Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors
Regal Entertainment Group:
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.
Management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of such controls as of
December 31, 2017
. This assessment was based on criteria for effective internal control over financial reporting described in the Internal Control - Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management believes that the Company's internal control over financial reporting is effective as of
December 31, 2017
.
KPMG LLP, independent registered public accounting firm of the Company's consolidated financial statements, has issued an audit report on the effectiveness of the Company's internal control over financial reporting as of
December 31, 2017
, as stated in their report which is included herein.
|
|
|
|
|
|
|
/s/ AMY E. MILES
|
|
/s/ DAVID H. OWNBY
|
|
Amy E. Miles
|
|
David H. Ownby
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
Report of Independent Registered Public Accounting Firm
To the Stockholder and Board of Directors
Regal Entertainment Group:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Regal Entertainment Group and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, deficit, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Mangement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2001.
Knoxville, Tennessee
March 1, 2018
REGAL ENTERTAINMENT GROUP
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
228.8
|
|
|
$
|
246.5
|
|
|
Trade and other receivables, net
|
|
184.0
|
|
|
155.1
|
|
|
Inventories
|
|
22.9
|
|
|
20.9
|
|
|
Prepaid expenses and other current assets
|
|
27.6
|
|
|
24.4
|
|
|
TOTAL CURRENT ASSETS
|
|
463.3
|
|
|
446.9
|
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
Land
|
|
154.8
|
|
|
131.2
|
|
|
Buildings and leasehold improvements
|
|
2,478.7
|
|
|
2,319.7
|
|
|
Equipment
|
|
1,083.4
|
|
|
1,065.7
|
|
|
Construction in progress
|
|
34.8
|
|
|
20.2
|
|
|
Total property and equipment
|
|
3,751.7
|
|
|
3,536.8
|
|
|
Accumulated depreciation and amortization
|
|
(2,238.5
|
)
|
|
(2,146.7
|
)
|
|
TOTAL PROPERTY AND EQUIPMENT, NET
|
|
1,513.2
|
|
|
1,390.1
|
|
|
GOODWILL
|
|
345.8
|
|
|
327.0
|
|
|
INTANGIBLE ASSETS, NET
|
|
43.6
|
|
|
46.0
|
|
|
DEFERRED INCOME TAX ASSET
|
|
54.5
|
|
|
56.3
|
|
|
OTHER NON-CURRENT ASSETS
|
|
422.5
|
|
|
379.4
|
|
|
TOTAL ASSETS
|
|
$
|
2,842.9
|
|
|
$
|
2,645.7
|
|
|
LIABILITIES AND DEFICIT
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Current portion of debt obligations
|
|
$
|
26.6
|
|
|
$
|
25.5
|
|
|
Accounts payable
|
|
232.2
|
|
|
194.8
|
|
|
Accrued expenses
|
|
73.8
|
|
|
70.7
|
|
|
Deferred revenue
|
|
186.2
|
|
|
192.7
|
|
|
Income taxes payable
|
|
2.7
|
|
|
6.4
|
|
|
Other current liabilities
|
|
39.9
|
|
|
31.2
|
|
|
TOTAL CURRENT LIABILITIES
|
|
561.4
|
|
|
521.3
|
|
|
LONG-TERM DEBT, LESS CURRENT PORTION
|
|
2,339.4
|
|
|
2,197.1
|
|
|
LEASE FINANCING ARRANGEMENTS, LESS CURRENT PORTION
|
|
74.5
|
|
|
84.8
|
|
|
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION
|
|
6.7
|
|
|
6.9
|
|
|
NON-CURRENT DEFERRED REVENUE
|
|
404.6
|
|
|
412.3
|
|
|
OTHER NON-CURRENT LIABILITIES
|
|
312.1
|
|
|
262.2
|
|
|
TOTAL LIABILITIES
|
|
3,698.7
|
|
|
3,484.6
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
DEFICIT:
|
|
|
|
|
|
Class A common stock, $0.001 par value; 500,000,000 shares authorized, 133,306,994 and 133,080,279 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively
|
|
0.1
|
|
|
0.1
|
|
|
Class B common stock, $0.001 par value; 200,000,000 shares authorized, 23,708,639 shares issued and outstanding at December 31, 2017 and December 31, 2016
|
|
—
|
|
|
—
|
|
|
Preferred stock, $0.001 par value; 50,000,000 shares authorized; none issued and outstanding
|
|
—
|
|
|
—
|
|
|
Additional paid-in capital (deficit)
|
|
(929.4
|
)
|
|
(934.4
|
)
|
|
Retained earnings
|
|
70.9
|
|
|
96.5
|
|
|
Accumulated other comprehensive income (loss), net
|
|
2.5
|
|
|
(1.3
|
)
|
|
TOTAL STOCKHOLDERS' DEFICIT OF REGAL ENTERTAINMENT GROUP
|
|
(855.9
|
)
|
|
(839.1
|
)
|
|
Noncontrolling interest
|
|
0.1
|
|
|
0.2
|
|
|
TOTAL DEFICIT
|
|
(855.8
|
)
|
|
(838.9
|
)
|
|
TOTAL LIABILITIES AND DEFICIT
|
|
$
|
2,842.9
|
|
|
$
|
2,645.7
|
|
See accompanying notes to consolidated financial statements.
REGAL ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
REVENUES:
|
|
|
|
|
|
|
|
Admissions
|
|
$
|
2,008.1
|
|
|
$
|
2,061.7
|
|
|
$
|
2,038.2
|
|
|
Concessions
|
|
930.2
|
|
|
932.6
|
|
|
901.7
|
|
|
Other operating revenues
|
|
224.7
|
|
|
202.8
|
|
|
187.4
|
|
|
TOTAL REVENUES
|
|
3,163.0
|
|
|
3,197.1
|
|
|
3,127.3
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
Film rental and advertising costs
|
|
1,067.8
|
|
|
1,107.3
|
|
|
1,093.1
|
|
|
Cost of concessions
|
|
123.8
|
|
|
119.5
|
|
|
114.4
|
|
|
Rent expense
|
|
426.8
|
|
|
427.6
|
|
|
421.5
|
|
|
Other operating expenses
|
|
912.6
|
|
|
883.2
|
|
|
863.7
|
|
|
General and administrative expenses (including share-based compensation of $9.2, $8.8 and $8.3 for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively)
|
|
86.6
|
|
|
84.6
|
|
|
78.8
|
|
|
Depreciation and amortization
|
|
249.7
|
|
|
230.7
|
|
|
216.8
|
|
|
Net loss on disposal and impairment of operating assets and other
|
|
24.0
|
|
|
4.8
|
|
|
19.7
|
|
|
TOTAL OPERATING EXPENSES
|
|
2,891.3
|
|
|
2,857.7
|
|
|
2,808.0
|
|
|
INCOME FROM OPERATIONS
|
|
271.7
|
|
|
339.4
|
|
|
319.3
|
|
|
OTHER EXPENSE (INCOME):
|
|
|
|
|
|
|
|
Interest expense, net
|
|
125.1
|
|
|
128.1
|
|
|
129.6
|
|
|
Loss on extinguishment of debt
|
|
1.3
|
|
|
2.9
|
|
|
5.7
|
|
|
Earnings recognized from NCM
|
|
(24.1
|
)
|
|
(29.4
|
)
|
|
(31.0
|
)
|
|
Gain on sale of Open Road Films investment
|
|
(17.8
|
)
|
|
—
|
|
|
—
|
|
|
Equity in income of non-consolidated entities and other, net
|
|
(39.2
|
)
|
|
(43.9
|
)
|
|
(38.3
|
)
|
|
Merger related expenses
|
|
12.5
|
|
|
—
|
|
|
—
|
|
|
TOTAL OTHER EXPENSE, NET
|
|
57.8
|
|
|
57.7
|
|
|
66.0
|
|
|
INCOME BEFORE INCOME TAXES
|
|
213.9
|
|
|
281.7
|
|
|
253.3
|
|
|
PROVISION FOR INCOME TAXES
|
|
101.6
|
|
|
111.2
|
|
|
100.1
|
|
|
NET INCOME
|
|
112.3
|
|
|
170.5
|
|
|
153.2
|
|
|
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST, NET OF TAX
|
|
—
|
|
|
(0.1
|
)
|
|
0.2
|
|
|
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
|
|
$
|
112.3
|
|
|
$
|
170.4
|
|
|
$
|
153.4
|
|
|
EARNINGS PER SHARE OF CLASS A AND CLASS B COMMON STOCK (NOTE 12):
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
|
$
|
1.09
|
|
|
$
|
0.99
|
|
|
Diluted
|
|
$
|
0.72
|
|
|
$
|
1.09
|
|
|
$
|
0.98
|
|
|
AVERAGE SHARES OUTSTANDING (in thousands):
|
|
|
|
|
|
|
|
Basic
|
|
156,336
|
|
|
155,995
|
|
|
155,680
|
|
|
Diluted
|
|
156,986
|
|
|
156,804
|
|
|
156,511
|
|
|
DIVIDENDS DECLARED PER COMMON SHARE
|
|
$
|
0.88
|
|
|
$
|
0.88
|
|
|
$
|
0.88
|
|
See accompanying notes to consolidated financial statements.
REGAL ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
NET INCOME
|
$
|
112.3
|
|
|
$
|
170.5
|
|
|
$
|
153.2
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
|
|
|
|
|
|
Change in fair value of interest rate swap transactions
|
2.0
|
|
|
(2.3
|
)
|
|
(4.3
|
)
|
|
Amounts reclassified to net income from interest rate swaps
|
1.6
|
|
|
3.6
|
|
|
4.5
|
|
|
Change in fair value of available for sale securities
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
Reclassification adjustment for gain on sale of available for sale securities recognized in net income
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
Change in fair value of equity method investee interest rate swaps
|
0.2
|
|
|
—
|
|
|
(0.6
|
)
|
|
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
3.8
|
|
|
0.8
|
|
|
(0.6
|
)
|
|
TOTAL COMPREHENSIVE INCOME, NET OF TAX
|
116.1
|
|
|
171.3
|
|
|
152.6
|
|
|
Comprehensive (income) loss attributable to noncontrolling interest, net of tax
|
—
|
|
|
(0.1
|
)
|
|
0.2
|
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST, NET OF TAX
|
$
|
116.1
|
|
|
$
|
171.2
|
|
|
$
|
152.8
|
|
See accompanying notes to consolidated financial statements.
REGAL ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF DEFICIT
(in millions, except amounts of cash dividends declared per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
Class B
Common Stock
|
|
Additional
Paid-In
Capital
(Deficit)
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total Stockholders'
Deficit of Regal
Entertainment
Group
|
|
Noncontrolling
Interest
|
|
Total
Deficit
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
Balances, January 1, 2015
|
|
132.5
|
|
|
$
|
0.1
|
|
|
23.7
|
|
|
$
|
—
|
|
|
$
|
(941.8
|
)
|
|
$
|
48.4
|
|
|
$
|
(1.5
|
)
|
|
$
|
(894.8
|
)
|
|
$
|
(2.5
|
)
|
|
$
|
(897.3
|
)
|
|
Net income attributable to controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
153.4
|
|
|
—
|
|
|
153.4
|
|
|
—
|
|
|
153.4
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
Purchase of noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.5
|
)
|
|
—
|
|
|
—
|
|
|
(5.5
|
)
|
|
2.9
|
|
|
(2.6
|
)
|
|
Other noncontrolling interest adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
|
7.7
|
|
|
—
|
|
|
7.7
|
|
|
Tax benefits from vesting of restricted stock and other
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
Issuance of restricted stock
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash dividends declared, $0.88 per share
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(137.6
|
)
|
|
—
|
|
|
(137.7
|
)
|
|
—
|
|
|
(137.7
|
)
|
|
Balances, December 31, 2015
|
|
132.7
|
|
|
0.1
|
|
|
23.7
|
|
|
—
|
|
|
(940.0
|
)
|
|
64.2
|
|
|
(2.1
|
)
|
|
(877.8
|
)
|
|
0.2
|
|
|
(877.6
|
)
|
|
Net income attributable to controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
170.4
|
|
|
—
|
|
|
170.4
|
|
|
—
|
|
|
170.4
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
0.8
|
|
|
—
|
|
|
0.8
|
|
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.9
|
|
|
—
|
|
|
—
|
|
|
7.9
|
|
|
—
|
|
|
7.9
|
|
|
Tax benefits from vesting of restricted stock and other
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.3
|
)
|
|
—
|
|
|
—
|
|
|
(2.3
|
)
|
|
—
|
|
|
(2.3
|
)
|
|
Issuance of restricted stock
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash dividends declared, $0.88 per share
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(138.1
|
)
|
|
—
|
|
|
(138.1
|
)
|
|
—
|
|
|
(138.1
|
)
|
|
Balances, December 31, 2016
|
|
133.1
|
|
|
0.1
|
|
|
23.7
|
|
|
—
|
|
|
(934.4
|
)
|
|
96.5
|
|
|
(1.3
|
)
|
|
(839.1
|
)
|
|
0.2
|
|
|
(838.9
|
)
|
|
Net income attributable to controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
112.3
|
|
|
—
|
|
|
112.3
|
|
|
—
|
|
|
112.3
|
|
|
Other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.8
|
|
|
3.8
|
|
|
—
|
|
|
3.8
|
|
|
Other noncontrolling interest adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
Share-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
|
—
|
|
|
8.6
|
|
|
Tax benefits from vesting of restricted stock and other
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.6
|
)
|
|
0.3
|
|
|
—
|
|
|
(3.3
|
)
|
|
—
|
|
|
(3.3
|
)
|
|
Issuance of restricted stock
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash dividends declared, $0.88 per share
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(138.2
|
)
|
|
—
|
|
|
(138.2
|
)
|
|
—
|
|
|
(138.2
|
)
|
|
Balances, December 31, 2017
|
|
133.3
|
|
|
$
|
0.1
|
|
|
23.7
|
|
|
$
|
—
|
|
|
$
|
(929.4
|
)
|
|
$
|
70.9
|
|
|
$
|
2.5
|
|
|
$
|
(855.9
|
)
|
|
$
|
0.1
|
|
|
$
|
(855.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
REGAL ENTERTAINMENT GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
112.3
|
|
|
$
|
170.5
|
|
|
$
|
153.2
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
249.7
|
|
|
230.7
|
|
|
216.8
|
|
|
Amortization of debt discount
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
|
Amortization of debt acquisition costs
|
|
4.8
|
|
|
4.6
|
|
|
4.7
|
|
|
Share-based compensation expense
|
|
9.2
|
|
|
8.8
|
|
|
8.3
|
|
|
Deferred income tax provision (benefit)
|
|
(0.6
|
)
|
|
2.4
|
|
|
(10.9
|
)
|
|
Net loss on disposal and impairment of operating assets and other
|
|
24.0
|
|
|
14.6
|
|
|
19.7
|
|
|
Gain on lease termination
|
|
—
|
|
|
(9.8
|
)
|
|
—
|
|
|
Equity in income of non-consolidated entities
|
|
(41.2
|
)
|
|
(51.4
|
)
|
|
(44.6
|
)
|
|
Gain on sale of Open Road Films investment
|
|
(17.8
|
)
|
|
—
|
|
|
—
|
|
|
Proceeds from business interruption insurance claim
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
|
1.3
|
|
|
2.9
|
|
|
5.7
|
|
|
Gain on sale of available for sale securities
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
Non-cash (gain) loss on interest rate swaps
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
0.7
|
|
|
Non-cash rent income
|
|
(7.0
|
)
|
|
(6.3
|
)
|
|
(6.2
|
)
|
|
Cash distributions on investments in other non-consolidated entities
|
|
12.3
|
|
|
12.0
|
|
|
3.6
|
|
|
Excess cash distribution on NCM shares
|
|
15.6
|
|
|
13.8
|
|
|
15.4
|
|
|
Landlord contributions
|
|
91.8
|
|
|
75.3
|
|
|
32.2
|
|
|
Proceeds from litigation settlement
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
Proceeds from lease termination and other
|
|
—
|
|
|
10.6
|
|
|
—
|
|
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
Trade and other receivables
|
|
(27.7
|
)
|
|
—
|
|
|
(19.0
|
)
|
|
Inventories
|
|
(1.3
|
)
|
|
1.5
|
|
|
(4.7
|
)
|
|
Prepaid expenses and other assets
|
|
(3.6
|
)
|
|
(2.5
|
)
|
|
1.5
|
|
|
Accounts payable
|
|
31.1
|
|
|
(38.3
|
)
|
|
63.1
|
|
|
Income taxes payable
|
|
(3.8
|
)
|
|
6.7
|
|
|
0.2
|
|
|
Deferred revenue
|
|
(20.5
|
)
|
|
(23.6
|
)
|
|
3.6
|
|
|
Accrued expenses and other liabilities
|
|
(20.6
|
)
|
|
(11.2
|
)
|
|
(9.2
|
)
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
409.9
|
|
|
410.5
|
|
|
434.4
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(250.4
|
)
|
|
(214.9
|
)
|
|
(185.7
|
)
|
|
Proceeds from disposition of assets
|
|
16.1
|
|
|
1.4
|
|
|
12.0
|
|
|
Investment in non-consolidated entities
|
|
(11.9
|
)
|
|
(13.7
|
)
|
|
(0.4
|
)
|
|
Net cash used for acquisitions
|
|
(171.6
|
)
|
|
—
|
|
|
(9.2
|
)
|
|
Proceeds from sale of Open Road Films investment
|
|
10.3
|
|
|
—
|
|
|
—
|
|
|
Proceeds from sale of available for sale securities
|
|
—
|
|
|
3.6
|
|
|
—
|
|
|
Change in other long-term assets
|
|
(3.1
|
)
|
|
—
|
|
|
—
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(410.6
|
)
|
|
(223.6
|
)
|
|
(183.3
|
)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Cash used to pay dividends
|
|
(138.9
|
)
|
|
(138.9
|
)
|
|
(139.1
|
)
|
|
Payments on long-term obligations
|
|
(23.5
|
)
|
|
(21.7
|
)
|
|
(23.3
|
)
|
|
Landlord contributions received from lease financing arrangements
|
|
2.5
|
|
|
6.0
|
|
|
3.9
|
|
|
Cash paid for tax withholdings and other
|
|
(3.7
|
)
|
|
(3.3
|
)
|
|
(4.4
|
)
|
|
Proceeds from Amended Senior Credit Facility
|
|
1,103.7
|
|
|
1,914.6
|
|
|
963.3
|
|
|
Payoff of Amended Senior Credit Facility
|
|
(953.7
|
)
|
|
(1,914.6
|
)
|
|
(963.2
|
)
|
|
Payment of debt acquisition costs
|
|
(3.4
|
)
|
|
(2.1
|
)
|
|
(13.2
|
)
|
|
Purchase of noncontrolling interest
|
|
—
|
|
|
—
|
|
|
(2.6
|
)
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
(17.0
|
)
|
|
(160.0
|
)
|
|
(178.6
|
)
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(17.7
|
)
|
|
26.9
|
|
|
72.5
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
246.5
|
|
|
219.6
|
|
|
147.1
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
228.8
|
|
|
$
|
246.5
|
|
|
$
|
219.6
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
105.9
|
|
|
$
|
101.9
|
|
|
$
|
105.9
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
121.4
|
|
|
$
|
124.3
|
|
|
$
|
125.3
|
|
|
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Investment in NCM
|
|
$
|
6.3
|
|
|
$
|
9.9
|
|
|
$
|
9.0
|
|
|
Increase in property and equipment and other from lease financing arrangements
|
|
$
|
3.2
|
|
|
$
|
13.1
|
|
|
$
|
3.2
|
|
See accompanying notes to consolidated financial statements.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, December 31, 2016, and December 31, 2015
1. THE COMPANY AND BASIS OF PRESENTATION
Regal Entertainment Group (the "Company," "Regal," "we" or "us") is the parent company of Regal Entertainment Holdings, Inc. ("REH"), which is the parent company of Regal Cinemas Corporation ("Regal Cinemas") and its subsidiaries. Regal Cinemas' subsidiaries include Regal Cinemas, Inc. ("RCI") and its subsidiaries, which include Edwards Theatres, Inc. ("Edwards") and United Artists Theatre Company ("United Artists"). The terms Regal or the Company, REH, Regal Cinemas, RCI, Edwards and United Artists shall be deemed to include the respective subsidiaries of such entities when used in discussions included herein regarding the current operations or assets of such entities. Certain amounts in prior fiscal years have been reclassified to conform with the presentation adopted in the current year.
Regal operates one of the largest and most geographically diverse theatre circuits in the United States, consisting of
7,322
screens in
560
theatres in
43
states along with Guam, Saipan, American Samoa and the District of Columbia as of
December 31, 2017
.
During 2001 and 2002, Anschutz Company and its subsidiaries ("Anschutz") acquired controlling equity interests in United Artists, Edwards and RCI upon each of the entities' emergence from bankruptcy reorganization. In May 2002, the Company sold
18.0 million
shares of its Class A common stock in an initial public offering at a price of
$19.00
per share, receiving aggregate net offering proceeds, net of underwriting discounts, commissions and other offering expenses, of
$314.8 million
. In 2015, as a result of an internal restructuring, Anschutz Company changed its name to The Anschutz Corporation.
On December 5, 2017, Regal entered into an Agreement and Plan of Merger (the "Merger Agreement") with Cineworld Group plc, a public limited company incorporated in England and Wales ("Cineworld"), Crown Intermediate Holdco, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Cineworld ("US Holdco"), and Crown Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of US Holdco (the "Merger Sub"). The Merger Agreement provides, subject to its terms and conditions, for the acquisition of Regal by Cineworld at a price of
$23.00
in cash for each share of Regal’s Class A common stock and Class B common stock (each, a "Share"), without interest and subject to deduction for any required withholding tax (the "Merger Consideration"), through the merger of the Merger Sub with and into Regal (the "Merger"), with Regal surviving the Merger as a wholly owned, indirect subsidiary of Cineworld. Regal’s Board of Directors unanimously approved the Merger and the Merger Agreement and recommended that stockholders adopt the Merger Agreement. See Note 16—"Subsequent Events," for further developments occurring after December 31, 2017 with respect to the Merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Regal and its subsidiaries. Majority-owned subsidiaries that the Company controls are consolidated while those affiliates of which the Company owns between 20% and 50% and does not control are accounted for under the equity method. Those affiliates of which the Company owns less than 20% are generally accounted for under the cost method, unless the Company is deemed to have the ability to exercise significant influence over the affiliate, in which case the Company would account for its investment under the equity method. The results of these subsidiaries and affiliates are included in the consolidated financial statements effective with their formation or from their dates of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenues are generated principally through admissions and concessions sales with proceeds received in cash or via credit card at the point of sale. Other operating revenues consist primarily of product advertising (including vendor marketing programs) and other ancillary revenues that are recognized as income in the period earned. The Company generally recognizes payments received attributable to the marketing and advertising services provided by the Company under certain vendor programs as revenue in the periods in which the advertising is displayed or when the related impressions are delivered. Such impressions are measured by the concession product sales volume, which is a mutually agreed upon proxy of attendance and reflects the Company's marketing and advertising services delivered to its vendors. In instances where the consideration received is in excess of fair value of the advertising services provided, the excess is recorded as a reduction of concession costs.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
The Company maintains a deferred revenue balance pertaining to amounts received for agreeing to the 2007 National CineMedia exhibitor services agreement ("ESA") modification, amounts recorded in connection with the receipt of newly issued common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement described in Note 4—"Investments," and amounts received from the sale of bulk tickets and gift cards that have not been redeemed. Amortization of deferred revenue related to the amount we received for agreeing to the existing National CineMedia exhibitor services agreement modification and amounts recorded in connection with the receipt of newly issued common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement are described below in this Note 2 under "Deferred Revenue" and in Note 4—"Investments." The Company recognizes revenue associated with bulk tickets and gift cards when redeemed, or when the likelihood of redemption becomes remote. The determination of the likelihood of redemption is based on an analysis of actual historical redemption trends.
Cash Equivalents
The Company considers all unrestricted highly liquid debt instruments and investments purchased with an original maturity of
3 months
or less to be cash equivalents. At
December 31, 2017
, the Company held substantially all of its cash 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. The Company states inventories on the basis of first-in, first-out (FIFO) cost, which is not in excess of net realizable value.
Property and Equipment
The Company states property and equipment at cost. Major renewals and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are expensed currently. Gains and losses from disposition of property and equipment are included in income and expense when realized.
The Company capitalizes the cost of computer equipment, system hardware and purchased software ready for service. During the years ended
December 31, 2017
and
December 31, 2016
, the Company capitalized approximately
$14.3 million
and
$8.0 million
, respectively, of such costs, which were associated primarily with (i) new point-of-sale devices at the Company's box offices and concession stands, (ii) new ticketing kiosks, and (iii) computer hardware and software purchased for the Company's theatre locations and corporate office. The Company also capitalizes certain direct external costs associated with software developed for internal use after the preliminary software project stage is completed and Company management has authorized further funding for a software project and it is deemed probable of completion. The Company capitalizes these external software development costs only until the point at which the project is substantially complete and the software is ready for its intended purpose.
The Company records depreciation and amortization using the straight-line method over the following estimated useful lives:
|
|
|
|
|
|
|
Buildings
|
|
20 - 30 years
|
|
Equipment
|
|
3 - 20 years
|
|
Leasehold improvements
|
|
Lesser of term of lease or asset life
|
|
Computer equipment and software
|
|
3 - 5 years
|
As of
December 31, 2017
and
December 31, 2016
, included in property and equipment is
$189.3 million
and
$190.6 million
of assets accounted for under capital leases and lease financing arrangements, before accumulated depreciation of
$128.6 million
and
$118.0 million
, respectively. The Company records amortization using the straight-line method over the shorter of the lease terms or the estimated useful lives noted above.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Impairment of Long-Lived Assets
The Company reviews long-lived assets (including intangible assets, marketable equity securities and investments in non-consolidated entities as described further below) for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. The Company generally evaluates assets for impairment on an individual theatre basis, which management believes is the lowest level for which there are identifiable cash flows. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the carrying amount of the assets, the Company recognizes an impairment charge in the amount by which the carrying value of the assets exceeds their fair market value.
The Company considers historical theatre level cash flows, estimated future theatre level cash flows, theatre property and equipment carrying values, intangible asset carrying values, the age of the theatre, competitive theatres in the marketplace, the impact of recent pricing changes, strategic initiatives, available lease renewal options and other factors considered relevant in its assessment of whether or not a triggering event has occurred that indicates impairment of individual theatre assets may be necessary. For theatres where a triggering event is identified, impairment is measured based on the estimated cash flows from continuing use until the expected disposal date or the fair value of furniture, fixtures and equipment. The expected disposal date does not exceed the remaining lease period unless it is probable the lease period will be extended and may be less than the remaining lease period when the Company does not expect to operate the theatre to the end of its lease term. 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 of which the Company expects to dispose. Significant judgment is involved in determining whether a triggering event has occurred, estimating future cash flows and determining fair value. Management's estimates (Level 3 inputs as described in FASB Accounting Standards Codification ("ASC") Topic 820,
Fair Value Measurements and Disclosures
) are based on historical and projected operating performance, recent market transactions, and current industry trading multiples.
The Company's analysis relative to long-lived assets resulted in the recording of impairment charges of
$13.5 million
,
$7.9 million
and
$15.6 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively. The long-lived asset impairment charges recorded were specific to theatres that were directly and individually impacted by increased competition, adverse changes in market demographics or adverse changes in the development or the conditions of the areas surrounding the theatres we deemed other than temporary.
Leases
The majority of the Company's operations are conducted in premises occupied under non-cancelable lease agreements with initial base terms generally ranging from
15
to
20 years
. 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 our theatres provide for contingent rentals based on the revenue results of the underlying theatre and require the payment of taxes, insurance, and other costs applicable to the property. Also, certain leases contain escalating minimum rental provisions. There are no conditions imposed upon us by our lease agreements or by parties other than the lessor that legally obligate the Company to incur costs to retire assets as a result of a decision to vacate our leased properties. None of our lease agreements require us to return the leased property to the lessor in its original condition (allowing for normal wear and tear) or to remove leasehold improvements at our cost.
The Company accounts for leased properties under the provisions of ASC Topic 840,
Leases
and other authoritative accounting literature. ASC Subtopic 840-10,
Leases—Overview
requires that the Company evaluate each lease for classification as either a capital lease or an operating lease. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. As to those arrangements that are classified as capital leases, the Company records property under capital leases and a capital lease obligation in an amount equal to the lesser of the present value of the minimum lease payments to be made over the life of the lease at the beginning of the lease term, or the fair value of the leased property. The property under capital lease is amortized on a straight-line basis as a charge to expense over the lease term, as defined, or the economic life of the leased property, whichever is less. During the lease term, as defined, each minimum lease payment is allocated between a reduction of the lease obligation and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the lease obligation. The Company does not believe that exercise of the renewal options in its leases are reasonably assured at the inception of the lease agreements because such leases: (i) provide for either (a) renewal rents based on market rates or (b) renewal rents that equal or exceed the initial rents, and (ii) do not impose economic penalties upon the determination whether or not to exercise the renewal option. As a result, there are not sufficient economic incentives at the inception of the leases to consider the lease renewal options to be reasonably assured of being exercised and therefore, the initial base term is generally considered as the lease term under ASC Subtopic 840-10.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
The Company records rent expense for its operating leases with contractual rent increases in accordance with ASC Subtopic 840-20,
Leases—Operating Leases,
on a straight-line basis from the "lease commencement date" as specified in the lease agreement until the end of the base lease term.
The Company accounts for lease incentive payments received from a landlord in accordance with ASC Subtopic 840-20,
Leases—Lease Incentives
, and records the proceeds as a deferred lease incentive liability and amortizes the liability as a reduction in rent expense over the base term of the lease.
For leases in which the Company is involved with construction of the theatre, the Company accounts for the lease during the construction period under the provisions of ASC Subtopic 840-40,
Leases—Sale-Leaseback Transactions
. The landlord is typically responsible for constructing a theatre using guidelines and specifications agreed to by the Company and assumes substantially all of the risk of construction. In accordance with ASC Subtopic 840-40, if the Company concludes that it has substantially all of the construction period risks, it records a construction asset and related liability for the amount of total project costs incurred during the construction period. Once construction is completed, the Company considers the requirements under ASC Subtopic 840-40, for sale-leaseback treatment, and if the arrangement does not meet such requirements, it records the project's construction costs funded by the landlord as a financing obligation. The obligation is amortized over the financing term based on the payments designated in the contract.
In accordance with ASC Subtopic 840-20, we expense rental costs incurred during construction periods for operating leases as such costs are incurred. For rental costs incurred during construction periods for both operating and capital leases, the "lease commencement date" is the date at which we gain access to the leased asset. Historically, and for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, these rental costs have not been significant to our consolidated financial statements.
Sale and Leaseback Transactions
The Company accounts for the sale and leaseback of real estate assets in accordance with ASC Subtopic 840-40. Losses on sale leaseback transactions are recognized at the time of sale if the fair value of the property sold is less than the undepreciated cost of the property. Gains on sale and leaseback transactions are deferred and amortized over the remaining lease term.
Goodwill
The carrying amount of goodwill at
December 31, 2017
and
December 31, 2016
was approximately
$345.8 million
and
$327.0 million
, respectively. The
$18.8 million
net increase in goodwill during year ended
December 31, 2017
was primarily attributable to
$26.2 million
of goodwill recorded in connection with the Company's acquisitions of
nine
theatres with
134
screens, which are more fully described in Note 3
—
"Acquisitions," partially offset by a
$7.3 million
impairment charge to one of the Company’s reporting units as described below. The Company evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate. Under ASC Subtopic 350-20
, Intangibles-Goodwill and Other-Goodwill
, the Company has identified its reporting units to be the designated market areas in which the Company conducts its theatre operations. Goodwill impairment is evaluated using an approach requiring the Company to compute the fair value of a reporting unit and compare it with its carrying value. In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The purpose of ASU 2017-04 was to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The Company early adopted ASU 2017-04 in connection with its interim goodwill impairment test performed during the quarter ended September 30, 2017 as further described below. The Company determines fair value by using an enterprise valuation methodology determined by applying multiples to cash flow estimates less net indebtedness, which the Company believes is an appropriate method to determine fair value. There is considerable management judgment with respect to cash flow estimates and appropriate multiples and discount rates to be used in determining fair value and such management estimates fall under Level 3 within the fair value measurement hierarchy.
As part of the Company’s ongoing operations, we may close certain theatres within a reporting unit containing goodwill due to underperformance of the theatre or inability to renew our lease, among other reasons. Additionally, we generally abandon certain assets associated with a closed theatre, primarily leasehold improvements. Under ASC Topic 350,
Intangibles—Goodwill and Other
, when a portion of a reporting unit that constitutes a business is disposed of, goodwill associated with that
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
business shall be included in the carrying amount of the business in determining the gain or loss on disposal. We evaluate whether the portion of a reporting unit being disposed of constitutes a business on the date of closure. Generally, on the date of closure, the closed theatre does not constitute a business because the Company retains assets and processes on that date essential to the operation of the theatre. These assets and processes are significant missing elements impeding the operation of a business. Accordingly, when closing individual theatres, we generally do not include goodwill in the calculation of any gain or loss on disposal of the related assets.
The Company evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate. After considering various industry specific factors, the Company conducted an interim goodwill impairment assessment during the quarter ended September 30, 2017, which indicated that the carrying value of one of its reporting units exceeded its estimated fair value. As a result, the Company recorded a goodwill impairment charge of approximately
$7.3 million
. The Company's annual goodwill impairment assessment for the year ended December 31, 2016 indicated that the carrying value of one of its reporting units exceeded its estimated fair value and as a result, the Company recorded a goodwill impairment charge of approximately
$1.7 million
. The Company's annual goodwill impairment assessment for the year ended
December 31, 2015
indicated that the estimated fair value of each of its reporting units exceeded their carrying value and therefore, goodwill was not deemed to be impaired.
Intangible Assets
As of
December 31, 2017
and
December 31, 2016
, intangible assets totaled
$69.6 million
and
$66.8 million
, respectively, before accumulated amortization of
$26.0 million
and
$20.8 million
, respectively. Such intangible assets are recorded at fair value and are amortized on a straight-line basis over the estimated remaining useful lives of the assets. The Company's identifiable intangible assets substantially consist of favorable leases acquired in connection with various acquisitions since fiscal 2008. During the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company recognized
$3.8 million
,
$3.8 million
and
$3.7 million
of amortization, respectively, related to these intangible assets.
Estimated amortization expense for the next five fiscal years for such intangible assets as of
December 31, 2017
is projected below (in millions):
|
|
|
|
|
|
|
|
2018
|
$
|
3.8
|
|
|
2019
|
3.7
|
|
|
2020
|
3.5
|
|
|
2021
|
3.3
|
|
|
2022
|
3.2
|
|
During the year ended
December 31, 2017
, the Company recorded a favorable lease impairment charge of approximately
$1.4 million
related to a theatre scheduled to be closed. During the year ended December 31, 2016, the Company recorded a favorable lease impairment charge of approximately
$0.3 million
related to a theatre closure. The Company did not record an impairment of any intangible assets during the year ended December 31, 2015.
Debt Acquisition Costs
Debt acquisition costs are deferred and amortized to interest expense using the effective interest method over the terms of the related agreements. In April 2015, the FASB issued ASU 2015-03,
Interest—Imputation of Interest
, which intended to simplify the presentation of debt issuance costs. Prior to the issuance of ASU 2015-03, debt issuance costs were reported on the balance sheet as assets and amortized as interest expense. ASU 2015-03 requires that they be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. The costs will continue to be amortized to interest expense using the effective interest method. The Company adopted this guidance during the quarter ended March 31, 2016. Debt issuance costs associated with long-term debt, net of accumulated amortization, were
$23.1 million
and
$25.8 million
as of December 31, 2017 and December 31, 2016, respectively.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Investments
The Company primarily accounts for its investments in non-consolidated subsidiaries using the equity method of accounting and has recorded the investments within "Other Non-Current Assets" and "Other Non-Current Liabilities" as applicable in its consolidated balance sheets. The Company records equity in earnings and losses of these entities in its consolidated statements of income. As of
December 31, 2017
, the Company holds a
17.9%
interest in National CineMedia, LLC ("National CineMedia" or "NCM") and a
46.7%
interest in Digital Cinema Implementation Partners, LLC. The carrying value of the Company's investment in these and other entities as of
December 31, 2017
and
December 31, 2016
was approximately
$407.1 million
and
$367.7 million
, respectively.
The Company reviews investments in non-consolidated subsidiaries accounted for under the equity method for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be fully recoverable. The Company reviews unaudited financial statements on a quarterly basis and audited financial statements on an annual basis for indicators of triggering events or circumstances that indicate the potential impairment of these investments as well as current equity prices for its investment in National CineMedia and discounted projections of cash flows for certain of its other investees. Additionally, the Company has periodic discussions with the management of significant investees to assist in the identification of any factors that might indicate the potential for impairment. In order to determine whether the carrying value of investments may have experienced an other-than-temporary decline in value necessitating the write-down of the recorded investment, the Company considers various factors, including the period of time during which the fair value of the investment remains substantially below the recorded amounts, the investees' financial condition and quality of assets, the length of time the investee has been operating, the severity and nature of losses sustained in current and prior years, a reduction or cessation in the investees dividend payments, suspension of trading in the security, qualifications in accountant's reports due to liquidity or going concern issues, investee announcement of adverse changes, downgrading of investee debt, regulatory actions, changes in reserves for product liability, loss of a principal customer, negative operating cash flows or working capital deficiencies and the recording of an impairment charge by the investee for goodwill, intangible or long-lived assets. Once a determination is made that an other-than-temporary impairment exists, the Company writes down its investment to fair value.
There was no impairment of the Company's investments during the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance if it is deemed more likely than not that its deferred income tax assets will not be realized. The Company expects that certain deferred income tax assets are not more likely than not to be recovered and therefore has established a valuation allowance. The Company reassesses its need for the valuation allowance for its deferred income taxes on an ongoing basis.
Additionally, income tax rules and regulations are subject to interpretation, require judgment by the Company and may be challenged by the taxation authorities. As described further in Note 7—"Income Taxes," the Company applies the provisions of ASC Subtopic 740-10,
Income Taxes—Overview
. In accordance with ASC Subtopic 740-10, the Company recognizes a tax benefit only for tax positions that are determined to be more likely than not sustainable based on the technical merits of the tax position. With respect to such tax positions for which recognition of a benefit is appropriate, the benefit is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions are evaluated on an ongoing basis as part of the Company's process for determining the provision for income taxes.
Interest Rate Swaps
Regal Cinemas has entered into hedging relationships via interest rate swap agreements to hedge against interest rate exposure of its variable rate debt obligations under Regal Cinemas' Amended Senior Credit Facility. Certain of these interest rate swaps qualify for cash flow hedge accounting treatment and as such, the change in the fair values of the interest rate swaps is recorded on the Company's consolidated balance sheet as an asset or liability with the effective portion of the interest rate
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
swaps' gains or losses reported as a component of other comprehensive income and the ineffective portion reported in earnings. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive income/loss related to the interest rate swaps will be reclassified into earnings. In the event that an interest rate swap is terminated or de-designated prior to maturity, gains or losses accumulated in other comprehensive income or loss remain deferred and are reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings. See Note 14—"Fair Value of Financial Instruments" for discussion of the Company’s interest rate swaps’ fair value estimation methods and assumptions. The fair value of the Company's interest rate swaps is based on Level 2 inputs as described in ASC Topic 820,
Fair Value Measurements and Disclosures
, which include observable inputs such as dealer quoted prices for similar assets or liabilities, and represents the estimated amount Regal Cinemas would receive or pay to terminate the agreements taking into consideration various factors, including current interest rates, credit risk and counterparty credit risk. The counterparties to the Company’s interest rate swaps are major financial institutions. The Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptably low level.
Deferred Revenue
Deferred revenue relates primarily to the amount we received for agreeing to the 2007 ESA modification, amounts recorded in connection with the receipt of newly issued common units of National CineMedia, cash received from the sale of bulk tickets and gift cards, and amounts received in connection with vendor marketing programs. The amount we received for agreeing to the ESA modification is being amortized to advertising revenue over the
30
year term of the agreement following the units of revenue method. In addition, as described in Note 4—"Investments," amounts recorded as deferred revenue in connection with the receipt of newly issued common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement are being amortized to advertising revenue over the remaining term of the ESA following the units of revenue method. As of
December 31, 2017
and
December 31, 2016
, approximately
$418.5 million
and
$425.0 million
of deferred revenue, respectively, related to the ESA was recorded as components of current and non-current deferred revenue in the accompanying consolidated balance sheets. Deferred revenue related to gift cards and bulk ticket sales and vendor marketing programs is recognized as revenue as described above in this Note 2 under "Revenue Recognition." As of
December 31, 2017
and
December 31, 2016
, approximately
$168.6 million
and
$175.6 million
of deferred revenue, respectively, related to the gift cards and bulk tickets was recorded as a component of current deferred revenue in the accompanying consolidated balance sheets.
Deferred Rent
The Company recognizes rent 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. The deferred rent liability is included in other non-current liabilities in the accompanying consolidated balance sheets.
Film Costs
The Company estimates its film cost expense and related film cost payable based on management's best estimate of the ultimate settlement of the film costs with the distributors. Generally, less than
one
-
third
of our quarterly film expense is estimated at period-end. The length of time until these costs are known with certainty depends on the ultimate duration of the film's theatrical run, but is typically "settled" within
2
to
3 months
of a particular film's opening release. Upon settlement with our film distributors, film cost expense and the related film cost payable are adjusted to the final film settlement.
Loyalty Program
Members of the Regal Crown Club® earn credits for each dollar spent at the Company's theatres and can redeem such credits for movie tickets, concession items and movie memorabilia at the theatre or in an online reward center. Because the Company believes that the value of the awards granted to Regal Crown Club® members is insignificant in relation to the value of the transactions necessary to earn the award, the Company records the estimated incremental cost of providing awards under the Regal Crown Club® loyalty program at the time the awards are earned. Historically, and for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the costs of these awards have not been significant to the Company's consolidated financial statements.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Advertising and Start-Up Costs
The Company expenses advertising costs as incurred. Start-up costs associated with a new theatre are also expensed as incurred.
Share-Based Compensation
As described in Note 9—"Capital Stock and Share-Based Compensation," we apply the provisions of ASC Subtopic 718-10,
Compensation—Stock Compensation—Overall
. Under ASC Subtopic 718-10, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite service period.
Estimates
The preparation of financial statements in conformity with GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, deferred revenue, property and equipment, goodwill, income taxes and purchase accounting. Actual results could differ from those estimates.
Segments
As of
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company managed its business under
one
reportable segment: theatre exhibition operations.
Acquisitions
The Company accounts for acquisitions under the acquisition method of accounting. The acquisition method requires that the acquired assets and liabilities, including contingencies, be recorded at fair value determined on the acquisition date and changes thereafter reflected in income. For significant acquisitions, the Company obtains independent third party valuation studies for certain of the assets acquired and liabilities assumed to assist the Company in determining fair value. The estimation of the fair values of the assets acquired and liabilities assumed involves a number of estimates and assumptions that could differ materially from the actual amounts recorded. The results of the acquired businesses are included in the Company's results from operations beginning from the day of acquisition.
Comprehensive Income
Total comprehensive income, net of tax, for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
was
$116.1 million
,
$171.3 million
and
$152.6 million
, respectively. Total comprehensive income consists of net income and other comprehensive income, net of tax, related to the change in the aggregate unrealized gain/loss on the Company's interest rate swap arrangement, the change in fair value of available for sale equity securities (including other-than-temporary impairments), the reclassification adjustment for gain on sale of available for sale securities recognized in net income and the change in fair value of equity method investee interest rate swap transactions during each of the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
. The Company's interest rate swap arrangements and available for sale equity securities are further described in Note 13—"Derivative Instruments" and Note 14—"Fair Value of Financial Instruments."
Recent Accounting Pronouncements
Adoption of New Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323)
. The purpose of ASU 2016-07 is to eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment was held. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-07 during the quarter ended March 31, 2017 had no impact on the Company's consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting for employee share-based payments. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-09 had the impact of reducing income tax expense by approximately
$1.3 million
pertaining to excess tax benefits related to vesting of
493,516
restricted stock awards and to a lesser extent, dividends paid on restricted stock during the year ended December 31, 2017. Historically, such excess tax benefits would have been recorded as a component of additional paid-in capital.
In October 2016, the FASB issued ASU 2016-17,
Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
, which requires when assessing which party is the primary beneficiary in a VIE, the decision maker considers interests held by entities under common control on a proportionate basis instead of treating those interests as if they were that of the decision maker itself, as current U.S. GAAP requires. ASU 2016-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-17 during the quarter ended March 31, 2017 had no impact on the Company's consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 in connection with its interim goodwill impairment test performed during the year ended December 31, 2017 as further described in Notes 2 and 14 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Recently Issued FASB Accounting Standard Codification Updates
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or modified retrospective transition method. ASU 2014-09 was originally effective for annual and interim reporting periods beginning after December 15, 2016. However, the standard was deferred by ASU 2015-14, issued by the FASB in August 2015, and is now effective for fiscal years beginning on or after December 15, 2017, including interim reporting periods within that reporting period, with early adoption permitted as of the original effective date. In addition, amendments in subsequent Accounting Standards Updates have either clarified or revised guidance as set forth in ASU 2014-09, including ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenues Gross versus Net)
, ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
and ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.
The Company has selected the modified retrospective method for adoption of ASU 2014-09 and its related ASU amendments. Under this method, we will recognize the cumulative effect of the changes in retained earnings at the date of adoption (January 1, 2018) as described below, but will not restate prior periods. The adoption of ASU 2014-09 and its related ASU amendments primarily impacts the Company's accounting for its (i) loyalty program, (ii) gift cards and bulk tickets, including commissions paid to third parties, (iii) the classification of internet ticketing surcharges and (iv) amounts recorded as deferred revenue and the method of amortization for the advanced payment received in connection with the 2007 National CineMedia ESA modification and subsequent receipts of common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement. While we do not believe the adoption of ASU 2014-09 will have a material impact on our net income or cash flows from operations, we do expect the standard to materially impact the timing and classification of revenues and related expenses in the following key areas:
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
•
|
First, we believe the advanced payment received in connection with the 2007 National CineMedia ESA modification and subsequent receipts of common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement, each as described in Note 4 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K, include a significant financing component under ASU 2014-09. Accordingly, we expect advertising revenues will increase materially with a similar offsetting increase in non-cash interest expense beginning January 1, 2018. Through December 31, 2017, the Company utilized the units of revenue method to amortize such amounts, but will change its amortization to a straight-line method under ASU 2014-09 effective January 1, 2018. We do not expect these changes to have a material impact on our net income or cash flows from operations. As of the date of this Form 10-K, the Company expects to reduce its opening January 1, 2018 retained earnings balance (along with a corresponding credit to deferred revenue) by approximately
$15 million
to
$20 million
, before related tax effects, to give effect to the change in amortization method with respect to these advanced payments.
|
|
|
|
|
•
|
Second, under ASU 2014-09 and effective January 1, 2018, the Company will record internet ticketing surcharge fees based on the gross transaction price. Previously, the Company recorded such fees net of third-party commission or service fees. This change will have the effect of materially increasing other operating revenues and other operating expenses, but will have no impact on net income or cash flows from operations.
|
|
|
|
|
•
|
Third, with respect to our gift card and bulk ticket programs, the adoption of ASU 2014-09 is not expected to have a material impact on the annual revenue we currently recognize from these programs, but it will change the method in which we recognize revenue from gift cards and bulk tickets. Through December 31, 2017, the Company recognized revenue associated with gift cards and bulk tickets when redeemed, or when the likelihood of redemption became remote (known as "breakage" in our industry) based on historical experience. Under ASU 2014-09 and effective January 1, 2018, the Company will recognize revenue from unredeemed gift cards and bulk tickets as redeemed and will recognize breakage following the proportional method where revenue is recognized in proportion to the pattern of rights exercised by the customer when the Company expects that it is probable that a significant revenue reversal would not occur for any estimated breakage amounts. As of the date of this Form 10-K, the Company expects to reduce its opening January 1, 2018 retained earnings balance (along with a corresponding credit to deferred revenue) by approximately
$25 million
to
$30 million
, before related tax effects, to give effect to this change in accounting for our gift card and bulk ticket programs.
|
With respect to gift card commissions paid to third parties, under ASU 2014-09 and effective January 1, 2018, the Company will begin to amortize the commission fees over the expected redemption period. Previously, such gift card commissions were expensed as incurred. We do not expect these changes to have a material impact on our net income or cash flows from operations, however we do expect to increase our opening January 1, 2018 retained earnings balance (along with a corresponding debit to a gift card commission contract asset) by approximately
$18 million
to
$20 million
, before related tax effects, to give effect to this change in accounting for our gift card commissions.
|
|
|
|
•
|
Finally, with respect to other areas impacted by ASU 2014-09 such as our loyalty program, we do not expect those accounting changes to have a material impact on our net income or cash flows from operations. Through December 31, 2017, the Company recorded the estimated incremental cost of providing awards under the Regal Crown Club® loyalty program at the time the awards are earned. Under ASU 2014-09 and effective January 1, 2018, the Company will estimate the fair value of providing such loyalty program awards at the time the related awards are earned. As of the date of this Form 10-K, the Company expects to reduce its opening January 1, 2018 retained earnings balance (along with a corresponding credit to deferred revenue) by approximately
$40 million
to
$50 million
, before related tax effects, to give effect to this change in accounting for our loyalty program.
|
The Company is currently finalizing its review of ASU 2014-09 and its related ASU amendments with respect to required disclosures and financial statement presentation for fiscal 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures and believes that the significance of its future minimum rental payments will result in a material increase in ROU assets and lease liabilities.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The purpose of ASU 2016-15 is to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company is evaluating the impact that ASU 2016-15 will have on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which requires that an entity recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of the transfer instead of deferring the tax consequences until the asset has been sold to an outside party, as current U.S. GAAP requires. ASU 2016-16 is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted in any interim or annual period. The Company is evaluating the impact that ASU 2016-16 will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The purpose of ASU 2017-01 is to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2017-01 should be applied prospectively on or after the effective date. Early adoption is permitted. The Company does not expect that the adoption of ASU 2017-01 will have a material impact on its consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which is intended to simplify and amend the application of hedge accounting to more clearly portray the economics of an entity’s risk management strategies in its financial statements. ASU 2017-12 also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The Company is evaluating the impact that ASU 2017-12 will have on its consolidated financial statements and related disclosures.
3. ACQUISITIONS
On April 13, 2017, the Company completed the acquisition of
two
theatres with
41
screens located in Houston, Texas from Santikos Theaters, Inc. for an aggregate net cash purchase price of
$29.8 million
. In addition, on April 18, 2017, the Company purchased a parcel of land located in Montgomery County, Texas from an entity affiliated with Santikos Theaters, Inc. for a net cash purchase price of approximately
$7.3 million
. On May 18, 2017, the Company completed the acquisition of
seven
theatres with
93
screens located in Kansas and Oklahoma from Warren Theatres for an aggregate net cash purchase price, before post-closing adjustments, of
$134.5 million
. The Company incurred approximately
$1.7 million
in transaction costs associated with these acquisitions, which are reflected in "general and administrative expenses" in the accompanying consolidated statements of income for year ended December 31, 2017.
The transactions have been accounted for using the acquisition method of accounting in accordance with ASC 805,
Business Combinations
, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in each transaction. The allocation of purchase price is based on management’s judgment after evaluating several factors, including preliminary valuation assessments. Any changes in the fair values of assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. The allocation of purchase price is preliminary and subject to changes as appraisals of tangible and intangible assets and liabilities including working capital are finalized, purchase price adjustments are completed and additional information regarding the tax bases of assets and liabilities at the acquisition date becomes available. The following is a summary of the final allocation of the aggregate purchase price to the estimated fair values of the assets acquired and liabilities assumed at the respective dates of acquisition (in millions):
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
|
|
|
|
Current assets
|
$
|
2.1
|
|
|
Land
|
28.8
|
|
|
Buildings, equipment and leasehold improvements
|
115.7
|
|
|
Noncompete agreements
|
2.7
|
|
|
Goodwill (1)
|
26.2
|
|
|
Other assets
|
0.1
|
|
|
Current liabilities
|
(4.0
|
)
|
|
Total purchase price
|
$
|
171.6
|
|
________________________________
(1) Goodwill represents the excess aggregate purchase price over the amounts assigned to assets acquired, including intangible assets, and liabilities assumed and is fully deductible for tax purposes.
The results of operations of the acquired theatre operations have been included in the Company's consolidated financial statements for periods subsequent to the respective acquisition dates. The acquisitions contributed approximately
$57.9 million
of total revenues for the year ended
December 31, 2017
. Net income was an immaterial amount for the year ended
December 31, 2017
.
The following unaudited pro forma results of operations for the years ended
December 31, 2017
and
December 31, 2016
assume the acquisitions occurred as of the beginning of fiscal 2016. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combination been in effect on the dates indicated, or which may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
Year Ended December 31, 2017
|
|
Year Ended December 31, 2016
|
|
Revenues
|
|
$
|
3,196.0
|
|
|
$
|
3,295.6
|
|
|
Income from operations
|
|
272.1
|
|
|
343.4
|
|
|
Net income attributable to controlling interest
|
|
112.5
|
|
|
172.7
|
|
|
Diluted earnings per share
|
|
$
|
0.72
|
|
|
$
|
1.10
|
|
4. INVESTMENTS
Investment in National CineMedia, LLC
We maintain an investment in National CineMedia. National CineMedia provides in-theatre advertising for its theatrical exhibition partners, which include us, AMC Entertainment Holdings, Inc. ("AMC") and Cinemark Holdings, Inc. ("Cinemark").
On February 13, 2007, National CineMedia, Inc. ("NCM, Inc."), the sole manager of National CineMedia, completed an initial public offering ("IPO") of its common stock. NCM, Inc. sold
38.0 million
shares of its common stock for
$21
per share in the IPO, less underwriting discounts and expenses. NCM, Inc. used a portion of the net cash proceeds from the IPO to acquire newly issued common units from National CineMedia. At the closing of the IPO, the underwriters exercised their over-allotment option to purchase an additional
4.0 million
shares of common stock of NCM, Inc. at the initial offering price of
$21
per share, less underwriting discounts and commissions. In connection with this over-allotment option exercise, Regal, AMC and Cinemark each sold to NCM, Inc. common units of National CineMedia on a pro rata basis at the initial offering price of
$21
per share, less underwriting discounts and expenses. Upon completion of this sale of common units, Regal held approximately
21.2 million
common units of National CineMedia ("Initial Investment Tranche"). Such common units are immediately redeemable on a
one
-to-one basis for shares of NCM, Inc. common stock.
As a result of the transactions associated with the IPO and receipt of proceeds in excess of our investment balance, the Company reduced its investment in National CineMedia to
zero
. Accordingly, we will not provide for any additional losses, as we have not guaranteed obligations of National CineMedia and we are not otherwise committed to provide further financial
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
support for National CineMedia. In addition, subsequent to the IPO, the Company determined it would not recognize its share of any undistributed equity in the earnings of National CineMedia pertaining to the Company's Initial Investment Tranche in National CineMedia until National CineMedia's future net earnings, net of distributions received, equal or exceed the amount of the above described excess distribution. Until such time, equity in earnings related to the Company's Initial Investment Tranche in National CineMedia will be recognized only to the extent that the Company receives cash distributions from National CineMedia. The Company believes that the accounting model provided by ASC 323-10-35-22 for recognition of equity investee losses in excess of an investor's basis is analogous to the accounting for equity income subsequent to recognizing an excess distribution. The Company's Initial Investment Tranche is recorded at
$0
cost.
In connection with the completion of the IPO, the joint venture partners, including RCI, amended and restated their exhibitor services agreements with National CineMedia in exchange for a significant portion of its pro rata share of the IPO proceeds. The modification extended the term of the exhibitor services agreement ("ESA") to
30 years
, provided National CineMedia with a
5
-year right of first refusal beginning
one
year prior to the end of the term and changed the basis upon which RCI is paid by National CineMedia from a percentage of revenues associated with advertising contracts entered into by National CineMedia to a monthly theatre access fee. The theatre access fee is composed of a fixed
$0.0816
payment per patron for fiscal 2017 and increases by
8%
every
5 years
starting at the end of fiscal 2011, a fixed
$800
payment per digital screen each year, which increases by
5%
annually starting at the end of fiscal 2007 (or
$1,304
for fiscal 2017) and an additional payment per digital screen of
$670
for fiscal 2017. The access fee revenues received by the Company under its contract are determined annually based on a combination of both fixed and variable factors which include the total number of theatre screens, attendance and actual revenues (as defined in the ESA) generated by National CineMedia. The ESA does not require us to maintain a minimum number of screens and does not provide a fixed amount of access fee revenue to be earned by the Company in any period. The theatre access fee paid in the aggregate to us, AMC and Cinemark will not be less than
12%
of NCM's aggregate advertising revenue, or it will be adjusted upward to meet this minimum payment. On-screen advertising time provided to our beverage concessionaire is provided by National CineMedia under the terms of the ESA. In addition, we receive mandatory quarterly distributions of any excess cash from National CineMedia. The modified ESA has, except with respect to certain limited services, a remaining term of approximately
20 years
.
The amount we received for agreeing to the ESA modification was approximately
$281.0 million
, which represents the estimated fair value of the ESA modification payment. We estimated the fair value of the ESA payment based upon a valuation performed by the Company with the assistance of third party specialists. This amount has been recorded as deferred revenue and is being amortized to advertising revenue over the
30
year term of the ESA following the units of revenue method. Under the units of revenue method, amortization for a period is calculated by computing a ratio of the proceeds received from the ESA modification payment to the total expected decrease in revenues due to entry into the new ESA over the
30
year term of the agreement and then applying that ratio to the current period's expected decrease in revenues due to entry into the new ESA.
Also in connection with the IPO, the joint venture partners entered into a Common Unit Adjustment Agreement with National CineMedia. Pursuant to our Common Unit Adjustment Agreement, from time to time, common units of National CineMedia held by the joint venture partners will be adjusted up or down through a formula primarily based on increases or decreases in the number of theatre screens operated and theatre attendance generated by each joint venture partner. The common unit adjustment is computed annually, except that an earlier common unit adjustment will occur for a joint venture partner if its acquisition or disposition of theatres, in a single transaction or cumulatively since the most recent common unit adjustment, will cause a change of
two
percent or more in the total annual attendance of all of the joint venture partners. In the event that a common unit adjustment is determined to be a negative number, the joint venture partner shall cause, at its election, either (a) the transfer and surrender to National CineMedia a number of common units equal to all or part of such joint venture partner's common unit adjustment or (b) pay to National CineMedia, an amount equal to such joint venture partner's common unit adjustment calculated in accordance with the Common Unit Adjustment Agreement. If the Company elects to surrender common units as part of a negative common unit adjustment, the Company would record a reduction to deferred revenue at the then fair value of the common units surrendered and a reduction of the Company’s Additional Investments Tranche at an amount equal to the weighted average cost for the Additional Investments Tranche common units, with the difference between the two values recorded as a non-operating gain or loss.
As described further below, subsequent to the IPO and through
December 31, 2017
, the Company received from National CineMedia approximately
12.9 million
newly issued common units of National CineMedia ("Additional Investments Tranche") as a result of the adjustment provisions of the Common Unit Adjustment Agreement. The Company follows the guidance in ASC 323-10-35-29 (formerly EITF 02-18,
Accounting for Subsequent Investments in an Investee after Suspension of Equity Loss Recognition
) by analogy, which also refers to AICPA Technical Practice Aid 2220.14, which indicates that if a subsequent
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
investment is made in an equity method investee that has experienced significant losses, the investor must determine if the subsequent investment constitutes funding of prior losses. The Company concluded that the construction or acquisition of new theatres that has led to the common unit adjustments included in its Additional Investments Tranche equates to making additional investments in National CineMedia. The Company evaluated the receipt of the additional common units in National CineMedia and the assets exchanged for these additional units and has determined that the right to use its incremental new screens would not be considered funding of prior losses. As such, the Additional Investments Tranche is accounted for separately from the Company's Initial Investment Tranche following the equity method with undistributed equity earnings included as a component of "Earnings recognized from NCM" in the accompanying consolidated financial statements.
The NCM, Inc. IPO and related transactions have the effect of reducing the amounts NCM, Inc. would otherwise pay in the future to various tax authorities as a result of an increase in Regal's proportionate share of tax basis in NCM Inc.'s tangible and intangible assets. On the IPO date, NCM, Inc., the Company, AMC and Cinemark entered into a tax receivable agreement. Under the terms of this agreement, NCM, Inc. will make cash payments to us, AMC and Cinemark in amounts equal to
90%
of NCM, Inc.'s actual tax benefit realized from the tax amortization of the intangible assets described above. For purposes of the tax receivable agreement, cash savings in income and franchise tax will be computed by comparing NCM, Inc.'s actual income and franchise tax liability to the amount of such taxes that NCM, Inc. would have been required to pay had there been no increase in NCM Inc.'s proportionate share of tax basis in NCM's tangible and intangible assets and had the tax receivable agreement not been entered into. The tax receivable agreement shall generally apply to NCM, Inc.'s taxable years up to and including the
30
t
h
anniversary date of the NCM, Inc. IPO and related transactions.
The Company accounts for its investment in National CineMedia following the equity method of accounting and such investment is included as a component of "Other Non-Current Assets" in the consolidated balance sheets. Below is a summary of activity with National CineMedia included in the Company's consolidated financial statements as of and for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
(in millions):
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the period ended
|
|
For the period ended
|
|
|
|
Investment
in NCM
|
|
Deferred
Revenue
|
|
Cash
Received
|
|
Earnings
recognized
from NCM
|
|
Other
NCM
Revenues
|
|
Balance as of and for the period ended January 1, 2015
|
|
$
|
157.4
|
|
|
$
|
(428.5
|
)
|
|
$
|
53.3
|
|
|
$
|
(32.1
|
)
|
|
$
|
(23.8
|
)
|
|
Receipt of additional common units(1)
|
|
9.0
|
|
|
(9.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Receipt of excess cash distributions(2)
|
|
(11.8
|
)
|
|
—
|
|
|
30.5
|
|
|
(18.7
|
)
|
|
—
|
|
|
Receipt under tax receivable agreement(2)
|
|
(3.5
|
)
|
|
—
|
|
|
9.5
|
|
|
(6.0
|
)
|
|
—
|
|
|
Revenues earned under ESA(3)
|
|
—
|
|
|
—
|
|
|
16.7
|
|
|
—
|
|
|
(16.7
|
)
|
|
Amortization of deferred revenue(4)
|
|
—
|
|
|
10.8
|
|
|
—
|
|
|
—
|
|
|
(10.8
|
)
|
|
Equity income attributable to additional common units(5)
|
|
6.3
|
|
|
—
|
|
|
—
|
|
|
(6.3
|
)
|
|
—
|
|
|
Balance as of and for the period ended December 31, 2015
|
|
$
|
157.4
|
|
|
$
|
(426.7
|
)
|
|
$
|
56.7
|
|
|
$
|
(31.0
|
)
|
|
$
|
(27.5
|
)
|
|
Receipt of additional common units(1)
|
|
9.9
|
|
|
(9.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Receipt of excess cash distributions(2)
|
|
(9.3
|
)
|
|
—
|
|
|
23.3
|
|
|
(14.0
|
)
|
|
—
|
|
|
Receipt under tax receivable agreement(2)
|
|
(4.5
|
)
|
|
—
|
|
|
11.4
|
|
|
(6.9
|
)
|
|
—
|
|
|
Revenues earned under ESA(3)
|
|
—
|
|
|
—
|
|
|
16.7
|
|
|
—
|
|
|
(16.7
|
)
|
|
Amortization of deferred revenue(4)
|
|
—
|
|
|
11.6
|
|
|
—
|
|
|
—
|
|
|
(11.6
|
)
|
|
Equity income attributable to additional common units(5)
|
|
8.5
|
|
|
—
|
|
|
—
|
|
|
(8.5
|
)
|
|
—
|
|
|
Balance as of and for the period ended December 31, 2016
|
|
$
|
162.0
|
|
|
$
|
(425.0
|
)
|
|
$
|
51.4
|
|
|
$
|
(29.4
|
)
|
|
$
|
(28.3
|
)
|
|
Receipt of additional common units(1)
|
|
6.3
|
|
|
(6.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Receipt of excess cash distributions(2)
|
|
(12.2
|
)
|
|
—
|
|
|
29.4
|
|
|
(17.2
|
)
|
|
—
|
|
|
Receipt under tax receivable agreement(2)
|
|
(3.4
|
)
|
|
—
|
|
|
8.3
|
|
|
(4.9
|
)
|
|
—
|
|
|
Revenues earned under ESA(3)
|
|
—
|
|
|
—
|
|
|
17.1
|
|
|
—
|
|
|
(17.1
|
)
|
|
Amortization of deferred revenue(4)
|
|
—
|
|
|
12.8
|
|
|
—
|
|
|
—
|
|
|
(12.8
|
)
|
|
Equity income attributable to additional common units(5)
|
|
7.6
|
|
|
—
|
|
|
—
|
|
|
(7.6
|
)
|
|
—
|
|
|
Change in interest loss(6)
|
|
(5.6
|
)
|
|
—
|
|
|
—
|
|
|
5.6
|
|
|
—
|
|
|
Balance as of and for the period ended December 31, 2017
|
|
$
|
154.7
|
|
|
$
|
(418.5
|
)
|
|
$
|
54.8
|
|
|
$
|
(24.1
|
)
|
|
$
|
(29.9
|
)
|
_______________________________________________________________________________
|
|
|
|
(1)
|
On March 16, 2017, March 17, 2016, and March 17, 2015, we received from National CineMedia approximately
0.5 million
,
0.7 million
and
0.6 million
, respectively, newly issued common units of National CineMedia in accordance with the annual adjustment provisions of the Common Unit Adjustment Agreement. The Company recorded the additional common units (Additional Investments Tranche) at fair value using the available closing stock prices of NCM, Inc. as of the dates on which the units were issued. As a result of these adjustments, the Company recorded increases to its investment in National CineMedia (along with corresponding increases to deferred revenue) of
$6.3 million
,
$9.9 million
and
$9.0 million
during the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively. Such deferred revenue amounts are being amortized to advertising revenue over the remaining term of the ESA between RCI and National CineMedia following the units of revenue method as described in (4) below. As of
December 31, 2017
, we held approximately
27.6 million
common units of National CineMedia. On a fully diluted basis, we own a
17.9%
interest in NCM, Inc. as of
December 31, 2017
.
|
|
|
|
|
(2)
|
During the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company received
$37.7 million
,
$34.7 million
,
$40.0 million
, respectively, in cash distributions from National CineMedia, exclusive of receipts for services performed under the ESA (including payments of
$8.3 million
,
$11.4 million
, and
$9.5 million
received under the tax receivable agreement). Approximately
$15.6 million
,
$13.8 million
and
$15.3 million
of these cash distributions received during the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively, were attributable to the Additional Investments Tranche and were recognized as a reduction in our investment in National CineMedia. The remaining amounts were recognized in equity earnings during each of these periods and have been included as components of "Earnings recognized from NCM" in the accompanying consolidated financial statements.
|
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
(3)
|
The Company recorded other revenues, excluding the amortization of deferred revenue, of approximately
$17.1 million
,
$16.7 million
and
$16.7 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively, pertaining to our agreements with National CineMedia, including per patron and per digital screen theatre access fees (net of payments
$12.5 million
,
$12.2 million
and
$11.8 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively, for on-screen advertising time provided to our beverage concessionaire) and other NCM revenues. These advertising revenues are presented as a component of "Other operating revenues" in the Company's consolidated financial statements.
|
|
|
|
|
(4)
|
Amounts represent amortization of ESA modification fees received from NCM to advertising revenue utilizing the units of revenue amortization method. These advertising revenues are presented as a component of "Other operating revenues" in the Company's consolidated financial statements.
|
|
|
|
|
(5)
|
Amounts represent the Company's share in the net gain (loss) of National CineMedia with respect to the Additional Investments Tranche. Such amounts have been included as a component of "Earnings recognized from NCM" in the consolidated financial statements.
|
|
|
|
|
(6)
|
The Company recorded a non-cash change in interest loss of
$5.6 million
during the quarter ended March 31, 2017 to adjust the Company's investment balance due to NCM's issuance of common units to other founding members, at a price per share below the Company's average carrying amount per share. Such amount has been included as a component of "Earnings recognized from NCM" in the consolidated financial statements.
|
As of
December 31, 2017
, approximately
$3.1 million
and
$1.5 million
due from/to National CineMedia were included in "Trade and other receivables, net" and "Accounts payable," respectively. As of
December 31, 2016
, approximately
$2.8 million
and
$1.3 million
due from/to National CineMedia were included in "Trade and other receivables, net" and "Accounts payable," respectively.
As of the date of this Form 10-K, no summarized financial information for National CineMedia was available for the year ended
December 31, 2017
. Summarized consolidated statements of income information for National CineMedia for the years ended December 29, 2016 December 31, 2015, and January 1, 2015 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 29, 2016
|
|
Year Ended
December 31, 2015
|
|
Year Ended
January 1, 2015
|
|
Revenues
|
|
$
|
447.6
|
|
|
$
|
446.5
|
|
|
$
|
394.0
|
|
|
Income from operations
|
|
173.0
|
|
|
140.5
|
|
|
159.2
|
|
|
Net income
|
|
109.3
|
|
|
87.5
|
|
|
96.3
|
|
Summarized consolidated balance sheet information for National CineMedia as of December 29, 2016 and December 31, 2016 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2016
|
|
December 31, 2015
|
|
Current assets
|
|
$
|
180.9
|
|
|
$
|
159.5
|
|
|
Noncurrent assets
|
|
607.6
|
|
|
612.5
|
|
|
Total assets
|
|
788.5
|
|
|
772.0
|
|
|
Current liabilities
|
|
121.1
|
|
|
113.1
|
|
|
Noncurrent liabilities
|
|
924.3
|
|
|
925.4
|
|
|
Total liabilities
|
|
1,045.4
|
|
|
1,038.5
|
|
|
Members' deficit
|
|
(256.9
|
)
|
|
(266.5
|
)
|
|
Liabilities and members' deficit
|
|
788.5
|
|
|
772.0
|
|
Investment in Digital Cinema Implementation Partners
We maintain an investment in Digital Cinema Implementation Partners, LLC, a Delaware limited liability company ("DCIP"). DCIP is a joint venture company formed by Regal, AMC and Cinemark. DCIP funds the cost of digital projection equipment principally through the collection of virtual print fees from motion picture studios and equipment lease payments
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
from participating exhibitors, including us. In addition to its U.S. digital deployment, DCIP actively manages the deployment of over
1,800
digital systems in Canada for Canadian Digital Cinema Partnership, a joint venture between Cineplex Inc. and Empire Theatres Limited.
Regal holds a
46.7%
economic interest in DCIP as of
December 31, 2017
and a
one-third
voting interest along with subsidiaries of each of AMC and Cinemark. Since the Company does not have a controlling financial interest in DCIP or any of its subsidiaries, it accounts for its investment in DCIP under the equity method of accounting. The Company's investment in DCIP is included as a component of "Other Non-Current Assets" in the accompanying consolidated balance sheets. The changes in the carrying amount of our investment in DCIP for the years ended
December 31, 2017
,
December 31, 2016
, and
December 31, 2015
are as follows (in millions):
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
126.3
|
|
|
Equity contributions
|
0.4
|
|
|
Equity in earnings of DCIP(1)
|
37.0
|
|
|
Receipt of cash distributions(2)
|
(2.0
|
)
|
|
Change in fair value of equity method investee interest rate swap transactions
|
(1.0
|
)
|
|
Balance as of December 31, 2015
|
160.7
|
|
|
Equity contributions
|
0.5
|
|
|
Equity in earnings of DCIP(1)
|
41.6
|
|
|
Receipt of cash distributions(2)
|
(9.7
|
)
|
|
Change in fair value of equity method investee interest rate swap transactions
|
0.1
|
|
|
Balance as of December 31, 2016
|
193.2
|
|
|
Equity contributions
|
1.2
|
|
|
Equity in earnings of DCIP(1)
|
43.5
|
|
|
Receipt of cash distributions(2)
|
(9.5
|
)
|
|
Change in fair value of equity method investee interest rate swap transactions
|
0.3
|
|
|
Balance as of December 31, 2017
|
$
|
228.7
|
|
_______________________________________________________________________________
|
|
|
|
(1)
|
Represents the Company's share of the net income of DCIP. Such amount is presented as a component of "Equity in income of non-consolidated entities and other, net" in the accompanying consolidated statements of income.
|
|
|
|
|
(2)
|
Represents cash distributions from DCIP as a return on its investment.
|
In accordance with the master equipment lease agreement (the "Master Lease"), the digital projection systems are leased from a subsidiary of DCIP under a
12
-year term with
ten one-year
fair value renewal options. The Master Lease also contains a fair value purchase option. As of
December 31, 2017
, under the Master Lease, the Company pays annual minimum rent of
$1,000
per digital projection system through the end of the lease term. The Company considers the
$1,000
rent payment to be a minimum rental, and accordingly, records such rent on a straight-line basis in its consolidated financial statements. The Company is also subject to various types of other rent if such digital projection systems do not meet minimum performance requirements as outlined in the Master Lease. Certain of the other rent payments are subject to either a monthly or an annual maximum. The Company accounts for the Master Lease as an operating lease for accounting purposes. During the years ended
December 31, 2017
,
December 31, 2016
, and
December 31, 2015
, the Company incurred total rent expense of approximately
$5.3 million
,
$5.3 million
, and
$5.4 million
, respectively, associated with the leased digital projection systems. Such rent expense is presented as a component of "Other operating expenses" in the Company's consolidated statements of income.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Summarized consolidated statements of operations information for DCIP for the years ended
December 31, 2017
,
December 31, 2016
, and
December 31, 2015
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Net revenues
|
|
$
|
177.4
|
|
|
$
|
178.8
|
|
|
$
|
172.3
|
|
|
Income from operations
|
|
106.7
|
|
|
107.9
|
|
|
103.4
|
|
|
Net income
|
|
93.1
|
|
|
89.2
|
|
|
79.3
|
|
Summarized consolidated balance sheet information for DCIP as of December 31, 2017 and 2016 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
56.3
|
|
|
$
|
45.1
|
|
|
Noncurrent assets
|
|
772.4
|
|
|
861.3
|
|
|
Total assets
|
|
828.7
|
|
|
906.4
|
|
|
Current liabilities
|
|
59.2
|
|
|
44.8
|
|
|
Noncurrent liabilities
|
|
296.8
|
|
|
464.2
|
|
|
Total liabilities
|
|
356.0
|
|
|
509.0
|
|
|
Members' equity
|
|
472.7
|
|
|
397.4
|
|
|
Liabilities and members' equity
|
|
828.7
|
|
|
906.4
|
|
Investment in Open Road Films
On August 4, 2017, the Company sold all of its
50%
equity interest in Open Road Films, a film distribution company jointly owned by us and AMC, to a third party for total proceeds of approximately
$14.0 million
. In accordance with the purchase agreement, approximately
$3.7 million
of the net proceeds received were in satisfaction of various receivables and other amounts due to the Company related to film marketing services provided to Open Road Films prior to the closing date. As a result of the sale, the Company recorded a gain of approximately
$17.8 million
, representing the difference between the net proceeds received of
$10.3 million
(after satisfaction of the above amounts due the Company) and the carrying amount of the Company's investment in Open Road Films (approximately
$(7.5) million
) as of the closing date. Also effective with closing, the Company and Open Road Films entered into a new marketing agreement with respect to films released by Open Road Films after the closing date.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
5. DEBT OBLIGATIONS
Debt obligations at
December 31, 2017
and
December 31, 2016
consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Regal Cinemas Amended Senior Credit Facility, net of debt discount
|
|
$
|
1,097.2
|
|
|
$
|
954.7
|
|
|
Regal 5
3
/
4
% Senior Notes Due 2022
|
|
775.0
|
|
|
775.0
|
|
|
Regal 5
3
/
4
% Senior Notes Due 2025
|
|
250.0
|
|
|
250.0
|
|
|
Regal 5
3
/
4
% Senior Notes Due 2023
|
|
250.0
|
|
|
250.0
|
|
|
Lease financing arrangements, weighted average interest rate of 11.22% as of December 31, 2017, maturing in various installments through November 2028
|
|
88.3
|
|
|
97.1
|
|
|
Capital lease obligations, 7.8% to 10.7%, maturing in various installments through December 2030
|
|
7.0
|
|
|
9.2
|
|
|
Other
|
|
2.8
|
|
|
4.1
|
|
|
Total debt obligations
|
|
2,470.3
|
|
|
2,340.1
|
|
|
Less current portion
|
|
26.6
|
|
|
25.5
|
|
|
Less debt issuance costs, net of accumulated amortization of $22.3 and $18.5, respectively
|
|
23.1
|
|
|
25.8
|
|
|
Total debt obligations, less current portion and debt issuance costs
|
|
$
|
2,420.6
|
|
|
$
|
2,288.8
|
|
Regal Cinemas Seventh Amended and Restated Credit Agreement
— On April 2, 2015, Regal Cinemas entered into a seventh amended and restated credit agreement (the “Amended Senior Credit Facility”), with Credit Suisse AG as Administrative Agent (“Credit Suisse AG”) and the lenders party thereto which amended, restated and refinanced the sixth amended and restated credit agreement (the “Prior Senior Credit Facility”). The Amended Senior Credit Facility consisted of a term loan facility (the “Term Facility”) in an aggregate principal amount of
$965.8 million
with a final maturity date in April 2022 and a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of
$85.0 million
with a final maturity date in April 2020. The Term Facility amortized in equal quarterly installments in an aggregate annual amount equal to
1.0%
of the original principal amount of the Term Facility, with the balance payable on the Term Facility maturity date. Proceeds from the Term Facility (approximately
$963.3 million
, net of debt discount) were applied to refinance the term loan under the Prior Senior Credit Facility, which had an aggregate outstanding principal balance of approximately
$963.2 million
. As a result of the amendment, the Company recorded a loss on debt extinguishment of approximately
$5.7 million
during the year ended December 31, 2015.
On June 1, 2016, Regal Cinemas entered into a permitted secured refinancing agreement with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto (the "June 2016 Refinancing Agreement"). Pursuant to the June 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility under the Amended Senior Credit Facility, which had an aggregate principal balance of approximately
$958.5 million
, and in accordance therewith, received term loans in an aggregate principal amount of approximately
$958.5 million
with a final maturity date in April 2022. Together with other amounts provided by Regal Cinemas, proceeds of the term loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the Term Facility under the Amended Senior Credit Facility. In connection with the execution of the June 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately
$1.5 million
during the quarter ended June 30, 2016.
On December 2, 2016, Regal Cinemas entered into a permitted secured refinancing agreement (the “December 2016 Refinancing Agreement”) with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto. Pursuant to the December 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility, which had an aggregate principal balance of approximately
$956.1 million
, and in accordance therewith received term loans in an aggregate principal amount of approximately
$956.1 million
with a final maturity date in April 2022. Together with other amounts provided by Regal Cinemas, proceeds of the term loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the Term Facility under the Amended Senior Credit Facility. In connection with the execution of the December 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately
$1.4 million
during the quarter ended December 31, 2016.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
On June 6, 2017, Regal Cinemas entered into a permitted secured refinancing and incremental joinder agreement (the “June 2017 Refinancing Agreement”) with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto. Pursuant to the June 2017 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility, which had an aggregate principal balance of approximately
$953.7 million
, and in accordance therewith, received term loans in an aggregate principal amount of approximately
$953.7 million
with a final maturity date in April 2022 (the “Refinanced Term Loans”). Together with other amounts provided by Regal Cinemas, proceeds of the Refinanced Term Loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the existing term facility under the Amended Senior Credit Facility in effect immediately prior to the making of the Refinanced Term Loans.
Pursuant to the June 2017 Refinancing Agreement, Regal Cinemas also exercised the “accordion” feature under the Amended Senior Credit Facility to increase the aggregate amount of term loans thereunder by
$150.0 million
(the "2017 Accordion"). The "accordion" feature provides Regal Cinemas with the option to borrow additional term loans under the Amended Senior Credit Facility in an amount of up to
$200.0 million
, plus additional amounts as would not cause the consolidated total leverage ratio to exceed
3.00
:1.00, in each case, subject to lenders providing additional commitments for such amounts and the satisfaction of certain other customary conditions. The entire
$150.0 million
under the 2017 Accordion was fully drawn on June 6, 2017 on the same terms as the Refinanced Term Loans (such amounts drawn, the “Incremental Term Loans”, and together with the Refinanced Term Loans, the "New Term Loans"). A portion of the proceeds of the Incremental Term Loans were used by Regal Cinemas to pay fees and expenses related to the June 2017 Refinancing Agreement, with the remainder used to partially fund the acquisitions described in Note 2-"Acquisitions."
The New Term Loans amortize in equal quarterly installments in an aggregate annual amount equal to
1.0%
of the original principal amount of the New Term Loans, with the balance payable on the maturity date of the New Term Loans. The June 2017 Refinancing Agreement also amends the Amended Senior Credit Facility by reducing the interest rate on the New Term Loans, by providing, at Regal Cinemas’ option, either a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin will be either
1.00%
in the case of base rate loans or
2.00%
in the case of LIBOR rate loans. The June 2017 Refinancing Agreement also provides for a
1%
prepayment premium applicable in the event that Regal Cinemas enters into a refinancing or amendment of the New Term Loans on or prior to the
six
-month anniversary of the closing of the June 2017 Refinancing Agreement that, in either case, has the effect of reducing the interest rate on the New Term Loans. In connection with the execution of the June 2017 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately
$1.3 million
during the quarter ended June 30, 2017.
No
amounts have been drawn on the Revolving Facility. As of December 31, 2017, we had approximately
$2.7 million
outstanding in letters of credit, leaving approximately
$82.3 million
available for drawing under the Revolving Facility. The obligations of Regal Cinemas are secured by, among other things, a lien on substantially all of its tangible and intangible personal property (including but not limited to accounts receivable, inventory, equipment, general intangibles, investment property, deposit and securities accounts, and intellectual property) and certain owned real property. The obligations under the Amended Senior Credit Facility are also guaranteed by certain subsidiaries of Regal Cinemas and secured by a lien on all or substantially all of such subsidiaries’ personal property and certain owned real property pursuant to that certain second amended and restated guaranty and collateral agreement, dated as of May 19, 2010, among Regal Cinemas, certain subsidiaries of Regal Cinemas party thereto and Credit Suisse AG (the “Amended Guaranty Agreement”). The obligations are further guaranteed by Regal Entertainment Holdings, Inc., on a limited recourse basis, with such guaranty being secured by a lien on the capital stock of Regal Cinemas.
Borrowings under the Amended Senior Credit Facility bear interest, at Regal Cinemas’ option, at either a
base rate
or an adjusted
LIBOR
rate (as defined in the Amended Senior Credit Facility) plus, in each case, an applicable margin of
1.00%
in the case of base rate loans or
2.00%
in the case of LIBOR rate loans. Interest is payable (a) in the case of base rate loans, quarterly in arrears, and (b) in the case of LIBOR rate loans, at the end of each interest period, but in no event less often than every
3 months
.
Regal Cinemas may prepay borrowings under the Amended Senior Credit Facility, in whole or in part, in minimum amounts and subject to other conditions set forth in the Amended Senior Credit Facility. Regal Cinemas is required to make mandatory prepayments with:
|
|
|
|
•
|
50%
of excess cash flow in any fiscal year (as reduced by voluntary repayments of the New Term Loans), with elimination based upon achievement and maintenance of a leverage ratio of
3.75
:1.00 or less;
|
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
•
|
100%
of the net cash proceeds of all asset sales or other dispositions of property by Regal Cinemas and its subsidiaries, subject to certain exceptions (including reinvestment rights); and
|
|
|
|
|
•
|
100%
of the net cash proceeds of issuances of funded debt of Regal Cinemas and its subsidiaries, subject to exceptions for most permitted debt issuances.
|
The above-described mandatory prepayments are required to be applied pro rata to the remaining amortization payments under the New Term Loans. When there are no longer outstanding loans under the New Term Loans, mandatory prepayments are to be applied to prepay outstanding loans under the Revolving Facility with no corresponding permanent reduction of commitments under the Revolving Facility.
The Amended Senior Credit Facility includes the following financial maintenance covenants, which are applicable only in certain circumstances where usage of the revolving credit commitments exceeds
30%
of such commitments. Such financial covenants are limited to the following:
|
|
|
|
•
|
maximum adjusted leverage ratio, determined by the ratio of (i) the sum of funded debt (net of unencumbered cash) plus the product of
eight
(8) times lease expense to (ii) consolidated EBITDAR (as defined in the Amended Senior Credit Facility), of
6.0
to 1.0; and
|
|
|
|
|
•
|
maximum total leverage ratio, determined by the ratio of funded debt (net of unencumbered cash) to consolidated EBITDA, of
4.0
to 1.0.
|
The Amended Senior Credit Facility requires that Regal Cinemas and its subsidiaries comply with covenants relating to customary matters, including with respect to incurring indebtedness and liens, making investments and acquisitions, effecting mergers and asset sales, prepaying indebtedness, and paying dividends. The Amended Senior Credit Facility also limits capital expenditures to an amount not to exceed
35%
of consolidated EBITDA for the prior fiscal year plus a
one
-year carryforward for unused amounts from the prior fiscal year. Among other things, such limitations will restrict the ability of Regal Cinemas to fund the operations of Regal or any subsidiary of Regal that is not a subsidiary of Regal Cinemas which guarantees the obligations under Amended Senior Credit Facility.
The Amended Senior Credit Facility includes events of default relating to customary matters, including, among other things, nonpayment of principal, interest or other amounts; violation of covenants; incorrectness of representations and warranties in any material respect; cross default and cross acceleration with respect to indebtedness in an aggregate principal amount of
$25.0 million
or more; bankruptcy; judgments involving liability of
$25.0 million
or more that are not paid; ERISA events; actual or asserted invalidity of guarantees or security documents; and change of control.
As of
December 31, 2017
and
December 31, 2016
, borrowings of
$1,097.2 million
(net of debt discount) and
$954.7 million
(net of debt discount), respectively, were outstanding under the New Term Loans and term facility under the Prior Senior Credit Facility at an effective interest rate of
3.68%
(as of
December 31, 2017
) and
3.56%
(as of
December 31, 2016
), after the impact of the interest rate swaps is taken into account.
See Note 16—"Subsequent Events," for further developments occurring after December 31, 2017 with respect to the Amended Senior Credit Facility in connection with the Merger.
Regal 5
3
/
4
% Senior Notes Due 2022—
On March 11, 2014, Regal issued
$775.0 million
in aggregate principal amount of its 5
3
/
4
% senior notes due 2022 (the “5
3
/
4
% Senior Notes Due 2022”) in a registered public offering. The net proceeds from the offering were approximately
$760.1 million
, after deducting underwriting discounts and offering expenses. Regal used a portion of the net proceeds from the offering to purchase approximately
$222.3 million
aggregate principal amount of its then outstanding 9
1
/
8
% Senior Notes for an aggregate purchase price of approximately
$240.5 million
pursuant to a cash tender offer for such notes, and
$355.8 million
aggregate principal amount of Regal Cinemas' then outstanding 8
5
/
8
% Senior Notes for an aggregate purchase price of approximately
$381.0 million
pursuant to a cash tender offer for such notes as described further below.
Also on March 11, 2014, the Company and Regal Cinemas each announced their intention to redeem all 9
1
/
8
% Senior Notes and 8
5
/
8
% Senior Notes that remained outstanding following the consummation of the tender offers at a price equal to
100%
of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest payable thereon up to, but not including, the redemption date, in accordance with the terms of the indentures governing the 9
1
/
8
% Senior Notes and 8
5
/
8
% Senior Notes. On April 10, 2014, the remaining 9
1
/
8
% Senior Notes and 8
5
/
8
% Senior Notes were fully redeemed by the
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Company and Regal Cinemas for an aggregate purchase price of
$144.9 million
(including accrued and unpaid interest) using the remaining net proceeds from the 5
3
/
4
% Senior Notes Due 2022 and available cash on hand.
The 5
3
/
4
% Senior Notes Due 2022 bear interest at a rate of
5.75%
per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning September 15, 2014. The 5
3
/
4
% Senior Notes Due 2022 will mature on March 15, 2022. The 5
3
/
4
% Senior Notes Due 2022 are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness and prior to all of the Company’s future subordinated indebtedness. The 5
3
/
4
% Senior Notes Due 2022 are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries. None of the Company’s subsidiaries guaranty any of the Company’s obligations with respect to the 5
3
/
4
% Senior Notes Due 2022.
Prior to March 15, 2017, the Company may redeem all or any part of the 5
3
/
4
% Senior Notes Due 2022 at its option at
100%
of the principal amount, plus accrued and unpaid interest to the redemption date and a make-whole premium. The Company may redeem the 5
3
/
4
% Senior Notes Due 2022 in whole or in part at any time on or after March 15, 2017 at the redemption prices specified in the indenture. In addition, prior to March 15, 2017, the Company may redeem up to
35%
of the original aggregate principal amount of the 5
3
/
4
% Senior Notes Due 2022 from the net proceeds of certain equity offerings at the redemption price specified in the indenture. The Company has not separated the make-whole premium from the underlying debt instrument to account for it as a derivative instrument, as the economic characteristics and risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.
If the Company undergoes a change of control (as defined in the indenture), holders may require the Company to repurchase all or a portion of their 5
3
/
4
% Senior Notes Due 2022 at a price equal to
101%
of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, to the date of purchase.
The indenture contains covenants that limit the Company's (and its restricted subsidiaries') ability to, among other things: (i) incur additional indebtedness; (ii) pay dividends on or make other distributions in respect of its capital stock, purchase or redeem capital stock, or purchase, redeem or otherwise acquire or retire certain subordinated obligations; (iii) enter into certain transactions with affiliates; (iv) permit, directly or indirectly, it to create, incur, or suffer to exist any lien, except in certain circumstances; (v) create or permit encumbrances or restrictions on the ability of its restricted subsidiaries to pay dividends or make distributions on their capital stock, make loans or advances to other subsidiaries or the Company, or transfer any properties or assets to other subsidiaries or the Company; and (vi) merge or consolidate with other companies or transfer all or substantially all of its assets. These covenants are, however, subject to a number of important limitations and exceptions. The indenture contains other customary terms, including, but not limited to, events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding notes to be due and payable immediately.
See Note 16—"Subsequent Events," for further developments occurring after December 31, 2017 with respect to the 5
3
/
4
% Senior Notes Due 2022 in connection with the Merger.
Regal 5
3
/
4
% Senior Notes Due 2025—
On January 17, 2013, Regal issued
$250.0 million
in aggregate principal amount of its 5
3
/
4
% senior notes due 2025 (the "5
3
/
4
% Senior Notes Due 2025") in a registered public offering. The net proceeds from the offering were approximately
$244.5 million
, after deducting underwriting discounts and offering expenses. Regal used approximately
$194.4 million
of the net proceeds from the offering to fund the acquisition of Hollywood Theaters.
The 5
3
/
4
% Senior Notes Due 2025 bear interest at a rate of
5.75%
per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning August 1, 2013. The 5
3
/
4
% Senior Notes Due 2025 will mature on February 1, 2025. The 5
3
/
4
% Senior Notes Due 2025 are the Company's senior unsecured obligations. They rank equal in right of payment with all of the Company's existing and future senior unsecured indebtedness and prior to all of the Company's future subordinated indebtedness. The 5
3
/
4
% Senior Notes Due 2025 are effectively subordinated to all of the Company's future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company's subsidiaries. None of the Company's subsidiaries guaranty any of the Company's obligations with respect to the 5
3
/
4
% Senior Notes Due 2025.
Prior to February 1, 2018, the Company may redeem all or any part of the 5
3
/
4
% Senior Notes Due 2025 at its option at
100%
of the principal amount, plus accrued and unpaid interest to the redemption date and a make-whole premium. The
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Company may redeem the 5
3
/
4
% Senior Notes Due 2025 in whole or in part at any time on or after February 1, 2018 at the redemption prices specified in the indenture governing the 5
3
/
4
% Senior Notes Due 2025. In addition, prior to February 1, 2016, the Company may redeem up to
35%
of the original aggregate principal amount of the 5
3
/
4
% Senior Notes Due 2025 from the net proceeds from certain equity offerings at the redemption price specified in the indenture. The Company has not separated the make-whole premium from the underlying debt instrument to account for it as a derivative instrument, as the economic characteristics and risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.
If the Company undergoes a change of control (as defined in the indenture), holders may require the Company to repurchase all or a portion of their notes at a price equal to
101%
of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, to the date of purchase.
The indenture contains covenants that limit the Company's (and its restricted subsidiaries') ability to, among other things: (i) incur additional indebtedness; (ii) pay dividends on or make other distributions in respect of its capital stock, purchase or redeem capital stock, or purchase, redeem or otherwise acquire or retire certain subordinated obligations; (iii) enter into certain transactions with affiliates; (iv) permit, directly or indirectly, it to create, incur, or suffer to exist any lien, except in certain circumstances; (v) create or permit encumbrances or restrictions on the ability of its restricted subsidiaries to pay dividends or make distributions on their capital stock, make loans or advances to other subsidiaries or the Company, or transfer any properties or assets to other subsidiaries or the Company; and (vi) merge or consolidate with other companies or transfer all or substantially all of its assets. These covenants are, however, subject to a number of important limitations and exceptions. The indenture contains other customary terms, including, but not limited to, events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding notes to be due and payable immediately.
See Note 16—"Subsequent Events," for further developments occurring after December 31, 2017 with respect to the 5
3
/
4
% Senior Notes Due 2025 in connection with the Merger.
Regal 5
3
/
4
% Senior Notes Due 2023—
On June 13, 2013, Regal issued
$250.0 million
in aggregate principal amount of its 5
3
/
4
% senior notes due 2023 (the "5
3
/
4
% Senior Notes Due 2023") in a registered public offering. The net proceeds from the offering were approximately
$244.4 million
, after deducting underwriting discounts and offering expenses. Regal used the net proceeds from the offering to purchase approximately
$213.6 million
aggregate principal amount of its outstanding 9
1
/
8
% Senior Notes for an aggregate purchase price of approximately
$244.3 million
pursuant to a cash tender offer for such notes as described further above.
The 5
3
/
4
% Senior Notes Due 2023 bear interest at a rate of
5.75%
per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning December 15, 2013. The 5
3
/
4
% Senior Notes Due 2023 will mature on June 15, 2023. The 5
3
/
4
% Senior Notes Due 2023 are the Company’s senior unsecured obligations. They rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness and prior to all of the Company’s future subordinated indebtedness. The 5
3
/
4
% Senior Notes Due 2023 are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries. None of the Company’s subsidiaries will guaranty any of the Company’s obligations with respect to the 5
3
/
4
% Senior Notes Due 2023.
Prior to June 15, 2018, the Company may redeem all or any part of the 5
3
/
4
% Senior Notes Due 2023 at its option at
100%
of the principal amount, plus accrued and unpaid interest to the redemption date and a make-whole premium. The Company may redeem the 5
3
/
4
% Senior Notes Due 2023 in whole or in part at any time on or after June 15, 2018 at the redemption prices specified in the indenture. In addition, prior to June 15, 2016, the Company may redeem up to
35%
of the original aggregate principal amount of the 5
3
/
4
% Senior Notes Due 2023 from the net proceeds of certain equity offerings at the redemption price specified in the indenture. The Company has not separated the make-whole premium from the underlying debt instrument to account for it as a derivative instrument, as the economic characteristics and risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.
If the Company undergoes a change of control (as defined in the indenture), holders may require the Company to repurchase all or a portion of their 5
3
/
4
% Senior Notes Due 2023 at a price equal to
101%
of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, to the date of purchase.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
The indenture contains covenants that limit the Company's (and its restricted subsidiaries') ability to, among other things: (i) incur additional indebtedness; (ii) pay dividends on or make other distributions in respect of its capital stock, purchase or redeem capital stock, or purchase, redeem or otherwise acquire or retire certain subordinated obligations; (iii) enter into certain transactions with affiliates; (iv) permit, directly or indirectly, it to create, incur, or suffer to exist any lien, except in certain circumstances; (v) create or permit encumbrances or restrictions on the ability of its restricted subsidiaries to pay dividends or make distributions on their capital stock, make loans or advances to other subsidiaries or the Company, or transfer any properties or assets to other subsidiaries or the Company; and (vi) merge or consolidate with other companies or transfer all or substantially all of its assets. These covenants are, however, subject to a number of important limitations and exceptions. The indenture contains other customary terms, including, but not limited to, events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding notes to be due and payable immediately.
See Note 16—"Subsequent Events," for further developments occurring after December 31, 2017 with respect to the 5
3
/
4
% Senior Notes Due 2023 in connection with the Merger.
Lease Financing Arrangements
—These obligations primarily represent lease financing obligations resulting from the requirements of ASC Subtopic 840-40.
Maturities of Debt Obligations
—The Company's long-term debt and future minimum lease payments for its capital lease obligations and lease financing arrangements are scheduled to mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt and Other
|
|
Capital
Leases
|
|
Lease Financing
Arrangements
|
|
Total
|
|
|
|
(in millions)
|
|
2018
|
|
$
|
12.4
|
|
|
$
|
1.0
|
|
|
$
|
22.2
|
|
|
$
|
35.6
|
|
|
2019
|
|
12.4
|
|
|
0.9
|
|
|
20.3
|
|
|
33.6
|
|
|
2020
|
|
11.1
|
|
|
0.9
|
|
|
14.7
|
|
|
26.7
|
|
|
2021
|
|
11.1
|
|
|
1.0
|
|
|
10.8
|
|
|
22.9
|
|
|
2022
|
|
1,828.0
|
|
|
1.0
|
|
|
9.0
|
|
|
1,838.0
|
|
|
Thereafter
|
|
500.0
|
|
|
8.1
|
|
|
52.7
|
|
|
560.8
|
|
|
Less: interest on capital leases and lease financing arrangements
|
|
—
|
|
|
(5.9
|
)
|
|
(41.4
|
)
|
|
(47.3
|
)
|
|
Totals
|
|
$
|
2,375.0
|
|
|
$
|
7.0
|
|
|
$
|
88.3
|
|
|
$
|
2,470.3
|
|
Covenant Compliance
—As of
December 31, 2017
, we are in full compliance with all agreements, including all related covenants, governing our outstanding debt obligations.
6. LEASES
The Company accounts for a majority of its leases as operating leases. Minimum rentals payable under all non-cancelable operating leases with terms in excess of
one
year as of
December 31, 2017
, are summarized for the following fiscal years (in millions):
|
|
|
|
|
|
|
|
2018
|
$
|
446.1
|
|
|
2019
|
404.0
|
|
|
2020
|
359.6
|
|
|
2021
|
322.0
|
|
|
2022
|
293.1
|
|
|
Thereafter
|
1,296.8
|
|
|
Total
|
$
|
3,121.6
|
|
Rent expense under such operating leases amounted to
$426.8 million
,
$427.6 million
and
$421.5 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively. Contingent rent expense was
$20.9 million
,
$23.5 million
and
$22.7 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
7. INCOME TAXES
The components of the provision for income taxes for income from operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
79.5
|
|
|
$
|
89.2
|
|
|
$
|
91.1
|
|
|
Deferred
|
|
4.6
|
|
|
3.3
|
|
|
(8.1
|
)
|
|
Total Federal
|
|
84.1
|
|
|
92.5
|
|
|
83.0
|
|
|
State:
|
|
|
|
|
|
|
|
Current
|
|
22.7
|
|
|
19.6
|
|
|
19.9
|
|
|
Deferred
|
|
(5.2
|
)
|
|
(0.9
|
)
|
|
(2.8
|
)
|
|
Total State
|
|
17.5
|
|
|
18.7
|
|
|
17.1
|
|
|
Total income tax provision
|
|
$
|
101.6
|
|
|
$
|
111.2
|
|
|
$
|
100.1
|
|
During the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, a current tax benefit of
$0.0 million
,
$0.9 million
and
$1.8 million
, respectively, was allocated directly to stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.
A reconciliation of the provision for income taxes as reported and the amount computed by multiplying the income before taxes and extraordinary item by the U.S. federal statutory rate of
35%
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Provision calculated at federal statutory income tax rate
|
|
$
|
74.9
|
|
|
$
|
98.6
|
|
|
$
|
88.7
|
|
|
State and local income taxes, net of federal benefit
|
|
5.9
|
|
|
12.2
|
|
|
11.1
|
|
|
U.S. Tax Cuts and Jobs Act
|
|
15.9
|
|
|
—
|
|
|
—
|
|
|
Permanent items
|
|
4.1
|
|
|
0.6
|
|
|
0.5
|
|
|
Other
|
|
0.8
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Total income tax provision
|
|
$
|
101.6
|
|
|
$
|
111.2
|
|
|
$
|
100.1
|
|
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded federal and state tax expense of
$10.5 million
due to a remeasurement of deferred tax assets and liabilities during the year ended December 31, 2017.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
With respect to our accounting for the effect of the changes in the Tax Reform Act, we are still in the process of evaluating the transition rule applicable to the executive compensation limitations that will be effective January 1, 2018 and the impact of the full-expensing provisions on property and equipment placed in service during the year ended December 31, 2017. Furthermore, the remeasurement of the deferred tax liabilities associated with the Company’s investments in National CineMedia and DCIP are based on estimates of the tax basis of these investments at December 31, 2017. Therefore, the federal and state tax expenses represent provisional amounts and the Company’s current best estimate. Any adjustments recorded to the provisional amounts during the one-year measurement period will be included in income from operations as an adjustment to
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.
Significant components of the Company's net deferred tax asset consisted of the following at (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
21.4
|
|
|
$
|
46.6
|
|
|
Excess of tax basis over book basis of fixed assets
|
|
18.0
|
|
|
55.2
|
|
|
Deferred revenue
|
|
119.4
|
|
|
176.5
|
|
|
Deferred rent
|
|
76.6
|
|
|
86.6
|
|
|
Other
|
|
8.8
|
|
|
14.3
|
|
|
Total deferred tax assets
|
|
244.2
|
|
|
379.2
|
|
|
Valuation allowance
|
|
(16.7
|
)
|
|
(34.5
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
|
227.5
|
|
|
344.7
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Excess of book basis over tax basis of intangible assets
|
|
(34.9
|
)
|
|
(58.7
|
)
|
|
Excess of book basis over tax basis of investments
|
|
(128.2
|
)
|
|
(219.1
|
)
|
|
Other
|
|
(9.9
|
)
|
|
(10.6
|
)
|
|
Total deferred tax liabilities
|
|
(173.0
|
)
|
|
(288.4
|
)
|
|
Net deferred tax asset
|
|
$
|
54.5
|
|
|
$
|
56.3
|
|
At
December 31, 2017
, the Company had net operating loss carryforwards for federal income tax purposes of approximately
$69.4 million
with expiration commencing in 2018. The Company's net operating loss carryforwards were generated by the entities of Edwards and Hollywood Theaters. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses in the event of an "ownership change" of a corporation. Accordingly, the Company's ability to utilize the net operating losses acquired from Edwards and Hollywood Theaters may be impaired as a result of the "ownership change" limitations. The Company’s state net operating losses may be carried forward for various periods, between
seven
and
20 years
, with expiration commencing in 2018. The Company also has net operating losses in U.S. territorial jurisdictions with expirations commencing in 2019.
In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. The Company has recorded a valuation allowance against deferred tax assets of
$16.7 million
and
$34.5 million
as of
December 31, 2017
and
December 31, 2016
, respectively, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management's determination of the Company's ability to realize these deferred tax assets will result in a decrease in the provision for income taxes. During the year ended
December 31, 2017
, the valuation allowance decreased by
$11.0 million
related to a reduction in certain state net operating losses in connection with the settlement of state tax positions and decreased by
$6.8 million
related to the U.S. Tax Cuts and Jobs Act.
In accordance with the provisions of ASC Subtopic 740-10, a reconciliation of the change in the amount of unrecognized tax benefits during the years ended
December 31, 2017
and
December 31, 2016
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Beginning balance
|
|
$
|
10.9
|
|
|
$
|
13.1
|
|
|
Decreases related to prior year tax positions
|
|
(2.5
|
)
|
|
—
|
|
|
Increases related to current year tax positions
|
|
0.2
|
|
|
0.4
|
|
|
Lapse of statute of limitations
|
|
(2.9
|
)
|
|
(2.6
|
)
|
|
Ending balance
|
|
$
|
5.7
|
|
|
$
|
10.9
|
|
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Exclusive of interest and penalties, it is reasonably possible that gross unrecognized tax benefits associated with state tax positions will decrease between
$0.6 million
and
$3.5 million
within the next 12 months primarily due to the settlement of tax disputes with taxing authorities and the expiration of the statute of limitations.
The total net unrecognized tax benefits that would affect the effective tax rate if recognized at
December 31, 2017
and
December 31, 2016
was
$4.6 million
and
$5.4 million
, respectively. Additionally, the total net unrecognized tax benefits that would result in an increase to the valuation allowance if recognized at
December 31, 2017
and
December 31, 2016
was approximately
$0.0 million
and
$1.7 million
, respectively.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of
December 31, 2017
and
December 31, 2016
, the Company has accrued gross interest and penalties of approximately
$2.0 million
and
$1.8 million
, respectively. The total amount of interest and penalties recognized in the statement of income for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
was
$0.2 million
,
$(0.2) million
and
$0.3 million
, respectively.
The Company and its subsidiaries collectively file income tax returns in the U.S. federal jurisdiction and various state and U.S. territory jurisdictions. The Company is not subject to U.S. federal or U.S. Territory examinations before 2014, and with limited exceptions, state examinations before 2013. However, the taxing authorities still have the ability to review the propriety of tax attributes created in closed tax years if such tax attributes are utilized in an open tax year. During the year ended December 31, 2017, the Company settled an Internal Revenue Service ("IRS") examination of its 2014 federal income tax return. The settlement did not have a material impact on the Company’s financial statements. In September 2017, the Company was notified that the IRS would examine its 2015 federal tax return. The Company is in the process of providing information requested by the IRS with respect to such tax year. Management believes that it has provided adequate provision for income taxes relative to the tax year under examination.
8. LITIGATION AND CONTINGENCIES
The Company is presently involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business operations, including but not limited to, personal injury claims, landlord-tenant, antitrust, vendor and other third party disputes, tax disputes, employment and other contractual matters, some of which are described below. Many of these proceedings are at preliminary stages, and many of these cases seek an indeterminate amount of damages. The Company's theatre operations are also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation and environmental protection requirements.
On October 9, 2012, staff at the San Francisco Regional Water Quality Board (the "Regional Board") notified United Artists Theatre Circuit, Inc. (“UATC”), an indirect, wholly owned subsidiary of the Company, that the Regional Board was contemplating issuing a cleanup and abatement order to UATC with respect to a property in Santa Clara, California that UATC owned and then leased during the 1960s and 1970s. On June 25, 2013, the Regional Board issued a tentative order to UATC setting out proposed site clean-up requirements for UATC with respect to the property. According to the Regional Board, the property in question has been contaminated by dry-cleaning facilities that operated at the property in question from approximately 1961 until 1996. The Regional Board also issued a tentative order to the current property owner, who has been conducting site investigation and remediation activities at the site for several years. UATC submitted comments to the Regional Board on July 28, 2013, objecting to the tentative order. The Regional Board considered the matter at its regular meeting on September 11, 2013 and adopted the tentative order with only minor changes. On October 11, 2013, UATC filed a petition with the State Water Resources Control Board (“the State Board”) for review of the Regional Board’s order. The State Board failed to act on the petition and hence by operation of law it was deemed denied, and UATC filed a petition for writ of mandamus with the California Superior Court seeking review and modification of the order. On September 29, 2017, the Superior Court ruled in UATC’s favor and granted its Petition for a Writ of Mandamus challenging the cleanup and abatement order, and remanded the matter to the Regional Board for further proceedings in light of the Superior Court’s opinion. On November 3, 2017, the court amended its order to allow the Regional Board to remove UATC as a named discharger under the order while leaving the rest of the order intact against the current property owner. On November 30, 2017, the Regional Board filed a notice of appeal with the California Court of Appeal. UATC subsequently filed a notice of cross appeal to preserve its bankruptcy defense. UATC intends to continue to vigorously defend this matter. UATC has been cooperating with the Regional Board while it appeals the Regional Board's cleanup and abatement order. To that end, UATC and the current property owner jointly submitted, and on
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
October 27, 2015, the Regional Board approved, a Remedial Action Plan (“RAP”) to remediate the dry-cleaner contamination. We believe that we are, and were during the period in question described in this paragraph, in compliance with such applicable laws and regulations.
On January 28, 2016, Regional Board staff contacted UATC’s counsel in the Santa Clara matter to ascertain whether he would be representing UATC in connection with the cleanup of a drycleaner-impacted property located in Millbrae, California that the Regional Board believes UATC or related entities formerly owned during the dry-cleaning operations. Counsel subsequently responded in the affirmative. The Company has received no further communications from the Regional Board on this matter.
On May 5, 2014, NCM, Inc. announced that it had entered into a merger agreement to acquire Screenvision, LLC ("Screenvision"). On November 3, 2014, the United States Department of Justice (the "DOJ") filed an antitrust lawsuit seeking to enjoin the proposed merger between NCM, Inc. and Screenvision. On March 16, 2015, NCM, Inc. announced that it had agreed with Screenvision to terminate the merger agreement. On March 17, 2015, the Company was notified by the DOJ that it had opened an investigation into potential anticompetitive conduct by and coordination among NCM, Inc., National CineMedia, Regal, AMC and Cinemark (the “DOJ Notice”). In addition, the DOJ Notice requested that the Company preserve all documents and information since January 1, 2011 relating to movie clearances or communications or cooperation between and among AMC, Regal and Cinemark or their participation in NCM. On May 28, 2015, the Company received a civil investigative demand (the “CID”) from the DOJ as part of an investigation into potentially anticompetitive conduct under Sections 1 and 2 of the Sherman Act, 15 U.S.C. § 1 and § 2. The Company has also received investigative demands from the antitrust sections of various state attorneys general regarding movie clearances and Regal's various joint venture investments, including National CineMedia. The CID and various state investigative demands require the Company to produce documents and answer interrogatories. The Company may receive additional investigative demands from the DOJ and state attorneys general regarding these or related matters. The Company has cooperated with these investigations and other related Federal or state investigations. The DOJ and various state investigations may also give rise to lawsuits filed against the Company related to clearances and the Company’s investments in its various joint ventures. While we do not believe that the Company has engaged in any violation of Federal or state antitrust or competition laws during its participation in NCM and other joint ventures, we can provide no assurances as to the scope, timing or outcome of the DOJ’s or any other state or Federal governmental reviews of the Company’s conduct.
In situations where management believes that a loss arising from judicial, administrative, regulatory and arbitration proceedings is probable and can reasonably be estimated, the Company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no amount within the range is more probable than another. As additional information becomes available, any potential liability related to these proceedings is assessed and the estimates are revised, if necessary. The amounts reserved for such proceedings totaled approximately
$3.3 million
and
$3.5 million
as of December 31, 2017 and December 31, 2016, respectively. Management believes any additional liability with respect to these claims and disputes will not be material in the aggregate to the Company’s consolidated financial position, results of operations or cash flows. Under ASC Topic 450,
Contingencies—Loss Contingencies
, an event is "reasonably possible" if "the chance of the future event or events occurring is more than remote but less than likely" and an event is "remote" if "the chance of the future event or events occurring is slight." Thus, references to the upper end of the range of reasonably possible loss for cases in which the Company is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Company believes the risk of loss is more than slight. Management is unable to estimate a range of reasonably possible loss for cases described herein in which damages have not been specified and (i) the proceedings are in early stages, (ii) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iii) there is uncertainty as to the outcome of pending appeals or motions, (iv) there are significant factual issues to be resolved, and/or (v) there are novel legal issues presented. However, for these cases, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on the Company’s financial condition, though the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.
Our 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, awards of damages to private litigants and additional capital expenditures to remedy such non-compliance. The
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
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 except as set forth above, does not currently anticipate that compliance will require the Company to expend substantial funds.
The Company has entered into employment contracts (the "employment contracts"), with
four
of its current executive officers, Ms. Miles and Messrs. Dunn, Ownby, and Brandow, to whom we refer as the "executive" or "executives." Under each of the employment contracts, the Company must indemnify each executive from and against all liabilities with respect to such executive's service as an officer, and as a director, to the extent applicable. In addition, under the employment contracts, each executive is entitled to severance payments in connection with the termination by the Company of the executive without cause, the termination by the executive for good reason, or the termination of the executive under circumstances in connection with a change of control of the Company (as defined within each employment contract).
Pursuant to each employment contract, the Company provides for severance payments if the Company terminates an executive's employment without cause or if an executive terminates his or her employment for good reason;
provided
,
however
, such executive must provide written notification to the Company of the existence of a condition constituting good reason within
90 days
of the initial existence of such condition and the resignation must occur within two (
2
) years of such existence date. Under these circumstances, the executive shall be entitled to receive severance payments equal to (i) the actual bonus, pro-rated to the date of termination, that executive would have received with respect to the fiscal year in which the termination occurs; (ii)
two
times the executive's annual base salary
plus
one
times the executive's target bonus; and (iii) continued coverage under any medical, health and life insurance plans for a
24
-month period following the date of termination.
If the Company terminates any executive's employment, or if any executive resigns for good reason, within three (
3
)months prior to, or one (
1
) year after, a change of control of the Company (as defined within each employment contract), the executive shall be entitled to receive severance payments equal to: (i) the actual bonus, pro-rated to the date of termination, that executive would have received with respect to the fiscal year in which the termination occurs; and (ii)(a) in the case of Ms. Miles, two and one-half times the executive's annual base salary
plus
two
times the executive's target bonus; and (b) in the case of Messrs. Dunn, Ownby, and Brandow,
two
times the executive's annual salary
plus
one and one-half times the executive's target bonus; and (iii) continued coverage under any medical, health and life insurance plans for a
30
-month period following the date of termination.
Pursuant to the employment contracts, the maximum amount of payments and benefits payable (excluding the value of any unvested restricted stock and unvested performance shares) to Ms. Miles and Messrs. Dunn, Ownby and Brandow, in the aggregate, if such executives were terminated (in the event of a change of control), would be approximately
$13.4 million
as of December 31, 2017 and without giving effect to any increases in compensation effected after such date.
Each employment contract contains standard provisions for non-competition and non-solicitation of the Company's employees (other than the executive's secretary or other administrative employee who worked directly for executive) that are effective during the term of the executive's employment and shall continue for a period of
one
year following the executive's termination of employment with the Company. Each Executive is also subject to a permanent covenant to maintain confidentiality of the Company's confidential information.
9. CAPITAL STOCK AND SHARE-BASED COMPENSATION
Capital Stock
As of
December 31, 2017
, the Company's authorized capital stock consisted of:
|
|
|
|
•
|
500,000,000
shares of Class A common stock, par value
$0.001
per share;
|
|
|
|
|
•
|
200,000,000
shares of Class B common stock, par value
$0.001
per share; and
|
|
|
|
|
•
|
50,000,000
shares of preferred stock, par value
$0.001
per share.
|
Of the authorized shares of Class A common stock,
18.0 million
shares were sold in connection with the Company's initial public offering in May 2002. The Company's Class A common stock is listed on the New York Stock Exchange under the trading symbol "RGC." As of
December 31, 2017
,
133,306,994
shares of Class A common stock were outstanding. Of the authorized shares of Class B common stock,
23,708,639
shares were outstanding as of
December 31, 2017
, all of which are
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
beneficially owned by The Anschutz Corporation ("Anschutz"). Each share of Class B common stock converts into a single share of Class A common stock at the option of the holder or upon certain transfers of a holder's Class B common stock. Each holder of Class B common stock is entitled to
ten
votes for each outstanding share of Class B common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Of the authorized shares of the preferred stock,
no
shares were issued and outstanding as of
December 31, 2017
. The Class A common stock is entitled to a single vote for each outstanding share of Class A common stock on every matter properly submitted to the stockholders for a vote. Except as required by law, the Class A and Class B common stock vote together as a single class on all matters submitted to the stockholders. The material terms and provisions of the Company's certificate of incorporation affecting the relative rights of the Class A common stock and the Class B common stock are described below.
On August 2, 2016, the Company entered into an underwriting agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated and The Anschutz Corporation and certain of its affiliates named therein (the “Selling Stockholders”). Pursuant to the underwriting agreement, the Selling Stockholders agreed to sell
13,000,000
shares of the Company’s Class A common stock, par value
$0.001
per share, to Merrill Lynch, Pierce, Fenner & Smith Incorporated at a price of
$21.60
per share. In addition, on November 17, 2016, the Company entered into an underwriting agreement with UBS Securities LLC and the Selling Stockholders. Pursuant to the underwriting agreement, the Selling Stockholders agreed to sell
13,000,000
shares of the Company’s Class A common stock, par value
$0.001
per share, to UBS Securities LLC at a price of
$22.95
per share. The Company did
not
receive any proceeds from the sales of the shares by the Selling Stockholders. The offerings were made pursuant to two prospectus supplements, dated August 3, 2016 and November 17, 2016, respectively, to the prospectus dated August 28, 2015 that was included in the Company’s effective shelf registration statement (Reg. No. 333-206656) relating to shares of the Company’s Class A common stock.
As of December 31, 2017, Anschutz owned
12,440,000
shares of our issued and outstanding Class A Common Stock, representing approximately
9.3%
of our Class A common stock issued and outstanding as of December 31, 2017, which together with the
23,708,639
shares of our Class B common stock owned by Anschutz, represents approximately
67.4%
of the combined voting power of the outstanding shares of Class A common stock and Class B common stock as of December 31, 2017.
Common Stock
The Class A common stock and the Class B common stock are identical in all respects, except with respect to voting and except that each share of Class B common stock will convert into a single share of Class A common stock at the option of the holder or upon a transfer of the holder's Class B common stock, other than to certain transferees. Each holder of Class A common stock will be entitled to a single vote for each outstanding share of Class A common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Each holder of Class B common stock will be entitled to ten votes for each outstanding share of Class B common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Except as required by law, the Class A common stock and the Class B common stock will vote together on all matters. Subject to the dividend rights of holders of any outstanding preferred stock, holders of common stock are entitled to any dividend declared by the Board of Directors out of funds legally available for this purpose, and, subject to the liquidation preferences of any outstanding preferred stock, holders of common stock are entitled to receive, on a pro rata basis, all the Company's remaining assets available for distribution to the stockholders in the event of the Company's liquidation, dissolution or winding up. No dividend can be declared on the Class A or Class B common stock unless at the same time an equal dividend is paid on each share of Class B or Class A common stock, as the case may be. Dividends paid in shares of common stock must be paid, with respect to a particular class of common stock, in shares of that class.
Holders of common stock do not have any preemptive right to become subscribers or purchasers of additional shares of any class of the Company's capital stock. The outstanding shares of common stock are, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock may be adversely affected by the rights of the holders of shares of any series of preferred stock that the Company may designate and issue in the future.
Preferred Stock
The Company's certificate of incorporation allows the Company to issue, without stockholder approval, preferred stock having rights senior to those of the common stock. The Company's Board of Directors is authorized, without further stockholder approval, to issue up to
50,000,000
shares of preferred stock in
one
or more series and to fix the rights, preferences, privileges and restrictions of any series of preferred stock, including dividend rights, conversion rights, voting rights, terms of
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of these series. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could also have the effect of decreasing the market price of the Class A common stock. As of
December 31, 2017
,
no
shares of preferred stock are outstanding.
Share Repurchase Program
During the year ended December 31, 2017, the Company's Board of Directors authorized a share repurchase program, which provided for the authorization of the Company to repurchase up to
$50.0 million
of its outstanding Class A common stock through the first quarter of 2019. Repurchases can be made at management's discretion from time to time as market conditions warrant, through open market purchases, privately negotiated transactions, or otherwise, in accordance with all applicable securities laws and regulations. Treasury shares are retired upon repurchase. At retirement, the Company records treasury stock purchases at cost with any excess of cost over par value recorded as a reduction of additional paid-in capital. The Company made
no
repurchases of its outstanding Class A common stock during the year ended December 31, 2017.
Warrants
No
warrants to acquire the Company's Class A or Class B common stock were outstanding as of
December 31, 2017
.
Dividends
Regal paid
four
quarterly cash dividends of
$0.22
per share on each outstanding share of the Company's Class A and Class B common stock, or approximately
$138.9 million
in the aggregate, during the year ended December 31, 2017. Regal paid
four
quarterly cash dividends of
$0.22
per share on each outstanding share of the Company's Class A and Class B common stock, or approximately
$138.9 million
in the aggregate, during the year ended December 31, 2016. Regal paid
four
quarterly cash dividends of
$0.22
per share on each outstanding share of the Company's Class A and Class B common stock, or approximately
$139.1 million
in the aggregate, during the year ended December 31, 2015.
Share-Based Compensation
In 2002, the Company established the Regal Entertainment Group Stock Incentive Plan (as amended, the "2002 Incentive Plan"), which provides for the granting of incentive stock options and non-qualified stock options to officers, employees and consultants of the Company. As described below under "Restricted Stock" and "Performance Share Units," the 2002 Incentive Plan also provides for grants of restricted stock and performance shares that are subject to restrictions and risks of forfeiture.
On May 9, 2012, the stockholders of Regal approved amendments to the 2002 Incentive Plan increasing the number of shares of Class A common stock authorized for issuance under the 2002 Incentive Plan by a total of
5,000,000
shares and extending the term of the 2002 Incentive Plan to May 9, 2022. As of
December 31, 2017
,
3,777,066
shares remain available for future issuance under the 2002 Incentive Plan.
Stock Options
As of
December 31, 2017
, there were
no
options to purchase shares of Class A common stock outstanding under the 2002 Incentive Plan. There were
no
stock options granted during the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively, and
no
compensation expense related to stock options was recorded during such periods.
Restricted Stock
The 2002 Incentive Plan also provides for restricted stock awards to officers, directors and key employees. Under the 2002 Incentive Plan, shares of Class A common stock of the Company may be granted at nominal cost to officers, directors and key employees, subject to a continued employment/service restriction. The restriction is fulfilled upon continued employment or service (in the case of directors) for a specified number of years (typically
one
to
four
years after the award date) and as such restrictions lapse, the award immediately vests. In addition, we will receive a tax deduction when restricted stock vests. The 2002 Incentive Plan participants are entitled to cash dividends and to vote their respective shares, although the sale and transfer
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
of such shares is prohibited during the restricted period. The shares are also subject to the terms and conditions of the 2002 Incentive Plan.
On January 28, 2015,
228,116
restricted shares were granted under the 2002 Incentive Plan at nominal cost to officers, directors and key employees. On January 13, 2016,
261,119
restricted shares were granted under the 2002 Incentive Plan at nominal cost to officers, directors and key employees. On January 11, 2017,
217,366
restricted shares were granted under the 2002 Incentive Plan at nominal cost to officers, directors and key employees. These awards vest
25%
at the end of each year for
4 years
(in the case of officers and key employees) and vest
100%
at the end of
one year
(in the case of directors). The closing price of the Company's Class A common stock was
$20.99
on January 28, 2015,
$17.74
per share on January 13, 2016, and
$22.10
on January 11, 2017. The Company assumed forfeiture rates ranging from
4%
to
6%
for such restricted stock awards.
During the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company withheld approximately
166,761
shares,
177,769
shares and
204,540
shares, respectively, of restricted stock at an aggregate cost of approximately
$3.6 million
,
$3.2 million
and
$4.3 million
, respectively, as permitted by the applicable equity award agreements, to satisfy employee tax withholding requirements related to the vesting of restricted stock awards. On January 8, 2017,
205,677
performance shares (originally granted on January 8, 2014) were effectively converted to shares of restricted common stock, as threshold performance goals for these awards were satisfied on January 8, 2017, the calculation date. These awards fully vested on January 8, 2018, the one-year anniversary of the calculation date. In addition, on January 9, 2016,
262,476
performance shares (originally granted on January 9, 2013) were effectively converted to shares of restricted common stock. As of the calculation date, which was January 9, 2016, threshold performance goals for these awards were satisfied, and therefore, all
262,476
outstanding performance shares were converted to restricted shares as of January 9, 2016. These awards fully vested on January 9, 2017, the
one year anniversary
of the calculation date. Finally, on January 11, 2015,
306,696
performance shares (originally granted on January 11, 2012) were effectively converted to shares of restricted common stock. These awards fully vested on January 11, 2016, the one year anniversary of the calculation date.
During the fiscal years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company recognized approximately
$4.3 million
,
$4.1 million
and
$4.0 million
, respectively, of share-based compensation expense related to restricted share grants. Such expense is presented as a component of "General and administrative expenses." The compensation expense for these awards was determined based on the market price of the Company's stock at the date of grant applied to the total numbers of shares that were anticipated to fully vest. As of
December 31, 2017
, we have unrecognized compensation expense of
$4.5 million
associated with restricted stock awards, which is expected to be recognized through January 11, 2021.
The following table represents the restricted stock activity for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Unvested shares at beginning of year:
|
|
765,952
|
|
|
773,643
|
|
|
885,365
|
|
|
Granted during the year
|
|
217,366
|
|
|
261,119
|
|
|
228,116
|
|
|
Vested during the year
|
|
(493,516
|
)
|
|
(520,258
|
)
|
|
(596,639
|
)
|
|
Forfeited during the year
|
|
(29,567
|
)
|
|
(11,028
|
)
|
|
(49,895
|
)
|
|
Conversion of performance shares during the year
|
|
205,677
|
|
|
262,476
|
|
|
306,696
|
|
|
Unvested shares at end of year
|
|
665,912
|
|
|
765,952
|
|
|
773,643
|
|
During the year ended
December 31, 2017
, the Company paid
four
cash dividends of
$0.22
on each share of outstanding restricted stock totaling approximately
$0.6 million
.
Performance Share Units
The 2002 Incentive Plan also provides for grants in the form of performance share units to officers, directors and key employees. Performance share agreements are entered into between the Company and each grantee of performance share units. In 2009, the Company adopted an amended and restated form of performance share agreement (each, a "Performance Agreement" and collectively, the "Performance Agreements"). Pursuant to the terms and conditions of the Performance Agreements, grantees will be issued shares of restricted common stock of the Company in an amount determined by the
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
attainment of Company performance criteria set forth in each Performance Agreement. The shares of restricted common stock received upon attainment of the performance criteria will be subject to further vesting over a period of time, provided the grantee remains a service provider to the Company during such period. Under the Performance Agreement, which is described further in the section entitled "Compensation Discussion and Analysis—Elements of Compensation—Performance Shares," of our 2017 proxy statement filed with the Commission on April 10, 2017, each performance share represents the right to receive from
0%
to
150%
of the target numbers of shares of restricted Class A common stock.
On January 28, 2015,
234,177
performance shares were granted under the 2002 Incentive Plan at nominal cost to officers and key employees. On January 13, 2016,
280,374
performance shares were granted under the 2002 Incentive Plan at nominal cost to officers and key employees. Finally, on January 8, 2017,
235,356
performance shares were granted under the 2002 Incentive Plan at nominal cost to officers and key employees. The number of shares of restricted common stock earned will be determined based on the attainment of specified performance goals by January 11, 2020 (the
third anniversary
of the grant date for the January 11, 2017 grant), January 8, 2017 (the
third anniversary
of the grant date for the January 8, 2014 grant), and January 28, 2018 (the
third anniversary
of the grant date for the January 28, 2015 grant), as set forth in the applicable Performance Agreement. Such performance shares vest on the
fourth anniversary
of their respective grant dates. The shares are subject to the terms and conditions of the 2002 Incentive Plan. The closing price of the Company's Class A common stock on the date of grant was
$20.99
on January 28, 2015,
$17.74
on January 13, 2016, and
$22.10
on January 11, 2017, which approximates the respective grant date fair value of the awards. The Company assumed forfeiture rates ranging from
8%
to
9%
for such performance share awards.
The fair value of the performance share awards are amortized as compensation expense over the expected term of the awards of
four years
. During the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company recognized approximately
$4.9 million
,
$4.7 million
and
$4.3 million
, respectively, of share-based compensation expense related to performance share grants. Such expense is presented as a component of "General and administrative expenses." As of
December 31, 2017
, we have unrecognized compensation expense of
$6.1 million
associated with performance share units, which is expected to be recognized through January 11, 2021.
The following table summarizes information about the Company's number of performance shares for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Unvested shares at beginning of year:
|
|
698,709
|
|
|
696,849
|
|
|
812,927
|
|
|
Granted (based on target) during the year
|
|
235,356
|
|
|
280,374
|
|
|
234,177
|
|
|
Cancelled/forfeited during the year
|
|
(28,492
|
)
|
|
(16,038
|
)
|
|
(43,559
|
)
|
|
Conversion to restricted shares during the year
|
|
(205,677
|
)
|
|
(262,476
|
)
|
|
(306,696
|
)
|
|
Unvested shares at end of year
|
|
699,896
|
|
|
698,709
|
|
|
696,849
|
|
In connection with the conversion of the above
205,677
performance shares, during the year ended December 31, 2017, the Company paid cumulative cash dividends of
$3.64
(representing the sum of all cash dividends paid from January 8, 2014 through January 8, 2017) on each performance share converted, totaling approximately
$0.7 million
. In connection with the conversion of the above
262,476
performance shares, during the year ended December 31, 2016, the Company paid cumulative cash dividends of
$3.60
(representing the sum of all cash dividends paid from January 9, 2013 through January 9, 2016) on each performance share converted, totaling approximately
$0.9 million
. In connection with the conversion of the above
306,696
performance shares, during the year ended December 31, 2015, the Company paid cumulative cash dividends of
$4.56
(representing the sum of all cash dividends paid from January 11, 2012 through January 11, 2015) and
$4.58
(representing the sum of all cash dividends paid from June 25, 2012 through June 25, 2015) on each performance share converted, totaling approximately
$1.4 million
.The above table does not reflect the maximum or minimum number of shares of restricted stock contingently issuable. An additional
0.3 million
shares of restricted stock could be issued if the performance criteria maximums are met as of December 31, 2017.
See Note 16—"Subsequent Events," for further developments occurring after December 31, 2017 with respect to our capital stock and share based compensation in connection with the Merger.
10. RELATED PARTY TRANSACTIONS
During the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, Regal Cinemas received approximately
$0.3 million
.
$0.2 million
, and
$0.1 million
, respectively, from an Anschutz affiliate for rent and other expenses related to a theatre facility.
During each of the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, in connection with an agreement with an Anschutz affiliate, Regal received various forms of advertising in exchange for on-screen advertising provided in certain of its theatres. The value of such advertising was approximately
$0.1 million
.
During each of the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, the Company received approximately
$0.5 million
from an Anschutz affiliate for management fees related to a theatre site in Los Angeles, California.
Please also refer to Note 4—“Investments” for a discussion of other related party transactions associated with our various investments in non-consolidated entities.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
The Company sponsors an employee benefit plan, the Regal Entertainment Group 401(k) Plan (the "401k Plan") under section 401(k) of the Internal Revenue Code of 1986, as amended, for the benefit of substantially all employees. The 401k Plan provides that participants may contribute up to
50%
of their compensation, subject to Internal Revenue Service limitations. The 401k Plan currently matches an amount equal to
100%
of the first
3%
of the participant's contributions and
50%
of the next
2%
of the participant's contributions. Employee contributions are invested in various investment funds based upon elections made by the employee. The Company made matching contributions of approximately
$3.7 million
,
$3.4 million
and
$3.3 million
to the 401k Plan in 2016, 2015 and 2014, respectively.
Union-Sponsored Plans
As of
December 31, 2017
, certain former theatre employees are covered by
five
insignificant union-sponsored multiemployer pension and health and welfare plans. Company contributions into those plans were determined in accordance with provisions of negotiated labor contracts and aggregated approximately
$0.1 million
for each of the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
.
During fiscal 2013, the Company received a notice of a written demand for payment of a complete withdrawal liability assessment from a collectively-bargained multiemployer pension plan, Local 160, Greater Cleveland Moving Picture Projector Operator’s Pension Plan ("Local 160") (Employment Identification No. 51-6115679), that covered certain of its unionized theatre employees. The Company made a complete withdrawal from Local 160 during fiscal 2012. The Company has established an estimated withdrawal liability of approximately
$0.5 million
related to its remaining plans, including Local 160, as of December 31, 2017.
12. EARNINGS PER SHARE
We compute earnings per share of Class A and Class B common stock using the two-class method. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, common stock equivalents outstanding during the period. Potential common stock equivalents consist of the incremental common shares issuable upon the vesting of restricted stock and performance share units. The dilutive effect of outstanding restricted stock and performance share units is reflected in diluted earnings per share by application of the treasury-stock method. In addition, the computation of the diluted earnings per share of Class A common stock assumes the conversion of Class B common stock, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. The earnings for the periods presented are allocated based on the contractual participation rights of the Class A and Class B common shares. As the liquidation and dividend rights are identical, the earnings are allocated on a proportionate basis. Further, as we assume the conversion of Class B common stock in the computation of the diluted earnings per share of Class A common stock, the earnings are equal to net income attributable to controlling interest for that computation.
The following table sets forth the computation of basic and diluted earnings per share of Class A and Class B common stock (in millions, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of earnings
|
|
$
|
95.3
|
|
|
$
|
17.0
|
|
|
$
|
144.5
|
|
|
$
|
25.9
|
|
|
$
|
130.0
|
|
|
$
|
23.4
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in thousands)
|
|
132,627
|
|
|
23,709
|
|
|
132,286
|
|
|
23,709
|
|
|
131,971
|
|
|
23,709
|
|
|
Basic earnings per share
|
|
$
|
0.72
|
|
|
$
|
0.72
|
|
|
$
|
1.09
|
|
|
$
|
1.09
|
|
|
$
|
0.99
|
|
|
$
|
0.99
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of earnings for basic computation
|
|
$
|
95.3
|
|
|
$
|
17.0
|
|
|
$
|
144.5
|
|
|
$
|
25.9
|
|
|
$
|
130.0
|
|
|
$
|
23.4
|
|
|
Reallocation of earnings as a result of conversion of Class B to Class A shares
|
|
17.0
|
|
|
—
|
|
|
25.9
|
|
|
—
|
|
|
23.4
|
|
|
—
|
|
|
Reallocation of earnings to Class B shares for effect of other dilutive securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Allocation of earnings
|
|
$
|
112.3
|
|
|
$
|
17.0
|
|
|
$
|
170.4
|
|
|
$
|
25.9
|
|
|
$
|
153.4
|
|
|
$
|
23.3
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in basic computation (in thousands)
|
|
132,627
|
|
|
23,709
|
|
|
132,286
|
|
|
23,709
|
|
|
131,971
|
|
|
23,709
|
|
|
Weighted average effect of dilutive securities (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
|
23,709
|
|
|
—
|
|
|
23,709
|
|
|
—
|
|
|
23,709
|
|
|
—
|
|
|
Restricted stock and performance shares
|
|
650
|
|
|
—
|
|
|
809
|
|
|
—
|
|
|
831
|
|
|
—
|
|
|
Number of shares used in per share computations (in thousands)
|
|
156,986
|
|
|
23,709
|
|
|
156,804
|
|
|
23,709
|
|
|
156,511
|
|
|
23,709
|
|
|
Diluted earnings per share
|
|
$
|
0.72
|
|
|
$
|
0.72
|
|
|
$
|
1.09
|
|
|
$
|
1.09
|
|
|
$
|
0.98
|
|
|
$
|
0.98
|
|
13. DERIVATIVE INSTRUMENTS
From time to time, Regal Cinemas enters into hedging relationships via interest rate swap agreements to hedge against interest rate exposure of its variable rate debt obligations under the Amended Senior Credit Facility. Certain of these interest rate swaps qualify for cash flow hedge accounting treatment, and as such, the change in the fair values of the interest rate swaps is recorded on the Company's consolidated balance sheet as an asset or liability with the effective portion of the interest rate swaps' gains or losses reported as a component of other comprehensive income and the ineffective portion reported in earnings. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive income/loss related to the interest rate swaps will be reclassified into earnings. In the event that an interest rate swap is terminated or de-designated prior to maturity, gains or losses accumulated in other comprehensive income or loss remain deferred and are reclassified into
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
earnings in the periods during which the hedged forecasted transaction affects earnings. See Note 14—"Fair Value of Financial Instruments" for discussion of the Company’s interest rate swaps’ fair value estimation methods and assumptions.
Below is a summary of Regal Cinemas' current interest rate swap agreements as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominal Amount
|
|
Effective Date
|
|
Fixed Rate
|
|
Receive Rate
|
|
Expiration Date
|
Designated as Cash Flow Hedge
|
Gross Fair Value at December 31, 2017
|
Balance Sheet Location
|
|
$200.0 million
|
|
June 30, 2015
|
|
2.165%
|
|
1-month LIBOR
|
|
June 30, 2018
|
No
|
$(0.5) million
|
See Note 14
|
|
$250.0 million
|
|
June 30, 2018
|
|
1.908%
|
|
1-month LIBOR
|
|
June 30, 2022
|
Yes
|
$2.5 million
|
See Note 14
|
|
$200.0 million
|
|
December 31, 2018
|
|
1.900%
|
|
1-month LIBOR
|
|
December 31, 2021
|
Yes
|
$1.7 million
|
See Note 14
|
On April 2, 2015, Regal Cinemas amended
two
of its existing interest rate swap agreements originally designated as cash flow hedges on
$350.0 million
of variable rate debt obligations. Since the terms of the interest rate swaps designated in the original cash flow hedge relationships changed with these amendments, we de-designated the original hedge relationships and re-designated the amended interest rate swaps in new cash flow hedge relationships as of the amendment date of April 2, 2015. On December 31, 2016,
one
of these interest rate swap agreements designated to hedge
$150.0 million
of variable rate debt obligations expired.
In connection with the June 2017 Refinancing Agreement described further in Note 5—"Debt Obligations,” no amendment or modification was made to the Company's interest swap agreement expiring on June 30, 2018 (originally designated to hedge
$200.0 million
of variable rate debt obligations). As a result, the interest rate swap no longer met the highly effective qualification for cash flow hedge accounting and accordingly, the remaining hedge relationship was de-designated effective June 6, 2017. Since the interest rate swap no longer qualifies for cash flow hedge accounting treatment, the change in its fair value since de-designation is recorded on the Company’s consolidated balance sheet as an asset or liability with the interest rate swap's gain or loss reported as a component of interest expense during the period of change. We estimate that
$0.5 million
of deferred pre-tax losses attributable to this interest rate swap will be reclassified into earnings as interest expense through June 30, 2018 as the underlying hedged transaction occurs.
As detailed in the table above, on August 9, 2017, Regal Cinemas entered into two additional hedging relationships via
two
distinct interest rate swap agreements with effective dates beginning on June 30, 2018 and December 31, 2018 and maturity terms ending on June 30, 2022 and December 31, 2021, respectively. These swaps were designated as cash flow hedges and will require Regal Cinemas to pay interest at fixed rates ranging from
1.90%
to
1.908%
and receive interest at a variable rate. The interest rate swaps are designated to hedge
$450.0 million
of variable rate debt obligations.
The following tables show the effective portion of gains and losses on derivative instruments designated and qualifying in cash flow hedges recognized in other comprehensive income (loss), and amounts reclassified from accumulated other comprehensive income/loss to interest expense for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
3.3
|
|
|
$
|
(3.8
|
)
|
|
$
|
(7.1
|
)
|
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Amounts Reclassified from Accumulated Other Comprehensive Loss into Interest Expense, net
|
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
2.6
|
|
|
$
|
6.0
|
|
|
$
|
7.4
|
|
The changes in accumulated other comprehensive income (loss), net associated with the Company’s interest rate swap arrangements for the years ended
December 31, 2017
,
December 31, 2016
, and
December 31, 2015
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Accumulated other comprehensive loss, net, beginning of period
|
$
|
(1.4
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(2.9
|
)
|
|
Change in fair value of interest rate swap transactions (effective portion), net of taxes of $1.3, $1.5, and $2.8, respectively
|
2.0
|
|
|
(2.3
|
)
|
|
(4.3
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of taxes of $1.0, $2.4 and $2.9, respectively
|
1.6
|
|
|
3.6
|
|
|
4.5
|
|
|
Accumulated other comprehensive income (loss), net, end of period
|
$
|
2.2
|
|
|
$
|
(1.4
|
)
|
|
$
|
(2.7
|
)
|
The following table sets forth the effect of our interest rate swap arrangements on our consolidated statements of income for the years ended
December 31, 2017
,
December 31, 2016
, and
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Gain (Loss) Recognized in Interest Expense, net
|
|
|
Year Ended
December 31, 2017
|
|
Year Ended
December 31, 2016
|
|
Year Ended
December 31, 2015
|
|
Derivatives designated as cash flow hedges (ineffective portion):
|
|
|
|
|
|
|
Interest rate swaps(1)
|
$
|
0.7
|
|
|
$
|
2.5
|
|
|
$
|
1.9
|
|
|
|
|
|
|
|
|
|
Derivatives
not
designated as cash flow hedges:
|
|
|
|
|
|
|
Interest rate swaps (2)
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
________________________________
|
|
|
|
(1)
|
Amounts represent the ineffective portion of the change in fair value of the hedging derivatives and are recorded as a reduction of interest expense in the consolidated financial statements.
|
|
|
|
|
(2)
|
Amounts represent the change in fair value of the former hedging derivatives and are recorded as a reduction of interest expense in the consolidated financial statements from the de-designation dates of April 2, 2015 and June 6, 2017.
|
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts. The inputs used to develop these fair value measurements are established in a hierarchy, which ranks the quality and reliability of the information used to determine fair value. The fair value classification is based on levels of inputs. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories described in ASC Topic 820,
Fair Value Measurements and Disclosures:
Level 1 Inputs: Quoted market prices in active markets for identical assets or liabilities.
Level 2 Inputs: Observable market based inputs or unobservable inputs that are corroborated by market data.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Level 3 Inputs: Unobservable inputs that are not corroborated by market data.
The following tables summarize the fair value hierarchy of the Company's financial assets and liabilities carried at fair value on a recurring basis as of
December 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carrying
Value at
December 31, 2017
|
|
Fair Value Measurements at December 31, 2017
|
|
|
Balance Sheet Location
|
Quoted prices in
active market
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as cash flow hedges (1)
|
Other Non-Current Assets
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
4.2
|
|
|
$
|
—
|
|
|
Total assets at fair value
|
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
4.2
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap
not
designated as cash flow hedge (1)
|
Accrued Expenses
|
$
|
0.5
|
|
|
|
|
$
|
0.5
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carrying
Value at
December 31, 2016
|
|
Fair Value Measurements at December 31, 2016
|
|
|
Balance Sheet Location
|
Quoted prices in
active market
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
|
|
|
(in millions)
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap designated as cash flow hedge (1)
|
Accrued Expenses
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
|
Interest rate swap designated as cash flow hedge (1)
|
Other Non-Current Liabilities
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
Total liabilities at fair value
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
_______________________________________________________________________________
|
|
|
|
(1)
|
The fair value of the Company’s interest rate swaps described in Note 13—"Derivative Instruments" is based on Level 2 inputs, which include observable inputs such as dealer quoted prices for similar assets or liabilities, and represents the estimated amount Regal Cinemas would receive or pay to terminate the agreements taking into consideration various factors, including current interest rates, credit risk and counterparty credit risk. The counterparties to the Company’s interest rate swaps are major financial institutions. The Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptably low level.
|
There were no changes in valuation techniques during the period. There were
no
transfers in or out of Level 3 during the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively.
In addition, the Company is required to disclose the fair value of financial instruments that are not recognized in the statement of financial position for which it is practicable to estimate that value. The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows:
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities:
The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-Lived Assets, Intangible Assets and Other Investments
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
As further described in Note 2—"Summary of Significant Accounting Policies," the Company regularly reviews long-lived assets (primarily property and equipment), intangible assets and investments in non-consolidated entities, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset down to its estimated fair value.
The Company’s analysis relative to long-lived assets resulted in the recording of impairment charges of
$13.5 million
,
$7.9 million
and
$15.6 million
for the years ended
December 31, 2017
,
December 31, 2016
and
December 31, 2015
, respectively. The long-lived asset impairment charges recorded were specific to theatres that were directly and individually impacted by increased competition, adverse changes in market demographics or adverse changes in the development or the conditions of the areas surrounding the theatres we deemed other than temporary.
The Company evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate. After considering various industry specific factors, the Company conducted an interim goodwill impairment assessment during the quarter ended September 30, 2017, which indicated that the carrying value of one of its reporting units exceeded its estimated fair value. As a result, the Company recorded a goodwill impairment charge of approximately
$7.3 million
. The Company's annual goodwill impairment assessment for the year ended December 31, 2016 indicated that the carrying value of one of its reporting units exceeded its estimated fair value and as a result, the Company recorded a goodwill impairment charge of approximately
$1.7 million
. Based on our annual impairment assessments conducted for the year ended December 31, 2015, we were not required to record a charge for goodwill impairment.
In addition, during the year ended December 31, 2017, the Company recorded a favorable lease impairment charge of approximately
$1.4 million
related to a theatre scheduled to be closed. During the year ended December 31, 2016, the Company recorded a favorable lease impairment charge of approximately
$0.3 million
related to a theatre closure. The Company did not record an impairment of any other intangible assets or investments in non-consolidated subsidiaries accounted for under the equity method during the years ended
December 31, 2017
,
December 31, 2016
or December 31, 2015, respectively.
Long term obligations, excluding capital lease obligations, lease financing arrangements and other:
The fair value of the Amended Senior Credit Facility described in Note 5—"Debt Obligations," which consists of the New Term Loans and the Revolving Facility, is estimated based on quoted prices (Level 2 inputs as described in ASC Topic 820) as of
December 31, 2017
and
December 31, 2016
. The associated interest rates are based on floating rates identified by reference to market rates and are assumed to approximate fair value. The fair values of the 5
3
/
4
% Senior Notes Due 2022, the 5
3
/
4
% Senior Notes Due 2025 and the 5
3
/
4
% Senior Notes Due 2023 were estimated based on quoted prices (Level 1 inputs as described in ASC Topic 820) for these issuances as of as of
December 31, 2017
and
December 31, 2016
.
The aggregate carrying values and fair values of long-term debt at
December 31, 2017
and
December 31, 2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
(in millions)
|
|
Carrying value
|
|
$
|
2,372.2
|
|
|
$
|
2,229.7
|
|
|
Fair value
|
|
$
|
2,415.7
|
|
|
$
|
2,287.1
|
|
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
The following tables present for the years ended
December 31, 2017
and
December 31, 2016
, respectively, the change in accumulated other comprehensive income (loss), net of tax, by component (in millions):
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Equity method investee interest rate swaps
|
|
Total
|
|
Balance as of December 31, 2016
|
$
|
(1.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(1.3
|
)
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
Change in fair value of interest rate swap transactions
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
Amounts reclassified to net income from interest rate swaps
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
Change in fair value of equity method investee interest rate swaps
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Total other comprehensive income (loss), net of tax
|
3.6
|
|
|
0.2
|
|
|
3.8
|
|
|
Balance as of December 31, 2017
|
$
|
2.2
|
|
|
$
|
0.3
|
|
|
$
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Available for sale securities
|
|
Equity method investee interest rate swaps
|
|
Total
|
|
Balance as of December 31, 2015
|
$
|
(2.7
|
)
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
(2.1
|
)
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swap transactions
|
(2.3
|
)
|
|
—
|
|
|
—
|
|
|
(2.3
|
)
|
|
Amounts reclassified to net income from interest rate swaps
|
3.6
|
|
|
—
|
|
|
—
|
|
|
3.6
|
|
|
Reclassification adjustment for gain on sale of available for sale securities recognized in net income
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
|
Total other comprehensive income (loss), net of tax
|
1.3
|
|
|
(0.5
|
)
|
|
—
|
|
|
0.8
|
|
|
Balance as of December 31, 2016
|
$
|
(1.4
|
)
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
(1.3
|
)
|
16. SUBSEQUENT EVENTS
Performance Share and Restricted Stock Activity
On January 28, 2018,
210,227
performance share awards (originally granted on January 28, 2015) were effectively converted to shares of restricted common stock. As of the calculation date, which was January 28, 2018, threshold performance goals for these awards were satisfied, and therefore, all
210,227
outstanding performance shares were converted to restricted shares as of January 28, 2018. In connection with the conversion of the above
210,227
performance shares, the Company paid a cumulative cash dividend of
$2.64
(representing the sum of all cash dividends paid from January 28, 2015 through January 28, 2018) on each performance share converted, totaling approximately
$0.6 million
during the first fiscal quarter of 2018.
On January 10, 2018,
300,832
performance shares were granted under our 2002 Incentive Plan at nominal cost to officers and key employees. Each performance share represents the right to receive from
0%
to
150%
of the target numbers of shares of restricted Class A common stock. The number of shares of restricted common stock earned will be determined based on the attainment of specified performance goals by January 10, 2021 (the third anniversary of the grant date) set forth in the 2009 Performance Agreement. Such performance shares fully vest on the
fourth anniversary
of the grant date. The shares are subject to the terms and conditions of the 2002 Incentive Plan. The closing price of our Class A common stock on the date of this grant was
$22.89
per share.
Also on January 10, 2018,
270,630
restricted shares were granted under the 2002 Incentive Plan at nominal cost to officers, directors and key employees. Under the 2002 Incentive Plan, Class A common stock of the Company may be granted at nominal cost to officers, directors and key employees, subject to a continued employment/service restriction (typically
one
to
four
years after the award date). The awards vest
25%
at the end of each year for
four
years (in the case of officers and key employees) and vest
100%
at the end of
one
year (in the case of directors). The plan participants are entitled to cash dividends and to vote their respective shares, although the sale and transfer of such shares is prohibited during the restricted period. The shares are subject to the terms and conditions of the 2002 Incentive Plan. The closing price of our Class A common stock on the date of this grant was
$22.89
per share.
REGAL ENTERTAINMENT GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017, December 31, 2016 and December 31, 2015
Declaration of Quarterly Dividend
On February 7, 2018, the Company declared a cash dividend of
$0.22
per share on each share of the Company's Class A and Class B common stock (including outstanding restricted stock), which was paid on February 26, 2018, to stockholders of record on February 17, 2018
.
Merger with Cineworld Group, plc
On February 28, 2018, following the satisfaction of the conditions in the Merger Agreement, Merger Sub was merged with and into the Company (the "Merger") pursuant to the Merger Agreement. As a result of the Merger, the Company became an indirect, wholly-owned subsidiary of Cineworld, the Company’s Class A Common Stock will no longer be listed on the New York Stock Exchange, and the registration of shares of the Company’s Class A common stock under the Exchange Act will be terminated. Upon the consummation of the Merger, (i) each share of our Class A and Class B common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares held in the treasury by us or owned by us, any of our subsidiaries, Cineworld, US Holdco, the Merger Sub or any other subsidiary of Cineworld (all of which, if any, were canceled) and shares of our Class A common stock held by holders who properly exercised their appraisal rights under Delaware law) were converted into the right to receive
$23.00
per share (the “Merger Consideration”); (ii) each outstanding and unvested Company restricted share was automatically fully vested, and was canceled and converted into the right to receive the Merger Consideration (less applicable withholding taxes); and (iii) each outstanding and unvested Company performance share award vested with respect to the target number of shares of Class A common stock that could be earned thereunder and was canceled and converted into the right to receive an amount of cash equal to the sum of (A) the product of the target number of shares then underlying such Company performance share award multiplied by the Merger Consideration and (B) the dividends paid with respect to the target number of shares then underlying such Company performance share award from the grant date to February 28, 2018 (less applicable withholding taxes). The 2002 Incentive Plan was terminated upon consummation of the Merger.
As the surviving corporation in the Merger, we adopted a certificate of incorporation providing for a total authorized capital stock consisting of
1,000
shares of common stock, par value
$.01
per share. All of the issued and outstanding shares of our common stock are now owned by US Holdco.
The aggregate consideration paid by Cineworld in the Merger was approximately
$3.6 billion
, excluding related transaction fees and expenses and repayment of certain Company indebtedness. Cineworld and US Holdco funded a portion of the aggregate Merger Consideration, the refinancing of certain Company indebtedness, as described below, and related fees and expenses through an equity financing of approximately
$2.3 billion
by way of a rights issue to the existing stockholders of Cineworld, underwritten by Barclays Bank PLC, HSBC Bank plc and Investec Bank plc, that entitled such stockholders to subscribe for newly issued Cineworld ordinary shares. Cineworld and US Holdco funded the remaining portion of the aggregate Merger Consideration, the refinancing of certain Company indebtedness, as described below, and related fees and expenses and a debt financing of approximately
$4.375 billion
, consisting of (i) a senior secured term loan facility in an aggregate principal amount of approximately
$4.075 billion
and (ii) a senior secured revolving credit facility in an aggregate principal amount of
$300.0 million
(the “Financing Facilities”) and cash and cash equivalents held by Cineworld and its subsidiaries and the Company at the closing of the Merger. The Company and certain of its subsidiaries agreed to guaranty all obligations of the parties to the agreements underlying the Financing Facilities, and pledge substantially all of their respective assets to secure the obligations of such parties.
In connection with the consummation of the Merger, on February 28, 2018, all amounts outstanding under the Amended Senior Credit Facility were repaid in full, and the Amended Senior Credit Facility was terminated. Also in connection with the Merger, on February 28, 2018: (i) we notified the Trustee, in its capacity as trustee under the indentures governing the Notes of our intention to redeem all of the aggregate principal amounts outstanding under the Notes, (ii) at our request, the Trustee distributed an irrevocable notice of redemption to holders of the Notes, and (iii) we deposited with the Trustee funds in trust solely for the benefit of the holders of the Notes sufficient to pay and discharge the entire indebtedness on the Notes. The Notes will be redeemed in full on March 30, 2018.
