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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 333-52943
REGAL CINEMAS, INC.
(Exact name of registrant as specified in its charter)
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Tennessee 62-1412720
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
7132 Commercial Park Drive
Knoxville, Tennessee 37918
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (423) 922-1123
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Shares of common stock, no par value per share, outstanding on March 31, 1999,
were 216,672,105.
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REGAL CINEMAS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I .........................................................................................................1
Item 1. Business........................................................................................1
The Company.........................................................................................1
Recapitalization and Financing......................................................................2
Business Strategy...................................................................................3
Industry Overview...................................................................................5
Theatre Operations..................................................................................6
Seasonality.........................................................................................8
Film Licensing......................................................................................8
Complementary Concepts..............................................................................9
Competition........................................................................................10
Management Information Systems.....................................................................10
Employees..........................................................................................11
Regulation.........................................................................................11
Risk Factors.......................................................................................11
Item 2. Properties.....................................................................................16
Item 3. Legal Proceedings..............................................................................16
Item 4. Submission of Matters to a Vote of Security-Holders............................................16
PART II ........................................................................................................17
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters......................17
Item 6. Selected Financial Data........................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................20
Overview...........................................................................................20
Background of Regal................................................................................20
Results of Operations..............................................................................20
Loss on Impairment of Assets.......................................................................21
Fiscal Years Ended December 31, 1998 and January 1, 1998...........................................22
Fiscal Years Ended January 1, 1998 and January 2, 1997.............................................22
Liquidity and Capital Resources....................................................................23
Inflation; Economic Downturn.......................................................................26
Year 2000-State of Readiness.......................................................................26
New Accounting Pronouncements......................................................................27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................29
Item 8. Financial Statements and Supplementary Data....................................................30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................................................53
PART III ........................................................................................................54
Item 10. Directors and Executive Officers of the Registrant.........................................54
Item 11. Executive Compensation.....................................................................57
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................61
Item 13. Certain Relationships and Related Transactions.............................................62
PART IV ........................................................................................................64
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................64
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SIGNATURES.......................................................................................................66
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT ...............................................................................67
INDEX TO EXHIBITS................................................................................................68
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REGAL CINEMAS, INC.
PART I
ITEM 1. BUSINESS
THE COMPANY
Regal Cinemas, Inc. ("Regal" or the "Company") is the largest motion
picture exhibitor in the United States based upon the number of screens in
operation. At December 31, 1998, the Company operated 403 theatres, with an
aggregate of 3,573 screens in 30 states. The Company operates primarily
multiplex theatres and has an average of 8.9 screens per location, which
management believes is among the highest in the industry and which compares
favorably to an average of approximately 7.4 screens per location for the five
largest North American motion picture exhibitors at May 1, 1998. Since its
inception in November 1989, the Company has achieved substantial growth in
revenues and in net income before interest expense, income taxes, depreciation
and amortization, other income or expense, extraordinary items and non-recurring
charges ("EBITDA"). As a result of the Company's focus on enhancing revenues,
operating efficiently and strictly controlling costs, the Company has increased
its EBITDA margins, achieving what management believes are among the highest
EBITDA margins in the motion picture exhibition industry. For the five year
period ended December 31, 1998, the Company had compound annual growth rates in
revenues and EBITDA of 27.0% and 37.4% respectively, and the Company's EBITDA
margins increased from 15.4% to 22.9%.
The Company develops, acquires and operates multiplex theatres
primarily in mid-sized metropolitan markets and suburban growth areas of larger
metropolitan markets, predominantly in the eastern and northwestern United
States. The Company seeks to locate theatres in markets that it believes are
underscreened or served by older theatre facilities. The Company also seeks to
locate each theatre where it will be the sole or leading exhibitor within a
particular geographic film licensing zone. Management believes that at December
31, 1998, approximately 74% of the Company's screens were located in film
licensing zones in which the Company was the sole exhibitor.
From its inception through December 31, 1998, the Company has grown by
acquiring a net of 314 theatres with 2,326 screens, constructing 89 theatres
with 1,158 screens and adding 89 screens to existing theatres. This strategy has
served to establish and enhance the Company's presence in selected geographic
markets. The Company anticipates that its future growth will result largely from
the development of new theatres, the addition of new screens to existing
theatres and strategic acquisitions of other theatre circuits. At December 31,
1998, the Company had 42 new theatres with 647 screens under construction and 51
new screens under construction at eight existing theatres. In addition, the
Company had entered into leases in connection with its plans to develop an
additional 52 theatres with 819 screens. The Company has historically achieved
substantial returns on invested capital for newly built theatres.
On August 26, 1998, the Company acquired Act III Cinemas, Inc. ("Act
III"), then the ninth largest motion picture exhibitor in the United States
based on number of screens in operation (the "Act III Merger"). At the time of
the Act III Merger, Act III operated 130 theatres, with an aggregate of 835
screens, strategically located in concentrated areas throughout the Pacific
Northwest, Texas and Nevada. The Company has acquired ten other theatre circuits
during the last five years, including Cobb Theatres, Georgia State Theatres and
Litchfield Theatres. These acquisitions have enabled the Company to become a
leading operator in certain of its markets and to improve its market
concentration in the eastern and northwestern United States. Through the
integration of these acquisitions, the Company has achieved (or, in the case of
the recently completed Act III Merger, is beginning to realize) economies of
scale by consolidating purchasing, operating and other administrative functions.
The Company continues to consider strategic acquisitions of complementary
theatres or theatre companies. In addition, the Company may enter into joint
ventures, which could serve as a platform for both domestic and international
expansion.
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RECAPITALIZATION AND FINANCING
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
("KKR") and an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") merged with and into the Company (the "Regal Merger"), with the Company
continuing as the surviving corporation. The consummation of the Regal Merger
resulted in a recapitalization (the "Recapitalization") of the Company. In the
Recapitalization, existing holders of the Company's common stock (the "Common
Stock") received cash for their shares of Common Stock, and KKR, Hicks Muse, DLJ
Merchant Banking Partners II, L.P. and affiliated funds ("DLJ") and certain
members of the Company's management acquired the Company. In addition, in
connection with the Recapitalization, the Company canceled options and
repurchased warrants held by certain directors, management and employees of the
Company (the "Option/Warrant Redemption"). The aggregate purchase price paid to
effect the Regal Merger and the Option/Warrant Redemption was approximately $1.2
billion.
The Regal Merger was financed by an offering (the "Original Note
Offering") of $400.0 million aggregate principal amount of 9 1/2% Senior
Subordinated Notes due 2008 (the "Original Notes"), initial borrowings of $375.0
million under the Company's current senior credit facility (as amended, the
"Senior Credit Facilities") and $776.9 million in proceeds from the investment
by KKR, Hicks Muse, DLJ and management in the Company (the "Equity Investment").
The proceeds of the Original Note Offering, the initial borrowing under the
Senior Credit Facilities and the Equity Investment (collectively, the
"Financing") were used: (i) to fund the cash payments required to effect the
Regal Merger and the Option/Warrant Redemption; (ii) to repay and retire the
Company's then existing senior credit facilities; (iii) to repurchase all of the
Company's then existing senior subordinated notes; and (iv) to pay related fees
and expenses. The Financing, the Regal Merger, the Recapitalization and the
transactions contemplated thereby, including but not limited to, the application
of the proceeds of the Financing, are referred to herein as the "Transactions."
The Company's Senior Credit Facilities provide for borrowings of up to
$1,012.5 million in the aggregate, consisting of $500.0 million under a
revolving credit facility (the "Revolving Credit Facility") and $512.5 million,
in the aggregate, under three separate term loan facilities. As of December 31,
1998, the Company had approximately $493.5 million available for borrowing under
the Senior Credit Facilities.
On August 26, 1998, in connection with the Act III Merger, the Company
amended its Senior Credit Facilities and borrowed $383.3 million thereunder to
repay Act III's then existing bank borrowings and two senior subordinated
promissory notes, each in the aggregate principal amount of $75.0 million, which
were owned by KKR and Hicks Muse. The repayment of Act III's bank borrowings and
promissory notes, together with the Act III Merger, are referred to herein as
the "Act III Combination."
On November 10, 1998, the Company issued an additional $200.0 million
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2008 (the
"Tack-On Notes") under the same indenture governing the Original Notes. The
proceeds of the offering of the Tack-On Notes (the "Tack-On Offering") were used
to repay and retire portions of the Senior Credit Facilities. The Original Notes
and the Tack-On Notes are collectively referred to herein as the "Regal Notes."
On December 16, 1998, the Company issued $200.0 million aggregate
principal amount of 8 7/8% Senior Subordinated Debentures due 2010 (the "Regal
Debentures"). The proceeds of the offering of the Regal Debentures (the
"Debenture Offering") were used to repay all of the then outstanding
indebtedness under the Revolving Credit Facility and the excess was used for
working capital purposes.
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BUSINESS STRATEGY
Operating Strategy
Management believes that the following are the key elements of the
Company's operating strategy:
Multiplex Theatres. Management believes that the Company's multiplex
theatres promote increased attendance and maximize operating efficiencies
through reduced labor costs and improved utilization of theatre capacity. The
Company's multiplex theatres enable it to offer a diverse selection of films,
stagger movie starting times, increase management's flexibility in determining
the number of weeks that a film will run and the size of the auditorium in which
it is shown and more efficiently serve patrons from common concessions and other
support facilities. The Company further believes that the development of
multiplex theatres allows it to achieve an optimal relationship between the
number of screens (generally 14 to 18) and the size of the auditoriums (100 to
500 seats). The Company's multiplex theatres are designed to increase the
profitability of the theatres by maximizing the revenue per square foot
generated by the facility and reducing the cost per square foot of constructing
and operating the theatres.
Cost Control. The Company's cost control programs have resulted in an
increase in its EBITDA margins, which management believes are among the highest
in the motion picture exhibition industry. Management's focus on cost control
extends from a theatre's initial development to its daily operation. Management
believes that it is able to reduce construction and operating costs by designing
prototype theatres adaptable to a variety of locations and by actively
supervising all aspects of construction. In addition, through the use of
detailed management reports, the Company closely monitors labor scheduling,
concession yields and other significant operating expenses. A significant
component of theatre management's compensation is based on controlling operating
expenses at the theatre level.
Revenue Enhancements. The Company strives to enhance revenue growth
through: (i) the addition of specialty cafes within certain theatre lobbies
serving non-traditional concessions; (ii) the sale of screen slide and rolling
stock advertising time prior to scheduled movies; (iii) the marketing and
advertising of certain theatres in its circuit; (iv) the addition of
state-of-the-art video arcades; and (v) the rental of theatres to organizations
during non-peak hours.
Patron Satisfaction/Quality Control. The Company emphasizes patron
satisfaction by providing convenient locations, comfortable seating, spacious
neon-enhanced lobby and concession areas and a wide variety of film selections.
The Company's theatre complexes feature clean, modern auditoriums with high
quality projection and digital stereo surround-sound systems. As of December 31,
1998, approximately 83% of the Company's theatres were equipped with digital
surround-sound systems. The Company is adding stadium seating to certain of its
existing theatres and expects that all of its newly constructed theatres will
feature stadium seating. The Company believes that all of these features serve
to enhance its patrons' movie-going experience and help build patron loyalty. In
addition, the Company promotes patron loyalty through specialized marketing
programs for its theatres and feature films. To maintain quality and consistency
within the Company's theatres, the Company conducts regular inspections of each
theatre and operates a "mystery shopper" program.
Integration of Acquisitions. The Company has acquired 11 theatre
circuits during the last five years. Management believes that acquisitions
provide the opportunity for the Company to increase revenue growth while
realizing operating efficiencies through the integration of operations. In this
regard, the Company believes it has achieved (or, in the case of the recently
completed Act III Merger, believes it will achieve) cost savings through the
consolidation of its purchasing function, the centralization of certain other
operating
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functions and the uniform application of the most successful cost control
strategies of the Company and its acquisition targets.
Centralized Corporate Decision Making/Decentralized Operations. The
Company centralizes many of its functions through its corporate office,
including film licensing, concessions purchasing and new theatre construction
and design. The Company also devotes significant resources to training its
theatre managers. These managers are responsible for most aspects of a theatre's
day-to-day operations and implement cost controls at the theatre level,
including the close monitoring of payroll, concession and advertising expenses.
Marketing. The Company actively markets its theatres through grand
opening promotions, including "VIP" preopening parties, newspaper and radio
advertising, television commercials in certain markets and promotional
activities, such as live music, spotlights and skydivers, which frequently
generate media coverage. The Company also utilizes special marketing programs
for specific films and concession items. The Company seeks to develop patron
loyalty through a number of marketing programs such as a free summer children's
film series, cross-promotion ticket redemptions and promotions within local
communities.
Performance-Based Compensation Packages. The Company maintains an
incentive program for its corporate personnel, district managers and theatre
managers that links employees' compensation to profitability. The Company
believes that its incentive program, which consists of cash bonuses, purchased
stock and stock options, aligns the employees' interests with those of the
Company's shareholders.
Growth Strategy
Management believes that the following are the key elements of the
Company's growth strategy:
Develop New Multiplex Theatres in Existing and Target Markets. The
Company develops multiplex theatres with generally 14 to 18 screens, in its
existing markets, in other mid-sized metropolitan markets and in suburban growth
areas of larger metropolitan markets in the United States. Management seeks to
locate its theatres in areas that are underscreened or that are served by older
theatre facilities. The Company seeks to identify new geographical markets that
present opportunities for expansion and growth and, when identified, targets
these geographical markets for future development. At December 31, 1998, the
Company had 42 new theatres with 647 screens under construction. In addition,
the Company has entered into leases in connection with its plans to develop an
additional 52 theatres with 819 screens.
Add New Screens and Upgrade Existing Theatres. To enhance profitability
and to maintain competitiveness at existing theatres, the Company continues to
add screens and upgrade its existing theatres, including by adding stadium
seating to certain existing theatres. The Company believes that by adding
screens and upgrading its facilities it can leverage the favorable location of
certain of its theatres and thereby improve its operating margins at those
theatres. At December 31, 1998, the Company had 51 new screens under
construction at eight existing theatre facilities and anticipates that it will
add a total of 90 to 100 screens to certain of its existing theatres by the end
of 1999. The addition of screens to existing theatres is designed not to disrupt
operations at the theatres.
Acquire Theatres. While management believes that a significant portion
of its future growth will come through the development of new theatres, the
Company will continue to consider strategic acquisitions of complementary
theatres or theatre companies. In addition, the Company may enter into joint
ventures, which could serve as a platform for both domestic and international
expansion. On August 26, 1998, the Company acquired Act III, then the ninth
largest motion picture exhibitor in the United States based on number of screens
in operation. The Company currently has no letters of intent or other written
agreements for any specific acquisitions or joint ventures.
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INDUSTRY OVERVIEW
The domestic motion picture exhibition industry is currently comprised
of approximately 402 exhibitors, 145 of which operate ten or more total screens.
Based on the May 1, 1998 listing of exhibitors in the National Association of
Theatre Owners 1998-99 Encyclopedia of Exhibition, the five largest exhibitors
(based on the number of screens) operated approximately 36% of the total screens
in operation, with no one exhibitor operating more than 10% of the total
screens. From 1987 through 1997, the number of screens in operation in the
United States increased from approximately 23,000 to approximately 32,000, and
admissions revenues increased from approximately $4.3 billion to approximately
$6.4 billion. The motion picture exhibition industry continues to grow despite
the emergence of competing film distribution channels. Since 1991, the industry
has experienced significant growth with attendance increasing at a 3.3% compound
annual rate. This growth is principally attributed to an increase in the supply
of first-run, big budget films, increased investment in advertising and
promotion by studios, the investment by leading exhibitors in appealing, modern
multiplex theatres to replace aging locations and the moderate price of movies
relative to other out-of-home entertainment options.
In an effort to realize greater operating efficiencies, operators of
multi-theatre circuits have emphasized the development of larger multiplex
complexes. Typically, multiplexes have six or more screens per theatre, although
in some instances multiplexes may have as many as 30 screens in a single
theatre. The multi-screen format provides numerous benefits for theatre
operators, including allowing facilities (concession stands and restrooms) and
operating costs (lease rentals, utilities and personnel) to be spread over a
larger base of screens and patrons. Multiplexes have varying seating capacities
(typically from 100 to 500 seats) that allow for multiple show times of the same
film and a variety of films with differing audience appeal to be shown, and
provide the flexibility to shift films to larger or smaller auditoriums
depending on their popularity. To limit crowd congestion and maximize the
efficiency of floor and concession staff, the starting times of films at
multiplexes are staggered. The trend of developing large multiplex theatres in
the theatre exhibition industry favors larger, better capitalized companies,
creating an environment for new construction and consolidation. Many smaller
theatre owners who operate older cinemas without state-of-the-art stadium
seating and projection and sound equipment may not have the capital required to
maintain or upgrade their circuits. The growth of the number of screens, strong
domestic consumer demand and growing foreign theatrical and domestic and foreign
ancillary revenue opportunities have led to an increase in the volume of major
film releases. The greater number of screens has allowed films to be produced
for and marketed to specific audience segments (e.g., horror films for
teenagers) without using capacity required for mainstream product.
The greater number of screens has also prompted distributors to
increase promotion of new films. Not only are there more films in the market at
any given time, but the multiplex format allows for much larger simultaneous
national theatrical release. In prior years, a studio might have released 1,000
prints of a major film, initially releasing the film only in major markets, and
gradually releasing it in smaller cities and towns nationwide. Today, studios
might release over 4,000 prints of a major film and can open it nationally in
one weekend. These national openings have made up-front promotion of films
critical to attract audiences and stimulate word-of-mouth advertising.
Motion pictures are generally made available through various
distribution methods at various dates after the theatrical release date. The
release dates of motion pictures in these other "distribution windows" begin
four to six months after the theatrical release date with video rentals,
followed generally by off-air or cable television programming including
pay-per-view services, pay television, other basic cable and broadcast network
syndicated programming. These distribution windows have given producers the
ability to generate a greater portion of a film's revenues through channels
other than theatrical release. This increased revenue potential after a film's
initial domestic release has enabled major studios and certain
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independent producers to increase film production and theatrical advertising.
The additional non-theatrical revenue has also permitted producers to incur
higher individual film production and marketing costs. The total cost of
producing and distributing a picture averaged approximately $52.7 million in
1998 compared with approximately $17.5 million in 1986, while the average cost
to advertise and promote a picture averaged approximately $22.1 million in 1997
as compared with $5.4 million in 1986. These higher costs have further enhanced
the importance of a large theatrical release. Distributors strive for a
successful opening run at the theatre to establish a film and substantiate the
film's revenue potential both internationally and through other distribution
windows. The value of home video and pay cable distribution agreements
frequently depends on the success of a film's theatrical release. Furthermore,
the studios' revenue-sharing percentage and ability to control who views the
product within each of the distribution windows generally declines as one moves
farther from the theatrical release window. As theatrical distribution remains
the cornerstone of a film's financial success, it is the primary distribution
window for the public's evaluation of films and motion picture promotion.
Management expects that the overall supply of films will continue to
increase, although there can be no assurance that any such increase will occur.
There has also been an increase in the number of major studios and reissues of
films as well as an increased popularity of films made by independent producers.
From January 1994 through December 1998, the number of large budget films and
the level of marketing support provided by the production companies has
increased, as evidenced by the increase in average production costs and average
advertising costs per film of approximately 53.6% and 59.3%, respectively.
THEATRE OPERATIONS
The Company is the largest motion picture exhibitor in the United
States based upon the number of screens in operation. The Company develops,
acquires and operates primarily multiplex theatres in mid-size metropolitan
markets and suburban growth areas of larger metropolitan markets predominately
in the eastern and northwestern United States.
Multiplex theatres enable the Company to offer a wide selection of
films attractive to a diverse group of patrons residing within the drawing area
of a particular theatre complex. Varied auditorium seating capacities within the
same theatre enable the Company to exhibit films on a more cost effective basis
for a longer period of time by shifting films to smaller auditoriums to meet
changing attendance levels. In addition, operating efficiencies are realized
through the economies of having common box office, concession, projection, lobby
and rest room facilities, which enable the Company to spread certain costs, such
as payroll, advertising and rent, over a higher revenue base. Staggered movie
starting times also reduce staffing requirements and lobby congestion and
contribute to more desirable parking and traffic flow patterns.
The Company has designed prototype theatres, adaptable to a variety of
locations, which management believes result in construction and operating cost
savings. The Company's multiplex theatre complexes, which typically contain
auditoriums ranging from 100 to 500 seats each, feature wall-to-wall screens,
digital stereo surround-sound, multi-station concessions, computerized ticketing
systems, plush stadium seating with cup holders and retractable arm rests,
neon-enhanced interiors and exteriors and video game areas adjacent to the
theatre lobby.
The Company's real estate department includes leasing and site
selection, construction supervision and property management. By utilizing a
network of contingent real estate brokers, the Company is able to service a wide
geographic region without incurring incremental staffing costs. The Company also
closely monitors the construction of its theatres to ensure that they will open
on time and remain on budget. The
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property management department ensures that ongoing occupancy costs are reviewed
for accuracy and compliance with the terms of the lease.
In addition to leasing and site selection, the Company's central
corporate office coordinates film buying, concession purchasing, advertising and
financial and accounting activities.
The Company's theatre operations are under the supervision of its Chief
Operating Officer and are divided into four geographic divisions, each of which
is headed by a Vice President supervising several district theatre supervisors.
The district theatre supervisors are responsible for implementing Company
operating policies and supervising the managers of the individual theatres, who
are responsible for most of the day-to-day operations of the Company's theatres.
The Company seeks theatre managers with experience in the motion picture
exhibition industry and requires all new managers to complete a training program
at designated training theatres. The program is designed to encompass all phases
of theatre operations, including the Company's philosophy, management strategy,
policies, procedures and operating standards.
Management closely monitors the Company's operations and cash flow
through daily reports generated from computerized box office terminals located
in each theatre. These reports permit the Company to maintain an accurate and
immediate count of admissions by film title and show times and provide
management with the information necessary to effectively and efficiently manage
the Company's theatre operations. Additionally, daily payroll data is input at
in-theatre terminals which allows the regular monitoring of payroll expenses. In
addition, the Company has a quality assurance program to maintain clean,
comfortable and modern facilities. Management believes that operating a theatre
circuit consisting primarily of modern multiplex theatres also enhances the
Company's ability to license commercially successful films from distributors. To
maintain quality and consistency within the Company's theatre circuit, the
district managers regularly inspect each theatre and the Company operates a
"mystery shopper" program, which involves unannounced visits by unidentified
customers who report on the quality of service, film presentation and
cleanliness at individual theatres. The Company has an incentive compensation
program for theatre level management which rewards managers for controlling
theatre level operating expenses while complying with the Company's operating
standards.
In addition to revenues from box office admissions, the Company
receives revenues from concession sales and video games located adjacent to the
theatre lobby. Concession sales constituted 28.6% of total revenues for fiscal
1998. The Company emphasizes prominent and appealing concession stations
designed for rapid and efficient service. Although popcorn, candy and soft
drinks remain the best selling concession items, the Company's theatres offer a
wide range of concession choices. The Company continually seeks to increase
concession sales through optimizing product mix, introducing special promotions
from time to time and training employees to cross sell products. In addition to
traditional concession stations, select existing theatres and theatres currently
under development feature specialty concession cafes serving items such as
cappuccino, fruit juices, cookies and muffins, soft pretzels and yogurt.
Management negotiates directly with manufacturers for many of its concession
items to ensure adequate supplies and to obtain competitive prices.
The Company relies upon advertisements, including movie schedules
published in newspapers, to inform its patrons of film selections and show
times. Newspaper advertisements are typically displayed in a single grouping for
all of the Company's theatres located in a newspaper's circulation area.
Multimedia advertising campaigns for major film releases are organized and
financed primarily by the film distributors.
The Company actively markets its theatres through grand opening
promotions, including "VIP" preopening parties, newspaper and radio advertising,
television commercials in certain markets and promotional activities such as
live music, spotlights and skydivers, which frequently generate media coverage.
The Company also utilizes special marketing programs for specific films and
concession items.
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The Company seeks to develop patron loyalty through a number of marketing
programs such as free summer children's film series, cross-promotion ticket
redemptions and promotions within local communities.
As of December 31, 1998, the Company operated 36 theatres with an
aggregate of 222 screens, which exhibit second-run movies and charge lower
admission prices (typically $1.00 to $2.00). These movies are the same high
quality features shown at all of the Company's theatres. The terminology
second-run is an industry term for the showing of movies after the film has been
shown for varying periods of time at other theatres. The Company believes that
the increased attendance resulting from lower admission prices and the lower
film rental costs of second-run movies compensate for the lower admission prices
and slightly higher operating costs as a percentage of admission revenues at the
Company's discount theatres. The design, construction and equipment in the
Company's discount theatres are of the same high quality as its first-run
theatres. The Company's discount theatres generate theatre level cash flows
similar to the Company's first-run theatres.
SEASONALITY
The Company's revenues are usually seasonal, coinciding with the timing
of releases of motion pictures by the major distributors. Generally, the most
marketable motion pictures are released during the summer and the Thanksgiving
through year-end holiday season. The unexpected emergence of a hit film during
other periods can alter the traditional trend. The timing of movie releases can
have a significant effect on the Company's results of operations, and the
results of one quarter are not necessarily indicative of results for the next
quarter. The seasonality of motion picture exhibition, however, has become less
pronounced in recent years as studios have begun to release major motion
pictures somewhat more evenly throughout the year.
FILM LICENSING
The Company licenses films from distributors on a film-by-film and
theatre-by-theatre basis. The Company negotiates directly with film
distributors. Prior to negotiating for a film license, the Company evaluates the
prospects for upcoming films. Criteria considered for each film include cast,
director, plot, performance of similar films, estimated film rental costs and
expected Motion Picture Association of America rating. Successful licensing
depends greatly upon the exhibitor's knowledge of trends and historical film
preferences of the residents in markets served by each theatre, as well as on
the availability of commercially successful motion pictures.
Films are licensed from film distributors owned by major film
production companies and from independent film distributors that generally
distribute films for smaller production companies. Film distributors typically
establish geographic film licensing zones and allocate each available film to
one theatre within that zone. Film zones generally encompass a radius of three
to five miles in metropolitan and suburban markets, depending primarily upon
population density. As of December 31, 1998, the Company believes that
approximately 74% of its screens were located in film licensing zones in which
such theatres were the sole exhibitors, permitting the Company to exhibit many
of the most commercially successful films in these zones.
In film zones where the Company is the sole exhibitor, the Company
obtains film licenses by selecting a film from among those offered and
negotiating directly with the distributor. In film zones where there is
competition, a distributor will either require the exhibitors in the zone to bid
for a film or will allocate its films among the exhibitors in the zone. When
films are licensed under the allocation process, a distributor will select an
exhibitor, who then negotiates film rental terms directly with the distributor.
Over the past several years, distributors have generally used the allocation
rather than bidding process to license
8
<PAGE> 12
their films. When films are licensed through a bidding process, exhibitors
compete for licenses based upon economic terms. The Company currently does not
bid for films in any of its markets, although it may be required to do so in the
future. Although the Company predominantly licenses first-run films, if a film
has substantial remaining potential following its first-run, the Company may
license it for a second-run. Film distributors establish second-run availability
on a national or market-by-market basis after the release from first-run
theatres.
Film licenses entered into in either a negotiated or bidding process
typically specify rental fees based on the higher of a gross receipts formula or
a theatre admissions revenue formula. Under a gross receipts formula, the
distributor receives a specified percentage of box office receipts, with the
percentage declining over the term of the film run. First-run film rental fees
may begin at up to 70% of admission revenues and gradually decline to as low as
30% over a period of four weeks or more. Second-run film rental fees typically
begin at 35% of admission revenues and often decline to 30% after the first
week. Under a theatre admissions revenue formula, the distributor receives a
specified percentage of the excess of admission revenues over a negotiated
allowance for theatre expenses. In addition, the Company is occasionally
required to pay non-refundable guarantees of film rental fees or to make
refundable advance payments of film rental fees or both in order to obtain a
license for a film. Rental fees actually paid by the Company generally are
adjusted subsequent to the exhibition of a film in a process known as
settlement. The commercial success of a film relative to original distributor
expectations is the primary factor taken into account in the settlement process;
secondarily, the past performance of other films in a specific theatre is a
factor. To date, the settlement process has not resulted in material adjustments
in the film rental fees accrued by the Company.
The Company's business is dependent upon the availability of marketable
motion pictures, its relationships with distributors and its ability to obtain
commercially successful films. Many distributors provide quality first-run
movies to the motion picture exhibition industry; however, according to industry
reports, eight distributors accounted for approximately 94% of industry
admission revenues during 1997, and 46 of the top 50 grossing films. No single
distributor dominates the market. Disruption in the production of motion
pictures by the major studios and/or independent producers, the lack of
commercial success of motion pictures or the Company's inability to otherwise
obtain motion pictures for exhibition would have a material adverse effect upon
the Company's business. The Company licenses films from each of the major
distributors and believes that its relationships with distributors are good.
From year to year, the revenues attributable to individual distributors will
vary widely depending upon the number and quality of films each distributes. The
Company believes that in 1998 no single distributor accounted for more than 21%
of the films licensed by the Company, or films producing more than 21% of the
Company's admission revenues.
COMPLEMENTARY CONCEPTS
IMAX(R) 3-D Theatres. The Company has signed an agreement to include
IMAX(R) 3-D theatres in ten new multiplex theatre projects over the next five
years, the first of which opened in Chicago in November 1998. Management
believes that the Company's theatres with IMAX(R) 3-D, which will contain highly
automated projection systems and specialized sound systems, will draw higher
traffic levels than theatres without them, allow the Company to attract patrons
during non-peak hours and expand its customer base in certain markets.
FunScapes(TM). To complement the Company's theatre development, the
Company operates its FunScapes(TM) entertainment complexes in certain locations
which are designed to increase both the drawing radius for patrons and patron
spending by offering a wider array of entertainment options at a single
destination. As of December 31, 1998, the Company operated FunScapes(TM) in
Chesapeake, Virginia; Rochester, New York; Syracuse, New York; Brandywine,
Delaware; Fort Lauderdale, Florida; Nashville, Tennessee and Knoxville,
Tennessee. The Company currently has one FunScapes(TM) under construction and
9
<PAGE> 13
has no plans to develop additional FunScapes(TM). The $6.0 million to $10.0
million estimated cost of construction of an entertainment center is comparable
to the cost of constructing the adjacent theatre complex. Each complex includes
a nine to 16 screen theatre and a 50,000 to 70,000 square foot family
entertainment center, which generally features a 36-hole, tropical-themed
miniature golf course, a children's soft play and exercise area, laser tag,
video batting cages, a video golf course, virtual reality games, a high-tech
video arcade and party rooms. A food court connects the theatres to the
entertainment center and features nationally recognized brand name pizza, taco,
sandwich and dessert restaurants. Each theatre and entertainment center totals
approximately 95,000 to 140,000 square feet and management believes the facility
is a comprehensive entertainment destination.
The Company is currently exploring its strategic alternatives with
respect to all of its FunScapes(TM) locations, other than the one in Knoxville,
Tennessee, and currently expects that these locations will be sold during the
next fiscal year. Otherwise, the Company intends to pursue other alternatives
including, but not limited to, subleasing these locations. In the fourth quarter
of 1998, management recorded an impairment charge of $36.9 million ($22.5
million after tax) with respect to those FunScapes(TM) locations.
COMPETITION
The motion picture exhibition industry is fragmented and highly
competitive, particularly in film licensing, attracting patrons and finding new
theatre sites. Theatres operated by national and regional circuits and by
smaller independent exhibitors compete with the Company's theatres. Many of the
Company's competitors have been in existence longer than the Company has and may
be better established in some of its existing and future markets. The Company
believes that the principal competitive factors in the motion picture exhibition
industry include: licensing terms; the seating capacity, location and reputation
of an exhibitor's theatres; the quality of projection and sound equipment at the
theatres; and the exhibitor's ability and willingness to promote the films.
In those areas where real estate is readily available, there are few
barriers preventing competing companies from opening theatres near one of the
Company's existing theatres, which may have a material adverse effect on the
Company's theatre. In addition, competitors have built or are planning to build
theatres in certain areas in which the Company operates, which may result in
excess capacity in such areas and adversely affect attendance and pricing at the
Company's theatres in such areas.
In addition, alternative motion picture exhibition delivery systems,
including cable television, video disks and cassettes, satellite and
pay-per-view services, exist for the exhibition of filmed entertainment in
periods subsequent to the theatrical release. The expansion of such delivery
systems (such as video on demand) could have a material adverse effect upon the
Company's business and results of operations. The Company also competes for the
public's leisure time and disposable income with all forms of entertainment,
including sporting events, concerts, live theatre and restaurants.
MANAGEMENT INFORMATION SYSTEMS
The Company has a significant commitment to its management information
systems, some of which have been developed internally. The point of sale
terminals within each theatre provide comprehensive information to the corporate
office each morning. These daily management reports address all aspects of
theatre operations, including concession sales, fraud detection and film
booking. Payroll information is gathered daily from theatres through the use of
automated time keeping systems, enabling a daily comparison of actual to
budgeted labor for each theatre. The Company's systems allow it to properly
schedule and
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<PAGE> 14
manage its hourly workforce. A corporate help desk is also available to monitor
and resolve any processing problems that might arise in the theatres.
EMPLOYEES
As of December 31, 1998, the Company employed 12,000 persons, of which
1,551 were full-time and 10,449 were part-time employees. Of the Company's
employees, 334 were corporate personnel, 1,815 were theatre management personnel
and the remainder were hourly theatre personnel. Film projectionists at nine of
the Company's theatres in the Seattle, Washington; Las Vegas, Nevada; Nashville,
Tennessee; and Cleveland and Youngstown, Ohio markets are represented by the
International Alliance of Theatrical Stage Employees and Moving Picture Machine
Operators of the United States and Canada ("IATSE"). Certain other employees of
the Company in the State of Washington are also represented by the IATSE. The
Company's collective bargaining agreements with the IATSE expire over various
periods through March 2000. The Company's expansion into new markets may
increase the number of employees represented by unions. The Company considers
its employee relations to be good.
REGULATION
The distribution of motion pictures is in large part regulated by
federal and state antitrust laws and has been the subject of numerous antitrust
cases. The Company has never been a party to any of such cases, but the manner
in which it can license films is subject to consent decrees resulting from these
cases. Consent decrees bind certain major film distributors and require the
films of such distributors to be offered and licensed to exhibitors, including
the Company, on a theatre-by-theatre basis. Consequently, exhibitors cannot
assure themselves of a supply of films by entering into long-term arrangements
with major distributors, but must negotiate for licenses on a film-by-film and
theatre-by-theatre basis.
The Company's theatres must comply with Title III of the Americans with
Disabilities Act of 1990 (the "ADA") to the extent that such properties are
"public accommodations" and/or "commercial facilities" as defined by the ADA.
Compliance with the ADA requires that public accommodations "reasonably
accommodate" individuals with disabilities and that new construction or
alterations made to "commercial facilities" conform to accessibility guidelines
unless "structurally impracticable" for new construction or technically
infeasible for alterations. Non-compliance with the ADA could result in the
imposition of injunctive relief, fines, an award of damages to private litigants
and additional capital expenditures to remedy such noncompliance. The Company
believes that it is in substantial compliance with all current applicable
regulations relating to accommodations for the disabled. The Company intends to
comply with future regulations in this regard, and the Company does not
currently anticipate that compliance will require the Company to expend
substantial funds.
The Company's theatre operations are also subject to federal, state and
local laws governing such matters as wages, working conditions, citizenship,
health and sanitation requirements and licensing. At December 31, 1998,
approximately 38.7% of the Company's employees were paid at the federal minimum
wage and, accordingly, the minimum wage largely determines the Company's labor
costs for those employees.
RISK FACTORS
This Form 10-K includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and
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<PAGE> 15
Results of Operations" and "Business" may constitute forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations are
disclosed in the following risk factors (the "Cautionary Statements"). All
forward-looking statements are expressly qualified in their entirety by the
Cautionary Statements.
We Depend on Motion Picture Production and Performance and on Our Relationship
with Film Distributors
The Company's ability to operate successfully depends upon a number of
factors, the most important of which are the availability and appeal of motion
pictures, our ability to license motion pictures and the performance of such
motion pictures in our markets. We mostly license first-run motion pictures.
Poor performance of, or disruption in the production of or our access to, these
motion pictures could hurt our business and results of operations. Because film
distributors usually release films that they anticipate will be the most
successful during the summer and holiday seasons, poor performance of these
films or disruption in the release of films during such periods could hurt our
results for those particular periods or for any fiscal year.
Our business also depends on maintaining good relations with the major
film distributors that license films to our theatres. A deterioration in our
relationship with any of the nine major film distributors could affect our
ability to get commercially successful films and, therefore, could hurt our
business and results of operations. See "Business - Film Licensing."
In addition, in times of recession, attendance levels experienced by
motion picture exhibitors may be adversely effected. For example, revenues
declined for the industry in 1990 and 1991.
We Have Significant Expansion Plans
The Company's growth strategy involves constructing new multiplex
theatres and adding new screens to certain of our existing theatres. We seek to
locate our theatres in markets that we believe are underscreened or that are
served by older theatre facilities. At December 31, 1998, we had 42 new theatres
with 647 screens under construction and 51 new screens under construction at
eight existing theatres. We intend to develop approximately 700 to 800 screens
during 1999. During 1999, we expect to spend approximately $375.0 million in
connection with new theatre construction or renovations to existing theatres. We
expect to get this money from cash generated from operations, asset sale
proceeds and borrowings under our Senior Credit Facilities. There is no
guarantee, however, that we will generate enough cash flow from operations or
proceeds from asset sales or that our future borrowing capacity under our Senior
Credit Facilities will be enough to cover our anticipated spending. In addition,
we intend to continue our expansion plans over the next several years. Any
future theatre development may require financing in addition to cash generated
from operations, asset sale proceeds and borrowings under the Senior Credit
Facilities. There is no guarantee that such additional financing will be
available on reasonable terms, or at all.
Our ability to open theatres and complete screen expansions on a timely
and profitable basis is subject to many factors, some of which are beyond our
control. There is significant competition in the United States for site
locations from both theatre companies and other businesses. There is no
guarantee that we will be able to acquire attractive theatre sites, negotiate
acceptable lease terms and build theatres and complete screen expansions on a
timely and cost-effective basis. There is also no guarantee that we will be able
to hire, train and retain skilled managers and personnel. Finally, there can be
no assurance that we will achieve our planned expansion or that our new theatres
will achieve targeted levels of profitability.
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<PAGE> 16
There Are Risks Associated with Our Acquisitions
Our growth strategy may also involve us acquiring additional theatres
and/or theatre companies. There is substantial competition for attractive
acquisition candidates. There is no guarantee that we will be able to
successfully acquire quality theatres or theatre companies or be able to
integrate their operations into ours. There is also no guarantee that future
acquisitions will not affect our operating results, particularly right after an
acquisition while we are in the process of integrating operations. Moreover, our
strategy involves increasing net revenue while reducing operating expenses.
Although we believe that this plan is reasonable, there is no guarantee that we
will be able to carry out our plans without delay or that our plan will result
in the increased profitability, cost savings or other benefits we expected. In
addition, the integration of acquired companies requires substantial attention
from our senior management, which may limit the amount of time available to be
devoted to our day-to-day operations or to our growth strategy. Finally,
expansion of our theatre circuit can be risky if we do not effectively manage
such growth and if we have to incur additional debt in connection with such
acquisitions.
We Operate in a Competitive Environment
The motion picture exhibition industry is very competitive. Theatres
operated by national and regional circuits and by smaller independent exhibitors
compete with our theatres. Many of our competitors have been around longer than
we have and may be better established in some of our existing and future
markets.
We believe that the principal competitive factors in our industry are:
licensing terms, the seating capacity, location and reputation of an exhibitor's
theatres; the quality of projection and sound equipment at the theatres; and the
exhibitor's ability and willingness to promote the films. Failure to compete
well in any of these categories could hurt our business and results of
operations.
In areas where real estate is readily available, competing companies
are able to open theatres near one of ours, which may affect our theatre.
Competitors have also built or are planning to build theatres in certain areas
in which we operate, which may result in excess capacity in such areas and hurt
attendance and pricing at our theatres in such areas. Filmgoers are generally
not brand conscious and usually choose a theatre based on the films showing
there.
In addition, there are many other ways to view movies once the movies
leave the theatre, including cable television, video disks and cassettes,
satellite and pay-per-view services. Creating new ways to watch movies (such as
video on demand) could hurt our business and results of operations. We also
compete for the public's leisure time and disposable income with all forms of
entertainment, including sporting events, concerts, live theatre and
restaurants. See "Business - Competition."
We Depend on Our Senior Management
Our success depends upon the continued contributions of our senior
management, including Michael L. Campbell, our Chairman, President and Chief
Executive Officer. We currently have employment contracts with Mr. Campbell and
our Chief Operating Officer, but we only maintain key-man life insurance for Mr.
Campbell. If we lost the services of Mr. Campbell it could hurt our business and
development. See "Item 11. Executive Compensation-Employment Agreements."
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<PAGE> 17
Our Quarterly Results of Operations Fluctuate
Our revenues are usually seasonal because of the way the major film
distributors release films. Generally, the most marketable movies are released
during the summer and the Thanksgiving through year-end holiday season. An
unexpected hit film during other periods can alter the traditional trend. The
timing of movie releases can have a significant effect on our results of
operations, and our results one quarter are not necessarily the same as results
for the next quarter. The seasonality of our business, however, has lessened as
studios have begun to release major motion pictures somewhat more evenly
throughout the year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We Have Substantial Indebtedness, Lease Commitments and Leverage
We have a large amount of debt. As of December 31, 1998, we had
approximately $1.34 billion of indebtedness outstanding, with approximately
$493.5 million available for future borrowings under our Senior Credit
Facilities. In addition, we may incur more debt in the future, for things such
as funding future construction and acquisitions as part of our growth strategy.
Our high degree of leverage could have negative consequences for us,
including, but not limited to, the following: (i) we will have to repay our
debt, which would reduce funds available for operations and future business
opportunities and increase our vulnerability to bad general economic and
industry conditions and competition; (ii) our ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate or other purposes, may be limited; (iii) our leveraged
position and the provisions in our indentures and Senior Credit Facilities could
limit our ability to compete, as well as our ability to expand, including
through acquisitions, and to make capital improvements; and (iv) our ability to
refinance our debt in order to pay it when it matures or upon a change of
control may be adversely affected. In addition, some of the debt under our
Senior Credit Facilities bears interest at floating rates which makes our
operating results sensitive to fluctuations in interest rates. There can be no
guarantee that our future cash flow will be sufficient to meet our obligations
and commitments, and any such insufficiency could hurt our business.
For the twelve month period ended December 31, 1998, our interest
expense was approximately $59.3 million, which would increase to $115.0 million
on a pro forma basis for such period assuming that the Transactions, the Act III
Combination, the Tack-On Offering and the Debenture Offering occurred at the
beginning of fiscal 1998. For 1998, the amount we paid under our non-cancelable
operating leases was $82.0 million, which would increase to $94.9 million on a
pro forma basis for such period assuming that the Transactions, the Act III
Combination, the Tack-On Offering and the Debenture Offering occurred at the
beginning of fiscal 1998. The Company has also entered into certain lease
agreements for the operation of theatres not yet constructed. As of December 31,
1998, the total future minimum rental payments under the terms of these leases
approximates $1.9 billion to be paid over 15 to 20 years.
There Is No Guarantee We Will Be Able to Service Our Debt
Our ability to make scheduled payments on our debt, or to refinance our
debt depends on our performance, which may be subject to economic, financial,
competitive and other factors beyond our control. Based upon our current
operations and anticipated growth, we believe that future cash flow from
operations, together with the available borrowings under our Senior Credit
Facilities, will be adequate to meet our anticipated needs for capital
expenditures, interest payments and scheduled principal payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." There can be no guarantee,
however, that our business will continue to generate sufficient cash flow from
operations in the future to service our debt and make necessary capital
expenditures. If this should occur, we may be required to refinance all or a
portion of our debt, to sell assets or to obtain additional financing. There can
be no guarantee that any such refinancing would be possible,
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<PAGE> 18
that any assets could be sold (or, if sold, of the timing of such sales and the
amount of proceeds realized therefrom) or that additional financing could be
obtained on acceptable terms, if at all.
We Are Subject to Restrictive Debt Covenants
Our indentures and our Senior Credit Facilities contain certain
covenants that restrict, among other things, our ability to incur additional
debt, pay dividends or make certain types of payments, enter into certain
transactions with affiliates, merge or consolidate with any other person or sell
all or substantially all of our assets. In addition, the Senior Credit
Facilities contain other limitations including restrictions on us prepaying
debt, and also require us to maintain specified financial ratios. Our ability to
comply with these financial ratios can be affected by events beyond our control
and there can be no guarantee that we will meet those tests. A breach of any of
these provisions could result in a default under the Senior Credit Facilities,
which would allow the lenders to declare all amounts outstanding thereunder
immediately due and payable. If we were unable to pay those amounts, the lenders
could proceed against the collateral securing that debt. If the amounts
outstanding under the Senior Credit Facilities were accelerated, there can be no
guarantee that the assets of the Company would be sufficient to repay the amount
in full.
Hicks Muse and KKR Effectively Control the Company
Each of Hicks Muse and KKR currently owns approximately 46.3% of the
Company. Therefore, if they vote together, Hicks Muse and KKR have the power to
elect a majority of the directors of the Company and exercise control over our
business, policies and affairs. We have a stockholders agreement with KKR and
Hicks Muse, which requires us to obtain the approval of the board designees of
each of Hicks Muse and KKR before the Board of Directors may take any action.
The stockholders agreement, however, does not contain any "deadlock" resolution
mechanisms.
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ITEM 2. PROPERTIES
As of December 31, 1998, the Company operated 256 of its 403 theatres
pursuant to lease agreements, owned the land and buildings for 100 theatres and
operated 47 locations pursuant to ground leases. Of the 403 theatres operated by
the Company as of December 31, 1998, 314 were acquired as existing theatres and
89 have been developed by the Company.
The majority of the Company's leased theatres are subject to lease
agreements with original terms of 20 years or more and, in most cases, renewal
options for up to an additional ten years. These leases provide for minimum
annual rentals and the renewal options generally provide for increased rent.
Under certain conditions, further rental payments may be based on a percentage
of revenues above specified amounts. A significant majority of the leases are
net leases, which require the Company to pay the cost of insurance, taxes and a
portion of the lessor's operating costs.
The Company's corporate office is located in approximately 70,000
square feet of space in Knoxville, Tennessee, which the Company acquired in
1994. The Company believes that these facilities are adequate for its
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation and
proceedings in the ordinary course of business. The Company does not have any
litigation that management believes is likely to have a material adverse effect
upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the shareholders during the
fourth quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
There is no established public trading market for the Company's Common
Stock. At March 30, 1999, there were approximately 141 holders of record of the
Company's Common Stock.
The Company has not declared or paid a cash dividend on its Common
Stock. It is the present policy of the Board of Directors to retain all earnings
to support operations and to finance expansion. The Company is restricted from
the payment of cash dividends under its Senior Credit Facilities and the
indentures governing its senior subordinated debt.
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ITEM 6. SELECTED FINANCIAL DATA
The selected historical consolidated financial data set forth below were derived
from the consolidated financial statements of the Company. The selected
historical consolidated financial data of the Company as of and for the year
ended December 31, 1998 were derived from the consolidated financial statements
and the notes thereto of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors, whose report has been included herein. The
selected historical consolidated financial data of the Company as of and for the
years ended December 29, 1994, December 28, 1995, January 2, 1997 and January 1,
1998 were derived from the consolidated financial statements and the notes
thereto of the Company, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated balance sheets at January 2, 1997 and
January 1, 1998 and the related consolidated statements of income, changes in
shareholders' equity and of cash flows for the three years ended January 1, 1998
and notes thereto appear elsewhere herein. The PricewaterhouseCoopers LLP report
on the fiscal year 1995 and 1996 financial statements is based in part on the
report of other independent auditors. The report of other independent auditors
with respect to the fiscal year 1996 financial statements appears elsewhere
herein. The selected historical consolidated financial data set forth below
should be read in conjunction with, and are qualified in their entirety by
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1997 1998 1998
----------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT FOR PERCENTAGES, RATIOS AND
OPERATING DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Admissions $ 185.2 $ 213.4 $ 266.0 $ 325.1 $ 462.8
Concessions 74.7 87.3 110.2 137.2 202.4
Other operating revenues 5.1 8.3 14.9 21.3 41.8
----------- ----------- ----------- ----------- -----------
Total revenues 265.0 309.0 391.1 483.6 707.0
Operating expenses:
Film rental and advertising costs 101.0 115.4 145.2 178.2 251.3
Cost of concessions and other 9.9 11.4 17.1 21.1 31.7
Theatre operating expenses 92.9 105.7 127.7 156.5 241.7
General and administrative expenses 14.1 14.8 16.6 16.6 20.4
----------- ----------- ----------- ----------- -----------
Total costs and expenses 217.9 247.3 306.6 372.4 545.1
----------- ----------- ----------- ----------- -----------
Sub-total 47.1 61.7 84.5 111.2 161.9
Depreciation and amortization 13.6 19.4 24.7 30.5 52.4
Merger expenses 5.1 1.2 1.6 7.8 --
Recapitalization expenses -- -- -- -- 65.7
Loss on impairment of assets (1) -- -- -- 5.0 67.9
----------- ----------- ----------- ----------- -----------
Operating income (loss) 28.4 41.1 58.2 67.9 (24.1)
Other (income) expense:
Interest expense 7.2 10.3 12.8 14.0 59.3
Interest income -- -- (0.6) (0.8) (1.5)
Other -- 0.7 (0.7) 0.4 1.9
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary item 21.2 30.1 46.7 54.3 (83.8)
(Provision for) benefit from income taxes (8.5) (12.2) (20.8) (19.1) 22.2
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item 12.7 17.9 25.9 35.2 (61.7)
Extraordinary item:
Loss on extinguishment of debt, net of applicable taxes 1.8 0.4 0.8 10.0 11.9
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 10.9 $ 17.5 $ 25.1 $ 25.2 $ (73.6)
=========== =========== =========== =========== ===========
OPERATING AND OTHER FINANCIAL DATA(4):
Cash flow provided by operating activities $ 36.5 $ 40.0 $ 67.5 $ 64.0 $ 44.2
Cash flow used in investing activities $ 106.4 $ 112.6 $ 131.1 $ 202.3 $ 295.4
Cash flow provided by financing activities $ 63.5 $ 69.8 $ 72.2 $ 139.6 $ 253.4
EBITDA (2) $ 47.1 $ 61.7 $ 84.5 $ 111.2 $ 161.9
EBITDAR (2) $ 79.6 $ 96.2 $ 125.9 $ 164.9 $ 242.8
EBITDA margin (3) 17.8 % 20.0 % 21.7 % 23.2 % 22.9 %
EBITDAR margin (3) 30.0 % 31.1 % 32.4 % 34.4 % 34.3 %
Theatre locations 195 206 223 256 403
Screens 1,397 1,616 1,899 2,306 3,573
Average screens per location 7.2 7.8 8.5 9.0 8.9
Attendance (in thousands) 49,690 55,091 65,530 76,331 102,702
Average ticket price $ 3.73 $ 3.87 $ 4.06 $ 4.26 $ 4.51
Average concessions per patron $ 1.50 $ 1.58 $ 1.68 $ 1.80 $ 1.97
BALANCE SHEET DATA:
Cash and cash equivalents $ 9.9 $ 7.0 $ 17.1 $ 18.4 $ 20.6
Total assets $ 252.6 $ 349.0 $ 488.8 $ 660.6 $ 1,662.0
Long-term obligations (including current maturities) $ 117.5 $ 188.5 $ 144.6 $ 288.6 $ 1,341.1
Shareholders' equity $ 88.1 $ 109.0 $ 279.3 $ 306.6 $ 202.5
</TABLE>
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<PAGE> 22
(1) Reflects non-cash charges for the impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of, which the Company adopted in 1995.
(2) EBITDA represents net income before interest expense, income taxes,
depreciation and amortization, other income or expense, extraordinary items
and non-recurring charges. EBITDAR represents EBITDA before rent expense.
While EBITDA and EBITDAR are not intended to represent cash flow from
operations as defined by GAAP and should not be considered as indicators of
operating performance or alternatives to cash flow (as measured by GAAP) as
a measure of liquidity, they are included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure, rental and working capital requirements.
(3) Defined as EBITDA and EBITDAR as a percentage of total revenue.
(4) Operating theatres and screens represent the number of theatres and screens
operated at the end of the period.
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<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following analysis of the financial condition and results of
operations of Regal should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein. Regal
consummated the acquisitions of Georgia State Theatres, Inc. ("GST") and Cobb
Theatres, L.L.C. and entities through which Cobb Theatres, L.L.C. and Tricob
Partnership, an entity controlled by Cobb Theatres, L.L.C. members, conducted
their business (collectively, "Cobb Theatres"), on May 30, 1996 and July 31,
1997, respectively. These two acquisitions have been accounted for as poolings
of interests. On August 26, 1998, the Company consummated the acquisition of Act
III, which has been accounted for under the purchase method.
BACKGROUND OF REGAL
Regal has achieved significant growth in theatres and screens since its
formation in November 1989. From its inception through December 31, 1998, Regal
has acquired 314 theatres with 2,326 screens, developed 89 new theatres with
1,158 screens and added 89 new screens to existing theatres. Theatres developed
by the Company typically generate positive theatre level cash flow within the
first six months following commencement of operation and reach a mature level of
attendance within one to three years following commencement of operation.
Theatre closings have had no significant effect on the operations of Regal.
RESULTS OF OPERATIONS
The Company's revenues are generated primarily from admissions and
concession sales. Additional revenues are generated by electronic video games
located adjacent to the lobbies of certain of the Company's theatres and by
on-screen advertisements, rebates from concession vendors and revenues from the
Company's eight entertainment centers which are adjacent to theatre complexes.
Direct theatre costs consist of film rental and advertising costs, costs of
concessions and theatre operating expenses. Film rental costs are related to the
popularity of a film and the length of time since the film's release and
generally decline as a percentage of admission revenues the longer a film has
been released. Because certain concession items, such as fountain drinks and
popcorn, are purchased in bulk and not pre-packaged for individual servings, the
Company is able to improve its margins by negotiating volume discounts. Theatre
operating expenses consist primarily of theatre labor and occupancy costs. At
December 31, 1998, approximately 38.7% of the Company's employees were paid at
the federal minimum wage and, accordingly, the minimum wage largely determines
the Company's labor costs for those employees. Future increases in minimum wage
requirements or legislation requiring additional employer funding of health
care, among other things, may increase theatre operating expenses as a
percentage of total revenues.
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<PAGE> 24
The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items reflected in the
Company's consolidated statements of operations.
<TABLE>
<CAPTION>
-----------------------------------------------------
January 2, January 1, December 31,
1997 1998 1998
--------------- -------------- ------------------
<S> <C> <C> <C>
Revenues:
Admissions.............................................. 68.0% 67.2% 65.5%
Concessions............................................. 28.2 28.4 28.6
Other operating revenue................................. 3.8 4.4 5.9
--------------- -------------- -----------------
Total revenues.......................................... 100.0 100.0 100.0
Operating expenses:
Film rental and advertising costs....................... 37.1 36.8 35.5
Cost of concessions and other........................... 4.4 4.4 4.5
Theatre operating expenses.............................. 32.7 32.4 34.2
General and administrative.............................. 4.2 3.4 2.9
Depreciation and amortization........................... 6.3 6.3 7.4
Merger expenses......................................... 0.4 1.6 --
Recapitalization expense................................ -- -- 9.3
Loss on impairment of assets............................ -- 1.0 9.6
--------------- -------------- -----------------
Total operating expenses.............................. 85.1 85.9 103.4
Other income (expense):
Interest expense........................................ (3.3) (2.9) (8.4)
Interest income......................................... 0.2 0.2 0.2
Other................................................... 0.2 (0.1) (0.3)
--------------- -------------- -----------------
Income (loss) before taxes and extraordinary item....... 12.0 11.3 (11.9)
Provision for income taxes................................. 5.4 4.0 3.1
--------------- -------------- -----------------
Income (loss) before extraordinary item................. 6.6 7.3 (8.8)
Extraordinary item:
Loss on extinguishment of debt.......................... (0.2) (2.1) (1.6)
--------------- -------------- -----------------
Net income (loss).......................................... 6.4% 5.2% (10.4)%
=============== ============== =================
</TABLE>
LOSS ON IMPAIRMENT OF ASSETS
Generally, the most marketable motion pictures are released during the summer
and the Thanksgiving through year-end holiday season. However, during the fourth
quarter of fiscal 1998, the financial results of certain theatre locations were
significantly less than expected due primarily to lower than expected theatre
attendance during the fourth quarter. The Company believes the decline in the
fourth quarter attendance at these theatres was principally due to heightened
competition from newer multiplexes operating in proximity to these theatres. As
a result, the Company revised its estimates of future cash flows from its
theatres and determined that certain locations had become impaired. Therefore,
the Company adjusted the carrying value of long-lived assets, including
goodwill, to their estimated fair market value based on discounted cash flows
and recognized an impairment loss of $31 million ($18.9 million after tax) on
these locations. Additionally, the Company determined that the carrying value of
seven of the FunScapes(TM) locations was impaired based on estimates of future
cash flows. An additional impairment charge of $36.9 million ($22.5 million
after tax) relative to the carrying value of fixed assets at these locations was
recorded based on the estimated selling price less selling costs. The Company
intends to sell these FunScapes(TM) locations during the next fiscal year.
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<PAGE> 25
FISCAL YEARS ENDED DECEMBER 31, 1998 AND JANUARY 1, 1998
Total Revenues. Total revenues increased in 1998 by 46.2% to $707.0
million from $483.6 million in 1997. This increase was due to a 35% increase in
attendance attributable primarily to the net addition of 1,267 screens in 1998.
Of the $223.4 million increase for 1998, $70.3 million was attributed to
theatres previously operated by the Company, $93.6 million was attributed to
theatres acquired by the Company during 1998, and $59.5 million was attributed
to new theatres constructed by the Company during 1998. Average ticket prices
increased 5.9% during the period, reflecting an increase in ticket prices and a
greater proportion of larger market theatres in 1998 than in the same period in
1997. Average concession sales per customer increased 9.4% for the period,
reflecting both an increase in consumption and, to a lesser extent, an increase
in concession prices.
Direct Theatre Costs. Direct theatre costs in 1998 increased by 47.5%
to $524.7 million from $355.8 million in 1997. Direct theatre costs as a
percentage of total revenues increased to 74.2% in 1998 from 73.6% in 1997. The
increase of direct theatre costs as a percentage of total revenues was primarily
attributable to higher theatre operating expense as a percentage of total
revenues.
General and Administrative Expenses. General and administrative
expenses increased in 1998 by 22.6% to $20.4 million from $16.6 million in 1997,
representing administrative costs associated with the 1998 theatre openings and
projects under construction. As a percentage of total revenues, general and
administrative expenses decreased to 2.9% in 1998 from 3.4% in 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased in 1998 by 71.6% to $52.4 million from $30.5 million in 1997. This
increase was primarily the result of theatre property additions associated with
the Company's expansion efforts.
Operating Income (Loss). Operating income (loss) for 1998 decreased by
135.5% to $(24.1) million, or (3.4)% of total revenues, from $67.9 million, or
14.0% of total revenues, in 1997. Before the $133.6 million and $12.7 million of
nonrecurring expenses for 1998 and 1997, respectively, operating income was
15.5% and 16.7% of total revenues for 1998 and 1997, respectively.
Interest Expense. Interest expense increased in 1998 by 324.8% to $59.3
million from $14.0 million in 1997. The increase was primarily due to higher
average borrowings outstanding.
Income Taxes. The provision for income taxes decreased in 1998 by
215.9% to $(22.2) million from $19.1 million in 1997. The effective tax rate was
26.4% in 1998 as compared to 35.2% in 1997 due primarily to certain merger and
recapitalization expenses which were not deductible for tax purposes.
Net Income (Loss). Net income (loss) in 1998 decreased by 392.1% to
$(73.5) million from $25.2 million in 1997. Before nonrecurring merger expenses
and extraordinary items, net income was $29.6 million and $41.4 million for 1998
and 1997, respectively, reflecting a 28.5% decrease.
FISCAL YEARS ENDED JANUARY 1, 1998 AND JANUARY 2, 1997
Total Revenues. Total revenues increased in 1997 by 23.6% to $483.6
million from $391.1 million in 1996. This increase was due to a 16.5% increase
in attendance attributable primarily to the net addition of 407 screens in 1997.
Of the $92.5 million increase for 1997, $30.3 million was attributed to theatres
previously operated by the Company, $23.5 million was attributed to theatres
acquired by the Company during 1997, and $38.7 million was attributed to new
theatres constructed by the Company during 1997. Average ticket prices increased
4.9% during the period, reflecting an increase in ticket prices and a greater
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<PAGE> 26
proportion of larger market theatres in 1997 than in the same period in 1996.
Average concession sales per customer increased 6.8% for the period, reflecting
both an increase in consumption and, to a lesser extent, an increase in
concession prices.
Direct Theatre Costs. Direct theatre costs in 1997 increased by 22.7%
to $355.8 million from $290.0 million in 1996. Direct theatre costs as a
percentage of total revenues decreased to 73.6% in 1997 from 74.2% in 1996. The
decrease of direct theatre costs as a percentage of total revenues was primarily
attributable to lower concession costs as a percentage of total revenues.
General and Administrative Expenses. General and administrative
expenses increased in 1997 by 0.2% to $16.6 million from $16.5 million in 1996,
representing administrative costs associated with the 1997 theatre openings and
projects under construction. As a percentage of total revenues, general and
administrative expenses decreased to 3.4% in 1997 from 4.2% in 1996.
Depreciation and Amortization. Depreciation and amortization expense
increased in 1997 by 23.6% to $30.5 million from $24.7 million in 1996. This
increase was primarily the result of theatre property additions associated with
the Company's expansion efforts.
Operating Income. Operating income for 1997 increased by 16.6% to $67.9
million, or 14.0% of total revenues, from $58.2 million, or 14.9% of total
revenues, in 1996. Before the $12.7 million and $1.6 million of nonrecurring
merger expenses for 1997 and 1996, respectively, operating income was 16.7% and
15.3% of total revenues.
Interest Expense. Interest expense increased in 1997 by 8.7% to $14.0
million from $12.8 million in 1996. The increase was primarily due to higher
average borrowings outstanding.
Income Taxes. The provision for income taxes decreased in 1997 by 8.2%
to $19.1 million from $20.8 million in 1996. The effective tax rate was 35.2% in
1997 as compared to 44.7% in 1996 as each period reflected certain merger
expenses which were not deductible for tax purposes and 1997 reflected a $2.3
million benefit associated with a deferred tax asset valuation allowance
adjustment related to Cobb Theatres.
Net Income. Net income in 1997 increased by .5% to $25.2 million from
$25.1 million in 1996. Before nonrecurring merger expenses and extraordinary
items, net income was $41.4 million and $27.0 million for 1997 and 1996,
respectively, reflecting a 53.2% increase.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's revenues are derived from cash box
office receipts and concession sales, while film rental fees are ordinarily paid
to distributors 15 to 45 days following receipt of admission revenues. The
Company thus has an operating cash "float" which partially finances its
operations, reducing the Company's needs for external sources of working
capital.
The Company's capital requirements have arisen principally in
connection with acquisitions of existing theatres, new theatre openings and the
addition of screens to existing theatres and have been financed with equity
(including equity issued in connection with acquisitions and public offerings),
debt and internally generated cash. The Company's Senior Credit Facilities
provide for borrowings of up to $1,012.5 million in the aggregate, consisting of
the Revolving Credit Facility, which permits the Company to borrow up to $500.0
million on a revolving basis and $512.5 million, in the aggregate, of term loan
borrowings under three separate term loan facilities. As of December 31, 1998,
the Company had $493.5 million of capacity
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<PAGE> 27
available under the Revolving Credit Facility. Under the Senior Credit
Facilities, the Company is required to comply with certain financial and other
covenants. The loans under the Senior Credit Facilities bear interest at either
a base rate (referred to as "Base Rate Loans") or adjusted LIBOR rate (referred
to as "LIBOR Rate Loans") plus, in each case, an applicable margin determined
depending upon the Company's Total Leverage Ratio (as defined in the Senior
Credit Facilities).
On June 10, 1996, the Company completed a public offering of 26,737,500
shares of the Company's Common Stock at $4.97 per share. The total proceeds to
the Company from the offering were approximately $126.5 million, net of the
underwriting discount and other expenses of $6.5 million and were used to repay
amounts outstanding under the Company's then existing revolving credit facility.
On May 9, 1997, the Company completed the purchase of assets consisting
of an existing five theatres with 32 screens, four theatres with 52 screens
under development, and a seven screen addition to an existing theatre from Magic
Cinemas LLC, an independent theatre company with operations in New Jersey and
Pennsylvania. The consideration paid was approximately $24.5 million in cash.
On July 31, 1997, Regal consummated the acquisition of the business
conducted by Cobb Theatres (the "Cobb Theatres Acquisition"). The aggregate
consideration paid by the Company was 17,593,083 shares of its Common Stock. The
acquisition has been accounted for as a pooling of interests. Regal recognized
certain one time charges totaling approximately $5.4 million (net of tax) in its
quarter ended October 2, 1997, relating to merger expenses and severance
payments. In connection with the Cobb Theatres Acquisition, Regal assumed
approximately $110 million of liabilities, including $85 million of outstanding
Senior Secured Notes (the "Cobb Notes"). The Company has repurchased all but
$70,000 principal amount of the Cobb Notes. Regal initially financed the
purchase price of the Cobb Notes with borrowings under a short-term credit
facility (the "Bank Tender Facility"). Regal recognized an extraordinary charge
totaling approximately $10.0 million (net of tax) in its quarter ended October
2, 1997, relating to the purchase of the Cobb Notes.
On September 24, 1997, Regal consummated the offering of $125 million
aggregate principal amount of 8 1/2% Senior Subordinated Notes due October 1,
2007 (the "Old Regal Notes"). A portion of the proceeds from such offering were
used to repay amounts borrowed under the Bank Tender Facility. The balance of
the proceeds were used to repay amounts outstanding under the Company's former
bank revolving credit facility.
On November 14, 1997, the Company completed the purchase of assets
consisting of an existing 10 theatres with 78 screens from Capitol Industries,
Inc. (known as RC Theatres), an independent theatre company with operations in
Virginia. The consideration paid was approximately $24.0 million in cash.
At January 1, 1998, the Company anticipated that it would spend $225
million to $250 million to develop and renovate theatres during 1998, of which
the Company had approximately $131.6 million in contractual commitments for
expenditures. The actual capital expenditures for fiscal 1998 approximated
$289.5 million.
On May 27, 1998, an affiliate of KKR and an affiliate of Hicks Muse
merged with and into the Company, with the Company continuing as the surviving
corporation. The consummation of the Regal Merger resulted in a recapitalization
of the Company. In the Recapitalization, the Company's existing holders of
Common Stock received cash for their shares of Common Stock, and KKR, Hicks
Muse, DLJ and certain members of the Company's management acquired the Company.
In addition, in connection with the Recapitalization, the Company canceled
options and repurchased warrants held by certain directors,
24
<PAGE> 28
management and employees of the Company. The aggregate purchase price paid to
effect the Regal Merger and the Option/Warrant Redemption was approximately $1.2
billion.
In connection with the Recapitalization, the Company made an offer to
purchase (the "Tender Offer") all $125.0 million aggregate principal amount of
the Old Regal Notes. In conjunction with the Tender Offer, the Company also
solicited consents to eliminate substantially all of the covenants contained in
the indenture relating to the Old Regal Notes. The purchase price paid by the
Company for the Old Regal Notes was approximately $139.5 million, including a
premium of approximately $14.5 million.
On May 27, 1998, the Company issued the Original Notes. The net
proceeds from the sale of the Original Notes, initial borrowings of $375.0
million under the Company's Senior Credit Facilities and $776.9 million in
proceeds from the Equity Investment were used: (i) to fund the cash payments
required to effect the Regal Merger and the Option/Warrant Redemption; (ii) to
repay and retire the Company's then existing senior credit facilities; (iii) to
repurchase the Old Regal Notes; and (iv) to pay related fees and expenses.
On August 26, 1998, the Company acquired Act III. In the Act III
Merger, Act III became a wholly owned subsidiary of the Company and each share
of Act III's outstanding common stock was converted into the right to receive
one share of the Company's Common Stock. In connection with the Act III Merger,
the Company amended its Senior Credit Facilities and borrowed $383.3 million
thereunder to repay Act III's then existing bank borrowings and two senior
subordinated promissory notes, each in the aggregate principal amount of $75.0
million, which were owned by KKR and Hicks Muse.
On November 10, 1998, the Company issued the Tack-On Notes in the
amount of $200 million under the same indenture governing the Original Notes.
The proceeds of the Tack-On Offering were used to repay and retire portions of
the Senior Credit Facilities.
On December 16, 1998, the Company issued the Regal Debentures in the
amount of $200 million. The proceeds of the Debenture Offering were used to
repay all of the then outstanding indebtedness under the Revolving Credit
Facility and the excess was used for working capital purposes.
Interest payments on the Regal Notes and the Regal Debentures and
interest payments and amortization with respect to the Senior Credit Facilities
represent significant liquidity requirements for the Company. The Company had
interest expense of approximately $59.3 million for the twelve month period
ended December 31, 1998. In addition, for 1998, the amount paid under the
Company's non-cancelable operating leases was $82.0 million.
At December 31, 1998, the Company had 42 new theatres with 647 screens
and 51 screens at eight existing locations under construction. The Company
intends to develop approximately 700 to 800 screens during 1999. The Company
expects that the capital expenditures in connection with its development plan
will aggregate approximately $375.0 million during 1999, of which, as of
December 31, 1998, the Company had approximately $300.0 million in contractual
commitments for expenditures. The Company believes that its capital needs for
completion of theatre construction and development for at least the next 6 to 12
months will be satisfied by available credit under the Senior Credit Facilities,
internally generated cash flow and available cash including any excess cash from
the proceeds of the Debenture Offering.
Based on the current level of operations and anticipated future growth
(both internally generated as well as through acquisitions), the Company
anticipates that its cash flow from operations, together with borrowings under
the Senior Credit Facilities should be sufficient to meet its anticipated
requirements for working capital, capital expenditure, interest payments and
scheduled principal payments. The Company's future operating performance and
ability to service or refinance the Regal Notes, the Regal Debentures and
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<PAGE> 29
to extend or refinance the Senior Credit Facilities will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond the Company's control.
The Regal Notes, Regal Debentures and Senior Credit Facilities impose
certain restrictions on the Company's ability to make capital expenditures and
limit the Company's ability to incur additional indebtedness. Such restrictions
could limit the Company's ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of business or
acquisition opportunities. The covenants contained in the Senior Credit
Facilities and/or the indentures governing the Regal Notes and the Regal
Debentures also, among other things, limit the ability of the Company to dispose
of assets, repay indebtedness or amend other debt instruments, pay
distributions, enter into sale and leaseback transactions, make loans or
advances and make acquisitions.
INFLATION; ECONOMIC DOWNTURN
The Company does not believe that inflation has had a material impact
on its financial position or results of operations. In times of recession,
attendance levels experienced by motion picture exhibitors may be adversely
affected. For example, revenues declined for the industry in 1990 and 1991.
YEAR 2000 - STATE OF READINESS
Potential Impact on the Company. The failure of information technology
("IT") and embedded, or "non-IT" systems, because of the Year 2000 issue or
otherwise could adversely affect the Company's operations. If not corrected,
many computer-based systems and theatre equipment, such as air conditioning
systems and fire and sprinkler systems, could encounter difficulty
differentiating between the year 1900 and the year 2000 and interpreting other
dates, resulting in system malfunctions, corruption of date or system failure.
Additionally, the Company relies upon outside third parties ("business
partners") to supply many of the products and services that it needs in its
business. Such products include films which it exhibits and concession products
which it sells. Attendance at the Company's theatres could be severely impacted
if one or more film producers are unable to produce new films because of Year
2000 issues. The Company could suffer other business disruptions and loss of
revenues if any other types of material business partners fail to supply the
goods or services necessary for the Company's operations.
IT Systems. The Company utilizes a weighted methodology to evaluate the
readiness of its corporate and theatre level IT systems. For this purpose,
corporate and theatre system types include commercial off-the-shelf software,
custom in-house developed software, ticketing system software, concession system
software and hardware systems such as workstations and servers. The Company has
weighted each corporate and theatre system based on its overall importance to
the organization. The Company's readiness is evaluated in terms of a five-phase
process utilized in the Year 2000 strategic plan (the "Plan") with appropriate
weighting given to each phase based on its relative importance to IT system Year
2000 readiness. The phases may generally be described as follows: (i) develop
company-wide awareness; (ii) inventory and assess internal systems and business
partners and develop contingency plans for systems that cannot be renovated;
(iii) renovate critical systems and contact material business partners; (iv)
validate and test critical systems, analyze responses from critical business
partners and develop contingency plans for non-compliant partners; and (v)
implement renovated systems and contingency plans. The Company has placed a high
level of importance on its corporate and theatre software systems and a lesser
degree of importance on its hardware systems when evaluating Year 2000
readiness. As a result, the Company has focused more of its initial efforts
toward Year 2000 readiness with respect to its software systems than it has with
respect to its hardware systems. Additionally, the Company believes that the
assessment, validation and testing and implementation phases are the most
important phases in the Plan.
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<PAGE> 30
Based on the weighting methodology described above, the Company has
assessed all of its corporate IT systems and, as of December 31, 1998, has
renovated 95% of those systems that require renovation as a result of the Year
2000 issue. In the aggregate, as of December 31, 1998, 75% of the Company's
corporate IT systems have been tested and verified as being Year 2000 ready. The
percentage of corporate IT systems that has been tested and verified as being
Year 2000 ready assumes that a significant component of commercial-off-the-shelf
software, the Global Software, Inc. financial applications, is Year 2000 ready.
This system was warranted to be Year 2000 ready when purchased. Although the
Company has plans to test and verify Global Software, Inc.'s financial
applications to validate that the implementation is in fact Year 2000 ready, it
does not believe that it has a significant risk with respect to such software.
Based on the weighting methodology described above, the Company has
also assessed all of its theatre IT systems and, as of December 31, 1998, has
renovated 75% of those systems that require renovation as a result of the Year
2000 issue. In the aggregate, as of December 31, 1998, 75% of the Company's
theatre IT systems have been tested and verified as being Year 2000 ready.
Overall, the Company has assessed the Plan with respect to IT systems
as being 90% complete as of December 31, 1998. Although, no assurance can be
given, the Company does not believe that it has material exposure to the Year
2000 issue with respect to its internal IT systems.
Non-IT Systems. The Company is in the process of identifying and
assessing potential Year 2000 readiness risks associated with its non-IT systems
and with systems of its business partners. Based on budgeted and expended
personnel hours, assessment of the Company's non-IT systems and with systems of
its business partners was substantially complete as of December 31, 1998.
Costs. Although a definitive estimate of costs associated with required
modifications to address the Year 2000 issue cannot be made until the Company
has at least completed the assessment phase of the Plan, management presently
does not expect such costs to be material to the Company's results of
operations, liquidity or financial condition. The total amount expended from
January 1, 1996 through December 31, 1998 was approximately $100,000. Based on
information presently known, the total amount expected to be expended on the
Year 2000 effort for IT systems is approximately $2,500,000, primarily comprised
of software upgrades and replacement costs, internal personnel hours and
consulting costs. To date, the Year 2000 effort has been funded primarily from
the existing IT budget.
Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Statements." In addition to the factors listed therein
which could cause actual results to be different from those anticipated, the
following special factors could affect the Company's ability to be Year 2000
ready: (i) the Company's ability to implement the Plan; (ii) cooperation and
participation by business partners; (iii) the availability and cost of trained
personnel and the ability to recruit and retain them; and (iv) the ability to
locate all system coding requiring correction.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Emerging Issues Task Force ("EITF") released
EITF Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction.
The EITF addresses how an entity (lessee) that is involved with the construction
of an asset that the entity subsequently plans to lease when construction is
completed should determine whether it should be considered the owner of that
asset during the construction period. The Task Force reached a consensus that a
lessee should be considered the owner of a real estate project during the
construction period if the lessee has substantially all of the construction
period risk. As the Company's construction project agreements are currently
structured, management believes the Company
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<PAGE> 31
would be considered the owner of certain pending construction projects. As a
result, management believes the Company may be required to reflect these lease
agreements as on balance sheet financing transactions. The EITF is applicable to
all construction projects committed to subsequent to May 21, 1998 and to all
construction projects committed to on May 21, 1998 if construction does not
commence prior to December 31, 1999. The Company is currently pursuing various
alternatives including the amendment of certain existing construction project
agreements. The Company is in the process of evaluating the impact of EITF Issue
97-10 on its consolidated financial position, results of operations and cash
flows.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
and Financial Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 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. The
Company is currently evaluating the effect that SFAS No. 133 will have on the
Company's consolidated financial statements.
During fiscal 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1") and SOP
98-5, Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-1
requires companies to capitalize certain internal-use software costs once
certain criteria are met. SOP 98-5 requires costs of start-up activities to be
expensed when incurred. Management does not believe that adoption of these
statements will not have the material impact on the Company's consolidated
financial position, results of operations or cash flows.
28
<PAGE> 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity. The table below provides information about
the Company's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
The Company's fixed rate obligations consist primarily of $600 million senior
subordinated notes due June 1, 2008 and $200 million senior subordinated
debentures due December 15, 2010. For interest rate swaps, the table presents
notional amounts and weighted average interest rates by expected (contractual)
maturity dates. Notional amounts are used to calculate the contractual payments
to be exchanged under the contract. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.
($'s in thousands)
DEBT OBLIGATIONS:
<TABLE>
<CAPTION>
Fiscal Year Ending
1999 2000 2001 2002
<S> <C> <C> <C> <C>
Long-term Debt:
Fixed Rate................. $804,469 $804,070 $803,629 $803,143
Average interest rate.... 9.34% 9.34% 9.34% 9.34%
Variable Rate.............. 509,500 507,400 504,850 502,300
Average interest rate... 5.44% 5.67% 5.78% 5.89%
INTEREST RATE DERIVATIVES:
Interest Rate Swaps:
Variable to Fixed........... $270,000 $270,000 $270,000 $270,000
Average pay rate......... 5.48% 5.48% 5.48% 5.48%
Average receive rate..... 5.44% 5.67% 5.78% 5.89%
<CAPTION>
Fiscal Year Ending
2003 Thereafter Fair Market Value at
December 31, 1998
<S> <C> <C> <C>
Long-term Debt:
Fixed Rate................. $802,606 $801,955 $825,757
Average interest rate.... 9.345% --
Variable Rate.............. 499,750 497,200 $512,500
Average interest rate... 6.00% --
INTEREST RATE DERIVATIVES:
Interest Rate Swaps:
Variable to Fixed........... $250,000 -- $(3,160)
Average pay rate......... 5.34% --
Average receive rate..... 6.00% --
</TABLE>
29
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Financial Statements
<S> <C>
Report of Independent Auditors..................................................................31
Report of Coopers & Lybrand L.L.P., Independent Accountants.....................................32
Report of Ernst & Young LLP, Independent Auditors...............................................33
Consolidated Balance Sheets at January 1, 1998 and December 31, 1998............................34
Consolidated Statements of Operations for the years ended January 2, 1997,
January 1, 1998 and December 31, 1998...................................................35
Consolidated Statements of Shareholders' Equity for the years ended
January 2, 1997, January 1, 1998 and December 31, 1998..................................36
Consolidated Statements of Cash Flows for the years ended January 2, 1997,
January 1, 1998 and December 31, 1998...................................................37
Notes to Consolidated Financial Statements......................................................38
</TABLE>
30
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Board of Directors
Regal Cinemas, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheet of Regal Cinemas,
Inc. and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Regal Cinemas, Inc. and subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 16, 1999
Nashville, Tennessee
31
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Regal Cinemas, Inc.
We have audited the accompanying consolidated balance sheets of Regal Cinemas,
Inc. and Subsidiaries (the "Company") as of January 2, 1997 and January 1, 1998,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended January
1, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the acquisition of Cobb Theatres, L.L.C. which has been
accounted for as pooling of interests as described in Note 1 to the consolidated
financial statements. We did not audit the financial statements of Cobb
Theatres, L.L.C. for 1995 and 1996. Such statements reflect aggregate total
assets constituting 23% in 1996 and aggregate total revenues constituting 34%
and 31% in 1995 and 1996, respectively, of the related consolidated totals.
Those statements were audited by other auditors, whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Cobb
Theatres, L.L.C. is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Regal Cinemas, Inc. and Subsidiaries as
of January 2, 1997 and January 1, 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
January 1, 1998, in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Coopers & Lybrand L.L.P.
Knoxville, Tennessee
February 6, 1998
32
<PAGE> 36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cobb Theatres, L.L.C.
We have audited the consolidated balance sheet of Cobb Theatres, L.L.C. as of
December 31, 1996 and the related consolidated statements of operations, changes
in members equity and cash flows for the year then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cobb Theatres,
L.L.C. at December 31, 1996 and the consolidated results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
July 2, 1997
33
<PAGE> 37
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------
JANUARY 1, DECEMBER 31,
ASSETS 1998 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,398 $ 20,621
Accounts receivable 4,791 3,161
Inventories 2,159 4,014
Prepaid and other current assets 8,801 12,999
Deferred income tax asset -- 1,271
----------- -----------
Total current assets 34,149 42,066
PROPERTY AND EQUIPMENT:
Land 53,955 111,854
Buildings and leasehold improvements 366,323 650,313
Equipment 211,465 368,792
Construction in progress 46,529 103,253
----------- -----------
678,272 1,234,212
Accumulated depreciation and amortization (112,927) (139,643)
----------- -----------
Total property and equipment, net 565,345 1,094,569
GOODWILL, net of accumulated amortization of $5,026 and
$10,170, respectively 52,619 439,842
DEFERRED INCOME TAX ASSET -- 37,538
OTHER ASSETS 8,537 47,989
----------- -----------
TOTAL $ 660,650 $ 1,662,004
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 306 $ 6,524
Accounts payable 38,982 65,592
Accrued expenses 13,739 44,734
----------- -----------
Total current liabilities 53,027 116,850
LONG-TERM DEBT, less current maturities 288,277 1,334,542
OTHER LIABILITIES 12,771 8,077
----------- -----------
Total liabilities 354,075 1,459,469
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par; 100,000,000 shares authorized, none issued
and outstanding -- --
Common stock, no par; 500,000,000 shares authorized; 223,903,849 issued
and outstanding in 1997; 216,552,105 issued and outstanding in 1998 223,707 197,427
Loans to shareholders -- (4,212)
Retained earnings 82,868 9,320
----------- -----------
Total shareholders' equity 306,575 202,535
----------- -----------
TOTAL $ 660,650 $ 1,662,004
=========== ===========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 38
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------------------------------------
January 2, January 1, December 31,
1997 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Admissions $ 266,003 $ 325,118 $ 462,826
Concessions 110,237 137,173 202,418
Other operating revenue 14,890 21,305 41,783
--------- --------- ---------
Total revenues 391,130 483,596 707,027
OPERATING EXPENSES:
Film rental and advertising costs 145,247 178,173 251,345
Cost of concessions and other 17,066 21,072 31,657
Theatre operating expenses 127,706 156,588 241,720
General and administrative expenses 16,581 16,609 20,355
Depreciation and amortization 24,695 30,535 52,413
Merger expenses 1,639 7,789 --
Recapitalization expenses -- -- 65,755
Loss on impairment of assets -- 4,960 67,873
--------- --------- ---------
Total operating expenses 332,934 415,726 731,118
--------- --------- ---------
OPERATING INCOME (LOSS) 58,196 67,870 (24,091)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (12,844) (13,959) (59,301)
Interest income 619 816 1,506
Other 676 (407) (1,942)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 46,647 54,320 (83,828)
(PROVISION FOR) BENEFIT FROM INCOME TAXES (20,830) (19,121) 22,170
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 25,817 35,199 (61,658)
EXTRAORDINARY ITEM:
Loss on extinguishment of debt, net of applicable taxes (751) (10,020) (11,890)
--------- --------- ---------
NET INCOME (LOSS) 25,066 25,179 (73,548)
GST DIVIDENDS (229) -- --
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ 24,837 $ 25,179 $ (73,548)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 39
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON PREFERRED LOANS TO
STOCK STOCK SHAREHOLDERS
----------- -------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 28, 1995 $ 74,591 $ -- $ --
Payment of GST dividends and
partnership distributions -- -- --
Issuance of 31,097,594 shares of common
stock, net of offering costs 140,651 -- --
Issuance of 2,838,922 shares upon exercise of
stock options and restricted stock awards 1,177 -- --
Income tax benefits related to exercised stock options 5,017 -- --
Conformation of Cobb Theatres fiscal year -- -- --
Stock option amortization 177 -- --
Net income -- -- --
----------- -------- -----------
BALANCE, JANUARY 2, 1997 221,613 -- --
Issuance of 844,614 shares upon exercise of stock
options and restricted stock awards 723 -- --
Income tax benefits related to exercised stock options 1,306 -- --
Stock option amortization 65 -- --
Net income -- -- --
----------- -------- -----------
BALANCE, JANUARY 1, 1998 223,707 -- --
Purchase and retirement of 223,937,974
shares of common stock related to the
Recapitalization (1,119,690) -- --
Issuance of 2,630,556 shares of common stock
related to the Recapitalization 13,153 -- --
Issuance of 15,277 shares of Series A
Convertible Preferred Stock related to the
Recapitalization -- 763,820 --
Conversion of 15,277 shares of Series A
Convertible Preferred Stock to 152,763,973 shares of
common stock 763,820 (763,820) --
Issuance of 60,383,388 shares of common stock and 5,195,598
options to purchase the Company's common stock
related to the acquisition of Act III 312,157 -- --
Issuance of 808,313 shares of common stock
in exchange for shareholder loans 4,212 -- (4,212)
Stock option amortization 68 -- --
Net loss -- -- --
----------- -------- -----------
BALANCE, DECEMBER 31, 1998 $ 197,427 $ -- $ (4,212)
=========== ======== ===========
<CAPTION>
RETAINED
EARNINGS TOTAL
----------- -----------
<S> <C> <C>
BALANCE, DECEMBER 28, 1995 $ 34,429 $ 109,020
Payment of GST dividends and
partnership distributions (263) (263)
Issuance of 31,097,594 shares of common
stock, net of offering costs -- 140,651
Issuance of 2,838,922 shares upon exercise of
stock options and restricted stock awards -- 1,177
Income tax benefits related to exercised stock options -- 5,017
Conformation of Cobb Theatres fiscal year (1,543) (1,543)
Stock option amortization -- 177
Net income 25,066 25,066
----------- -----------
BALANCE, JANUARY 2, 1997 57,689 279,302
Issuance of 844,614 shares upon exercise of stock
options and restricted stock awards -- 723
Income tax benefits related to exercised stock options -- 1,306
Stock option amortization -- 65
Net income 25,179 25,179
----------- -----------
BALANCE, JANUARY 1, 1998 82,868 306,575
Purchase and retirement of 223,937,974
shares of common stock related to the
Recapitalization -- (1,119,690)
Issuance of 2,630,556 shares of common stock
related to the Recapitalization -- 13,153
Issuance of 15,277 shares of Series A
Convertible Preferred Stock related to the
Recapitalization -- 763,820
Conversion of 15,277 shares of Series A
Convertible Preferred Stock to 152,763,973 shares of
common stock -- --
Issuance of 60,383,388 shares of common stock and 5,195,598
options to purchase the Company's common stock
related to the acquisition of Act III -- 312,157
Issuance of 808,313 shares of common stock
in exchange for shareholder loans -- --
Stock option amortization -- 68
Net loss (73,548) (73,548)
----------- -----------
BALANCE, DECEMBER 31, 1998 $ 9,320 $ 202,535
=========== ===========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 40
<TABLE>
<CAPTION>
REGAL CINEMAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1997 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 25,066 $ 25,179 $ (73,548)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 24,695 30,535 52,413
Non-cash loss on extinguishment of debt 751 2,575 4,975
Loss on impairment of assets -- 4,960 67,873
Deferred income taxes 4,112 1,293 (29,771)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (1,182) (1,899) 3,585
Inventories (365) (135) (118)
Prepaids and other current assets 4,521 2,150 (3,373)
Accounts payable 10,878 2,881 13,054
Accrued expenses and other liabilities (946) (3,579) 9,132
----------- ----------- -----------
Net cash provided by operating activities 67,530 63,960 44,222
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (124,068) (178,099) (289,532)
Increase in goodwill and other assets (7,077) (24,198) (5,829)
----------- ----------- -----------
Net cash used in investing activities (131,145) (202,297) (295,361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 161,500 358,418 1,329,800
Payments on long-term debt (211,623) (214,460) (688,653)
Deferred financing costs (5,127) (5,127) (45,137)
Proceeds from issuance of stock, net 126,763 -- 774,691
Purchase and retirement of common stock -- -- (1,117,407)
Exercise of warrants, options and stock compensation expense 1,177 788 68
GST dividends paid (500) -- --
Partnership distribution (34) -- --
----------- ----------- -----------
Net cash provided by financing activities 72,156 139,619 253,362
----------- ----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 8,541 1,282 2,223
CASH AND EQUIVALENTS, beginning of period 8,575 17,116 18,398
----------- ----------- -----------
CASH AND EQUIVALENTS, end of period $ 17,116 $ 18,398 $ 20,621
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 41
REGAL CINEMAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1997, JANUARY 1, 1998 AND DECEMBER 31, 1998
1. THE COMPANY AND RECAPITALIZATION
Regal Cinemas, Inc. and its wholly owned subsidiaries (the "Company" or
"Regal") operates multi-screen motion picture theatres principally
throughout the eastern and northwestern United States.
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
("KKR") and an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") merged with and into Regal Cinemas, Inc., with the Company
continuing as the surviving corporation of the Merger (the "Merger"). The
Merger and related transactions have been recorded as a recapitalization
(the "Recapitalization"). In the Recapitalization, the Company's existing
shareholders received cash for their shares of common stock. In addition,
in connection with the Recapitalization, the Company canceled options and
repurchased warrants held by certain former directors, management and
employees of the Company (the "Option/Warrant Redemption"). The aggregate
amount paid to effect the Merger and the Option/Warrant Redemption was
approximately $1.2 billion.
The net proceeds of a $400 million senior subordinated note offering,
initial borrowings of $375.0 million under senior credit facilities and
the proceeds of $776.9 million from the investment by KKR, Hicks Muse, DLJ
Merchant Banking Partners II, L.P. and affiliated funds ("DLJ") and
management in the Company were used: (i) to fund the cash payments
required to effect the Merger and the Option/Warrant Redemption; (ii) to
repay and retire the Company's existing senior credit facilities; (iii) to
repurchase the Company's existing 8.5% senior subordinated notes; and (iv)
to pay related fees and expenses. Upon consummation of the Merger, KKR
owned $287.3 million of the Company's equity securities, Hicks Muse owned
$437.3 million of the Company's equity securities and DLJ owned $50.0
million of the Company's equity securities. Each investor received
securities consisting of a combination of the Company's common stock, no
par value ("Common Stock"), and the Company's Series A Convertible
Preferred Stock, no par value ("Convertible Preferred Stock"), which was
converted into Common Stock on June 3, 1998. To equalize KKR's and Hicks
Muse's investments in the Company at $362.3 million each, Hicks Muse
exchanged $75.0 million of Convertible Preferred Stock, with KKR for $75.0
million of common stock of Act III Cinemas, Inc. ("Act III"). As a result
of the Recapitalization and the Act III Merger (see Note 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 $65.7 million, including
approximately $41.9 million of compensation costs, were incurred in
connection with the Recapitalization. Financing costs of approximately
$34.2 million were incurred and classified as deferred financing costs
which will be amortized over the lives of the new debt facilities (see
Note 5). Of the total Merger and Recapitalization costs above, an
aggregate of $19.5 million was paid to KKR and Hicks Muse.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Regal and its wholly owned subsidiaries. Prior to
the merger with Regal, Cobb Theatres, L.L.C. and Tricob Partnership, an
entity controlled by the members of Cobb Theatres, L.L.C., collectively
referred to as
38
<PAGE> 42
"Cobb Theatres", formerly operated and reported on a fiscal year ended
August 31. Cobb Theatres' fiscal year 1996 financial statements were
conformed to Regal's fiscal year end and the accompanying consolidated
statement of changes in shareholders' equity reflects a charge directly to
retained earnings representing a net loss incurred by Cobb Theatres for
the period from September 1, 1995 through December 31, 1995.
All significant intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
FISCAL YEAR - The Company formally operates with a fiscal year ending on
the Thursday closest to December 31.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents. At January 1, 1998 and December 31, 1998, the Company
held approximately $12,549,000 and $19,559,000, respectively, in temporary
cash investments in the form of certificates of deposit and variable rate
investment accounts with major financial institutions.
INVENTORIES - Inventories consist of concession products and theatre
supplies and are stated on the basis of first-in, first-out (FIFO) cost,
which is not in excess of net realizable value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Repairs and maintenance are charged to expense as incurred. Gains and
losses from disposition of property and equipment are included in income
and expense when realized. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives as follows:
Buildings and leaseholds 20-30 years
Equipment 5-20 years
GOODWILL - Goodwill, which represents the excess of acquisition costs over
the net assets acquired in business combinations, is amortized on the
straight-line method over periods ranging from 25 to 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets,
including goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
fully recoverable. If the sum of the expected future cash flows,
undiscounted and without interest charges, is less than the carrying
amount of the asset, an impairment charge is recognized in the amount by
which the carrying value of the assets exceeds it fair market value.
Assets are evaluated for impairment on an individual theatre basis, which
management believes is the lowest level for which there are identifiable
cash flows. The fair value of assets is determined using the present value
of the estimated future cash flows or the expected selling price less
selling costs for assets expected to be disposed of.
DEBT ACQUISITION AND LEASE COSTS (INCLUDED IN OTHER ASSETS) - Debt
acquisition and lease costs are deferred and amortized over the terms of
the related agreements.
INCOME TAXES - Deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
39
<PAGE> 43
DEFERRED REVENUE (INCLUDED IN OTHER LIABILITIES) - Deferred revenue
relates primarily to vendor rebates. Rebates are recognized in the
accompanying financial statements as earned.
DEFERRED RENT (INCLUDED IN OTHER LIABILITIES) - Rent expense is recognized
on a straight-line basis after considering the effect of rent escalation
provisions resulting in a level monthly rent expense for each lease over
its term.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
INTEREST RATE SWAPS - Interest rate swaps are entered into as a hedge
against interest exposure of variable rate debt. The differences to be
paid or received on swaps are included in interest expense. The fair value
of the Company's interest rate swap agreements is based on dealer quotes.
These values represent the amounts the Company would receive or pay to
terminate the agreements taking into consideration current interest rates.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NEW ACCOUNTING STANDARDS - During fiscal 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of An Enterprise and Related Information. SFAS 130 requires
disclosure of comprehensive income and its components in a company's
financial statements and the adoption of this standard had no impact on
the Company's financial position or results of operations. SFAS 131
requires disclosures of segment information in a company's financial
statements. The Company manages it business on the basis of one reportable
segment. See Note 1 for a brief description of the Company's business and
geographic locations.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
and 1997 financial statements to conform to the 1998 presentation.
3. ACQUISTIONS
On August 26, 1998, the Company acquired Act III Cinemas, Inc. (the "Act
III Merger"). The total purchase cost was approximately $312.2 million,
representing primarily the value of 60,383,388 shares of the Company's
common stock issued to acquire all of Act III's outstanding common stock
and the value of 5,195,598 options of the Company issued for Act III
options. In connection with the Act III Merger, the Company also amended
its credit facilities and borrowed $383.3 million thereunder to repay Act
III's borrowings and accrued interest under Act III's existing credit
facilities and two senior subordinated notes totaling $150.0 million.
The Act III Merger has been accounted for as a purchase, applying the
applicable provisions of Accounting Principles Board Opinion No. 16.
Preliminary allocation of the purchase price as of December 31, 1998 is as
follows:
40
<PAGE> 44
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Property, plant and equipment $ 343,694
Long-term debt assumed (411,337)
Net working capital acquired (17,167)
Excess purchase cost over fair value of net assets acquired 396,967
---------
Total purchase cost $ 312,157
=========
</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 following pro forma unaudited results of operations data gives effect
to the Act III Merger and the Recapitalization (Note 1) as if they had
occurred as of January 3, 1997:
<TABLE>
<CAPTION>
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Revenues $ 738,668 $ 897,459
Loss before extraordinary items (18,601) (67,517)
Net loss (28,621) (79,407)
</TABLE>
On July 31, 1997, the Company issued 17,593,083 shares of its Common Stock
for all of the outstanding common stock of Cobb Theatres. Additionally, on
May 30, 1996, the Company issued 8,743,302 shares of its Common Stock for
all of the outstanding common stock of Georgia State Theatres ("GST").
Such mergers have been accounted for as poolings of interest and,
accordingly, these consolidated financial statements have been restated
for all periods to include the results of operations and financial
positions of Cobb Theatres and GST.
Separate results of the combining entities for the fiscal years 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Regal $267,064 $402,445
Cobb Theatres, L.L.C. and Tricob Partnership
(through July 31 for 1997) 119,357 81,151
GST (through May 30 for 1996) 4,709 --
-------- --------
$391,130 $483,596
======== ========
Net income (loss):
Regal $ 29,935 $ 27,940
Cobb Theatres, L.L.C. and Tricob Partnership
(through July 31 for 1997) (4,959) (2,761)
GST (through May 30 for 1996) 90 --
-------- --------
$ 25,066 $ 25,179
======== ========
</TABLE>
41
<PAGE> 45
In addition to the 1998 acquisition of Act III and the GST and Cobb
Theatre mergers described above, the Company completed the purchase of 19
theatres with 169 screens during fiscal year 1997. The theatres were
purchased for consideration of approximately $48.5 million cash. These
transactions were accounted for using the purchase method of accounting
and, accordingly, the purchase prices have been allocated at fair value to
the separately identifiable assets (principally property and equipment,
and leasehold improvements) of the respective theatre locations, with the
remaining balance allocated to goodwill.
The following unaudited pro forma results of operations data assume the
individual fiscal 1997 acquisitions referred to above occurred as of the
beginning of fiscal 1996:
<TABLE>
<CAPTION>
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Revenues $415,680 $503,722
Operating income 62,533 70,108
Income before extraordinary item 28,463 36,564
Net income applicable to common stock 27,483 26,544
</TABLE>
4. IMPAIRMENT OF LONG-LIVED ASSETS
During the fourth quarter of the 1998 fiscal year, the financial results
of certain theatre locations were significantly less than expected due
primarily to lower than expected theatre attendance during the fourth
quarter as a result of heightened competition from the increased number of
newer multiplexes operating throughout the industry. As a result, the
Company revised its estimates of future cash flows from its theatre
locations and determined that the carrying value of a number of locations
had become impaired. Therefore the Company adjusted the carrying value of
the long-lived assets, including goodwill, to their estimated fair market
value based on discounted cash flows and recognized an impairment loss of
$31.0 million ($18.9 million after tax) on these locations. Such
impairment charge included a writedown of property and equipment of $23.7
million and a writeoff of goodwill of $7.3 million. Additionally, the
Company determined that the carrying value of seven Funscapes(TM)
locations was impaired based on estimates of future cash flows. An
additional impairment charge of $36.9 million ($22.5 million after tax)
relative to the net book value of fixed assets at these locations was
recorded based on the estimated selling price less selling costs. The
Company intends to sell these Funscapes(TM) locations during the next
fiscal year.
During the fiscal year 1997, the Company recognized a non-cash loss on
impairment of assets of $4.9 million dollars ($3.0 million after tax)
principally related to declines in cash flows for certain theatres located
in markets experiencing declining box office results.
42
<PAGE> 46
5. LONG-TERM DEBT
Long-term debt at January 1, 1998 and December 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1998 1998
(IN THOUSANDS)
<S> <C> <C>
$600,000 of the Company's senior subordinated notes due June 1, 2008, with
interest payable semiannually at 9.5%. Notes are redeemable, in whole or
in part, at the option of the Company at any time on or after June 1,
2003, at the redemption prices (expressed as percentages of the principal
amount thereof) set forth below together with accrued and unpaid interest
to the redemption date, if redeemed during the 12 month period beginning
on June 1 of the years indicated:
REDEMPTION
YEAR PRICE
2003 104.750%
2004 103.167%
2005 101.583%
2006 and thereafter 100.000% $ - $ 600,000
$200,000 of the Company's senior subordinated debentures due December 15,
2010, with interest payable semiannually at 8.875%. Debentures are
redeemable, in whole or in part, at the option of the Company at any time
on or after December 15, 2003, at the redemption prices (expressed as
percentages of the principal amount thereof) set forth below together with
accrued and unpaid interest to the redemption date, if redeemed during the
12 month period beginning on December 15 of the years indicated:
REDEMPTION
YEAR PRICE
2003 104.438%
2004 103.328%
2005 102.219%
2006 101.109%
2007 and thereafter 100.000% - 200,000
Term loans - 512,500
$125,000 of the Company's senior subordinated notes, due
October 1, 2007 with interest payable semiannually at 8.5% 125,000 -
</TABLE>
43
<PAGE> 47
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1998 1998
(IN THOUSANDS)
<S> <C> <C>
$250,000 of the Company's senior reducing revolving
credit facility 162,000 --
Capital lease obligations, payable in monthly installments
plus interest at 14% -- 23,809
Other 1,583 4,757
----------- -----------
288,583 1,341,066
Less current maturities (306) (6,524)
----------- -----------
$ 288,277 $ 1,334,542
=========== ===========
</TABLE>
CREDIT FACILITIES (IN THOUSANDS) - In connection with the Merger and
Recapitalization (Note 1), the Company entered into credit facilities
provided by a syndicate of financial institutions. In August and December
1998, 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, Term B, and
Term C (the "Term Loans"). The Company must pay an annual commitment fee
ranging from 0.2% to 0.425%, depending on the Company's Total Leverage
Ratio, as defined in the Credit Facilities, of the unused portion of the
Revolving Credit Facility. The Revolving Credit Facility expires in June
2005. At December 31, 1998, there were no outstanding borrowings under the
Revolving Credit Facility.
Borrowings under the Term A Loan or the Revolving Credit Facility can be
made at the "Base Rate" plus a margin of 0% to 1%, or the "LIBOR Rate,"
plus .625% to 2.25%, both depending on the Total Leverage Ratio. The Base
Rate on revolving loans is the rate established by the Administrative
Agent in New York as its base rate for dollars loaned in the United
States. The LIBOR Rate is based on the LIBOR rate for the corresponding
length of loan. The outstanding balance amounted to $240,000 at December
31, 1998 and one percent of the outstanding balance on the Term A Loan is
due annually through 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 LIBOR Rate plus 2.0% to 2.5%, both
depending on the Total Leverage Ratio. The outstanding balance amounted to
$137,500 at December 31, 1998 and one percent of the outstanding balance
is due annually through 2005, with the balance of the loan due in 2006.
Borrowings under the Term C Loan can be made at the Base Rate plus a
margin of 1.0% to 1.5% or the LIBOR Rate plus 2.25% to 2.75%, both
depending on the Total Leverage Ratio. The outstanding balance amounted to
$135,000 at December 31, 1998 and 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, pay dividends or engage in
certain activities and include customary events of default. In addition,
the Credit Facilities specify that the Company must meet or exceed defined
interest coverage ratios and must not exceed defined leverage ratios.
44
<PAGE> 48
The Credit Facilities are collateralized by a pledge of the stock of the
Company's domestic subsidiaries. The Company's payment obligations under
the Credit Facilities are guaranteed by its direct and indirect U.S.
subsidiaries.
Under the Company's previous $250,000 senior reducing revolving credit
facility (the "previous credit facility"), interest was payable quarterly
at LIBOR plus .65%. The margin added to LIBOR was determined based upon
certain financial ratios of the Company. The previous credit facility was
repaid in conjunction with the Recapitalization.
The Company's long term debt and capital lease obligations are scheduled
to mature as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASES TOTAL
DEBT INTEREST PRINCIPAL PRINCIPAL
<S> <C> <C> <C> <C>
1999 $ 4,038 $ 3,046 $ 2,486 $ 6,524
2000 4,149 2,786 1,601 5,750
2001 4,191 2,551 1,826 6,017
2002 4,236 2,259 2,482 6,718
2003 4,287 1,890 2,885 7,172
Thereafter 1,296,356 3,138 12,529 1,308,885
--------- --------- ------ ---------
$ 1,317,257 $ 15,670 $ 23,809 $ 1,341,066
============ ========= ========= ============
</TABLE>
TENDER OFFER - In connection with the Recapitalization, the Company
commenced a tender offer for all of the Company's 8.5% senior subordinated
notes ("Regal Notes") and a consent solicitation in order to effect
certain changes in the related indenture. Upon completion of the tender
offer, holders had tendered and given consents with respect to 100% of the
outstanding principal amount of the Regal Notes. In addition, the Company
and the trustee executed a supplement to such indenture, effecting the
proposed amendments which included, among other things, the elimination of
all financial covenants for the Regal Notes. On May 27, 1998, the Company
paid, for each $1,000 principal amount, $1,116.24 for the Regal Notes
tendered plus, in each case, accrued and unpaid interest of $13.22. Regal
financed the purchase price of the Regal Notes with funds from the
Recapitalization.
EXTRAORDINARY LOSS - An extraordinary loss of $11,890, net of income taxes
of $7,601, 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. Additionally, the Company
refinanced debt of acquired companies, recognizing losses on
extinguishment of debt of $751 and $10,020 (each, net of applicable income
taxes) in 1996 and 1997, respectively. Such losses are reported as
extraordinary losses in the accompanying financial statements.
6. CAPITAL STOCK AND STOCK OPTION PLANS
COMMON STOCK - Effective May 27, 1998, the Recapitalization date, the
Company effected a stock split in the form of a stock dividend resulting
in a price per share of $5.00, which $5.00 per share is equivalent to the
$31.00 per share consideration paid in the Merger. The Company's common
shares issued and outstanding throughout the accompanying financial
statements and notes reflect the retroactive effect of the
Recapitalization stock split. Additionally, the financial statements and
notes reflect the retroactive effect of stock issued in connection with
the poolings of interest
45
<PAGE> 49
transactions described in Note 3 and the authorization of additional
shares and the effect of the 3-for-2 stock split authorized on September
16, 1996.
EARNINGS PER SHARE - Earnings per share information is not presented
herein as the Company's shares do not trade in a public market.
PREFERRED STOCK - The Company currently has 100,000,000 shares of
preferred stock authorized with none issued. The Company may issue the
preferred shares from time to time in such series having such designated
preferences and rights, qualifications and limitations as the Board of
Directors may determine.
STOCK OPTION PLANS - Prior to the Recapitalization, the Company had three
employee stock option plans under which certain employees were granted
options to purchase shares of the Company's common stock. All such options
issued under these plans became fully vested upon consummation of the
Recapitalization, and all participants either received cash for the
difference between the per share price inherent in the Recapitalization
and the exercise price of their options, or retained their existing
options. In addition, certain key members of management were issued
options under a newly formed 1998 Stock Purchase and Option Plan for Key
Employees of Regal Cinemas, Inc. (the "Plan").
Under the Plan, the Board of Directors of the Company may award stock
options to purchase up to 30,000,000 shares of the Company's common stock.
Grants or awards under the Plan may take the form of purchased stock,
restricted stock, incentive or nonqualified stock options or other types
of rights as specified in the Plan.
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
AVERAGE EXERCISABLE AT
SHARES EXERCISE PRICE YEAR END
<S> <C> <C> <C>
Under option at December 28, 1995 16,105,883 $1.37
Options granted in 1996 5,907,050 $4.04
Options exercised in 1996 (2,299,673) $0.46
-----------
Under option at January 2, 1997 19,713,260 $2.28 349,246
===========
Options granted in 1997 6,057,400 $4.55
Options exercised in 1997 (698,139) $0.88
Options canceled in 1997 (449,500) $3.70
----------- -----
Under option at January 1, 1998 24,623,021 $2.86 3,574,945
===========
Options granted in 1998 14,419,334 $4.34
Options exercised in 1998 -- --
Options canceled or redeemed in 1998 (20,316,730) $2.84
-----------
Under option at December 31, 1998 18,725,625 $3.76 8,021,889
=========== ===== ===========
</TABLE>
46
<PAGE> 50
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- -----------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
<S> <C> <C> <C> <C> <C> <C>
$.38-$.62 2,087,197 5.5 $ 0.49 2,087,197 $ 0.49
$1.58-$3.67 4,149,793 6.6 $ 2.11 4,149,793 $ 2.11
$4.03-$5.00 12,488,635 9.2 $ 4.86 1,784,899 $ 4.08
----------- -------------
$18,725,625 $ 8,021,889
=========== =============
</TABLE>
Prior to the Recapitalization, the Company also had the 1993 Outside
Directors' Stock Option Plan (the "1993 Directors' Plan"). Directors'
stock options for the purchase of 125,550 shares at an exercise price of
$4.77 and 186,000 shares at an exercise price of $4.40 were granted during
1996 and 1997, respectively. All such options became fully vested and were
redeemed for cash at the date of the Recapitalization. In addition, the
Company, prior to the Recapitalization, had issued warrants to purchase
982,421 shares of the Company's common stock at an exercise price of $.20
per share. The warrants were redeemed for cash at the date of the
Recapitalization.
Regal has elected to continue following Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock option plans
and its outside directors' plan rather than the alternative fair value
accounting provided for under FASB Statement 123, Accounting for
Stock-Based Compensation (Statement 123). Under APB 25, because the
exercise price of the Company's employee and director stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the accompanying financial
statements.
Pro forma information regarding net income is required by Statement 123,
and has been determined as if the Company has accounted for its stock
options under the fair value method of that Statement. The fair value for
the employee and directors options granted during fiscal years 1996, 1997
and 1998, was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rates ranging from 6.06% to 6.95% for 1996 grants, 5.9% to 6.68%
for 1997 grants, and 5.0% to 5.9% for 1998 grants; volatility factors of
the expected market price of the Company's common stock of 32.8% for 1996,
33.7% for 1997, and an inconsequential volatility factor in 1998 due to
the Company's Recapitalization (Note 1). The pricing model assumptions
also included a weighted average expected life of 5 years for employee
options and 7 years for outside director options. The weighted average
grant date fair value of options granted in fiscal years 1996, 1997 and
1998, was $1.67, $1.85 and $.96 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro
forma results do not purport to indicate the effects on reported net
income for recognizing compensation expense which are expected to occur in
future years. The Company's pro forma information for 1996, 1997, and 1998
option grants is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma net income (loss) $ 23,930 $ 22,883 $(59,423)
</TABLE>
47
<PAGE> 51
The 1998 pro forma net loss reflects an adjustment for the intrinsic value
of the options redeemed at the Recapitalization date that were issued
prior to the Company's adoption of the disclosure provisions of Statement
123. Such options had intrinsic value prior to the Recapitalization date
and therefore the value of these options has been excluded from the amount
of compensation costs reflected in the 1998 proforma net loss.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax asset (liability)
consisted of the following at:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1998 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,036 $ 25,766
Excess of tax basis over book basis for leases -- 5,032
Accrued expenses 1,230 4,515
Interest expense deferred under IRC 163(j) -- 2,742
Favorable leases 488 524
Noncompete 342 439
Operating leases 524 388
Excess of tax basis over book basis of certain assets -- 336
AMT credit carryforward 627 162
Other 1,063 1,399
-------- --------
Deferred tax assets 8,310 41,303
Deferred tax liabilities:
Excess of book basis over tax basis of certain assets (16,313) --
Excess of book basis over tax basis of certain
intangible assets (805) (1,709)
Other (650) (785)
-------- --------
Deferred tax liabilities (17,768) (2,494)
-------- --------
Net deferred tax asset (liability) $ (9,458) $ 38,809
======== ========
</TABLE>
The Company provided no valuation allowance against deferred tax assets
recorded as of December 31, 1998 and January 1, 1998, as management
believes that it is more likely than not that all deferred assets will be
fully realizable in future tax periods. The $2,309,000 increase in the
valuation allowance in 1996, and the corresponding decrease in 1997,
primarily reflect the change in the assessment of the likelihood of
utilization of net operating loss carryforwards of the Company and its
subsidiaries.
At December 31, 1998, the Company and certain of its subsidiaries have
various federal and state net operating loss ("NOL") carryforwards
available to offset future taxable income. The Company has approximately
$66,500,000 of NOL carryforwards, in the aggregate, for federal purposes.
Portions of the federal NOL are subject to utilization limitations.
However, the deferred tax asset related to the federal NOL is expected to
be fully realized as such losses do not begin expiring until the 2009 tax
year.
48
<PAGE> 52
Furthermore, a substantial portion of the federal NOL does not expire
until 2018. The Company also has NOL carryforwards for state purposes. The
deferred tax asset related to the state NOL is expected to be fully
realized as well. At December 31, 1998, the Company has approximately
$162,000 alternative minimum tax credit carryforward available to reduce
future federal income tax liabilities. Under current Federal income tax
law, the alternative minimum tax credit can be carried forward
indefinitely.
The components of the provision (benefit) for income taxes for income from
continuing operations for each of the three fiscal years were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Current $ 16,718 $ 17,828 $ --
Deferred 1,803 3,602 (22,170)
Increase (decrease) in deferred
income tax valuation allowance 2,309 (2,309) --
-------- -------- --------
Total income tax provision (benefit) $ 20,830 $ 19,121 $(22,170)
======== ======== ========
</TABLE>
Extraordinary losses are presented net of related tax benefits. Therefore,
the 1996 and 1997 income tax provision and the 1998 income tax benefit in
the above table exclude tax benefits of $.5 million, $6.2 million and $7.6
million, respectively, on extraordinary losses related to expenses
incurred in the extinguishment of debt and the write-off of debt financing
costs related to the debt.
A reconciliation of the provision (benefit) for income taxes as reported
and the amount computed by multiplying the income before income taxes and
extraordinary item by the U.S. federal statutory rate of 35% was as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory
income tax rate $ 16,244 $ 19,012 $(29,340)
State and local income taxes, net of federal benefit 1,870 2,161 (2,425)
Merger expenses - non deductible 407 257 8,268
Goodwill amortization -- -- 1,221
Increase (decrease) in valuation allowance 2,309 (2,309) --
Other -- -- 106
-------- -------- --------
Total income tax provision (benefit) $ 20,830 $ 19,121 $(22,170)
======== ======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
LEASES - Leases entered into by the Company, principally for theatres, are
accounted for as operating leases. The Company, at its option, can renew a
substantial portion of the leases at defined or then fair rental rates for
various periods. Certain leases for Company theatres provide for
contingent rentals based on revenues. Minimum rentals payable under all
noncancelable operating leases with terms in excess of one year as of
December 31, 1998, are summarized for the following fiscal years:
49
<PAGE> 53
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999 $ 103,728
2000 103,221
2001 100,092
2002 98,384
2003 98,867
Thereafter 1,158,869
</TABLE>
Rent expense under such operating leases amounted to $41,427, $52,632 and
$80,923 for fiscal years 1996, 1997 and 1998, respectively.
The Company has also entered into certain lease agreements for the
operation of theatres not yet constructed. The scheduled completion of
construction for these theatre openings are at various dates during fiscal
1999 and 2000. As of December 31, 1998, the total future minimum rental
payments under the terms of these leases approximate $1.9 billion to be
paid over 15 to 20 years.
CONTINGENCIES - From time to time, the Company is involved in legal
proceedings arising in the ordinary course of its business operations,
such as personal injury claims, employment matters and contractual
disputes. Management believes that the Company's potential liability with
respect to such proceedings is not material in the aggregate to the
Company's consolidated financial position, results of operations or cash
flows.
9. RELATED PARTY TRANSACTIONS
Prior to May 1996, Regal obtained film licenses through an independent
film-booking agency owned by a director of the Company. Additionally, this
director provided consulting services to the Company. The Company paid
$655,000 in 1996 for booking fees and consulting services.
Regal paid $952,000, $1,200,057 and $642,302 in 1996, 1997 and 1998,
respectively, for legal services provided by a law firm, a member of which
served as a director of the Company through May of 1998.
Cobb Theatres leased office and warehouse facilities from a related party.
The related rent expense amounted to approximately $509,000 and $187,000
in 1996 and 1997, respectively.
Cobb Theatres had an agreement with a corporation owned by a related
party, to provide aircraft services. The fees for such services amounted
to approximately $432,000 and $257,250 for 1996 and 1997, respectively.
In connection with the Recapitalization, the Company entered into a
management agreement with KKR and Hicks Muse pursuant to which the Company
has paid approximately $1,093,000 of management fees during fiscal 1998.
Additionally, the Recapitalization costs included in the accompanying 1998
financial statement include an aggregate of $19.5 million of fees paid to
KKR and Hicks Muse.
50
<PAGE> 54
10. CASH FLOW INFORMATION
<TABLE>
<CAPTION>
January 2, January 1, December 31,
1997 1998 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental information on cash flows:
Interest paid $ 12,027 $ 14,486 $ 59,745
Less: Interest capitalized (1,682) (2,617) (6,164)
-------- -------- --------
Interest paid, net $ 10,345 $ 11,869 $ 53,581
======== ======== ========
Income taxes paid, net of refunds $ 11,318 $ 10,001 $ 4,656
======== ======== ========
</TABLE>
NONCASH TRANSACTIONS:
1996:
- Regal issued 4,360,094 shares of Regal common stock as additional
consideration for assets purchased from an individual and
corporations controlled by him. The value of the common stock issued
in the 1996 acquisition of approximately $14,100,000 was allocated
to property and equipment and goodwill.
- Regal recognized income tax benefits relating to exercised stock
options totaling $5,017,000.
1997:
- Regal recognized income tax benefits relating to exercised stock
options totaling $1,306,000.
1998:
- Regal issued 60,383,388 shares of common stock and certain options
to purchase shares of the Company's common stock valued at
approximately $312,157,000 and assumed debt of approximately
$411,337,000 as consideration for assets purchased from Act III
(Note 3).
- Regal issued 808,313 shares of common stock valued at approximately
$4.2 million in exchange for notes receivables from certain
shareholders.
- In connection with the Recapitalization, 456,549 shares of common
stock valued at approximately $2.2 million held by certain of the
Company's senior management were reinvested in the Company.
11. EMPLOYEE BENEFIT PLANS
The Company sponsors employee benefit plans under section 401(k) of the
Internal Revenue Code for the benefit of substantially all full-time
employees. The Company made discretionary contributions of approximately
$280,000, $291,000 and $319,000 to the plans in 1996, 1997 and 1998,
respectively. All full-time employees are eligible to participate in the
plans upon completion of twelve months of employment with 1,000 or more
hours of service, subject to a minimum age of 21.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instrument are as follows:
Cash and equivalents, accounts receivable, accounts payable: The carrying
amounts approximate fair value because of the short maturity of these
instruments.
Long term debt, excluding capital lease obligations: The carrying amounts
of the Company's term loans and the revolving credit facility approximate
fair value because the interest rates are based on
51
<PAGE> 55
floating rates identified by reference to market rates. The fair values of
the Company's senior subordinated notes and debentures and other debt
obligations are estimated based on quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of
the same remaining maturities. The carrying amounts and fair values of
long-term debt at January 1, 1998 and December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
January 1, December 31,
1998 1998
<S> <C> <C>
Carrying amount $ 288,277 $1,317,257
Fair value $ 289,529 $1,338,257
</TABLE>
Interest rate swaps: As of January 1, 1998 and December 31, 1998 the
Company had entered into interest rate swap agreements ranging from five
to seven years for the management of interest rate exposure. As of January
1, 1998 and December 31, 1998, such agreements had effectively converted
$20 million and $270 million, respectively, of LIBOR floating rate debt to
fixed rate obligations with interest rates ranging from 5.32% to 7.32%.
Regal continually monitors its position and the credit rating of the
interest swap counterparty. The fair values of interest rate swap
agreements are estimated based on quotes from dealers of these instruments
and represent the estimated amounts the Company would expect to (pay) or
receive to terminate the agreements. The fair value of the Company's
interest rate swap agreements at January 1, 1998 and December 31, 1998
were $(955,000) and $(3,159,844), respectively.
* * * * * *
52
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company engaged Deloitte & Touche LLP ("Deloitte & Touche") as its
new independent accountants as of September 9, 1998. Prior to such date, the
Company did not consult with Deloitte & Touche regarding (i) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or (ii) any matter that was either the subject of a disagreement (as
defined in paragraph 304(a)(1)(iv) and the related instructions to Item 304) or
a reportable event (as described in paragraph 304(a)(1)(v)).
53
<PAGE> 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are the current directors and executive officers
of the Company. Certain information relating to the directors and executive
officers, which has been furnished to the Company by the individuals named, is
set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- -------------- --------------------------------------------------------------------
<S> <C> <C>
Michael L. Campbell 45 Chairman, President, Chief Executive Officer and Director
Gregory W. Dunn 39 Executive Vice President and Chief Operating Officer
Robert J. Del Moro 39 Senior Vice President, Purchasing
Denise K. Gurin 47 Senior Vice President, Head Film Buyer
J.E. Henry 50 Senior Vice President, Chief Information Officer, Management Information
Systems
Mike Levesque 40 Senior Vice President, Operations
D. Mark Monroe 36 Senior Vice President, Acting Chief Financial Officer and Treasurer
R. Keith Thompson 37 Senior Vice President, Real Estate and Construction
Phillip J. Zacheretti 39 Senior Vice President, Marketing and Advertising
David Deniger 54 Director
Thomas O. Hicks 53 Director
Henry R. Kravis 55 Director
Michael J. Levitt 40 Director
John R. Muse 48 Director
Alexander Navab, Jr. 33 Director
Clifton S. Robbins 40 Director
George R. Roberts 56 Director
</TABLE>
Michael L. Campbell founded the Company in November 1989 and has served
as Chairman of the Board, President and Chief Executive Officer since inception.
Prior thereto, Mr. Campbell was the Chief Executive Officer of Premiere Cinemas
Corporation ("Premiere"), which he co-founded in 1982, and served in such
capacity until Premiere was sold in October 1989. Mr. Campbell serves on the
Executive Committee of the Board of Directors of the National Association of
Theatre Owners.
Gregory W. Dunn has served as Executive Vice President and Chief
Operating Officer since 1995. From 1991 to 1995, Mr. Dunn was Vice President,
Marketing and Concessions. From 1989 to 1991, Mr. Dunn was the Purchasing and
Operations Manager for Goodrich Quality Theaters, a Grand Rapids, Michigan based
theatre chain. From 1986 to 1989, he was a film buyer for Tri-State Theatre
Service, Inc.
54
<PAGE> 58
Robert J. Del Moro has served as Senior Vice President, Purchasing
since September of 1998. From 1997 to 1998, Mr. Del Moro was Vice President,
Food Service for the Company. From 1996 to 1997, Mr. Del Moro was Vice
President, Entertainment Centers and Food Service. From 1995 to 1996, Mr. Del
Moro was Vice President, Marketing and Concession. From 1994 to 1995, Mr. Del
Moro was Director, Theatre Promotions and Concession.
Denise K. Gurin has served as Senior Vice President, Head Film Buyer
since September of 1998. From 1997 to 1998, Ms. Gurin was Vice-President, Head
Film Buyer. From 1995 to 1997, Ms. Gurin was Senior Vice President, Film and
Marketing for Mann Theatres, a Los Angeles, California based theatre chain
("Mann Theatres"). From 1992 to 1995, Ms. Gurin was a film buyer for Mann
Theatres.
J.E. Henry has served as Senior Vice President, Chief Information
Officer, Management Information Systems since September of 1998. From 1996 to
1998, Mr. Henry was Vice President, Management Information Systems. From 1994
to 1996, Mr. Henry served as Director of Management Information Systems.
Mike Levesque has served as Senior Vice President, Operations since
January of 1999. From 1996 to 1999, Mr. Levesque was Vice President, Operations
- - Northern Region. From 1995 to 1996, Mr. Levesque served as Director of
Marketing. During 1995, Mr. Levesque was a District Manager for the Eastern
Region, and from 1994 to 1995, Mr. Levesque was a theatre general manager.
D. Mark Monroe is a certified public accountant and has served as
Senior Vice President and Acting Chief Financial Officer since October 1, 1998
and as Vice President and Treasurer since November 1997. From September 1995 to
October 1997, Mr. Monroe served as the Director of Accounting Projects. From
1992 to 1995, Mr. Monroe was a manager with Pershing, Yoakley and Associates, a
regional accounting and consulting firm. From 1986 to 1991, Mr. Monroe was with
Ernst & Young LLP.
R. Keith Thompson has served as Senior Vice President, Real Estate and
Construction since February 1993. Prior thereto, he served as Vice President,
Finance since joining the Company in 1991. From June 1984 to July 1991, Mr.
Thompson was a Vice President of Corporate Lending at PNC Commercial
Corporation.
Phillip J. Zacheretti has served as Senior Vice President, Marketing
and Advertising since August of 1998. During 1998, Mr. Zacheretti was Vice
President, Marketing and during 1997 Mr. Zacheritti was Director of Marketing.
From 1989 through 1996, Mr. Zacheretti was Director of Marketing for Cinemark
USA, Inc., a Plano, Texas based theatre chain.
David Deniger became a director of the Company upon the closing of the
Regal Merger. Mr. Deniger is a Managing Director and principal of Hicks Muse.
Mr. Deniger is also General Partner, President and CEO of Olympus Real Estate
Corporation. Prior to forming Olympus Real Estate Corporation with Hicks Muse,
Mr. Deniger was a founder and served as President and Chief Executive Officer of
GE Capital Realty Group, Inc. ("GECRG"), a wholly owned subsidiary of General
Electric Capital Corporation ("GE Capital"), organized to underwrite, acquire
and manage real estate equity investments made by GE Capital and its
co-investors. Prior to forming GECRG, Mr. Deniger was President and CEO of FGB
Realty Advisors, a wholly owned subsidiary of MacAndrews & Forbes Financial
Service Group. Mr. Deniger also serves as a director of the Arnold Palmer Golf
Management Company, Olympus Real Estate Corporation and Park Plaza
International.
Thomas O. Hicks became a director of the Company upon the closing of
the Regal Merger. Mr. Hicks has been Chairman and Chief Executive Officer of
Hicks Muse since co-founding the firm in 1989. Prior to forming Hicks Muse, Mr.
Hicks co-founded Hicks & Haas Incorporated in 1983 and served as its Co-Chairman
and Co-Chief Executive Officer through 1989. Mr. Hicks also serves as a director
of Capstar Broadcasting Corporation, CEI Citicorp Holdings, S.A., Chancellor
Media Corporation, Cooperative Computing, Inc., CorpGroup Limited, Group MVS,
S.A. de C.V., Home Interiors & Gifts, Inc., International Home Foods, Inc., LIN
Television Corporation, Neodata Services, Inc., Olympus Real Estate Corporation,
Sybron International Corporation, Triton Energy Limited and Viasystems Group,
Inc.
Henry R. Kravis became a director of the Company upon the closing of
the Regal Merger. He is a managing member of the limited liability company which
serves as the general partner of KKR. He is also
55
<PAGE> 59
a director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The
Boyds Collection, Ltd., Bruno's, Inc., Evenflo & Spalding Holdings Corporation,
The Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreational Group, Inc., Newsquest Capital plc, Owens-Illinois, Inc.,
Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Reltec
Corporation, Safeway Inc., Sotheby's Holdings, Inc., Union Texas Petroleum
Holdings, Inc. and World Color Press, Inc.
Michael J. Levitt became a director of the Company upon the closing of
the Regal Merger. Mr. Levitt is a Partner of Hicks Muse. Before joining Hicks
Muse, Mr. Levitt was a Managing Director and Deputy Head of Investment Banking
with Smith Barney Inc. from 1993 through 1995. From 1986 through 1993, Mr.
Levitt was with Morgan Stanley & Co. Incorporated, most recently as a Managing
Director responsible for the New York based Financial Enterpreneurs Group. Mr.
Levitt also serves as a director of Capstar Broadcasting Corporation, Chancellor
Media Corporation, Group MVS, S.A. de C.V., International Home Foods, Inc., LIN
Television Corporation and Sunrise Television Corp.
John R. Muse became a director of the Company upon the closing of the
Regal Merger. Mr. Muse is Chief Operating Officer and co-founder of Hicks Muse.
Prior to the formation of Hicks Muse in 1989, Mr. Muse headed the
investment/merchant banking activities of Prudential Securities for the
southwestern region of the United States from 1984 to 1989. Prior to joining
Prudential Securities, Mr. Muse served as Senior Vice President and a director
of Schneider, Bernet & Hickman, Inc. in Dallas from 1979 to 1983 and was
responsible for the company's investment banking activities. Mr. Muse is a
director of Arena Brands Holding Corp, Arnold Palmer Golf Management Company,
Glass's Information Services, International Home Foods, Inc., LIN Television
Corporation, Lucchese, Inc., Olympus Real Estate Corporation, Suiza Foods
Corporation and Sunrise Television Corp.
Alexander Navab, Jr. became a director of the Company upon the closing
of the Regal Merger. He has been an executive of KKR and a limited partner of
KKR Associates since 1993. From 1991 to 1993, Mr. Navab was an associate at
James D. Wolfensohn, Inc. He is also a director of Borden, Inc., KSL Recreation
Group, Inc., Newsquest Capital plc, Reltec Corporation and World Color Press,
Inc.
Clifton S. Robbins became a director of the Company upon the closing of
the Regal Merger. He was a General Partner of KKR from January 1, 1995 until
January 1, 1996 when he became a member of the limited liability company which
serves as the general partner of KKR. Prior thereto, he was an executive
thereof. Mr. Robbins is a director of AEP Industries, Inc., Borden, Inc., IDEX
Corporation, KinderCare Learning Center, Inc. and Newsquest Capital plc.
George R. Roberts became a director of the Company upon the closing of
the Regal Merger. He is a managing member of the limited liability company which
serves as the general partner of KKR. He is also a director of Accuride
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Bruno's, Inc., Evenflo & Spalding Holdings Corporation, IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., Owens-Illinois,
Inc., Owens-Illinois Group, Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc.,
Reltec Corporation, Safeway Inc., Union Texas Petroleum Holdings, Inc. and World
Color Press, Inc.
COMPOSITION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company consists of nine members,
including four directors designated by KKR and four directors designated by
Hicks Muse. Directors of the Company are elected annually by the stockholders to
serve during the ensuing year or until their respective successors are duly
elected and qualified.
56
<PAGE> 60
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information as to annual, long-term or
other compensation during the last three fiscal years for the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers who were serving as executive officers at the end of fiscal 1998 whose
salary and bonus exceeded $100,000 during fiscal 1998 and two individuals who
served as executive officers during fiscal 1998 whose salary and bonus exceeded
$100,000 during fiscal 1998 (collectively the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------- ---------------------
SECURITIES
UNDERLYING
NAME AND POSITION FISCAL YEAR SALARY($) BONUS($)(1) OPTIONS/SARS(#)
-------------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Michael L. Campbell 1998 $ 402,000 $ 500,000 3,631,364
Chairman, President and Chief Executive 1997 241,500 671,941 190,000
Officer 1996 209,463 716,988 150,000
Gregory W. Dunn 1998 $ 252,000 $ 219,213 413,255
Executive Vice President and Chief Operating 1997 125,000 135,000 60,000
Officer 1996 115,358 130,000 52,500
Lewis Frazer III (2) 1998 $ 157,000 $ -- 470,484
Executive Vice President, Chief Financial 1997 120,000 120,000 60,000
Officer and Secretary 1996 108,413 124,950 45,000
R. Keith Thompson 1998 $ 145,000 $ 101,175 227,657
Senior Vice President, Real Estate and 1997 110,000 70,000 40,000
Development 1996 95,568 60,000 30,000
Robert J. Del Moro 1998 $ 102,000 $ 69,892 146,063
Senior Vice President, Purchasing 1997 83,500 42,500 180,997
1996 71,000 35,000 139,500
J.E. Henry 1998 $ 95,000 $ 55,646 148,343
Senior Vice President, Chief Information Officer 1997 82,000 40,000 155,000
Management Information Systems 1996 74,000 32,000 139,500
Robert A. Engel (2) 1998 $ 77,885 $ 41,735 --
Senior Vice President Film and Advertising 1997 95,000 50,000 --
1996 85,540 55,000 30,000
</TABLE>
- ------------------
(1) Reflects cash bonus earned in fiscal 1998, 1997 and 1996, respectively, and
paid the following fiscal year.
(2) As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
the Company.
57
<PAGE> 61
The following table summarizes certain information regarding stock
options issued to the Named Executive Officers during fiscal 1998. No stock
appreciation rights ("SARs") have been granted by the Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS POTENTIAL REALIZABLE
UNDERLYING GRANTED TO VALUE AT ASSUMED
OPTIONS EMPLOYEES EXERCISE ANNUAL RATES OF STOCK
GRANTED IN FISCAL PRICE EXPIRATION APPRECIATION FOR
NAME (#)(1) 1998 ($/SHARE) DATE OPTION TERM (2)
-------------------------------
5%($) 10%($)
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael L. Campbell 2,536,023(3) 23.62 $5.00 5/27/08 $ 7,974,839 $ 20,209,807
1,095,341(4) 10.20 $5.00 5/27/08 3,443,888 8,727,488
Gregory W. Dunn 309,941(3) 2.89 $5.00 5/27/08 974,602 2,469,833
103,314(4) 0.96 $5.00 5/27/08 324,867 823,277
Lewis Frazer III (5) 352,863(3) 3.29 $5.00 5/27/08 -- --
117,621(4) 1.09 $5.00 5/27/08 -- --
R. Keith Thompson 170,743(3) 1.59 $5.00 5/27/08 536,896 1,360,600
56,914(4) 0.53 $5.00 5/27/08 178,965 453,533
Robert J. Del Moro 109,547(3) 1.02 $5.00 5/27/08 344,468 872,950
36,516(4) 0.34 $5.00 5/27/08 114,823 290,984
J.E. Henry 111,257(3) 1.04 $5.00 5/27/08 349,846 886,577
37,086(4) 0.34 $5.00 5/27/08 116,615 295,526
Robert A. Engel (5) -- -- -- -- -- --
</TABLE>
- ------------
(1) All options were granted pursuant to the 1998 Stock Purchase and Option
Plan for Key Employees of Regal Cinemas, Inc. Reflects 6.2 to 1 stock split
effected on May 27, 1998 in connection with the Regal Merger.
(2) Potential realizable value is calculated from a base stock price of $5.00
per share, the exercise price of the options granted.
(3) Options vest in 20% increments annually beginning one year after the date
of grant.
(4) Options vest after nine years or earlier if EBIT performance goals are
achieved.
(5) As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
the Company and their respective options were canceled.
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<PAGE> 62
The following table summarizes certain information with respect to
stock options exercised by the Named Executive Officers pursuant to the
Company's Stock Option Plans.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS HELD AT OPTIONS HELD AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
(#) ($)
---------------------------- ---------------------------
SHARES NET
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ---------------- ---------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael L. Campbell 2,720,926 (2) $6,850,522 (3) 1,911,801 3,631,364 $7,176,497 -0-
Gregory W. Dunn 863,597 (2) 1,879,628 (3) 498,654 413,255 1,878,087 -0-
Lewis Frazer III (4) 1,457,887 (5) 4,277,473 (6) -- -- -- --
R. Keith Thompson 471,629 (2) 1,035,046 (3) 272,769 227,657 1,034,649 -0-
Robert J. Del Moro 380,110 (2) 657,776 (3) 207,068 146,063 663,480 -0-
J.E. Henry 370,909 (2) 674,686 (3) 201,816 148,343 673,876 -0-
Robert A. Engel (4) 926,876 (2) $3,074,086 (3) -- -- -- --
</TABLE>
- ------------
(1) Reflects the market value of the underlying securities at exercise, $5.00,
minus the average exercise price.
(2) These stock options were canceled in connection with the Regal Merger.
(3) Reflects cash payments of $5.00 per share minus the exercise price paid in
connection with the Regal Merger.
(4) As of October 1, 1998, Messrs. Frazer and Engel were no longer employed by
the Company.
(5) Of these shares, 1,457,887 were canceled in connection with the Regal
Merger and 470,484 were canceled as a result of Mr. Frazer's resignation.
(6) Of this amount, 2,138,908 reflects cash payments of $5.00 per share minus
the exercise price paid in connection with the Regal Merger and 2,138,565
reflects cash payments of $5.00 per share minus the exercise price paid in
connection with Mr. Frazer's resignation.
DIRECTORS' COMPENSATION
Each director of the Company who is not also an officer or employee of
the Company receives a fee of $40,000 per year. Directors of the Company are
entitled to reimbursement of their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Board of
Directors of the Company or committees thereof.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs.
Campbell and Dunn pursuant to which they respectively serve as Chief Executive
Officer and Chief Operating Officer of the Company. The terms of the employment
agreements commenced upon the closing of the Regal Merger and continue for three
years. The employment agreements provide for initial base salaries of $500,000
and $325,000 per year for Messrs. Campbell and Dunn, respectively. Messrs.
Campbell and Dunn are entitled to receive
59
<PAGE> 63
annual target bonuses of 140% and 100%, respectively, of their base salaries
based upon the achievement by the Company of certain EBITDA and other
performance targets set by the Board of Directors of the Company. The employment
agreements also provide that the Company will supply Messrs. Campbell and Dunn
with other customary benefits generally made available to other senior
executives of the Company. Each of the employment agreements also contains a
noncompetition and no-raid provision pursuant to which each of Messrs. Campbell
and Dunn has agreed, subject to certain exceptions, that during the term of his
employment agreement and for one year thereafter, he will not compete with the
Company or its theatre affiliates and will not solicit or hire certain employees
of the Company. Each of the employment agreements also contains severance
provisions providing for the termination of employment of Messrs. Campbell and
Dunn by the Company under certain circumstances in which Messrs. Campbell and
Dunn will be entitled to receive severance payments equal to the greater of (i)
two times their respective annual base salaries and (ii) the balance of their
respective base salaries over the then-remaining employment term, in either case
payable over 24 months (or if longer, the remaining balance of the employment
term) and continuation of health, life, disability and other similar welfare
plan benefits.
SETTLEMENT AGREEMENT
Under the terms of a Settlement Agreement and General Release between
the Company and Lewis Frazer III, the Company's former Executive Vice President,
Chief Financial Officer and Secretary, the Company paid to Mr. Frazer in a lump
sum $2,138,565. In consideration for this payment, Mr. Frazer's options were
canceled and his shares of Common Stock were purchased by the Company. In
addition, Mr. Frazer and the Company executed mutual releases and Mr. Frazer
agreed, subject to certain exceptions, not to disclose any confidential
information obtained by him while employed by the Company and not to compete
with the Company for a one-year period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, the Compensation Committee was comprised of Messrs.
Levitt, Muse, Navab and Robbins. None of these persons has at any time been an
officer or employee of the Company or its subsidiaries.
60
<PAGE> 64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of shares of the Common Stock as of March 29, 1999, by (i)
each person who is known to the Company to own beneficially more than 5% of the
Common Stock; (ii) each director of the Company; (iii) the Named Executive
Officers of the Company; and (iv) all directors and executive officers of the
Company as a group. Unless noted otherwise, the address for each executive
officer is in the care of the Company at 7132 Commercial Park Drive, Knoxville,
Tennessee 37918.
<TABLE>
<CAPTION>
Amount and
Name and Address of Nature of Beneficial Percent
Beneficial Owners Ownership(1) of Class
- ---------------------------------------------------------- ------------------------------ ------------------
<S> <C> <C>
5% STOCKHOLDERS:
Hicks Muse Parties (2) 100,000,000 46.3%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court
Suite 1600
Dallas, Texas 75201
KKR 1996 GP L.L.C. (3) 100,000,000 46.3%
c/o Kohlberg Kravis Roberts & Co. L.P.
9 West 57th Street
Suite 4200
New York, New York 10019
OFFICERS AND DIRECTORS:
David Deniger -- *
Thomas O. Hicks -- *
Henry R. Kravis -- *
Michael J. Levitt -- *
John R. Muse -- *
Alexander Navab, Jr. -- *
Clifton S. Robbins -- *
George R. Roberts -- *
Michael L. Campbell 2,368,350 1.1%
Gregory W. Dunn 498,654 *
Robert J. Del Moro -- *
J.E. Henry -- *
Lewis Frazer III -- *
Robert A. Engel, Jr. -- *
R. Keith Thompson 272,769 *
All directors and executive officers as a group 3,227,620 1.5%
(15 persons)
</TABLE>
- ------------------------
*Indicates ownership of less than one percent of the Company's outstanding
Common Stock.
(1) Pursuant to the rules of the Securities and Exchange Commission, certain
shares of the Company's Common Stock which a beneficial owner has the right
to acquire within 60 days of March 29, 1999 pursuant to the exercise of
stock options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such owner but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Includes shares owned of record by Regal Equity Partners, L.P. ("Regal
Partners"), a limited partnership whose sole general partner is TOH/Ranger,
LLC ("Ranger LLC"). Mr. Hicks is the sole member and director of Ranger LLC
and, accordingly, may be deemed to be the beneficial owner of the Common
Stock held directly or indirectly by Regal Partners. John R. Muse, Charles
W. Tate, Jack D. Furst, Lawrence D. Stuart, Jr. and Michael J. Levitt are
officers of Ranger LLC and as such may be deemed to share with Mr. Hicks
the power to vote or dispose of the Common Stock held by Regal Partners.
Each of Messrs. Hicks, Muse, Tate, Furst, Stuart and Levitt disclaims
beneficial ownership of the Common Stock not respectively owned of record
by him.
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<PAGE> 65
(3) KKR 1996 GP L.L.C. is the sole general partner of KKR Associates 1996 L.P.
KKR Associates 1996 L.P., a limited partnership, is the sole general
partner of KKR 1996 Fund L.P., a limited partnership formed at the
direction of KKR, and possesses sole voting and investment power with
respect to such shares. KKR 1996 GP L.L.C. is a limited liability company,
the managing members of which are Henry R. Kravis and George R. Roberts,
and the other members of which are Robert I. MacDowell, Paul E. Raether,
Michael W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry
Golkin, Clifton S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs.
Kravis, Roberts and Robbins are directors of the Company. Mr. Alexander
Navab, Jr. is a limited partner of KKR Associates 1996 L.P. and is also a
director of the Company. Each of such individuals may be deemed to share
beneficial ownership of the shares shown as beneficially owned by KKR 1996
GP L.L.C. Each of such individuals disclaims beneficial ownership of such
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary description of the principal terms of the
following agreements and is subject to and qualified in its entirety by
reference to the full text of such agreements, which are filed as exhibits to
this Form 10-K.
KKR/HICKS MUSE STOCKHOLDERS AGREEMENT
Concurrently with the consummation of the Regal Merger, the Company
entered into a stockholder agreement with Hicks Muse and KKR (the "KKR/Hicks
Muse Stockholders Agreement"). Among other things, the KKR/Hicks Muse
Stockholders Agreement provides that each of Hicks Muse and KKR has the right to
appoint an equal number of directors to the Board of Directors of the Company,
subject to maintaining specified ownership thresholds. The number of directors
appointed by KKR and Hicks Muse together shall constitute a majority of the
Board of Directors. The KKR/Hicks Muse Stockholders Agreement further provides
that Hicks Muse and KKR will amend the Company's bylaws to provide that no
action may be validly taken at a meeting of the Board of Directors unless a
majority of the Board of Directors, a majority of the directors designated by
Hicks Muse and a majority of the directors designated by KKR have approved such
action.
The KKR/Hicks Muse Stockholders Agreement provides that neither Hicks
Muse nor KKR may transfer its shares of Common Stock to a person other than its
respective affiliates for a period of five years following the closing date of
the Regal Merger. In addition, the KKR/Hicks Muse Stockholders Agreement
provides KKR and Hicks Muse with certain registration rights and limits the
ability of either KKR or Hicks Muse to separately acquire motion picture
exhibition assets in excess of a specified amount without first offering the
other the right to participate in such acquisition opportunity.
DLJ STOCKHOLDERS AGREEMENT
Concurrently with the consummation of the Regal Merger, the Company,
Hicks Muse, KKR and DLJ entered into a stockholders agreement (the "DLJ
Stockholders Agreement"). Under the DLJ Stockholders Agreement, DLJ has the
right to participate pro rata in certain sales of Common Stock by KKR and Hicks
Muse, and KKR and Hicks Muse have the right to require DLJ to participate pro
rata in certain sales by KKR and Hicks Muse. The DLJ Stockholders Agreement also
grants DLJ stockholders certain registration and preemptive rights.
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<PAGE> 66
CERTAIN FEES
Each of KKR and Hicks Muse received a fee for negotiating the
Recapitalization and arranging the financing therefor, plus the reimbursement of
their respective expenses in connection therewith, and from time to time, each
of KKR and Hicks Muse may receive customary investment banking fees for services
rendered to the Company in connection with divestitures, acquisitions and
certain other transactions. In addition, KKR and Hicks Muse have agreed to
render management, consulting and financial services to the Company for an
aggregate annual fee of $1.0 million.
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<PAGE> 67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements:
The following Financial Statements of Regal Cinemas,
Inc. are included in Part II, Item 8.
Report of Independent Auditors
Report of Coopers & Lybrand L.L.P., Independent
Accountants
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at January 1, 1998 and
December 31, 1998.
Consolidated Statements of Operations for the years
ended January 2, 1997, January 1, 1998 and
December 31, 1998.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended January 2, 1997,
January 1, 1998 and December 31, 1998.
Consolidated Statements of Cash Flows for the years
ended January 2, 1997, January 1, 1998 and
December 31, 1998.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules - Not applicable.
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------- ---------------------------------------------------------
<S> <C>
2.1 -- Agreement and Plan of Merger, dated as of January 19,
1998, by and among Regal Cinemas, Inc., Screen
Acquisition Corp. and Monarch Acquisition Corp. (1)
2.2 -- Agreement and Plan of Merger, dated as of August 20,
1998, by and among Regal Cinemas, Inc., Knoxville
Acquisition Corp. and Act III Cinemas, Inc. (2)
3.1 -- Amended and Restated Charter of the Registrant. (3)
3.2 -- Restated Bylaws of the Registrant. (4)
4.1 -- Specimen Common Stock certificate. (4)
4.2 -- Article 5 of the Registrant's Amended and Restated
Charter (included in the Amended and Restated Charter
filed as Exhibit 3.1 hereto).
4.3 -- Indenture, dated as of May 27, 1998, by and between
Regal Cinemas, Inc. and IBJ Whitehall Bank & Trust
Company (formerly IBJ Schroder Bank & Trust Company).
(5)
4.4 -- Form of Regal Cinemas, Inc. 9 1/2% Senior
Subordinated Note due June 1, 2008 (contained in
Indenture filed as Exhibit 4.3 hereto).
4.5 -- Indenture, dated as of December 16, 1998, by and
between Regal Cinemas, Inc. and IBJ Whitehall Bank &
Trust Company (IBJ Schroder Bank & Trust Company).
(6)
4.6 -- Form of Regal Cinemas, Inc. 8 7/8% Senior
Subordinated Debenture due December 15, 2010
(contained in the Indenture filed as Exhibit 4.5
hereto).
10.1 -- Employment Agreement, dated as of May 27, 1998, by
and between Regal Cinemas, Inc. and Michael L.
Campbell. (5)
</TABLE>
64
<PAGE> 68
<TABLE>
<S> <C>
10.2 -- Employment Agreement, dated as of May 27, 1998, by
and between Regal Cinemas, Inc. and Gregory W. Dunn.
(5)
10.3 -- Severance Agreement and General Release, dated as of
September 30, 1998, by and between Regal Cinemas,
Inc. and Lewis Frazer III.*
10.4 -- Credit Agreement, dated as of May 27, 1998, by and
between Regal Cinemas, Inc., its subsidiaries and the
lenders named therein. (5)
10.4-1 -- First Amendment, dated as of August 26, 1998, by and
between Regal Cinemas, Inc., its subsidiaries and the
lenders named therein. (3)
10.4-2 -- Second Amendment, dated as of December 31, 1998, by
and between Regal Cinemas, Inc., its subsidiaries and
the lenders named therein. (7)
10.5 -- 1993 Employee Stock Incentive Plan. (4)
10.6 -- Regal Cinemas, Inc. Participant Stock Option Plan. (4)
10.7 -- Regal Cinemas, Inc. Employee Stock Option Plan. (4)
10.8 -- 1998 Stock Purchase and Option Plan for Key Employees
of Regal Cinemas, Inc. (8)
10.9 -- Form of Management Stockholder's Agreement. (8)
10.10 -- Form of Non-Qualified Stock Option Agreement. (8)
10.11 -- Form of Sale Participation Agreement. (8)
10.12 -- Form of Registration Rights Agreement. (8)
10.13 -- Stockholders' Agreement, dated as of May 27, 1998, by
and among Regal Cinemas, Inc., KKR 1996 Fund, L.P.,
KKR Partners II, L.P. and Regal Equity Partners, L.P.
(3)
10.14 -- Stockholders' and Registration Rights Agreement,
dated as of May 27, 1998, by and among Regal Cinemas,
Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P.,
Regal Equity Partners, L.P. and the DLJ signatories
thereto. (3)
21 -- Subsidiaries.*
23.1 -- Consent of Deloitte & Touche LLP. *
23.2 -- Consent of PricewaterhouseCoopers LLP.*
23.3 -- Consent of Ernst & Young LLP. *
27 -- Financial Data Schedule (for SEC use only).*
</TABLE>
- -----------------
* Filed herewith.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 20, 1998.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated September 1, 1998.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Registration No. 333-64399.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration No. 33-62868.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 2, 1998.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Registration No. 333-69943.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-4/A, Registration No. 333-69931.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 333-52943.
(b) During the fourth quarter of fiscal 1998 ended December 31, 1998,
the Registrant filed a Current Report on Form 8-K/A on September 23, 1998,
reporting changes in the Registrant's Certifying Accountant.
65
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGAL CINEMAS, INC.
Dated: March 31, 1999 By: /s/ Michael L. Campbell
------------------------
Michael L. Campbell, Chairman,
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Michael L. Campbell Chairman of the Board, March 31, 1999
Michael L. Campbell President, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ D. Mark Monroe Senior Vice President, Acting March 31, 1999
D. Mark Monroe Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
/s/ David Deniger Director March 31, 1999
David Deniger
/s/ Thomas O. Hicks Director March 31, 1999
Thomas O. Hicks
/s/ Henry R. Kravis Director March 31, 1999
Henry R. Kravis
/s/ Michael J. Levitt Director March 31, 1999
Michael J. Levitt
/s/ John R. Muse Director March 31, 1999
John R. Muse
/s/ Alexander Navab, Jr. Director March 31, 1999
Alexander Navab, Jr.
/s/ Clifton S. Robbins Director March 31, 1999
Clifton S. Robbins
/s/ George R. Roberts Director March 31, 1999
George R. Roberts
</TABLE>
66
<PAGE> 70
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security holders.
67
<PAGE> 71
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------- ---------------------------------------------------------
<S> <C>
2.1 -- Agreement and Plan of Merger, dated as of January 19,
1998, by and among Regal Cinemas, Inc., Screen
Acquisition Corp. and Monarch Acquisition Corp. (1)
2.2 -- Agreement and Plan of Merger, dated as of August 20,
1998, by and among Regal Cinemas, Inc., Knoxville
Acquisition Corp. and Act III Cinemas, Inc. (2)
3.1 -- Amended and Restated Charter of the Registrant. (3)
3.2 -- Restated Bylaws of the Registrant. (4)
4.1 -- Specimen Common Stock certificate. (4)
4.2 -- Article 5 of the Registrant's Amended and Restated
Charter (included in the Amended and Restated Charter
filed as Exhibit 3.1 hereto).
4.3 -- Indenture, dated as of May 27, 1998, by and between
Regal Cinemas, Inc. and IBJ Whitehall Bank & Trust
Company (formerly IBJ Schroder Bank & Trust Company).
(5)
4.4 -- Form of Regal Cinemas, Inc. 9 1/2% Senior
Subordinated Note due June 1, 2008 (contained in
Indenture filed as Exhibit 4.3 hereto).
4.5 -- Indenture, dated as of December 16, 1998, by and
between Regal Cinemas, Inc. and IBJ Whitehall Bank &
Trust Company (IBJ Schroder Bank & Trust Company).
(6)
4.6 -- Form of Regal Cinemas, Inc. 8 7/8% Senior
Subordinated Debenture due December 15, 2010
(contained in the Indenture filed as Exhibit 4.5
hereto).
10.1 -- Employment Agreement, dated as of May 27, 1998, by
and between Regal Cinemas, Inc. and Michael L.
Campbell. (5)
10.2 -- Employment Agreement, dated as of May 27, 1998, by
and between Regal Cinemas, Inc. and Gregory W. Dunn.
(5)
10.3 -- Severance Agreement and General Release, dated as of
September 30, 1998, by and between Regal Cinemas,
Inc. and Lewis Frazer III.*
10.4 -- Credit Agreement, dated as of May 27, 1998, by and
between Regal Cinemas, Inc., its subsidiaries and the
lenders named therein. (5)
10.4-1 -- First Amendment, dated as of August 26, 1998, by and
between Regal Cinemas, Inc., its subsidiaries and the
lenders named therein. (3)
10.4-2 -- Second Amendment, dated as of December 31, 1998, by
and between Regal Cinemas, Inc., its subsidiaries and
the lenders named therein. (7)
10.5 -- 1993 Employee Stock Incentive Plan. (4)
10.6 -- Regal Cinemas, Inc. Participant Stock Option Plan.(4)
10.7 -- Regal Cinemas, Inc. Employee Stock Option Plan. (4)
10.8 -- 1998 Stock Purchase and Option Plan for Key Employees
of Regal Cinemas, Inc. (8)
10.9 -- Form of Management Stockholder's Agreement. (8)
10.10 -- Form of Non-Qualified Stock Option Agreement. (8)
10.11 -- Form of Sale Participation Agreement. (8)
10.12 -- Form of Registration Rights Agreement. (8)
10.13 -- Stockholders' Agreement, dated as of May 27, 1998, by
and among Regal Cinemas, Inc., KKR 1996 Fund, L.P.,
KKR Partners II, L.P. and Regal Equity Partners, L.P.
(3)
</TABLE>
68
<PAGE> 72
<TABLE>
<S> <C>
10.14 -- Stockholders' and Registration Rights Agreement,
dated as of May 27, 1998, by and among Regal Cinemas,
Inc., KKR 1996 Fund, L.P., KKR Partners II, L.P.,
Regal Equity Partners, L.P. and the DLJ signatories
thereto. (3)
21 -- Subsidiaries.*
23.1 -- Consent of Deloitte & Touche LLP. *
23.2 -- Consent of PricewaterhouseCoopers LLP.*
23.3 -- Consent of Ernst & Young LLP. *
27 -- Financial Data Schedule (for SEC use only).*
</TABLE>
- -----------------
* Filed herewith.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 20, 1998.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated September 1, 1998.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Registration No. 333-64399.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration No. 33-62868.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 2, 1998.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Registration No. 333-69943.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-4/A, Registration No. 333-69931.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 333-52943.
69
<PAGE> 1
Exhibit 10.3
SETTLEMENT AGREEMENT AND GENERAL RELEASE
dated as of September 30, 1998
WHEREAS, LEWIS FRAZER ("Mr. Frazer") and REGAL CINEMAS, INC. (the
"Company") desire to enter into an agreement regarding Mr. Frazer's termination
of his employment as Chief Financial Officer and all other positions held by Mr.
Frazer at the Company or any of its subsidiaries, the effective date of such
termination being September 30, 1998 (the "Effective Date"); and
WHEREAS, in order to avoid any dispute as to the rights and obligations
of the parties, the parties have agreed to execute and comply fully with the
terms of this Settlement Agreement and General Release (the "Release").
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, Mr. Frazer and the Company agree and covenant as
follows:
1. By entering into this Release, neither of the parties hereto admit,
and each specifically denies, any liability, wrongdoing or violation of any law,
statute, regulations, agreement or policy.
2. The Company and Mr. Frazer agree to treat Mr. Frazer's resignation
of his employment with the Company on the Effective Date as a termination under
Section 6.4 of the employment agreement between Mr. Frazer and the Company dated
May 27, 1997 (the "Employment Agreement") and, therefore, the obligations of the
Company to make any further payments or provide any benefits under the
Employment Agreement shall hereby cease and terminate .
3. In consideration of the obligations upon Mr. Frazer as set forth in
this Release, and in full settlement and final satisfaction of any and all
claims, contractual or otherwise, which Mr. Frazer had, has or may have against
the Company or the Released Parties (as defined in Section 4 hereof) with
respect to his employment, the termination of his employment with the Company
and its subsidiaries, or otherwise arising on or prior to the date of execution
of this Release, except to the extent that any such claim concerns an allegation
that the Company has failed to comply with any obligations created by this
Release, the Company agrees to cancel Mr. Frazer's Old Options (as defined in
the Management Stockholder's Agreement dated May 27, 1998 between Mr. Frazer and
the Company (the "Management Stockholder's Agreement")) to purchase 566,463
shares on a post-split basis and all of Mr. Frazer's New Options (as defined in
the Management Stockholder's Agreement) for aggregate cash consideration of
$2,138,565, less applicable withholding taxes and other deductions required by
law.
4. (a) Except as expressly set forth herein, Mr. Frazer, for and in
consideration of the payments as set forth in this Release and for other good
and valuable
<PAGE> 2
2
consideration, hereby releases and forever discharges, and by this Release does
release and forever discharge, the Company, the Company's divisions, merged
entities and affiliates, stockholders (including without limitation all
affiliates of Kohlberg Kravis Roberts & Co. L.P. and Hicks, Muse, Tate & Furst
Incorporated), subsidiaries, parents, branches, predecessors, successors,
assigns, officers, directors, trustees, employees, agents, administrators,
representatives, attorneys, insurers or fiduciaries, past, present or future
(the "Released Parties") of and from all debts, obligations, promises,
covenants, collective bargaining obligations, agreements, contracts,
endorsements, bonds, controversies, disputes, claims, suits or causes of actions
known or unknown, suspected or unsuspected, of every kind and nature whatsoever,
which may heretofore have existed or which may now exist, including but not
limited to those arising under the Age Discrimination in Employment Act of 1967,
as amended, ("ADEA"), Title VII of the Civil Rights Act of 1964, as amended, the
Fair Labor Standards Act, as amended, the Equal Pay Act, as amended, the
Employee Retirement Income Security Act of 1974, as amended, the Americans with
Disabilities Act, as amended, the Reconstruction Era Civil Rights Act, as
amended, the Rehabilitation Act of 1973, as amended, the Family and Medical
Leave Act of 1992, and any and all state or local laws regarding employment
discrimination and/or federal, state or local laws of any type or description
regarding employment or the retention of options to purchase securities retained
by Mr. Frazer pursuant to the Management Stockholder's Agreement, including but
not limited to any and all claims arising from or derivative of Mr. Frazer's
employment with the Company and its subsidiaries and Mr. Frazer's termination
from employment with the Company and its subsidiaries or otherwise, as well as
any rights or claims Mr. Frazer or his attorney has or may have for costs,
expenses, attorneys' fees or otherwise, and except with respect to any claims
arising from or derivative of any criminal conduct or fraud, and except with
respect to any claim for indemnification from the Company or its subsidiaries in
connection with Mr. Frazer's service as director, officer or employee of the
Company or any subsidiary of the Company.
(b) Except as expressly set forth herein, the Company (on behalf of
itself and its subsidiaries), Kohlberg Kravis Roberts & Co. L.P., KKR 1996 Fund
L.P., KKR Partners II, L.P., Hicks, Muse, Tate & Furst Incorporated and Regal
Equity Partners, L.P. for and in consideration of performance of the obligations
as set forth in this Release and for other good and valuable consideration,
hereby release and forever discharge, and by this Release do release and forever
discharge, Mr. Frazer of and from all debts, obligations, promises, covenants,
agreements, contracts, endorsements, bonds, controversies, disputes, claims,
suits or causes of actions known or unknown, suspected or unsuspected, of every
kind and nature whatsoever, which may heretofore have existed or which may now
exist, including but not limited to federal, state or local laws of any type or
description regarding employment or the retention of options to purchase
securities retained by Mr. Frazer pursuant to the Management Stockholder's
Agreement, including but not limited to any and all claims arising from or
derivative of Mr. Frazer's employment with the Company and Mr. Frazer's
termination from employment with the Company and its subsidiaries or otherwise,
as well as any rights or claims the Company (on behalf of itself and its
subsidiaries), Kohlberg Kravis Roberts & Co. L.P., KKR 1996 Fund L.P., KKR
Partners II, L.P., Hicks, Muse, Tate & Furst Incorporated or Regal Equity
Partners, L.P. or their attorneys have or may have for costs, expenses,
<PAGE> 3
3
attorneys' fees or otherwise, and except with respect to any claims arising from
or derivative of any criminal conduct or fraud.
5. Mr. Frazer covenants and agrees not to sue, file any grievance,
arbitration or other proceeding, administrative or judicial, against the
Released Parties and the Company, Kohlberg Kravis Roberts & Co. L.P., KKR 1996
Fund L.P., KKR Partners II, L.P., Hicks, Muse, Tate & Furst Incorporated and
Regal Equity Partners, L.P. covenant and agree not to sue, file any grievance,
arbitration or other proceeding, administrative or judicial, against Mr. Frazer
in any court of law or equity, or before any administrative agency, with respect
to any matter whatsoever released hereby, including but not limited to matters
arising from or derivative of Mr. Frazer's employment with the Company and Mr.
Frazer's termination from employment with the Company and its subsidiaries or
otherwise.
6. (a) Mr. Frazer and the Company expressly understand and agree that
the Company's obligations under this Release are in lieu of any and all other
amounts to which Mr. Frazer might be, is now or may become entitled to receive
from any of the Released Parties upon any claim whatsoever and, without limiting
the generality of the foregoing, except as provided in Sections 3 and 6(b)
herein, Mr. Frazer expressly waives any right or claim that he may have or
assert to employment or reinstatement to employment with the Released Parties,
or payment for backpay, front pay, interest, bonuses, damages, vacation, sick
leave, medical, dental, optical or hospitalization benefits, accidental death
and dismemberment coverage, long term disability coverage, stock options,
pensions, education benefits, automobile usage benefits, life insurance
benefits, overtime, severance pay, liquidated damages and/or attorneys' fees or
costs. Mr. Frazer expressly understands and agrees that any Company stock option
in which he has any interest shall be canceled as of the Effective Date.
(b) Nothing herein shall effect Mr. Frazer"s rights with respect to
(i) his account under the Company 401(k) plan and (ii) continuation of health
insurance coverage under COBRA.
7. (a) Mr. Frazer agrees that, without limiting the Released Parties'
remedies, any material violation or breach by him of this Release or the
institution of any grievance, arbitration or other proceeding, administrative or
judicial, by Mr. Frazer against any of the Released Parties in violation of this
Release shall give rise to an action by any such Released Party, including, but
not limited to, the Company, Kohlberg Kravis Roberts & Co. L.P., KKR 1996 Fund
L.P., KKR Partners II, L.P., Hicks, Muse, Tate & Furst Incorporated or Regal
Equity Partners, L.P., for relief including, but not limited to, damages caused
by such breach and shall forever release and discharge the applicable Released
Party from the performance of its obligations arising from this Release but
shall not release Mr. Frazer from the performance of his obligations pursuant to
this Release.
(b) The Company agrees that, without limiting Mr. Frazer's remedies,
any material violation or breach by the Company, Kohlberg Kravis Roberts & Co.
L.P., KKR 1996 Fund L.P., KKR Partners II, L.P., Hicks, Muse, Tate & Furst
Incorporated or Regal Equity Partners, L.P. of this Release or the institution
of any grievance, arbitration or
<PAGE> 4
4
other proceeding, administrative or judicial, by any of the Released Parties
against Mr. Frazer in violation of this Release shall give rise to an action by
Mr. Frazer for relief including, but not limited to, damages caused by such
breach and shall forever release and discharge Mr. Frazer from the performance
of his obligations arising from this Release with respect to the applicable
Released Party but shall not release the Company, Kohlberg Kravis Roberts & Co.
L.P., KKR 1996 Fund L.P., KKR Partners II, L.P., Hicks, Muse, Tate & Furst
Incorporated or Regal Equity Partners, L.P. from the performance of its
obligations pursuant to this Release.
8. The parties each agree not to make any material disparaging
statements about the other, the Released Parties or the Company's personnel
policies and practices to any of the Company's customers, competitors,
suppliers, employees, former employees, or the press or other media in any
country and neither party shall issue any press release, other than in order to
comply with law or in response to press inquiries.
9. Mr. Frazer covenants and agrees that he will return to the Company
any letters, files, documents, equipment, supplies, security access passes,
property or other items in his possession or control which were entrusted or
issued to him during the course of his employment with the Company.
10. Mr. Frazer further covenants and agrees, as a condition of the
Company's performance of its obligations arising from this Release, that Mr.
Frazer will regard and preserve all noncompetition, confidentiality and
nonsolicitation obligations set forth in Section 12 of the Employment Agreement
and Section 26 of the Management Stockholder's Agreement.
11. Should any provision of this Release be found to be in violation of
any law, or ineffective or barred for any reason whatsoever, the remainder of
this Release shall be in full force and effect to the maximum extent permitted
by law.
12. The Company and Mr. Frazer agree to execute such other documents
and to take such other actions as may be reasonably necessary to further the
purposes of this Release.
13. Mr. Frazer acknowledges and agrees that, in deciding to execute
this Release, he has had the opportunity to consult with legal, financial and
other personal advisors of his own choosing as he deems appropriate, in
assessing whether to execute this Release and that he has consulted with legal
counsel. Mr. Frazer represents and acknowledges that no representations,
statement, promise, inducement, threat or suggestion has been made by the
Company or the Released Parties to influence him to sign this Release except
such statements as are expressly set forth herein. Mr. Frazer agrees that he has
been given a minimum of twenty-one (21) days within which to consider the terms
and effects of this Release and to consult with, and to ask any questions that
he may have of anyone, including legal counsel and other personal advisors of
his own choosing, and that he has executed this Release voluntarily and with
full understanding of its terms and effects. Mr. Frazer understands that in
executing
<PAGE> 5
5
the Release he is, inter alia, giving up any rights and claims he may have under
the ADEA. The Company and Mr. Frazer agree that Mr. Frazer has a period of seven
(7) days after signing this Release within which to revoke his agreement, and
neither the Company nor any other person is obligated to make any payments or
provide any other benefits to Mr. Frazer hereunder until eight (8) days have
passed since the signing of this Release so long as no revocation has occurred.
Mr. Frazer further agrees that no fact, evidence, event or transaction currently
unknown to him but which hereafter may become known to him shall affect in any
way or manner the final and unconditional nature of this Release.
14. The foregoing represents the entire agreement between Mr. Frazer
and the Company and supersedes all prior agreements or understandings, written
or oral, between them, other than Section 12 of the Employment Agreement and
Section 26 of the Management Stockholder's Agreement. This Release may not be
changed or modified, except by a written instrument signed by Mr. Frazer, the
Company, Kohlberg Kravis Roberts & Co. L.P. and KKR 1996 Fund L.P., KKR Partners
II, L.P., Hicks, Muse, Tate & Furst Incorporated and Regal Equity Partners, L.P.
15. This Release shall be construed, interpreted and governed in
accordance with the laws of the state of Delaware without reference to rules
relating to conflicts of law.
<PAGE> 6
6
16. This Release may be executed in two or more counterparts, each of
which will be deemed an original.
- -------------------
Lewis Frazer
- -------------------
- -------------------
Address
Dated as of:
STATE OF _______ )
: ss.:
COUNTY OF _____ )
On ____________, 1998, before me personally came Lewis Frazer
to me known and known to me to be the individual described in, and who executed,
the foregoing General Release, and duly acknowledged to me that he executed
same.
---------------------------
Notary Public
<PAGE> 7
7
REGAL CINEMAS, INC
on behalf of itself and its subsidiaries
By:
-------------------
Name:
Title:
Dated as of: _________, 1998.
KOHLBERG KRAVIS ROBERTS & CO. L.P.
By: KKR & CO. L.L.C., its general partner
By:
---------------------
Name:
Title:
Dated as of: _________, 1998.
KKR 1996 FUND L.P.
By: KKR Associates 1996 L.P., its general partner
By: KKR 1996 GP L.L.C., its general partner
By:
---------------------
Name:
Title:
Dated as of: __________, 1998.
<PAGE> 8
8
KKR 1996 FUND L.P.
By: KKR Associates 1996 L.P., its general partner
By: KKR 1996 GP L.L.C., its general partner
By:
------------
Name:
Title:
Dated as of: __________, 1998.
KKR PARTNERS II, L.P.
By: KKR Associates, L.P., its general partner
By:
----------------
Name:
Title:
Dated as of: __________, 1998.
REGAL EQUITY PARTNERS, L.P.
By: TOH/Ranger, L.LC., its general partner
By:
----------------
Authorized Signatory
Dated as of: __________, 1998.
<PAGE> 9
9
HICKS, MUSE, TATE & FURST INCORPORATED
By:
----------------
Name:
Title:
Dated as of: ___________, 1998.
<PAGE> 1
EXHIBIT 21
Subsidiaries
------------
1. R.C. Cobb, Inc.
2. Cobb Finance Corp.
3. Regal Investment Company
4. Act III Cinemas, Inc.
5. Act III Theatres, Inc.
6. A 3 Theatres of Texas, Inc.
7. A 3 Theatres of San Antonio, Ltd.
8. General American Theatres, Inc.
9. Broadway Cinemas, Inc.
10. TEMT Alaska, Inc.
11. JR Cinemas, Inc.
12. Eastgate Theatres, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-74634, 333-13291,333-13295 and 333-52943 of Regal Cinemas, Inc. on Form S-8
of our report dated February 16, 1999, appearing in the Annual Report on Form
10-K of Regal Cinemas, Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Regal Cinemas, Inc. on Form S-8 (File Nos. 333-52943, 33-74634, 333-13291, and
333-13295) of our report dated February 6, 1998, on our audits of the
consolidated financial statements of Regal Cinemas, Inc. as of January 2, 1997
and January 1, 1998, and for each of the three years in the period ended January
1, 1998, which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Knoxville, Tennessee
March 29, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the:
1. Registration Statement (Form S-8 No. 33-74634) pertaining to the Regal
Cinemas, Inc. Participant Stock Option Plan, Regal Cinemas, Inc. Employee Stock
Option Plan, 1993 Employee Stock Incentive Plan and 1993 Outside Directors'
Stock Option Plan of Regal Cinemas, Inc.;
2. Registration Statement (Form S-8 No. 333-13295) pertaining to the 401(k)
Profit Sharing Plan of Regal Cinemas, Inc.;
3. Registration Statement (Form S-8 No. 333-13291) pertaining to the 1993
Employee Stock Incentive Plan of Regal Cinemas, Inc.;
4. Registration Statement (Form S-8 No. 333-52943) pertaining to the Regal
Cinemas, Inc. Participant Stock Option Plan, Regal Cinemas, Inc. Employee Stock
Option Plan, 1993 Employee Stock Incentive Plan, and 1998 Stock Purchase and
Option Plan for Key Employees of Regal Cinemas, Inc.;
of our report dated July 2, 1997 (with respect to the consolidated financial
statements of Cobb Theatres, L.L.C. for the year ended December 31, 1996
included in the Current Report on Form 8-K/A (Amendment No. 1) dated September
10, 1997 of Regal Cinemas, Inc.) appearing in the Annual Report (Form 10-K) of
Regal Cinemas, Inc. for the fiscal year ended December 31, 1998.
/s/ Ernst & Young LLP
---------------------
Birmingham, Alabama
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REGAL CINEMAS, INC. FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-02-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 20,621
<SECURITIES> 0
<RECEIVABLES> 3,161
<ALLOWANCES> 0
<INVENTORY> 4,014
<CURRENT-ASSETS> 42,066
<PP&E> 1,234,212
<DEPRECIATION> 139,643
<TOTAL-ASSETS> 1,662,004
<CURRENT-LIABILITIES> 116,850
<BONDS> 1,334,542
0
0
<COMMON> 197,427
<OTHER-SE> 5,108
<TOTAL-LIABILITY-AND-EQUITY> 1,662,004
<SALES> 202,418
<TOTAL-REVENUES> 707,027
<CGS> 31,657
<TOTAL-COSTS> 283,002
<OTHER-EXPENSES> 448,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,301
<INCOME-PRETAX> (83,828)
<INCOME-TAX> 22,170
<INCOME-CONTINUING> (61,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 11,890
<CHANGES> 0
<NET-INCOME> (73,548)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
