBLIGATIONS
Long-term debtobligations at January 1, 1998December 30, 1999 and December 31, 1998,
consists of the following:
JANUARY 1,DECEMBER 30, DECEMBER 31,
1998 1998
(IN THOUSANDS) 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 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
YEAR PRICE
$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 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
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 104.438%104.750%
2004 103.328%
2005 102.219%101.219%
2006 101.109%
2007 and thereafter 100.000% - 200,000
Term loans - 512,500
$125,000 of the Company's senior subordinated notes, due
October 1,
2007 with interest payable semiannually at 8.5% 125,000 -and thereafter 100.000%
43
47
JANUARY 1, DECEMBER 31,
1998 1998
(IN THOUSANDS)
$250,000 of the Company's senior reducing revolving$ 200,000 $ 200,000
Term Loans 508,750 512,500
Revolving credit facility 162,000 --370,000 -
Other 4,877 4,757
Capital lease obligations, payable11.5% to 14.0%, maturing in monthlyvarious
installments plus interest at 14% --through 2024 21,311 23,809
Other 1,583 4,757
----------- -----------
288,583Lease financing arrangements, 11.5% , maturing in
various installments through 2019 74,737 -
------------- ------------
1,779,675 1,341,066
Less current maturities (306)(6,537) (6,524)
----------- ------------------------ ------------
Total long-term obligations $ 288,2771,773,138 $ 1,334,542
=========== ======================== ============
37
38
CREDIT FACILITIES (IN THOUSANDS) - In connection with the Merger and Recapitalization
(Note 1), the Company entered into credit facilities provided by a
syndicate of financial institutions. In August and1998, December 1998, and
March 1999, such credit facilities were amended. Such credit facilities
(the "Credit Facilities")Credit Facilities) now include a $500,000$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")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 31, 1998,30, 1999, there were no$370.0
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"Base Rate plus a margin of 0% to 1%, or the "LIBORLIBOR 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 LIBOR rate for the corresponding
length of loan. The
outstanding balance amounted to $240,000under the Term A Loan was $237.6 million at
December 30, 1999 and $240.0 million at December 31, 1998 and one percent of the outstanding balance on the Term A Loan iswith $2.4
million due annually through 2004 withand the balance of the Term A Loan 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 amounted to
$137,500under
the Term B Loan was $137.5 million at December 30, 1999 and December
31, 1998 and one percent of the outstanding balance
is due annually through 2005, with the balance of the loan 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 amounted to
$135,000under
the Term C Loan was $133.7 million at December 30, 1999 and $135.0
million at December 31, 1998 and one percent of the outstanding balance
iswith $1.35 million due annually through
2006, withand the balance of the loan due in 2007.
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. 44
48The Company was in compliance with such covenants 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.
UnderLEASE 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
previous $250,000 senior reducing revolving credit
facility (the "previous credit facility"), interest was payable quarterly
at LIBOR plus .65%. The margin added to LIBOR was determined based upon
certain financial ratios ofconstruction projects for leased theatre sites in the Company. The previous credit facility was
repaid in conjunction with the Recapitalization.2000 fiscal year
will be reported as on balance sheet financing.
38
39
MATURITIES OF LONG TERM OBLIGATIONS --
The Company's long term debt, and capital lease obligations, and lease
financing arrangements are scheduled to mature as follows (in
thousands):
LEASE
LONG-TERM CAPITAL FINANCING
DEBT LEASES ARRANGEMENT TOTAL
DEBT INTEREST PRINCIPAL PRINCIPAL---------- ---------- ---------- ----------
19992000 $ 4,0384,410 $ 3,0461,589 $ 2,486538 $ 6,524
2000 4,149 2,786 1,601 5,7506,537
2001 4,191 2,551 1,826 6,0174,192 1,976 609 6,777
2002 4,236 2,259 2,482 6,7184,239 2,313 683 7,235
2003 4,287 1,890 2,885 7,1724,290 2,670 766 7,726
2004 4,345 3,082 1,015 8,442
Thereafter 1,296,356 3,138 12,529 1,308,885
--------- --------- ------ ---------1,662,151 9,681 71,126 1,742,958
---------- ---------- ---------- ----------
$1,683,627 $ 1,317,25721,311 $ 15,670 $ 23,809 $ 1,341,066
============ ========= ========= ============74,737 $1,779,675
========== ========== ========== ==========
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")(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 supplement to such
indenture, effecting the proposed amendments which 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 - An extraordinaryIn 1998, the Company recognized a loss of $11,890,$11.9
million, net of income taxes of $7,601, was recognized$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. Additionally,In 1997, the Company refinanced debt of acquired companies,
recognizing lossesand recognized a loss on extinguishment of debt of $751 and $10,020 (each, net$10.0 million (net
of applicable income taxes) in 1996 and 1997, respectively.. Such losses are reported as extraordinary
losses in the accompanying financial statements.statements
6. COMMITMENTS AND CONTINGENCIES
LEASES - 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, are summarized for the following fiscal years:
(IN THOUSANDS)
2000 $ 147,976
2001 154,561
2002 154,195
2003 154,202
2004 154,385
Thereafter $2,002,474
39
40
Rent expense under such operating leases amounted to $130.3 million,
$80.9 million, and $52.6 million for fiscal years 1999, 1998 and 1997,
respectively. Contingent rent expense was $3.6 million, $2.8 million,
and $1.0 million for fiscal years 1999, 1998, and 1997, 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, the total future minimum
rental payments under the terms of these leases approximate $568.3
million to be paid over 20 to 30 years.
CONTINGENCIES - From time to time, the Company is involved in legal
proceedings arising in the ordinary course of its business operations,
such as personal injury claims, employment matters and contractual
disputes. Management believes that the Company's potential liability
with respect to such proceedings is not material in the aggregate to
the Company's consolidated financial position, results of operations or
cash flows.
7. 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. Additionally, the financial statements and
notes reflect the retroactive effect of stock issued in connection with
the poolings of interest
45
49
transactions described in Note 3 and the authorization of additional
shares and the effect of the 3-for-2 stock split authorized on September
16, 1996.
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 OPTIONS
AVERAGE EXERCISABLE
EXERCISE AT
SHARES EXERCISE PRICE YEAR END
----------- -----------
Under option at December 28, 1995 16,105,883 $1.37
Options granted in 1996 5,907,050 $4.04
Options exercised in 1996 (2,299,673) $0.46
-----------
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 3,574,945
===========
Options granted in 1998 14,419,334 $4.34
Options exercised in 1998 -- --
-----------
Options canceled or redeemed in 1998 (20,316,730) $2.84
-----------
Under option at December 31, 1998 18,725,62518,725, 625 $3.76 8,021,889
=========== =====Options granted in 1999 1,692,609 $5.00
Options exercised in 1999 (120,000) $5.00
Options canceled or redeemed in 1999 (3,742,404) $3.72
-----------
Under option at December 30, 1999 16,455,830 $3.78 9,027,781
===========
46
50
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- -----------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE ATOptions Outstanding Options Exercisable
------------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Contractual Exercise Excercisable Exercise
Price at 12/31/98 LIFE PRICE AT30/99 Life Price at 12/31/98 PRICE30/99 Price
------------------------------------------------------- ----------------------------
$.38-$0.34-$.62 2,087,197 5.5 $ 0.49 2,087,197 $ 0.490.62 1,562,820 5.1 $0.5358 1,562,820 $0.5358
$1.58-$3.67 4,149,793 6.6 $ 2.11 4,149,793 $ 2.113,931,243 5.3 $2.0680 3,931,243 $2.0680
$4.03-$5.00 12,488,635 9.2 $ 4.86 1,784,899 $ 4.08
----------- -------------
$18,725,625 $ 8,021,889
=========== =============10,961,767 8.4 $4.8542 3,533,718 $4.5477
---------- ---------
16,455,830 9,027,781
========== =========
Prior to the Recapitalization, the Company also had the 1993 Outside
Directors' Stock Option Plan (the "19931993 Directors' Plan")Plan). Directors'
stock options for the purchase of 125,550 shares at an exercise price of
$4.77 and 186,000 shares at an exercise price
of $4.40 were granted during 1996 and 1997, respectively.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 than 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 1996,1999, 1998 and 1997,
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 ranging from 6.06% to 6.95%of 5.92% for 19961999 grants, 5.9% to 6.68%
for 1997 grants, and 5.0% to
5.9% for 1998 grants, 5.90% to 6.68% for 1997 grants; with an
inconsequential volatility factorsfactor 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 32.8% for 1996,
33.7% for 1997, and an inconsequential volatility factor in 1998 due to
the Company's Recapitalization (Note 1).1997. The 1999
pricing model assumptions also includedused 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 in fiscal years 1996,1999, 1998 and 1997,
was $2.24, $ .96, and 1998, was $1.67, $1.85 and $.96 per share, respectively.
41
42
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
pro forma results do not purport to indicate the effects on reported
net income for recognizing compensation expense which are expected to
occur in future years. The Company's pro forma information for 1996,1999,
1998, and 1997 and 1998 option grants is as follows:
1996(IN THOUSANDS) 1999 1998 1997
1998
(IN THOUSANDS)------------- ------------- -------------
Pro forma net income (loss) $ 23,930(91,204) $ (59,423) $ 22,883
$(59,423)============= ============== ==============
47
51
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
proformapro forma net loss.
7.8. 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 at:at
JANUARY 1, DECEMBER 31,(IN THOUSANDS) 1999 1998
1998
-------- --------
(IN THOUSANDS)------------- -------------
Deferred tax assets:
Net operating loss carryforwardscarryforward $ 4,03649,697 $ 25,766
Excess of tax basis over book basis for leases --4,960 5,032
Accrued expenses 1,2306,878 4,515
Interest expense deferred under IRC 163(j) --2,161 2,742
Favorable leases 488 524
Noncompete 342 439
Operating leases 524 388
Excess of tax basis over book basis of certain assets --24,990 336
AMT credit carryforward 627527 162
Other 1,063 1,399
-------- --------1,371 2,750
------------- -------------
Deferred tax assets 8,31090,584 41,303
Deferred tax liabilities:
Excess of book basis over tax basis of certain
assets (16,313) --
Excess of book basis over tax basis of certain
intangible assets (805)(2,640) (1,709)
Other (650)(1,236) (785)
-------- --------------------- --------------
Deferred tax liabilities (17,768)(3,876) (2,494)
-------- ---------------------- --------------
Net deferred tax asset (liability) $ (9,458)86,708 $ 38,809
======== ===================== =============
The Company provided no valuation allowance against deferred tax assets
recorded as of December 31, 199830, 1999 and January 1,December 31, 1998, as management
believes that it is more"more likely than notnot" that all deferred assets
will be fully realizable in future tax periods.
The $2,309,000 increase in the
valuation allowance in 1996, and the corresponding decrease in 1997,
primarily reflect the change in the assessment of the likelihood of
utilization of net operating loss carryforwards of the Company and its
subsidiaries.
At December 31, 1998,30, 1999, the Company and certain of its subsidiaries have
various federal and state net operating loss ("NOL")(NOL) carryforwards
available to offset future taxable income. The Company has
approximately $66,500,000$127.0 million of NOL carryforwards, in the aggregate,
for federal purposes. Portions of the federal NOL are subject 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 until the 2009 tax year.
48
52
Furthermore, a substantial portion 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. At December 31, 1998,30, 1999, the Company has approximately
$162,000an approximate
$0.5 million alternative
42
43
minimum tax credit carryforward available to reduce future federal
income tax liabilities. Under current Federal income tax law, the
alternative minimum tax credit can be carried forward indefinitely.
The components of the provision (benefit) for (benefit from) income taxes for
income from continuing operations for each of the three fiscal years
were as follows:
1996(IN THOUSANDS) 1999 1998 1997
1998
(IN THOUSANDS)------------- ------------- -------------
Current $ 16,718- $ - $ 17,828
$ --
Deferred 1,803(45,357) (22,170) 3,602
(22,170)
Increase (decrease)Decrease in deferred income tax
valuation allowance 2,309- - (2,309)
--
-------- -------- --------------------- ------------- --------------
Total income tax provision (benefit) $ 20,830(45,357) $ (22,170) $ 19,121
$(22,170)
======== ======== ====================== ============== =============
Extraordinary losses are presented net of related tax benefits.
Therefore, the 1996 and 1997 income tax provision and the 1998 income tax
benefit in the above table exclude tax benefits of $.5 million, $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 million decrease in
the valuation allowance in 1997 primarily reflects the change in the
assessment of the likelihood of utilization of net operating loss
carryforwards of a Company subsidiary subsequent to the merger of such
subsidiary with Regal.
A reconciliation of the provision (benefit)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:
1996(IN THOUSANDS) 1999 1998 1997
1998
(IN THOUSANDS)------------- ------------- -------------
Provision (benefit) computed at federal statutory
income tax rate $ 16,244(46,868) $ (29,340) $ 19,012 $(29,340)
State and local income taxes, net of federal benefit 1,870(2,029) (2,425) 2,161 (2,425)
Merger expenses - non deductible 407- 8,268 257 8,268
Goodwill amortization -- --3,481 1,221 Increase (decrease)-
Decrease in valuation allowance 2,309- - (2,309)
--
Other -- --59 106 -------- -------- ---------
-------------- ------------- -------------
Total income tax provision (benefit) $ 20,830(45,357) $ (22,170) $ 19,121
$(22,170)
======== ======== ====================== ============== =============
8. COMMITMENTS AND CONTINGENCIES
LEASES - Leases entered into by the Company, 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 31, 1998, are summarized for the following fiscal years:
49
53
(IN THOUSANDS)
1999 $ 103,728
2000 103,221
2001 100,092
2002 98,384
2003 98,867
Thereafter 1,158,869
Rent expense under such operating leases amounted to $41,427, $52,632 and
$80,923 for fiscal years 1996, 1997 and 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 are at various dates during fiscal
1999 and 2000. As of December 31, 1998, the total future minimum rental
payments under the terms of these leases approximate $1.9 billion to be
paid over 15 to 20 years.
CONTINGENCIES - From time to time, the Company is involved in legal
proceedings arising in the ordinary course of its business operations,
such as personal injury claims, employment matters and contractual
disputes. Management believes that the Company's potential liability with
respect to such proceedings is not material in the aggregate to the
Company's consolidated financial position, results of operations or cash
flows.
9. RELATED PARTY TRANSACTIONS
Prior to May 1996, Regal obtained film licenses through an independent
film-booking agency owned by a director of the Company. Additionally, this
director provided consulting services to the Company. The Company paid
$655,000 in 1996 for booking fees and consulting services.
Regal paid $952,000, $1,200,057$1.2 million and $642,302$0.6 million in 1996, 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 $509,000 and $187,000$0.2 million
in 1996 and 1997, respectively.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 $432,000 and $257,250$0.3 million for 1996 and 1997, respectively.1997.
In connection with the Recapitalization, the Company entered into a
management agreement with KKR and Hicks Muse pursuant to which the
Company has paid approximately $1,093,000$1.0 million of management fees during each of the
fiscal 1998.1999 and 1998 years. 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.
5043
5444
10. CASH FLOW INFORMATION
January 2, January 1, December 31,(IN THOUSANDS) 1999 1998 1997
1998 1998
(IN THOUSANDS)------------- ------------- -------------
Supplemental information on cash flows:
Interest paid $ 12,027128,909 59,745 $ 14,486 $ 59,745
Less: Interest capitalized (1,682) (2,617) (6,164)
-------- -------- --------
Interest paid, net $ 10,345 $ 11,869 $ 53,581
======== ======== ========
Income taxes paid (refunds received), net of refunds $ 11,318 $(4,884) 4,656 10,001 $ 4,656
======== ======== ========
NONCASH TRANSACTIONS:
1996:
- Regal1999:
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 4,360,094569,500 shares of Regal common stock as additional
considerationvalued at $2.8
million in exchange for assets purchasednotes receivables from an individual and
corporations controlled by him.certain shareholders.
The valueCompany cancelled 119,964 shares of the common stock issued
inand the 1996 acquisition of approximately $14,100,000 was allocated
to property and equipment and goodwill.
- Regal recognized income tax benefits relating to exercised stock
options totaling $5,017,000.
1997:
- Regal recognized income tax benefits relating to exercised stock
options totaling $1,306,000.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
$312,157,000$312.2 million and assumed debt of approximately $411,337,000$411.3 million as
consideration for assets purchased from Act III (Note 3).
-
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. 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. The Company made discretionary contributions of
approximately $280,000,$426,000, $319,000, and $291,000 and $319,000 to the plans in 1996,1999,
1998 and 1997, and 1998,
respectively. All full-time employees areEmployees become eligible to participate inon the plans upon completionfirst of
twelve monthsthe month after they have 1,000 hours of employment withservice. If they do not have
1,000 or more hours of service subject to ain 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 21.21 also applies.
12. 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:obligations and lease financing
arrangements: The carrying amounts of the Company's term loans and the
revolving credit facility approximate fair value because the
44
45
interest rates are based on
51
55 floating rates identified by reference to
market rates. 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 debt of the same remaining maturities.
The carrying amounts and fair values of long-term debt at January 1, 1998December 30,
1999 and December 31, 1998 consists of the following:
January 1, December 31,(IN THOUSANDS) 1999 1998
1998------------- -------------
Carrying amount $ 288,277 $1,317,2571,683,627 $ 1,317,257
Fair value $ 289,529 $1,338,2571,491,627 $ 1,338,257
Interest rate swaps: As of January 1, 1998December 30, 1999 and December 31, 1998 the
Company had entered into interest rate swap agreements ranging from
five to seven years for the management of interest rate exposure. As of
January
1, 1998December 30, 1999 and December 31, 1998, such agreements had
effectively converted $20 million and $270 million respectively, of LIBOR floating rate debt to fixed
rate obligations with interest rates ranging from 5.32% to 7.32%. Regal
continually monitors its position and the credit rating of the interest
swap counterparty. The fair values of interest rate swap agreements are
estimated based on quotes from dealers of these instruments and
represent the estimated amounts the Company would expect to (pay) or
receive to terminate the agreements. The fair value of the Company's
interest rate swap agreements at January 1, 1998December 30, 1999 and December 31,
1998 were $(955,000)$11.7 million and $(3,159,844),$(3.2) million, respectively.
* * * * * *
52
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company engaged Deloitte & Touche LLP ("Deloitte(Deloitte & Touche")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 described in paragraph 304(a)(1)(v)).
5345
5746
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 4546 Chairman, President, Chief Executive Officer and Director
Gregory W. Dunn 3940 Executive Vice President and Chief Operating Officer
Amy Miles 33 Senior Vice President, Chief Financial Officer, and Treasurer
Peter B. Brandow 39 Senior Vice President, General Counsel, and Secretary
Robert J. Del Moro 3940 Senior Vice President, Purchasing
Denise K. Gurin 4748 Senior Vice President, Head Film Buyer
J.E. Henry 5051 Senior Vice President, Chief Information Officer, Management
Information Systems
Mike Levesque 4041 Senior Vice President, Operations
D. Mark MonroeRon Reid 58 Senior Vice President, Construction
Raymond L. Smith 36 Senior Vice President, Acting Chief Financial Officer and TreasurerHuman Resources Counsel
R. Keith Thompson 3738 Senior Vice President, Real Estate and Construction
Phillip J. Zacheretti 3940 Senior Vice President, Marketing and Advertising
Joseph Y. Bae 28 Director
Joseph E. Colonnetta 38 Director
David Deniger 54 Director
Thomas O. Hicks 5355 Director
Henry R. Kravis 55 Director
Michael J. Levitt 4041 Director
John R. Muse 4849 Director
Alexander Navab, Jr. 3334 Director
Clifton S. Robbins 40 Director
George R. Roberts 56Paul E. Raether 53 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 on the
Executive Committee of the Board of Directors of the National Association of
Theatre Owners.
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.
54
58Amy Miles has served as Senior Vice President, Chief Financial Officer,
and Treasurer since January of 2000. From April 1999 to 2000, Ms. Miles was
Senior Vice President of Finance. 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
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.
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.
D. Mark Monroe is a certified public accountant andRonald Reid has served as Senior Vice President, Construction since
joining the Company in May,1999. Prior thereto, he was the Executive Vice
President and Acting Chief FinancialOperating 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 October 1, 1998
andJuly 1999. Prior thereto, he served as Vice President, and TreasurerHuman
Resources Counsel since November 1997.joining the Company in April 1998. From SeptemberJanuary 1995 to
October 1997, Mr. Monroe served as the Director of Accounting Projects. From
1992 to 1995, Mr. MonroeApril 1998, he was a manager with Pershing, Yoakley and Associates,partner of the law firm of Pitt, Fenton & Smith. From May
1989 to January 1995, he was a regional accounting and consulting firm. From 1986 to 1991, Mr. Monroe was with
Ernstsenior associate at Rodgers, Fuller & Young LLP.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. Zacheretti has served as Senior Vice President, Marketing
and Advertising since August of 1998. During 1998, Mr. Zacheretti was Vice
President, Marketing and during 1997 Mr. Zacheritti was Director of Marketing.
From 1989 through 1996, Mr. Zacheretti was Director of Marketing for Cinemark
USA, Inc., a Plano, Texas based theatre chain.
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 Collonnetta became a Director of the Company in December 1999. Mr.
Collonnetta has served as a principal of Hicks Muse since January 1999. From
1995 to 1998, Mr. Collonnetta served as a Managing Principal of a management
affiliate of Hicks Muse. From 1994 to 1995, Mr. Collonnetta was the Chief
Executive Officer of Triangle FoodService. From 1989 to 1994, Mr. Collonnetta
was the Chief Financial Officer of TRC, Inc. Mr. Collonnetta 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 director 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")(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.
Thomas O. Hicks became a director of the Company upon the closing of
the Regal Merger. Mr. Hicks has been Chairman and Chief Executive Officer of
Hicks Muse since co-founding the firm in 1989. Prior to forming Hicks Muse, Mr.
Hicks co-founded Hicks & Haas Incorporated in 1983 and served as its Co-Chairman
and Co-Chief Executive Officer through 1989. Mr. Hicks also serves as a director
of Capstar Broadcasting Corporation, CEI Citicorp Holdings, S.A., Chancellor
Media Corporation, Cooperative Computing, Inc., CorpGroup Limited, Group MVS,
S.A. de C.V., Home Interiors & Gifts, Inc., International Home Foods, Inc., LIN
Television Corporation, Neodata Services, Inc., Olympus Real Estate Corporation,
Sybron International Corporation, Triton Energy Limited and Viasystems Group,
Inc.
Henry R. Kravis became a director 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
55
59 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, Safeway Inc., 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 director 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.
Alexander Navab, Jr. became a director of the Company upon the closing
of the Regal Merger. He has been a director of KKR since 1999 and has been an
executive of KKR and a limited partner of KKR Associates since 1993. From 1991 to 1993, Mr. Navab was an associate at
James D. Wolfensohn, Inc. He is also
a director of Borden Inc., Birch Telecom Inc., CAIS Internet Inc., KSL
Recreation Group Inc., Newsquest Capital plc, Reltec CorporationIntermedia Communications and World Color Press,
Inc.
Clifton S. RobbinsZhone Technologies.
Paul E. Raether became a directorDirector of the Company upon the closing of
the Regal Merger. He was a General Partner of KKR fromin December 1999.
Since January 1, 1995 until
January 1, 1996, when he becamehas been a member of the limited liability company which
serves as the general partner of KKR. Prior thereto, he was an executive
thereof. Mr. Robbins isRaether has been a director of AEP Industries, Inc., Borden, Inc., IDEX
Corporation, KinderCare Learning Center, Inc. and Newsquest Capital plc.
George R. Roberts became a director 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. HeKKR 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 Accuride
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Bruno's, Inc., Evenflo & Spalding Holdings Corporation, IDEX
Corporation, KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois,
Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc.,
Reltec Corporation Safeway Inc., Union Texas Petroleum Holdings, Inc. and World
Color Press, Inc.Shoppers Drug Mart.
48
49
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.
56
60
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 19981999 whose
salary and bonus exceeded $100,000 during fiscal 1998 and two individuals who
served as executive officers during fiscal 1998 whose salary and bonus exceeded
$100,000 during fiscal 1998 (collectively the "Named Executive Officers").1999:
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------- ----------------------------------------------------------------------------------------
SECURITIES
FISCAL UNDERLYING
NAME AND POSITION FISCAL YEAR SALARY($SALARY ($) BONUS($BONUS ($)(1) OPTIONS/SARS(#)
-------------- -------------- -------------- ------------------------- ------- ------- ---------
Michael L. Campbell 1999 526,350 -- --
Chairman, President & Chief Executive Officer 1998 $ 402,000 $ 500,000 3,631,364
Chairman, President and Chief Executive
1997 241,500 671,941 190,000
Officer 1996 209,463 716,988 150,000
Gregory W. Dunn 1998 $ 252,000 $ 219,213 413,2551999 372,278 -- --
Executive Vice President and& Chief Operating 1998 252,000 219,213 413,255
Officer 1997 125,000 135,000 60,000
Officer 1996 115,358 130,000 52,500
Lewis Frazer III (2) 1998 $ 157,000 $Neal Rider(2) 1999 193,106 -- 470,484--
Executive Vice President & Chief Financial 1998 -- -- --
Officer 1997 120,000 120,000 60,000
Officer and Secretary 1996 108,413 124,950 45,000-- -- --
Denise Gurin 1999 210,000 40,000 --
Senior Vice President, Head Film Buyer 1998 43,700 108,763 164,251
1997 -- 10,000 139,500
R. Keith Thompson 1998 $ 145,000 $ 101,175 227,6571999 211,194 -- --
Senior Vice President, Real Estate and 1997 110,000 70,000 40,000& 1998 145,000 101,175 227,687
Development 1996 95,568 60,000 30,000
Robert J. Del Moro 1998 $ 102,000 $ 69,892 146,063
Senior Vice President, Purchasing 1997 83,500 42,500 180,997
1996 71,000 35,000 139,500
J.E. Henry 1998 $ 95,000 $ 55,646 148,343
Senior Vice President, Chief Information Officer 1997 82,000110,000 70,000 40,000 155,000
Management Information Systems 1996 74,000 32,000 139,500
Robert A. Engel (2) 1998 $ 77,885 $ 41,735 --
Senior Vice President Film and Advertising 1997 95,000 50,000 --
1996 85,540 55,000 30,000
- ------------------
(1) Reflects cash bonus earned in fiscal 1999, 1998 1997 and 1996,1997, respectively, and
paid the following fiscal year.
(2) As of October 1, 1998, Messrs. Frazer and Engel wereJanuary 2000, Mr. Rider was no longer employed by the Company.
57
61
The following table summarizes certain information regarding stockDuring the 1999 fiscal year, the Company did not grant options issued to the Named Executive Officers during fiscal 1998. No stock
appreciation rights ("SARs") have been granted by the Company.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS POTENTIAL REALIZABLE
UNDERLYING GRANTED TO VALUE AT ASSUMED
OPTIONS EMPLOYEES EXERCISE ANNUAL RATES OF STOCK
GRANTED IN FISCAL PRICE EXPIRATION APPRECIATION FOR
NAME (#)(1) 1998 ($/SHARE) DATE OPTION TERM (2)
-------------------------------
5%($) 10%($)
--------------- ---------------
Michael L. Campbell 2,536,023(3) 23.62 $5.00 5/27/08 $ 7,974,839 $ 20,209,807
1,095,341(4) 10.20 $5.00 5/27/08 3,443,888 8,727,488
Gregory W. Dunn 309,941(3) 2.89 $5.00 5/27/08 974,602 2,469,833
103,314(4) 0.96 $5.00 5/27/08 324,867 823,277
Lewis Frazer III (5) 352,863(3) 3.29 $5.00 5/27/08 -- --
117,621(4) 1.09 $5.00 5/27/08 -- --
R. Keith Thompson 170,743(3) 1.59 $5.00 5/27/08 536,896 1,360,600
56,914(4) 0.53 $5.00 5/27/08 178,965 453,533
Robert J. Del Moro 109,547(3) 1.02 $5.00 5/27/08 344,468 872,950
36,516(4) 0.34 $5.00 5/27/08 114,823 290,984
J.E. Henry 111,257(3) 1.04 $5.00 5/27/08 349,846 886,577
37,086(4) 0.34 $5.00 5/27/08 116,615 295,526
Robert A. Engel (5) -- -- -- -- -- --
- ------------
(1) All options were granted pursuant to the 1998 Stock Purchase and Option
Plan for Key Employees of Regal Cinemas, Inc. Reflects 6.2 to 1 stock split
effected on May 27, 1998 in connection with the Regal Merger.
(2) Potential realizable value is calculated from a base stock price of $5.00
per share, the exercise price of the options granted.
(3) Options vest in 20% increments annually beginning one year after the date
of grant.
(4) Options vest after nine years or earlier if EBIT performance goals are
achieved.
(5) As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
the Company and their respective options were canceled.
58named
executive officers.
49
6250
The following table summarizes certain information with respect to
stock options exercised by the Named Executive Officers pursuant to the
Company's Stock Option Plans.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL 19981999 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS HELD AT OPTIONS HELD AT
DECEMBER 31, 199830 1999 DECEMBER 31, 1998(1)30 1999 (1)
(#) ($)
---------------------------- ---------------------------------------------------------------------------------------------
SHARES NET
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ---------------- -------------------- ------------ ----------- ----------- ------------- -------------- ------------------------ -------------
Michael L. Campbell 2,720,926 (2) $6,850,522 (3) 1,911,801 3,631,364 $7,176,497 -0--- -- 2,759,119 2,784,046 7,176,497 --
Gregory W. Dunn 863,597 (2) 1,879,628 (3) 498,654 413,255-- -- 595,080 316,829 1,878,087 -0-
Lewis Frazer III (4) 1,457,887 (5) 4,277,473 (6)--
Neal Rider(2) -- -- -- -- -- --
Denise Gurin -- -- 177,825 125,926 124,155 --
R. Keith Thompson 471,629 (2) 1,035,046 (3) 272,769 227,657 1,034,649 -0-
Robert J. Del Moro 380,110 (2) 657,776 (3) 207,068 146,063 663,480 -0-
J.E. Henry 370,909 (2) 674,686 (3) 201,816 148,343 673,876 -0-
Robert A. Engel (4) 926,876 (2) $3,074,086 (3) -- -- --325,889 174,537 1,034,649 --
- ------------
(1) Reflects the market value of the underlying securitiessecurity at exercise, $5.00,
minus the average exercise price.
(2) These stock options were canceled in connection with the Regal Merger.
(3) Reflects cash payments of $5.00 per share minus the exercise price paid in
connection with the Regal Merger.
(4) As of October 1, 1998, Messrs. Frazer and Engel wereJanuary 2000, Mr. Rider was no longer employed by the Company.
(5) Of these shares, 1,457,887 were canceled in connection with the Regal
Merger and 470,484 were canceled as a result of Mr. Frazer's resignation.
(6) Of this amount, 2,138,908 reflects cash payments of $5.00 per share minus
the exercise price paid in connection with the Regal Merger and 2,138,565
reflects cash payments of $5.00 per share minus the exercise price paid in
connection with Mr. Frazer's resignation.
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 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. 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
59
63 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.
SETTLEMENT AGREEMENT
Under the terms of a Settlement Agreement and General Release between
the Company and Lewis Frazer III, the Company's former Executive Vice President,
Chief Financial Officer and Secretary, the Company paid to Mr. Frazer in a lump
sum $2,138,565. In consideration for this payment, Mr. Frazer's options were
canceled and his shares of Common Stock were purchased by the Company. In
addition, Mr. Frazer and the Company executed mutual releases and Mr. Frazer
agreed, subject to certain exceptions, not to disclose any confidential
information obtained by him while employed by the Company and not to compete
with the Company for a one-year period.50
51
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998,1999, the Compensation Committee was comprised of Messrs.
Levitt, Muse, Navab and Robbins.Navab. None of these persons has at any time been an officer
or employee of the Company or its subsidiaries. 60
64Mr. Clifton S. Robbins served on
the Compensation Committee until his resignation in December of 1999, when he
was replaced by Mr. Raether.
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, 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 Park Drive, Knoxville, Tennessee 37918.
Amount and
Name and Address of Nature of Beneficial Percent
Beneficial Owners Ownership(1)Ownership (1) of Class
- ---------------------------------------------------------- ------------------------------ ----------------------------------- ------------- --------
5% STOCKHOLDERS:
Hicks Muse Parties (2) 100,000,000 46.3%46.1%
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 46.3%46.1%
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 -- *
Thomas O. Hicks --- *
Henry R. Kravis --- *
Michael J. Levitt --- *
John R. Muse --- *
Alexander Navab, Jr. --- *
Clifton S. Robbins -- *
George R. Roberts --Paul E. Raether - *
Michael L. Campbell 2,368,3504,062,987 1.1%
Gregory W. Dunn 498,654691,506 *
Robert J. Del Moro --Neal Rider - *
J.E. Henry -- *
Lewis Frazer III -- *
Robert A. Engel, Jr. --Denise Gurin 246,150 *
R. Keith Thompson 272,769379,009 *
*
All directors and executive officers as a group 3,227,620 1.5%6,256,155 2.9%
(15 persons)
- ------------------------
*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 29, 199930, 2000 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")(Regal
Partners), a limited partnership whose sole general partner is TOH/Ranger,
LLC ("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
51
52
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.
61
65
(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, Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts and RobbinsRaether 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 "DLJDLJ
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.
62
66
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.
6352
6753
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. are included in Part II, Item 8.
Independent Auditors' Report
Report of Independent Auditors
Report of Coopers & Lybrand L.L.P., Independent
Accountants
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at January 1, 1998December 30, 1999 and
December 31, 1998.
Consolidated Statements of Operations for the years
ended January 2, 1997,December 30, 1999, December 31, 1998 and
January 1, 1998 and
December 31, 1998.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended January 2, 1997,December 30, 1999,
December 31, 1998 and January 1, 1998 and December 31, 1998.
Consolidated Statements of Cash Flows for the years
ended January 2, 1997,December 30, 1999, December 31, 1998 and
January 1, 1998 and
December 31, 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 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)
4.4 -- Form of Regal Cinemas, Inc. 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).
(6)
4.6 -- Form of Regal Cinemas, Inc. 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)
64
68
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.*
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)
10.5 -- 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.*
23.3 -- Consent of Ernst & Young 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.
(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.
(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.
65
69
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 31, 1999 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 31, 1999
Michael L. Campbell President, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ D. Mark Monroe Senior Vice President, Acting March 31, 1999
D. Mark Monroe Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
/s/ David Deniger Director March 31, 1999
David Deniger
/s/ Thomas O. Hicks Director March 31, 1999
Thomas O. Hicks
/s/ Henry R. Kravis Director March 31, 1999
Henry R. Kravis
/s/ Michael J. Levitt Director March 31, 1999
Michael J. Levitt
/s/ John R. Muse Director March 31, 1999
John R. Muse
/s/ Alexander Navab, Jr. Director March 31, 1999
Alexander Navab, Jr.
/s/ Clifton S. Robbins Director March 31, 1999
Clifton S. Robbins
/s/ George R. Roberts Director March 31, 1999
George R. Roberts
66
70
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 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.
67
71
INDEX TO 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 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)
4.4 -- Form of Regal Cinemas, Inc. 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). (6)
4.6 -- Form of Regal Cinemas, Inc. 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)
53
54
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. *
10.5 -- 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)
68
72
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.*
23.3 -- Consent of Ernst & Young 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.
(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.
69(9) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
(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.
54
55
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, 2000 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
----------------------- President, Chief Executive
Michael L. Campbell Officer and Director (Principal
Executive Officer)
/s/ Amy Miles Senior Vice President, Chief March 29, 2000
------------- Financial Officer and Treasurer
Amy Miles (Principal Financial and
Accounting Officer)
/s/ Joseph Y. Bae Director March 29, 2000
------------------
Joseph Y. Bae
/s/ 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
-------------------
Henry R. Kravis
/s/ Michael J. Levitt Director March 29, 2000
---------------------
Michael J. Levitt
Director March 29, 2000
----------------
John R. Muse
/s/ Alexander Navab, Jr. Director March 29, 2000
------------------------
Alexander Navab, Jr.
/s/ Paul E. Raether Director March 29, 2000
-------------------
Paul E. Raether
55
56
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
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.
56