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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2001
Commission file number: 333-52943
REGAL CINEMAS, INC.
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(Exact name of Registrant as Specified in its Charter)
Tennessee 62-1412720
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (Internal Revenue Service Employer
Incorporation or Organization) Identification Number)
7132 Mike Campbell Drive
Knoxville, TN 37918
- ------------------------------- ----------------------------------
(Address of Principal Executive Offices) (Zip code)
Registrant's Telephone Number, Including Area Code: 865/922-1123
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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 [ ]
Common Stock outstanding - 216,235,316 shares at August 13, 2001
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED) (AUDITED)
JUNE 28, DECEMBER 28,
2001 2001
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 140,487 $ 118,834
Accounts receivable 560 1,473
Reimbursable construction advances 7,882 10,221
Inventories 4,306 6,092
Prepaid and other current assets 30,705 22,690
Assets held for sale 4,540 3,808
----------- -----------
Total current assets 188,480 163,118
PROPERTY AND EQUIPMENT:
Land 79,406 87,491
Buildings and leasehold improvements 1,093,613 1,119,677
Equipment 442,081 453,320
Construction in progress 226 8,195
----------- -----------
1,615,326 1,668,683
Accumulated depreciation and amortization (276,700) (246,850)
----------- -----------
Total property and equipment, net 1,338,626 1,421,833
GOODWILL, net of accumulated amortization of
$35,143 and $31,080, respectively 350,934 365,227
OTHER ASSETS 41,879 40,950
----------- -----------
TOTAL ASSETS $ 1,919,919 $ 1,991,128
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,821,549 $ 1,823,683
Accounts payable 45,669 55,753
Accrued expenses 219,390 148,559
----------- -----------
Total current liabilities 2,086,608 2,027,995
LONG-TERM DEBT, less current maturities:
Long-term debt 3,469 3,709
Capital lease obligations 1,542 17,790
Lease financing arrangements 159,343 153,350
OTHER LIABILITIES 43,026 40,669
----------- -----------
TOTAL LIABILITIES 2,293,988 2,243,513
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock, no par: 100,000,000 shares
authorized, none issued -- --
Common stock, no par: 500,000,000 shares
authorized; 216,235,316 shares issued and
outstanding at June 28, 2001 and 216,282,348
shares issued and outstanding at
December 28, 2000 196,568 196,804
Loans to shareholders (3,178) (3,414)
Retained deficit (567,459) (445,775)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIT $ (374,069) $ (252,385)
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 1,919,919 $ 1,991,128
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUES:
Admissions $ 199,308 $ 182,544 $ 400,036 $ 342,775
Concessions 82,557 74,488 158,619 140,526
Other operating revenue 10,446 11,597 20,736 23,508
--------- --------- --------- ---------
Total revenues 292,311 268,629 579,391 506,809
--------- --------- --------- ---------
OPERATING EXPENSES:
Film rental and advertising 111,611 103,644 211,555 184,566
Cost of concessions and other 12,131 11,506 23,335 21,860
Theatre operating expenses 114,555 107,254 232,446 212,531
General and administrative 8,277 8,066 15,433 16,335
Legal and professional fees -
restructuring related 5,415 -- 7,952 --
Depreciation and amortization 23,302 21,702 46,660 43,358
Theatre closing costs (6,644) 9,101 18,757 12,867
Loss (gain) on disposal of
operating assets 3,495 (240) 10,636 287
Loss on impairment of fixed assets 15,355 10,245 52,318 14,503
--------- --------- --------- ---------
Total operating expenses 287,497 271,278 619,092 506,307
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 4,814 (2,649) (39,701) 502
OTHER INCOME (LOSS):
Interest expense (49,862) (42,174) (99,630) (82,596)
Interest income 1,015 248 2,637 506
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (44,033) (44,575) (136,694) (81,588)
BENEFIT FROM INCOME TAXES -- 15,157 -- 27,584
--------- --------- --------- ---------
NET LOSS BEFORE
EXTRAORDINARY ITEM (44,033) (29,418) (136,694) (54,004)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt, net
of applicable taxes of $0 15,010 -- 15,010 --
--------- --------- --------- ---------
NET LOSS $ (29,023) $ (29,418) $(121,684) $ (54,004)
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
---------------------
JUNE 28, JUNE 29,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(121,684) $ (54,004)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 46,660 43,359
Extraordinary gain on extinguishment of debt (15,010) --
Loss on impairment of assets 52,318 14,503
Loss on disposal of operating assets 10,636 287
Theatre closing costs 18,757 12,867
Deferred income taxes -- (27,556)
Changes in operating assets and liabilities:
Accounts receivable 913 1,047
Inventories 1,786 (101)
Prepaids and other assets (8,944) 367
Accounts payable (10,084) (38,602)
Accrued expenses and other liabilities 54,431 7,987
--------- ---------
Net cash provided by (used in) operating activities 29,779 (39,846)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (13,673) (99,443)
Proceeds from sales of fixed assets 4,927 13,917
Net change in reimbursable construction advances 2,339 10,380
--------- ---------
Net cash used in investing activities (6,407) (75,146)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt -- 147,000
Payments made on long-term debt (1,719) (38,293)
--------- ---------
Net cash provided by (used in) financing activities (1,719) 108,707
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 21,653 (6,285)
CASH AND CASH EQUIVALENTS, beginning of period 118,834 40,604
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 140,487 $ 34,319
========= =========
See accompanying notes to condensed consolidated financial statements.
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REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 THE COMPANY AND BASIS OF PRESENTATION
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 Company
formally operates on a fiscal year ending on the Thursday closest to
December 31.
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 once stable markets and rendered many older theatres
obsolete more rapidly than anticipated. This effect, together with the
fact that the Company leases many of these now obsolete theatres 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 the previous fiscal years 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.
As 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 term note ("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 Notes due 2010
(the "Regal Debentures") prohibiting the payment by Regal of the
semi-annual interest payments of approximately $28.5 million due
holders of the Regal Notes on December 1, 2000 and June 1, 2001 and
$8.9 million due to the holders of the Regal Debentures on December 15,
2000 and June 15, 2001. Because of the interest payment defaults, the
Company is also in default of the indentures related to the Regal Notes
and Regal Debentures. Additionally, the Company is in payment default
of its Senior Credit Facilities, as the Company failed to pay the first
and second quarter interest payments totaling approximately $49.2
million and principal payments totaling approximately $3.8 million. As
a result of the interest payment defaults, the holders of the Company's
Senior Credit Facilities and the indenture trustee for the Regal Notes
and Regal Debentures have exercised their right to accelerate the
maturity of all of the outstanding indebtedness under the respective
agreements, which together totals approximately $1.80 billion plus
accrued and unpaid interest of approximately $129.1 million. 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 developing
a longer-term financial plan to address various restructuring
alternatives. The financial plan will provide for the closure of
under-performing theatre sites and a restructuring of the Company.
Accordingly, the Company is currently in discussions with the majority
holders of the Company's Senior bank and bond debt.
Based on the substantial doubt that exists about the Company's ability
to continue under its existing capital structure, the restructuring of
the Company may include a potential recapitalization or bankruptcy
reorganization.
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
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normal course of business. As discussed above, the Company's bank
lenders and bondholders have accelerated the outstanding indebtedness
under the Senior Credit facilities, the Regal Notes, and the Regal
Debentures. These factors among others raise substantial doubt about
the Company's ability to continue as a going concern for a reasonable
period. 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.
The Company, without audit, has prepared the condensed consolidated
balance sheet as of June 28, 2001, the condensed consolidated
statements of operations for the three and six month periods ended June
28, 2001 and June 29, 2000, and the condensed consolidated statements
of cash flows for the six months ended June 28, 2001 and June 29, 2000.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly in all
material respects the financial position, results of operations and
cash flows for all periods presented have been made. The December 28,
2000 information is from the audited December 28, 2000 consolidated
balance sheet of the Company.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
Users should read these condensed consolidated financial statements in
conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report filed on Form 10-K
dated March 28, 2001. The results of operations for the three and six
month periods ended June 28, 2001 are not necessarily indicative of the
operating results for the full year.
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2 LONG-TERM DEBT
Long-term debt at June 28, 2001 and December 28, 2000, consists of the
following (in thousands):
JUN. 28, DEC. 28,
(IN THOUSANDS) 2001 2000
$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%
2007 and thereafter 100.000% 200,000 200,000
Term Loans 505,000 505,000
Revolving credit facility 495,000 495,000
Equipment financing note payable, payable in varying
quarterly installments through April 1, 2005,
including interest at LIBOR plus 3.25% (8.33% at June
28, 2001), collateralized by related equipment 19,000 19,500
Capital lease obligations, 7.9%, maturing in 2009 1,597 19,597
Lease financing arrangements, 11.5%, maturing in
various installments through 2019 161,300 155,165
Other 4,006 4,270
----------- -----------
1,985,903 1,998,532
Less current maturities (1,821,549) (1,823,683)
----------- -----------
Total long-term obligations $ 164,354 $ 174,849
=========== ===========
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CREDIT FACILITIES - The Company entered into credit facilities provided
by a syndicate of financial institutions. The Company amended these
facilities in August 1998, December 1998, and March 1999. These 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.
Outstanding borrowings under the Revolving Credit Facility were $495.0
million as of June 28, 2001 and December 28, 2000, respectively.
Under the Term A Loan or the Revolving Credit Facility, the Company may
borrow funds 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 both June 28, 2001 and December
28, 2000 with $2.4 million due annually through 2004 and the balance
due in 2005.
Under the Term B Loan, the Company may borrow funds 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
June 28, 2001 and December 28, 2000, with the balance scheduled to be
due in 2006.
Under the Term C Loan, the Company may borrow funds 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
June 28, 2001 and December 28, 2000, 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 Senior Credit Facilities. The Company's direct and
indirect U.S. subsidiaries guarantee payment obligations under certain
of the Senior Credit Facilities.
The Senior 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.
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 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 Notes due 2010 (the "Regal
Debentures") prohibiting the payment by Regal of the semi-annual
interest payments of approximately $28.5 million due holders of the
Regal Notes on December 1, 2000 and June 1, 2001 and $8.9 million due
to the holders of the Regal Debentures on December 15, 2000 and June
15, 2001. Because of the interest payment defaults, the Company is also
in default of the indentures related to the Regal Notes and Regal
Debentures. Additionally, the Company is in payment default of its
Senior Credit Facilities, as the Company failed to pay the first and
second quarter interest payments totaling approximately $49.2 million
and principal payments totaling approximately $3.8 million. As a result
of the interest payment defaults, the holders of the Company's Senior
Credit Facilities and the indenture trustee for the Regal Notes and
Regal Debentures have exercised their right to accelerate the maturity
of all of the outstanding indebtedness under the respective agreements,
which
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together totals approximately $1.80 billion plus accrued and unpaid
interest of approximately $129.1 million. The Company does not have the
ability to fund or refinance the accelerated maturity of this
indebtedness. Accordingly, the Company has classified the Senior Credit
Facilities, Equipment Financing, Regal Notes and Regal Debentures as
current liabilities in the accompanying balance sheet as of June 28,
2001 and December 28, 2000.
LEASE FINANCING ARRANGEMENTS - 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 when construction of the asset is completed, the
owner-lessor will lease to the lessee. 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.
INTEREST RATE SWAPS - In September 1998, the Company entered into
interest rate swap agreements for five-year terms to hedge a portion of
the Senior Credit Facilities variable interest rate risk. In September
2000, the Company monetized the value of these agreements for
approximately $8.6 million. As the Company had accounted for these swap
agreements as interest rate hedges, the Company has deferred the gain
realized from the sale. The Company will amortize the deferred gain as
a credit to interest expense 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 one remaining interest
rate swap, which matures in March 2002, is ($0.5) million as of June
28, 2001.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities and subsequently
amended No. 133 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 resulted in a charge
of $0.5 million to establish a liability for the fair market value of
the Company's interest rate swap agreement.
EXTRAORDINARY GAIN - During the second quarter of 2001, the Company
recognized an extraordinary gain of $15.0 million, on which there was
no income tax effect (see Note 3), due to the early termination of
certain capital leases. The landlord terminated these leases in
exchange for rights to purchase theatre equipment at these theatre
sites.
3 INCOME TAXES
The Company periodically evaluates its deferred tax asset to determine
the need for any valuation allowance that may be appropriate in light
of the Company's projections for taxable income and the expiration
dates of the Company's net operating loss carry-forwards. Based on the
results of its evaluation, the Company recorded a $182.8 million
valuation allowance against the deferred tax assets as of December 28,
2000 to reflect the determination that it was more likely than not that
the net deferred tax asset will not be realized. The Company did not
book a tax asset for the quarter and six-month period ended June 28,
2001 as the entire deferred tax asset resulting from the loss before
income taxes, net of the extraordinary gain ($9.5 million and $42.6
million, respectively, resulting in an effective tax rate of 32.8% and
35.0%, respectively) was reserved by a corresponding increase in the
valuation allowance. The Company will continue to review this valuation
allowance on a periodic basis and make adjustments as appropriate.
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4 CAPITAL STOCK
Earnings per share information is not presented herein as the Company's
shares do not trade in a public market. After the Recapitalization, 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 price 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.
5 LOSS ON IMPAIRMENT OF ASSETS
ASSET IMPAIRMENT - The Company periodically reviews the carrying value
of long-lived assets, including allocated goodwill, for impairment
based on expected future cash flows. The Company performs these reviews
as part of the Company's budgeting process and 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 Company's estimate of the resulting
impairment loss is the amount by which the carrying value of the asset
exceeds fair value 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. The Company
has recognized the following impairment losses per this analysis:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2001 2000 2001 2000
------- ------- ------- -------
(IN THOUSANDS)
Write-down of theatre
property and equipment $13,267 $ 1,022 $43,255 $ 1,749
Write-off of goodwill 2,088 9,223 9,063 12,754
------- ------- ------- -------
Total $15,355 $10,245 $52,318 $14,503
======= ======= ======= =======
THEATRE CLOSING AND LOSS ON DISPOSAL COSTS - The Company's management
team continually evaluates the status of the Company's under-performing
locations. During the second quarter of 2001, the Company recorded $3.5
million as the net loss on disposal of these locations. The Company
maintains, in conjunction with certain closed locations, a reserve for
lease termination costs of $51.4 million. This reserve for lease
termination costs represents management's best estimate of the
potential costs for exiting these leases. The Company bases this
reserve on analyses of the properties, correspondence with the
landlord, exploratory discussions with potential sublessees and
individual market conditions.
The following is the activity in this reserve during the six-month
periods ended: (In thousands)
JUNE 28, JUNE 29,
2001 2000
-------- ---------
Beginning balance $ 41,463 $ 4,269
Rent and other termination payments (5,195) (9,744)
Additional closing and termination costs 25,277 13,967
Change in previous reserve estimates (10,099) (1,563)
---------- ----------
Ending balance $ 51,446 $ 6,929
========= =========
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The Company has made decisions after June 28, 2001 to close additional
theatres in conjunction with its restructuring program. The Company
will recognize additional theatre closing and loss on disposal costs in
2001 because of these closures.
6 CASH FLOW INFORMATION
(IN THOUSANDS) JUNE 28, JUNE 29,
2001 2000
-------- -------
Supplemental information on cash flows:
Interest paid $ 21,707 $82,000
Income taxes paid (refunds received), net (194) 246
NONCASH TRANSACTIONS:
JUNE 28, 2001:
Pursuant to EITF 97-10, the Company recorded lease financing
arrangements and net assets of $7.1 million.
The Company retired 47,032 shares of common stock valued at $0.2
million in exchange for canceling notes receivable from certain
shareholders.
JUNE 29, 2000:
Pursuant to EITF 97-10, the Company recorded lease financing
arrangements and net assets of $37.6 million.
The Company retired 23,408 shares of common stock valued at $0.1
million in exchange for canceling notes receivables from certain
shareholders.
7 SUBSEQUENT EVENT
In July 2001, the Company entered into an agreement with one of its
landlords that provides for the termination of long-term leases at five
locations, two of which the Company accounted for as lease financing
arrangements. Accordingly, the Company wrote-off the lease financing
arrangement obligations and net book value of the related property and
equipment and other assets during the third quarter of 2001, resulting
in an extraordinary gain due to debt extinguishment of $3.4 million,
net of applicable taxes.
8 RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board has approved for issuance
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets." SFAS
No. 141 will require that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 and that the
use of the pooling-of-interest method is no longer allowed. SFAS No.
142 requires that upon adoption, amortization of goodwill will cease
and instead, the carrying value of goodwill will be evaluated for
impairment on an annual basis. Identifiable intangible assets will
continue to be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of the adoption
of these standards and has not yet determined the effect of adoption on
its financial position and results of operations.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Users should read the following analysis of the financial condition and results
of operations of Regal Cinemas, Inc. (the "Company") in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto included herein.
RESULTS OF OPERATIONS
The Company's generates revenues primarily from admissions and concession sales.
Additional revenues are generated by electronic video games located adjacent to
the lobbies of certain of the Company's theatres and by on-screen
advertisements, and rebates from concession vendors. Direct theatre costs
consist of film rental and advertising costs, costs of concessions and theatre
operating expenses. Film rental costs depend on 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 is in exhibition. Because the Company
purchases certain concession items, such as fountain drinks and popcorn, 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 June 28, 2001, the Company
paid the federal minimum wage to approximately 6.0 percent of the Company's
employees 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.
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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.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
2001 2000 2001 2000
------- ------- ------- -------
REVENUES:
Admissions 68.2 68.0 69.0 67.6
Concessions 28.2 27.7 27.4 27.7
Other operating revenue 3.6 4.3 3.6 4.7
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
------- ------- ------- -------
OPERATING EXPENSES:
Film rental and advertising 38.2 38.6 36.5 36.4
Cost of concessions and other 4.1 4.3 4.0 4.3
Theatre operating expenses 39.2 39.9 40.1 41.9
General and administrative 2.8 3.0 2.7 3.2
Legal and professional fees -
restructuring related 1.9 0.0 1.4 0.0
Depreciation and amortization 8.0 8.1 8.1 8.6
Theatre closing costs (2.7) 3.4 3.1 2.5
Loss on disposal of operating assets 1.2 (0.1) 1.8 0.1
Loss on impairment of fixed assets 5.3 3.8 9.0 2.9
------- ------- ------- -------
Total operating expenses 98.0 101.0 106.7 99.9
------- ------- ------- -------
OPERATING INCOME (LOSS) 2.0 (1.0) (6.7) 0.1
OTHER INCOME (LOSS):
Interest expense (17.0) (15.7) (17.2) (16.3)
Interest income 0.4 0.1 0.5 0.1
Other (0.4) 0.0 (0.2) 0.0
------- ------- ------- -------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (15.0) (16.6) (23.6) (16.1)
BENEFIT FROM INCOME TAXES 0.0 5.6 0.0 5.4
------- ------- ------- -------
NET LOSS BEFORE
EXTRAORDINARY ITEM (15.0) (11.0) (23.6) (10.7)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt, net
of applicable taxes 5.1 0.0 2.6 0.0
------- ------- ------- -------
NET LOSS $ (9.9) $ (11.0) $ (21.0) $ (10.7)
======= ======= ======= =======
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THREE MONTHS ENDED JUNE 28, 2001 AND JUNE 29, 2000
TOTAL REVENUES - Total revenues for the second quarter of fiscal 2001
increased 8.8% to $292.3 million from $268.6 million in the comparable 2000
period. Box office ticket prices for the second quarter of 2001 averaged $5.60,
which was 4.7% higher than the $5.35 average ticket price in the second quarter
of 2000. Average concession prices also were higher in the second quarter of
2001 ($2.32) versus the second quarter in 2000 ($2.18). The higher prices
increased box revenues and concession revenues by $8.4 million and $4.6 million,
respectively. Admissions for the second quarter of 2001 increased 4.4% to 35.6
million patrons as compared to 34.1 million patrons for the second quarter of
2000. The Company's attendance increased in spite of the fact that the circuit's
average screen count during the second quarter of 2001 decreased to 4,036 as
compared to the average screen count of 4,428 during the second quarter of 2000.
The increased attendance yielded an increase in box revenues of $8.3 million and
concession revenues of $3.5 million. Other operating revenue for the second
quarter of 2001 was lower than in the same period in 2000 by $1.1 million due
primarily to the elimination of revenues from the Company's entertainment
centers (Funscapes), partially offset by increased revenues from certain vendor
rebates.
DIRECT THEATRE COSTS - Direct theatre costs increased by 7.1% to $238.3
million in the second quarter 2001 from $222.4 million in the second quarter of
2000. Direct theatre costs as a percentage of total revenues decreased to 81.5%
in the 2001 period from 82.8% in the 2000 period. The decrease in direct theatre
costs as a percentage of total revenues was primarily attributable to as the
Company's continued closure of unprofitable theatres combined with the increase
in total revenues in the second quarter of 2001 as compared to the same period
in 2000.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative
expenses increased by 2.6% to $8.3 million in the second quarter of 2001 from
$8.1 million in the second quarter 2000. As a percentage of total revenues,
general and administrative expenses decreased to 2.8% in the 2001 period from
3.0% in the 2000 period. The reduction in general and administrative expenses as
a percentage of total revenues was primarily due to lower corporate salary and
wage expenses and the corresponding decrease in payroll related costs.
LEGAL AND PROFESSIONAL - RESTRUCTURING RELATED - The Company incurred
$5.4 million of professional and consulting fees in the second quarter of 2001
relating to the Company's ongoing restructuring efforts.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense
increased in the second quarter of 2001 by 7.4% to $23.3 million from $21.7
million in the second quarter of 2000.
OPERATING INCOME (LOSS) - Operating income (loss) for the second
quarter of 2001 increased to $4.8 million from $(2.6) million in the second
quarter of 2000. The increase is primarily due to increased box and concession
revenues coupled with the recognition of a gain in theatre closing costs.
INTEREST EXPENSE - Interest expense increased in the second quarter of
2001 to $49.9 million from $42.2 million in the second quarter of 2000. The
increase is primarily due to higher average debt and financing obligations in
2001.
INCOME TAXES - No benefit for income taxes was recorded in the second
quarter of 2001 since the Company recorded an offsetting valuation allowance
against the resulting deferred tax asset ($9.5 million yielding a 32.8%
effective tax rate) as it is more likely than not that such deferred tax assets
would not be realized. The Company recorded a $15.2 million benefit in the
second quarter of 2000 with an effective rate of 34.0%. The effective rate
differs from the statutory rate due to nondeductible goodwill amortization and
the inclusion of state income taxes.
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NET LOSS - The net loss in the second quarter of 2001 was $29.0 million
as compared to $29.4 million in the second quarter of 2000.
IMPAIRMENT AND OTHER DISPOSAL CHARGES - The Company periodically
reviews the carrying value of long-lived assets, including allocated goodwill,
for impairment based on expected future cash flows. The Company performs these
reviews as part of the Company's budgeting process and 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 Company's estimate of the resulting impairment loss
is the amount by which the carrying value of the asset exceeds fair value 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 $15.4 million
impairment charge during the second quarter of 2001.
Additionally, the Company continually evaluates the status of the
Company's under-performing locations. Consequently, the Company decided to close
a number of existing theatre locations as well as discontinue plans to develop
certain sites. In conjunction with certain closed locations, the Company
maintains a reserve for lease termination costs of $51.4 million. This reserve
for lease termination costs represents management's best estimate of the
potential costs for exiting these leases. The Company bases this estimate on
analyses of the properties, correspondence with the landlord, exploratory
discussion with potential sub-lessees and individual market conditions.
SIX MONTHS ENDED JUNE 28, 2001 AND JUNE 29, 2000
TOTAL REVENUES - Total revenues for the first half of fiscal 2001
increased by 14.3% to $579.4 million from $506.8 million in the first half of
2000. This increase was due to both higher admissions as well as increased
ticket prices. Box office ticket prices for the first half of 2001 averaged
$5.56, which was 6.7% higher than the $5.21 average ticket price for the same
period in 2000. Concession prices also were higher in the first half of 2001
($2.20) versus the same period in 2000 ($2.14). The higher prices increased
revenue by $27.4 million. Attendance was higher in the first half of 2001 (72.0
million admissions) as compared to the 2000 period (65.8 million admissions).
The increase in attendance yielded a revenue increase of $47.8 million. Other
operating revenue was lower in the first half of 2001 by $2.8 million due
primarily to the elimination of revenues from the Company's entertainment
centers (Funscapes), partially offset by increased revenues from certain vendor
rebates.
DIRECT THEATRE COSTS - Direct theatre costs increased by 11.5% to
$467.3 million in the first half of 2001 from $419.0 million in the first half
of 2000. Direct theatre costs as a percentage of total revenues decreased to
80.7% in the 2001 period from 82.7% in the 2000 period. The decrease was
primarily attributable to the Company's continued closure of unprofitable
theatres combined with the increase in total revenues in the first half of 2001
as compared to the same period in 2000.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative
expenses decreased by 5.5% to $15.4 million in the first half of 2001 from $16.3
million in the first half of 2000. As a percentage of total revenues, general
and administrative expenses decreased to 2.7% in the 2001 period from 3.2% in
the 2000 period. The reduction in general and administrative expenses as a
percentage of total revenues was primarily due to lower corporate salary and
wage expenses and the corresponding decrease in payroll related costs.
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LEGAL AND PROFESSIONAL - RESTRUCTURING RELATED - The Company incurred
$8.0 million of professional and consulting fees in the first half of 2001
relating to the Company's ongoing restructuring efforts.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense
increased in the first half of 2001 by 7.6% to $46.7 million from $43.4 million
in the first half of 2000.
OPERATING INCOME - Operating income (loss) for the first half of 2001
decreased to $(39.7) million from $0.1 million in the first half of 2000. The
decrease is primarily due to the $52.9 million increase in theatre closing
costs, impairment charges, and loss on disposal of operating assets.
INTEREST EXPENSE - Interest expense increased in the first half of 2001
to $99.6 million from $82.6 million in the first half of 2000. The increase is
primarily due to higher average debt and financing obligations in 2001.
INCOME TAXES - No benefit for income taxes was recorded in the first
half of 2001 since the Company recorded an offsetting valuation allowance
against the resulting deferred tax asset ($42.6 million yielding a 35.0%
effective tax rate) as it is more likely than not that such deferred tax assets
would not be realized. The Company recorded a $27.6 million benefit in the first
half of 2000 with an effective rate of 33.8%. The effective rate differs from
the statutory rate due to nondeductible goodwill amortization and the inclusion
of state income taxes.
NET LOSS - The net loss in the first half of 2001 was $121.7 million as
compared to $54.0 million in the first half of 2000. The increase in the net
loss was primarily due to the $52.9 million increase in theatre closing costs,
impairment charges, and loss on disposal of operating assets, as well as
increases in interest expense of $17.0 million. In addition, the Company
incurred $8.0 million in professional and consulting fees relating to the
Company's ongoing restructuring efforts.
IMPAIRMENT AND OTHER DISPOSAL CHARGES - The Company periodically
reviews the carrying value of long-lived assets, including allocated goodwill,
for impairment based on expected future cash flows. The Company performs these
reviews as part of the Company's budgeting process and 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 Company's estimate of the resulting impairment loss
as the amount by which the carrying value of the asset exceeds fair value 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 $52.3 million
impairment charge during the first half of 2001.
Additionally, the Company continually evaluates the status of the
Company's under-performing locations. Consequently, the Company decided to close
a number of existing theatre locations as well as discontinue plans to develop
certain sites. In conjunction with certain closed locations, the Company
maintains a reserve for lease termination costs of $51.4 million. This reserve
for lease termination costs represents management's best estimate of the
potential costs for exiting these leases. The Company bases this estimate on
analyses of the properties, correspondence with the landlord, exploratory
discussion with potential sub-lessees and individual market conditions.
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LIQUIDITY AND CAPITAL RESOURCES
The Company derives substantially all its revenues from admission
revenues and concession sales.
The Company's capital requirements have historically arisen principally
due to new theatre openings, acquisitions of existing theatres, and the addition
of screens to existing theatres. The Company financed these capital requirements
with debt and to a lesser extent, internally generated cash. The Company's
Senior Credit Facilities provided 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 June 28, 2001, the Company did not have the ability to borrow
additional amounts under these facilities. Under the Senior Credit Facilities,
the Company is required to comply with certain financial and other covenants.
The Company is currently in default of certain of these financial covenants. The
loans under the Senior Credit Facilities bear interest at a base rate (referred
to as "Base Rate Loans") plus an applicable margin determined depending upon the
Company's Total Leverage Ratio (as defined in the Senior Credit Facilities).
Additionally, the Company is in payment default with regard to its Senior Credit
Facilities as the Company failed to pay all principal and accrued and due
interest payments as of the end of June 2001. As a result of these defaults, the
lenders under the Company's Senior Credit Facilities and the holders of the
Regal Notes and Regal Debentures have exercised their right to accelerate the
maturity of all of the outstanding indebtedness under the respective agreements
which together totals $1.80 billion on which the Company owes $129.1 million in
accrued and unpaid interest. The Company does not have the ability to fund or
refinance the accelerated maturity of this indebtedness.
Additionally, because of the Company's interest payment default, the
lenders under the Company's Senior Credit Facilities notified the Company
effective April 2001, that a default interest rate would be applied to the
outstanding indebtedness under the Senior Credit Facilities.
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 ("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 Merchant Banking
Partners II, L.P. ("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 of $400.0 million
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2008 (the
"Original Notes"), initial borrowings of $375.0 million under the Company's
current senior credit facility (as amended, the "Senior Credit Facilities") and
$776.9 million in proceeds from the investment of KKR, Hicks Muse, DLJ and
management in the Company (the "Equity Investment"). In connection with the
Recapitalization, the Company made an offer to purchase (the "Tender Offer") all
$125.0 million aggregate principal amount of the previously outstanding 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.
The proceeds of the Original Note Offering, the initial borrowing under
the Company's Senior Credit Facilities and the Equity Investment were used: (i)
to fund the cash payments required to effect the Regal Merger and the
Option/Warrant Redemption; (ii) to repay and retire
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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 Theatres, Inc. ("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
a 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 principal
aggregate amount of $75.0, which was owned by KKR and Hicks Muse.
On November 10, 1998, the Company issued $200.0 million aggregate
principal amount of 8 7/8% Senior Subordinate Notes due 2008 (the "Tack-On
Note") under the same indenture governing the Original Notes. The Company used
the proceeds of the Tack-On Note to repay and retire portions of the Senior
Credit Facilities.
On December 16, 1998, the Company issued an additional $200.0 million
aggregate principal amount of 9 1/2% Senior Subordinated Debentures due 2010
(the "Regal Debentures"). The Company used the proceeds of the offering of the
Regal Debentures to repay all of the then outstanding indebtedness under the
Revolving Credit Facility and the excess for working capital purposes.
In April of 2000, the Company obtained $20.0 million of equipment
financing. The Company used the proceeds to repay the Revolving Credit Facility.
In addition, the Company closed $45.2 million of sale-leaseback financing during
its second and third quarters of 2000.
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 $49.8 million for the three-month period ended
June 28, 2001. Due to the Company's non-compliance with its Senior Credit
Facilities, the lenders under the Senior Credit Facility have the right under
the indenture governing the Regal Notes and Regal Debentures to prevent the
Company from making interest payments under the Regal Notes and Regal
Debentures.
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.
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 due to the holders of the Regal Notes on December 1,
2000 and June 1, 2001 and $8.9 million due to holders of the Regal Debentures on
December 15, 2000 and June 15, 2001. Additionally, the Company is in payment
default with regard to its Senior Credit Facilities as the Company failed to pay
the first and second quarter interest payments totaling $49.2 million and
principal payments totaling approximately $3.8 million. As a result of the
interest payment defaults, the lenders under the Company's Senior Credit
Facilities and the holders of the Regal Notes and Regal Debentures have
exercised their right to accelerate the maturity of all of the outstanding
indebtedness under the respective agreements which together
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totals $1.80 billion on which the Company owes $129.1 million in accrued and
unpaid interest. 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 developing
a longer-term financial plan to address various restructuring alternatives. The
financial plan will provide for the closure of under-performing theatre sites
and a restructuring of the Company. Accordingly, the Company is currently in
discussions with the majority holders of the Company's Senior bank and bond
debt.
Based on the substantial doubt that exists about the Company's ability
to continue under its existing capital structure, the restructuring of the
Company may include a potential recapitalization or bankruptcy reorganization.
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 and related agreement between all the Company's
existing creditors, 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 operations throughout 2001.
In July 2001, the Company entered into an agreement with one of its
landlords that provides for the termination of long-term leases at five
locations, two of which the Company accounted for as lease financing
arrangements. Accordingly, the Company wrote-off the lease financing arrangement
obligations and net book value of the related property and equipment and other
assets during the third quarter of 2001, resulting in an extraordinary gain due
to debt extinguishment of $3.4 million, net of applicable taxes.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities and subsequently amended No. 133
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 resulted in a charge of
$0.5 million to establish a liability for the fair market value of the Company's
interest rate swap agreement.
The Financial Accounting Standards Board has approved for issuance
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141
will require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and that the use of the
pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon
adoption, amortization of goodwill will cease and instead, the carrying value of
goodwill will be evaluated for impairment on an annual basis. Identifiable
intangible assets will continue to be evaluated for impairment on an annual
basis. Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121
"Accounting for
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the Impairment of Long-Lived Assets to be Disposed Of." SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The Company is
evaluating the impact of the adoption of these standards and has not yet
determined the effect of adoption on its financial position and results of
operations.
SEASONALITY
The Company's revenues are usually seasonal, coinciding with the timing
of releases of motion pictures by the major distributors. Generally, studios
release the most marketable motion pictures 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.
RISK FACTORS
This Form 10-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may constitute forward-looking
statements. 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.
CONTINUATION UNDER OUR CURRENT CAPITAL STRUCTURE
As disclosed in "Liquidity and Capital Resources," the Company is in
interest payment default with regard to its Senior Credit Facilities as the
Company failed to pay all accrued and due interest and principal payments as of
the end of June 2001. As a result of these defaults, the lenders under the
Company's Senior Credit Facilities and the holders of the Regal Notes and Regal
Debentures have exercised their right to accelerate the maturity of all of the
outstanding indebtedness under the respective agreements which together totals
$1.80 billion on which the Company owes $129.1 million in accrued and unpaid
interest. 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 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 (such
as the lack of supply of popular motion pictures), 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
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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 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. 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.
In addition, in times of recession, attendance levels experienced by
motion picture exhibitors may be adversely affected.
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, videodisks 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, lives theatre and
restaurants.
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. If we lost the services of Mr. Campbell, it could hurt our
business.
OUR QUARTERLY RESULTS OF OPERATIONS FLUCTUATE
Our revenues are usually seasonal because of the way the major film
distributors release films. Generally, studios release the most marketable
movies during the summer and the Thanksgiving through year-end holiday season.
An unexpected hit film during other periods can alter the traditional trend. The
timing of movie releases can have a significant effect on our results of
operations, and our results one quarter are not necessarily the same as results
for the next quarter. The seasonality of our business, however, has lessened as
studios have begun to release major motion pictures somewhat more evenly
throughout the year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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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.
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ITEM 3.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A of the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 2000, and filed with the Commission on March 28, 2001, is
incorporated in this item of this report by this reference.
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ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAL CINEMAS, INC.
Date: August 13, 2001 By: /s/ Michael L. Campbell
Michael L. Campbell, Chairman, President
and Chief Executive Officer
By: /s/ Amy Miles
Executive Vice President and
Chief Financial Officer
Exhibit Index
Item Description
- ----------------- ----------------------------------------------------
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