1
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 July 2, 1998
Commission file number 333-52943
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Regal Cinemas, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 62-1412720
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7132 Commercial Park Drive
Knoxville, Tennessee 37918
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(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (423) 922-1123
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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
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PART I -- FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in thousands of dollars)
ASSETS
JULY 2, JANUARY 1,
1998 1998
--------- ---------
Current assets:
Cash and equivalents .................... $ 27,480 $ 18,398
Accounts receivable ..................... 1,080 4,791
Inventories ............................. 2,194 2,159
Prepaids and other current assets ....... 8,255 6,377
Refundable income taxes ................. 7,744 2,424
--------- ---------
Total current assets ................. 46,753 34,149
--------- ---------
Property and equipment:
Land .................................... 54,330 53,955
Buildings and leasehold improvements .... 415,345 366,323
Equipment ............................... 244,428 211,465
Construction in progress ................ 55,310 46,529
--------- ---------
769,413 678,272
Accumulated depreciation and amortization (131,232) (112,927)
--------- ---------
Total property and equipment, net .... 638,181 565,345
Goodwill, net ................................ 55,475 52,619
Other assets ................................. 44,005 8,537
--------- ---------
Total assets ......................... $ 784,414 $ 660,650
========= =========
See accompanying notes to condensed consolidated financial statements.
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REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
-------------------------------------------------
(in thousands of dollars, except share amounts)
LIABILITIES AND SHAREHOLDERS' DEFICIT
JULY 2, JANUARY 1,
1998 1998
--------- --------
Current liabilities:
Current maturities of long-term debt (Note 4) .......... $ 306 $ 306
Accounts payable ....................................... 38,582 38,982
Accrued expenses ....................................... 35,517 13,739
--------- --------
Total current liabilities ........................... 74,405 53,027
--------- --------
Long-term debt, less current maturities (Note 4) ............ 775,963 288,277
Other liabilities ........................................... 10,184 12,771
--------- --------
Total liabilities ................................... 860,552 354,075
--------- --------
Commitments (Note 4)
Shareholders' equity (deficit) (Note 1):
Preferred stock, no par; 100,000,000 shares
authorized, none issued ............................. --
Common stock, no par; 500,000,000 shares
authorized; 155,494,566 and 223,903,849 shares
issued and outstanding at July 2, 1998 and
January 1, 1998 ..................................... (118,941) 223,707
Retained earnings ........................................... 42,803 82,868
--------- --------
Total shareholders' equity (deficit) ................ $ (76,138) $306,575
--------- --------
Total liabilities and shareholders' equity .......... $ 784,414 $660,650
========= ========
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
------------------------ ------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1998 1997 1998 1997
--------- --------- --------- ---------
Revenue:
Admissions ...................... $ 95,571 $ 73,941 $ 190,918 $ 150,455
Concessions ..................... 41,940 32,379 82,041 62,996
Other operating revenue ......... 8,485 4,860 15,184 8,739
--------- --------- --------- ---------
Total revenues ........... 145,996 111,180 288,143 222,190
--------- --------- --------- ---------
Operating expenses:
Film rental and advertising costs 55,141 41,122 103,987 81,298
Cost of concessions and other ... 6,626 5,252 12,995 10,217
Theatre operating expenses ...... 50,508 37,990 100,177 75,112
General and administrative
expenses .................... 3,801 4,977 8,011 9,544
Depreciation and amortization ... 10,336 7,272 19,917 14,460
Recapitalization expenses
(Note 1) .................... 62,047 -- 62,047 --
--------- --------- --------- ---------
Total operating expenses . 188,459 96,613 307,134 190,631
--------- --------- --------- ---------
Operating income (loss) ........... (42,463) 14,567 (18,991) 31,559
Other income (expense):
Interest expense ............ (8,536) (3,197) (13,327) (6,077)
Interest income ............. 318 56 467 173
Other ....................... 4 (141) (236) (331)
--------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary loss .......... (50,677) 11,285 (32,087) 25,324
Provision for (benefit from)
income taxes (Note 5) ........... (11,162) 4,347 (3,912) 9,799
--------- --------- --------- ---------
Income (loss) before extraordinary
loss) ........................... (39,515) 6,938 (28,175) 15,525
Extraordinary loss -- loss on
retirement of debt, net of
income tax benefit of
$7,602 (Note 4) .......... (11,890) -- (11,890)
--------- --------- --------- ---------
Net income (loss) ................. $ (51,405) $ 6,938 $ (40,065) $ 15,525
========= ========= ========= =========
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
-------------------------
JULY 2, JULY 3,
1998 1997
----------- --------
Cash flows from operating activities:
Net income (loss)(1) ................................... $ (40,065) $ 15,525
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash loss on extinguishment of debt ......... 3,026 --
Depreciation and amortization .................. 19,917 14,460
Loss (gain) on sale of assets .................. (23) 331
Deferred income taxes .......................... (9,664) 133
Changes in operating assets and liabilities:
Accounts receivable .......................... 3,711 1,139
Inventories .................................. (35) (534)
Prepaids and other current assets ............ (7,198) (554)
Accounts payable ............................. (400) 1,594
Accrued expenses and other liabilities ....... 28,855 4,693
----------- --------
Net cash provided (used) by operating
activities(1) ........................... (1,876) 36,787
Cash flows from investing activities:
Capital expenditures, net ........................... (91,119) (77,387)
Investment in goodwill and other assets ............. (8,030) (13,775)
----------- --------
Net cash used in investing activities ... (99,149) (91,162)
Cash flows from financing activities:
Long-term debt borrowings ........................... 790,000 50,868
Payments made on long-term debt ..................... (302,314) --
Deferred financing costs ............................ (34,931) --
Proceeds from issuance of common stock .............. 774,717 751
Purchase and retirement of common stock ............. (1,117,407) --
Stock compensation expense .......................... 42 60
----------- --------
Net cash provided by financing activities 110,107 51,679
----------- --------
Net increase (decrease) in cash and equivalents ........ 9,082 (2,696)
Cash and equivalents at beginning of period ............ 18,398 17,116
----------- --------
Cash and equivalents at end of period .................. $ 27,480 $ 14,420
=========== ========
- ----------
(1) Includes $46,451 of Recapitalization expenses, net of tax benefit.
See accompanying notes to condensed consolidated financial statements.
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REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
1. 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. (the "Merger"),
with the Company continuing as the surviving corporation of 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 the $400 million senior subordinated notes, initial
borrowings of $375.0 million under the senior credit facility 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 was 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 existing Regal 8.5% senior subordinated notes;
(iv) to pay related fees and expenses; and (v) for general corporate
purposes. 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 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"). Upon completion of the Recapitalization and
the conversion of the Convertible Preferred Stock, KKR, Hicks Muse and
DLJ own approximately 46.6%, 46.6% and 6.4%, respectively, of the
Company's Common Stock.
During 1998, nonrecurring costs of approximately $62.0 million,
including approximately $39.8 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 4). Of the total Merger Recapitalization costs
above, $19.5 million was paid to KKR and Hicks Muse.
2. THE COMPANY AND BASIS OF PRESENTATION
Regal Cinemas, Inc. ("Regal") and its wholly owned subsidiaries,
collectively referred to as the "Company" operates multi-screen motion
picture theatres principally throughout the eastern United States. The
Company formally operates on a fiscal year ending on the Thursday
closest to December 31.
On July 31, 1997, Regal issued 2,837,594 shares of its common stock for
all of the outstanding common stock of Cobb Theatres. The merger has
been accounted for as a pooling of interests and, accordingly, these
condensed consolidated financial statements have been restated for all
periods to include the results of operations and financial positions of
Cobb Theatres.
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REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
Separate results of the combining entities for the three and six-month
periods ended July 3, 1997 are as follows:
Three Six
Months Months
Ended Ended
July 3, 1997 July 3, 1997
------------ ------------
Revenues: (in thousands)
Regal ...................................... $ 79,083 $ 157,129
Cobb Theatres, L.L.C. and Tricob Partnership 32,097 65,061
--------- ---------
$ 111,180 $ 222,190
========= =========
Net (loss):
Regal ...................................... $ 7,812 $ 16,348
Cobb Theatres, L.L.C. and Tricob Partnership (874) (823)
--------- ---------
$ 6,938 $ 15,525
========= =========
3. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of July 2, 1998, the
condensed consolidated statements of operations for the three months
and six months ended July 2, 1998 and July 3, 1997 and the condensed
consolidated statements of cash flows for the six months ended July 2,
1998 and July 3, 1997 have been prepared by the Company, without audit.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods
presented have been made. The January 1, 1998 information has been
derived from the audited January 1, 1998 balance sheet of Regal
Cinemas, Inc.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
It is suggested that these condensed consolidated financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's Report filed on Form 10-K dated March 31,
1998. The results of operations for the three and six-month periods
ended July 2, 1998 are not necessarily indicative of the operating
results for the full year.
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REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt at July 2, 1998 and January 1, 1998, consists of the
following:
JULY 2, JANUARY 1,
1998 1998
-------- --------
(IN THOUSANDS)
$400,000 Regal 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:
Year Redemption Price
---- ----------------
2003 104.750%
2004 103.167%
2005 101.583%
2006 and thereafter 100.000% $400,000 --
Term Loans 375,000 --
Revolving credit facility -- --
$125,000 Regal senior subordinated notes, due October 1, 2007 with
interest payable semiannually at 8.5% 125,000
$250,000 Regal senior reducing revolving credit facility -- 162,000
Other 1,269 1,583
-------- --------
776,269 288,583
Less current maturities (306) (306)
-------- --------
$775,963 $288,277
======== ========
The Company's debt at July 2, 1998, is scheduled to mature as follows:
(in thousands)
1998....................... $ 306
1999....................... 2,093
2000....................... 2,400
2001....................... 3,750
2002....................... 3,750
Thereafter................. $ 763,970
---------
Total...................... $ 776,269
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REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
4. LONG-TERM DEBT, CONTINUED
Under the Company's previous $250,000 senior reducing revolving credit
facility (the "revolving credit facility"), interest was payable
quarterly at LIBOR plus .65%. The margin added to LIBOR was determined
based upon certain financial ratios of the Company. The revolving
credit facility was repaid in conjunction with the Recapitalization.
NEW CREDIT FACILITIES -- In connection with the Merger and
Recapitalization, the Company entered into credit facilities provided
by a syndicate of financial institutions. Such credit facilities (the
"Credit Facilities") include a $350,000 Revolving Credit Facility
(including the availability of Revolving Loans, Swing Line Loans, and
Letters of Credit) and three term loan facilities: Term A ($120,000),
Term B ($120,000), and Term C ($135,000) (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, of the
unused portion of the Revolving Credit Facility. The Revolving Credit
Facility expires in June 2005. No borrowings were outstanding under the
Revolving Credit Facility at July 2, 1998.
Borrowings under the Term A Loan or the Revolving Credit Facility can
be made at the "Base Rate" plus a margin of 0% to 1%, or the "LIBO
Rate," plus .625% to 2.25%, both depending on the Total Leverage Ratio.
The Base Rate on revolving loans is the rate established by the
Administrative Agent in New York as its base rate for dollars loaned in
the United States. The LIBO Rate is based on the LIBOR rate for the
corresponding length of loan. One percent of the outstanding balance on
the Term A Loan is due annually though 2004 with the balance of the
Term A Loan due in 2005.
Borrowings under the Term B Loan can be made at the Base Rate plus a
margin of 0.75% to 1.25% or the LIBO Rate plus 2.0% to 2.5%, both
depending on the Total Leverage Ratio. One percent of the outstanding
balance is due annually through 2005, with the balance of the loan due
in 2006.
Borrowings under the Term C Loan can be made at the Base Rate plus a
margin of 1.0% to 1.5% or the LIBO Rate plus 2.25% to 2.75%, both
depending on the Total Leverage Ratio. One percent of the outstanding
balance is due annually through 2006, with the balance of the loan due
in 2007.
The Credit Facilities contain customary covenants and restrictions on
the Company's ability to issue additional debt 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.
The Company was in compliance with such covenants at July 2, 1998.
The Credit Facility is secured by a pledge of the stock of the
Company's domestic subsidiaries. The Company's payment obligations
under the Credit Facility is guaranteed by its direct and indirect U.S.
subsidiaries.
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REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
4. LONG-TERM DEBT, CONTINUED
TENDER OFFER -- In connection with the Recapitalization, the Company
commenced a tender offer for all of the Regal 8.5% senior subordinated
notes ("Regal Notes") and a consent solicitation in order to effect
certain changes in the Indenture. Upon completion of the tender offer,
holders had tendered and given consents with respect to 100% of the
outstanding principal amount of the Regal Notes. In addition, the
Company and the trustee executed a supplement to the Indenture,
effecting the proposed amendments which included, among other things,
the elimination of all financial covenants for the Regal Notes. On May
27, 1998, the Company paid, for each $1,000 principal amount, $1,116.24
for Regal Notes tendered plus, in each case, accrued and unpaid
interest of $13.22. Regal financed the purchase price of the Regal
Notes with funds from the Recapitalization.
EXTRAORDINARY LOSS -- An extraordinary loss of $11.9 million, net of
income taxes of $7.6 million, was recognized 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.
5. INCOME TAXES
The effective income tax rate on income (loss) before extraordinary
items for the six month periods ended July 2, 1998 and July 3, 1997
differs from the statutory federal income tax rate of 35% as follows:
SIX MONTHS ENDED
------------------
JULY 2, JULY 3,
1998 1997
------- -------
Federal statutory tax rate.......................... 35.0% 35.0%
Nondeductible recapitalization costs................ (26.8%) --
State taxes, net of federal effect.................. 4.0% 3.7%
------ -------
Effective rate............................. 12.2% 38.7%
====== =======
6. CAPITAL STOCK
Earnings per share information is not presented as the Company's shares
do not trade in a public market. After the Recapitalization, the
Company effected a stock split 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 January 1, 1998 shares
outstanding have been adjusted to reflect such equivalent shares.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial
statements to conform with the 1998 presentation. These
reclassifications had no impact on previously reported results of
operations or shareholders' deficit.
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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 the Company, should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto included herein.
BACKGROUND OF REGAL
Regal has achieved significant growth in theatres and screens since its
formation in November of 1989. Since inception through July 2, 1998, Regal
acquired 191 theatres with 1,510 screens, developed 70 new theatres with 879
screens and added 78 new screens to existing theatres. Theatres developed by the
Company typically generate positive theatre level cash flow within the first
three months following commencement of operation and reach a mature level of
attendance within one to three years following commencement of operation.
Theatre closings have had no significant effect on the operations of Regal.
RESULTS OF OPERATIONS
The Company's revenues are generated primarily from box office receipts
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 revenues from the Company's five entertainment
centers which are adjacent to theatre complexes. Direct theatre costs consist of
film rental costs, costs of concessions and theatre operating expenses. Film
rental costs are related to the popularity of a film and the length of time
since the film's release and generally decline as a percentage of admission
revenues the longer a film has been released. Because certain concession items,
such as fountain drinks and popcorn, are purchased in bulk and not pre-packed
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. 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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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 income.
PERCENTAGE OF TOTAL REVENUES
----------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1998 1997 1998 1997
------- ------- -------- --------
Revenue:
Admissions................................... 65.5% 66.5% 66.2% 67.7%
Concessions.................................. 28.7% 29.1% 28.5% 28.4%
Other operating revenue...................... 5.8% 4.4% 5.3% 3.9%
------- ------ ------ -------
Total revenues........................ 100.0% 100.0% 100.0% 100.0%
------- ------ ------ -------
Operating expenses:
Film rental and advertising costs............ 37.8% 37.0% 36.1% 36.5%
Cost of concessions and other................ 4.5% 4.7% 4.5% 4.6%
Theatre operating expenses................... 34.6% 34.2% 34.8% 33.9%
General and administrative
expenses................................. 2.6% 4.5% 2.8% 4.3%
Depreciation and amortization................ 7.1% 6.5% 6.9% 6.5%
Recapitalization expenses.................... 42.5% -- 21.5% --
------- ------ ------ ------
Total operating expenses.............. 129.1% 86.9% 106.6% 85.8%
------- ------ ------ ------
Operating income (loss)........................ (29.1%) 13.1% (6.6%) 14.2%
Other income (expense):
Interest expense......................... (5.8%) (2.9%) (4.6%) (2.7%)
Interest income.......................... 0.2% 0.1% 0.2% --
Other.................................... -- (0.1%) (0.1%) (0.1%)
------- ------ ------ ------
Income (loss) before income taxes
and extraordinary loss....................... (34.7%) 10.2% (11.1%) 11.4%
Provision for (benefit from) income
taxes........................................ (7.6%) 4.0% (1.3%) 4.4%
------- ------ ------ ------
Income (loss) before extraordinary
loss)........................................ 27.1% 6.2% (9.8%) 7.0%
Extraordinary loss....................... (8.1%) -- (4.1%) --
------- ------ ------ ------
Net income (loss).............................. (35.2%) 6.2% (13.9%) 7.0%
======= ====== ====== ======
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
THREE MONTHS ENDED JULY 2, 1998 AND JULY 3, 1997
TOTAL REVENUES -- Total revenues for the second quarter of fiscal 1998
increased by 31.3% to $146.0 million from $111.1 million in the comparable 1997
period. This increase was due to a 19.6% increase in attendance attributable
primarily to the net addition of 407 screens in the last 12 months. Of the $34.9
million net increase in revenues for the period, a $6.1 million increase was
attributed to theatres previously operated by the Company, $5.6 million increase
was attributed to theatres acquired by the Company, and $23.0 million increase
was attributed to new theatres constructed by the Company. Average ticket prices
increased 8.0% during the period, reflecting an increase in ticket prices and a
greater proportion of larger market theatres in the 1998 period than in the same
period in 1997. Average concession sales per customer increased 8.3% for the
period, reflecting both an increase in consumption and, to a lesser degree, an
increase in concession prices.
DIRECT THEATRE COSTS -- Direct theatre costs increased by 33.1% to
$112.3 million in the second quarter 1998 from $84.4 million in the second
quarter 1997. Direct theatre costs as a percentage of total revenues increased
to 76.9% in the 1998 period from 75.9% in the 1997 period. The increase of
direct theatre costs as a percentage of total revenues was primarily
attributable to higher film rental and advertising costs as a percentage of
total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES -- General and administrative
expenses decreased by 23.6% to $3.8 million in the second quarter 1998 from $5.0
million in the second quarter 1997. As a percentage of total revenues, general
and administrative expenses decreased to 2.6% in the 1998 period from 4.5% in
the 1997 period.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense
increased in the second quarter 1998 by 42.1% to $10.3 million from $7.3 million
in the second quarter 1997. This increase was primarily the result of theatre
property additions associated with the Company's expansion efforts.
OPERATING INCOME (LOSS) -- Operating income (loss) for the second
quarter 1998 decreased to $(42.5) million, or (29.1)% of total revenues, from
$14.6 million, or 13.1% of total revenues, in the second quarter 1997. Before
nonrecurring expenses associated with the Recapitalization, operating income for
the second quarter 1998 was $19.6 million or 13.4% of total revenues.
INTEREST EXPENSE -- Interest expense increased in the second quarter
1998 by 167.0% to $8.5 million from $3.2 million in the second quarter 1997. The
increase was primarily due to higher average borrowings outstanding associated
with the Recapitalization of the Company.
INCOME TAXES -- The provision (benefit) for income taxes in the second
quarter 1998 was $(11.2) million as compared to $4.3 million in the second
quarter 1997. The effective tax rate was
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
(22.0)% in the 1998 period as compared to 38.5%% in the 1997 period as the 1998
period reflected certain Recapitalization expenses which were not deductible for
tax purposes.
NET INCOME (LOSS) -- The net income (loss) in the second quarter 1998
was ($51.4) million as compared to $6.9 million in the second quarter 1997. Net
income before nonrecurring and extraordinary items was $6.9 million or 4.8% of
total revenues in the second quarter of 1998 as compared to $6.9 million or 6.2%
of total revenues in the 1997 period.
SIX MONTHS ENDED JULY 2, 1998 AND JULY 3, 1997
TOTAL REVENUES -- Total revenues for the six months ended July 2, 1998
increased by 29.7% to $288.1 million from $222.2 million in the comparable 1997
period. This increase was due to a 18.8% increase in attendance attributable
primarily to the net addition of 407 screens in the last 12 months. Of the $65.9
million net increase in revenues for the period, a $16.3 million decrease was
attributed to theatres previously operated by the Company, $11.2 million
increase was attributed to theatres acquired by the Company, and $38.4 million
increase was attributed to new theatres constructed by the Company. Average
ticket prices increased 6.9% during the period, reflecting an increase in ticket
prices and a greater proportion of larger market theatres in the 1998 period
than in the same period in 1997. Average concession sales per customer increased
9.7% for the period, reflecting both an increase in consumption and, to a lesser
degree, an increase in concession prices.
DIRECT THEATRE COSTS -- Direct theatre costs increased by 30.4% to
$217.2 million for the six months ended July 2, 1998 from $166.6 million in the
comparable 1997 period. Direct theatre costs as a percentage of total revenues
increased to 75.4% in the 1998 period from 75.0% in the 1997 period. The
increase of direct theatre costs as a percentage of total revenues was primarily
attributable to higher theatre operating expenses as a percentage of total
revenues.
GENERAL AND ADMINISTRATIVE EXPENSES -- General and administrative
expenses decreased by 16.1% to $8.0 million for the six months ended July 2,
1998 from $9.5 million in the comparable 1997 period. As a percentage of total
revenues, general and administrative expenses decreased to 2.8% in the 1998
period from 4.3% in the 1997 period.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense
increased for the six months ended July 2, 1998 by 37.7% to $19.9 million from
$14.5 million in the comparable 1997 period. This increase was primarily the
result of theatre property additions associated with the Company's expansion
efforts.
OPERATING INCOME (LOSS) -- Operating income (loss) for the six months
ended July 2, 1998 decreased to $(19.0) million, or (6.6)% of total revenues,
from $31.6 million, or 14.2% of total revenues, in the comparable 1997 period.
Before nonrecurring expenses associated with the
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Recapitalization, operating income for the six month period ended July 2, 1998
was $43.1 million or 14.9% of total revenues.
INTEREST EXPENSE -- Interest expense increased for the six months ended
July 2, 1998 by 119.3% to $13.3 million from $6.1 million in the comparable 1997
period. The increase was primarily due to higher average borrowings outstanding
associated with the Recapitalization of the Company.
INCOME TAXES -- The provision (benefit) for income taxes for the six
months ended July 2, 1998 was $(13.9) million as compared to $9.8 million in the
1997 period. The effective tax rate was (12.2)% in the 1998 period as compared
to 38.7% in the 1997 period as the 1998 period reflected certain
Recapitalization expenses which were not deductible for tax purposes.
NET INCOME (LOSS) -- The net income (loss) for the six months ended
July 2, 1998 increased was $(40.1) million as compared to $15.5 million in the
1997 period. Net income before nonrecurring and extraordinary items was $18.2
million or 6.3% of total revenues in the six months ended July 2, 1998 as
compared to $15.5 million or 7.0% of total revenues in the 1997 period.
RECENT TRANSACTIONS
RECAPITALIZATION AND MERGER -- 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
"Merger"), with the Company continuing as the surviving corporation of 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 the $400 million senior subordinated notes, initial
borrowings of $375.0 million under the senior credit facility 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 was
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 existing Regal 8.5% senior
subordinated notes; (iv) to pay related fees and expenses; and (v) for general
corporate purposes. 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
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
combination of 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"). Upon completion of the Recapitalization and the
conversion of the Convertible Preferred Stock, KKR, Hicks Muse and DLJ own
approximately 46.6%, 46.6% and 6.4%, respectively, of the Company's Common
Stock.
During 1998, nonrecurring costs of approximately $62.0 million,
including approximately $39.8 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 4). Of the total
Merger Recapitalization costs above, $19.5 million was paid to KKR and Hicks
Muse.
TENDER OFFER -- In connection with the Recapitalization, the Company
commenced a tender offer for all of the Regal 8.5% senior subordinated notes
("Regal Notes") and a consent solicitation in order to effect certain changes in
the Indenture. Upon completion of the tender offer, holders had tendered and
given consents with respect to 100% of the outstanding principal amount of the
Regal Notes. In addition, the Company and the trustee executed a supplement to
the Indenture, effecting the proposed amendments which included, among other
things, the elimination of all financial covenants for the Regal Notes. On May
27, 1998, the Company paid, for each $1,000 principal amount, $1,116.24 for
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.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's revenues are derived from cash box
office receipts and concession sales, while film rental fees are ordinarily paid
to distributors 15 to 45 days following receipt of admission revenues. The
Company thus has an operating cash "float" which partially finances its
operations, reducing the Company's needs for external sources of working
capital.
The Company's capital requirements have arisen principally in
connection with acquisitions of existing theatres, new theatre openings and the
addition of screens to existing theatres and have been financed with equity
(including equity issued in connection with acquisitions and public offerings),
borrowings under the Company's loan agreement and internally generated cash.
NEW CREDIT FACILITIES -- In connection with the Merger and
Recapitalization, the Company entered into credit facilities provided by a
syndicate of financial institutions. Such credit facilities (the "Credit
Facilities") include a $350,000 Revolving Credit Facility (including the
availability of Revolving Loans, Swing Line Loans, and Letters of Credit) and
three term loan facilities: Term A ($120,000), Term B ($120,000), and Term C
($135,000) (the "Term Loans"). The Company
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
must pay an annual commitment fee ranging from 0.2% to 0.425%, depending on the
Company's Total Leverage Ratio, as defined, of the unused portion of the
Revolving Credit Facility. The Revolving Credit Facility expires in June 2005.
No borrowings were outstanding under the Revolving Credit Facility at July 2,
1998.
Borrowings under the Term A Loan or the Revolving Credit Facility can
be made at the "Base Rate" plus a margin of 0% to 1%, or the "LIBO Rate," plus
.625% to 2.25%, both depending on the Total Leverage Ratio. The Base Rate on
revolving loans is the rate established by the Administrative Agent in New York
as its base rate for dollars loaned in the United States. The LIBO Rate is based
on the LIBOR rate for the corresponding length of loan. One percent of the
outstanding balance on the Term A Loan is due annually though 2004 with the
balance of the Term A Loan due in 2005.
Borrowings under the Term B Loan can be made at the Base Rate plus a
margin of 0.75% to 1.25% or the LIBO Rate plus 2.0% to 2.5%, both depending on
the Total Leverage Ratio. One percent of the outstanding balance is due annually
through 2005, with the balance of the loan due in 2006.
Borrowings under the Term C Loan can be made at the Base Rate plus a
margin of 1.0% to 1.5% or the LIBO Rate plus 2.25% to 2.75%, both depending on
the Total Leverage Ratio. One percent of the outstanding balance is due annually
through 2006, with the balance of the loan due in 2007.
The Credit Facilities contain customary covenants and restrictions on
the Company's ability to issue additional debt 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. The Company was in compliance with
such covenants at July 2, 1998.
The Credit Facility is secured by a pledge of the stock of the
Company's domestic subsidiaries. The Company's payment obligations under the
Credit Facility is guaranteed by its direct and indirect U.S. subsidiaries.
During 1997, the Company effected three acquisitions (including one
acquisition accounted for as a pooling of interests). The aggregate
consideration paid was approximately $48.5 million in cash, the issuance of
2,837,594 shares of Common Stock and the assumption of approximately $110
million of liabilities.
At January 2, 1997, the Company anticipated that it would spend $125
million to $150 million to develop and renovate theatres during 1997, of which
the Company had approximately $58.1 million in contractual commitments for
expenditures. The actual capital expenditures for fiscal 1997 were $178.1
million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
At July 2, 1998, the Company had 261 multi-screen theatres with an
aggregate of 2,467 screens. At such date, the Company had 35 new theatres with
571 screens and 32 screens at 6 existing locations under construction. The
Company intends to develop approximately 450 to 500 screens during the balance
of 1998 and approximately 600 to 700 screens during 1999. The Company expects
that the capital expenditures in connection with its development plan will
aggregate approximately $180.0 million for the balance of 1998 and approximately
$140.0 million during 1999. The Company believes that its capital needs for
completion of theatre construction and development for at least the next 6 to 12
months will be satisfied by available credit under the new loan agreement, as
amended, internally generated cash flow and available cash and equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, Statement of Financial Accounting Standards No. 131 ("SFAS
131"), Disclosures About Segment of an Enterprise and Related Information. SFAS
130 requires disclosure of comprehensive income and its components in a
company's financial statements and is effective for fiscal years beginning after
December 15, 1997. SFAS 131 requires new disclosures of segment information in a
company's financial statements and is effective for fiscal years beginning after
December 15, 1997. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows.
On June 15, 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative and Financial Instruments and Hedging Activities. FAS
133 establishes a new model for accounting for derivatives and hedging
activities based on these fundamental principles i) derivatives represent assets
and liabilities that should be recognized at fair value on the balance sheet ii)
derivative gains and losses do not represent liabilities or assets and,
therefore, should not be reported on the balance sheet as deferred credits or
deferred debits and iii) special hedge accounting should be provided only for
transactions that meet certain specified criteria, which include a requirement
that the change in the fair value of the derivative be highly effective in
offsetting the change in the fair value or cash flows of the hedged item. This
Statement is effective for fiscal years beginning after June 15, 1999 and is not
expected to have a material effect on the Company's financial position or
results of operations.
RECENT DEVELOPMENTS
Act III, the ninth largest motion picture exhibitor in the United
States based on number of screens in operation, is controlled by KKR and Hicks
Muse. As of July 2, 1998, Act III operated 131 theatres, with an aggregate of
843 screens in seven states. While KKR and Hicks Muse currently intend to merge
Act III with and into Regal or an affiliate of Regal (the "Act III
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MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
Merger") approximately 90 days after the closing of the Recapitalization, there
is currently no definitive agreement to consummate the Act III Merger.
YEAR 2000
The Company is dependent on computer systems and applications to
conduct its business. Based on a current assessment of its computer systems and
applications, Regal believes that it will not experience any material Year 2000
problems with its computer systems. The Company estimates that costs to
remediate any Year 2000 issues will not be material and will be funded through
operating cash flows. The Company is expensing all costs associated with
remediation of Year 2000 issues as incurred.
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20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------------------------------------------
(a) Exhibits:
(4) Indenture dated as of May 27, 1998, between Regal Cinemas, Inc. and IBJ
Schroder Bank & Trust Company.
(10.1) Employment Agreement, dated as of May 27, 1998, between Regal
Cinemas, Inc. and Michael L. Campbell.
(10.2) Employment Agreement, dated as of May 27, 1998, between Regal
Cinemas, Inc. and Lewis Frazer III.
(10.3) Employment Agreement, dated as of May 27, 1998, between Regal
Cinemas, Inc. and Gregory W. Dunn.
(10.4) Credit Agreement, dated as of May 27, 1998, among
Regal Cinemas, Inc., its subsidiaries and the lenders
named therein.
(27) Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
None.
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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 10, 1998 By: /s/ Michael L. Campbell
-------------------------------------
Michael L. Campbell, Chairman,
President and Chief Executive Officer
By: /s/ Lewis Frazer III
-------------------------------------
Lewis Frazer III, Executive Vice
President and Chief Financial Officer
21
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EXHIBIT INDEX
ITEM DESCRIPTION
- ------------------- -------------------------------------------------------------
(4) Indenture dated as of May 27, 1998, between
Regal Cinemas, Inc. and IBJ Schroder Bank & Trust Company.
(10.1) Employment Agreement, dated as of May 27, 1998, between Regal
Cinemas, Inc. and Michael L. Campbell.
(10.2) Employment Agreement, dated as of May 27, 1998, between Regal
Cinemas, Inc. and Lewis Frazer III.
(10.3) Employment Agreement, dated as of May 27, 1998, between Regal
Cinemas, Inc. and Gregory W. Dunn.
(10.4) Credit Agreement, dated as of May 27, 1998, among Regal
Cinemas, Inc., its subsidiaries and the lenders named
therein.
(27) Financial Data Schedule (for SEC use only).