**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

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**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedMarch 30, 2006**

**Commission file number 001-31315**

 

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**Regal Entertainment Group**(Exact name ofRegistrant as Specified in Its Charter) 

 

| **Delaware**                              | **02-0556934**                   |
|-------------------------------------------|----------------------------------|
| (State or Other  Jurisdiction of          | (Internal Revenue  Service       |
| Incorporation or Organization)            | Employer Identification  Number) |
|                                      |                             |
| **7132  Regal Lane**                      | ** **                       |
| **Knoxville,  TN**                        | **37918**                        |
| (Address of Principal  Executive Offices) | (Zip Code)                       |

Registrant’s Telephone Number, Including Area Code: **865/922-1123**

 

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        Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities and Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days: Yes x    No o

        Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and larger accelerated filer” in Rule 12b-2 of the ExchangeAct).(Check one): 

 

| Large accelerated  filer  x | Accelerated  filer  o | Non-accelerated  filer  o |
|---------------------------------------|---------------------------------|-------------------------------------|

 

        Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act): Yes o    No x

        Class ACommon Stock—67,190,023 shares outstanding at May 5, 2006

        Class BCommon Stock—81,936,967shares outstanding at May 5, 2006

 

** **

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**TABLE OF CONTENTS**

 
| PART  I—FINANCIAL INFORMATION |                                                                                        |   |
|------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                               |                                                                                        |   |
| Item 1.                            | FINANCIAL STATEMENTS                                                                        |   |   |
|                               |                                                                                        |   |   |
|                               | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS                                             |   |   |
|                               |                                                                                        |   |   |
|                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF  INCOME                                      |   |   |
|                               |                                                                                        |   |   |
|                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS                                  |   |   |
|                               |                                                                                        |   |   |
|                               | NOTES  TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                             |   |   |
|                               |                                                                                        |   |   |
| Item  2.                           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |   |
|                               |                                                                                        |   |   |
| Item  3.                           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |   |   |
|                               |                                                                                        |   |   |
| Item  4.                           | CONTROLS  AND PROCEDURES                                                                    |   |   |
|                               |                                                                                        |   |   |
| PART  II—OTHER INFORMATION    |                                                                                        |   |
|                               |                                                                                        |   |
| Item 1.                            | LEGAL PROCEEDINGS                                                                           |   |   |
|                               |                                                                                        |   |   |
| Item 6.                            | EXHIBITS                                                                                    |   |   |
|                               |                                                                                        |   |   |
| SIGNATURES                         |                                                                                        |   |

 

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**PARTI—FINANCIAL INFORMATION**

**Item1.    FINANCIAL STATEMENTS**

 

**REGAL ENTERTAINMENT GROUP**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

**(in millions, except share data)**
| ** **                                                                                                                                                                             | ** ** | **March 30, 2006** | ** ** | **December 29, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                             |       |               |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                                        |       |               |       |                       |       |
| Cash and cash equivalents                                                                                                                                                              |       | $                  | 156.6      |                       | $          | 196.3 |   |
| Trade and other receivables, net                                                                                                                                                       |       | 25.3               |       | 55.6                       |       |
| Inventories                                                                                                                                                                            |       | 7.9                |       | 7.8                        |       |
| Prepaid expenses and other current assets                                                                                                                                              |       | 7.1                |       | 1.3                        |       |
| Assets held for sale                                                                                                                                                                   |       | 3.8                |       | 0.4                        |       |
| Deferred income tax asset                                                                                                                                                              |       | 1.2                |       | 1.2                        |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| TOTAL CURRENT ASSETS                                                                                                                                                                   |       | 201.9              |       | 262.6                      |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                |       |               |       |                       |       |
| Land                                                                                                                                                                                   |       | 135.0              |       | 136.8                      |       |
| Buildings, leasehold improvements and equipment                                                                                                                                        |       | 2,433.8            |       | 2,429.4                    |       |
| Construction in progress                                                                                                                                                               |       | 18.5               |       | 21.8                       |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| Total property and equipment                                                                                                                                                           |       | 2,587.3            |       | 2,588.0                    |       |
| Accumulated depreciation and amortization                                                                                                                                              |       | (641.4             | )          | (600.3                     | )          |
|                                                                                                                                                                                   |       |               |       |                       |       |
| Total property and equipment, net                                                                                                                                                      |       | 1,945.9            |       | 1,987.7                    |       |
| GOODWILL                                                                                                                                                                               |       | 223.8              |       | 223.8                      |       |
| OTHER NON-CURRENT ASSETS                                                                                                                                                               |       | 64.8               |       | 58.7                       |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| TOTAL ASSETS                                                                                                                                                                           |       | $                  | 2,436.4    |                       | $          | 2,532.8 |   |
|                                                                                                                                                                                   |       |               |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                         |       |               |       |                       |       |
| CURRENT LIABILITIES:                                                                                                                                                                   |       |               |       |                       |       |
| Current portion of debt obligations                                                                                                                                                    |       | $                  | 257.0      |                       | $          | 260.4 |   |
| Accounts payable                                                                                                                                                                       |       | 139.0              |       | 181.3                      |       |
| Accrued expenses                                                                                                                                                                       |       | 71.8               |       | 88.3                       |       |
| Income taxes payable                                                                                                                                                                   |       | 23.3               |       | 68.2                       |       |
| Deferred revenue                                                                                                                                                                       |       | 116.9              |       | 94.3                       |       |
| Bankruptcy claims and liabilities                                                                                                                                                      |       | 1.1                |       | 1.1                        |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                                              |       | 609.1              |       | 693.6                      |       |
| LONG-TERM DEBT                                                                                                                                                                         |       | 1,608.3            |       | 1,612.3                    |       |
| LEASE FINANCING ARRANGEMENTS                                                                                                                                                           |       | 88.5               |       | 89.4                       |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                                                                              |       | 21.3               |       | 22.4                       |       |
| DEFERRED INCOME TAX LIABILITY                                                                                                                                                          |       | 5.5                |       | 2.1                        |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                          |       | 83.8               |       | 81.3                       |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| TOTAL LIABILITIES                                                                                                                                                                      |       | 2,416.5            |       | 2,501.1                    |       |
| MINORITY INTEREST                                                                                                                                                                      |       | 1.9                |       | 1.8                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                             |       |               |       |                       |       |
| Class A common stock, $0.001 par value; 500,000,000 shares authorized,  64,832,932 and 63,426,325 shares issued and outstanding at March 30, 2006 and  December 29, 2005, respectively |       | —             |       | —                     |       |
| Class B common stock, $0.001 par value; 200,000,000 shares  authorized, 83,936,967 shares issued and outstanding at March 30, 2006 and  December 29, 2005                              |       | 0.1                |       | 0.1                        |       |
| Preferred stock, $0.001 par value; 50,000,000 shares authorized; none  issued and outstanding                                                                                          |       | —             |       | —                     |       |
| Additional paid-in capital (deficit)                                                                                                                                                   |       | (12.5              | )          | (22.5                      | )          |
| Retained earnings                                                                                                                                                                      |       | 11.3               |       | 44.6                       |       |
| Unamortized deferred stock compensation                                                                                                                                                |       | —             |       | (4.4                       | )          |
| Accumulated other comprehensive income                                                                                                                                                 |       | 19.1               |       | 12.1                       |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                        |       | 18.0               |       | 29.9                       |       |
|                                                                                                                                                                                   |       |               |       |                       |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                        |       | $                  | 2,436.4    |                       | $          | 2,532.8 |   |

See accompanying notes to unaudited condensed consolidatedfinancial statements.

 

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**REGAL ENTERTAINMENT GROUP**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(in millions, except share andper share data)**
| ** **                                                                                                                         | ** ** | **Quarter Ended  March 30, 2006** | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|
| REVENUES:                                                                                                                          |       |                              |       |                                   |       |
| Admissions                                                                                                                         |       | $                                 | 392.0      |                                   | $          | 388.8 |   |
| Concessions                                                                                                                        |       | 158.6                             |       | 149.6                                  |       |
| Other operating revenue                                                                                                            |       | 34.5                              |       | 38.6                                   |       |
|                                                                                                                               |       |                              |       |                                   |       |
| TOTAL REVENUE                                                                                                                      |       | 585.1                             |       | 577.0                                  |       |
| OPERATING EXPENSES:                                                                                                                |       |                              |       |                                   |       |
| Film rental and advertising costs                                                                                                  |       | 197.0                             |       | 198.9                                  |       |
| Cost of concessions                                                                                                                |       | 24.1                              |       | 22.4                                   |       |
| Rent expense                                                                                                                       |       | 77.6                              |       | 74.5                                   |       |
| Other operating expenses                                                                                                           |       | 158.6                             |       | 161.8                                  |       |
| General and administrative expenses (including share-based  compensation expense of $2.0 million in 2006 and $1.5 million in 2005) |       | 15.9                              |       | 18.8                                   |       |
| Depreciation and amortization                                                                                                      |       | 49.7                              |       | 48.2                                   |       |
| Net loss on disposal and impairment of operating assets                                                                            |       | 5.7                               |       | 2.9                                    |       |
| Equity in loss (income) of joint venture including former employee  compensation                                                   |       | 5.8                               |       | —                                 |       |
|                                                                                                                               |       |                              |       |                                   |       |
| TOTAL OPERATING EXPENSES                                                                                                           |       | 534.4                             |       | 527.5                                  |       |
|                                                                                                                               |       |                              |       |                                   |       |
| INCOME FROM OPERATIONS                                                                                                             |       | 50.7                              |       | 49.5                                   |       |
| OTHER EXPENSE (INCOME):                                                                                                            |       |                              |       |                                   |       |
| Interest expense, net                                                                                                              |       | 31.1                              |       | 27.9                                   |       |
| Loss on debt extinguishment                                                                                                        |       | 0.9                               |       | —                                 |       |
|                                                                                                                               |       |                              |       |                                   |       |
| TOTAL OTHER EXPENSE, NET                                                                                                           |       | 32.0                              |       | 27.9                                   |       |
|                                                                                                                               |       |                              |       |                                   |       |
| INCOME BEFORE INCOME TAXES                                                                                                         |       | 18.7                              |       | 21.6                                   |       |
| PROVISION FOR INCOME TAXES                                                                                                         |       | 7.5                               |       | 8.5                                    |       |
|                                                                                                                               |       |                              |       |                                   |       |
| NET INCOME                                                                                                                         |       | $                                 | 11.2       |                                   | $          | 13.1 |   |
|                                                                                                                               |       |                              |       |                                   |       |
| EARNINGS PER SHARE:                                                                                                                |       |                              |       |                                   |       |
| Basic                                                                                                                              |       | $                                 | 0.08       |                                   | $          | 0.09 |   |
| Diluted                                                                                                                            |       | 0.07                              |       | 0.09                                   |       |
| AVERAGE SHARES OUTSTANDING (in thousands)                                                                                          |       |                              |       |                                   |       |
| Basic                                                                                                                              |       | 147,767                           |       | 145,017                                |       |
| Diluted                                                                                                                            |       | 154,038                           |       | 153,690                                |       |

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**REGAL ENTERTAINMENT GROUP**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)**

 
| ** **                                                                                          | ** ** | **Quarter Ended  March 30, 2006** | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                              |       |                                   |       |
| Net income                                                                                          |       | $                                 | 11.2       |                                   | $          | 13.1 |   |
| Adjustments to reconcile net income to cash provided by operating  activities:                      |       |                              |       |                                   |       |
| Depreciation and amortization                                                                       |       | 49.7                              |       | 48.2                                   |       |
| Share-based compensation expense                                                                    |       | 2.0                               |       | 1.5                                    |       |
| Deferred income tax expense (benefit)                                                               |       | (1.1                              | )          | (1.5                                   | )          |
| Net loss on disposal and impairment of operating assets                                             |       | 5.7                               |       | 2.9                                    |       |
| Equity in loss (income) of joint venture including former employee  compensation                    |       | 5.8                               |       | —                                 |       |
| Loss on debt extinguishment                                                                         |       | 0.9                               |       | —                                 |       |
| Changes in operating assets and liabilities (excluding effects of acquisition  and reorganization): |       |                              |       |                                   |       |
| Trade and other receivables                                                                         |       | 31.0                              |       | 25.2                                   |       |
| Inventories                                                                                         |       | (0.1                              | )          | 0.6                                    |       |
| Prepaid expenses and other current assets                                                           |       | (3.5                              | )          | (11.1                                  | )          |
| Accounts payable                                                                                    |       | (42.3                             | )          | (48.1                                  | )          |
| Income taxes payable                                                                                |       | (44.7                             | )          | (8.7                                   | )          |
| Accrued expenses and other liabilities                                                              |       | 6.3                               |       | 5.1                                    |       |
|                                                                                                |       |                              |       |                                   |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                                           |       | 20.9                              |       | 27.2                                   |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                              |       |                                   |       |
| Capital expenditures                                                                                |       | (18.5                             | )          | (30.7                                  | )          |
| Proceeds from disposition of assets                                                                 |       | 1.9                               |       | 0.9                                    |       |
|                                                                                                |       |                              |       |                                   |       |
| NET CASH USED IN INVESTING ACTIVITIES                                                               |       | (16.6                             | )          | (29.8                                  | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |                              |       |                                   |       |
| Cash used to pay dividends                                                                          |       | (44.6                             | )          | (43.6                                  | )          |
| Proceeds from stock option exercises                                                                |       | 6.2                               |       | 2.7                                    |       |
| Net payments on long term obligations                                                               |       | (5.0                              | )          | (8.9                                   | )          |
| Cash used to settle conversions of convertible notes                                                |       | (5.3                              | )          | —                                 |       |
| Net proceeds attributable to convertible note hedge and warrant                                     |       | 0.7                               |       | —                                 |       |
| Payment of debt acquisition costs and other                                                         |       | (1.4                              | )          | —                                 |       |
| Excess tax benefits from share-based payment arrangements                                           |       | 5.4                               |       | —                                 |       |
|                                                                                                |       |                              |       |                                   |       |
| NET CASH USED IN FINANCING ACTIVITIES                                                               |       | (44.0                             | )          | (49.8                                  | )          |
|                                                                                                |       |                              |       |                                   |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                |       | (39.7                             | )          | (52.4                                  | )          |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                    |       | 196.3                             |       | 243.9                                  |       |
|                                                                                                |       |                              |       |                                   |       |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                                 | 156.6      |                                   | $          | 191.5 |   |
|                                                                                                |       |                              |       |                                   |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                 |       |                              |       |                                   |       |
| Cash paid for income taxes, net of refunds received                                                 |       | $                                 | 48.2       |                                   | $          | 18.9 |   |
|                                                                                                |       |                              |       |                                   |       |
| Cash paid for interest                                                                              |       | $                                 | 29.7       |                                   | $          | 47.4 |   |

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**REGALENTERTAINMENT GROUPNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1. THE COMPANY AND BASIS OF PRESENTATION**

        RegalEntertainment Group (the “Company,” “Regal,” “we” or “us”) is the parentcompany of Regal Entertainment Holdings, Inc. (“REH”), which is the parentcompany of Regal Cinemas Corporation (“Regal Cinemas”) and its subsidiaries.Regal Cinemas’ subsidiaries include Regal Cinemas, Inc. (“RCI”) and itssubsidiaries, which include Edwards Theatres, Inc. (“Edwards”), RegalCineMedia Corporation (“Regal CineMedia” or “RCM”), Hoyts Cinemas Corporation (“Hoyts”),United Artists Theatre Group (“UATG”) and United Artists Theatre Company (“UnitedArtists”). The terms Regal or the Company, REH, Regal Cinemas, RCI, UnitedArtists, Edwards, Regal CineMedia, Hoyts and UATG shall be deemed to includethe respective subsidiaries of such entities when used in discussions includedherein regarding the current operations or assets of such entities.

        Regaloperates the largest theatre circuit in the United States, consisting of 6,415screens in 546 theatres in 40 states as of March 30, 2006.  The Company formally operates on a 52-weekfiscal year with each quarter generally consisting of 13 weeks, unlessotherwise noted. The Company’s fiscal year ends on the first Thursday afterDecember 25, which in certain years results in a 53-week fiscalyear.  As of March 30, 2006, the Companymanaged its business under one reportable segment: theatre exhibitionoperations.

         Fora discussion of the series of events leading to the formation of the Companyand other significant transactions which have occurred throughDecember 29, 2005, please refer to Note 1 to the consolidatedfinancial statements included in Part II, Item 8 of our annual report onForm 10-K filed on March 14, 2006 with the Securities and ExchangeCommission (File No. 001-31315) for the fiscal year endedDecember 29, 2005.

        Duringthe quarter ended March 30, 2006, Regal paid one quarterly cash dividend of$0.30 on each outstanding share of the Company’s Class A and Class Bcommon stock, including outstanding restricted stock (see Note 6—“CapitalStock and Share-Based Compensation”), or approximately $44.6 million inthe aggregate.

        Totalcomprehensive income for the quarters ended March 30, 2006 and March 31, 2005was $18.2 million and $24.8 million, respectively.  Total comprehensive income consists of netincome and other comprehensive income (loss), net of tax, related to the changein the aggregate unrealized gain (loss) on the Company’s interest rate swaparrangements during each of the quarters ended March 30, 2006 and March 31,2005. The Company’s interest rate swap arrangements are further described inNote 4—“Debt Obligations.”

        TheCompany has prepared the unaudited condensed consolidated balance sheet as ofMarch 30, 2006 and the unaudited condensed consolidated statements of incomeand cash flows in accordance with accounting principles generally accepted inthe United States of America for interim financial information and the rulesand regulations of the Securities and Exchange Commission. Accordingly, certaininformation and footnote disclosures typically included in an annual reporthave been condensed or omitted for this quarterly report. In the opinion ofmanagement, all adjustments (which include only normal recurring adjustments)necessary to present fairly in all material respects the financial position,results of operations and cash flows for all periods presented have been made.The December 29, 2005 unaudited condensed consolidated balance sheetinformation is derived from the audited consolidated financial statements ofthe Company included in its annual report on Form 10-K for the fiscal yearended December 29, 2005. These unaudited condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto. The results of operations for thequarter ended March 

 

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30, 2006are not necessarily indicative of the operating results that may be achievedfor the full 2006 fiscal year.         Certain reclassifications havebeen made to the 2005 financial statements to conform to the 2006 presentation.**2. ACQUISITIONS**

***Acquisition of R/CTheatres and Eastern Federal Corporation Theatres***

        OnApril 28, 2005, the Company acquired seven theatres comprising 76 screensin Maryland, Florida, Pennsylvania and Virginia from R/C Theatres. OnJuly 21, 2005, the Company acquired 21 theatres and 230 screens inFlorida, North Carolina and South Carolina from Eastern Federal Corporation.The total aggregate cash purchase price for the combined acquisitions totaledapproximately $156.7 million, including $125.2 million for the EasternFederal Corporation acquisition, subject to post-closing adjustments. Thetransactions have been accounted for using the purchase method of accountingand, accordingly, the purchase price has been allocated to the assets acquiredand liabilities assumed for each of the respective theatre locations based ontheir estimated fair values at the dates of acquisition, with the remainingbalance allocated to goodwill. The allocation of the purchase price is based onmanagement’s judgment after evaluating several factors, including anindependent third party appraisal of certain Eastern Federal Corporation feeproperties. The results of operations of the acquired theatre operations havebeen included in the Company’s consolidated financial statements for periods subsequentto the respective acquisition dates. 

 

        Thefollowing is a summary of the preliminary allocation of the aggregate cashpurchase price to the estimated fair values of the assets acquired andliabilities assumed at the respective dates of acquisition (in millions):

 

| Current assets               |   | $      | 0.2    |   |
|------------------------------|--------|--------|--------|--------|
| Property and equipment,  net |   | 157.8  |   |
| Goodwill                     |   | 2.9    |   |
| Current liabilities          |   | (4.2   | )      |
|                         |   |   |   |
| Total purchase price         |   | $      | 156.7  |   |

 

        The following unaudited pro formaresults of operations for the quarter ended March 31, 2005 assume the aboveacquisitions occurred as of the beginning of fiscal 2005. The pro forma resultshave been prepared for comparative purposes only and do not purport to indicatethe results of operations which would actually have occurred had thecombination been in effect on the date indicated, or which may occur in thefuture. 

 

| ** **             | ** ** | **Quarter Ended  March 31, 2005  (in millions, except per  share amounts)** | ** ** |
|------------------------|------------|-----------------------------------------------------------------------------|------------|
| Revenues               |       | $                                                                           | 594.4      |   |
| Income from operations |       | 51.1                                                                        |       |
| Net income             |       | 14.1                                                                        |       |
| Earnings per share     |       |                                                                        |       |
| Basic:                 |       | 0.10                                                                        |       |
| Diluted:               |       | 0.09                                                                        |       |
|                        |            |                                                                             |            |  |

 

 

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**3. FORMATION OF NATIONAL CINEMEDIA, LLC**

        OnMarch 29, 2005, Regal and AMC Entertainment Inc. (“AMC”) announced thecombination of the operations of RCM and AMC’s subsidiary, National CinemaNetwork, Inc. (“NCN”), into a new joint venture company known as NationalCineMedia, LLC (“National CineMedia”). On July 15, 2005, Cinemark, Inc. (“Cinemark”), through a whollyowned subsidiary, acquired a 20.7% interest in National CineMedia. As of March30, 2006, RCM’s wholly owned subsidiary, Regal CineMedia Holdings, LLC (“RCH”),owned 49.9% of the Class A Units of National CineMedia, NCN owned 29.4% ofthe Class A Units of National CineMedia and Cinemark owned 20.7% of theClass A Units of National CineMedia. National CineMedia focuses on theexpansion of ancillary businesses, such as in-theatre advertising and thecreation of complementary business lines that leverage the existing operatingpersonnel, asset and customer bases of its theatrical exhibition partners,which includes us, AMC and Cinemark. National CineMedia is, subject to limitedexceptions, the exclusive provider of advertising and event services to Regal,AMC and Cinemark.

        As part of the jointventure transaction, on March 29, 2005, RCM and NCN entered into aContribution and Unit Holders Agreement with National CineMedia pursuant towhich, among other things, RCM and NCN agreed to contribute assets to NationalCineMedia and National CineMedia agreed to assume specified liabilities of RCMand NCN in consideration for the issuance of equity units by National CineMediato RCH and NCN, respectively. The assets contributed to National CineMedia byRCM included fixed assets and agreements as well as approximately$1.3 million in cash. The Company accounts for its investment in NationalCineMedia using the equity method of accounting and did not recognize any gainor loss resulting from the initial formation of National CineMedia due to theCompany’s continued involvement in the operations of National CineMedia. As ofMarch 30, 2006, RCH’s investment in National CineMedia totaled approximately($2.1 million). Such investment is presented as a component of “OtherNon-Current Assets” on the accompanying consolidated balance sheet as of March30, 2006.

        Inaddition, on March 29, 2005, RCM, AMC’s subsidiary, AmericanMulti-Cinemas, Inc., and National CineMedia entered into a SoftwareLicense Agreement, which was amended and restated on July 15, 2005 pursuantto Cinemark’s participation in National CineMedia, in connection with thelicensing of software and related rights ancillary to the use of such softwareto National CineMedia for the conduct of its business. Pursuant to the otherdocuments entered into in connection with the joint venture transaction, AMCand Regal, through their subsidiaries, retained all advertising contractssigned on or before the close of business on March 31, 2005, and Cinemarkretained all advertising contracts signed on or before the close of business onJuly 15, 2005, subject to a 32% administrative fee payable to NationalCineMedia to service such contracts. For the quarter ended March 30, 2006,administrative fees paid to National CineMedia totaled $1.1 million.Revenues and expenses attributable to these advertising contracts are recordedas a component of other operating revenues and other operating expenses in theCompany’s financial statements. For contracts signed by National CineMediaafter the close of business on March 31, 2005, AMC and Regal, and withrespect to advertising contracts signed after the close of business onJuly 15, 2005, Cinemark, through their respective theatre exhibitionsubsidiaries, receive revenue from National CineMedia with respect to advertisingand event services at their respective theatres through an agreed upon formulaas well as equity in income/loss of National CineMedia. Such formula is basedon the weighted average number of screens owned by and the number of theatrepatrons of the applicable exhibitor’s theatres for any measurement period.During the quarter ended March 30, 2006, the Company recorded $7.6 millionof advertising revenues and $0.6 million of other revenues derived fromthese contracts, which are presented as a component of other operating revenuesin the Company’s financial statements. For the quarter ended March 30, 2006,the Company recorded a loss of $4.2 million, representing its share of thenet loss of National CineMedia.  Inaddition, as of March 30, 2006, approximately $11.7 million and$0.9 million due from/to National CineMedia were included in “Trade andother receivables, net” and “Accounts payable,” respectively.

        Inconnection with the formation of National CineMedia, on May 11, 2005, RCIadopted and approved the RCI Severance Plan For Equity Compensation (the “SeverancePlan”). Participation in the 

 

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SeverancePlan is limited to employees of RCM, who held an unvested option to purchaseshares of Regal’s Class A common stock or unvested shares of Regal’srestricted Class A common stock pursuant to the terms of the Company’s2002 Incentive Plan (the “Incentive Plan”) immediately prior to such employee’stermination of employment with RCM and commencement of employment with NationalCineMedia. Each employee’s termination of employment with RCM was effective asof the close of business on May 24, 2005 and commencement of employmentwith National CineMedia was effective as of May 25, 2005. Under the termsof and subject to the conditions of the Severance Plan, each eligible employeewho participates in the Severance Plan (a “Participant”) is, at the times setforth in the Severance Plan, entitled to a cash payment equal to (1) withrespect to each unvested stock option held on May 24, 2005, the differencebetween the exercise price of such unvested option and $20.19 (the fair marketvalue of a share of Regal’s Class A common stock on May 24, 2005 ascalculated pursuant to the terms of the Severance Plan) and (2) withrespect to each unvested share of restricted stock, $20.19 (the fair marketvalue of a share of Regal’s Class A common stock on May 24, 2005 ascalculated pursuant to the terms of the Severance Plan). In addition, theSeverance Plan provides that each Participant who held unvested shares ofrestricted stock on May 24, 2005 will be entitled to receive payments inlieu of dividend distributions in an amount equal to the per share value ofdividends paid on Regal’s Class A common stock times the number of sharesof such restricted stock. Each such Participant will receive these payments inlieu of dividend distributions until the date that each such Participant’srestricted stock would have vested in accordance with the Incentive Plan.Solely for purposes of the calculation of such payments with respect torestricted stock, in the event of any stock dividend, stock split or otherchange in the corporate structure affecting Regal’s Class A common stock,there shall be an equitable proportionate adjustment to the number of shares ofrestricted stock held by each Participant immediately prior to his or hertermination of employment with RCM.

        EachParticipant’s cash payment will vest according to the year and date on whichsuch unvested options and restricted stock held by such Participant would havevested pursuant to the terms of the Incentive Plan and the related awardagreement had employment with RCM not ceased. As a result of the formation of National CineMedia, approximately1.5 million unvested options and 77,020 shares of unvested restrictedstock were forfeited.  The total cost ofthe Severance Plan, including payments in lieu of dividend distributions onrestricted stock, is estimated to be in the range of approximately$15.0 million to $16.0 million. Pursuant to the terms of the NationalCineMedia arrangements, approximately $4.0 million of such costsassociated with the Severance Plan were funded by National CineMedia. As theSeverance Plan provides for payments over future periods that are contingentupon continued employment with National CineMedia, the cost of the SeverancePlan will be recorded as an expense over the remaining required serviceperiods. During the quarter ended March 30, 2006, the Company recorded totalseverance expense of approximately $1.6 million, including less than$0.1 million of payments in lieu of dividends, related to the SeverancePlan.

        Aspart of the joint venture transaction, RCH, NCN and Cinemark, or theirrespective affiliates, entered into a number of ancillary agreements, includinga Limited Liability Company Operating Agreement, as amended (the “OperatingAgreement”), in order to set forth their respective rights and obligations asmembers in connection with their interests in National CineMedia. The OperatingAgreement provides that the board of directors of National CineMedia consistsof ten members including three directors designated by NCN, three directorsdesignated by RCH, three directors designated by Cinemark’s wholly ownedsubsidiary, and Kurt Hall, the Chairman and Chief Executive Officer of NationalCineMedia. The Operating Agreement also provides that all actions of NationalCineMedia’s board of directors require the vote of nine directors.

 

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**4. DEBT OBLIGATIONS**

        Debt obligations at March 30, 2006 andDecember 29, 2005 consist of the following (in millions): 

 
| ** **                                                                                               | ** ** | **March 30, 2006** | ** ** | **December 29 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------------|------------|
| Regal 33⁄4% Convertible Senior Notes                                                                  |       | $                  | 235.6      |                      | $          | 240.0 |   |
| Regal Cinemas Senior Credit Facility                                                                     |       | 1,571.9            |       | 1,575.9                   |       |
| Regal Cinemas 93/8% Senior  Subordinated Notes                                                           |       | 51.5               |       | 51.5                      |       |
| Lease financing arrangements, 3.3% to 12.3%, maturing in various  installments through January 2021 |       | 91.8               |       | 92.6                      |       |
| Capital lease obligations, 8.5% to 10.3%, maturing in various  installments through December 2017   |       | 23.3               |       | 23.5                      |       |
| Other                                                                                                    |       | 1.0                |       | 1.0                       |       |
|                                                                                                     |       |               |       |                      |       |
| Total debt obligations                                                                                   |       | 1,975.1            |       | 1,984.5                   |       |
| Less current portion                                                                                     |       | (257.0             | )          | (260.4                    | )          |
|                                                                                                     |       |               |       |                      |       |
| Total debt obligations, net of current maturities                                                        |       | $                  | 1,718.1    |                      | $          | 1,724.1 |   |

******

***Regal 33⁄4% Convertible Senior Notes***—On May 28, 2003, Regal issued$240.0 million aggregate principal amount of 33⁄4% Convertible Senior Notesdue May 15, 2008 (the “Convertible Senior Notes”). Interest on theConvertible Senior Notes is payable semi-annually in arrears on May 15 andNovember 15 of each year, beginning November 15, 2003. TheConvertible Senior Notes are senior unsecured obligations of Regal and rank onparity with all of our existing and future senior unsecured indebtedness andprior to all of our subordinated indebtedness. The Convertible Senior Notes areeffectively subordinated to all of our future secured indebtedness to theextent of the assets securing that indebtedness and to any indebtedness andother liabilities of our subsidiaries. None of our subsidiaries have guaranteedany of our obligations with respect to the Convertible Senior Notes. On orafter May 15, 2007, our note holders will have the option to convert theirConvertible Senior Notes, in whole or in part, into shares of our Class Acommon stock at any time prior to maturity, subject to certain limitations,unless previously purchased by us at the note holder’s option upon a change incontrol, at the then existing conversion price per share.  Prior to May 15, 2007, our note holdershave the right, at their option, to convert their Convertible Senior Notes, inwhole or in part, into shares of our Class A common stock, subject tocertain limitations, unless previously purchased by us at the note holder’soption upon a change in control, at the then existing conversion price pershare, subject to further adjustments described below, if:

 

•                  the closing sale price of our Class A commonstock on the previous trading day was 110% or more of the then currentconversion price;

•                  we distribute to all or substantially all holders ofour common stock certain rights entitling them to purchase common stock at lessthan the closing sale price of our Class A common stock on the daypreceding the declaration of such distribution;

•                  other than the extraordinary dividend paid onJuly 1, 2003, we distribute to all or substantially all holders of ourcommon stock cash or other assets, debt securities or certain rights topurchase our securities, which distribution has a per share value as determinedby our board of directors exceeding 10% of the closing sale price of ourClass A common stock on the day preceding the declaration of suchdistribution;

•                  we become a party to a consolidation, merger or saleof all or substantially all of our assets or a change in control occurs, ineach case, pursuant to which our common stock would be converted into cash,stock or other property unless, in the case of a consolidation or merger, allof the consideration, excluding cash payments for fractional shares and cashpayments made pursuant to dissenters’ appraisal rights, in such merger orconsolidation consists of shares of common stock, American Depositary Shares orother certificates representing common equity interests traded on a UnitedStates national securities exchange or quoted on The NASDAQ Stock Market, orwill be so traded or quoted when issued or exchanged in connection with suchmerger or consolidation, and as a result of such merger or consolidation theConvertible Senior Notes become 

 

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convertible solely into such common stock or othercertificates representing common equity interests; or

•                  after any five consecutive trading-dayperiod in which the average of the trading prices for the Convertible SeniorNotes for that five trading-day period was less than 100% of the average of theconversion values for the Convertible Senior Notes during that period.

        OnMarch 30, 2006, at the then current conversion price of $14.9663 per share(which conversion price has been adjusted pursuant to the antidilutionprovisions of the Convertible Senior Notes in connection with the payment byRegal of dividends on its common stock), each $1,000 of aggregate principalamount of Convertible Senior Notes is convertible into approximately 66.8168shares of our Class A common stock. Upon conversion, we may elect todeliver cash in lieu of shares of Class A common stock or a combination ofcash and shares of Class A common stock. As explained below, with respectto the par amount of the conversion obligation, we intend to deliver cash tonote holders upon conversion. The conversion price and the number of sharesdelivered on conversion are subject to adjustment upon certain events.

        In connection with theissuance of the Convertible Senior Notes, we used approximately$18.8 million of the net proceeds of the offering to enter intoconvertible note hedge and warrant transactions with respect to ourClass A common stock to reduce the potential dilution from conversion ofthe Convertible Senior Notes. Under the terms of the convertible note hedgearrangement (the “Convertible Note Hedge”) with Credit Suisse First Boston (“CSFB”),we paid $36.2 million for a forward purchase option contract under whichwe are entitled to purchase from CSFB a fixed number of shares of ourClass A common stock (at a March 30, 2006 price per share of $14.9663). Inthe event of the conversion of the Convertible Senior Notes, this forwardpurchase option contract allows us to purchase, at a fixed price equal to theimplicit conversion price of shares issued under the Convertible Senior Notes,a number of shares equal to the shares that we issue to a note holder uponconversion. Settlement terms of this forward purchase option allow the Companyto elect cash or share settlement based on the settlement option it chooses insettling the conversion feature of the Convertible Senior Notes. We accountedfor the Convertible Note Hedge pursuant to the guidance in EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in aCompany’s Own Stock.” Accordingly, the $36.2 million purchase price of theforward stock purchase option contract was recorded as a reduction ofconsolidated stockholders’ equity.

        Wealso sold to CSFB a warrant (the “Warrant”) to purchase shares of ourClass A common stock. The Warrant is currently exercisable for 15,741,967shares of our Class A common stock at a March 30, 2006 exercise price of$17.2688 per share (which exercise price has been adjusted pursuant to theantidilution provisions of the Warrant in connection with the payment by Regalof dividends on its common stock). We received $17.4 million cash fromCSFB in return for the sale of this forward share purchase option contract.CSFB cannot exercise the Warrant unless and until a conversion event occurs. Wehave the option of settling the Warrant in cash or shares of our Class Acommon stock. We accounted for the sale of the Warrant as the sale of apermanent equity instrument pursuant to the guidance in EITF 00-19.Accordingly, the $17.4 million sales price of the forward stock purchaseoption contract was recorded as a credit to consolidated stockholders’ equity.

        TheConvertible Note Hedge and the Warrant allow us to acquire sufficientClass A common shares from CSFB to meet our obligation to deliverClass A common shares upon conversion by the note holder, unless theClass A common share price exceeds $17.2688 (as of March 30, 2006). Whenthe fair value of our Class A common shares exceeds such price, the equitycontracts no longer have an offsetting economic impact, and accordingly will nolonger be effective as a hedge of the dilutive impact of possible conversion.

        TheConvertible Senior Notes allow us to settle any conversion, and we intend tosettle any conversion, by remitting to the note holder the accreted value ofthe note in cash plus the conversion spread (the excess conversion value overthe accreted value) in either cash, shares of our Class A common stock ora combination of stock and cash. The accounting for convertible debt with suchsettlement features is addressed in the consensus reached by the EITF withrespect to the accounting for Instrument C as set forth 

 

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in EITF90-19, “Convertible Bonds with Issuer Option to Settle for Cash UponConversion.” It is our intent to settle the Convertible Senior Notes’conversion obligations consistent with Instrument C. Because the accreted valueof the Convertible Senior Notes will be settled for cash upon the conversion,only the conversion spread (the excess conversion value over the accretedvalue), which may be settled in stock, will result in potential dilution in ourearnings-per-share computations.

        OnMarch 30, 2006, the closing sale price of our Class A common stock was$18.58, which exceeded 110% of the then current conversion price of $14.9663.Accordingly, as of March 30, 2006, our note holders had the right, at theiroption, to convert their Convertible Senior Notes, in whole or in part, intoshares of our Class A common stock, subject to certain limitations, at thecurrent conversion price of $14.9663. This conversion option, coupled with theCompany’s stated policy to settle any conversion by remitting to the noteholder the accreted value of the note in cash, resulted in the classificationof the $235.6 million principal amount of the Convertible Senior Notes asa current liability on the accompanying consolidated balance sheet as of March30, 2006. The future balance sheet classification of this liability (i.e.,current versus non-current presentation) will be monitored at each quarterlyreporting date, and will be determined based on an analysis of the variousconversion rights described above.

        OnMarch 28, 2005, one of the holders of the Convertible Senior Notesexercised its conversion right with respect to $1,000 principal amount of thenotes held by it, and the Company settled the entire conversion in cash. OnApril 5, 2005, the Company filed a complaint in the Delaware Court ofChancery to resolve a question that has arisen about the terminology used inthe Indenture, dated as of May 28, 2003, as amended April 5, 2005 (the “Indenture”),between the Company and U.S. Bank National Association (the “Trustee”)regarding the Convertible Senior Notes’ conversion price adjustment mechanism.See Note 7—“Commitments and Contingencies” for further discussion of thismatter.

        During February 2006, certainholders of the Convertible Senior Notes exercised conversion rights withrespect to $4.4 million principal amount of the notes held by them, andthe Company settled each of these conversions entirely in cash forapproximately $5.3 million. As a result of these conversions, the Companyrecorded a $0.9 million loss on debt extinguishment during the quarter endedMarch 30, 2006. In connection with these conversions, the Company received netproceeds of approximately $0.7 million from CSFB attributable to theConvertible Note Hedge and the Warrant. Such proceeds were recorded as an increase to additional paid-incapital.

        ***Regal Cinemas Fourth Amended andRestated Credit Agreement, as Amended***—

        On March 9, 2006, Regal Cinemasentered into a fourth amendment (the “Fourth Amendment”) to its Fourth Amendedand Restated Credit Agreement, dated as of May 10, 2004, as first amended as ofJuly 27, 2004, as second amended as of November 24, 2004 and as third amendedas of September 26, 2005 (as amended, including by the Fourth Amendment, the “SeniorCredit Facility”) to reduce the interest rate applicable to the term loanfacility under the Senior Credit Facility (the “Term Facility”) by25 basis points. Borrowings under the Term Facility and revolving loanfacility under the Senior Credit Facility bear interest, at Regal Cinemas’option, at either an adjusted Eurodollar rate or the base rate plus, in eachcase, an applicable margin. Effective March 9, 2006, the applicable marginwas reduced from 2.00% to 1.75% on the Term Facility. The applicable marginwill be further reduced to 1.50% if the consolidated leverage ratio of RegalCinemas is maintained at 3.0 or less.  Asof March 30, 2006, the interest rate on the Term Facility was approximately6.28%.

        TheSenior Credit Facility is further described in Note 5 to the consolidatedfinancial statements included in our annual report on Form 10-K for thefiscal year ended December 29, 2005 and, as such discussion is amended by thediscussion herein, is incorporated by reference herein.

        ***Interest Rate Swaps***—Asdescribed in Note 5 to the consolidated financial statements included inour annual report on Form 10-K for the fiscal year ended December 29,2005, during 2004 and 2005, Regal 

 

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Cinemasentered into a total of five hedging relationships via five distinct interestrate swap agreements to hedge approximately $1.1 billion of variable rateliabilities under the Senior Credit Facility.

        Asof March 30, 2006, the aggregate fair value of the five interest rate swaps wasdetermined to be approximately $31.4 million, which has been recorded as acomponent of “Other Non-Current Assets” with a corresponding amount of$19.1 million, net of tax, recorded to “Accumulated Other ComprehensiveIncome.” The interest rate swaps exhibited no ineffectiveness for the quartersended March 30, 2006 and March 31, 2005.

        ***Other Long-Term Obligations***—Allother long-term obligations (including the Regal Cinemas 93/8% Senior Subordinated Notes) not explicitly discussedherein are described in Note 5 to the consolidated financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 29, 2005 and incorporated by reference herein.

**5. INCOME TAXES**

        Theprovision for income taxes of $7.5 million and $8.5 million****for the quarters ended March 30, 2006 and March 31, 2005,respectively, reflect effective tax rates of approximately 40.1% and 39.4%,respectively. The effective tax rates for the quarters ended March 30, 2006 andMarch 31, 2005 reflect the impact of certain non-deductible expenses.

       Inassessing the realizable value of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich these temporary differences become deductible. The Company has recorded avaluation allowance against deferred tax assets at March 30, 2006 and December29, 2005, totaling $37.4 million as management believes it is more likelythan not that certain deferred tax assets will not be realized in future taxperiods. As of March 30, 2006 and December 29, 2005, $33.7 million of thevaluation allowance relates to pre-acquisition deferred tax assets of Hoyts,Edwards and United Artists. Accordingly, future reductions in the valuationallowance associated with a change in management’s determination of the Company’sability to realize these deferred tax assets will reduce recorded goodwillrelated to such acquisitions.

**6. CAPITAL STOCK AND SHARE-BASED COMPENSATION**

***Capital Stock***

        Asof March 30, 2006, the Company’s authorized capital stock consisted of:

•                  500,000,000 shares of Class A commonstock, par value $0.001 per share;

•                  200,000,000 shares of Class B commonstock, par value $0.001 per share; and

•                  50,000,000 shares of preferred stock, parvalue $0.001 per share.

 

        Of the authorizedshares of Class A common stock, 18,000,000 shares were sold in connectionwith the Company’s initial public offering in May 2002. The Company’sClass A common stock is listed on the New York Stock Exchange under thetrading symbol “RGC.” As of March 30, 2006, 64,832,932 shares of Class Acommon stock were outstanding. Of the authorized shares of Class B commonstock, 83,936,967shares were outstanding as of March 30, 2006, all of which are held byAnschutz Company (“Anschutz”) and OCM Principal Opportunities Fund II, L.P. andits subsidiaries. Each share of Class B common stock converts into oneshare of Class A common stock at the option of the holder or upon certaintransfers of a holder’s Class B common stock. Each holder of Class Bcommon stock is entitled to ten votes for each outstanding share ofClass B common stock owned by that stockholder on every matter properlysubmitted to the stockholders for their vote. Of the authorized shares of thepreferred stock, no shares are issued and outstanding as of March 30, 2006. TheClass A common stock is entitled to one vote for each outstanding share ofClass A common stock on every matter properly submitted to thestockholders for a vote. Except 

 

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as required by law, the Class A and Class B common stock votetogether as a single class on all matters submitted to the stockholders for avote. The material terms and provisions of the Company’s certificate ofincorporation affecting the relative rights of the Class A common stockand the Class B common stock are described in Note 9 to the financialstatements included in our annual report on Form 10-K for the fiscal yearended December 29, 2005.

***Share RepurchaseProgram***

        Duringthe quarter ended September 30, 2004, the Company’s board of directorsauthorized a share repurchase program, which provided for the authorization torepurchase up to $50.0 million of the Company’s outstanding Class Acommon stock within a twelve month period. During the quarter endedJune 30, 2005, the Company repurchased 520,386 shares of its outstandingClass A common stock at an aggregate cost of approximately$10.0 million. During the quarter ended September 29, 2005, theCompany’s board of directors extended the share repurchase program for anadditional twelve month period. Accordingly, the Company can repurchase up toan additional $40.0 million under the share repurchase program throughSeptember 2006. The Company made no repurchases of its outstandingClass A common stock during the quarter ended March 30, 2006. Repurchasescan be made from time to time as market conditions warrant, through open marketpurchases, negotiated transactions, or in such a manner deemed appropriate bythe Company. Treasury shares are retired upon repurchase. At retirement, theCompany records treasury stock purchases at cost with any excess of cost overpar value recorded as a reduction of additional paid-in capital. 

***Warrants***

        Other than disclosed in Note 4—“DebtObligations” and Note 9—“Earnings Per Share,” no warrants to acquire theCompany’s common stock were outstanding as of March 30, 2006.

***Share-BasedCompensation***

        In 2002, the Companyestablished the Incentive Plan which provides for the granting of incentivestock options and non-qualified stock options to officers, employees andconsultants of the Company. As described below under “Restricted Stock,” theIncentive Plan also provides for grants of restricted stock that are subject torestrictions and risks of forfeiture. Readers should refer to Note 9 tothe financial statements included in our annual report on Form 10-K forthe fiscal year ended December 29, 2005 for additional information relatedto these awards and the Incentive Plan.

 

        Effective December 30,2005, the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised), “Share-Based Payment” (SFAS 123R) utilizing themodified prospective approach. Prior to the adoption of SFAS 123R, we accountedfor stock option grants in accordance with Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsicvalue method), and accordingly, recognized no compensation expense for thosestock options having an exercise price equal to the market value of the Company’sClass A common stock on the date of the grant.

 

        Under the modifiedprospective approach, SFAS 123R applies to awards that were outstanding onDecember 30, 2005 and to new awards and the modification, repurchase orcancellation of awards after December 30, 2005. Under the modified prospective approach, compensation cost recognized inthe first quarter of fiscal 2006 includes share-based compensation cost for allshare-based payments granted prior to, but not yet vested as of December 30,2005, based on the grant-date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”(SFAS 123) and recognized as expense over the remaining requisite serviceperiod. Share-based compensation cost for all share-based payments grantedsubsequent to December 30, 2005 are based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123R and recognized asexpense over the employee’s requisite service period.  Prior periods were not restated to reflectthe impact of adopting the new standard.

 

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        On November 10,2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards.”The Company has elected to adopt the alternative transition method provided inthis FASB Staff Position for calculating the tax effects of share-basedcompensation pursuant to SFAS 123R. The alternative transition method includesa simplified method to establish the beginning balance of the additionalpaid-in capital pool (APIC pool) related to the tax effects of employeeshare-based compensation, which is available to absorb tax deficienciesrecognized subsequent to the adoption of SFAS 123R.

 

        As a result of adoptingSFAS 123R on December 30, 2005, our income before income taxes, net income andbasic earnings per share for the quarter ended March 30, 2006, were $0.7million, $0.4 million, $0.01 lower, respectively, than if we had continuedto account for share-based compensation under APB Opinion No. 25 for ourstock option grants.  Diluted earningsper share for the quarter ended March 30, 2006 would have been the same as thereported amount had the Company continued to apply APB Opinion No. 25.

 

*Stock Options*

 

        We use the Black-Scholesoption pricing model to estimate the fair value of our stock option awards withthe assumptions noted in the following table for the indicated periods.

 

| ** **                          | ** ** | **Quarter Ended  March 30, 2006** | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Expected volatility                 |       | 38.0-39.0                         | %          | 38.0-39.0                         | %          |
| Expected life of options (in years) |       | 7.5                               |       | 7.5                               |       |
| Risk-free interest rate             |       | 3.0-4.9                           | %          | 3.0-4.9                           | %          |
| Dividend yield                      |       | 3.0-4.5                           | %          | 3.0-4.5                           | %          |

 

        Expected volatility isbased on historical volatility of the Company’s common stock price.  The expected term of options granted isderived using the midpoint of the average vesting period and contractual lifeof the stock options. The risk-free interest rate assumption is based upon observedinterest rates appropriate for the terms of the Company’s employee stockoptions. The Company does not target a specific dividend yield for its dividendpayments but is required to assume a dividend yield as an input to theBlack-Scholes model. The dividend yield assumption is based on the Company’shistory and expectation of future dividend payouts and may be subject tosubstantial change in the future. There were no stock options granted duringthe quarters ended March 30, 2006 and March 31, 2005.

 

        As share-basedcompensation expense recognized in the unaudited condensed consolidatedstatement of income for the quarter ended March 30, 2006 is based onawards ultimately expected to vest, it should be reduced for estimatedforfeitures.  SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.  In the Company’s pro forma informationrequired under SFAS 123 for the periods prior to fiscal 2006, the Companyaccounted for forfeitures as they occurred.

 

        During the quarter endedMarch 30, 2006, the Company recognized approximately $1.8 million ofshare-based compensation expense related to stock options.  Such expense is presented as a component ofgeneral and administrative expenses for the quarter ended March 30, 2006. AtMarch 30, 2006, there was $6.5 million of unrecognized compensation costrelated to share-based payments which is expected to be recognized over aweighted-average period of 1.03 years.

 

        We receive a taxdeduction for certain stock option exercises during the period the options areexercised, generally for the excess of the price at which the stock is soldover the exercise price of the options. In addition, we will receive a tax deduction when restricted stockvests.  Prior to adoption of SFAS 123R,we reported all tax benefits resulting from the exercise of stock options asoperating cash flows in our consolidated statements of cash flows. Inaccordance with SFAS 123R, we are required to report excess tax benefits fromthe award of equity instruments as financing cash flows.  Excess tax benefits are recorded when adeduction reported for tax return purposes for an award of equity instruments 

 

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exceeds the cumulative compensation cost for the instruments recognizedfor financial reporting purposes.  Forthe quarter ended March 30, 2006, our unaudited condensed consolidatedstatement of cash flows reflects $5.4 million of excess tax benefits asfinancing cash flows rather than operating cash flows.  Net cash proceeds from the exercise of stockoptions were $6.2 million for the quarter ended March 30, 2006. The actualincome tax benefit realized from stock option exercises is $6.8 million for thesame period.

 

        The following tablerepresents stock option activity for the quarter ended March 30, 2006:

 
| ** **                                  | ** ** | **Number of** | ** ** | **Weighted-Average** | ** ** | **Weighted-Average** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **Shares**    | ** ** | **Exercise Price**   | ** ** | **Contract Life**    | ** ** |
| Outstanding options at  beginning of period |       | 5,943,986     |       | $                    | 6.43       |                 |       |   |
| Granted                                     |       | —        |       | —               |       |                 |       |
| Exercised                                   |       | (1,236,918    | )          | 5.02                 |       |                 |       |
| Forfeited                                   |       | (14,604       | )          | 13.79                |       |                 |       |
| Outstanding options at end  of period       |       | 4,692,464     |       | $                    | 6.78       |                 | 6.20  Yrs  |   |
| Outstanding exercisable at  end of period   |       | 2,110,777     |       | $                    | 6.37       |                 | 6.16  Yrs  |   |

 

        Shares available forfuture stock option grants to employees and directors under the Incentive Planwere approximately 3.8 million at March 30, 2006.  The aggregate intrinsic value of optionsoutstanding at March 30, 2006 was $55.3 million, and the aggregateintrinsic value of options exercisable was $25.8 million. Total intrinsicvalue of options exercised was $17.3 million and $6.0 million for thequarters ended March 30, 2006 and March 31, 2005.

 

        The following tablesummarizes our nonvested stock option activity for the quarter endedMarch 30, 2006:

 
| ** **                                     | ** ** | **Number of** | ** ** | **Weighted-Average**      | ** ** |
|------------------------------------------------|------------|---------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **Shares**    | ** ** | **Grant-Date Fair Value** | ** ** |
| Nonvested stock options at beginning of period |       | 5,017,954     |       | $                         | 2.98       |   |
| Granted                                        |       | —        |       | —                    |       |
| Vested                                         |       | (2,431,500    | )          | 2.84                      |       |
| Forfeited                                      |       | (4,767        | )          | 4.25                      |       |
| Nonvested stock options at end of period       |       | 2,581,687     |       | $                         | 3.10       |   |

 

        Prior to adopting theprovisions of SFAS 123R, the Company recorded estimated compensation expensefor employee stock options based upon their intrinsic value on the date ofgrant pursuant to Accounting Principles Board Opinion 25 (APB 25), “Accountingfor Stock Issued to Employees” and provided the required pro forma disclosuresof SFAS 123.  For purposes of pro formadisclosures under SFAS 123 for the quarter ended March 31, 2005, the estimatedfair value of the share-based awards was assumed to be amortized to expenseover their vesting periods. The pro forma effects of recognizing estimatedcompensation expense under the fair value method on net income and earnings percommon share were as follows (in millions, except per share data):

 

| Net income:                                                                                         |   |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|
| As reported                                                                                         |   | $      | 13.1   |   |
| Add: Share-based employee compensation reported in net income, net of  taxes                        |   | 0.8    |   |
| Deduct: Share-based employee compensation under the fair value method  for all awards, net of taxes |   | (1.6   | )      |
|                                                                                                |   |   |   |
| Pro forma                                                                                           |   | $      | 12.3   |   |
|                                                                                                |   |   |   |
| Basic earnings per share:                                                                           |   |   |   |
| As reported                                                                                         |   | $      | 0.09   |   |
| Add: Share-based employee compensation reported in net income, net of  taxes                        |   | — |   |
| Deduct: Share-based employee compensation under the fair value method  for all awards, net of taxes |   | (0.01  | )      |

 

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| Pro forma                                                                                           |   | $      | 0.08   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                                |   |   |   |
| Diluted earnings per share:                                                                         |   |   |   |
| As reported                                                                                         |   | $      | 0.09   |   |
| Add: Share-based employee compensation reported in net income, net of  taxes                        |   | — |   |
| Deduct: Share-based employee compensation under the fair value method  for all awards, net of taxes |   | (0.01  | )      |
|                                                                                                |   |   |   |
| Pro forma                                                                                           |   | $      | 0.08   |   |

 

*Restricted Stock*

        As described in Note 9 to the financialstatements included in our annual report on Form 10-K for the fiscal yearended December 29, 2005, the Company implemented a restricted stockprogram to provide for restricted stock awards to officers, directors and keyemployees. Under the restricted stock program, common stock of the Company maybe granted at nominal cost to officers and key employees, subject to acontinued employment restriction. The restriction is fulfilled upon continuedemployment for a specified number of years (typically one to four years afterthe award date) and as such restrictions lapse, the award immediately vests.The plan participants are entitled to cash dividends and to vote theirrespective shares, although the sale and transfer of such shares is prohibitedduring the restricted period. The shares are also subject to the terms andprovisions of the Incentive Plan. On February 11, 2005, 229,990 shareswere granted under the restricted stock program at nominal cost to officers andkey employees.  The closing price of ourClass A common stock on the date of grant was $19.90 per share. OnMarch 7, 2006, 169,689 shares were granted under the restricted stockprogram at nominal cost to officers, directors and key employees.  The closing price of our Class A common stockon the date of grant was $18.67 per share.

       During thequarter ended March 30, 2006, the Company recognized approximately $0.2 millionof share-based compensation expense related to these restricted shares.  Such expense is presented as a component ofgeneral and administrative expenses for the quarter ended March 30, 2006.  The compensation expense for these awards wasdetermined based on the market price of our stock at the date of grant appliedto the total numbers of shares that were anticipated to fully vest. As of March30, 2006, we have unrecognized compensation expense of $5.9 millionassociated with these awards. Upon adoption of SFAS 123R, the cumulative effectof a change in accounting principle as a result of our change in policy from recognizingforfeitures as they occur to one where we recognize expense based on ourexpectation of the amount of awards that will vest over the requisite serviceperiod for our restricted stock awards was not material.

 

        The following tablerepresents the shares of restricted stock that were granted and outstanding asof March 30, 2006 and March 31, 2005:

 
| ** **                       | ** ** | **March 30, 2006** | ** ** | **March 31, 2005** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------|------------|
|                             |       |               |       |               |       |
| Restricted stock:                |       |               |       |               |       |
| Granted during the period  ended |       | 169,689            |       | 229,990            |       |
| Outstanding, as of               |       | 321,449            |       | 229,990            |       |

        Theaggregate intrinsic value of restricted stock outstanding as of March 30, 2006was $6.2 million.  During the quarterended March 30, 2006, the Company paid one cash dividend of $0.30 on each shareof outstanding restricted stock totaling less than $0.1 million.

        **7.COMMITMENTS AND CONTINGENCIES**

***Sale-LeasebackTransactions***

 

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        TheCompany’s sale-leaseback transactions are described in Note 6 to theconsolidated financial statements included in our annual report onForm 10-K for the fiscal year ended December 29, 2005.

***Other***

        On March 18, 2003, ReadingInternational, Inc., Citadel Cinemas, Inc. and Sutton Hill Capital,LLC (collectively, the “Plaintiffs”) filed a complaint and demand for jurytrial in the United States District Court for the Southern District of New Yorkagainst Oaktree Capital Management LLC, Onex Corporation (“Loews”), Regal,United Artists, United Artists Theatre Circuit, Inc., Loews CineplexEntertainment Corporation, Columbia Pictures Industries, Inc., The WaltDisney Company, Universal Studios, Inc., Paramount Pictures Corporation,Metro-Goldwyn-Mayer Distribution Company, Fox Entertainment Group, Inc.,Dreamworks LLC, Stephen Kaplan and Bruce Karsh (collectively, the “Defendants”)alleging various violations by the Defendants of federal and state antitrustlaws and New York common law. The Plaintiffs allege, among other things, thatthe consolidation of the theatre industry and alleged agreements between andamong Regal, movie distributors, and Loews, have adversely impacted theirability to exhibit first-run industry-anticipated top-grossing commercial filmsat their Village East theatre in Lower Manhattan, and are seeking, among other things,a declaration that the Defendants’ conduct is in violation of antitrust laws,damages, and equitable relief enjoining Defendants from engaging in futureanticompetitive conduct. On December 10, 2003, the court grantedDefendants’ motion to dismiss in part, thereby dismissing several of Plaintiffs’claims and dismissing Sutton Hill as a plaintiff. On December 24, 2003,Plaintiffs amended their complaint to add Village East Limited Partnership as aPlaintiff. Management believes that the remaining allegations and claims arewithout merit and intends to vigorously defend against the Plaintiffs’ claims.On July 29, 2005, Regal filed a motion for summary judgement as to allcounts asserted against it. The motion will most likely be decided in the firsthalf of 2006.

        Ourtheatres must comply with Title III of the Americans with Disabilities Act of1990 (the “ADA”) to the extent that such properties are “public accommodations”and/or “commercial facilities” as defined by the ADA. Compliance with the ADArequires that public accommodations “reasonably accommodate” individuals withdisabilities and that new construction or alterations made to “commercialfacilities” conform to accessibility guidelines unless “structurallyimpracticable” for new construction or technically infeasible for alterations.Non-compliance with the ADA could result in the imposition of injunctiverelief, fines, awards of damages to private litigants and additional capitalexpenditures to remedy such non-compliance.

        UnitedArtists and several of its subsidiaries and UATG are subject to a consentdecree arising from a lawsuit captioned Connie Arnold et. al. v. United ArtistsTheatre Circuit, Inc. et. al. (the “Arnold Decree”). The plaintiffsalleged nationwide violations with the ADA for failure to remove barriers toaccess at existing theatres in a timely manner. In 1996, the parties involvedin the case entered into a settlement agreement in which United Artists agreedto remove physical barriers to access at its theatres prior to July 2001.In January 2001, the settlement agreement was amended, among other things,to extend the completion date for barrier removal to July 2006 and requireminimum expenditures of $250,000 a year for barrier removal.

        Inprior years, private litigants and the Department of Justice (the “DOJ”) hadfiled claims against Regal or its subsidiaries alleging that a number of ourtheatres with stadium seating violated the ADA because these theatres failed toprovide wheelchair-bound patrons with lines of sight comparable to thoseavailable to other members of the general public and denied persons inwheelchairs access to the stadium portion of the theatres. On June 8,2005, Regal reached an agreement with the DOJ resolving and dismissing theseclaims of private litigants and all claims made by the United States under theADA. Over the next five years, the Company anticipates that it will incurcapital costs to modify its theatres in accordance with the settlementarrangements (including the Arnold Decree) in the aggregate of up to$15.0 million.

        Fromtime to time, we have received letters from the attorneys general of states inwhich we operate theatres regarding investigation into the accessibility of ourtheatres to persons with visual or hearing 

 

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impairments.We believe we provide the members of the visually and hearing impairedcommunities with reasonable access to the movie-going experience.

        Webelieve that we are in substantial compliance with all current applicableregulations relating to accommodations for the disabled. We intend to complywith future regulations in this regard, and except as set forth above, we donot currently anticipate that compliance will require us to expend substantialfunds. Our theatre operations are also subject to federal, state and local lawsgoverning such matters as wages, working conditions, citizenship and health andsanitation requirements. We believe that we are in substantial compliance with allof such laws.

        On April 5, 2005, the Companyfiled a complaint in the Delaware Court of Chancery against Amaranth LLC,Amaranth Advisors, L.L.C. and Nicholas M. Maounis (collectively, “Amaranth”),individually, and as representatives of a class of all holders of theConvertible Senior Notes issued pursuant to the Indenture.  On March 21, 2005, Amaranth filed aSchedule 13G with the Securities and Exchange Commission questioning theterminology used in the Indenture for calculating the conversion priceadjustment to the Convertible Senior Notes required to be made by the Companyin relation to quarterly dividends paid by the Company. In addition, onMarch 28, 2005, Amaranth exercised its conversion rights with respect to$1,000 principal amount of its notes, which the Company settled in cash. In itscomplaint, the Company is seeking a declaratory judgment to resolve thequestion that has arisen regarding the proper calculation of the conversionprice adjustments in relation to certain of the Company’s quarterly dividends.In order to remedy any confusion, the Company approved and the Company and theTrustee executed a First Supplemental Indenture, dated April 5, 2005, to amendthe terminology in the conversion price adjustment formula. On May 17, 2005,Amaranth filed its answer and counterclaim against the Company. OnJune 20, 2005, the Company filed an answer to Amaranth’s counterclaim.

        RCI is a defendant in a number ofclaims arising from its decision to file voluntary petitions for bankruptcyrelief and to close theatre locations or to cease construction of theatres onsites for which such entities had contractual obligations to lease suchproperty. We and our various subsidiary corporations are also presentlyinvolved in various legal proceedings arising in the ordinary course of ourbusiness operations, including personal injury claims, employment andcontractual matters and other disputes. We believe we have adequately providedfor the settlement of such matters. Management believes any additionalliability with respect to the above proceedings will not be material in theaggregate to our consolidated financial position, results of operations or cashflows.

**8. RELATED PARTY TRANSACTIONS**

        Duringthe quarter ended March 30, 2006, Regal Cinemas, incurred approximately$0.8 million of expenses payable to an Anschutz affiliate, QwestCommunications and its subsidiaries, for telecommunication services. Inaddition, Regal Cinemas incurred approximately $0.1 million of expenses payableto Anschutz affiliates for certain advertising services.

        Duringthe quarter ended March 30, 2006, Regal Cinemas received less than$0.1 million from an Anschutz affiliate for rent and other expensesrelated to a theatre facility. In addition, Regal received less than $0.1million for travel costs incurred during 2005 on behalf of an Anschutzaffiliate.

**9. EARNINGS PER SHARE**

        Basicearnings per share is computed on the basis of the weighted average number ofthe common shares outstanding. Diluted earnings per share is computed on thebasis of the weighted average number of common shares outstanding plus theeffect of potentially dilutive common stock options, warrants and restrictedstock using the treasury stock method. The components of basic and dilutedearnings per share are as follows (in millions, except share data):

 

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| ** **                                          | ** ** | **Quarter ended  March 30, 2006** | ** ** | **Quarter ended  March 31, 2005** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Net income                                          |       | $                                 | 11.2       |                              | $          | 13.1 |   |
| Weighted average shares outstanding (in thousands): |       |                              |       |                              |       |
| Basic:                                              |       | 147,767                           |       | 145,017                           |       |
| Add common stock equivalents                        |       | 6,271                             |       | 8,673                             |       |
|                                                |       |                              |       |                              |       |
| Diluted:                                            |       | 154,038                           |       | 153,690                           |       |
| Earnings per share                                  |       |                              |       |                              |       |
| Basic:                                              |       | $                                 | 0.08       |                              | $          | 0.09 |   |
| Diluted:                                            |       | $                                 | 0.07       |                              | $          | 0.09 |   |

        Commonstock equivalents consist principally of stock options, warrants and restrictedstock. There were no antidilutive stock options, warrants or restricted stockoutstanding as of March 30, 2006 and March 31, 2005.

        TheConvertible Senior Notes discussed in Note 4—“Debt Obligations” allow usto settle any conversion, and we intend to settle any conversion, by remittingto the note holder the accreted value of the note in cash, while settling theconversion spread in either cash, shares of our Class A common stock or acombination of stock and cash. The accounting for convertible debt with suchsettlement features is addressed in the consensus reached by the EITF withrespect to the accounting for Instrument C as set forth in EITF 90-19, “ConvertibleBonds with Issuer Option to Settle for Cash Upon Conversion.” It is our intentto settle the Convertible Senior Notes’ conversion obligations consistent withInstrument C. Because the accreted value of the Convertible Senior Notes willbe settled for cash upon the conversion, only the conversion spread, which maybe settled in stock, will result in potential dilution in ourearnings-per-share computations under current accounting standards. On March30, 2006, the closing sale price of our Class A common stock was $18.58,which exceeded 110% of the then current conversion price of $14.9663 on theConvertible Senior Notes. Accordingly, as of March 30, 2006, our note holdershad the right, at their option, to convert their Convertible Senior Notes, inwhole or in part, into shares of our Class A common stock, subject tocertain limitations, at the then conversion price of $14.9663. Utilizing thetreasury stock method, the conversion spread resulted in dilution ofapproximately 3.0 million shares and 3.4 million shares in ourdiluted earnings per share computations for the quarters ended March 30, 2006and March 31, 2005, respectively.

        Inaddition, as described in Note 4—“Debt Obligations,” we entered into theConvertible Note Hedge and sold the Warrant which, in combination, have theeffect of reducing the dilutive impact of the Convertible Senior Notes byincreasing the effective conversion price for these notes from our economicperspective to $17.2688. SFAS No. 128, “Earnings Per Share,” however,requires us to analyze the impact of the Convertible Note Hedge and Warrant ondiluted earnings per share separately. As a result, the purchase of the ConvertibleNote Hedge is excluded because its impact will always be antidilutive. SFASNo. 128 further requires that the impact of the sale of the Warrant becomputed using the treasury stock method. The Warrant resulted in dilution ofapproximately 1.0 million shares and 1.5 million shares in ourdiluted earnings per share computations for the quarters ended March 30, 2006and March 31, 2005, respectively. If the average sales price of ourClass A common stock during the quarter ended March 30, 2006 had been$17.2688, $20.00 or $21.00, the number of shares from the Warrant to beincluded in diluted earnings per share for the quarter ended March 30, 2006would have been zero, 2.1 million and 2.8 million, respectively. Asof March 30, 2006, the maximum number of shares that could potentially beincluded under the Warrant is 15.7 million.

**10. RECENT ACCOUNTING PRONOUNCEMENTS**

        During2003, the FASB issued an Exposure Draft entitled, “Earnings per Share, anamendment of SFAS No. 128.” Following the Exposure Draft, the FASB madeadditional changes to the requirements of 

 

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SFASNo. 128, but did not make significant changes to the other issuesaddressed in that Exposure Draft. Therefore, a revised Exposure Draft (the “proposedStatement”) that addresses the additional changes to the requirements of SFASNo. 128 was issued on September 30, 2005. The proposed Statementwould amend SFAS No. 128 to clarify guidance for mandatorily convertibleinstruments, the treasury stock method, contingently issuable shares andcontracts that may be settled in cash or shares. The proposed Statement wouldrequire that when an entity has issued a contract that may be settled either inshares or in cash at the entity’s option, the entity should presume that thecontract will be settled in shares, if the effect to earnings per share isdilutive. That presumption may not be overcome, regardless of past practice orstated policy to the contrary. As a result, shares that would be issued uponthe assumed conversion of the Convertible Senior Notes would be included indiluted earnings per share to the extent dilutive using the “if-converted”method. The comment period for the proposed Statement ended onNovember 30, 2005. The proposed Statement will be effective for interimand annual periods ending after June 15, 2006. This effective date may bereconsidered at a later date if the final statement is not issued as expectedin the immediate near future.  Uponadoption, all prior period earnings per share data would be adjusted to conformto the provisions of the proposed Statement. Had the provisions of the proposedStatement been effective for the reporting periods included herein, dilutedearnings per share for the quarter ended March 30, 2006 would have been $0.01higher than the reported amount and diluted earnings per share for the quarterended March 31, 2005 would have been the same as the reported amount. TheCompany is evaluating the proposed Statement and potential alternative coursesof action it might pursue, if any, with respect to the Convertible Senior Notesto address the impact of the proposed Statement.

**11. SUBSEQUENT EVENTS**

        OnApril 27, 2006, the Company declared a cash dividend of $0.30 per share oneach share of the Company’s Class A and Class B common stock(including outstanding restricted stock), payable on June 20, 2006, tostockholders of record on June 12, 2006.

**Item 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

        *Some of the information in this Quarterly Report onForm 10-Q includes “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. All statementsother than statements of historical facts included in this Form 10-Q,including, without limitation, certain statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, mayconstitute forward-looking statements. In some cases you can identify these “forward-lookingstatements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue” or the negativeof those words and other comparable words. These forward-looking statementsinvolve risks and uncertainties. Our actual results could differ materiallyfrom those indicated in these statements as a result of certain factors as morefully discussed under the heading “Risk Factors” contained in our annual reporton Form 10-K filed on March 14, 2006 with the Securities and ExchangeCommission (File No. 001-31315) for the Company’s fiscal year endedDecember 29, 2005. The following discussion and analysis should be read inconjunction with the unaudited condensed consolidated financial statements andnotes thereto included herein.*

**The Company**

        We conduct our operations primarilythrough our wholly owned subsidiaries. We operate the largest and mostgeographically diverse theatre circuit in the United States, consisting of6,415 screens in 546 theatres in 40 states as of March 30, 2006. We believe thesize, reach and quality of our theatre circuit provide an exceptional platformto realize economies of scale from our theatre operations.  As of March 30, 2006, the Company managed itsbusiness under one reportable segment: theatre exhibition operations.

 

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        We also maintain an investment inNational CineMedia, LLC (“National CineMedia) which focuses on the expansion ofancillary businesses, such as in-theatre advertising and complementary businesslines that leverage the operating personnel, asset and customer bases of itstheatrical exhibition partners, which includes us, AMC Entertainment, Inc. (“AMC”)and Cinemark, Inc. (“Cinemark”).

        Wegenerate revenues primarily from admissions and concession sales. Additionalrevenues are generated by our vendor marketing programs and electronic videogames located adjacent to the lobbies of certain of our theatres. In addition,National CineMedia provides us with revenues from its sale of on-screenadvertising, rental of theatres for business meetings and concerts and otherevents. Film rental costs depend on a variety of factors including theprospects of a film and the popularity of a film and generally increase as theadmissions revenue generated by a film increases. Because we purchase certainconcession items, such as fountain drinks and popcorn, in bulk and notpre-packaged for individual servings, we are able to improve our margins bynegotiating volume discounts. Other operating expenses consist primarily oftheatre labor and occupancy costs.

        Regalwas created through a series of transactions during 2001 and 2002. The AnschutzCorporation and its subsidiaries (“Anschutz”) acquired controlling equityinterests in United Artists Theatre Company (“United Artists”) (our predecessorfor accounting purposes) upon the emergence from bankruptcy reorganization onMarch 2, 2001 of the United Artists Bankrupt Entities (as defined inNote 1 to the consolidated financial statements included in Part II,Item 8 of our annual report on Form 10-K for the fiscal year endedDecember 29, 2005). In the same manner, on September 29, 2001, Anschutzacquired controlling equity interests in the Edwards Bankrupt Entities (asdefined in Note 1 to the consolidated financial statements included inPart II, Item 8 of our annual report on Form 10-K for the fiscalyear ended December 29, 2005). On January 29, 2002, Anschutz acquired acontrolling equity interest in Regal Cinemas, Inc. (“RCI”) when the RegalCinemas, Inc. Bankrupt Entities (as defined in Note 1 to theconsolidated financial statements included in Part II, Item 8 of ourannual report on Form 10-K for the fiscal year ended December 29, 2005)emerged from bankruptcy reorganization. Anschutz exchanged its controllingequity interest in RCI for a controlling equity interest in Regal CinemasCorporation (“Regal Cinemas”) immediately thereafter. Regal acquired thecontrolling equity interests of United Artists, Edwards Theatres, Inc., RegalCinemas and Regal CineMedia Corporation (“Regal CineMedia” or “RCM”) through aseries of transactions described in further detail in Note 1 to theconsolidated financial statements included Part II, Item 8 of ourannual report on Form 10-K for the fiscal year ended December 29, 2005.

        Theresults of operations of the seven theatres acquired from R/C Theatres onApril 28, 2005 and the 21 theatres acquired from Eastern FederalCorporation on July 21, 2005 have been included in the Company’sconsolidated financial statements for periods subsequent to the respectiveacquisition dates.

        OnMarch 29, 2005, Regal and AMC announced the combination of the operationsof RCM and AMC’s subsidiary, National Cinema Network, Inc. (“NCN”), into a newjoint venture company, National CineMedia . On July 15, 2005, Cinemark,through a wholly owned subsidiary, acquired a 20.7% interest in NationalCineMedia. As a result, as of March 30, 2006, Regal CineMedia Holdings, LLC, awholly owned subsidiary of RCM, owned 49.9% of the Class A Units ofNational CineMedia, NCN owned 29.4% of the Class A Units of NationalCineMedia and Cinemark owned 20.7% of the Class A Units of NationalCineMedia. Pursuant to the joint venture transaction, AMC and Regal, throughtheir subsidiaries, retained all advertising contracts signed on or before theclose of business on March 31, 2005, and Cinemark retained all advertisingcontracts signed on or before the close of business on July 15, 2005,subject to an administrative fee payable to National CineMedia to service suchcontracts. For contracts signed by National CineMedia after the close ofbusiness on March 31, 2005, AMC and Regal, and with respect to advertisingcontracts signed after the close of business on July 15, 2005, Cinemark,through their respective theatre exhibition subsidiaries, receive revenue fromNational CineMedia with respect to advertising and event services at the theatresof National CineMedia partners and other third party exhibition companies,through an agreed upon formula based generally on screen count and attendance.See Note 3—“Formation of National CineMedia, LLC,” for further discussionof this joint venture arrangement.

 

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        For a summary of industry trends aswell as other risks and uncertainties relevant to the Company, see “Business—IndustryOverview and Trends” and “Risk Factors” contained in our annual report on Form10-K for the fiscal year ended December 29, 2005 and “Results of Operations”below.

**Results of Operations**

        Thefirst quarter of 2006 was a steady quarter for the industry and theCompany.  Based on our review of industrysources, national box office revenues were estimated to have remainedconsistent during the first calendar quarter of 2006 in comparison to the firstcalendar quarter of 2005.  In spite of aslight decline in national attendance, we believe the first calendar quarter2006 national box office results benefited from increases in average ticketprices per patron, the carryover success of certain December 2005 releases andsolid performances of certain films released during the quarter.  In addition, the success of certain family-orientedand concession-friendly films exhibited during the first calendar quarter of2006 largely contributed to an increase in average concessions revenues perpatron.

        Our total revenue for the quarter endedMarch 30, 2006 (“Q1 2006 Period”) was $585.1 million, a 1.4% increase overtotal revenue of $577.0 million for the quarter ended March 31, 2005 (“Q12005 Period”). Our Q1 2006 Period box office results were favorably impacted bya 2.0% increase in average ticket prices, partially offset by a 1.0% decline inattendance. The decline in the Q1 2006 Period attendance was partiallymitigated by the inclusion of the results of operations of the seven theatresacquired from R/C Theatres on April 28, 2005 and the 21 theatres acquiredfrom Eastern Federal Corporation on July 21, 2005. Since the R/C Theatresand Eastern Federal Corporation acquisitions occurred subsequent to the Q1 2005Period, the results of operations of such theatres were not included in the Q12005 Period results.  Excluding the impactof the incremental attendance from these theatres, the Company’s Q1 2006 Periodtotal attendance declined by approximately 4.8%. The increase in the averageticket prices per patron for the Q1 2006 Period was not enough to offset theCompany’s Q1 2006 Period attendance per average screen decline of 3.6%,resulting in a decline in per average screen box office revenues of 1.8%. Basedon certain industry sources, the decline in our per screen admissions revenuesapproximated the industry results for the Q1 2006 Period as compared to the Q12005 Period.  During the Q1 2006 Period,we experienced growth in average concession revenues per patron and a slightdecline in other operating revenues. The growth in average concession revenuesper patron was attributable to changes in our product mix (including certainpricing and size changes) and the success of certain family-oriented andconcession-friendly films exhibited during the Q1 2006 Period.  The decrease in other operating revenues inthe Q1 2006 Period was primarily attributable to the revenues generated fromNational CineMedia being less than generated in the Q1 2005 Period due to thepayment arrangement described in further detail under Note 3—“Formation ofNational CineMedia, LLC” and to a lesser extent, the seasonal nature of theadvertising revenues generated by National CineMedia.  Such decreases were partially offset byincreased revenues related to our vendor marketing programs and incrementalrevenues from the inclusion of the theatres purchased from R/C Theatres andEastern Federal Corporation.

        Incomefrom operations increased 2.4% to $50.7 million for the Q1 2006 Periodcompared to $49.5 million in the Q1 2005 Period. Net income decreased to$11.2 million in the Q1 2006 Period compared to net income of$13.1 million in the Q1 2005 Period. Earnings per diluted share alsodecreased to $0.07 for the Q1 2006 Period compared to $0.09 during the Q1 2005Period. EBITDA was $99.5 million for the Q1 2006 Period, an increase of1.8% from $97.7 million in the Q1 2005 Period and represented an EBITDAmargin of 17.0%. The increase in income from operations is primarilyattributable to a slight increase in total revenues due to the inclusion of theresults of operations of theatres purchased from R/C Theatres and EasternFederal Corporation, largely offset by increases in certain expense itemsdescribed in further detail below.  Thedecrease in net income and earnings per diluted share during the Q1 2006 Periodis primarily attributable to incremental interest expense, partially offset bya slight increase in operating income described below.  A tabular reconciliation of net income toEBITDA and net cash provided by operating activities is provided below under “Resultsof Operations—EBITDA.”

        Duringthe Q1 2006 Period, we made progress with certain of our strategic initiatives:

 

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•                  We demonstrated our commitment to providingincremental value to our stockholders. Total cash dividends distributed to ourstockholders during the Q1 2006 Period totaled approximately$44.6 million.

 

•                  In addition, we opened 2 new theatreswith 28 screens and closed 11 theaters with 76 screens, ending the Q1 2006Period with 546 theaters and 6,415 screens.

        Thefollowing table sets forth the percentage of total revenues represented bycertain items included in our consolidated statements of income for the Q1 2006Period and the Q1 2005 Period (dollars and attendance in millions, exceptaverage ticket prices and average concession per patron):

 
| ** **                                                                                                                            | ** ** | **Q1 2006 Period** | ** ** | **Q1 2005 Period** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                                                            | ** ** | **$**              | ** ** | **% of  Revenue**  | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                                                                             |       |               |       |               |       |   |   |   |   |
| Admissions                                                                                                                            |       | $                  | 392.0      |               | 67.0       | % | $ | 388.8 |   | 67.4 | % |
| Concessions                                                                                                                           |       | 158.6              |       | 27.1               |       | 149.6 |   | 25.9 |   |
| Other operating revenue                                                                                                               |       | 34.5               |       | 5.9                |       | 38.6 |   | 6.7 |   |
|                                                                                                                                  |       |               |       |               |       |   |   |   |   |
| Total revenue                                                                                                                         |       | 585.1              |       | 100.0              |       | 577.0 |   | 100.0 |   |
| Operating expenses:                                                                                                                   |       |               |       |               |       |   |   |   |   |
| Film rental and advertising costs(1)                                                                                                  |       | 197.0              |       | 50.3               |       | 198.9 |   | 51.2 |   |
| Cost of concessions(2)                                                                                                                |       | 24.1               |       | 15.2               |       | 22.4 |   | 15.0 |   |
| Rent expense(3)                                                                                                                       |       | 77.6               |       | 13.3               |       | 74.5 |   | 12.9 |   |
| Other operating expenses(3)                                                                                                           |       | 158.6              |       | 27.1               |       | 161.8 |   | 28.0 |   |
| General and administrative expenses (including share-based  compensation expense of $2.0 million in 2006 and $1.5 million in 2005)(3) |       | 15.9               |       | 2.7                |       | 18.8 |   | 3.3 |   |
| Depreciation and amortization(3)                                                                                                      |       | 49.7               |       | 8.5                |       | 48.2 |   | 8.4 |   |
| Net loss on disposal and impairment of operating assets(3)                                                                            |       | 5.7                |       | 1.0                |       | 2.9 |   | 0.5 |   |
| Equity in loss (income) of joint venture including former employee  compensation(3)                                                   |       | 5.8                |       | 1.0                |       | — |   | — |   |
|                                                                                                                                  |       |               |       |               |       |   |   |   |   |
| Total operating expenses(3)                                                                                                           |       | 534.4              |       | 91.3               |       | 527.5 |   | 91.4 |   |
|                                                                                                                                  |       |               |       |               |       |   |   |   |   |
| Income from operations(3)                                                                                                             |       | 50.7               |       | 8.7                |       | 49.5 |   | 8.6 |   |
| Interest expense, net(3)                                                                                                              |       | 31.1               |       | 5.3                |       | 27.9 |   | 4.8 |   |
|                                                                                                                                       |            |                    |            |                    |            |  |  |  |  |  |  |

 

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| Provision for income taxes(3)    |   | 7.5  |   | 1.3    |   | 8.5    |   | 1.5    |   |
|----------------------------------|--------|------|--------|--------|--------|--------|--------|--------|--------|
| Net income(3)                    |   | 11.2 |   | 1.9    |   | 13.1   |   | 2.3    |   |
| EBITDA(3),(4)                    |   | $    | 99.5   |   | 17.0   |   | $      | 97.7   |   | 16.9 |   |
| Attendance                       |   | 58.0 |   |   |   | 58.6   |   |   |   |
| Average ticket price(5)          |   | $    | 6.76   |   | *      |   | $      | 6.63   |   | * |   |
| Average concession per patron(6) |   | $    | 2.74   |   | *      |   | $      | 2.55   |   | * |   |

----

**Notmeaningful*

(1)Percentage of revenuescalculated as a percentage of admissions revenues.

(2)Percentage of revenuescalculated as a percentage of concessions revenues.

(3)Percentage of revenuescalculated as a percentage of total revenues.

(4)EBITDA represents earningsbefore interest, taxes, depreciation and amortization. See “—Results ofOperations—EBITDA” below for a tabular reconciliation of net income to EBITDAand net cash provided by operating activities.

(5)Calculated as admissionsrevenue/attendance.

(6)Calculated as concessionsrevenue/attendance.

***Q1 2006 Period Compared to Q1 2005 Period***

***Admissions***

        Total admissionsrevenues increased $3.2 million, or 0.8%, to $392.0 million for theQ1 2006 Period, from $388.8 million for the Q1 2005 Period. Our Q1 2006Period box office results were favorably impacted by a 2.0% increase in averageticket prices, partially offset by a 1.0% decline in attendance. The decline inthe Q1 2006 Period attendance was partially mitigated by the inclusion of theresults of operations of the seven theatres acquired from R/C Theatres onApril 28, 2005 and the 21 theatres acquired from Eastern FederalCorporation on July 21, 2005. Since the R/C Theatres and Eastern FederalCorporation acquisitions occurred subsequent to the Q1 2005 Period, the resultsof operations of such theatres were not included in the Q1 2005 Periodresults.  Excluding the impact of theincremental attendance from these theatres, the Company’s Q1 2006 Period totalattendance declined by approximately 4.8%. See Note 2—“Acquisitions” to the unaudited condensed consolidatedfinancial statements for additional information regarding these acquisitions.The increase in the Q1 2006 Period average ticket price was primarilyattributable to periodic pricing reviews conducted by the Company, whichincludes analysis of various factors, including general inflationary trends andlocal market conditions. The increase in the average ticket prices per patronfor the Q1 2006 Period was not enough to offset the Company’s Q1 2006 Periodattendance per average screen decline of 3.6%, resulting in a decline in peraverage screen box office revenues of 1.8%. Based on certain industry sources,the decline in our per screen admissions revenues approximated the industryresults for the Q1 2006 Period as compared to the Q1 2005 Period.

***Concessions***

        Totalconcessions revenues increased $9.0 million, or 6.0%, to$158.6 million for the Q1 2006 Period, from $149.6 million for the Q12005 Period. The increase in concessions revenues in the Q1 2006 Periodcompared to the Q1 2005 Period was due to a 7.5% increase in averageconcessions per patron, partially offset by a 1.0% decrease in attendance. Theincrease in the Q1 2006 Period concessions revenue and average concessions perpatron was primarily attributable to changes in our concessions product mix(including certain pricing and size changes) and the success of certainfamily-oriented and concession-friendly films exhibited during the Q1 2006Period.

***Other OperatingRevenues***

        Totalother operating revenues decreased $4.1 million, or 10.6%, to$34.5 million for the Q1 2006 Period, from $38.6 million for the Q12005 Period. Included in other operating revenues are on-screen advertisingrevenues, business meetings and concert event revenues generated by RegalCineMedia prior to the formation of the National CineMedia on March 29, 2005,the activities of the National CineMedia joint 

 

25

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venturesubsequent to its formation, marketing revenues from our vendor marketingprograms and game revenues.  The decreasein other operating revenues in the Q1 2006 Period was primarily attributable tothe revenues generated from National CineMedia being less than generated in theQ1 2005 Period due to the payment arrangement described in further detail underNote 3—“Formation of National CineMedia, LLC” and to a lesser extent, the seasonalnature of the advertising revenues generated by National CineMedia.  Such decreases were partially offset byincreased revenues related to our vendor marketing programs and incrementalrevenues from the inclusion of the theatres purchased from R/C Theatres andEastern Federal Corporation.

***Film Rental andAdvertising Costs***

        Duringthe Q1 2006 Period, film rental and advertising costs as a percentage ofadmissions revenues decreased to 50.3% as compared to 51.2% in the Q1 2005Period. The decreases in film rental and advertising costs during the Q1 2006Period as a percentage of box office revenues was primarily the result of filmproduct mix and lower film rental cost associated with certain Q1 2006 Periodfilms.

***Cost of Concessions***

        Cost of concessions asa percentage of concessions revenues increased to 15.2% in the Q1 2006 Periodas compared to 15.0% in the Q1 2005 Period. The increase in the cost ofconcessions as a percentage of concession revenues during the Q1 2006 Periodwas primarily attributable to the mix of concession product.

***Rent Expense***

        Rentexpense increased $3.1 million or 4.2% to $77.6 million in the Q12006 Period, from $74.5 million in the Q1 2005 Period. Rent expense as apercentage of total revenues increased to 13.3% in the Q1 2006 Period, from12.9% in the Q1 2005 Period. The increase in rent expense in the Q1 2006 Periodwas primarily attributable to incremental rent from the inclusion of thetheatres purchased from R/C Theatres and Eastern Federal Corporation.

***Other OperatingExpenses***

        Forthe Q1 2006 Period, other operating expenses decreased $3.2 million, or2.0%, to $158.6 million, from $161.8 million in the Q1 2005 Period.Other operating expenses as a percentage of total revenues decreased to 27.1%in the Q1 2006 Period, from 28.0% in the Q1 2005 Period. The decrease in totalother operating expenses in the Q1 2006 Period was primarily attributable tothe expenses generated from National CineMedia being less than generated in theQ1 2005 Period due to the payment arrangement described in further detail underNote 3—“Formation of National CineMedia, LLC” and to a lesser extent, areduction of certain non-rent occupancy costs and certain other operatingcosts, partially offset by added costs associated with the inclusion of thetheatres purchased from R/C Theatres and Eastern Federal Corporation.

***General andAdministrative Expenses***

        Generaland administrative expenses decreased $2.9 million, or 15.4%, to$15.9 million during the Q1 2006 Period, from $18.8 million in the Q12005 Period. As a percentage of total revenues, general and administrativeexpenses decreased to 2.7% during the Q1 2006 Period, from 3.3% in the Q1 2005Period. The decrease in general and administrative expenses during the Q1 2006Period was primarily attributable to a reduction of Regal CineMedia general andadministrative expenses resulting from the formation of National CineMedia,partially offset by an increase in share-based compensation expense resultingfrom the Company’s adoption of Statement of Financial Accounting StandardsNo. 123 (revised), “Share-Based Payment” effective December 30, 2005 (seeNote 6—“Capital Stock and Share-Based Compensation” for furtherdiscussion).

 

26

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***Depreciation andAmortization***

        Depreciationand amortization increased $1.5 million, or 3.1%, to $49.7 million inthe Q1 2006 Period, from $48.2 million in the Q1 2005 Period. The increasein depreciation and amortization during the Q1 2006 Period was primarily due toincremental depreciation and amortization from the inclusion of the theatrespurchased from R/C Theatres and Eastern Federal Corporation.

***Income fromOperations***

        Incomefrom operations totaled approximately $50.7 million for the Q1 2006Period, which represents an increase of $1.2 million or 2.4%, from$49.5 million in the Q1 2005 Period. The net increase in income fromoperations during the Q1 2006 Period was primarily attributable to incrementaladmissions and concessions revenues and the inclusion of the results ofoperations of theatres purchased from R/C Theatres and Eastern FederalCorporation described above, largely offset by increases in certain operatingexpense items such as rent, depreciation and amortization associated with theinclusion of the theatres purchased from R/C Theatres and Eastern Federal Corporation,equity in loss (income) of the National CineMedia joint venture includingformer employee compensation, and a greater net loss on the disposal andimpairment of operating assets.

***Interest Expense***

        Net interest expenseincreased $3.2 million, or 11.5%, to $31.1 million in the Q1 2006Period, from $27.9 million in the Q1 2005 Period. The increase in interestexpense in the Q1 2006 Period was principally due to a higher effectiveinterest rate on Regal Cinemas’ term loan facility (the “Term Facility”) underRegal Cinemas’ Fourth Amended and Restated Credit Agreement, dated as of May10, 2004, as first amended as of July 27, 2004, as second amended as ofNovember 24, 2004, as third amended as of September 26, 2005 and as fourthamended as of March 9, 2006 (the “Senior Credit Facility”) during the Q1 2006Period as compared to the Q1 2005 Period.

***Income Taxes***

        Theprovision for income taxes of $7.5 million and $8.5 million****for the Q1 2006 Period and the Q1 2005 Period reflecteffective tax rates of approximately 40.1% and 39.4%, respectively. Theeffective tax rates for the Q1 2006 Period and the Q1 2005 Period reflect theimpact of certain non-deductible expenses.

***Net Income***

        Netincome totaled $11.2 million for the Q1 2006 Period, which represents adecrease of $1.9 million, from $13.1 million in the Q1 2005 Period.The decrease in net income for the Q1 2006 Period was primarily attributable toincremental interest expense, partially offset by a slight increase in operatingincome described above.

***EBITDA***

        EBITDA(earnings before interest, taxes, depreciation and amortization) wasapproximately $99.5 million, or 17.0% of total revenues for the Q1 2006Period and $97.7 million, or 16.9% of total revenues, for the Q1 2005Period.  We believe EBITDA provides auseful measure of liquidity and financial performance for our investors becauseEBITDA is an industry comparative measure of liquidity and financialperformance prior to the payment of interest and taxes and because it is a primaryfinancial measure used by management to assess our performance and liquidity.EBITDA is not a measurement of liquidity or financial performance underaccounting principles generally accepted in 

 

27

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theUnited States of America and should not be considered in isolation or construedas a substitute for net income or other operations data or cash flow dataprepared in accordance with accounting principles generally accepted in theUnited States of America for purposes of analyzing our profitability orliquidity. In addition, not all funds depicted by EBITDA are available formanagement’s discretionary use. For example, a substantial portion of suchfunds are subject to contractual restrictions and functional requirements fordebt service, fund necessary capital expenditures and to meet other commitmentsfrom time to time as described in more detail elsewhere in this quarterlyreport on Form 10-Q. EBITDA, as calculated, may not be comparable to similarlytitled measures reported by other companies. A reconciliation of net income toEBITDA and net cash provided by operating activities is calculated as follows(in millions): 

| ** **                                  | ** ** | **Q1 2006 Period** | ** ** | **Q1 2005 Period** | ** ** |
|---------------------------------------------|------------|--------------------|------------|--------------------|------------|
| Net income                                  |       | $                  | 11.2       |               | $          | 13.1 |   |
| Interest expense, net                       |       | 31.1               |       | 27.9               |       |
| Provision for income taxes                  |       | 7.5                |       | 8.5                |       |
| Depreciation and amortization               |       | 49.7               |       | 48.2               |       |
|                                        |       |               |       |               |       |
| EBITDA                                      |       | 99.5               |       | 97.7               |       |
| Interest expense, net                       |       | (31.1              | )          | (27.9              | )          |
| Provision for income taxes                  |       | (7.5               | )          | (8.5               | )          |
| Deferred income taxes                       |       | (1.1               | )          | (1.5               | )          |
| Changes in operating assets and liabilities |       | (53.3              | )          | (37.0              | )          |
| Loss on debt extinguishment                 |       | 0.9                |       | —             |       |
| Other items, net                            |       | 13.5               |       | 4.4                |       |
|                                        |       |               |       |               |       |
| Net cash provided by operating activities   |       | $                  | 20.9       |               | $          | 27.2 |   |

 

***Cash Flows***

        Thefollowing table summarizes certain cash flow data for the Q1 2006 Period and Q12005 Period (in millions): 

| ** **                                 | ** ** | **Q1 2006 Period** | ** ** | **Q1 2005 Period** | ** ** |
|--------------------------------------------|------------|--------------------|------------|--------------------|------------|
| Net cash provided by  operating activities |       | $20.9              |       | $27.2              |       |
| Net cash used in investing  activities     |       | (16.6              | )          | (29.8              | )          |
| Net cash used in financing  activities     |       | (44.0              | )          | (49.8              | )          |
|                                       |       |               |       |               |       |
| Net decrease in cash and  cash equivalents |       | $(39.7             | )          | $(52.4             | )          |

 

28

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*Q1 2006 Period Compared to Q1 2005Period*

        Netcash flows generated from operating activities were approximately$20.9 million for the Q1 2006 Period, which represents a decrease of $6.3million compared to $27.2 million in the Q1 2005 Period. Q1 2006 Periodnet cash flows generated from operating activities were impacted by severalfactors including a slight increase in total revenues due to the inclusion ofthe results of operations of theatres purchased from R/C Theatres and EasternFederal Corporation partially offset by increases in certain expenseitems.  An approximate $11.9 millionincrease in adjustments (primarily equity in loss (income) of joint ventureincluding former employee compensation, a greater loss on disposal andimpairment of operating assets and a loss on extinguishment of debt) toreconcile net income to cash provided by operating activities, partially offsetby a $1.9 million decrease in net income and a $16.3 millionreduction of changes in operating assets and liabilities contributed to the netdecrease in net cash provided by operating activities. The net decrease in thechanges in operating assets and liabilities and other working capital items wasprimarily related to the timing of certain vendor payments and income taxpayments (including a reclassification of excess tax benefits from share basedpayment arrangements to cash flows used in financing activities discussedfurther in Note 6—“Capital Stock and Share-Based Compensation”), partiallyoffset by increases in deferred revenues and a decrease in trade and otherreceivables.

        Netcash flows used in investing activities totaled approximately$16.6 million for the Q1 2006 Period compared to cash flows used ininvesting activities of approximately $29.8 million for the Q1 2005Period. Contributing to the decrease in cash flows used in investing activitieswas a $12.2 million decrease in capital expenditures during the Q1 2006Period, which was primarily attributable to the timing of certain capitalprojects during the Q1 2006 Period, coupled with greater proceeds from thedisposition of assets during the Q1 2006 Period as compared the Q1 2005 Period.

        Netcash flows used in financing activities were approximately $44.0 millionfor the Q1 2006 Period compared to cash flows used in financing activities ofapproximately $49.8 million for the Q1 2005 Period. The net decrease incash flows used in financing activities during the Q1 2006 Period was primarilyattributable to fewer payments on long term obligations, greater proceeds fromstock option exercises and the reclassification of excess tax benefits from sharebased payment arrangements from cash flows from operating activities discussedfurther in Note 6—“Capital Stock and Share-Based Compensation,” partiallyoffset by cash used to settle conversions of a portion of the Company’sConvertible Senior Notes and increased debt acquisition costs.

**Liquidity and Capital Resources**

        Ona consolidated basis, we expect our primary uses of cash to be for operatingexpenses, capital expenditures, general corporate purposes related to corporateoperations, debt service, share repurchases and the Company’s quarterlydividend payments. The principal sources of liquidity are cash generated fromoperations, cash on hand and the revolving facility provided for under theSenior Credit Facility. Under the terms of the Senior Credit Facility, RegalCinemas is restricted as to how much it can advance or distribute to Regal, itsindirect parent. Since Regal is a holding company with no significant assetsother than its subsidiaries, this restriction could impact Regal’s ability toeffect future debt or dividend payments, pay corporate expenses or redeem itsConvertible Senior Notes.

        Ourrevenues are generally collected in cash through admissions and concessionsrevenues. Our operating expenses are primarily related to film and advertisingcosts, rent and occupancy, and payroll. Film costs are ordinarily paid todistributors within 30 days following receipt of admissions revenues andthe cost of the Company’s concessions are generally paid to vendorsapproximately 30 days from purchase. Our current liabilities generallyinclude items that will become due within twelve months and, as a result, atany given time, our balance sheet is likely to reflect a working capitaldeficit.

        Wefund the cost of capital expenditures through internally generated cash flows,cash on hand, proceeds from disposition of assets and financing activities. Ourcapital requirements have historically arisen principally in connection withacquisitions of theatres, new theatre construction, adding new screens toexisting theatres, upgrading the Company’s theatre facilities and replacingequipment. We intend to 

 

29

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continueto grow our theatre circuit through selective expansion and acquisition opportunities.The Company has a formal and intensive review procedure for the authorizationof capital projects, with the most important financial measure of acceptabilityfor a discretionary non-maintenance capital project being whether its projecteddiscounted cash flow return on investment meets or exceeds the Company’sinternal rate of return targets. We currently expect capital expenditures fortheatre development, replacement, expansion, upgrading and replacements to bein the range of approximately $135.0 million to $150.0 million infiscal 2006, exclusive of acquisitions. Such capital expenditures are expectedto be partially funded through asset dispositions conducted during the normalcourse of our business. During the Q1 2006 Period, we invested approximately$18.5 million in capital expenditures.

        For a discussion of the series ofsignificant financing transactions which have occurred throughDecember 29, 2005, please refer to “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Liquidity and CapitalResources” contained in Part II, Item 8 of our annual report onForm 10-K filed on March 14, 2006 with the Securities and ExchangeCommission (File No. 001-31315) for the fiscal year ended December 29, 2005.

        Asdescribed in Note 3—“Formation of National CineMedia, LLC,” in connectionwith the formation of National CineMedia, on May 11, 2005, RCI adopted andapproved a severance plan (the “Severance Plan”) for RCM employees who held anunvested option to purchase shares of Regal’s Class A common stock orshares of Regal’s restricted Class A common stock pursuant to the terms ofthe Regal 2002 Stock Incentive Plan immediately prior to such employee’stermination of employment with RCM and commencement of employment with NationalCineMedia. During the Q1 2006 Period, the Company recorded total severanceexpense of approximately $1.6 million, including less than$0.1 million of payments in lieu of dividends, related to the SeverancePlan.

       Regalpaid one quarterly cash dividend of $0.30 per share on each outstanding shareof the Company’s Class A and Class B common stock, includingoutstanding restricted stock (see Note 6—“Capital Stock and Share-BasedCompensation”), or approximately $44.6 million in the aggregate, duringthe quarter ended March 30, 2006.  OnApril 27, 2006, the Company declared a cash dividend of $0.30 per share oneach share of the Company’s Class A and Class B common stock(including outstanding restricted stock), payable on June 20, 2006, tostockholders of record on June 12, 2006. We, at the discretion of the board ofdirectors and subject to applicable law, anticipate paying regular quarterlydividends on our Class A and Class B common stock for the foreseeablefuture. The amount, if any, of the dividends to be paid in the future willdepend upon our then available cash, anticipated cash needs, overall financialcondition, loan agreement restrictions, future prospects for earnings and cashflows, as well as other relevant factors.

        As of March 30, 2006, the holders of our 33⁄4%Convertible Senior Notes due May 15, 2008 (the “Convertible Senior Notes”)had the right, at their option, to convert their Convertible Senior Notes, inwhole or in part, into shares of our Class A common stock, subject tocertain limitations, at the then existing conversion price per share. TheConvertible Senior Notes allow us to settle any conversion, and we have theability and intent to settle any conversion, by remitting to the note holderthe accreted value of the note in cash plus the conversion spread (the excessconversion value over the accreted value) in either cash, shares of ourClass A common stock or a combination of stock and cash. DuringFebruary 2006, certain holders of the Convertible Senior Notes exercisedconversion rights with respect to $4.4 million principal amount of thenotes held by them, and the Company settled each of these conversions entirelyin cash for approximately $5.3 million. As a result of these conversions, theCompany recorded a $0.9 million loss on debt extinguishment during the quarterended March 30, 2006. In connection with these conversions, the Companyreceived net proceeds of approximately $0.7 million from CSFB attributable tothe convertible note hedge arrangement entered into with Credit Suisse FirstBoston (“CSFB”) and the warrant sold to CSFB in connection with the issuance ofthe Convertible Senior Notes.  Suchproceeds were recorded as an increase to additional paid-in capital.  Based upon our ability to generate cash flowfrom operations, our financial capacity and ability to raise capital andavailable cash on hand, we believe that we have the ability to generate theliquidity necessary to settle in cash the remaining principal amount of theoutstanding Convertible Senior Notes upon their conversion.

 

30

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        As of March 30, 2006, we hadapproximately $1,571.9 million outstanding under the Term Facility underthe Senior Credit Facility, $235.6 million aggregate principal amountremaining under Convertible Senior Notes and $51.5 million aggregateprincipal amount remaining under the Regal Cinemas 93/8% Senior Subordinated Notes. As of March 30, 2006, wehad approximately $99.0 million available for drawing under the RegalCinemas $100.0 revolving loan facility under the Senior Credit Facility (the “RevolvingFacility”). Regal Cinemas maintains a letter of credit sub-facility of up to$30.0 million (of which approximately $1.0 million was outstanding asof March 30, 2006), which reduces availability under the Revolving Facility.

**Contractual Cash Obligations and Commitments**

        Fora summary of our contractual cash obligations and commitments as of December29, 2005, please refer to Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Contractual Cash Obligations andCommitments” contained in our annual report on Form 10-K for the fiscalyear ended December 29, 2005. As of March 30, 2006, there were no materialchanges outside the ordinary course of our business in our contractual cashobligations and commitments. We believe that the amount of cash and cashequivalents on hand, cash flow expected from operations and availability underour Revolving Facility will be adequate for the Company to execute its businessstrategy and meet anticipated requirements for lease obligations, capitalexpenditures, working capital and debt service for the next 12 months.

**Critical Accounting Estimates**

        Fora discussion of accounting policies that we consider critical to our businessoperations and the understanding of our results of operations and affect themore significant judgments and estimates used in the preparation of ourunaudited condensed consolidated financial statements, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Estimates” contained in our annual report onForm 10-K for the fiscal year ended December 29, 2005 andincorporated by reference herein. As of March 30, 2006, there were nosignificant changes in our critical accounting policies or estimationprocedures.

**Recent Accounting Pronouncements**

        Fora discussion of the recent accounting pronouncements relevant to ouroperations, please refer to the information provided under Note 10 to theaccompanying unaudited condensed consolidated financial statements, whichinformation is incorporated by reference herein.

**Seasonality**

        The Company’s revenues are usuallyseasonal, coinciding with the timing of releases of motion pictures by themajor distributors. Generally, studios release the most marketable motionpictures during the summer and the holiday seasons. The unexpected emergence ofa “hit” film during other periods can alter the traditional pattern. The timingof movie releases can have a significant effect on the Company’s results ofoperations, and the results of one quarter are not necessarily indicative ofthe results for the next or any other quarter. The seasonality of motionpicture exhibition, however, has become less pronounced as studios arereleasing motion pictures somewhat more evenly throughout the year.

        **Item 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

        The Company’s market risk is confinedto interest rate exposure of its and its wholly owned subsidiaries’ debtobligations that bear interest based on floating rates. The Senior CreditFacility provides for variable rate interest that could be adversely affectedby an increase in interest rates. Borrowings under 

 

31

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the TermFacility bear interest, at Regal Cinemas’ option, at either an adjustedEurodollar rate or the base rate plus, in each case, an applicable margin.

        During 2004 and 2005, Regal Cinemasentered into five distinct hedging relationships via five separate interestrate swap agreements with final maturity terms ranging from three to five yearsfor the purpose of hedging an aggregate of approximately $1.1 billion ofvariable interest rate risk under the Senior Credit Facility. Under the termsof the interest rate swap agreements, Regal Cinemas pays interest at variousfixed rates ranging from 3.49%—4.337% and receives interest at a variable ratebased on the 3-month LIBOR. For a further description of the swap agreements,see Note 5 to the consolidated financial statements included inPart II, Item 8 of our annual report on Form 10-K for the fiscalyear ended December 29, 2005, which is incorporated herein by reference.

        Asof March 30, 2006 and December 29, 2005, borrowings of$1,571.9 million and $1,575.9 million, respectively were outstandingunder the Term Facility at effective interest rates of 5.9% (as of March 30,2006) and 6.0% (as of December 29, 2005), after the impact of the interestrate swaps is taken into account. A hypothetical change of 10% in the Company’seffective interest rate under the Term Facility as of March 30, 2006, wouldincrease or decrease interest expense by $2.3 million.

**Item 4. CONTROLS AND PROCEDURES**

        Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit to the Securities and Exchange Commission under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified by the Commission’s rules and forms, and thatinformation is accumulated and communicated to our management, including ourprincipal executive and principal financial officers (whom we refer to in thisperiodic report as our Certifying Officers), as appropriate to allow timelydecisions regarding required disclosure. Our management evaluated, with theparticipation of our Certifying Officers, the effectiveness of our disclosurecontrols and procedures as of March 30, 2006, pursuant toRule 13a-15(b) under the Exchange Act. Based upon that evaluation,our Certifying Officers concluded that, as of March 30, 2006, our disclosurecontrols and procedures were effective.

        Therewere no changes in our internal control over financial reporting that occurredduring our most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

**PART II—OTHER INFORMATION**

**Item 1. LEGAL PROCEEDINGS**

        Informationrequired to be furnished by us under this Part II, Item 1 (LegalProceedings) is incorporated by reference to Note 7 (Commitments andContingencies) of our notes to unaudited condensed consolidated financialstatements included in Part I, Item 1 (Financial Statements) of thisquarterly report on Form 10-Q.

**Item 6.EXHIBITS**
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                   |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                  |       | Fourth Amendment to Fourth Amended and Restated  Credit Agreement, dated as of March 9, 2006, between Regal Cinemas and Credit  Suisse, Cayman Islands Branch (f/k/a Credit Suisse First Boston, acting  through its Cayman Islands Branch), as Administrative |

 

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|   |   | Agent (filed as exhibit 4.1 to the current report on  Form 8-K filed on March 10, 2006 (Commission File No. 001-31315),  and incorporated herein by reference).                                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                |
| 10.1   |   | Form of Restricted Stock Agreement for use under the  Regal Entertainment Group 2002 Stock Incentive Plan (filed as Exhibit 10.1 to  the current report on Form 8-K filed on March 2, 2006 (Commission File No.  001-31315), and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                |
| 10.2   |   | Summary of Director Compensation Arrangements (filed  as Exhibit 10.2 to the current report on Form 8-K filed on March 2, 2006  (Commission File No. 001-31315), and incorporated herein by reference).                                                             |
|   |   |                                                                                                                                                                                                                                                                |
| 10.3   |   | Regal Entertainment Group form of Director  Indemnification Agreement (filed as Exhibit 10.1 to the current report on  Form 8-K filed on March 9, 2006 (Commission File No. 001-31315), and  incorporated herein by reference).                                     |
|   |   |                                                                                                                                                                                                                                                                |
| 31.1   |   | Rule 13a-14(a) Certification of Chief  Executive Officer of Regal.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                |
| 31.2   |   | Rule 13a-14(a) Certification of Chief  Financial Officer of Regal.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                |
| 32     |   | Section 1350 Certifications.                                                                                                                                                                                                                                   |

** **

**SIGNATURES**

        Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized. 
|              | **REGAL ENTERTAINMENT GROUP** |
|-------------------|-------------------------------|
|              | ** **                    |
| Date: May 9, 2006 | By:                           | /s/  MICHAEL L. CAMPBELL |
|              |                          | Michael L. Campbell*Chief Executive Officer (Principal  Executive Officer)* |
|              |                          |   |
| Date: May 9, 2006 | By:                           | /s/  AMY E. MILES |
|              |                          | Amy E. Miles*Executive Vice President and Chief Financial Officer (Principal Financial  Officer and Principal Accounting Officer)* |

 

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**REGAL ENTERTAINMENT GROUP**

**Exhibit Index**
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                  |       | Fourth Amendment to  Fourth Amended and Restated Credit Agreement, dated as of March 9, 2006,  between Regal Cinemas and Credit Suisse, Cayman Islands Branch (f/k/a Credit  Suisse First Boston, acting through its Cayman Islands Branch), as  Administrative Agent (filed as exhibit 4.1 to the current report on Form 8-K  filed on March 10, 2006 (Commission File No. 001-31315), and  incorporated herein by reference). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1                 |       | Form of Restricted  Stock Agreement for use under the Regal Entertainment Group 2002 Stock  Incentive Plan (filed as Exhibit 10.1 to the current report on Form 8-K filed  on March 2, 2006 (Commission File No. 001-31315), and incorporated herein by  reference).                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2                 |       | Summary of Director  Compensation Arrangements (filed as Exhibit 10.2 to the current report on  Form 8-K filed on March 2, 2006 (Commission File No. 001-31315), and  incorporated herein by reference).                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.3                 |       | Regal Entertainment  Group form of Director Indemnification Agreement (filed as Exhibit 10.1 to  the current report on Form 8-K filed on March 9, 2006 (Commission File No.  001-31315), and incorporated herein by reference).                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1                 |       | Rule 13a-14(a) Certification  of Chief Executive Officer of Regal.                                                                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2                 |       | Rule 13a-14(a) Certification  of Chief Financial Officer of Regal.                                                                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32                   |       | Section 1350  Certifications.                                                                                                                                                                                                                                                                                                                                                                                                        |

 

 

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