-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gyc5ZV533peHpk6tVJ882qpLhRnLGohQHgDarrd/kZY0TvMUHDon0du9Yaub0274 fi32SH7fYunbYzZsa+7fUA== 0000950144-01-004162.txt : 20010330 0000950144-01-004162.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950144-01-004162 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001228 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGAL CINEMAS INC CENTRAL INDEX KEY: 0000905035 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE THEATERS [7830] IRS NUMBER: 621412720 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-64399 FILM NUMBER: 1582889 BUSINESS ADDRESS: STREET 1: 7132 COMMERCIAL PARK DR CITY: KNOXVILLE STATE: TN ZIP: 37918 BUSINESS PHONE: 4239221123 MAIL ADDRESS: STREET 1: 7132 COMMERCIAL PARK DR CITY: KNOXVILLE STATE: TN ZIP: 37918 10-K 1 g68010e10-k.txt REGAL CINEMAS, INC. 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 28, 2000 Commission file number 333-52943 REGAL CINEMAS, INC. (Exact name of registrant as specified in its charter) Tennessee 62-1412720 (STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NUMBER) OF INCORPORATION OR ORGANIZATION) 7132 Mike Campbell Drive Knoxville, Tennessee 37918 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (865) 922-1123 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Shares of common stock, no par value per share, outstanding on March 28, 2001 were 216,282,348. 2 TABLE OF CONTENTS
PART I Item 1. Business The Company 2 Recapitalization and Financing 3 Business Strategy 5 Industry Overview 6 Theatre Operations 7 Seasonality 9 Film Distribution 9 Film Licensing 10 Competition 11 Management Information Systems 12 Employees 12 Regulation 12 Risk Factors 13 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security-Holders 15 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters 16 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Overview 17 The Company and the Industry 17 Results of Operations 19 Fiscal Years Ended December 28, 2000 and December 30, 1999 20 Fiscal Years Ended December 30, 1999 and December 31, 1998 21 Impairment and Other Disposal Charges 22 Liquidity and Capital Resources 23 Inflation; Economic Downturn 25 New Accounting Pronouncements 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8. Financial Statements and Supplemental Data 28 Independent Auditors' Report 29 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures 51 PART III Item 10. Directors and Executive Officers of the Registrant 51 Composition of the Board of Directors 54 Item 11. Executive Compensation 54 Directors' Compensation 55 Employment Agreements 56 Compensation Committee Interlocks and Insider Participation 56 Item 12. Security Ownership of Certain Beneficial Owners and Managements 57 Item 13. Certain Relationships and Related Transactions 58 PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 59
1 3 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 28, 2000, the Company operated 391 theatres, with an aggregate of 4,328 screens in 32 states. Since its inception in November 1989, the Company has achieved growth in revenues and net income before interest expense, income taxes, depreciation and amortization, other income or expense, extraordinary items, non-recurring charges, impairment charges, and other theatre closing costs including loss on disposal of operating assets ("EBITDA"). As a result of the Company's focus on enhancing revenues, operating efficiently and strictly controlling costs, the Company has achieved what management believes are among the highest EBITDA margins in the domestic motion picture exhibition industry. The Company operates primarily multiplex theatres and has an average of 11.1 screens per location, which management believes is among the highest in the industry and which compares favorably to an average of approximately 8.6 screens per location for the five largest North American motion picture exhibitors at June 1, 2000. The Company develops, acquires and operates multiplex theatres primarily in mid-sized metropolitan markets and suburban growth areas of larger metropolitan markets, predominantly in the eastern and northwestern United States. The Company seeks to locate each theatre where it will be the sole or leading exhibitor within a particular geographic film licensing zone. Management believes that at December 28, 2000, approximately 85% of the Company's screens were located in film licensing zones in which the Company was the sole exhibitor. The Company has historically upgraded its theatre circuit by opening new theatres, adding new screens to existing theatres and selectively closing or disposing of under-performing theatres. The Company has also grown by acquiring eleven theatre circuits during the last seven years. From its inception through December 28, 2000, the Company has grown by acquiring 233 theatres with 1,905 screens (net of subsequently closed locations), developing 158 new theatres with 2,255 screens and adding 168 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 44.3% of its circuit having been built since 1997. Approximately 44.0% of the Company's screens are in theatres with 15 or more screens. As a whole, the film exhibition industry is in a period of transition. Over the past several years, film exhibition companies, including the Company, embarked on aggressive programs of rapidly building state of the art theatre complexes (complete with amenities such as stadium seating and digital stereo surround-sound) in an effort to increase overall industry attendance. However, these aggressive new building strategies generated significant competition in once stable markets and rendered many theatres obsolete more rapidly than anticipated. This effect, together with the fact that many of the now obsolete theatres are leased under long-term commitments, produced an oversupply of screens throughout the exhibition industry at a rate much quicker than the industry could effectively handle. The industry overcapacity coupled with 2 4 declining national box office attendance during 2000 severely impacted the operating results of the Company and many of its competitors. The exhibition industry continues to report severe liquidity concerns, defaults under credit facilities, renegotiations of financial covenants, as well as many recently announced bankruptcy filings. These industry dynamics have severely affected the Company, which has experienced deteriorating operating results over the last fiscal year. Additionally, because the Company has funded its expansion efforts over the past several years primarily from borrowings under its credit facilities, the Company's leverage has grown significantly over this time. Consequently, since the fourth quarter of 2000, the Company has been in default of certain financial covenants contained in its Senior Credit Facilities and its Equipment Financing (as these terms are defined below). As a result of the default, the administrative agent under the Company's Senior Credit Facilities delivered payment blockage notices to the Company and the indenture trustee of its 9-1/2% Senior Subordinated Notes due 2008 (the "Regal Notes") and its 8-7/8% Senior Subordinated Debentures due 2010 (the "Regal Debentures") prohibiting the payment by Regal of the semi-annual interest payments of approximately $28.5 million and $8.9 million due to the holders of the notes on December 1, 2000 and December 15, 2000, respectively. As a result of the interest payment defaults, the Company is also in default of the indentures related to the Regal Notes and Regal Debentures Accordingly, the holders of the Company's Senior Credit Facilities and the indenture trustee for the Regal Notes and Regal Debentures have the right to accelerate the maturity of all of the outstanding indebtedness under the respective agreements, which together totals approximately $1.82 billion. The Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. The Company has engaged financial advisers and is currently evaluating a longer-term financial plan to address various restructuring alternatives and liquidity requirements. The financial plan will provide for the closure of under-performing theatre sites, potential sales of non-strategic assets and a potential restructuring, recapitalization or a bankruptcy reorganization of the Company. 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"), with the Company continuing as the surviving corporation. The consummation of the Regal Merger resulted in a recapitalization (the "Recapitalization") of the Company. In the Recapitalization, existing holders of the Company's common stock (the "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") 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/Warrant 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 Regal 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 3 5 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 $1,005.0 million in the aggregate, consisting of $500.0 million under a revolving credit facility (the "Revolving Credit Facility") and $505.0 million, in the aggregate, under three separate term loan facilities. As of December 28, 2000, the Company had fully drawn all available funds under the Senior Credit Facilities. On August 26, 1998, the Company acquired Act III Cinemas, Inc. ("Act III"), then the ninth largest motion picture exhibitor in the United States based on number of screens in operation (the "Act III Merger"). At the time of the Act III Merger, Act III operated 130 theatres, with an aggregate of 835 screens, strategically located in concentrated areas throughout the Pacific Northwest, Texas and Nevada. On August 26, 1998, in connection with the Act III Merger, the Company amended its Senior Credit Facilities and borrowed $383.3 million thereunder to repay Act III's then existing bank borrowings and two senior subordinated promissory notes, each in the aggregate principal amount of $75.0 million, which were owned by KKR and Hicks Muse. The repayment of Act III's bank borrowings and promissory notes, together with the Act III Merger, are referred to herein as the "Act III Combination." On November 10, 1998, the Company issued an additional $200.0 million aggregate principal amount of Regal Notes under the same indenture governing the first series of Regal Notes. The proceeds of this offering of the Regal Notes were used to repay and retire portions of the Senior Credit Facilities. On December 16, 1998, the Company issued $200.0 million aggregate principal amount of Regal Debentures. The proceeds of the offering of the Regal Debentures (the "Debenture Offering") were used to repay all of the then outstanding indebtedness under the Revolving Credit Facility and the excess was used for working capital purposes. The Company currently is in default of certain financial covenants contained in the Senior Credit Facilities and its $19.5 million equipment financing agreement ("Equipment Financing") . Additionally, the Company is in default of the indentures related to the Regal Notes and the Regal Debentures. The Company reclassified all debt outstanding under the Credit Facilities, the Equipment Financing, the Regal Notes and the Regal Debentures from long-term debt to current debt on the Company's financial statements because of non-compliance with the related agreements. See Note 7 of the Notes to Consolidated Financial Statements. 4 6 BUSINESS STRATEGY Operating Strategy Management believes that the following are the key elements of the Company's operating strategy: New Multiplex Theatres: Management believes that the Company's multiplex theatres promote increased attendance per location and maximize operating efficiencies through reduced labor costs and improved utilization of theatre capacity. The Company's multiplex theatres enable it to offer a diverse selection of films, stagger movie starting times, increase 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 its base of multiplex theatres allows it to achieve an optimal relationship between the number of screens (generally 14 to 18) and the size of the auditoriums (100 to 500 seats). The Company's multiplex theatres are designed to increase the profitability of the theatres by maximizing the revenue per square foot generated by the facility and reducing the cost per square foot of constructing and operating the theatres. Asset Base: The Company maintains one of the most modern circuits in the industry with 44.3% of its circuit having been built since 1997. Management believes that the modern asset base provides the Company with a competitive advantage as consumers continue to choose 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 closed 328 screens in 54 theatres during the 2000 fiscal year. Management believes the acceleration of screen closures will mitigate the erosion of its older theatres, increase cash flow by eliminating negative cash flow sites and increase traffic at newer sites by redirecting patrons to these sites. The Company has developed specific action plans to aggressively bring under-performing theatres off-line including selling fee properties and working with existing landlords to terminate certain leases. The Company's restructuring plan includes the closure of an additional 900 to 1,000 screens in the 2001 fiscal year. Cost Control: The Company's cost control programs have resulted in EBITDA margins, which management believes are among the highest in the motion picture exhibition industry. 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 2001. The Company believes that in addition to the items mentioned, there are opportunities with the Internet for additional ticket sales/advertising revenues. Patron Satisfaction/Quality Control: 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 5 7 systems. As of December 28, 2000, approximately 50.1% of the Company's theatres were equipped with digital surround-sound systems. Stadium seating (seating with an elevation between rows to provide unobstructed viewing as well as other amenities to enhance the movie-going experience) has been shown to be preferred by movie patrons. Presently, the Company has 51.8% of its screens with stadium seating. The Company believes that all of these features serve to enhance its patrons' movie-going experience and help build patron loyalty. In addition, the Company promotes patron loyalty through specialized marketing programs for its theatres and feature films. To maintain quality and consistency within the Company's theatres, the Company conducts regular inspections of each theatre and operates a mystery shopper program. Integration of Acquisitions: The Company has acquired 11 theatre circuits during the last seven years. Management believes that acquisitions provide the opportunity for the Company to increase revenue growth while realizing operating efficiencies through the integration of operations. In this regard, the Company believes it has achieved cost savings through the consolidation of its purchasing function, the centralization of certain other operating functions and the uniform application of the most successful cost control strategies of the Company and its acquisition targets. Centralized Corporate Decision Making/Decentralized Operation: The Company centralizes many of its functions through its corporate office, including film licensing, concessions purchasing, marketing and real estate. The Company also devotes significant resources to training its theatre managers. These managers are responsible for most aspects of a theatre's day-to-day operations and implement cost controls at the theatre level, including the close monitoring of payroll, concession and other theatre level expenses. 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 aligns the employees' interests with those of the Company's shareholders. INDUSTRY OVERVIEW The domestic motion picture exhibition industry is currently comprised of approximately 480 exhibitors (in the U.S. and Canada), 159 of which operate ten or more total screens. Based on the June 1, 2000 listing of exhibitors in the National Association of Theatre Owners 1999-2000 Encyclopedia of Exhibition, the five largest exhibitors (based on the number of screens) operated approximately 43.2% of the total screens in operation, with Regal operating 12.9% of the total screens. From 1989 through 1999, the number of screens in operation in the United States increased from approximately 23,000 to approximately 37,000, and admissions revenues increased from approximately $5.0 billion to approximately $7.5 billion. The motion picture exhibition industry has continued to grow despite the emergence of competing film distribution channels. 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 increases in box office ticket prices. In an effort to realize greater operating efficiencies, operators of multi-theatre circuits have emphasized the development of larger megaplex complexes. Typically, multiplexes have six or more screens per theatre, although in some instances megaplexes may have as many as 30 screens in a single theatre. The megaplex 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. 6 8 Megaplexes have varying seating capacities (typically from 100 to 500 seats) that allow for multiple show times of the same film and a variety of films with differing audience appeal to be shown, and provide the flexibility to shift films to larger or smaller auditoriums depending on their popularity. To limit crowd congestion and maximize the efficiency of floor and concession staff, the starting times of films at multiplexes are staggered. However, for all of the benefits of operating megaplex theatres, the industry-wide strategy of aggressively building megaplexes greatly increased the construction cost per screen of building new theatres, generated significant competition in once stable markets and rendered many theatres obsolete more rapidly than anticipated. This effect, together with the fact that many of these now obsolete theatres are leased under long-term commitments, produced an oversupply of screens throughout the exhibition industry at a rate much quicker than the industry could effectively handle. The industry overcapacity coupled with declines in national box office attendance during 2000 severely impacted the operating results of the Company and many of its competitors. Additionally, because the Company's expansion efforts over the past several years have been funded primarily from borrowings under its Senior Credit Facilities, the Company's leverage has grown significantly over this time period. As a result, the Company is currently in default of its Senior Credit Facilities, Equipment Financing, Regal Notes and Regal Debentures. Each of these lenders has the right to accelerate the maturity of all outstanding indebtedness under its respective agreements, which totals approximately $1.82 billion. The Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. THEATRE OPERATIONS The Company is the largest motion picture exhibitor in the United States based upon the number of screens in operation. The Company develops, acquires and operates primarily multiplex theatres in mid-size metropolitan markets and suburban growth areas of larger metropolitan markets predominately in the eastern and northwestern United States. Multiplex theatres enable the Company to offer a wide selection of films attractive to a diverse group of patrons residing within the drawing area of a particular theatre complex. Varied auditorium seating capacities within the same theatre enable the Company to exhibit films on a more cost effective basis for a longer period of time by shifting films to smaller auditoriums to meet changing attendance levels. In addition, operating efficiencies are realized through the economies of having common box office, concession, projection, lobby and rest room facilities, which enable the Company to spread certain costs, such as payroll, advertising and rent, over a higher revenue base. Staggered movie starting times also reduce staffing requirements and lobby congestion and contribute to more desirable parking and traffic flow patterns. The Company has designed prototype theatres, adaptable to a variety of locations, which management believes result in construction and operating cost savings. The Company's multiplex theatre complexes, which typically contain auditoriums ranging from 100 to 500 seats each, feature wall-to-wall screens, digital stereo surround-sound, multi-station concessions, computerized ticketing systems, plush stadium seating with cup holders and retractable arm rests, neon-enhanced interiors and exteriors and video game areas adjacent to the theatre lobby. The Company's 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 7 9 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 revenues through daily reports generated from computerized box office terminals located in each theatre. These reports permit the Company to maintain an accurate and immediate count of admissions by film title and show times and provide management with the information necessary to effectively and efficiently manage the Company's theatre operations. Additionally, daily payroll data is input at in-theatre terminals which allows the regular monitoring of payroll expenses. In addition, the Company has a quality assurance program to maintain clean, comfortable and modern facilities. Management believes that operating a theatre circuit consisting primarily of modern multiplex theatres also enhances the Company's ability to license commercially successful films from distributors. To maintain quality and consistency within the Company's theatre circuit, the district managers regularly inspect each theatre and the Company operates a mystery shopper program, which involves unannounced visits by unidentified customers who report on the quality of service, film presentation and cleanliness at individual theatres. The Company has an incentive compensation program for theatre level management, which rewards managers for controlling theatre level operating expenses while complying with the Company's operating standards. In addition to revenues from box office admissions, the Company receives revenues from concession sales and, to a lesser extent, video games located adjacent to the theatre lobby. Concession sales constituted 27.4% of total revenues for fiscal 2000. The Company emphasizes prominent and appealing concession stations designed for rapid and efficient service. Although popcorn, candy and soft drinks remain the best selling concession items, the Company's theatres offer a wide range of concession choices. The Company continually seeks to increase concession sales through optimizing product mix, introducing special promotions from time to time and training employees to cross sell products. In addition to traditional concession stations, select existing theatres 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 newspaper and radio advertising, television commercials in certain markets and certain promotional activities which frequently generate media coverage. The Company also utilizes special marketing programs for specific films and concession items. The Company seeks to develop patron loyalty through a number of marketing programs such as free summer children's film series, cross-promotion ticket redemptions and promotions within local communities. As of December 28, 2000, the Company operated 28 theatres with an aggregate of 158 screens, which exhibit second-run movies and charge lower admission prices (typically $1.00 to 8 10 $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 first-run theatres. SEASONALITY The Company's revenues are usually seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, the most marketable motion pictures are released during the summer and the Thanksgiving through year-end holiday season. The unexpected emergence of a hit film during other periods can alter the traditional trend. The timing of movie releases can have a significant effect on the Company's results of operations, and the results of one quarter are not necessarily indicative of results for the next quarter. The seasonality of motion picture exhibition, however, has become less pronounced in recent years as studios have begun to release major motion pictures somewhat more evenly throughout the year. FILM DISTRIBUTION Motion pictures are generally made available through various distribution methods at various dates after the theatrical release date. The release dates of motion pictures in these other distribution windows begin four to six months after the theatrical release date with pay-per-view services, followed generally video rentals and by off-air or cable television programming including pay television, other basic cable and broadcast network syndicated programming. These distribution windows have given producers the ability to generate a greater portion of a film's revenues through channels other than theatrical release. This increased revenue potential after a film's initial domestic release has enabled major studios and certain independent producers to increase film production and theatrical advertising. The additional non-theatrical revenue has also permitted producers to incur higher individual film production and marketing costs. The total cost of producing a picture averaged approximately $51.5 million in 1999 compared with approximately $23.5 million in 1989, while the average cost to advertise and promote a picture averaged approximately $24.5 million in 1999 as compared with $9.2 million in 1989. These higher costs have further enhanced the importance of a large theatrical release. Distributors strive for a successful opening run at the theatre to establish a film and substantiate the film's revenue potential both internationally and through other distribution windows. The value of home video and pay cable distribution agreements frequently depends on the success of a film's theatrical release. Furthermore, the studios' revenue-sharing percentage and ability to control whom views the product within each of the distribution windows generally declines as one moves farther from the theatrical release window. As theatrical distribution remains the cornerstone of a film's financial success, it is the primary distribution window for the public's evaluation of films and motion picture promotion. Management expects that the overall supply of films will remain constant during the 2001 fiscal year, although there can be no assurance that this will occur. There has been an increase in the number of distributors and reissues of films as well as an increase in films made by independent producers. From January 1995 through December 1999, the number of large budget films and the level of marketing support provided by the production companies has 9 11 increased, as evidenced by the increase in average production costs and average advertising costs per film of approximately 50.1% and 39.1%, respectively. FILM LICENSING The Company licenses films from distributors on a film-by-film and theatre-by-theatre basis. The Company negotiates directly with film distributors. Prior to negotiating for a film license, the Company evaluates the prospects for upcoming films. Criteria considered for each film include cast, director, plot, performance of similar films, estimated film rental costs and expected Motion Picture Association of America rating. Successful licensing depends greatly upon the exhibitor's knowledge of trends and historical film preferences of the residents in markets served by each theatre, as well as on the availability of commercially successful motion pictures. Films are licensed from film distributors owned by major film production companies and from independent film distributors that generally distribute films for smaller production companies. Film distributors typically establish geographic film licensing zones and allocate each available film to one theatre within that zone. Film zones generally encompass a radius of three to five miles in metropolitan and suburban markets, depending primarily upon population density. As of December 28, 2000, the Company believes that approximately 85% of its screens were located in film licensing zones in which such theatres were the sole exhibitors, permitting the Company to exhibit many of the most commercially successful films in these zones. In film zones where the Company is the sole exhibitor, the Company obtains film licenses by selecting a film from among those offered and negotiating directly with the distributor. In film zones where there is competition, a distributor will either require the exhibitors in the zone to bid for a film or will allocate its films among the exhibitors in the zone. When films are licensed under the allocation process, a distributor will select an exhibitor, who then negotiates film rental terms directly with the distributor. Over the past several years, distributors have generally used the allocation rather than bidding process to license their films. When films are licensed through a bidding process, exhibitors compete for licenses based upon economic terms. The Company currently does not bid for films in any of its markets, although it may be required to do so in the future. Although the Company predominantly licenses first-run films, if a film has substantial remaining potential following its first-run, the Company may license it for a second-run. Film distributors establish second-run availability on a national or market-by-market basis after the release from first-run theatres. Film licenses entered into in either a negotiated or bidding process typically specify rental fees based on the higher of a gross receipts formula or a theatre admissions revenue formula. Under a gross receipts formula, the distributor receives a specified percentage of box office receipts, with the percentage declining over the term of the film run. First-run film rental fees may begin at up to 70% of admission revenues and gradually decline to as low as 30% over a period of four weeks or more. Second-run film rental fees typically begin at 35% of admission revenues and often decline to 30% after the first week. Under a theatre admissions revenue formula, the distributor receives a specified percentage of the excess of admission revenues over a negotiated allowance for theatre expenses. 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 10 12 taken into account in the settlement process. To date, the settlement process has not resulted in material adjustments in the film rental fees accrued by the Company. The Company's business is dependent upon the availability of marketable motion pictures, its relationships with distributors and its ability to obtain commercially successful films. Many distributors provide quality first-run movies to the motion picture exhibition industry; however, according to industry reports, 10 distributors accounted for approximately 92% of industry admission revenues during 1999, and 49 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 2000 no single distributor accounted for more than 12% of the films licensed by the Company. COMPETITION The motion picture exhibition industry is fragmented and highly competitive, particularly in film licensing, attracting patrons and finding new theatre sites. Theatres operated by national and regional circuits and by smaller independent exhibitors compete with the Company's theatres. The motion picture industry has rapidly expanded the number of U.S. screens over the past several years as theatre companies have upgraded their theatre circuits. The industry growth has resulted in declines in margins and returns on invested capital as older theatres suffer due to increased competition from newer multiplexes. The Company believes that the rate of industry screen growth is slowing as many of the exhibitors are curtailing expansion plans for the 2001 fiscal year. Management believes that as competitive building declines and as older screens are aggressively closed the competitive framework improves for the Company and other exhibitors with modern circuits. The Company believes that the competitive factors in the motion picture exhibition industry include: licensing terms; the seating capacity, location and reputation of an exhibitor's theatres; the quality of projection and sound equipment at the theatres; and the exhibitor's ability and willingness to promote the films. However, in those areas where real estate is readily available, there are few barriers preventing competing companies from opening theatres near one of the Company's existing theatres, which may have a material adverse effect on the Company's theatre. In addition, competitors have built or are planning to build theatres in certain areas in which the Company operates, which may result in excess capacity in such areas and adversely affect attendance at the Company's theatres in such areas. In addition, alternative motion picture exhibition delivery systems, including cable television, video disks and cassettes, satellite and pay-per-view services exist for the exhibition of filmed entertainment in periods after the theatrical release. The expansion of such delivery systems (such as video on demand) could have a material adverse effect upon the Company's business and results of operations. The Company also competes for the public's leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants. 11 13 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 provide 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 comparison of actual to budgeted labor for each theatre. The Company's systems allow it to properly schedule and manage its hourly workforce. A help desk is also available to monitor and resolve any processing problems that might arise in the theatres. EMPLOYEES As of December 28, 2000, the Company employed 15,159 persons. Of the Company's employees, 305 were corporate personnel, 1,830 were theatre management personnel and the remainder hourly theatre personnel. Film projectionists at nine of the Company's theatres in the Seattle, Washington; Las Vegas, Nevada; Nashville, Tennessee; and Cleveland and Youngstown, Ohio markets are represented by the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada ("IATSE"). Certain other employees of the Company in the State of Washington are also represented by the IATSE. The Company's collective bargaining agreements with the IATSE expire over various periods through March 3, 2002. The Company's expansion into new markets may increase the number of employees represented by unions. The Company considers its employee relations to be good. REGULATION The distribution of motion pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. The Company has never been a party to any of such cases, but the manner in which it can license films is subject to consent decrees resulting from these cases. Consent decrees bind certain major film distributors and require the films of such distributors to be offered and licensed to exhibitors, including the Company, on a theatre-by-theatre basis. Consequently, exhibitors cannot assure themselves of a supply of films by entering long-term arrangements with major distributors, but must negotiate for licenses on a film-by-film and theatre-by-theatre basis. The Company's theatres must comply with Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. 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 12 14 licensing. At December 28, 2000, approximately 7.7% of the Company's employees were paid at the federal minimum wage and, accordingly, the minimum wage largely determines the Company's labor costs for those employees. RISK FACTORS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K, including, without limitation, certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in the following risk factors (the "Cautionary Statements"). All forward-looking statements are expressly qualified in their entirety by the Cautionary Statements. Continuation Under our Current Capital Structure As disclosed in "Recapitalization and Financing," the Company is currently in default of its Senior Credit Facilities, Equipment Financing , Regal Notes and Regal Debentures. Each of these lenders has the right to acclerate the maturity of all outstanding indebtedness under its respective agreements, which totals $1.82 billion. Currently, the Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. The Company has engaged financial advisers and is currently evaluating a long-term financial plan to address various restructuring alternatives. The financial plan will provide for the closure of under-performing theatres, potential sales of non-strategic assets and a potential restructuring, recapitalization or a bankruptcy reorganization of the Company. Because of the potential restructuring alternatives, doubt exists about the Company's ability to continue operating under its existing capital structure. In addition, the uncertainty regarding the eventual outcome of the Company's restructuring, and the effect of other unknown adverse factors, could threaten the Company's existence as a going concern. Continuing on a going concern basis is dependent upon, among other things, the success of the Company's financial plan, continuing to license popular motion pictures, maintaining the support of key vendors and key landlords, retaining key personnel and the continued slowing of construction within the theatre exhibition industry along with financial, business, and other factors, many of which are beyond the Company's control. We Depend on Motion Picture Production and Performance and on Our Relationship with Film Distributors The Company's ability to operate successfully depends upon a number of factors, the most important of which are the availability and appeal of motion pictures, our ability to license motion pictures and the performance of such motion pictures in our markets. We mostly license first-run motion pictures. Poor performance of, or any disruption in the production of or our access to, these motion pictures could hurt our business and results of operations. Because film distributors usually release films that they anticipate will be the most successful during the summer and 13 15 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 ten major film distributors could affect our ability to get commercially successful films and, therefore, could hurt our business and results of operations. See "Business - Film Licensing." In addition, in times of recession, attendance levels experienced by motion picture exhibitors may be adversely effected. For example, revenues declined for the industry in 1990 and 1991. We Operate in a Competitive Environment The motion picture exhibition industry is very competitive. Theatres operated by national and regional circuits and by smaller independent exhibitors compete with our theatres. Many of our competitors have been around longer than we have and may be better established in some of our existing and future markets. In areas where real estate is readily available, competing companies are able to open theatres near one of ours, which may severely affect our theatre. Competitors have also built or are planning to build theatres in certain areas in which we operate, which may result in excess capacity in such areas and hurt attendance 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 2001 fiscal year. If the overbuilding does not subside, the Company remains at risk for increased erosion of its theatre base. In addition, there are many other ways to view movies once the movies leave the theatre, including cable television, video disks and cassettes, satellite and pay-per-view services. Creating new ways to watch movies (such as video on demand) could hurt our business and results of operations. We also compete for the public's leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants. See "Business - 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 which expire in May 2001. We only maintain key-man life insurance for Mr. Campbell. If we lost the services of Mr. Campbell it could hurt our business. See "Item 11. Executive Compensation-Employment Agreements." Our Quarterly Results of Operations Fluctuate Our revenues are usually seasonal because of the way the major film distributors release films. Generally, the most marketable movies are released during the summer and the Thanksgiving through year-end holiday season. An unexpected hit film during other periods can 14 16 alter the traditional trend. The timing of movie releases can have a significant effect on our results of operations, and our results one quarter are not necessarily the same as results for the next quarter. The seasonality of our business, however, has lessened as studios have begun to release major motion pictures somewhat more evenly throughout the year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Hicks Muse and KKR Effectively Control the Company Each of Hicks Muse and KKR currently owns approximately 46.2% of the Company. Therefore, if they vote together, Hicks Muse and KKR have the power to elect a majority of the directors of the Company and exercise control over our business, policies and affairs. We have a stockholders agreement with KKR and Hicks Muse that requires us to obtain the approval of the board designees of each of Hicks Muse and KKR before the Board of Directors may act. The stockholders agreement, however, does not contain any "deadlock" resolution mechanisms. ITEM 2. PROPERTIES As of December 28, 2000, the Company operated 266 of its 391 theatres pursuant to lease agreements, owned the land and buildings for 62 theatres and operated 63 locations pursuant to ground leases. Of the 391 theatres operated by the Company as of December 28, 2000, 233 were acquired as existing theatres and 158 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 based on a percentage of revenues above specified amounts. A significant majority of the leases are net leases, which require the Company to pay the cost of insurance, taxes and a portion of the lessor's operating costs. The Company's corporate office is located in approximately 96,450 square feet of space in Knoxville, Tennessee, which the Company acquired in 1994. The Company believes that these facilities are adequate for its operations. ITEM 3. LEGAL PROCEEDINGS The Company is presently involved in various legal proceedings arising in the ordinary course of its business operations, including personal injury claims, employment matters and contractual disputes . During fiscal 2000, the Company also became a defendant in a number of claims arising from its decision to close theatre locations or to cease construction of theatres on sites for which the Company purportedly had a contractual obligation to lease such property. The Company believes it has adequately provided for the settlement of such contractual disputes. Management believes any additional liability with respect to the above proceedings will not be material in the aggregate to the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of the shareholders during the fourth quarter ended December 28, 2000. 15 17 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 28, 2001, there were approximately 126 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. The Company is restricted from the payment of cash dividends under its Senior Credit Facilities and the indentures governing its senior subordinated debt. ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below as of and for each of the five fiscal years in the period ended December 28, 2000 was derived from the audited consolidated financial statements of the Company. The consolidated financial statements for each of the three fiscal years and the periods ended December 28, 2000, which have been audited by independent auditors, are included elsewhere in this report. The selected 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 the related notes thereto included elsewhere herein: CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(IN MILLIONS, EXCEPT FOR PERCENTAGES, RATIOS, DECEMBER 28, DECEMBER 30 DECEMBER 31 JANUARY 1 JANUARY 2 AND OPERATING DATA) 2000 1999 1998 1998 1997 ----------- ----------- ----------- ----------- ----------- Revenue: Admissions $ 767.1 $ 690.5 $ 462.8 $ 325.1 $ 266.0 Concessions 310.2 285.7 202.4 137.2 110.2 Other operating revenues 53.4 60.9 41.8 21.3 14.9 ----------- ----------- ----------- ----------- ----------- Total revenues 1,130.7 1,037.1 707.0 483.6 391.1 Operating expenses: Film rental and advertising costs 421.6 384.9 251.3 178.2 145.2 Cost of concessions and other 49.0 44.3 31.7 21.1 17.1 Theatre operating expenses 446.4 377.7 241.7 156.5 127.7 General and administrative expenses 37.6 32.1 20.4 16.6 16.6 ----------- ----------- ----------- ----------- ----------- Total costs and expenses 954.6 839.0 545.1 372.4 306.6 ----------- ----------- ----------- ----------- ----------- Sub-total 176.1 198.1 161.9 111.2 84.5 ----------- ----------- ----------- ----------- ----------- Depreciation and amortization 95.7 80.8 52.4 30.5 24.7 Merger expenses -- -- -- 7.8 1.6 Recapitalization expenses -- -- 65.7 -- -- Theatre closing costs (1) 55.8 4.3 -- -- -- Loss on disposal of operating assets (2) 20.9 16.8 0.9 -- -- Loss on impairment of assets (3) 113.7 98.6 67.9 5.0 -- ----------- ----------- ----------- ----------- ----------- Operating income (loss) (110.0) (2.4) (25.0) 67.9 58.2 ----------- ----------- ----------- ----------- ----------- Other (income) expense: Interest expense 178.5 132.2 59.3 14.0 12.8 Interest income (2.8) (0.7) (1.5) (0.8) (0.6) Other 0.0 0.0 1.0 0.4 (0.7) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item (285.7) (133.9) (83.8) 54.3 46.7 Benefit from (provision for) income taxes (80.8) 45.4 22.2 (19.1) (20.8) ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary item (366.5) (88.5) (61.6) 35.2 25.9 Extraordinary item: Loss on extinguishment of debt, net of applicable Taxes 0.0 0.0 11.9 10.0 0.8 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (366.5) $ (88.5) $ (73.5) $ 25.2 $ 25.1 =========== =========== =========== =========== =========== OPERATING AND OTHER FINANCIAL DATA (4): Cash flow provided (used) by operating activities $ (3.6) $ 92.7 $ 45.1 $ 64.0 $ 67.5 Cash flow used in investing activities $ 62.3 $ 435.9 $ 296.2 $ 202.3 $ 131.1 Cash flow provided by financing activities $ 144.2 $ 363.2 $ 253.4 $ 139.6 $ 72.2 EBITDA (5) $ 176.2 $ 198.1 $ 161.9 $ 111.2 $ 84.5 EBITDAR (5) $ 338.0 $ 332.0 $ 248.3 $ 164.9 $ 125.9 EBITDA margin (6) 15.6% 19.1% 22.9% 23.2% 21.7% EBITDAR margin (6) 29.9% 32.0% 35.1% 34.1% 32.4% Theatre locations 391 430 403 256 223 Screens 4,328 4,413 3,573 2,306 1,899 Average screens per location 11.1 10.3 8.9 9.0 8.5 Attendance (in thousands) 143,086 141,043 102,702 76,331 65,530 Average ticket price $ 5.36 $ 4.90 $ 4.51 $ 4.26 $ 4.06 Average concessions per patron $ 2.17 $ 2.03 $ 1.97 $ 1.80 $ 1.68 BALANCE SHEET DATA: Cash and cash equivalents $ 118.8 $ 40.6 $ 20.6 $ 18.4 $ 17.1 Total assets $ 1,991.1 $ 2,080.4 $ 1,662.0 $ 660.6 $ 488.8 Long-term obligations (including current maturities) $ 1,998.5 $ 1,779.7 $ 1,341.1 $ 288.6 $ 144.6 Shareholders' equity (deficit) $ (252.4) $ 114.2 $ 202.5 $ 306.6 $ 279.3
16 18 (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. (4) Operating theatres and screens represent the number of theatres and screens operated at the end of the period. (5) EBITDA represents net income before interest expense, income taxes, depreciation and amortization, other income or expense, extraordinary items, non-recurring charges, impairment charges, and other theatre closing costs including loss on disposal of operating assets. EBITDAR represents EBITDA before rent expense. While EBITDA and EBITDAR are not intended to represent cash flow from operations as defined by GAAP and should not be considered as indicators of operating performance or alternatives to cash flow (as measured by GAAP) as a measure of liquidity, they are included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure, rental and working capital requirements. (6) Defined as EBITDA and EBITDAR as a percentage of total revenue. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following analysis of the financial condition and results of operations of Regal should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. THE COMPANY AND THE INDUSTRY Regal Cinemas, Inc. ("Regal" or the "Company") is the largest motion picture exhibitor in the United States based upon the number of screens in operation. At December 28, 2000, the Company operated 391 theatres, with an aggregate of 4,328 screens in 32 states. Since its inception in November 1989, the Company has achieved growth in revenues and net income before interest expense, income taxes, depreciation and amortization, other income or expense, extraordinary items, non-recurring charges, impairment charges, and other theatre closing costs including loss on disposal of operating assets ("EBITDA"). As a result of the Company's focus on enhancing revenues, operating efficiently and strictly controlling costs, the Company has 17 19 achieved what management believes are among the highest EBITDA margins in the domestic motion picture exhibition industry. The Company operates primarily multiplex theatres and has an average of 11.1 screens per location, which management believes is among the highest in the industry and which compares favorably to an average of approximately 8.6 screens per location for the five largest North American motion picture exhibitors at September 30, 2000. The Company develops, acquires and operates multiplex theatres primarily in mid-sized metropolitan markets and suburban growth areas of larger metropolitan markets, predominantly in the eastern and northwestern United States. The Company seeks to locate each theatre where it will be the sole or leading exhibitor within a particular geographic film licensing zone. Management believes that at December 28, 2000, approximately 85% of the Company's screens were located in film licensing zones in which the Company was the sole exhibitor. The Company has historically upgraded its theatre circuit by opening new theatres, adding new screens to existing theatres and selectively closing or disposing of under-performing theatres. The Company has also grown by acquiring eleven theatre circuits during the last seven years. From its inception through December 28, 2000, the Company has grown by acquiring 233 theatres with 1,905 screens (net of subsequently closed locations), developing 158 new theatres with 2,255 screens and adding 168 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 44.3% of its circuit having been built since 1997. Approximately 44.0% of the Company's screens are in theatres with 15 or more screens. As a whole, the film exhibition industry is in a period of transition. Over the past several years, film exhibition companies, including the Company, embarked on aggressive programs of rapidly building state of the art theatre complexes (complete with amenities such as stadium seating and digital stereo surround-sound) in an effort to increase overall industry attendance. However, these aggressive new building strategies generated significant competition in once stable markets and rendered many theatres obsolete more rapidly than anticipated. This effect, together with the fact that many of the now obsolete theatres are leased under long-term commitments, produced an oversupply of screens throughout the exhibition industry at a rate much quicker than the industry could effectively handle. The industry overcapacity coupled with declining national box office attendance during 2000 severely impacted the operating results of the Company and many of its competitors. The exhibition industry continues to report severe liquidity concerns, defaults under credit facilities, renegotiations of financial covenants, as well as many recently announced bankruptcy filings. These industry dynamics have severely affected the Company, which has experienced deteriorating operating results over the last fiscal year. Additionally, because the Company has funded its expansion efforts over the past several years primarily from borrowings under its credit facilities, the Company's leverage has grown significantly over this time. Consequently, since the fourth quarter of 2000, the Company has been in default of certain financial covenants contained in its Senior Credit Facilities and its Equipment Financing. As a result, the administrative agent under the Company's Senior Credit Facilities delivered payment blockage notices to the Company and the indenture trustee of the Regal Notes and the Regal Debentures prohibiting the payment by Regal of the semi-annual interest payments of approximately $28.5 million and $8.9 million due to the holders of the notes on December 1, 18 20 2000 and December 15, 2000, respectively. As a result of the interest payment defaults, the Company is also in default of its indentures related to the Regal Notes and Regal Debentures. Accordingly, the holders of the Company's Senior Credit Facilities and the indenture trustee have the right to accelerate the maturity of all of the outstanding indebtedness under the respective agreements, which together totals approximately $1.82 billion. The Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. The Company has engaged financial advisers and is currently evaluating a longer-term financial plan to address various restructuring alternatives and liquidity requirements. The financial plan will provide for the closure of under-performing theatre sites, potential sales of non-strategic assets and a potential restructuring, recapitalization or a bankruptcy reorganization of the Company. RESULTS OF OPERATIONS The Company's generates revenue primarily from admissions and concession sales. Additional revenues are generated by electronic video games located adjacent to the lobbies of certain of the Company's theatres, on-screen advertisements, and rebates from certain of its vendors . Direct theatre costs consist of film rental and advertising costs, costs of concessions and theatre operating expenses. Film rental costs are related to the popularity of a film and the length of time since the film's release and generally decline as a percentage of admission revenues the longer a film has been shown. Because certain concession items, such as fountain drinks and popcorn, are purchased in bulk and not pre-packaged for individual servings, the Company is able to improve its margins by negotiating volume discounts. Theatre operating expenses consist primarily of theatre labor and occupancy costs. At December 28, 2000, approximately 7.7% of the Company's employees were paid at the federal minimum wage and, accordingly, the minimum wage largely determines the Company's labor costs for those employees. Future increases in minimum wage requirements or legislation requiring additional employer funding of health care, among other things, may increase theatre operating expenses as a percentage of total revenues. 19 21 The following table sets forth for the fiscal periods indicated the percentage of total revenues represented by certain items reflected in the Company's consolidated statements of operations.
December 28, December 30, December 31, 2000 1999 1998 ------ ------ ------ Revenues: Admissions 67.8% 66.6% 65.5% Concessions 27.5 27.5 28.6 Other operating revenue 4.7 5.9 5.9 ------ ------ ------ Total revenues 100.0 100.0 100.0 Operating expenses: Film rental and advertising costs 37.3 37.1 35.5 Cost of concessions and other 4.3 4.3 4.5 Theatre operating expense 39.5 36.4 34.2 General and administrative 3.3 3.1 2.9 Depreciation and amortization 8.5 7.8 7.4 Recapitalization expenses -- -- 9.3 Theatre closing costs 4.9 .4 -- Loss on disposal of operating assets 1.8 1.6 -- Loss on impairment of assets 10.1 9.5 9.6 ------ ------ ------ Total operating expenses 109.7 100.2 103.4 Other income (expense): Interest expense (15.8) (12.7) (8.4) Interest income .2 0.1 0.2 Other -- -- (0.3) ------ ------ ------ Loss before taxes and extraordinary item (25.3) (12.8) (11.9) Benefit (provision) for income taxes: (7.1) 4.4 3.1 ------ ------ ------ Loss before extraordinary item (32.4) (8.4) (8.8) Extraordinary item: Loss on extinguishment of debt -- -- (1.6) ------ ------ ------ Net loss (32.4)% (8.4)% (10.4)% ====== ====== ======
FISCAL YEARS ENDED DECEMBER 28, 2000 AND DECEMBER 30, 1999 Total Revenues. Total revenues increased in 2000 by 9.0% to $1,130.7 million from $1,037.1 million in 1999. This increase was attributable primarily to increased ticket prices. Box office ticket prices averaged $5.36 during 2000, which was 9.4% higher than the $4.90 average ticket price in 1999. Average concession per patron were also higher in 2000 ($2.17) versus 1999 ($2.03). The higher prices per patron increased revenue by $84.6 million. Also, the slight increase in year over year admissions of 2.0 million patrons contributed $14.2 million of the revenue increase. Such increases were partially offset by declines in other operating revenues. Direct Theatre Costs. Direct theatre costs in 2000 increased by 13.6% to $916.9 million from $806.9 million in 1999. Direct theatre costs as a percentage of total revenues increased to 81.1% in 2000 from 77.8% in 1999. The increase in direct theatre costs, as a percentage of total revenues was primarily attributable to increased film and advertising costs ($36.7 million), occupancy and rent ($41.6 million), and other operating expenses ($13.9 million). The increases are primarily due to additional theatres as the Company averaged 4,371 screens in 2000 versus 3,993 screens in 1999. 20 22 General and Administrative Expenses. General and administrative expenses increased in 2000 by 17.0% to $37.6 million from $32.1 million in 1999. As a percentage of total revenues, general and administrative expenses increased to 3.3% in 2000 from 3.1% in 1999. The increase was due to approximately $6.0 million in additional legal and professional fees relating to the Company's restructuring efforts. Depreciation and Amortization. Depreciation and amortization expense increased in 2000 by 18.5% to $95.7 million from $80.8 million in 1999. The increase is due to the additional depreciation resulting from the Company's expansion efforts offset by the effects of asset write-offs due to theatre closings and impairment. Operating Loss. Operating loss for 2000 increased to $110.0 million, or 9.7% of total revenues, from $2.4 million, or 0.2% of total revenues, in 1999. The increased loss is primarily due to the $70.7 million increase in theatre closing costs, loss on disposals of assets, and impairment charges over 1999. Before the $190.4 million and $119.7 million of nonrecurring expenses for 2000 and 1999, respectively, operating income was 7.1% and 11.3% of total revenues for 2000 and 1999, respectively. The decrease is due to increased direct theatre costs, depreciation, and amortization. Interest Expense. Interest expense increased in 2000 by 35.1% to $178.6 million from $132.2 million in 1999. The increase was due to higher average borrowings as well as higher interest rates. Income Taxes. The provision from income taxes for the 2000 fiscal year was $80.8 million as compared to a benefit of $45.4 million in 1999. The difference is primarily due to the establishment of a valuation allowance against the Company's deferred tax assets. Net Loss. Net loss in 2000 increased to $366.5 million from $88.5 million in 1999. FISCAL YEARS ENDED DECEMBER 30, 1999 AND DECEMBER 31, 1998 Total Revenues. Total revenues increased in 1999 by 46.7% to $1,037.1 million from $707.0 million in 1998. This increase was attributable primarily to the net addition of 840 screens in 1999 and also reflects a full year of revenues for the Act III theatres as compared to the partial year results in 1998 (835 screens were added August 26, 1998 as a result of the Act III merger.) The $330.1 million increase for 1999 includes a $51.3 million decrease in revenues resulting from a decline in same store revenues, $175.7 million increase attributable to theatres acquired by the Company, and a $205.6 million increase attributable to new theatres constructed by the Company. Average ticket prices increased 8.6% during the period, reflecting an overall increase in ticket prices and a greater proportion of newer theatres with higher ticket prices in 1999 than in the same period in 1998. Average concession sales per customer increased 3.0% for the period, reflecting the greater proportion of newer theatres with higher concession prices and, to a lesser extent, an increase in concession prices. Direct Theatre Costs. Direct theatre costs in 1999 increased by 53.8% to $806.9 million from $524.7 million in 1998. Direct theatre costs as a percentage of total revenues increased to 77.8% in 1999 from 74.2% in 1998. The increase in direct theatre costs as a percentage of total revenues was primarily attributable to a $53 million increase in occupancy and promotional costs due to theatre property additions associated with the Company's newly constructed theatres efforts. Additional increases are due to a full year of costs for the Act III theatres as compared to a partial year in 1998. The increase also reflects higher film rental cost due primarily to film rental costs associated with "Star Wars - The Phantom Menace." 21 23 General and Administrative Expenses. General and administrative expenses increased in 1999 by 57.4% to $32.1 million from $20.4 million in 1998, representing increased administrative costs associated with the 1999 theatre openings and projects under construction. The increase also reflects additional costs related to the Act III merger included in the Company's results subsequent to the Act III merger. As a percentage of total revenues, general and administrative expenses increased to 3.1% in 1999 from 2.9% in 1998. Depreciation and Amortization. Depreciation and amortization expense increased in 1999 by 54.2% to $80.8 million from $52.4 million in 1998. This increase was primarily the result of theatre property additions associated with the Company's newly constructed theatres and the Act III merger. Operating Loss. Operating loss for 1999 decreased by 90.0% to $2.4 million, or 0.2% of total revenues, from $25.0 million, or 3.5% of total revenues, in 1998. Before the $119.7 million and $134.5 million of nonrecurring expenses for 1999 and 1998, respectively, operating income was 11.3% and 15.5% of total revenues for 1999 and 1998, respectively. Interest Expense. Interest expense increased in 1999 by 122.9% to $132.2 million from $59.3 million in 1998. The increase was due to higher average borrowings outstanding associated with the recapitalization of the Company, the Act III merger and the Company's expansion efforts. Income Taxes. The benefit from income taxes for the 1999 fiscal year increased to $45.4 million from $22.2 million compared to fiscal year 1998. The effective tax rate was 33.9% in the 1999 fiscal year as compared to 26.4% in the comparable 1998 period. The 1999 period reflected certain goodwill amortization costs that were not deductible for tax purposes. Additionally, the 1998 fiscal year reflected certain nondeductible recapitalization expenses. Both periods also differ due to the inclusion of state income taxes. Net Loss. Net loss in 1999 increased by 20.4% to $88.5 million from $73.5 million in 1998. Before nonrecurring expenses and extraordinary items, net (loss) income was $(14.9) million and $29.6 million for 1999 and 1998, respectively, reflecting a 150.3% decrease. 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 analysis resulted in the recording of a $113.7 million and a $98.6 million impairment charge in fiscal 2000 and 1999, respectively. 22 24 Additionally, the Company's management team continually evaluates the status of the Company's under-performing locations. Consequently, the Company decided to close or relocate a number of existing theatre locations as well as discontinue plans to develop certain sites. During 2000, the Company recorded $20.9 million as the net loss on disposal of these locations as well as the write-off of certain costs incurred to develop sites, where the Company has discontinued development. In conjunction with certain closed locations, the Company has a reserve for lease termination costs of $41.4 million at December 28, 2000. This reserve for lease termination costs was initially established at December 30, 1999 and represents management's best estimate of the potential costs for exiting these leases and are based on analyses of the properties, correspondence with the landlord, exploratory discussions with potential sub lessees and individual market conditions. LIQUIDITY AND CAPITAL RESOURCES Substantially all of the Company's revenues are derived from cash box office receipts and concession sales. The Company's capital requirements have historically arisen principally in connection with acquisitions of existing theatres, new theatre openings and the addition of screens to existing theatres and have been financed with debt and to a lesser extent internally generated cash. The Company's Senior Credit Facilities provide for borrowings of up to $1,005.0 million in the aggregate, consisting of the Revolving Credit Facility, which permits the Company to borrow up to $500.0 million on a revolving basis and $505.0 million, in the aggregate, of term loan borrowings under three separate term loan facilities. As of December 28, 2000, the Company had exhausted its capacity available under the Revolving Credit Facility. The loans under the Senior Credit Facilities bear interest at either a base rate (referred to as "Base Rate Loans") or adjusted LIBO rate (referred to as "LIBOR Rate Loans") plus, in each case, an applicable margin determined depending upon the Company's Total Leverage Ratio (as defined in the Senior Credit Facilities). On May 27, 1998, an affiliate of KKR and an affiliate of Hicks Muse merged with and into the Company, with the Company continuing as the surviving corporation. The consummation of the Regal Merger resulted in a recapitalization of the Company. In the Recapitalization, the Company's existing holders of Common Stock received cash for their shares of Common Stock, and KKR, Hicks Muse, DLJ and certain members of the Company's management acquired the Company. In addition, in connection with the Recapitalization, the Company canceled options and repurchased warrants held by certain directors, management and employees of the Company. The aggregate purchase price paid to affect the Regal Merger and the Option/Warrant Redemption was approximately $1.2 billion. In connection with the Recapitalization, the Company made an offer to purchase (the Tender Offer) all $125.0 million aggregate principal amount of the 8 1/2% Senior Subordinated Notes due October 1, 2007 (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 first series of Regal Notes. The net proceeds from this issuance, initial borrowings of $375.0 million under the Company's Senior Credit Facilities and $776.9 million in proceeds from the Equity Investment were used: (i) to 23 25 fund the cash payments required to effect the Regal Merger and the Option/Warrant Redemption; (ii) to repay and retire the Company's then existing senior credit facilities; (iii) to repurchase the Old Regal Notes; and (iv) to pay related fees and expenses. 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 a second series of Regal Notes for $200 million. The proceeds of this issuance were used to repay and retire portions of the Senior Credit Facilities. On December 16, 1998, the Company issued the Regal Debentures for $200 million. The proceeds of the Debenture Offering were used to repay all of the then outstanding indebtedness under the Revolving Credit Facility and the excess was used for working capital purposes. Interest payments on the Regal Notes and the Regal Debentures and interest payments and amortization with respect to the Senior Credit Facilities represent significant liquidity requirements for the Company. The Company had interest expense of approximately $178.6 million for the twelve-month period ended December 28, 2000. In addition, for 2000, the amount paid under the Company's non-cancelable operating leases was $156.5 million. At December 28, 2000, the Company had 2 new theatres with 30 screens under construction. The Company intends to develop approximately 40 screens during 2001. The Company expects that the capital expenditures associated with new theatres will aggregate approximately $7.4 million during 2001. The Regal Notes, Regal Debentures and Senior Credit Facilities impose certain restrictions on the Company's ability to make capital expenditures and limit the Company's ability to incur additional indebtedness. Such restrictions could limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business or acquisition opportunities. The covenants contained in the Senior Credit Facilities and/or the indentures governing the Regal Notes and the Regal Debentures also, among other things, limit the ability of the Company to dispose of assets, repay indebtedness or amend other debt instruments, pay distributions, enter into sale and leaseback transactions, make loans or advances and make acquisitions. Currently, under terms of the indentures governing the Regal Notes and Regal Debentures, the Company is prohibited from incurring additional indebtedness (as defined in such indentures). Since the fourth quarter of 2000, the Company has been in default of certain financial covenants contained in its Senior Credit Facilities and its Equipment Financing. As a result of the defaults, the administrative agent under the Company's Senior Credit Facilities delivered payment blockage notices to the Company and the indenture trustee of its Regal Notes and its Regal Debentures prohibiting the payment by Regal of the semi-annual interest payments of approximately $28.5 million and $8.9 million due to the holders of the notes on December 1, 2000 and December 15, 2000, respectively. As a result of the interest payment default, the 24 26 Company is also in default of the indentures related to the Regal Notes and Regal Debentures. Accordingly, the holders of the Company's Senior Credit Facilities and the indenture trustee for the Regal Notes and Regal Debentures have the right to accelerate the maturity of all of the Company's outstanding indebtedness under the respective agreements, which together totals approximately $1.82 billion. The Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. The Company has engaged financial advisers and is currently evaluating a longer-term financial plan to address various restructuring alternatives and liquidity requirements. The financial plan will provide for the closure of under-performing theatre sites, potential sales of non-strategic assets and a potential restructuring, recapitalization or a bankruptcy reorganization of the Company. Because of the potential restructuring alternatives, substantial doubt exists about the Company's ability to continue operating under its existing capital structure. In addition, the uncertainty regarding the eventual outcome of the Company's restructuring, and the effect of other unknown adverse factors, could threaten the Company's existence as a going concern. Continuing on a going concern basis is dependent upon, among other things, the success of the Company's financial plan, continuing to license popular motion pictures, maintaining the support of key vendors and key landlords, retaining key personnel and the continued slowing of construction within the theatre exhibition industry along with financial, business and other factors, many of which are beyond the Company's control. The Company anticipates it will incur significant legal and professional fees, and other restructuring costs, due to the ongoing restructuring of its business. INFLATION; ECONOMIC DOWNTURN The Company does not believe that inflation has had a material impact on its financial position or results of operations. In times of recession, attendance levels experienced by motion picture exhibitors may be adversely affected. For example, revenues declined for the industry in 1990 and 1991. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements - Emerging Issues Task Force (EITF) Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction, is applicable to entities involved on behalf of an owner-lessor with the construction of an asset that will be leased to the lessee when construction of the asset is completed. The consensus reached in Issue No. 97-10 applies to construction projects committed to after May 21, 1998 and to those projects that were committed to on May 21, 1998 if construction did not commence by December 31, 1999. Issue 97-10 has required the Company to be considered the owner (for accounting purposes) of these types of projects during the construction period as well as when construction of the asset is completed. Subsequent to the issuance of Issue 97-10, the Company did not amend the leasing arrangements that were historically recorded as off-balance sheet operating leases as such amendments would have changed the economics of the lease agreements. Management believes a change in the economics of the lease would have been unfavorable to the Company. Therefore, the Company is required to record such leases as lease financing arrangements (capital leases). The application of the provisions of EITF Issue No. 97-10 resulted in the recording of approximately $83.3 and $75.5 million of such leases as capital leases in 2000 and 1999, respectively. During the fourth quarter of 2000, the Company adopted SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which provides guidance for applying generally accepted accounting principles to selected revenue recognition issues. The adoption of SAB No. 101 did not have a material effect on the Company's consolidated financial statements. 25 27 Accounting Pronouncements Not Yet Adopted - In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities was issued, and was subsequently amended by SFAS Nos. 137 and 138. These statements specify how to report and account for derivative instruments and hedging activities, thus requiring the recognition of those items as assets or liabilities in the statement of financial position and measure them at fair value. The Company adopted these statements in the first quarter of fiscal 2001. The adoption of these statements did not have a material effect on the Company's consolidated financial statements (see note 14 of the Consolidated Financial Statements). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK With certain instruments entered into for other than trading purposes, the Company is subject to market risk exposure related to changes in interest rates. As of December 28, 2000, the Company has in place a $1,005.0 million bank credit facility whose various components mature during 2005 through 2007. A portion of that facility, a $500.0 million revolver, bears interest at a percentage point spread from either the base rate or LIBOR both based on the Company's total leverage ratio. As of December 28, 2000, the Company had $495.0 million outstanding under the revolver at interest rates ranging from 9.00% to 10.50%. The remaining portion of the bank credit facility is $505.0 million in term loans. Borrowings under the Term A Loan or the Revolving Credit Facility can be made at the Base Rate plus a margin of 0% to 1%, 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 $235.2 million at December 28, 2000 with $2.4 million due annually through 2004 and the balance due in 2005. Borrowings under the Term B Loan can be made at the Base Rate plus a margin of 0.75% to 1.25%, depending on the Total Leverage Ratio. The outstanding balance under the Term B Loan was $137.5 million at December 28, 2000 with the balance due in 2006. Borrowings under the Term C Loan can be made at the Base Rate plus a margin of 1.0% to 1.5%, depending on the Total Leverage Ratio. The outstanding balance under the Term C Loan was $132.3 million at December 28, 2000 with $1.35 million due annually through 2006, and the balance due in 2007. The weighted average interest rates through the expected maturity dates for the Company's term loans and revolving credit facility are 10.27% and 10.70%, respectively, based on the Company's current spread of 1.00% for the revolver and 1.0% to 1.5% for the term loans. While changes in the Base Rate would affect the cost of funds borrowed in the future, the Company believes the effect, if any, of reasonably possible near term changes in interest rates on the Company's consolidated financial position, results of operations, or cash flows would not be material. 26 28 The Company has $200.0 million in senior subordinated debentures due December 15, 2010, with interest payable semiannually at 8.875%. Debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2003, at the redemption prices (expressed as percentages of the principal amount thereof) set forth below together with accrued and unpaid interest to the redemption date, if redeemed during the 12 month period beginning on December 15 of the years indicated:
REDEMPTION YEAR PRICE 2003 104.438% 2004 103.328% 2005 101.219% 2006 101.109% 2007 and thereafter 100.000%
The Company has $600 million in senior subordinated notes due June 1, 2008, with interest payable semiannually at 9.5%. Notes are redeemable, in whole or in part, at the option of the Company at any time on or after June 1, 2003, at the redemption prices (expressed as percentages of the principal amount thereof) set forth below together with accrued and unpaid interest to the redemption date, if redeemed during the 12 month period beginning on June 1 of the years indicated:
REDEMPTION YEAR PRICE 2003 104.750% 2004 103.167% 2005 101.583% 2006 and thereafter 100.000%
The fair market value of the outstanding senior subordinated debt as of December 28, 2000 was $56.0 million based on market prices as of that date. In September 1998, the Company entered into interest rate swap agreements with five-year terms to hedge a portion of the Credit Facilities variable interest rate risk. On September 22, 2000, the Company monetized the value of all of these contracts for approximately $8.6 million. The gain realized from the termination of the swap agreements has been deferred and will be amortized as a credit to interest expenses over the remaining original term of these swap agreements (through September 2003). The current portion of this gain is included in accrued expenses and the long-term portion in other liabilities. The fair value of the Company's remaining interest rate swap, which matures on March 21, 2002, is ($0.3) million. The fair value of the Company's interest rate swap agreements at December 30, 1999 was $11.7 million. 27 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report 29 Consolidated Balance Sheets at December 28, 2000 and December 30, 1999 30 Consolidated Statements of Operations for the years ended December 28, 2000, December 30, 1999 and December 31, 1998 31 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 28, 2000, December 30, 1999 and December 31, 1998 32 Consolidated Statements of Cash Flows for the years ended December 28, 2000, December 30, 1999 and December 31, 1998 33 Notes to Consolidated Financial Statements 34
28 30 INDEPENDENT AUDITORS' REPORT Board of Directors Regal Cinemas, Inc. Knoxville, Tennessee We have audited the accompanying consolidated balance sheets of Regal Cinemas, Inc. and subsidiaries (the Company) as of December 28, 2000 and December 30, 1999, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 28, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Regal Cinemas, Inc. and subsidiaries as of December 28, 2000 and December 30, 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2000 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's deteriorating operating results, shareholders' equity deficiency, and defaults under its financing arrangements raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. /s/ DELOITTE & TOUCHE LLP February 20, 2001 Nashville, Tennessee 29 31 REGAL CINEMAS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 28, 2000 AND DECEMBER 30, 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 28, DECEMBER 30, 2000 1999 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 118,834 $ 40,604 Accounts receivable 1,473 2,752 Reimbursable construction advances 10,221 20,250 Inventories 6,092 5,050 Prepaid and other current assets 22,690 18,283 Assets held for sale 3,808 9,670 Deferred income tax asset -- 633 ----------- ----------- Total current assets 163,118 97,242 PROPERTY AND EQUIPMENT: Land 87,491 113,516 Buildings and leasehold improvements 1,119,677 999,012 Equipment 453,320 453,751 Construction in progress 8,195 75,879 ----------- ----------- 1,668,683 1,642,158 Accumulated depreciation and amortization (246,850) (185,409) ----------- ----------- Total property and equipment, net 1,421,833 1,456,749 GOODWILL, net of accumulated amortization of $31,080 and $20,952, respectively 365,227 398,567 DEFERRED INCOME TAX ASSET -- 86,075 OTHER ASSETS 40,950 41,576 ----------- ----------- TOTAL ASSETS $ 1,991,128 $ 2,080,209 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term obligations $ 1,823,683 $ 6,537 Accounts payable 55,753 101,152 Accrued expenses 148,559 56,701 ----------- ----------- Total current liabilities 2,027,995 164,390 LONG-TERM OBLIGATIONS, less current maturities: Long-term debt 3,709 1,679,217 Capital lease obligations 17,790 19,722 Lease financing arrangements 153,350 74,199 OTHER LIABILITIES 40,669 28,521 ----------- ----------- Total liabilities 2,243,513 1,966,049 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, no par; 100,000,000 shares authorized, none issued and outstanding -- -- Common stock, no par; 500,000,000 shares authorized; 216,282,348 issued and outstanding in 2000; 216,873,501 issued and outstanding in 1999 196,804 199,778 Loans to shareholders (3,414) (6,388) Retained deficit (445,775) (79,230) ----------- ----------- Total shareholders' equity (deficit) (252,385) 114,160 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,991,128 $ 2,080,209 =========== ===========
See notes to consolidated financial statements. 30 32 REGAL CINEMAS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999, AND DECEMBER 31, 1998 (IN THOUSANDS)
DECEMBER 28, DECEMBER 30, DECEMBER 31, 2000 1999 1998 ----------- ----------- --------- REVENUES: Admissions $ 767,108 $ 690,469 $ 462,826 Concessions 310,234 285,707 202,418 Other operating revenue 53,379 60,895 41,783 ----------- ----------- --------- Total revenues 1,130,721 1,037,071 707,027 OPERATING EXPENSES: Film rental and advertising costs 421,594 384,894 251,345 Cost of concessions and other 48,962 44,276 31,657 Theatre operating expenses 446,391 377,702 241,720 General and administrative expenses 37,593 32,134 20,355 Depreciation and amortization 95,734 80,787 52,413 Recapitalization expenses -- -- 65,755 Theatre closing costs 55,802 4,269 -- Loss on disposal of operating assets 20,893 16,826 861 Loss on impairment of assets 113,734 98,587 67,873 ----------- ----------- --------- Total operating expenses 1,240,703 1,039,475 731,979 ----------- ----------- --------- OPERATING LOSS (109,982) (2,404) (24,952) ----------- ----------- --------- OTHER INCOME (EXPENSE): Interest expense (178,559) (132,162) (59,301) Interest income 2,821 659 1,506 Other -- -- (1,081) ----------- ----------- --------- LOSS BEFORE INCOME TAXES (285,720) (133,907) (83,828) BENEFIT FROM (PROVISION FOR) INCOME TAXES (80,825) 45,357 22,170 ----------- ----------- --------- LOSS BEFORE EXTRAORDINARY ITEM (366,545) (88,550) (61,658) EXTRAORDINARY ITEM: Loss on extinguishment of debt, net of applicable taxes -- -- (11,890) ----------- ----------- --------- NET LOSS $ (366,545) $ (88,550) $ (73,548) =========== =========== =========
See notes to consolidated financial statements. 31 33 REGAL CINEMAS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999, AND DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON PREFERRED LOANS TO RETAINED STOCK STOCK SHAREHOLDERS EARNINGS TOTAL ----------- --------- ------- --------- ----------- BALANCE, JANUARY 1, 1998 $ 223,707 $ -- $ -- $ 82,868 $ 306,575 Purchase and retirement of 223,937,974 shares of common stock related to the Recapitalization (1,119,690) -- -- -- (1,119,690) Issuance of 2,630,556 shares of Common stock related to the Recapitalization 13,153 -- -- -- 13,153 Issuance of 15,277 shares of Series A Convertible Preferred Stock related to the Recapitalization -- 763,820 -- -- 763,820 Conversion of 15,277 shares of Series A Convertible Preferred Stock to 152,763,973 shares of common stock 763,820 (763,820) -- -- -- Issuance of 60,383,388 shares of common stock and 5,195,598 options to purchase the Company's common stock related to the acquisition of Act III 312,157 -- -- -- 312,157 Issuance of 808,313 shares of common stock in exchange for shareholder loans 4,212 -- (4,140) -- 72 Stock option amortization 68 -- -- -- 68 Net loss -- -- -- (73,548) (73,548) ----------- --------- ------- --------- ----------- BALANCE, DECEMBER 31, 1998 $ 197,427 $ -- $(4,140) $ 9,320 $ 202,607 Issuance of 120,000 shares of common stock upon exercise of stock options 600 -- -- -- 600 Issuance of 569,500 shares of common stock in exchange for shareholder loans 2,848 -- (2,848) -- -- Repurchase and cancellation of 307,564 shares of common stock (1,097) -- 600 -- (497) Net loss -- -- -- (88,550) (88,550) ----------- --------- ------- --------- ----------- BALANCE, DECEMBER 30, 1999 $ 199,778 $ -- $(6,388) $ (79,230) $ 114,160 Cancellation of 591,153 shares of common stock (2,974) -- 2,974 -- -- Net loss -- -- -- (366,545) (366,545) ----------- --------- ------- --------- ----------- BALANCE, DECEMBER 28, 2000 $ 196,804 $ -- $(3,414) $(445,775) $ (252,358) =========== ========= ======= ========= ===========
See notes to consolidated financial statements. 32 34 REGAL CINEMAS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999, AND DECEMBER 31, 1998 (IN THOUSANDS)
DECEMBER 28, DECEMBER 30, DECEMBER 31, 2000 1999 1998 --------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(366,545) $ (88,550) $ (73,548) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 95,734 80,787 52,413 Non-cash loss on extinguishment of debt -- -- 4,975 Loss on impairment of assets 113,734 98,587 67,873 Loss on disposal of operating assets 20,893 16,826 861 Theatre closing costs 55,802 4,269 -- Deferred income taxes 86,708 (47,899) (29,771) Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 1,279 409 3,585 Inventories (1,042) (1,036) (118) Prepaids and other current assets (4,407) (6,304) (3,373) Accounts payable (45,399) 22,352 13,054 Accrued expenses and other liabilities 39,601 13,248 9,132 --------- --------- ----------- Net cash (used in) provided by operating activities (3,642) 92,689 45,083 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (148,751) (435,768) (286,363) Proceeds from sale of fixed assets 75,791 8,875 1,731 Decrease (increase) in reimbursable construction advances 10,029 (11,607) (5,761) Increase (decrease) in goodwill and other assets 626 2,618 (5,829) --------- --------- ----------- Net cash used in investing activities (62,305) (435,882) (296,222) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under long-term obligations 177,000 390,000 1,329,800 Payments on long-term obligations (41,426) (26,927) (688,653) Deferred financing costs -- -- (45,137) Proceeds from issuance of stock, net -- -- 774,691 Proceeds from interest rate swap terminations 8,603 -- -- Purchase and retirement of common stock -- (497) (1,117,407) Exercise of warrants, options and stock compensation expense -- 600 68 --------- --------- ----------- Net cash provided by financing activities 144,177 363,176 253,362 --------- --------- ----------- NET INCREASE IN CASH AND EQUIVALENTS 78,230 19,983 2,223 CASH AND EQUIVALENTS, beginning of period 40,604 20,621 18,398 --------- --------- ----------- CASH AND EQUIVALENTS, end of period $ 118,834 $ 40,604 $ 20,621 ========= ========= ===========
See notes to consolidated financial statements. 33 35 REGAL CINEMAS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 28, 2000, DECEMBER 30, 1999 AND DECEMBER 31, 1998 1. THE COMPANY AND INDUSTRY CONSIDERATIONS Regal Cinemas, Inc. and its wholly owned subsidiaries (the "Company" or "Regal") operate multi-screen motion picture theatres principally throughout the eastern and northwestern United States. The film exhibition industry continues to face severe financial challenges due primarily to the rapid building of state of the art theatre complexes that resulted in an unanticipated oversupply of screens. The aggressive new build strategies generated significant competition in certain once stable markets and rendered many older theatres obsolete more rapidly than anticipated. This effect, together with the fact many of the now obsolete theatres are leased under long-term commitments, produced an oversupply of screens throughout the exhibition industry at a rate much quicker than the industry could effectively handle. This industry overcapacity coupled with declines in national box office attendance during 2000 has negatively affected the operating results of the Company and many of its competitors. The exhibition industry continues to report severe liquidity concerns, defaults under credit facilities, renegotiations of financial covenants, as well as several announced bankruptcy filings. These industry dynamics have severely affected the Company, which continues to experience deteriorating operating results and a deficit in shareholders' equity at December 28, 2000. Additionally, because the Company has funded expansion efforts over the past several years primarily from borrowings under its credit facilities, the Company's leverage has grown significantly over this time. Consequently, since the fourth quarter of 2000, the Company has been in default of certain financial covenants contained in its Senior Credit Facilities and its equipment financing agreement ("Equipment Financing") As a result of the default, the administrative agent under the Company's Senior Credit Facilities delivered payment blockage notices to the Company and the indenture trustee of its 9-1/2% Senior Subordinated Notes due 2008 (the "Regal Notes") and its 8-7/8% Senior Subordinated Debentures due 2010 (the "Regal Debentures") prohibiting the payment by Regal of the semi-annual interest payments of approximately $28.5 million and $8.9 million due to the holders of the notes on December 1, 2000 and December 15, 2000, respectively. As a result of the interest payment defaults, the Company is also in default of the indentures related to Regal Notes and Regal Debentures. Accordingly, the holders of the Company's Senior Credit Facilities and the indenture trustee for the Regal Notes and Regal Debentures have the right to accelerate the maturity of all of the outstanding indebtedness under the respective agreements, which together totals approximately $1.82 billion. The Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. 34 36 The Company has engaged financial advisers and is currently evaluating a long-term financial plan to address various restructuring alternatives and liquidity requirements. The financial plan will provide for the closure of under-performing theatre sites, potential sales of non-strategic assets and a potential restructuring, recapitalization or a bankruptcy reorganization of the Company. In light of the Company's current financial condition, substantial doubt exists about the Company's ability to continue operating under its existing capital structure. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the Company has experienced deteriorating operating results and has a shareholders' equity deficiency as of December 28, 2000. As discussed above, the Company is also in default of financial covenants under its financing arrangements and does not have the ability to fund or refinance the resulting accelerated maturity of its indebtedness. These factors among others raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities that may result from the outcome of these uncertainties. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Regal and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated from the consolidated financial statements. FISCAL YEAR - The Company maintains its accounting records on a 52 week fiscal year with four thirteen week quarters. The fiscal months of March, June, August, and November consist of five weeks while all other months consist of four. CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At December 28, 2000 and December 30, 1999, the Company held approximately $107.0 million and $29.1 million, respectively, in temporary cash investments in the form of certificates of deposit and variable rate investment accounts with major financial institutions. INVENTORIES - Inventories consist of concession products and theatre supplies and are stated on the basis of first-in, first-out (FIFO) cost, which is not in excess of net realizable value. START-UP COSTS - Start up costs of a new theatre are expensed as incurred. REIMBURSABLE CONSTRUCTION ADVANCES - Reimbursable construction advances consist of amounts due from landlords to fund a portion of the construction costs of new theatres that are to be operated by the Company pursuant to lease agreements. The landlords repay the amounts either during construction on a percentage of completion basis, or upon completion of the theatre. 35 37 PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred. Gains and losses from disposition of property and equipment are included in income and expense when realized. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Buildings and leaseholds 20-30 years Equipment 5-20 years Included in property and equipment is $188.0 million and $126.5 million of assets accounted for under capital leases and lease financing arrangements as of December 28, 2000 and December 30, 1999, respectively. Amortization is provided using the straight-line method over the shorter of the lease terms or the estimated useful lives noted above. Interest is capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 34, Capitalization of Interest. Capitalized interest was $5.4 million, $11.5 million, and $6.2 million for fiscal years 2000, 1999 and 1998, respectively. GOODWILL - Goodwill, which represents the excess of acquisition costs over the net assets acquired in business combinations, has been allocated to the individual theatres acquired and is amortized on the straight-line method. Goodwill generated from the acquisition of Act III Cinemas, Inc. (see note 4) is amortized over a 40 year period, all other goodwill is amortized over a 25-30 year period. IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets, including allocated goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the carrying amount of the asset, an impairment charge is recognized in the amount by which the carrying value of the assets exceeds its fair market value. Assets are evaluated for impairment on an individual theatre basis, which management believes is the lowest level for which there are identifiable cash flows. The fair value of assets is determined using the present value of the estimated future cash flows or the expected selling price less selling costs for assets expected to be disposed of. DEBT ACQUISITION COSTS (INCLUDED IN OTHER ASSETS) - Debt acquisition costs are deferred and amortized over the terms of the related agreements. INCOME TAXES - Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. DEFERRED REVENUE (INCLUDED IN OTHER LIABILITIES) - Deferred revenue relates primarily to vendor rebates. Rebates are recognized in the accompanying financial statements as earned. 36 38 DEFERRED RENT (INCLUDED IN OTHER LIABILITIES) - Rent expense is recognized on a straight-line basis after considering the effect of rent escalation provisions resulting in a level monthly rent expense for each lease over its term. ADVERTISING COSTS - The Company expenses advertising costs as incurred. INTEREST RATE SWAPS - Interest rate swaps are entered into as a hedge against interest exposure of variable rate debt. The differences to be paid or received on swaps are included in interest expense. The fair value of the Company's interest rate swap agreements is based on dealer quotes. These values represent the amounts the Company would receive or pay to terminate the agreements taking into consideration current interest rates. STOCK-BASED COMPENSATION - SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to adopt the fair value method of accounting for stock-based employee compensation. The Company has chose to continue to account for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (see Note 9). ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SEGMENTS - The Company manages its business based on one reportable segment. LEASE FINANCING ARRANGEMENT - Emerging Issues Task Force (EITF) Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction, is applicable to entities involved on behalf of an owner-lessor with the construction of an asset that will be leased to the lessee when construction of the asset is completed. The consensus reached in Issue No. 97-10 applies to construction projects committed to after May 21, 1998 and to those projects that were committed to on May 21, 1998 if construction did not commence by December 31, 1999. Issue 97-10 has required the Company to be considered the owner (for accounting purposes) of these types of projects during the construction period as well as when construction of the asset is completed. Therefore, as discussed in Note 7, the Company is required to record such leases as lease financing arrangements (capital leases). The application of the provisions of EITF Issue No. 97-10 resulted in the recording of approximately $83.3 million and $75.5 million of such leases as capital leases in 2000 and 1999, respectively. The application of the provisions of EITF Issue No. 97-10 has resulted in payments of $16.3 million in 2000 and $2.1 million in 1999 that would have been shown as rent expense absent this pronouncement. NEW ACCOUNTING STANDARDS - During the fourth quarter of 2000, the Company adopted SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which provides guidance for applying generally accepted accounting principles to selected revenue recognition issues. The adoption of SAB No. 101 did not have a material effect on the Company's consolidated financial statements. In June 1998, Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging 37 39 Activities was issued, and was subsequently amended by SFAS Nos. 137 and 138. These statements specify how to report and account for derivative instruments and hedging activities, thus requiring the recognition of those items as assets or liabilities in the statement of financial position and measure them at fair value. The Company adopted these statements in the first quarter of fiscal 2001. The adoption of these statements did not have a material effect on the Company's consoldiated financial statements (see Note 14). 3. MERGER AND RECAPITALIZATION On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P. (KKR) and an affiliate of Hicks, Muse, Tate & Furst Incorporated (Hicks Muse) merged with and into Regal Cinemas, Inc., with the Company continuing as the surviving corporation of the Merger (the Merger). The Merger and related transactions have been recorded as a recapitalization (the Recapitalization). In the Recapitalization, the Company's existing shareholders received cash for their shares of common stock. In addition, in connection with the Recapitalization, the Company canceled options and repurchased warrants held by certain former directors, management and employees of the Company (the Option/Warrant Redemption). The aggregate amount paid to effect the Merger and the Option/Warrant Redemption was approximately $1.2 billion. The net proceeds of a $400 million senior subordinated note offering, initial borrowings of $375.0 million under senior credit facilities and the proceeds of $776.9 million from the investment by KKR, Hicks Muse, DLJ Merchant Banking Partners II, L.P. and affiliated funds (DLJ) and management in the Company were used: (i) to fund the cash payments required to effect the Merger and the Option/Warrant Redemption; (ii) to repay and retire the Company's existing senior credit facilities; (iii) to repurchase the Company's existing 8.5% senior subordinated notes (Regal Notes); and (iv) to pay related fees and expenses. Upon consummation of the Merger, KKR owned $287.3 million of the Company's equity securities, Hicks Muse owned $437.3 million of the Company's equity securities and DLJ owned $50.0 million of the Company's equity securities. Each investor received securities consisting of a combination of the Company's common stock, no par value (Common Stock), and the Company's Series A Convertible Preferred Stock, no par value (Convertible Preferred Stock), which was converted into Common Stock on June 3, 1998. To equalize KKR's and Hicks Muse's investments in the Company at $362.3 million each, Hicks Muse exchanged $75.0 million of Convertible Preferred Stock, with KKR for $75.0 million of common stock of Act III Cinemas, Inc. (Act III). As a result of the Recapitalization and the Act III Merger (see Note 4), KKR and Hicks Muse each own 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 7). Of the total Merger and 38 40 Recapitalization costs above, an aggregate of $19.5 million was paid to KKR and Hicks Muse. 4. ACQUISITIONS On August 26, 1998, the Company acquired Act III Cinemas, Inc. (the Act III Merger). The total purchase cost was approximately $312.2 million, representing primarily the value of 60,383,388 shares of the Company's common stock issued to acquire all of Act III's outstanding common stock and the value of 5,195,598 options of the Company issued for Act III options. In connection with the Act III Merger, the Company also amended its credit facilities and borrowed $383.3 million thereunder to repay Act III's borrowings and accrued interest under Act III's existing credit facilities and two senior subordinated notes totaling $150.0 million. The Act III Merger has been accounted for as a purchase, applying the applicable provisions of Accounting Principles Board Opinion No. 16. The allocation of the purchase price as of December 28, 2000 is as follows:
(IN THOUSANDS) Property and equipment $ 343,694 Long-term debt assumed (411,337) Net working capital acquired (18,541) Excess purchase cost over fair value of net assets acquired 398,341 --------- Total purchase cost $ 312,157 =========
The above allocation of purchase cost has been allocated to the acquired assets and liabilities of Act III based on estimates of fair value as of the closing date. The following pro forma unaudited fiscal year results of operations data give effect to the Act III Merger and the Recapitalization (Note 3) as if they had occurred as of January 3, 1997:
(IN THOUSANDS) 1998 --------- Revenues $ 897,459 Loss before extraordinary item $ (67,571) Net loss $ (79,407)
5. SALE - LEASEBACK TRANSACTIONS During the third quarter of fiscal 2000, the Company completed sale-leaseback transactions involving 15 of its owned theatres. Under the terms of the transaction, the land and related improvements of the theateres were sold for $45.2 million and have been leased back for an initial lease term of 20 years. The leases include specified renewal options for up to 20 additional years and have been accounted for as operating leases. Rent expense during the initial term will be approximately $5.0 million annually. The gain on the sale of $2.1 million will be amortized over the initial lease term of 20 years and will offset rent expense. 39 41 6. IMPAIRMENT OF LONG-LIVED ASSETS ASSET IMPAIRMENT - As stated in Note 2, the Company periodically reviews the carrying value of long-lived assets, including allocated goodwill, for impairment based on expected future cash flows. Such reviews are performed as part of the Company's budgeting process and are performed on an individual theatre level, the lowest level of identifiable cash flows. Factors considered in management's estimate of future theatre cash flows include historical operating results over complete operating cycles, current and anticipated impacts of competitive openings in individual markets, and anticipated sales or dispositions of theatres. Management uses the results of this analysis to determine whether impairment has occurred. The resulting impairment loss is measured as the amount by which the carrying value of the asset exceeds fair value, which is estimated using discounted cash flows. Discounted cash flows also include estimated proceeds for the sale of owned properties in the instances where management intends to sell the location. This analysis has resulted in the following impairment losses being recognized:
2000 1999 1998 -------- ------- ------- (IN THOUSANDS) Write-down of theatre property and equipment $ 91,490 $46,460 $22,617 Write-down of FunScape property and equipment 564 22,017 36,950 Write-off of goodwill 21,680 30,110 8,306 -------- ------- ------- Total $113,734 $98,587 $67,873 ======== ======= =======
THEATRE CLOSING AND LOSS ON DISPOSAL COSTS - The Company's management team continually evaluates the status of the Company's under-performing locations. During 2000, the Company recorded $20.9 million as the net loss on disposal of these locations as well as the write-off of certain costs incurred to develop sites, where the Company has discontinued development. In conjunction with certain closed or abandoned locations, the Company has a reserve for lease termination and related costs of $41.4 million at December 28, 2000. This reserve was initially established at December 30, 1999 and represents management's best estimate of the potential costs for exiting these leases and are based on analyses of the properties, correspondence with the landlord, exploratory discussions with potential sub lessees and individual market conditions. The following is the activity in this reserve during 2000:
(IN THOUSANDS) Beginning balance, December 30, 1999 $ 4,269 Rent and other termination payments (14,967) Additional closing and termination costs 56,124 Revision of prior estimates (3,963) -------- Ending balance, December 28, 2000 $ 41,463 ========
The Company has made decisions subsequent to December 28, 2000 to close additional theatres in conjunction with its restructuring program. These closures will result in additional theatre closing and loss on disposal costs being recognized in 2001. 40 42 7. LONG-TERM OBLIGATIONS Long-term obligations at December 28, 2000 and December 30, 1999, consists of the following:
DECEMBER 28, DECEMBER 30, (IN THOUSANDS) 2000 1999 ----------- ----------- $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 104.750% 2004 103.328% 2005 101.219% 2006 101.109% $ 200,000 $ 200,000 2007 100.000% Term Loans 505,000 508,750 Revolving credit facility 495,000 370,000 Equipment financing note payable, payable in varying quarterly installments through April 1, 2005, including interest at LIBOR plus 3.25% (9.93% at December 28, 2000), collateralized by related equipment 19,500 -- Capital lease obligations, 11.5% to 14.0%, maturing in various installments through 2024 19,597 21,311 Other 4,270 4,877 Lease financing arrangements, 11.5%, maturing in various installments through 2020 155,165 74,737 ----------- ----------- 1,998,532 1,779,675 Less current maturities (1,823,683) (6,537) ----------- ----------- Total long-term obligations $ 174,849 $ 1,773,138 =========== ===========
41 43 CREDIT FACILITIES - In connection with the Merger and Recapitalization (see Note 3), the Company entered into credit facilities provided by a syndicate of financial institutions. In August 1998, December 1998, and March 1999, such credit facilities were amended. Such credit facilities (the Credit Facilities) now include a $500.0 million Revolving Credit Facility (including the availability of Revolving Loans, Swing Line Loans, and Letters of Credit) and three term loan facilities: Term A, Term B, and Term C (the Term Loans). The Company must pay an annual commitment fee ranging from 0.2% to 0.425%, depending on the Company's Total Leverage Ratio, as defined in the Credit Facilities, of the unused portion of the Revolving Credit Facility. The Revolving Credit Facility expires in June 2005. At December 28, 2000, there were $495.0 million in outstanding borrowings under the Revolving Credit Facility. Borrowings under the Term A Loan or the Revolving Credit Facility can be made at the Base Rate plus a margin of 0% to 1%, 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 outstanding balance under the Term A Loan was $235.2 million at December 28, 2000 and $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%, depending on the Total Leverage Ratio. The outstanding balance under the Term B Loan was $137.5 million at December 28, 2000 and 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%, depending on the Total Leverage Ratio. The outstanding balance under the Term C Loan was $132.3 million at December 28, 2000 and $133.7 million at December 30, 1999 with $1.35 million due annually through 2006, and the balance due in 2007. A pledge of the stock of the Company's domestic subsidiaries collateralizes the Credit Facilities. The Company's direct and indirect U.S. subsidiaries guarantee payment obligations under certain of the Credit Facilities. The Credit Facilities contain customary covenants and restrictions on the Company's ability to issue additional debt, pay dividends or engage in certain activities and include customary events of default. In addition, the Credit Facilities specify that the Company must meet or exceed defined interest coverage ratios and must not exceed defined leverage ratios. 42 44 Since the fourth quarter of 2000, the Company has been in default of certain financial covenants contained in its Credit Facilities and its equipment financing term note. As a result, the administrative agent under the Company's Credit Facilities delivered payment blockage notices to the Company and the indenture trustee of the Regal Notes and the Regal Debentures prohibiting the payment by Regal of the semi-annual interest payments of approximately $28.5 million and $8.9 million due to the holders of the notes on December 1, 2000 and December 15, 2000, respectively. As a result of the interest payment defaults, the Company is also in default of its indenture agreements related to the Regal Notes and Regal Debentures. Accordingly, the holder of the Company's Credit Facilities and the indenture trustee have the right to accelerate the maturity of all of the outstanding indebtedness under the respective agreements, which together totals approximately $1.82 billion. The Company does not have the ability to fund or refinance the accelerated maturity of this indebtedness. Accordingly, the Company has classified the Credit Facilities, Equipment Financing, Regal Notes and Regal Debentures as current liabilities in the accompanying balance sheet as of December 28, 2000. LEASE FINANCING ARRANGEMENTS - As discussed in Note 2, the Emerging Issues Task Force (EITF) released in fiscal 1998, Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction. Issue No. 97-10 is applicable to entities involved on behalf of an owner-lessor with the construction of an asset that will be leased to the lessee when construction of the asset is completed. Issue No. 97-10 requires the Company be considered the owner (for accounting purposes) of these types of projects during the construction period as well as when the construction of the asset is completed. Therefore, the Company has recorded such leases as lease financing arrangements on the accompanying balance sheet. MATURITIES OF LONG TERM OBLIGATIONS - The Company's long term debt, capital lease obligations, and lease financing arrangements are scheduled to mature as follows (in thousands):
LEASE LONG-TERM CAPITAL FINANCING (IN THOUSANDS) DEBT LEASES ARRANGEMENTS TOTAL ---- ---------- -------- ------------ ---------- 2001 $1,820,061 $ 1,807 $ 1,815 $1,823,683 2002 490 2,312 2,009 4,811 2003 541 2,669 2,256 5,466 2004 597 3,082 2,697 6,376 2005 659 3,558 3,465 7,682 Thereafter 1,422 6,169 142,923 150,514 ---------- -------- ---------- ---------- $1,823,770 $ 19,597 $ 155,165 $1,998,532 ========== ======== ========== ==========
TENDER OFFER - In connection with the Recapitalization, the Company commenced a tender offer for all of the Company's 8.5% senior subordinated notes (Regal Notes) and a consent solicitation in order to effect certain changes in the related indenture. Upon completion of the tender offer, holders had tendered and given consents with respect to 100% of the outstanding principal amount of the Regal Notes. In addition, the Company and the trustee executed a 43 45 supplement to such indenture, effecting the proposed amendments that included, among other things, the elimination of all financial covenants for the Regal Notes. On May 27, 1998, the Company paid, for each $1,000 principal amount, $1,116.24 for the Regal Notes tendered plus, in each case, accrued and unpaid interest of $13.22. Regal financed the purchase price of the Regal Notes with funds from the Recapitalization. EXTRAORDINARY LOSS - In 1998, the Company recognized a loss of $11.9 million, net of income taxes of $7.6 million, for the write-off of deferred financing costs and prepayment penalties incurred in connection with redeeming the Regal Notes as well as for the write-off of deferred financing costs related to the Company's previous credit facility. Such loss is reported as an extraordinary loss in the accompanying financial statements 8. COMMITMENTS AND CONTINGENCIES LEASES - The majority of 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 28, 2000, are summarized for the following fiscal years:
(IN THOUSANDS) 2001 147,407 2002 146,012 2003 146,289 2004 146,802 2005 145,791 Thereafter 1,771,657
Rent expense under such operating leases amounted to $158.2 million, $130.3 million, and $80.9 million for fiscal years 2000, 1999 and 1998, respectively. Contingent rent expense was $3.6 million, $3.6 million, and $2.8 million for fiscal years 2000, 1999, 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 is at various dates during fiscal 2001. As of December 28, 2000, the total future minimum rental payments under the terms of these leases approximate $34.2 million to be paid over 15 to 20 years. CONTINGENCIES - The Company is presently involved in various legal proceedings arising in the ordinary course of its business operations, including personal injury claims, employment matters and contractual disputes. During fiscal 2000, the Company also became a defendant in a number of claims arising from its decision to close theatre locations or to cease construction of theatres on sites for which the Company purportedly had a contractual obligation to lease such property. The Company believes it has adequately provided for the settlement of such contractual disputes. Management believes any additional liability with respect 44 46 to the above proceedings will not be material in the aggregate to the Company's consolidated financial position, results of operations or cash flows. 9. CAPITAL STOCK AND STOCK OPTION PLANS COMMON STOCK - Effective May 27, 1998, the Recapitalization date, the Company effected a stock split in the form of a stock dividend resulting in a price per share of $5.00, which $5.00 per share is equivalent to the $31.00 per share consideration paid in the Merger. The Company's common shares issued and outstanding throughout the accompanying financial statements and notes reflect the retroactive effect of the Recapitalization stock split. EARNINGS PER SHARE - Earnings per share information is not presented herein as the Company's shares do not trade in a public market. PREFERRED STOCK - The Company currently has 100,000,000 shares of preferred stock authorized with none issued. The Company may issue the preferred shares from time to time in such series having such designated preferences and rights, qualifications and limitations as the Board of Directors may determine. STOCK OPTION PLANS - Prior to the Recapitalization, the Company had three employee stock option plans under which certain employees were granted options to purchase shares of the Company's common stock. All such options issued under these plans became fully vested upon consummation of the Recapitalization, and all participants either received cash for the difference between the per share price inherent in the Recapitalization and the exercise price of their options, or retained their existing options. In addition, certain key members of management were issued options under a newly formed 1998 Stock Purchase and Option Plan for Key Employees of Regal Cinemas, Inc. (the "Plan"). Under the Plan, the Board of Directors of the Company may award stock options to purchase up to 30,000,000 shares of the Company's common stock. Grants or awards under the Plan may take the form of purchased stock, restricted stock, incentive or nonqualified stock options or other types of rights as specified in the Plan.
WEIGHTED AVERAGE OPTIONS SHARES EXERCISABLE PRICE YEAR END ----- -------- 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, 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 Options granted in 2000 -- -- Options exercised in 2000 -- -- Options canceled or redeemed in 2000 (1,652,818) $ 3.78 ----------- Under option at December 28, 2000 14,803,012 $ 3.78 9,920,444
45 47
OPTIONS OUTSTANDING Options Exercisable ---------------------------------------------------------- -------------------------- Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Price at 12/28/00 Life Price at 12/28/00 Price ----- ----------- ---- ----- ----------- ----- $0.34 - $0.62 1,403,311 4.1 $0.5370 1,403,311 $0.5370 $1.58 - $3.67 3,541,095 4.3 $2.0525 3,541,095 $2.0525 $4.03 - $5.00 9,858,606 7.4 $4.8603 4,976,038 $4.7231 ---------- --------- 14,803,012 9,920,444 ========== =========
Prior to the Recapitalization, the Company also had the 1993 Outside Directors' Stock Option Plan (the 1993 Directors' Plan). Directors' stock options for the purchase of 186,000 shares at an exercise price of $4.40 were granted during 1997. All such options became fully vested and were redeemed for cash at the date of the Recapitalization. In addition, the Company, prior to the Recapitalization, had issued warrants to purchase 982,421 shares of the Company's common stock at an exercise price of $.20 per share. The warrants were redeemed for cash at the date of the Recapitalization. Had the fair value of options granted under these plans been recognized in accordance with SFAS No. 123 as compensation expense on a straight-line basis over the vesting period of the grant, the Company's net loss would have been recorded in the amounts indicated below:
(IN THOUSANDS) 2000 1999 1998 --------- -------- -------- Net Loss: As Reported $(366,545) $(88,550) $(73,548) Pro Forma (368,769) (91,204) (59,423)
The pro forma results do not purport to indicate the effects on reported net income for recognizing compensation expense that is expected to occur in future years. The 1998 pro forma net loss reflects an adjustment for the intrinsic value of the options redeemed at the Recapitalization date that were issued prior to the Company's adoption of the disclosure provisions of Statement 123. Such options had intrinsic value prior to the Recapitalization date and therefore the value of these options has been excluded from the amount of compensation costs reflected in the 1998 pro forma net loss. The fair value for the employee and directors options granted during fiscal years 2000, 1999 and 1998, was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 5.9% for 1999 grants, and 5.0% to 5.9% for 1998 grants and an 46 48 inconsequential volatility factor in 2000, 1999 and 1998 due to the Company's Recapitalization (Note 3). The 1999 pricing model used a weighted average expected life of 10 years for employee options. The 1998 pricing model assumptions used a weighted average expected life of 5 years for employee options and 7 years for outside director options. The weighted average grant date fair value of options granted in fiscal years 1999, and 1998, was $ 2.24, and $.96 per share, respectively. There were no options granted in fiscal year 2000. 10. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset consisted of the following at:
(IN THOUSANDS) 2000 1999 --------- -------- Deferred tax assets: Net operating loss carryforward $ 107,378 $ 49,697 Excess of tax basis over book basis for leases 5,786 4,960 Accrued expenses 27,626 6,878 Interest expense deferred under IRC 163(j) 2,267 2,161 Favorable leases 476 -- Excess of tax basis over book basis of certain assets 42,263 24,990 AMT credit carryforward 1,316 527 Other 4,509 1,371 --------- -------- 191,621 90,584 Valuation allowance (182,846) -- --------- -------- Deferred tax assets 8,775 90,584 Deferred tax liabilities: Excess of book basis over tax basis of certain intangible assets (5,150) (2,640) Other (3,625) (1,236) --------- -------- Deferred tax liabilities (8,775) (3,876) --------- -------- Net deferred tax asset $ -- $ 86,708 ========= ========
The Company provided no valuation allowance against deferred tax assets as of December 30, 1999; however, the Company did record a valuation allowance against deferred tax assets as of December 28, 2000 totaling approximately $182.8 million, as management believes it became more likely than not during 2000 that the net deferred tax asset will not be realized in future tax periods. At December 28, 2000, the Company and certain of its subsidiaries have various federal and state net operating loss (NOL) carryforwards available to offset future taxable income. The Company has approximately $254.5 million of NOL carryforwards, in the aggregate, for federal purposes that begin to expire in the 2009 tax year. Additionally, the Company has approximately $340.2 million of NOL carryforwards for state tax purposes. At December 28, 2000, the Company has approximately $1.3 million of alternative minimum tax credit carryforwards 47 49 available to reduce future federal income tax liabilities. Under current federal income tax taw, the alternative minimum tax credit can be carried forward indefinitely. However, management believes it is more likely than not that the deferred tax assets relative to the NOLs and the alternative minimum tax credits will not be realized in future tax periods. The components of the provision for (benefit from) income taxes for income from continuing operations for each of the three fiscal years were as follows:
(IN THOUSANDS) 2000 1999 1998 --------- -------- -------- Current $ (5,883) $ -- $ -- Deferred (96,138) (45,357) (22,170) Increase in deferred income tax valuation allowance 182,846 -- -- --------- -------- -------- Total income tax provision (benefit) $ 80,825 $(45,357) $(22,170) ========= ======== ========
Extraordinary losses are presented net of related tax benefits. Therefore, the 1998 income tax benefit in the above table exclude tax benefits of $7.6 million 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 $182.8 million increase in the valuation allowance for 2000 primarily reflects the change in assessment of the likelihood of utilization of the net deferred tax assets of the Company and its subsidiaries. A reconciliation of the provision for (benefit from) for income taxes as reported and the amount computed by multiplying the income before income taxes and extraordinary item by the U.S. federal statutory rate of 35% was as follows:
(IN THOUSANDS) 2000 1999 1998 --------- -------- -------- Benefit computed at federal statutory income tax rate $(100,002) $(46,868) $(29,340) State and local income taxes, net of federal benefit (12,763) (2,029) (2,425) Merger expenses - non deductible -- -- 8,268 Goodwill amortization 3,414 3,481 1,221 Goodwill impairment 7,102 -- -- Increase in valuation allowance 182,846 -- -- Other 228 59 106 --------- -------- -------- Total income tax provision (benefit) $ 80,825 $(45,357) $(22,170) ========= ======== ========
11. RELATED PARTY TRANSACTIONS In connection with the Recapitalization, the Company entered into a management agreement with KKR and Hicks Muse pursuant to which the Company has incurred $1.0 million of management fee expense during fiscal 2000, 1999 and 1998. Additionally, the Recapitalization costs included in the accompanying 1998 financial statement include an aggregate of $19.5 million of fees paid to KKR and Hicks Muse. 48 50 Regal paid $0.6 million in 1998 for legal services provided by a law firm, a member of which served as a director of the Company through May of 1998. 12. CASH FLOW INFORMATION
(IN THOUSANDS) 2000 1999 1998 --------- -------- -------- Supplemental information on cash flows: Interest paid $ 138,541 $128,909 $ 59,745 Income taxes paid (refunds received), net (215) (4,884) 4,656
NONCASH TRANSACTIONS: 2000: Pursuant to EITF 97-10 the Company recorded lease financing arrangements and net assets of $83.3 million during fiscal 2000. The Company retired 591,153 shares of common stock valued at $3.0 million in exchange for canceling notes receivable from certain shareholders. 1999: Pursuant to EITF 97-10, the Company recorded lease financing arrangements and net assets of $75.5 million during the fourth quarter of 1999. The Company issued 569,500 shares of common stock valued at $2.8 million in exchange for notes receivables from certain shareholders. The Company cancelled 119,964 shares of common stock and the related notes receivable valued at $.6 million from certain shareholders. 1998: Regal issued 60,383,388 shares of common stock and certain options to purchase shares of the Company's common stock valued at approximately $312.2 million and assumed debt of approximately $411.3 million as consideration for assets purchased from Act III (Note 4). Regal issued 808,313 shares of common stock valued at approximately $4.2 million in exchange for notes receivables from certain shareholders. In connection with the Recapitalization, 456,549 shares of common stock valued at approximately $2.2 million held by certain of the Company's senior management were reinvested in the Company. 13. EMPLOYEE BENEFIT PLANS The Company sponsors employee benefit plans under section 401(k) of the Internal Revenue Code for the benefit of substantially all full-time employees. 49 51 The Company made discretionary contributions of approximately $508,000, $426,000, and $319,000 to the plans in 2000, 1999 and 1998, respectively. Employees are immediately eligible; however, there is an age requirement of 21. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows: Cash and equivalents, accounts receivable, accounts payable: The carrying amounts approximate fair value because of the short maturity of these instruments. Long term debt, excluding capital lease obligations and lease financing arrangements: The fair value of the Company's term loans and the revolving credit facility are estimated based on market prices as of the Company's fiscal year end for the Company's senior credit facility, which consists of the Company's term loans and revolving credit facility. The associated interest rates are based on floating rates identified by reference to market rates and are assumed to approximate fair value. The fair values of the Company's senior subordinated notes and debentures are estimated based on quoted market prices for these issuances as of the Company's fiscal year end. The fair value of the Company's other debt obligations are based on recent financing transactions for similar debt issuances and carrying value approximates fair value. The carrying amounts and fair values of long-term debt, including its current maturities at December 28, 2000 and December 30, 1999 consists of the following:
(IN THOUSANDS) 2000 1999 ---------- ---------- Carrying amount $1,823,770 $1,683,627 Fair value $ 779,770 $1,491,627
Interest rate swaps: In September 1998, the Company entered into interest rate swap agreements for five year terms to hedge a portion of the Credit Facilities variable interest rate risk. On September 22, 2000, the Company monetized the value of all of these contracts for approximately $8.6 million. As the Company had accounted for these swaps as interest rate hedges, the gain realized from the sale has been deferred and will be amortized as a credit to interest expenses over the remaining original term of these swaps (through September 2003). The current portion of this gain is included in accrued expenses and the long-term portion in other liabilities. The fair value of the Company's remaining interest rate swap which matures on March 21, 2002 is $(.3) million as of December 28, 2000. The fair value of the Company's interest rate swap agreements at December 30, 1999 was $11.7 million. 50 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company engaged Deloitte & Touche LLP (Deloitte & Touche) as its new independent accountants as of September 9, 1998. Prior to such date, the Company did not consult with Deloitte & Touche regarding (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of 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 defined in paragraph 304(a)(1)(v). 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 47 Chairman, President, Chief Executive Officer and Director Gregory W. Dunn 41 Executive Vice President and Chief Operating Officer Amy Miles 34 Executive Vice President, Chief Financial Officer, and Treasurer Peter B. Brandow 40 Senior Vice President, General Counsel, and Secretary Robert J. Del Moro 41 Senior Vice President, Chief Purchasing Officer Denise K. Gurin 49 Senior Vice President, Head Film Buyer J.E. Henry 52 Senior Vice President, Chief Information Officer, Management Information Systems Mike Levesque 42 Senior Vice President, Operations Ron Reid 59 Senior Vice President, Construction Raymond L. Smith 37 Senior Vice President, Human Resources Counsel Richard Westerling 49 Senior Vice President, Marketing and Advertising Joseph Y. Bae 29 Director Joe Colonnetta 39 Director David Deniger 56 Director Henry R. Kravis 56 Director John R. Muse 50 Director Alexander Navab, Jr. 35 Director Paul E. Raether 54 Director Lawrence D. Stuart, Jr. 56 Director
Michael L. Campbell founded the Company in November 1989 and has served as Chairman of the Board, President and Chief Executive Officer since inception. Prior thereto, Mr. Campbell was the Chief Executive Officer of Premiere Cinemas Corporation ("Premiere"), which he co-founded in 1982, and served in such capacity until Premiere was sold in October 1989. Mr. Campbell serves as Chairman of the National Association of Theatre Owners in addition to serving on its Executive Committee of the Board of Directors. 51 53 Gregory W. Dunn has served as Executive Vice President and Chief Operating Officer since 1995. From 1991 to 1995, Mr. Dunn was Vice President, Marketing and Concessions. From 1989 to 1991, Mr. Dunn was the Purchasing and Operations Manager for Goodrich Quality Theaters, a Grand Rapids, Michigan based theatre chain. From 1986 to 1989, he was a film buyer for Tri-State Theatre Service, Inc. Amy Miles has served as Executive Vice President, Chief Financial Officer, and Treasurer since January of 2000. Prior thereto, she was Senior Vice President of Finance since joining the Company in April 1999. From 1998 to 1999, she was a Senior Manager with Deloitte & Touche. From 1989 to 1998, Ms. Miles was with PriceWaterhouseCoopers, LLC. Peter B. Brandow has served as Senior Vice President, General Counsel and Secretary since February 2000. Prior thereto, he served as Vice President, General Counsel and Secretary since joining the Company in February 1999. From September 1989 to January 1999, Mr. Brandow was an Associate at Simpson Thacher & Bartlett. Robert J. Del Moro has served as Senior Vice President, Purchasing, Chief Purchasing Officer, since September of 1998. From 1997 to 1998, Mr. Del Moro was Vice President, Food Service for the Company. From 1996 to 1997, Mr. Del Moro was Vice President, Entertainment Centers and Food Service. From 1995 to 1996, Mr. Del Moro was Vice President, Marketing and Concession. From 1994 to 1995, Mr. Del Moro was Director, Theatre Promotions and Concession. Denise K. Gurin has served as Senior Vice President, Head Film Buyer since September of 1998. From 1997 to 1998, Ms. Gurin was Vice-President, Head Film Buyer. From 1995 to 1997, Ms. Gurin was Senior Vice President, Film and Marketing for Mann Theatres, a Los Angeles, California based theatre chain ("Mann Theatres"). From 1992 to 1995, Ms. Gurin was a film buyer for Mann Theatres. From 1983 to 1992, Ms. Gurin was a film buyer for AMC Theatres, with her last five years as Senior Vice President, Head Film Buyer for the West Division. J.E. Henry has served as Senior Vice President, Chief Information Officer, Management Information Systems since September of 1998. From 1996 to 1998, Mr. Henry was Vice President, Management Information Systems. From 1994 to 1996, Mr. Henry served as Director of Management Information Systems. Mike Levesque has served as Senior Vice President, Operations since January of 1999. From 1996 to 1999, Mr. Levesque was Vice President, Operations - - Northern Region. From 1995 to 1996, Mr. Levesque served as Director of Marketing. During 1995, Mr. Levesque was a District Manager for the Eastern Region, and from 1994 to 1995, Mr. Levesque was a theatre general manager. Prior to joining Regal Cinemas, Mr. Levesque was employed by United Artists Theatres, Inc. for sixteen years. Ronald Reid has served as Senior Vice President, Construction since joining the Company in May,1999. Prior thereto, he was the Executive Vice President and Chief Operating Officer at Silver Cinemas from August, 1996 to May, 1999. Prior to that, Mr. Reid was Vice President of Construction, Purchasing and International Shipping at Cinemark from November, 1987 to August, 1996. Raymond L. Smith has served as Senior Vice President, Human Resources Counsel since July 1999. Prior thereto, he served as Vice President, Human Resources Counsel since joining the Company in April 1998. From January 1995 to April 1998, he was a partner of the law firm of 52 54 Pitt, Fenton & Smith. From May 1989 to January 1995, he was a senior associate at Rogers, Fuller & Pitt. Richard S. Westerling has served as Senior Vice President, Marketing and Advertising since joining the Company in April 2000. From 1998 to 2000, he was the Senior Vice President, Film Marketing for AMC Theatres, Inc. Prior to 1998, he held the position of Vice President of Marketing at AMC Entertainment, Inc. where he had worked in various capacities since 1976. Joseph Y. Bae became Director of the Company in February 2000. He has been an executive of KKR since 1996. From 1994 to 1996, Mr. Bae was an investment banker at Goldman Sachs & Co. He is also a director of Shoppers Drug Mart Limited. Joe Colonnetta became a Director of the Company in December 1999. Mr. Colonnetta has served as a principal of Hicks Muse since January 1999. From 1995 to 1998, Mr. Colonnetta served as a Managing Principal of a management affiliate of Hicks Muse. From 1994 to 1995, Mr. Colonnetta was the Chief Executive Officer of Triangle FoodService. From 1989 to 1994, Mr. Colonnetta was the Chief Financial Officer of TRC, Inc. Mr. Colonnetta 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), a wholly owned subsidiary of General Electric Capital Corporation ("GE Capital"), organized to underwrite, acquire and manage real estate equity investments made by GE Capital and its co-investors. Prior to forming GECRG, Mr. Deniger was President and CEO of FGB Realty Advisors, a wholly owned subsidiary of MacAndrews & Forbes Financial Service Group. Mr. Deniger also serves as a director of the Arnold Palmer Golf Management Company, Olympus Real Estate Corporation and Park Plaza International. Effective January 2001, Mr. Deniger resigned as a member of the Board of Directors. Henry R. Kravis became a 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 a director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd., Bruno's, Inc., Evenflo & Spalding Holdings Corporation, The Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL Recreational Group, Inc., Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Reltec Corporation, Sotheby's Holdings, Inc., Union Texas Petroleum Holdings, Inc. and World Color Press, Inc. 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. 53 55 Alexander Navab, Jr. became a Director of the Company upon the closing of the Regal Merger. He is a Partner of KKR and has been an Executive at KKR since 1993. He is also a director of Borden Inc., Birch Telecom Inc., CAIS Internet Inc., KSL Recreation Group Inc., Intermedia Communications, NewSouth Communications and Zhone Technologies. Paul E. Raether became a Director of the Company in December 1999. Since January 1996, he has been a member of the limited liability company which serves as the general partner of KKR. Mr. Raether has been a general partner of KKR Associates, L.P. since prior to 1995 and was a general partner of KKR from prior to 1995 to December 1995. Mr. Raether is also a director of IDEX Corporation, KSL Recreation Corporation and Shoppers Drug Mart. Lawrence D. Stuart, Jr. became a Director of the Company in 2000. He has been a Partner of Hicks, Muse, Tate & Furst, Inc. since 1995. At Hicks Muse, Mr. Stuart coordinates all aspects of negotiating and closing the firm's leveraged acquisition transactions and managing the firm's relationships with professional service firms. Prior to joining Hicks Muse, Mr. Stuart had served for over 20 years as the principal outside legal counsel for the investment firms and portfolio companies led by Mr. Hicks. From 1989 to 1995, Mr. Stuart was the managing partner of the Dallas office of Weil, Gotshal & Manges LLP. Prior thereto, he was a managing partner at Johnson & Gibbs, where he was employed from 1973 to 1989. Prior to joining Johnson & Gibbs, he was employed at Rain, Harrell, Emery, Young & Doke. Mr. Stuart serves as a director of Microten, Home Interiors & Gifts, Inc., and several of the Firm's portfolio companies. Effective January 2001, Mr. Stuart resigned as a member of the Board of Directors. COMPOSITION OF THE BOARD OF DIRECTORS The Board of Directors of the Company consists of nine members, including four directors designated by KKR and four directors designated by Hicks Muse. Directors of the Company are elected annually by the stockholders to serve during the ensuing year or until their respective successors are duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION The following table provides information as to annual, long-term or other compensation during the last three fiscal years for the Company's Chief Executive Officer and the Company's four most highly compensated executive officers who were serving as executive officers at the end of fiscal 2000 whose salary and bonus exceeded $100,000 during fiscal 2000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ---------------------------------- ---------------- SECURITIES FISCAL SALARY BONUS UNDERLYING NAME AND POSITION YEAR ($) ($)(1) OPTIONS/SARS(#) - ----------------- ------ ------- ------- --------------- Michael L. Campbell 2000 547,060 150,000 -- Chairman, President & Chief Executive 1999 526,350 -- -- Officer 1998 402,000 500,000 3,631,364 Gregory W. Dunn 2000 351,004 75,000 -- Executive Vice President & Chief 1999 336,278 -- -- Operating Officer 1998 252,000 219,213 413,255 Amy Miles 2000 242,637 90,000 -- Executive Vice President, Chief 1999 110,494 50,000 -- Financial Officer and Treasurer 1998 -- -- -- Denise Gurin 2000 227,929 40,000 -- Senior Vice President, Head Film Buyer 1999 219,437 40,000 -- 1998 43,700 108,763 164,251 Peter Brandow 2000 194,970 55,000 -- Senior Vice President, General Counsel 1999 104,969 35,000 -- and Secretary 1998 -- -- --
- ---------- (1) Reflects cash bonus earned and paid in fiscal 2000, and cash bonus earned in 1999, and 1998 respectively, and paid the following fiscal year. 54 56 During the 2000 and 1999 fiscal years, the Company did not grant options to the named executive officers. The following table summarizes certain information with respect to stock options exercised by the Named Executive Officers pursuant to the Company's Stock Option Plans. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL 2000 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS HELD OPTIONS HELD AT AT DECEMBER 28, 2000 DECEMBER 28, 2000 (1) (#) ($) ----------------------------- --------------------------- SHARES NET ACQUIRED ON VALUE NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ ----------- ----------- ------------- ----------- ------------- Michael L. Campbell -- -- 3,606,437 1,936,728 -- -- Gregory W. Dunn -- -- 691,506 220,403 -- -- Amy Miles -- -- -- -- -- -- Denise Gurin -- -- 216,150 87,601 -- -- Peter Brandow -- -- -- -- -- --
- ------------ (1) Reflects the market value of the underlying security at exercise. DIRECTORS' COMPENSATION Each director of the Company who is not also an officer or employee of the Company receives a fee of $40,000 per year. Directors of the Company are entitled to reimbursement of 55 57 their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the Board of Directors of the Company or committees thereof. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Messrs. Campbell and Dunn pursuant to which they respectively serve as Chief Executive Officer and Chief Operating Officer of the Company. The terms of the employment agreements commenced upon the closing of the Regal Merger and expire on May 28, 2001. The employment agreements provide for initial base salaries of $500,000 and $325,000 per year for Messrs. Campbell and Dunn, respectively. Messrs. Campbell and Dunn are entitled to receive annual target bonuses of 140% and 100%, respectively, of their base salaries based upon the achievement by the Company of certain EBITDA and other performance targets set by the Board of Directors of the Company. The employment agreements also provide that the Company will supply Messrs. Campbell and Dunn with other customary benefits generally made available to other senior executives of the Company. Each of the employment agreements also contains a noncompetition and no-raid provision pursuant to which each of Messrs. Campbell and Dunn has agreed, subject to certain exceptions, that during the term of his employment agreement and for one year thereafter, he will not compete with the Company or its theatre affiliates and will not solicit or hire certain employees of the Company. Each of the employment agreements also contains severance provisions providing for the termination of employment of Messrs. Campbell and Dunn by the Company under certain circumstances in which Messrs. Campbell and Dunn will be entitled to receive severance payments equal to the greater of (i) two times their respective annual base salaries and (ii) the balance of their respective base salaries over the then-remaining employment term, in either case payable over 24 months (or if longer, the remaining balance of the employment term) and continuation of health, life, disability and other similar welfare plan benefits. In December 2000, the Company established a management retention program for fiscal 2001 which, among other things, provides a severance plan for the Company's corporate employees. Pursuant to the severance plan, participants are entitled severance payments in the amounts established by the Company's Board of Directors if such participant is involuntarily terminated without cause or resigns for good reason (as such terms are defined in the plan). The amounts payable to the Named Executive Officers under the severance plan, assuming involuntarily termination of such officers without cause or resigns for good reason as of January 1, 2001, were as follows: Mr. Campbell - at Mr. Campbell's election, $2,486,700 or the amount provided him under his employment contract; Mr. Dunn - at Mr. Dunn's election, $1,105,625 or the amount provided him under his employment contract; Ms. Miles - $937,500; Ms. Gurin - $291,975; and Mr. Brandow - $781,250. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 2000, the Compensation Committee was comprised of Messrs. Levitt, Muse, and Navab. None of these persons has at any time been an officer or employee of the Company or its subsidiaries. Mr. Michael J. Levitt served on the Compensation Committee until his resignation in August of 2000, when he was replaced by Mr. Stuart. 56 58 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of shares of the Common Stock as of March 28, 2001, by (i) each person who is known to the Company to own beneficially more than 5% of the Common Stock; (ii) each director of the Company; (iii) the Named Executive Officers of the Company; and (iv) all directors and executive officers of the Company as a group. Unless noted otherwise, the address for each executive officer is in the care of the Company at 7132 Mike Campbell Drive, Knoxville, Tennessee 37918.
Amount and Name and Address of Nature of Beneficial Percent Beneficial Owners Ownership (1) of Class ----------------- ------------- -------- 5% STOCKHOLDERS: Hicks Muse Parties (2) 100,000,000 46.2% c/o Hicks, Muse, Tate & Furst Incorporated 200 Crescent Court Suite 1600 Dallas, Texas 75201 KKR 1996 GP L.L.C. (3) 100,000,000 46.2% c/o Kohlberg Kravis Roberts & Co. L.P. 9 West 57th Street Suite 4200 New York, New York 10019 OFFICERS AND DIRECTORS: Joseph Y. Bae - * Joe Colonnetta - * David Deniger - * Henry R. Kravis - * Michael J. Levitt - * John R. Muse - * Alexander Navab, Jr. - * Paul E. Raether - Lawrence D. Stuart, Jr. - * Michael L. Campbell 4,900,305 2.3% Gregory W. Dunn 787,932 * Amy Miles -- * Denise Gurin 284,475 * Peter Brandow -- * * All directors and executive officers as a group 6,813,579 3.2% (19 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 28, 2001 pursuant to the exercise of stock options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such owner but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes shares owned of record by Regal Equity Partners, L.P. (Regal Partners), a limited partnership whose sole general partner is TOH/Ranger, LLC (Ranger LLC). Mr. Hicks is the sole member and director of Ranger LLC and, accordingly, may be deemed to be the beneficial owner of the Common Stock held directly or indirectly by Regal 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. 57 59 (3) KKR 1996 GP L.L.C. is the sole general partner of KKR Associates 1996 L.P. KKR Associates 1996 L.P., a limited partnership, is the sole general partner of KKR 1996 Fund L.P., a limited partnership formed at the direction of KKR, and possesses sole voting and investment power with respect to such shares. KKR 1996 GP L.L.C. is a limited liability company, the managing members of which are Henry R. Kravis and George R. Roberts, and the other members of which are Robert I. MacDowell, Paul E. Raether, Michael W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Scott M. Stuart, Edward A. Gilhuly, Johannes Huthe, Todd A. Fisher, Alexander Navab, Jr. and Neil A. Richardson. Messrs. Kravis, Navab and Raether are directors 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/Hicks Muse Stockholders Agreement"). Among other things, the KKR/Hicks Muse Stockholders Agreement provides that each of Hicks Muse and KKR has the right to appoint an equal number of directors to the Board of Directors of the Company, subject to maintaining specified ownership thresholds. The number of directors appointed by KKR and Hicks Muse together shall constitute a majority of the Board of Directors. The KKR/Hicks Muse Stockholders Agreement further provides that Hicks Muse and KKR will amend the Company's bylaws to provide that no action may be validly taken at a meeting of the Board of Directors unless a majority of the Board of Directors, a majority of the directors designated by Hicks Muse and a majority of the directors designated by KKR have approved such action. The KKR/Hicks Muse Stockholders Agreement provides that neither Hicks Muse nor KKR may transfer its shares of Common Stock to a person other than its respective affiliates for a period of five years following the closing date of the Regal Merger. In addition, the KKR/Hicks Muse Stockholders Agreement provides KKR and Hicks Muse with certain registration rights and limits the ability of either KKR or Hicks Muse to separately acquire motion picture exhibition assets in excess of a specified amount without first offering the other the right to participate in such acquisition opportunity. DLJ STOCKHOLDERS AGREEMENT Concurrently with the consummation of the Regal Merger, the Company, Hicks Muse, KKR and DLJ entered into a stockholders agreement (the "DLJ Stockholders 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. 58 60 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: The following Financial Statements of Regal Cinemas, Inc. and subsidiaries are included in Part II, Item 8. Independent Auditors' Report Consolidated Balance Sheets at December 28, 2000 and December 30, 1999. Consolidated Statements of Operations for the years ended December 28, 2000, December 30, 1999, and December 31, 1998. Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the years ended December 28, 2000, December 30, 1999, and December 31, 1998. Consolidated Statements of Cash Flows or the years ended December 28, 2000, December 30, 1999, 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)
59 61 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) (HSBC as successor trustee). (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) 10.4 -- Credit Agreement, dated as of May 27, 1998, by and between Regal Cinemas, Inc., its subsidiaries and the lenders named therein. (5) 10.4-1 -- First Amendment, dated as of August 26, 1998, by and between Regal Cinemas, Inc., its subsidiaries and the lenders named therein. (3) 10.4-2 -- Second Amendment, dated as of December 31, 1998, by and between Regal Cinemas, Inc., its subsidiaries and the lenders named therein. (7) 10.4-3 -- Third Amendment, dated as of March 3, 1999, by and between Regal Cinemas, Inc., and its subsidiaries and the lenders named therein. (10) 10.5 -- 1993 Employee Stock Incentive Plan. (4) 10.6 -- Regal Cinemas, Inc. Participant Stock Option Plan. (4) 10.7 -- Regal Cinemas, Inc. Employee Stock Option Plan. (4) 10.8 -- 1998 Stock Purchase and Option Plan for Key Employees of Regal Cinemas, Inc. (8) 10.9 -- Form of Management Stockholder's Agreement. (8) 10.10 -- Form of Non-Qualified Stock Option Agreement. (8) 10.11 -- Form of Sale Participation Agreement. (8) 10.12 -- Form of Registration Rights Agreement. (8) 10.13 -- Stockholders' Agreement, dated as of May 27, 1998, by and among Regal Cinemas, Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P. and Regal Equity Partners, L.P. (3) 10.14 -- Stockholders' and Registration Rights Agreement, dated as of May 27, 1998, by and among Regal Cinemas, Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P., Regal Equity Partners, L.P. and the DLJ signatories thereto. (3) 21 -- Subsidiaries.* 23.1 -- Consent of Deloitte & Touche LLP.*
- ----------------- * 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. 60 62 (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 1998. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-4, Registration No. 333-69943. (7) Incorporated by reference to the Registrant's Registration Statement on Form S-4/A, Registration No. 333-69931. (8) Incorporated by reference to the Registrant's Registration Statement on Form S-8, Registration No. 333-52943. (9) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (10) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1999. (b) During the fourth quarter of fiscal 1998 ended December 31, 1998, the Registrant filed a Current Report on Form 8-K/A on September 23, 1998, reporting changes in the Registrant's Certifying Accountant. During the fourth quarter of fiscal 2000 ended December 28, 2000, the Registrant filed Current Reports of Form 8-K on December 1, 2000 and December 15, 2000, reporting the administrative agents under the Company's Senior Credit Facilities delivered payment blockage notices to the Company and the indebture trustee prohibiting the payment by Regal of semi-annual interest payments to the holders of Regal Notes and Regal Debentures. 61 63 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 28, 2001 By: /s/ Michael L. Campbell ---------------------------------------- Michael L. Campbell, Chairman, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Michael L. Campbell Chairman of the Board, March 28, 2001 - ------------------------------------ President, Chief Executive Michael L. Campbell Officer and Director (Principal Executive Officer) /s/ Amy Miles Executive Vice President, Chief March 28, 2001 - ------------------------------------ Financial Officer and Treasurer Amy Miles (Principal Financial and Accounting Officer) /s/ Joseph Y. Bae Director March 28, 2001 - ------------------------------------ Joseph Y. Bae Director March __, 2001 - ------------------------------------ Joe Colonnetta /s/ Henry R. Kravis Director March 28, 2001 - ------------------------------------ Henry R. Kravis Director March __, 2001 - ------------------------------------ John R. Muse /s/ Alexander Navab, Jr. Director March 28, 2001 - ------------------------------------ Alexander Navab, Jr. /s/ Paul E. Raether Director March 28, 2001 - ------------------------------------ Paul E. Raether
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. EX-21 2 g68010ex21.txt SUBSIDIARIES 1 EXHIBIT 21 Subsidiaries ------------ 1. R.C. Cobb, Inc. 2. Cobb Finance Corp. 3. Regal Investment Company 4. Act III Cinemas, Inc. 5. Act III Theatres, Inc. 6. A 3 Theatres of Texas, Inc. 7. A 3 Theatres of San Antonio, Ltd. 8. General American Theatres, Inc. 9. Broadway Cinemas, Inc. 10. TEMT Alaska, Inc. 11. JR Cinemas, Inc. 12. Eastgate Theatres, Inc. 13. Regal Cinemas Holdings, Inc. 14. Regal Cinemas Group, Inc. EX-23.1 3 g68010ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-74634, 333-13291, 333-13295 and 333-52943 of Regal Cinemas, Inc. on Form S-8 of our report dated February 20, 2001 appearing in the Annual Report on Form 10-K of Regal Cinemas, Inc. for the year ended December 28, 2000. /s/ DELOITTE & TOUCHE LLP Nashville, Tennessee March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----