<PAGE> 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 October 1, 1998
Commission file number 333-52943
---------------
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
- --------------------------------- --------------------------------------
(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
---- ----
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
- -------------------------------------------------------------------------------
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------
(in thousands of dollars)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 1,
1998 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and equivalents ........................ $ 15,161 $ 18,398
Accounts receivable ......................... 7,686 4,791
Inventories ................................. 4,258 2,159
Prepaids and other current assets ........... 11,943 6,377
Refundable income taxes ..................... 13,907 2,424
----------- -----------
Total current assets ..................... 52,955 34,149
----------- -----------
Property and equipment:
Land ........................................ 115,093 53,955
Buildings and leasehold improvements ........ 643,263 366,323
Equipment ................................... 374,855 211,465
Construction in progress .................... 92,473 46,529
----------- -----------
1,225,684 678,272
Accumulated depreciation and amortization ... (143,674) (112,927)
----------- -----------
Total property and equipment, net ........ 1,082,010 565,345
Excess purchase cost over fair value of net assets
acquired, net ............................... 396,841 52,619
Other assets ..................................... 59,415 8,537
----------- -----------
Total assets ............................. $ 1,591,221 $ 660,650
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
--------------------------------------------------
(in thousands of dollars, except share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 1,
1998 1998
------------ -------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 4) ......... $ 306 $ 306
Accounts payable ...................................... 34,882 38,982
Accrued expenses ...................................... 56,258 13,739
----------- -----------
Total current liabilities .......................... 91,446 53,027
----------- -----------
Long-term debt, less current maturities (Note 4) ........... 1,226,122 288,277
Other liabilities .......................................... 33,788 12,771
----------- -----------
Total liabilities .................................. 1,351,356 354,075
----------- -----------
Commitments (Note 4)
Shareholders' equity (Note 1):
Preferred stock, no par; 100,000,000 shares authorized,
none issued ........................................ -- --
Common stock, no par; 500,000,000 shares authorized;
216,182,146 and 223,903,849 shares issued and
outstanding at October 1, 1998 and January 1, 1998 . 193,459 223,707
Loans to shareholders ................................. (501) --
Retained earnings .......................................... 46,907 82,868
----------- -----------
Total shareholders' equity ......................... $ 239,865 $ 306,575
----------- -----------
Total liabilities and shareholders' equity ......... $ 1,591,221 $ 660,650
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------
(in thousands of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- --------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
1998 1997 1998 1997
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Admissions......................................... $ 124,563 $ 87,147 $ 315,481 $ 237,602
Concessions ....................................... 54,966 37,641 137,007 100,637
Other operating revenue ........................... 10,196 4,780 25,380 13,519
--------- --------- --------- ---------
Total revenues ............................. 189,725 129,568 477,868 351,758
--------- --------- --------- ---------
Operating expenses:
Film rental and advertising costs ................. 66,368 48,602 170,355 129,900
Cost of concessions and other ..................... 8,556 5,404 21,551 15,621
Theatre operating expenses ........................ 63,540 38,851 163,717 113,963
General and administrative expenses ............... 5,732 3,392 13,743 12,936
Depreciation and amortization ..................... 15,599 7,078 35,516 21,538
Merger expenses ................................... -- 7,789 -- 7,789
Loss on impairment of assets ...................... -- 4,960 -- 4,960
Recapitalization expenses (Note 1) ................ 2,479 -- 64,526 --
--------- --------- --------- ---------
Total operating expenses ................... 162,274 116,076 469,408 306,707
--------- --------- --------- ---------
Operating income .................................... 27,451 13,492 8,460 45,051
Other income (expense):
Interest expense .............................. (19,508) (3,379) (32,835) (9,456)
Interest income ............................... 382 560 849 734
Other ......................................... (209) (122) (445) (453)
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item ................................ 8,116 10,551 (23,971) 35,876
Provision for income taxes (Note 5) ................. 4,012 2,300 100 12,099
--------- --------- --------- ---------
Income (loss) before extraordinary item ............. 4,104 8,251 (24,071) 23,777
Extraordinary loss on retirement of
debt, net of income tax benefit of
$7,602 and $6,141, respectively
(Note 4)................................... -- (10,020) (11,890) (10,020)
--------- --------- --------- ---------
Net income (loss)................................... $ 4,104 $ (1,769) $ (35,961) $ 13,757
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------
(in thousands of dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
OCTOBER 1, OCTOBER 2,
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)(1) ................................................... $ (35,961) $ 13,757
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on extinguishment of debt ................................. 11,890 10,020
Depreciation and amortization .................................. 35,516 21,538
Loss on impairment of assets ................................... -- 4,960
Deferred income taxes .......................................... 7,276 (4,750)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable .......................................... 3,035 1,413
Inventories .................................................. (72) (73)
Refundable income taxes ...................................... (13,230) 1,866
Prepaids and other current assets ............................ (2,644) (1,671)
Accounts payable ............................................. (23,429) (13,799)
Accrued expenses and other liabilities ....................... 35,353 (8,064)
----------- -----------
Net cash provided by operating activities(1) ............ 17,734 25,197
Cash flows from investing activities:
Capital expenditures, net ........................................... (157,728) (113,551)
Increase in other assets ............................................ (3,499) (22,083)
----------- -----------
Net cash used in investing activities ................... (161,227) (135,634)
Cash flows from financing activities:
Long-term debt ...................................................... 1,217,375 104,015
Payments made on long-term debt ..................................... (684,500) --
Deferred financing costs ............................................ (35,441) --
Premium paid to pay off long-term debt .............................. (14,530) --
Proceeds from issuance of common stock .............................. 774,717 1,500
Purchase and retirement of common stock ............................. (1,117,407) --
Stock compensation expense .......................................... 42 90
----------- -----------
Net cash provided by financing activities ............... 140,256 105,605
----------- -----------
Net decrease in cash and equivalents ................................... (3,237) (4,832)
Cash and equivalents at beginning of period ............................ 18,398 17,116
----------- -----------
Cash and equivalents at end of period .................................. $ 15,161 $ 12,284
=========== ===========
</TABLE>
(1) Includes $46,451 of Recapitalization expenses, net of tax benefit.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------------------------------------------------------------
1. THE COMPANY AND BASIS OF PRESENTATION
Regal Cinemas, Inc. and its wholly owned subsidiaries, collectively
referred to as the "Company," operates 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 condensed consolidated balance sheet as of October 1, 1998, the
condensed consolidated statements of operations for the three months
and nine months ended October 1, 1998 and October 2, 1997 and the
condensed consolidated statements of cash flows for the nine months
ended October 1, 1998 and October 2, 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 nine-month periods
ended October 1, 1998 are not necessarily indicative of the operating
results for the full year.
2. RECAPITALIZATION
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
("KKR") and an affiliate of Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") merged with and into Regal Cinemas, Inc., with
the Company continuing as the surviving corporation of the Merger (the
"Merger"). The Merger and related transactions have been recorded as a
recapitalization (the "Recapitalization"). In the Recapitalization, the
Company's existing shareholders, received cash for their shares of
common stock. In addition, in connection with the Recapitalization, the
Company canceled options and repurchased warrants held by certain
former directors, management and employees of the Company (the
"Option/Warrant Redemption"). The aggregate amount paid to effect the
Merger and the Option/Warrant Redemption was approximately $1.2
billion.
The net proceeds of a $400 million senior subordinated note offering,
initial borrowings of $375.0 million under its senior credit facilities
and the proceeds of $776.9 million from the investment by KKR, Hicks
Muse, DLJ Merchant Banking Partners II, L.P. and affiliated funds
("DLJ") and management in the Company were used: (i) to fund the cash
payments required to effect the Merger and the Option/Warrant
Redemption; (ii) to repay and retire the Company's existing senior
credit facilities; (iii) to repurchase the Company's existing 8.5%
senior subordinated notes; (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 the Company's common
stock, no par value (the "Common Stock") and the Company's
6
<PAGE> 7
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------------------------------------------------------------
Series A Convertible Preferred Stock, no par value ("Convertible
Preferred Stock"), which was converted into Common Stock on June 3,
1998. To equalize KKR's and Hicks Muse's investments in the Company at
$362.3 million each, Hicks Muse exchanged $75.0 million of Convertible
Preferred Stock, with KKR for $75.0 million of common stock of Act III
Cinemas, Inc. ("Act III"). As a result of the Recapitalization and the
Act III combination (see Note 3), KKR and Hicks Muse each own
approximately 46.3% of the Company's Common Stock, with DLJ, management
and other minority holders owning the remainder.
During 1998, nonrecurring costs of approximately $64.5 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 and Recapitalization costs
above, an aggregate of $19.5 million was paid to KKR and Hicks Muse.
3. ACQUISITIONS
On August 26, 1998, the Company acquired Act III Cinemas, Inc. (the
"Act III Merger"), the ninth largest motion picture exhibitor in the
United States based on number of screens in operation. Total purchase
cost was approximately $312.0 million, representing primarily the value
of 60,383,388 shares of the Company's common stock issued to acquire
each share of Act III's outstanding common stock and 5,195,598 options
of the Company issued for Act III options. In connection with the Act
III merger, the Company also amended its credit facilities and borrowed
$383.3 million thereunder to repay Act III's borrowings and accrued
interest under Act III's existing credit facilities and two senior
subordinated notes totaling $150.0 million.
The Act III merger has been accounted for as a purchase, applying the
applicable provisions of Accounting Principles Board Opinion No. 16.
Preliminary allocation of the purchase price as of September 30, 1998
is as follows:
<TABLE>
<CAPTION>
($'s in millions)
<S> <C>
Property, plant and equipment $ 390.5
Other long-term assets 23.2
Long-term debt assumed (405.0)
Net working capital acquired (38.6)
Excess purchase cost over fair
value of net assets acquired 341.9
--------
Total purchase cost $ 312.0
========
</TABLE>
The above allocation of purchase cost has been preliminarily allocated to
the acquired assets and liabilities of Act III based on estimates of fair
value as of the closing date. Such estimates were based on valuations and
studies which are not yet complete. Therefore, the above allocation of
purchase price may change when such studies are completed. The Company is
amortizing goodwill over an estimated useful life of 40 years.
7
<PAGE> 8
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
The following unaudited consolidated pro forma condensed results of
operations data gives effect to the Act III Combination and Regal
Recapitalization as if they had occurred as of January 1, 1997 ($'s in
millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
October 1, October 2, October 1, October 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro Forma Revenues $247.3 $197.7 $668.3 $541.0
Pro Forma Net Income
(Loss) Before $ 5.0 $ .4 $(41.2) $ (3.3)
Extraordinary Items
</TABLE>
On July 31, 1997, the Company 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.
Separate results of the combining entities for the three and nine-month
periods ended October 2, 1997 are as follows:
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
October 2, October 2,
1997 1997
----------- ----------
Revenues: (in thousands)
<S> <C> <C>
Regal .......................................... $ 111,651 $ 267,357
Cobb Theatres, L.L.C. and Tricob Partnership.... 16,469 81,151
--------- ---------
$ 128,120 $ 348,508
========= =========
Net (loss):
Regal .......................................... $ 648 $ 16,518
Cobb Theatres, L.L.C. and Tricob Partnership.... (2,417) (2,761)
--------- ---------
$ (1,769) $ 13,757
========= =========
</TABLE>
8
<PAGE> 9
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt at October 1, 1998 and January 1, 1998, consists of the
following:
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 1,
1998 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
$400,000 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:
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2003 104.750%
2004 103.167%
2005 101.583%
2006 and thereafter 100.000% $ 400,000 $ --
Term Loans 712,500 --
Revolving credit facility 84,845 --
$125,000 of the Company's senior subordinated notes, due October 1, 2007
with interest payable semiannually at 8.5% -- 125,000
$250,000 of the Company's senior reducing revolving credit facility -- 162,000
Capital lease obligations, payable in monthly installments plus interest
at 14% 24,241 --
Other non-recourse debt, generally payable in monthly installments,
plus interest at approximately 10% 4,772 --
Other 70 1,583
---------- ----------
1,226,428 288,583
Less current maturities (306) (306)
---------- ----------
$1,226,122 $ 288,277
========== ==========
</TABLE>
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.
9
<PAGE> 10
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------------
4. LONG-TERM DEBT, CONTINUED
NEW CREDIT FACILITIES -- In connection with the Merger and
Recapitalization, the Company entered into credit facilities provided
by a syndicate of financial institutions. In August 1998 in connection
with the Act III merger, such credit facilities were amended. Such
credit facilities (the "Credit Facilities") now include a $500,000
Revolving Credit Facility (including the availability of Revolving
Loans, Swing Line Loans, and Letters of Credit) and three term loan
facilities: Term A ($240,000), Term B ($240,000), 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 in the credit facilities, of the unused portion of
the Revolving Credit Facility. The Revolving Credit Facility expires in
June 2005. At October 1, 1998, there was approximately $84.9 million
outstanding under the Revolving Credit Facility.
Borrowings under the Term A Loan or the Revolving Credit Facility can
be made at the "Base Rate" plus a margin of 0% to 1%, or the "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 October 1, 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.
TENDER OFFER -- In connection with the Recapitalization, the Company
commenced a tender offer for all of the Company's 8.5% senior
subordinated notes ("Old 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 Old 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 Old
Regal Notes. On May 27, 1998, the Company paid, for each $1,000
principal amount, $1,116.24 for the Old Regal Notes tendered plus, in
each case, accrued and unpaid interest of $13.22. Regal financed the
purchase price of the Old 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 Old Regal Notes as well as for the
write-off of deferred financing costs related to the Company's previous
credit facility.
10
<PAGE> 11
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------------------------------------------------------------
5. INCOME TAXES
The effective income tax rate on income (loss) before extraordinary
items for the nine month periods ended October 1, 1998 and October 2,
1997 differs from the statutory income tax rates due primarily to
nondeductible recapitalization costs in 1998 and state income taxes in
1998 and 1997. The Company's effective tax rates for the nine-month
period ended October 1, 1998 and October 2, 1997 were .1% and 33.7%,
respectively.
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.
8. SUBSEQUENT EVENT
On November 10, 1998 the Company issued and sold $200,000,000 senior
subordinated notes due 2008 which bear interest at 9 1/2%. These
instruments are identical to the Company's $400,000,000 senior
subordinated notes offered May 27, 1998 as described in Note 4.
11
<PAGE> 12
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
The Company has achieved significant growth in theatres and screens
since its formation in November of 1989. Since inception through October 1,
1998, the Company has acquired 313 theatres (net of closed locations) with 2,326
screens, developed 72 new theatres with 908 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 the Company.
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, rebates from concession vendors, 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.
12
<PAGE> 13
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.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ----------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
1998 1997 1998 1997
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenue:
Admissions .......................... 65.6% 67.2% 66.0% 67.6%
Concessions ......................... 29.0% 29.1% 28.7% 28.6%
Other operating revenue ............. 5.4% 3.7% 5.3% 3.8%
----- ----- ----- -----
Total revenues ............... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Film rental and advertising costs ... 35.0% 37.5% 35.6% 36.9%
Cost of concessions and other ....... 4.5% 4.2% 4.5% 4.5%
Theatre operating expenses .......... 33.5% 30.0% 34.3% 32.4%
General and administrative expenses . 3.0% 2.6% 2.9% 3.7%
Depreciation and amortization ....... 8.2% 5.5% 7.4% 6.1%
Merger expenses ..................... -- 6.0% -- 2.2%
Loss on impairment of assets ........ -- 3.8% -- 1.4%
Recapitalization expenses ........... 1.3% -- 13.5% --
----- ----- ----- -----
Total operating expenses ..... 85.5% 89.6% 98.2% 87.2%
----- ----- ----- -----
Operating income ...................... 14.5% 10.4% 1.8% 12.8%
Other income (expense):
Interest expense ................ (10.3%) (2.6%) (6.9%) (2.7%)
Interest income ................. 0.2% 0.4% 0.2% 0.2%
Other ........................... (0.1%) (0.1%) (0.1%) (0.1%)
------ ------ ------ ------
Income (loss) before income taxes and
extraordinary item .................. 4.3% 8.1% (5.0)% 10.2%
Provision for income taxes ............ 2.1% 1.8% 0.1% 3.4%
----- ----- ----- -----
Income (loss) before extraordinary item 2.2% 6.3% (5.1%) 6.8%
Extraordinary loss .............. -- (7.7%) (2.4%) (2.9%)
----- ----- ----- -----
Net income (loss) ..................... 2.2% (1.4%) (7.5%) 3.9%
===== ===== ===== =====
</TABLE>
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
THREE MONTHS ENDED OCTOBER 1, 1998 AND OCTOBER 2, 1997
TOTAL REVENUES -- Total revenues for the third quarter of fiscal 1998
increased by 46.4% to $189.7 million from $129.6 million in the comparable 1997
period. This increase was due to a 32.9% increase in attendance attributable
primarily to the net addition of 1,201 screens in the last 12 months (834
screens were added August 26, 1998 as a result of the merger with Act III). Of
the $60.1 million net increase in revenues for the period, a $3.7 million
decrease was attributed to theatres previously operated by the Company, $29.3
million increase was attributed to theatres acquired by the Company, and $34.5
million increase was attributed to new theatres constructed by the Company.
Average ticket prices increased 7.6% 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 9.8% 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 49.1% to
$138.5 million in the third quarter 1998 from $92.9 million in the third quarter
1997. Direct theatre costs as a percentage of total revenues increased to 73.0%
in the 1998 period from 71.7% in the 1997 period. The increase of direct theatre
costs as a percentage of total revenues was primarily attributable to higher
occupancy costs as a percentage of total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES -- General and administrative
expenses increased by 69.0% to $5.7 million in the third quarter 1998 from $3.4
million in the third quarter 1997. This increase reflects additional costs
related to the Act III merger included in the Company's results subsequent to
the Act III merger. As a percentage of total revenues, general and
administrative expenses increased to 3.0% in the 1998 period from 2.6% in the
1997 period.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense
increased in the third quarter 1998 by 120.4% to $15.6 million from $7.1 million
in the third quarter 1997. This increase was primarily the result of theatre
property additions associated with the Company's expansion efforts, increased
debt amortization costs, and the Act III merger.
OPERATING INCOME -- Operating income for the third quarter 1998
increased to $27.5 million, or 14.5% of total revenues, from $13.5 million, or
10.4% of total revenues, in the third quarter 1997. Third quarter 1997 included
loss on impairment of assets under FASB Statement No. 121 of $4.9 million (3.8%
of total revenues).
INTEREST EXPENSE -- Interest expense increased in the third quarter
1998 by 477.3% to $19.5 million from $3.4 million in the third quarter 1997. The
increase was primarily due to higher average borrowings outstanding associated
with the Recapitalization of the Company and the Act III merger.
INCOME TAXES -- The provision for income taxes in the third quarter
1998 was $4.0 million as compared to $2.3 million in the third quarter 1997. The
effective tax rate was 49.4% in the 1998 period as compared to 21.8% in the 1997
period as the 1998 period reflected certain amortization, merger and
recapitalization expenses which were not deductible for tax purposes.
NET INCOME (LOSS) -- The net income (loss) in the third quarter 1998
was $4.1 million as compared to $1.8 million net loss in the third quarter 1997.
Net income before nonrecurring and extraordinary items was $6.1 million or 3.2%
of total revenues in the third quarter of 1998 as compared to $14.4 million or
11.3% of total revenues in the 1997 period.
NINE MONTHS ENDED OCTOBER 1, 1998 AND OCTOBER 2, 1997
TOTAL REVENUES -- Total revenues for the nine months ended October 1,
1998 increased by 35.9% to $477.9 million from $351.8 million in the comparable
1997 period. This increase was due to a 23.9%
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
increase in attendance attributable primarily to the net addition of 1,201
screens in the last 12 months (834 of which are attributable to the Act III
merger). Of the $126.1 million net increase in revenues for the period, a $5.6
million decrease was attributed to theatres previously operated by the Company,
$45.9 million increase was attributed to theatres acquired by the Company, and
$85.8 million increase was attributed to new theatres constructed by the
Company. Average ticket prices increased 7.1% 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 10.1% 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 37.1% to
$355.6 million for the nine months ended October 1, 1998 from $259.5 million in
the comparable 1997 period. Direct theatre costs as a percentage of total
revenues increased to 74.4% in the 1998 period from 73.8% 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 increased by 6.2% to $13.7 million for the nine months ended October 1,
1998 from $12.9 million in the comparable 1997 period. As a percentage of total
revenues, general and administrative expenses decreased to 2.9% in the 1998
period from 3.7% in the 1997 period.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense
increased for the nine months ended October 1, 1998 by 64.9% to $35.5 million
from $21.5 million in the comparable 1997 period. This increase was primarily
the result of theatre property additions associated with the Company's expansion
efforts, increased debt amortization costs, and the Act III merger.
OPERATING INCOME -- Operating income for the nine months ended October
1, 1998 decreased to $8.5 million, or 1.8% of total revenues, from $45.0
million, or 12.8% of total revenues, in the comparable 1997 period. Before
nonrecurring expenses associated with the Recapitalization, operating income for
the nine month period ended October 1, 1998 was $73.0 million or 15.3% of total
revenues.
INTEREST EXPENSE -- Interest expense increased for the nine months
ended October 1, 1998 by 247.2% to $32.8 million from $9.5 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 for income taxes for the nine months
ended October 1, 1998 was $0 million as compared to $12.1 million in the 1997
period. The effective tax rate was .1% in the 1998 period as compared to 33.7%
in the 1997 period as the 1998 period reflected certain recapitalization, merger
and amortization expenses which were not deductible for tax purposes.
NET INCOME (LOSS) -- The net income (loss) for the nine months ended
October 1, 1998 was $(36.0) million as compared to $13.8 million income in the
1997 period. Net income before nonrecurring and extraordinary items was $24.4
million or 5.1% of total revenues in the nine months ended October 1, 1998 as
compared to $30.0 million or 8.5% of total revenues in the 1997 period.
RECENT TRANSACTIONS
RECAPITALIZATION AND MERGER -- On May 27, 1998, an affiliate of KKR and
an affiliate of Hicks Muse merged with and into the Company, with the Company
continuing as the surviving corporation of the Merger. The Merger and related
transactions have been recorded as a recapitalization. In the Recapitalization,
the Company's existing shareholders received cash for their shares of Common
Stock.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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 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 and management in
the Company were used: (i) to fund the cash payments required to effect the
Merger and the Option/Warrant Redemption; (ii) to repay and retire the Company's
existing senior credit facilities; (iii) to repurchase the 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 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. 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 $64.5 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 and recapitalization costs above, an aggregate of $19.5 million was paid
to KKR and Hicks Muse.
COMBINATION WITH ACT III -- On August 26, 1998, the Company acquired
Act III Cinemas, Inc., the ninth largest motion picture exhibitor in the United
States based on number of screens in operation. In the Act III Merger, Act III
became a wholly-owned subsidiary of the Company and each share of Act III's
outstanding common stock was converted into the right to receive one share of
the Company's Common Stock. In connection with the Act III Merger, the Company
amended its Senior Credit Facilities and borrowed $383.3 million thereunder to
repay Act III's borrowings and accrued interest under Act III's credit
facilities and two senior subordinated promissory notes in the aggregate
principal amount of $75.0 million each of which were owned by KKR and Hicks
Muse.
TENDER OFFER -- In connection with the Recapitalization, the Company
commenced a tender offer for all of the Old 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 Old 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 Old Regal Notes. On May 27, 1998,
the Company paid, for each $1,000 principal amount, $1,116.24 for the Old Regal
Notes tendered plus, in each case, accrued and unpaid interest of $13.22. The
Company financed the purchase price of the Old Regal Notes with funds from the
Recapitalization.
NEW SUBORDINATED NOTE OFFERING -- On November 10, 1998, the Company
issued and sold $200,000 senior subordinated notes due 2008. Such notes bear
interest at 9 1/2%. These instruments are identical to the Company's $400,000
senior subordinated notes offered on May 27, 1998.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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. In August 1998 in connection with the Act
III merger, such credit facilities were amended. Such credit facilities (the
"Credit Facilities") now include a $500,000 Revolving Credit Facility (including
the availability of Revolving Loans, Swing Line Loans, and Letters of Credit)
and three term loan facilities: Term A ($240,000), Term B ($240,000), 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. At October 1, 1998, there was
approximately $84.9 million outstanding under the Revolving Credit Facility.
Borrowings under the Term A Loan or the Revolving Credit Facility can
be made at the "Base Rate" plus a margin of 0% to 1%, or the "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 LIBOR 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 October 1, 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
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
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.
At October 1, 1998, the Company had 385 multi-screen theatres with an
aggregate of 3,312 screens. At such date, the Company had 53 new theatres with
833 screens and 46 screens at 8 existing locations under construction. The
Company intends to develop approximately 250 to 300 screens during the balance
of 1998 and approximately 700 to 800 screens during 1999. The Company expects
that the capital expenditures in connection with its development plan will
aggregate approximately $100 to $125 million for the balance of 1998 and
approximately $270 to $300 million during 1999. The Company believes that its
capital needs for completion of theatre construction and development for at
least the next 30 to 36 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 ("SFAS") No. 130, Reporting
Comprehensive Income and SFAS No. 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. There are no
material differences between comprehensive income and net income as reported by
the Company. 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 SFAS
No. 133, Accounting for Derivative and Financial Instruments and Hedging
Activities. SFAS 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.
YEAR 2000
Until recently computer programs were written to store only two digits
for date-related information in order to more efficiently handle and store data.
Thus, the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the "Year 2000 Problem." In
1997, the Company initiated a company-wide Year 2000 project to address this
problem. Utilizing both internal and external resources, the Company is in the
process of defining, assessing and converting, or replacing, various programs
and hardware to make them Year 2000 compatible. The Year 2000 Problem
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED
goes beyond the Company's internal computer systems and requires coordination
with clients, vendors, government entities and other third parties to assure
that their systems and related interface are compliant. The Company's total Year
2000 remediation cost is not expected to exceed $100,000.
The Company believes that with minor modifications, the Year 2000
problem will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed in a timely fashion, the Year 2000 problem could have a material
impact on the operations and financial results of the Company.
The costs of the project and the manner in which the Company believes
it will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------------
(a) Exhibits:
(27) Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K dated
September 1, 1998.
(ii) The Company filed a Current Report on Form 8-K dated
September 14, 1998, as amended by Current Reports on Form
8-K/A dated September 16, 1998 and September 23, 1998.
20
<PAGE> 21
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: November 16, 1998 By: /s/ Michael L. Campbell
----------------------------------------
Michael L. Campbell, Chairman, President
and Chief Executive Officer
By: /s/ D. Mark Monroe
----------------------------------------
D. Mark Monroe, Vice President,
Treasurer and Acting Chief Financial
Officer
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
- -------------- ----------------------------------------------------------
<S> <C>
(27) FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REGAL CINEMAS, INC. FOR THE NINE MONTHS ENDED OCTOBER 1,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-02-1998
<PERIOD-END> OCT-01-1998
<CASH> 15,161
<SECURITIES> 0
<RECEIVABLES> 7,686
<ALLOWANCES> 0
<INVENTORY> 4,258
<CURRENT-ASSETS> 52,955
<PP&E> 1,225,684
<DEPRECIATION> (143,674)
<TOTAL-ASSETS> 1,591,221
<CURRENT-LIABILITIES> 91,446
<BONDS> 0
0
0
<COMMON> 193,459
<OTHER-SE> 46,406
<TOTAL-LIABILITY-AND-EQUITY> 1,591,221
<SALES> 137,007
<TOTAL-REVENUES> 477,868
<CGS> 21,551
<TOTAL-COSTS> 191,906
<OTHER-EXPENSES> 277,502
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,835
<INCOME-PRETAX> (23,971)
<INCOME-TAX> 100
<INCOME-CONTINUING> (24,071)
<DISCONTINUED> 0
<EXTRAORDINARY> (11,890)
<CHANGES> 0
<NET-INCOME> (35,961)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
