<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2000
Commission file number: 333-52943
---------
REGAL CINEMAS, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Tennessee 62-1412720
--------------------------------------- ------------------------------------
(State or Other Jurisdiction of (Internal Revenue Service Employer
Incorporation or Organization) Identification Number)
7132 Commercial Park Drive
Knoxville, TN 37918
-------------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip code)
Registrant's Telephone Number, Including Area Code: 865/922-1123
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Common Stock outstanding - 216,756,461 shares at August 14, 2000
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 29, DECEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,319 $ 40,604
Accounts receivable 1,705 2,752
Reimbursable construction advances 9,870 20,250
Inventories 5,151 5,050
Prepaid and other current assets 19,563 18,283
Assets held for sale 9,256 9,670
Deferred income tax asset 633 633
----------- -----------
Total current assets 80,497 97,242
PROPERTY AND EQUIPMENT:
Land 88,494 113,516
Buildings and leasehold improvements 1,103,660 999,012
Equipment 484,854 453,751
Construction in progress 69,900 75,879
----------- -----------
1,746,908 1,642,158
Accumulated depreciation and amortization (218,973) (185,409)
----------- -----------
Total property and equipment, net 1,527,935 1,456,749
GOODWILL, net of accumulated amortization of
$26,187 and $20,952, respectively 379,969 398,567
DEFERRED INCOME TAX ASSET 113,631 86,075
OTHER ASSETS 39,981 41,576
----------- -----------
TOTAL ASSETS $ 2,142,013 $ 2,080,209
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,288 $ 6,537
Accounts payable 49,751 101,152
Accrued expenses 75,060 56,701
----------- -----------
Total current liabilities 132,099 164,390
LONG-TERM DEBT, less current maturities:
Long-term debt 1,789,972 1,679,217
Capital lease obligations 18,712 19,722
Lease financing arrangements 110,058 74,199
OTHER LIABILITIES 31,016 28,521
----------- -----------
TOTAL LIABILITIES 2,081,857 1,966,049
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par: 100,000,000 shares
authorized, none issued -- --
Common stock, no par: 500,000,000 shares
authorized; 216,756,461 and 216,873,501
shares issued and outstanding at
June 29, 2000 and December 30, 1999 199,661 199,778
Loans to shareholders (6,271) (6,388)
Retained deficit (133,234) (79,230)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY $ 60,156 $ 114,160
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,142,013 $ 2,080,209
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statement.
<PAGE> 3
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Admissions $ 182,544 $ 175,055 $ 342,775 $ 307,298
Concessions 74,488 73,534 140,526 129,143
Other operating revenue 11,597 14,121 23,508 24,607
--------- --------- --------- ---------
Total revenues 268,629 262,710 506,809 461,048
--------- --------- --------- ---------
OPERATING EXPENSES:
Film rental and advertising 103,644 105,502 184,566 172,755
Cost of concessions and other 11,506 11,929 21,860 21,421
Theatre operating expenses 107,254 93,428 212,531 177,354
General and administrative 8,066 8,532 16,335 16,129
Depreciation and amortization 21,702 21,121 43,358 40,651
Theatre closing costs 9,101 -- 12,867 --
Loss (gain) on disposal of
operating assets (240) -- 287 --
Loss on impairment of fixed assets 10,245 -- 14,503 --
--------- --------- --------- ---------
Total operating expenses 271,278 240,512 506,307 428,310
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (2,649) 22,198 502 32,738
OTHER INCOME (LOSS):
Interest expense (42,174) (33,436) (82,596) (63,628)
Interest income 248 113 506 316
Other -- 64 -- 100
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (44,575) (11,061) (81,588) (30,474)
BENEFIT FROM INCOME TAXES 15,157 3,632 27,584 10,405
--------- --------- --------- ---------
NET LOSS $ (29,418) $ (7,429) $ (54,004) $ (20,069)
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
REGAL CINEMAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 29, JULY 1,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (54,004) $ (20,069)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 43,359 40,651
Loss on impairment of assets 14,503 --
Loss on disposal of operating assets 287 --
Theatre closing costs 12,867 --
Deferred income taxes (27,556) --
Changes in operating assets and liabilities:
Accounts receivable 1,047 1,916
Inventories (101) (1,493)
Prepaids and other assets 367 (5,542)
Accounts payable (38,602) (50,432)
Accrued expenses and other liabilities 7,987 (7,154)
--------- ---------
Net cash used in operating activities (39,846) (42,123)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (99,443) (218,737)
Proceeds from sales of fixed assets 13,917 --
Net change in reimbursable construction advances 10,380 --
Investment in goodwill and other assets -- (84)
--------- ---------
Net cash used in investing activities (75,146) (218,821)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 147,000 245,000
Payments made on long-term debt (38,293) (5,277)
Exercise of warrants, options and compensation expense -- 600
--------- ---------
Net cash provided by financing activities 108,707 240,323
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (6,285) (20,621)
CASH AND CASH EQUIVALENTS, beginning of period 40,604 20,621
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 34,319 $ --
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statement.
<PAGE> 5
REGAL CINEMAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 THE COMPANY AND BASIS OF PRESENTATION
Regal Cinemas, Inc. and its wholly owned subsidiaries (the "Company" or
"Regal") operate multi-screen motion picture theatres principally
throughout the eastern and northwestern United States. The Company
formally operates on a fiscal year ending on the Thursday closest to
December 31.
The Company, without audit has prepared the condensed consolidated
balance sheet as of June 29, 2000, the condensed consolidated
statements of operations for the three and six month periods ended June
29, 2000 and July 1, 1999, and the condensed consolidated statements of
cash flows for the six months ended June 29, 2000 and July 1, 1999. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly in all material
respects the financial position, results of operations and cash flows
for all periods presented have been made. The December 30, 1999
information has been derived from the audited December 30, 1999 balance
sheet of the Company.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report filed on Form 10-K dated March 29, 2000.
The results of operations for the three-month period ended June 29,
2000 are not necessarily indicative of the operating results for the
full year.
<PAGE> 6
2 LONG-TERM DEBT
Long-term debt at June 29, 2000 and December 30, 1999, consists of the
following (in thousands):
<TABLE>
<CAPTION>
JUN. 29, DEC. 30,
(IN THOUSANDS) 2000 1999
<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 $ 600,000
$200,000 of the Company's senior subordinated debentures due December
15, 2010, with interest payable semiannually at 8.875%. Debentures are
redeemable, in whole or in part, at the option of the Company at any
time on or after December 15, 2003, at the redemption prices (expressed
as percentages of the principal amount thereof) set forth below
together with accrued and unpaid interest to the redemption date, if
redeemed during the 12 month period beginning on December 15 of the
years indicated:
REDEMPTION
YEAR PRICE
2003 104.750%
2004 103.328%
2005 101.219%
2006 101.109%
2007 and thereafter 100.000% 200,000 600,000
Term Loans 505,000 508,750
Revolving credit facility 465,000 370,000
Equipment financing note payable, payable in varying quarterly
installments through April 1, 2005, including interest at
Libor plus 3.25% (9.56% at June 29, 2000), collateralized
by related equipment 19,750 --
Capital lease obligations, 11.5% to 14.0%, maturing in
various installments through 2024 20,915 21,311
Lease financing arrangements, 11.5%, maturing in
various installments through 2019 111,392 74,737
Other 3,973 4,877
----------- -----------
1,926,030 1,779,675
Less current maturities (7,288) (6,537)
----------- -----------
Total long-term obligations $ 1,918,742 $ 1,773,138
=========== ===========
</TABLE>
CREDIT FACILITIES - The Company entered into credit facilities provided
by a syndicate of financial institutions. In August 1998, December
1998, and March 1999, such credit facilities were amended. These credit
facilities (the "Credit Facilities") now include a $500.0 million
Revolving Credit Facility (including the availability of Revolving
Loans, Swing Line Loans, and Letters of Credit) and three term loan
facilities: Term A, Term B,
<PAGE> 7
and Term C (the "Term Loans"). The Company must pay an annual
commitment fee ranging from 0.2% to 0.425%, depending on the Company's
Total Leverage Ratio, as defined in the Credit Facilities, of the
unused portion of the Revolving Credit Facility. The Revolving Credit
Facility expires in June 2005. Outstanding borrowings under the
Revolving Credit Facility were $465.0 million and $370.0 million as of
June 29, 2000 and December 30, 1999, respectively.
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 length of loan. The
outstanding balance under the Term A Loan was $235.2 million at June
29, 2000 and $237.6 million at December 30, 1999 with $2.4 million due
annually through 2004 and the balance due in 2005.
Borrowings under the Term B Loan can be made at the Base Rate plus a
margin of 0.75% to 1.25% or the LIBOR Rate plus 2.0% to 2.5%, both
depending on the Total Leverage Ratio. The outstanding balance under
the Term B Loan was $137.5 million at June 29, 2000 and December 30,
1999, with the balance due in 2006.
Borrowings under the Term C Loan can be made at the Base Rate plus a
margin of 1.0% to 1.5% or the LIBOR Rate plus 2.25% to 2.75%, both
depending on the Total Leverage Ratio. The outstanding balance under
the Term C Loan was $132.3 million at June 29, 2000 and $133.7 million
at December 30, 1999 with $1.35 million due annually through 2006, and
the balance 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. The Company was in compliance with such covenants as
of June 29, 2000.
The Credit Facilities are collateralized by a pledge of the stock of
certain of the Company's domestic subsidiaries. The Company's payment
obligations under certain of the Credit Facilities are guaranteed by
its direct and indirect U.S. subsidiaries.
LEASE FINANCING ARRANGEMENTS - The Emerging Issues Task Force (EITF)
released in fiscal 1998, Issue No. 97-10, The Effect of Lessee
Involvement in Asset Construction. Issue No. 97-10 is applicable to
entities involved on behalf of an owner-lessor with the construction of
an asset that will be leased to the lessee when construction of the
asset is completed. Issue No. 97-10 requires the Company be considered
the owner (for accounting purposes) of these types of projects during
the construction period as well as when the construction of the asset
is completed. Therefore, the Company has recorded such leases as lease
financing arrangements on the accompanying balance sheet. As Issue
97-10 applies to construction projects committed to after May 21, 1998,
the majority of the Company's construction projects for leased theatre
sites in the 2000 fiscal year will be reported as on balance sheet
financing.
3 INCOME TAXES
The effective income tax rate for the three-month periods ending June
29, 2000 (34.0%) and July 1, 1999 (32.8%) differs from the statutory
income tax rate principally due to non-deductible goodwill amortization
and the inclusion of state income taxes.
<PAGE> 8
4 CAPITAL STOCK
Earnings per share information is not presented herein as the Company's
shares do not trade in a public market. After the Recapitalization, the
Company effected a stock split in the form of a stock dividend
resulting in a price per share of $5.00, which $5.00 per share price is
equivalent to the $31.00 per share consideration paid in the Merger.
The Company's common shares issued and outstanding throughout the
accompanying financial statements and notes reflect the retroactive
effect of the Recapitalization stock split.
5 LOSS ON IMPAIRMENT OF ASSETS
ASSET IMPAIRMENT - The Company periodically reviews the carrying value
of long-lived assets, including goodwill, for impairment based on
expected future cash flows. Such reviews are performed as part of the
Company's budgeting process and are performed on an individual theatre
level, the lowest level of identifiable cash flows. Factors considered
in management's estimate of future theatre cash flows include
historical operating results over complete operating cycles, current
and anticipated impacts of competitive openings in individual markets,
and anticipated sales or dispositions of theatres.
Management uses the results of this analysis to determine whether
impairment has occurred. The resulting impairment loss is measured as
the amount by which the carrying value of the asset exceeds fair value,
which is estimated using discounted cash flows. Discounted cash flows
also include estimated proceeds for the sale of owned properties in the
instances where management intends to sell the location. This analysis
has resulted in the following impairment losses being recognized:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Write-down of theatre
property and equipment $ 1,022 $ -- $ 1,749 $ --
Write-off of goodwill 9,223 -- 12,754
------- -------- ------- --------
Total $10,245 $ -- $14,503 $ --
======= ======== ======= ========
</TABLE>
THEATRE CLOSING AND LOSS ON DISPOSAL COSTS - During 1999, the Company's
management team began an extensive analysis of under-performing
locations. Consequently, the Company decided to close or relocate a
number of theatre locations as well as discontinue plans to build new
theatres in certain markets. During the second quarter of 2000, the
Company recorded $0.2 million as the net gain on disposal of these
locations as well as the write-off of certain costs incurred to develop
sites which have now been discontinued. In conjunction with certain
closed locations, a reserve for lease termination costs of $6.9 million
has also been recorded. This reserve for lease termination costs
represents management's best estimate of the potential costs for
exiting these leases and are based on analyses of the properties,
correspondence with the landlord, exploratory discussions with
potential sublessees and individual market conditions.
<PAGE> 9
The following is the activity in this reserve during 2000:
<TABLE>
<S> <C>
Beginning balance $ 4,269
Rent and other termination payments (9,744)
Additional theatre closings 13,967
Revision of prior estimates (1,563)
----------
Ending balance $ 6,929
==========
</TABLE>
Theatre properties owned by the Company which were closed during the
second quarter of 2000 and 1999 fiscal year are classified as assets
held for sale on the accompanying balance sheets. Such assets are
recorded at the estimated net realizable value of the individual
locations.
6 CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(IN THOUSANDS) JUNE 29, JULY 1,
2000 1999
-------- -------
<S> <C> <C>
Supplemental information on cash flows:
Interest paid $ 82,000 $ 62,361
Income taxes paid (refunds received), net 246 (4,796)
</TABLE>
NONCASH TRANSACTIONS:
JUNE 29, 2000:
Pursuant to EITF 97-10, the Company recorded lease financing
arrangements and net assets of $37.6 million.
The Company purchased and retired 23,408 shares of common stock valued
at $0.1 million in exchange for canceling notes receivables from
certain shareholders.
<PAGE> 10
ITEM 2.
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 Cinemas, Inc. (the "Company") should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto included herein.
BACKGROUND OF REGAL
The Company has achieved significant growth in theatres and screens since its
formation in November of 1989. Since inception through June 29, 2000, the
Company has acquired 269 theatres with 2,128 screens (net of subsequently closed
locations), developed 153 new theatres with 2,183 screens and added 168 new
screens to existing theatres. Theatres developed by the Company typically
generate positive theatre level cash flow within the first nine months following
commencement of operation and reach a mature level of attendance within one to
three years following commencement of operation. Theatre closings have had no
significant effect on the operations of the Company, but there can be no
assurance made with respect to the impact of future theatre closing on the
results of operations of the Company. See the section "Other" below.
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, on-screen
advertisements, and rebates from concession vendors. Direct theatre costs
consist of film rental and advertising costs, costs of concessions and theatre
operating expenses. Film rental costs 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 June 29, 2000,
approximately 13.7% 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.
<PAGE> 11
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>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
Admissions 68.0 66.6 67.6 66.7
Concessions 27.7 28.0 27.7 28.0
Other operating revenue 4.3 5.4 4.7 5.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Film rental and advertising 38.6 40.2 36.4 37.5
Cost of concessions and other 4.3 4.5 4.3 4.6
Theatre operating expenses 39.9 35.6 41.9 38.5
General and administrative 3.0 3.2 3.2 3.5
Depreciation and amortization 8.1 8.1 8.6 8.8
Theatre closing costs 3.4 0.0 2.5 0.0
Loss on disposal of operating assets (0.1) 0.0 0.1 0.0
Loss on impairment of fixed assets 3.8 0.0 2.9 0.0
----- ----- ----- -----
Total operating expenses 101.0 91.6 99.9 92.9
----- ----- ----- -----
OPERATING INCOME (LOSS) (1.0) 8.4 0.1 7.1
OTHER INCOME (LOSS):
Interest expense (15.7) (12.7) (16.3) (13.8)
Interest income 0.1 0.1 0.1 0.1
Other 0.0 0.0 0.0 0.0
----- ----- ----- -----
LOSS BEFORE INCOME TAXES (16.6) (4.2) (16.1) (6.6)
BENEFIT FROM INCOME TAXES 5.6 1.4 5.4 2.2
----- ----- ----- -----
NET LOSS (11.0) (2.8) (10.7) (4.4)
===== ===== ===== =====
</TABLE>
<PAGE> 12
THREE MONTHS ENDED JUNE 29, 2000 AND JULY 1, 1999
TOTAL REVENUES - Total revenues for the second quarter of fiscal 2000
increased by 2.3% to $268.6 million from $262.7 million in the comparable 1999
period. This increase was primarily due to increased ticket prices. Box office
ticket prices for the second quarter of 2000 averaged $5.35, which was 7.4%
higher than the $4.98 average ticket price in the second quarter of 1999.
Average concession prices also were higher in the second quarter of 2000 ($2.18)
versus the second quarter in 1999 ($2.09). The higher prices per admission
increased revenue by $16.2 million which helped offset the effect of lower
attendance in the second quarter of 2000 (34.1 million admissions) as compared
to the 1999 period (35.1 million admissions). The decline in attendance caused a
2000 period shortfall of $7.7 million as compared to the 1999 period as well as
a $2.6 million shortfall of other revenue primarily relating to the Company's
entertainment centers.
DIRECT THEATRE COSTS - Direct theatre costs increased by 5.5% to $222.4
million in the second quarter 2000 from $210.9 million in the second quarter of
1999. Direct theatre costs as a percentage of total revenues increased to 82.8%
in the 2000 period from 80.3% in the 1999 period. The increase was primarily
attributable to increased occupancy and rent costs resulting from the additional
theatre locations opened by the Company in the last twelve months as well as the
decline in attendance in the 2000 period as compared to the 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative
expenses decreased by 5.5% to $8.1 million in the second quarter of 2000 from
$8.5 million in the second quarter 1999. As a percentage of total revenues,
general and administrative expenses decreased to 3.0% in the 2000 period from
3.2% in the 1999 period.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense
increased in the second quarter of 2000 by 2.8% to $21.7 million from $21.1
million in the second quarter of 1999. The slight increase is due to the
additional depreciation resulting from the Company's expansion efforts offset by
the effects of asset write-offs due to theatre closing and asset impairment.
OPERATING INCOME (LOSS) - Operating income (loss) for the second
quarter 2000 decreased to $(2.7) million from $22.2 million in the second
quarter 1999. The decrease is primarily due to theatre closing and impairment
charges together totaling $19.1 million.
INTEREST EXPENSE - Interest expense increased in the second quarter of
2000 to $42.2 million from $33.4 million in the second quarter of 1999. The
increase is primarily due to higher average borrowings as well as increased
interest rates.
INCOME TAXES - The benefit from income taxes in the second quarter of
2000 was $15.2 million as compared to $3.6 million in the second quarter of
1999. The effective tax rate was 34.0% in the 2000 period as compared to 32.8%
in the 1999 period. Both periods differ from the expected rate due to
non-deductible goodwill and the inclusion of state income taxes.
NET LOSS - The net loss in the second quarter of 2000 was $29.4 million
as compared to $7.4 million in the second quarter of 1999. The net loss was
11.0% of total revenues in the second quarter of 2000 as compared to 2.8% of
total revenues in the 1999 period.
IMPAIRMENT AND OTHER DISPOSAL CHARGES - The Company periodically
reviews the carrying value of long-lived assets, including goodwill, for
impairment based on expected future cash flows. Such reviews are performed as
part of the Company's budgeting process and are performed on an individual
theatre level, the lowest level of identifiable cash flows. Factors considered
in management's estimate of future theatre cash flows include historical
operating results over complete operating cycles, current and anticipated
impacts of competitive openings in individual markets, and anticipated closings
or dispositions of theatres. Management uses the results of this analysis to
determine whether impairment has occurred. The resulting
<PAGE> 13
impairment loss is measured as the amount by which the carrying value of the
assets exceeds fair value which is estimated using discounted cash flows.
Discounted cash flows also include estimated proceeds for the sale of owned
properties in the instances where management intends to sell the location. This
analysis resulted in the recording of a $10.2 million impairment charge during
the second quarter of 2000. Additionally, the Company continuously monitors and
evaluates the performance of its theatres on a site by site basis. As part of
this analysis, the Company targets under-performing locations for closure.
During the second quarter of 2000 the Company recorded $0.2 million as the net
gain on disposal of certain locations previously identified for closure. In
conjunction with certain other locations, a reserve for lease termination costs
of $6.9 million has also been recorded. This reserve for lease termination costs
represents management's best estimate of the potential costs for exiting these
leases and are based on analyses of the properties, correspondence with the
landlord, exploratory discussion with potential sublessees and individual market
conditions.
SIX MONTHS ENDED JUNE 29, 2000 AND JULY 1, 1999
TOTAL REVENUES - Total revenues for the six-month period ending June
29, 2000 increased by 9.9% to $506.8 million from $461.0 million in the
corresponding period of 1999. This increase was primarily due to increased
ticket prices. Box office ticket prices for the six- month period ended June 29,
2000 averaged $5.21, which was 9.2% higher than the $4.77 average ticket price
for the same period in 1999. Concession prices also were higher in the six-
month period ended June 29, 2000 ($2.14) versus the same period in 1999 ($2.00).
The higher prices per admission increased revenue by $36.8 million. Attendance
was higher in the six-month period ended June 29, 2000 (70.6 million admissions)
as compared to the 1999 period (65.8 million admissions). The increase in
attendance yielded a revenue increase of $10.1 million as compared to the 1999
period that was partially offset by a $1.1 million shortfall of other revenue,
primarily related to the Company's entertainment centers.
DIRECT THEATRE COSTS - Direct theatre costs increased by 12.8% to
$419.0 million in the six-month period ended June 29, 2000 from $371.5 million
in the corresponding period of 1999. Direct theatre costs as a percentage of
total revenues increased to 82.6% in the 2000 period from 80.6% in the 1999
period. The increase was primarily attributable to increased occupancy and rent
costs resulting from the additional theatre locations opened by the Company in
the last twelve months.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative
expenses increased by 1.3% to $16.3 million in the six-month period ended June
29, 2000 from $16.1 million in the corresponding period of 1999. As a percentage
of total revenues, general and administrative expenses decreased slightly to
3.2% in the 2000 period from 3.5% in the 1999 period.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expense
increased in the six-month period ended June 29, 2000 by 6.7% to $43.4 million
from $40.7 million in the corresponding period of 1999. The increase is due to
the additional depreciation resulting from the Company's expansion efforts
offset by reduced depreciation and amortization resulting from theatre closing
and asset impairment.
OPERATING INCOME - Operating income for the six-month period ended June
29, 2000 decreased to $0.5 million from $32.7 million in the first half of 1999.
The decrease is primarily due to theatre closing and impairment charges together
totaling $27.7 million.
INTEREST EXPENSE - Interest expense increased in the six-month period
ended June 29, 2000 to $82.6 million from $63.6 million in the corresponding
period of 1999. The increase is primarily due to higher average borrowings as
well as increased interest rates.
INCOME TAXES - The benefit from income taxes in the six-month period
ended June 29, 2000 was $27.6 million as compared to $10.4 million in the
corresponding period of 1999. The effective tax rate was 33.8% in the 2000
period as compared to 34.1% in the 1999 period. Both
<PAGE> 14
periods differ from the expected rate due to non-deductible goodwill and the
inclusion of state income taxes.
NET LOSS - The net loss in the six-month period ended June 29, 2000 was
$54.0 million as compared to $20.1 million in the corresponding period of 1999.
The net loss was 10.7% of total revenues in the six-month period ended June 29,
2000 as compared to 4.4% of total revenues in the 1999 period.
IMPAIRMENT AND OTHER DISPOSAL CHARGES - The Company periodically
reviews the carrying value of long-lived assets, including goodwill, for
impairment based on expected future cash flows. Such reviews are performed as
part of the Company's budgeting process and are performed on an individual
theatre level, the lowest level of identifiable cash flows. Factors considered
in management's estimate of future theatre cash flows include historical
operating results over complete operating cycles, current and anticipated
impacts of competitive openings in individual markets, and anticipated closings
or dispositions of theatres. Management uses the results of this analysis to
determine whether impairment has occurred. The resulting impairment loss is
measured as the amount by which the carrying value of the assets exceeds fair
value which is estimated using discounted cash flows. Discounted cash flows also
include estimated proceeds for the sale of owned properties in the instances
where management intends to sell the location. This analysis resulted in the
recording of a $14.5 million impairment charge during the six-month period ended
June 29, 2000. Additionally, the Company continuously monitors and evaluates the
performance of its theatres on a site-by-site basis. As part of this analysis,
the Company targets under-performing locations for closure. During the six-month
period ended June 29, 2000 the Company recorded $0.3 million as the net loss on
disposal of certain locations previously identified for closure. In conjunction
with certain other locations, a reserve for lease termination costs of $6.9
million has also been recorded. This reserve for lease termination costs
represents management's best estimate of the potential costs for exiting these
leases and are based on analyses of the properties, correspondence with the
landlord, exploratory discussion with potential sublesses and individual market
conditions.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's revenues are derived from cash box
office receipts and concession sales, 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 debt and
internally generated cash. The Company's Senior Credit Facilities provide for
borrowings of up to $1,005.0 million in the aggregate, consisting of the
Revolving Credit Facility, which permits the Company to borrow up to $500.0
million on a revolving basis and $505.0 million, in the aggregate, of term loan
borrowings under three separate term loan facilities. As of June 29, 2000, the
Company had $31.3 million of capacity 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 LIBO rate (referred to as "LIBOR Rate Loans") plus, in each
case, an applicable margin determined depending upon the Company's Total
Leverage Ratio (as defined in the Senior Credit Facilities).
On May 27, 1998, an affiliate of Kohlberg Kravis Roberts & Co. L.P.
("KKR") and an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") merged with and into the Company (the "Regal Merger"), with the Company
continuing as the surviving corporation. The consummation of the Regal
Merger resulted in a recapitalization ("Recapitalization") of the Company. In
the Recapitalization, the Company's existing holders of common stock received
cash for their shares of common stock, and KKR, Hicks Muse, DLJ Merchant Banking
Partners II, L.P. ("DLJ") and certain members of the Company's management
acquired the Company. In addition, in connection with the Recapitalization, the
Company canceled options and repurchased
<PAGE> 15
warrants held by certain directors, management and employees of the Company (the
"Option/Warrant Redemption"). The aggregate purchase price paid to effect the
Regal Merger and the Option/Warrant Redemption was approximately $1.2 billion.
The Regal Merger was financed by an offering of $400.0 million
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2008 (the
"Original Notes"), initial borrowings of $375.0 million under the Company's
current senior credit facility (as amended, the "Senior Credit Facilities") and
$776.9 million in proceeds from the investment of KKR, Hicks Muse, DLJ and
management in the Company (the "Equity Investment"). In connection with the
Recapitalization, the Company made an offer to purchase (the Tender Offer) all
$125.0 million aggregate principal amount of the previously outstanding 8 1/2%
Senior Subordinated Notes due October 1, 2007, (the "Old Regal Notes"). In
conjunction with the "Tender Offer", the Company also solicited consents to
eliminate substantially all of the covenants contained in the indenture relating
to the Old Regal Notes. The purchase price paid by the Company for the Old Regal
Notes was approximately $139.5 million, including a premium of approximately
$14.5 million.
The proceeds of the Original Note Offering, the initial borrowing under
the Company's Senior Credit Facilities and the Equity Investment were used: (i)
to fund the cash payments required to effect the Regal Merger and the
Option/Warrant Redemption; (ii) to repay and retire the Company's then existing
senior credit facilities; (iii) to repurchase the Old Regal Notes; and (iv) to
pay related fees and expenses.
On August 26, 1998, the Company acquired Act III Theatres, Inc.
("Act III"). In the Act III Merger, Act III became a wholly owned subsidiary of
the Company and each share of Act III's outstanding common stock was converted
into 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 an additional $200.0 million
aggregate principal amount of 9 1/2% Senior Subordinate Notes due 2008 (the
"Tack-On Note") under the same indenture governing the Original Notes. The
proceeds of the Tack-On Note were used to repay and retire portions of the
Senior Credit Facilities.
On December 16, 1998, the Company issued $200.0 million aggregate
principal amount of 8 7/8% Senior Subordinated Debentures due 2010 (the "Regal
Debentures"). The proceeds of the offering of the Regal Debentures 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 $42.2 million for the three-month period ended
March 30, 2000.
As of June 29, 2000, the Company's new build program consists of 9 new
theatres with 123 screens for the 2000 fiscal year. As of June 29, 2000, the
Company has opened 11 theatres with 168 screens as the balance of the 2000
program is expected to be completed by the end of the Company's fourth quarter.
The Company intends to develop 2 new theatres with 26 screens in the 2001 fiscal
year. The expected capital commitments to fund the 2000 and 2001 new build
program total approximately $220.0 million.
The Company believes that its capital needs for completion of theatre
construction and development for at least the remainder of the Company's fiscal
year will be satisfied by available borrowings under its Senior Credit
Facilities, available cash, and the proceeds from committed financing
transactions.
<PAGE> 16
In April of 2000, the Company obtained $20.0 million of equipment
financing, the proceeds of which were used to repay the Revolving Credit
Facility. In addition, the Company has obtained commitments for $45.0 million in
sale-leaseback transactions, $20.0 of which has been funded by August 14, 2000.
The Company expects to fund the remaining $25.0 million by the end of the
Company's fiscal year.
Based on the current level of operations and anticipated future growth,
the Company anticipates that its cash flow from operations, together with
borrowings under the Senior Credit Facilities and additional financing should be
sufficient to meet its anticipated requirements for working capital, capital
expenditure, interest payments and scheduled principal payments for the balance
of the Company's fiscal year. The Company is taking additional action to
generate liquidity, including the elimination of new theatre development,
pursuit of additional real estate and other financings, sales of certain
non-strategic assets and markets, and evaluating opportunities to restructure
the Company's debt or reduce the principal amount outstanding. The Company's
future operating performance and ability to service or refinance the Regal
Notes, the Regal Debentures and to extend or refinance the Senior Credit
Facilities will be subject to future economic conditions (including a
continuation of the current industry downturn) and to financial, business and
other factors (including a decline in the expected returns from our new build
program or our inability to successfully complete the restructuring described
below under "Other") 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.
OTHER
During the Company's second quarter of fiscal 2000, the Company
determined that based on the current landscape of the industry, a restructuring
of its asset base will be necessary for the long-term growth of the Company. As
part of the restructuring process, the Company is reviewing its asset base on a
market by market and theatre by theatre basis. As a result of the asset bases
analysis, the Company has targeted a significant number of underperforming and
other sites and markets for potential disposal or closure. Management believes
that the most prudent long-term strategy for the Company would be to rationalize
markets that have excess screen capacity. The Company has engaged restructuring
counsel and advisors to assist the Company in rationalizing its property holding
and occupancy costs. There can be no assurance that the Company will
successfully restructure its asset base or that any such restructuring will
enhance the long-term growth of the Company.
The Company has commenced discussions with its senior bank lenders to
seek relief from certain financial covenant obligations as of the end of the
Company's third quarter of fiscal 2000. The Company anticipates negotiating with
its senior lenders in order to reach an accommodation from such lenders by the
end of the Company's third quarter. There can be no assurance the Company will
successfully reach an agreement with its senior lenders by the end of the third
quarter. Any inability to successfully negotiate with our senior lenders would
have a material adverse effect on the operating results of the Company and may
result in deferral of debt service and/or capital programs.
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
<PAGE> 17
picture exhibitors may be adversely affected. For example, revenues declined for
the industry in 1990 and 1991.
NEW ACCOUNTING PRONOUNCEMENTS
Emerging Issues Task Force (EITF) Issue No. 97-10, The Effect of Lessee
Involvement in Asset Construction, is applicable to entities involved on behalf
of an owner-lessor with the construction of an asset that will be leased to the
lessee when construction of the asset is completed. The consensus reached in
Issue No. 97-10 applies to construction projects committed to after May 21, 1998
and to those projects that were committed to on May 21, 1998 if construction did
not commence by December 31, 1999. Issue 97-10 has required the Company to be
considered the owner (for accounting purposes) of these types of projects during
the construction period as well as when construction of the asset is completed.
Subsequent to the issuance of Issue 97-10, the Company did not amend the leasing
arrangements which were historically recorded as off-balance sheet operating
leases as such amendments would have changed the economics of the lease
agreements. Management believes a change in the economics of the lease would
have been unfavorable to the Company. Therefore, the Company is required to
record such leases as lease financing arrangements (capital leases). The
application of the provisions of EITF Issue No. 97-10 did not result in the
recording of any leases or capital leases in 1998 but did result in the
recording of approximately $74.7 million of such leases as capital leases in
1999 and $37.6 million of such leases as capital leases during 2000. The
application of the provisions of EITF Issue No. 97-10 did not have a significant
effect on the results of operations for 1999 or the first two quarters of 2000.
RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
No.133, Accounting for Derivative Instruments and Hedging Activities. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations or
financial position. The Company will adopt this Statement during the first
quarter of fiscal 2001.
SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", released in December 1999 provides guidance for applying
generally accepted accounting principles to selected revenue recognition issues.
The implementation of SAB No. 101 is required no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company does not
expect the application of SAB No. 101 to have a material impact on the Company's
consolidated financial statements.
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.
RISK FACTORS
This Form 10-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-Q, including, without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may constitute forward-looking
<PAGE> 18
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 risk factors (the "Cautionary Statements") as described in the
Company's Annual Report on Form 10-K filed March 29, 2000 ("Form 10-K"). All
forward-looking statements are qualified in their entirety by the Cautionary
Statements.
In addition to the Cautionary Statements, the reader should refer to
Form 10-K for additional guidance relating to the Company's risk factors. As
noted in the Company's Form 10-K, the Company has substantial indebtedness,
lease commitments and leverage. The Company is also anticipating the funding of
certain committed financing transactions as a means of providing liquidity
during the remainder of the 2000 fiscal year. While management believes that
such transactions will close during the 2000 fiscal year, there can be no
guarantee such financings will occur. Also, any inability to successfully
negotiate with our senior lenders would have material adverse effect on our
operating results and may impair the Company's abilities to service future
capital and other long-term commitments.
ITEM 3.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
As of June 29, 2000, the Company had entered into interest rate swap agreements
ranging from five to seven years for the management of interest rate exposure.
As of June 29, 2000, such agreements had effectively converted $270 million 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 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 March 30, 2000 was $12.4 million.
<PAGE> 19
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------------------------------------------------------
(a) Exhibits:
(27) Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
During the second quarter of fiscal 2000 ended June 29, 2000, the
Registrant filed no Current Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAL CINEMAS, INC.
Date: August 14, 2000 By: /s/ Michael L. Campbell
Michael L. Campbell, Chairman, President
and Chief Executive Officer
By: /s/ Amy Miles
Senior Vice President and
Chief Financial Officer
Exhibit Index
<TABLE>
<CAPTION>
Item Description
----------- ------------------------------------------------------------
<S> <C>
(27) Financial Data Schedule (for SEC use only).
</TABLE>
