**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 thequarterly period ended June 29, 2006**

 

**Commissionfile number 001-31315**

 

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**Regal Entertainment Group**

(Exact name of Registrant asSpecified 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 TelephoneNumber, Including Area Code: (**865) 922-1123**

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days: Yes x    No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and larger accelerated filer” inRule 12b-2 of the Exchange Act).(Check one): 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act): Yes o    No x

 

Class A Common Stock—68,229,964 sharesoutstanding at August 4, 2006

 

Class B Common Stock—81,936,967 sharesoutstanding at August 4, 2006

 

 

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**TABLE OFCONTENTS**

 
| 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  1A.                         | RISK  FACTORS                                                                               |   |   |
|                              |                                                                                        |   |   |
| Item 4.                           | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |   |
|                              |                                                                                        |   |   |
| Item 6.                           | EXHIBITS                                                                                    |   |   |
|                              |                                                                                        |   |   |
| SIGNATURES                        |                                                                                        |   |

 

2

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**PARTI—FINANCIAL INFORMATION**

 

**Item1.    FINANCIAL STATEMENTS**

 

**REGALENTERTAINMENT GROUP**

 

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

**(inmillions, except share data)**

 
| ** **                                                                                                                                                                            | ** ** | **June 29, 2006** | ** ** | **December 29, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                            |       |              |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                                       |       |              |       |                       |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                 | 181.2      |                       | $          | 196.3 |   |
| Trade and other receivables, net                                                                                                                                                      |       | 34.1              |       | 55.6                       |       |
| Inventories                                                                                                                                                                           |       | 8.9               |       | 7.8                        |       |
| Prepaid expenses and other current assets                                                                                                                                             |       | 6.8               |       | 1.3                        |       |
| Assets held for sale                                                                                                                                                                  |       | 3.8               |       | 0.4                        |       |
| Deferred income tax asset                                                                                                                                                             |       | 1.2               |       | 1.2                        |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| TOTAL CURRENT ASSETS                                                                                                                                                                  |       | 236.0             |       | 262.6                      |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                               |       |              |       |                       |       |
| Land                                                                                                                                                                                  |       | 134.7             |       | 136.8                      |       |
| Buildings, leasehold improvements and equipment                                                                                                                                       |       | 2,451.0           |       | 2,429.4                    |       |
| Construction in progress                                                                                                                                                              |       | 19.2              |       | 21.8                       |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| Total property and equipment                                                                                                                                                          |       | 2,604.9           |       | 2,588.0                    |       |
| Accumulated depreciation and amortization                                                                                                                                             |       | (681.2            | )          | (600.3                     | )          |
|                                                                                                                                                                                  |       |              |       |                       |       |
| Total property and equipment, net                                                                                                                                                     |       | 1,923.7           |       | 1,987.7                    |       |
| GOODWILL                                                                                                                                                                              |       | 224.1             |       | 223.8                      |       |
| OTHER NON-CURRENT ASSETS                                                                                                                                                              |       | 71.3              |       | 58.7                       |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| TOTAL ASSETS                                                                                                                                                                          |       | $                 | 2,455.1    |                       | $          | 2,532.8 |   |
|                                                                                                                                                                                  |       |              |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |              |       |                       |       |
| CURRENT LIABILITIES:                                                                                                                                                                  |       |              |       |                       |       |
| Current portion of debt obligations                                                                                                                                                   |       | $                 | 157.9      |                       | $          | 260.4 |   |
| Accounts payable                                                                                                                                                                      |       | 155.5             |       | 181.3                      |       |
| Accrued expenses                                                                                                                                                                      |       | 81.8              |       | 88.3                       |       |
| Income taxes payable                                                                                                                                                                  |       | 49.5              |       | 68.2                       |       |
| Deferred revenue                                                                                                                                                                      |       | 96.0              |       | 94.3                       |       |
| Bankruptcy claims and liabilities                                                                                                                                                     |       | 1.1               |       | 1.1                        |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                                             |       | 541.8             |       | 693.6                      |       |
| LONG-TERM DEBT                                                                                                                                                                        |       | 1,703.5           |       | 1,612.3                    |       |
| LEASE FINANCING ARRANGEMENTS                                                                                                                                                          |       | 87.6              |       | 89.4                       |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                                                                             |       | 21.1              |       | 22.4                       |       |
| DEFERRED INCOME TAX LIABILITY                                                                                                                                                         |       | 4.9               |       | 2.1                        |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                         |       | 86.4              |       | 81.3                       |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| TOTAL LIABILITIES                                                                                                                                                                     |       | 2,445.3           |       | 2,501.1                    |       |
| MINORITY INTEREST                                                                                                                                                                     |       | 1.9               |       | 1.8                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                            |       |              |       |                       |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| Class A common stock, $0.001 par value;  500,000,000 shares authorized, 68,186,006 and 63,426,325 shares issued and  outstanding at June 29, 2006 and December 29, 2005, respectively |       | —            |       | —                     |       |
| Class B common stock, $0.001 par value;  200,000,000 shares authorized, 81,936,967 and 83,936,967 shares issued and  outstanding at June 29, 2006 and December 29, 2005, respectively |       | 0.1               |       | 0.1                        |       |
| Preferred stock, $0.001 par value;  50,000,000 shares authorized; none issued and outstanding                                                                                         |       | —            |       | —                     |       |
| Additional paid-in capital (deficit)                                                                                                                                                  |       | (32.8             | )          | (22.5                      | )          |
| Retained earnings                                                                                                                                                                     |       | 16.8              |       | 44.6                       |       |
| Unamortized deferred stock compensation                                                                                                                                               |       | —            |       | (4.4                       | )          |
| Accumulated other comprehensive income                                                                                                                                                |       | 23.8              |       | 12.1                       |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                       |       | 7.9               |       | 29.9                       |       |
|                                                                                                                                                                                  |       |              |       |                       |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                       |       | $                 | 2,455.1    |                       | $          | 2,532.8 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**REGALENTERTAINMENT GROUP**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(in millions,except share and per share data)**

 
| ** **                                                                                                                                                                                                                               | ** ** | **Quarter Ended  June 29, 2006** | ** ** | **Quarter Ended  June 30, 2005** | ** ** | **Two Quarters Ended  June 29, 2006** | ** ** | **Two Quarters Ended  June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| REVENUES:                                                                                                                                                                                                                                |       |                             |       |                             |       |                                  |       |                                  |       |
| Admissions                                                                                                                                                                                                                               |       | $                                | 452.5      |                             | $          | 419.7                                 |       | $                                     | 844.5      |   | $ | 808.5 |   |
| Concessions                                                                                                                                                                                                                              |       | 185.2                            |       | 171.6                            |       | 343.8                                 |       | 321.2                                 |       |
| Other operating revenue                                                                                                                                                                                                                  |       | 46.9                             |       | 51.8                             |       | 81.4                                  |       | 90.4                                  |       |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| TOTAL REVENUE                                                                                                                                                                                                                            |       | 684.6                            |       | 643.1                            |       | 1,269.7                               |       | 1,220.1                               |       |
| OPERATING EXPENSES:                                                                                                                                                                                                                      |       |                             |       |                             |       |                                  |       |                                  |       |
| Film rental and advertising costs                                                                                                                                                                                                        |       | 244.6                            |       | 234.2                            |       | 441.6                                 |       | 433.1                                 |       |
| Cost of concessions                                                                                                                                                                                                                      |       | 28.8                             |       | 25.0                             |       | 52.9                                  |       | 47.4                                  |       |
| Rent expense                                                                                                                                                                                                                             |       | 79.8                             |       | 76.8                             |       | 157.4                                 |       | 151.3                                 |       |
| Other operating expenses                                                                                                                                                                                                                 |       | 168.6                            |       | 166.8                            |       | 327.2                                 |       | 328.6                                 |       |
| General and administrative expenses (including  share-based compensation expense of $2.1 and $1.3 for the quarters ended June  29, 2006 and June 30, 2005 and $4.1 and $2.8 for the two quarters ended June  29, 2006 and June 30, 2005) |       | 17.1                             |       | 15.9                             |       | 33.0                                  |       | 34.7                                  |       |
| Depreciation and amortization                                                                                                                                                                                                            |       | 50.7                             |       | 48.9                             |       | 100.4                                 |       | 97.1                                  |       |
| Net loss on disposal and impairment of  operating assets                                                                                                                                                                                 |       | 5.1                              |       | 1.3                              |       | 10.8                                  |       | 4.2                                   |       |
| Equity in loss (income) of joint venture  including former employee compensation                                                                                                                                                         |       | 0.9                              |       | 2.5                              |       | 6.7                                   |       | 2.5                                   |       |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| TOTAL OPERATING EXPENSES                                                                                                                                                                                                                 |       | 595.6                            |       | 571.4                            |       | 1,130.0                               |       | 1,098.9                               |       |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| INCOME FROM OPERATIONS                                                                                                                                                                                                                   |       | 89.0                             |       | 71.7                             |       | 139.7                                 |       | 121.2                                 |       |
| OTHER EXPENSE (INCOME):                                                                                                                                                                                                                  |       |                             |       |                             |       |                                  |       |                                  |       |
| Interest expense, net                                                                                                                                                                                                                    |       | 29.4                             |       | 28.3                             |       | 60.5                                  |       | 56.2                                  |       |
| Minority interest in earnings (loss) of  consolidated subsidiaries                                                                                                                                                                       |       | 0.1                              |       | (0.1                             | )          | 0.1                                   |       | (0.1                                  | )          |
| Loss on debt extinguishment                                                                                                                                                                                                              |       | 31.6                             |       | —                           |       | 32.5                                  |       | —                                |       |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| TOTAL OTHER EXPENSE, NET                                                                                                                                                                                                                 |       | 61.1                             |       | 28.2                             |       | 93.1                                  |       | 56.1                                  |       |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| INCOME BEFORE INCOME TAXES                                                                                                                                                                                                               |       | 27.9                             |       | 43.5                             |       | 46.6                                  |       | 65.1                                  |       |
| PROVISION FOR INCOME TAXES                                                                                                                                                                                                               |       | 11.3                             |       | 17.1                             |       | 18.8                                  |       | 25.6                                  |       |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| NET INCOME                                                                                                                                                                                                                               |       | $                                | 16.6       |                             | $          | 26.4                                  |       | $                                     | 27.8       |   | $ | 39.5 |   |
|                                                                                                                                                                                                                                     |       |                             |       |                             |       |                                  |       |                                  |       |
| EARNINGS PER SHARE:                                                                                                                                                                                                                      |       |                             |       |                             |       |                                  |       |                                  |       |
| Basic                                                                                                                                                                                                                                    |       | $                                | 0.11       |                             | $          | 0.18                                  |       | $                                     | 0.19       |   | $ | 0.27 |   |
| Diluted                                                                                                                                                                                                                                  |       | 0.11                             |       | 0.17                             |       | 0.18                                  |       | 0.26                                  |       |
| AVERAGE SHARES OUTSTANDING (in thousands)                                                                                                                                                                                                |       |                             |       |                             |       |                                  |       |                                  |       |
| Basic                                                                                                                                                                                                                                    |       | 149,016                          |       | 145,955                          |       | 148,394                               |       | 145,486                               |       |
| Diluted                                                                                                                                                                                                                                  |       | 156,463                          |       | 154,976                          |       | 155,253                               |       | 154,333                               |       |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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 **REGAL ENTERTAINMENT GROUP**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inmillions)**

 
| ** **                                                                                          | ** ** | **Two Quarters  Ended  June 29, 2006** | ** ** | **Two Quarters  Ended  June 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                                   |       |                                   |       |
| Net income                                                                                          |       | $                                      | 27.8       |                                   | $          | 39.5 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:                      |       |                                   |       |                                   |       |
| Depreciation and amortization                                                                       |       | 100.4                                  |       | 97.1                                   |       |
| Share-based compensation expense                                                                    |       | 4.1                                    |       | 2.8                                    |       |
| Minority interest in earnings (loss) of  consolidated subsidiaries                                  |       | 0.1                                    |       | (0.1                                   | )          |
| Deferred income tax benefit                                                                         |       | (4.8                                   | )          | (3.8                                   | )          |
| Net loss on disposal and impairment of  operating assets                                            |       | 10.8                                   |       | 4.2                                    |       |
| Equity in loss of joint venture including  former employee compensation                             |       | 6.7                                    |       | 2.5                                    |       |
| Loss on debt extinguishment                                                                         |       | 32.5                                   |       | —                                 |       |
| Changes in operating assets and liabilities  (excluding effects of acquisition and reorganization): |       |                                   |       |                                   |       |
| Trade and other receivables                                                                         |       | 22.3                                   |       | 6.8                                    |       |
| Inventories                                                                                         |       | (1.1                                   | )          | (0.8                                   | )          |
| Prepaid expenses and other current assets                                                           |       | (1.5                                   | )          | (0.8                                   | )          |
| Accounts payable                                                                                    |       | (25.8                                  | )          | (21.0                                  | )          |
| Income taxes payable                                                                                |       | (32.8                                  | )          | 10.3                                   |       |
| Accrued expenses and other liabilities                                                              |       | (2.9                                   | )          | (9.7                                   | )          |
|                                                                                                |       |                                   |       |                                   |       |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                                           |       | 135.8                                  |       | 127.0                                  |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                                   |       |                                   |       |
| Capital expenditures                                                                                |       | (55.4                                  | )          | (75.3                                  | )          |
| Proceeds from disposition of assets                                                                 |       | 5.0                                    |       | 11.8                                   |       |
| Cash used for acquisitions, net of cash  acquired                                                   |       | —                                 |       | (31.7                                  | )          |
|                                                                                                |       |                                   |       |                                   |       |
| NET CASH USED IN INVESTING ACTIVITIES                                                               |       | (50.4                                  | )          | (95.2                                  | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |                                   |       |                                   |       |
| Cash used to pay dividends                                                                          |       | (89.5                                  | )          | (87.5                                  | )          |
| Proceeds from stock option exercises                                                                |       | 11.9                                   |       | 13.8                                   |       |
| Net payments on long term obligations                                                               |       | (10.0                                  | )          | (13.9                                  | )          |
| Proceeds from Regal Cinemas senior credit  facility                                                 |       | 100.0                                  |       | —                                 |       |
| Cash used to settle conversions of  convertible notes                                               |       | (135.7                                 | )          | —                                 |       |
| Net proceeds attributable to convertible  note hedge and warrant                                    |       | 16.1                                   |       | —                                 |       |
| Payment of debt acquisition costs and other                                                         |       | (3.2                                   | )          | —                                 |       |
| Excess tax benefits from share-based  payment arrangements                                          |       | 9.9                                    |       | —                                 |       |
| Cash used to purchase treasury shares                                                               |       | —                                 |       | (10.0                                  | )          |
| Payment on bankruptcy claims and  liabilities                                                       |       | —                                 |       | (0.1                                   | )          |
|                                                                                                |       |                                   |       |                                   |       |
| NET CASH USED IN FINANCING ACTIVITIES                                                               |       | (100.5                                 | )          | (97.7                                  | )          |
|                                                                                                |       |                                   |       |                                   |       |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                           |       | (15.1                                  | )          | (65.9                                  | )          |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                    |       | 196.3                                  |       | 243.9                                  |       |
|                                                                                                |       |                                   |       |                                   |       |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                                      | 181.2      |                                   | $          | 178.0 |   |
|                                                                                                |       |                                   |       |                                   |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                                 |       |                                   |       |                                   |       |
| Cash paid for income taxes, net of refunds  received                                                |       | $                                      | 49.0       |                                   | $          | 19.7 |   |
|                                                                                                |       |                                   |       |                                   |       |
| Cash paid for interest                                                                              |       | $                                      | 61.9       |                                   | $          | 76.5 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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 **REGAL ENTERTAINMENT GROUP**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

Regal Entertainment Group (the “Company,” “Regal,” “we”or “us”) is the parent company of Regal Entertainment Holdings, Inc. (“REH”),which is the parent company of Regal Cinemas Corporation (“Regal Cinemas”) andits subsidiaries. Regal Cinemas’ subsidiaries include Regal Cinemas, Inc.(“RCI”) and its subsidiaries, which include Edwards Theatres, Inc. (“Edwards”),Regal CineMedia Corporation (“Regal CineMedia” or “RCM”), Hoyts CinemasCorporation (“Hoyts”), United Artists Theatre Group (“UATG”) and United ArtistsTheatre Company (“United Artists”). The terms Regal or the Company, REH, RegalCinemas, RCI, United Artists, Edwards, Regal CineMedia, Hoyts and UATG shall bedeemed to include the respective subsidiaries of such entities when used indiscussions included herein regarding the current operations or assets of suchentities.

 

Regal operates the largest theatre circuit in theUnited States, consisting of 6,383 screens in 542 theatres in 40 states and theDistrict of Columbia as of June 29, 2006.  The Company formally operateson a 52-week fiscal year with each quarter generally consisting of 13 weeks,unless otherwise noted. The Company’s fiscal year ends on the first Thursdayafter December 25, which in certain years results in a 53-week fiscalyear.  As of June 29, 2006, the Company managed its business under onereportable segment: theatre exhibition operations.

 

For a discussion of the series of events leading tothe formation of the Company and other significant transactions which haveoccurred through December 29, 2005, please refer to Note 1 to theconsolidated financial statements included in Part II, Item 8 of ourannual report on Form 10-K filed on March 14, 2006 with theSecurities and Exchange Commission (File No. 001-31315) for the fiscalyear ended December 29, 2005.

 

During the two quarters ended June 29, 2006, Regalpaid two quarterly cash dividends of $0.30 on each outstanding share of theCompany’s Class A and Class B common stock, including outstandingrestricted stock (see Note 6—“Capital Stock and Share-Based Compensation”),or approximately $89.5 million in the aggregate.

 

Total comprehensive income for the quarter and twoquarters ended June 29, 2006 was $21.3 million and $39.5 million,respectively. Total comprehensive income for the quarter and two quarters endedJune 30, 2005 was $20.5 million and $45.3 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 and two quarters ended June 29, 2006and June 30, 2005. The Company’s interest rate swap arrangements are furtherdescribed in Note 4—“Debt Obligations.”

 

The Company has prepared the unaudited condensedconsolidated balance sheet as of June 29, 2006 and the unaudited condensedconsolidated statements of income and cash flows in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and the rules and regulations of the Securities andExchange Commission. Accordingly, certain information and footnote disclosurestypically included in an annual report have been condensed or omitted for thisquarterly report. In the opinion of management, all adjustments (which includeonly normal recurring adjustments) necessary to present fairly in all materialrespects the financial position, results of operations and cash flows for allperiods presented have been made. The December 29, 2005 unauditedcondensed consolidated balance sheet information is derived from the auditedconsolidated financial statements of the Company included in its annual reporton Form 10-K for the fiscal year ended December 29, 2005. Theseunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notes thereto.The results of operations for the quarter and two quarters ended June 29, 2006are not necessarily indicative of the operating results that may be achievedfor 

 

6

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thefull 2006 fiscal year. 

 

Certain reclassifications have been made to the 2005financial statements to conform to the 2006 presentation. 

 

**2. ACQUISITIONS**

 

***Acquisition of R/C Theatres and EasternFederal Corporation Theatres***

 

On April 28, 2005, the Company acquired seventheatres comprising 76 screens in Maryland, Florida, Pennsylvania and Virginiafrom R/C Theatres. On July 21, 2005, the Company acquired 21 theatres and230 screens in Florida, North Carolina and South Carolina from Eastern FederalCorporation. The total aggregate cash purchase price for the combinedacquisitions totaled approximately $156.7 million, including$125.2 million for the Eastern Federal Corporation acquisition, subject topost-closing adjustments. The transactions have been accounted for using the purchasemethod of accounting and, accordingly, the purchase price has been allocated tothe assets acquired and liabilities assumed for each of the respective theatrelocations based on their estimated fair values at the dates of acquisition,with the remaining balance allocated to goodwill. The allocation of thepurchase price is based on management’s judgment after evaluating severalfactors, including an independent third party appraisal of certain EasternFederal Corporation fee properties. The results of operations of the acquiredtheatre operations have been included in the Company’s consolidated financialstatements for periods subsequent to the respective acquisition dates.

 

The following is a summary of the preliminaryallocation of the aggregate cash purchase price to the estimated fair values ofthe assets acquired and liabilities assumed at the respective dates ofacquisition (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 forma results ofoperations for the quarter and two quarters ended June 30, 2005 assume theabove acquisitions occurred as of the beginning of fiscal 2005. The pro formaresults have been prepared for comparative purposes only and do not purport toindicate the 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  June 30, 2005**            | ** ** | **Two Quarters Ended  June 30, 2005** | ** ** |
|------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **(in millions, except per share amounts)** | ** ** |
| ** **             | ** ** | ** **                                  | ** ** | ** **                            | ** ** |
| Revenues               |       | $                                           | 658.2      |                                  | $          | 1,252.7 |   |
| Income from operations |       | 72.5                                        |       | 123.6                                 |       |
| Net income             |       | 26.9                                        |       | 41.0                                  |       |
| Earnings per share     |       |                                        |       |                                  |       |
| Basic:                 |       | 0.18                                        |       | 0.28                                  |       |
| Diluted:               |       | 0.17                                        |       | 0.27                                  |       |
|                        |            |                                             |            |                                       |            |  |  |

 

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

 

On March 29, 2005, Regal and AMC EntertainmentInc. (“AMC”) announced the combination of the operations of RCM and AMC’ssubsidiary, National Cinema Network, Inc. (“NCN”), into a new joint venturecompany known as National CineMedia, LLC (“National CineMedia”).  OnJuly 15, 2005, Cinemark, Inc. (“Cinemark”), through a wholly ownedsubsidiary, acquired a 20.7% interest in National CineMedia. As of June 29,2006, 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, whichincludes 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 joint venture transaction, onMarch 29, 2005, RCM and NCN entered into a Contribution and Unit HoldersAgreement with National CineMedia pursuant to which, among other things, RCMand NCN agreed to contribute assets to National CineMedia and NationalCineMedia agreed to assume specified liabilities of RCM and NCN in considerationfor the issuance of equity units by National CineMedia to RCH and NCN,respectively. The assets contributed to National CineMedia by RCM includedfixed assets and agreements as well as approximately $1.3 million in cash.The Company accounts for its investment in National CineMedia using the equitymethod of accounting and did not recognize any gain or loss resulting from theinitial formation of National CineMedia due to the Company’s continuedinvolvement in the operations of National CineMedia. As of June 29, 2006 and December29, 2005, RCH’s investment in National CineMedia totaled approximately ($2.3million) and $3.2 million, respectively. Such investment is presented as acomponent of “Other Non-Current Assets” on the accompanying consolidatedbalance sheets.

 

In addition, on March 29, 2005, RCM, AMC’ssubsidiary, American Multi-Cinemas, Inc., and National CineMedia enteredinto a Software License Agreement, which was amended and restated onJuly 15, 2005 pursuant to Cinemark’s participation in National CineMedia,in connection with the licensing of software and related rights ancillary tothe use of such software to National CineMedia for the conduct of its business.Pursuant to the other documents entered into in connection with the joint venturetransaction, AMC and Regal, through their subsidiaries, retained alladvertising contracts signed on or before the close of business onMarch 31, 2005, and Cinemark retained all advertising contracts signed onor before the close of business on July 15, 2005, subject to a 32%****administrative fee payable to National CineMedia to servicesuch contracts. For the quarter ended June 29, 2006, administrative fees paidto National CineMedia totaled $1.9 million.   Revenuesand expenses attributable to these advertising contracts are recorded as acomponent 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 toadvertising and event services at their respective theatres through an agreedupon formula as well as equity in income/loss of National CineMedia. Suchformula is based on the weighted average number of screens owned by and thenumber of theatre patrons of the applicable exhibitor’s theatres for any measurementperiod. During the quarter ended June 29, 2006, the Company recorded $14.9 millionof advertising revenues and $0.7 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 June 29, 2006, theCompany recorded a loss of $0.2 million, representing its share of the netloss of National CineMedia.  In addition, as of June 29, 2006,approximately $16.4 million and $0.7 million due from/to NationalCineMedia were included in “Trade and other receivables, net” and “Accountspayable,” respectively.

 

In connection with the formation of NationalCineMedia, on May 11, 2005, RCI adopted and approved the RCI SeverancePlan For Equity Compensation (the “Severance Plan”). 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 of restrictedstock on May 24, 2005 will be entitled to receive payments in lieu ofdividend distributions in an amount equal to the per share value of dividendspaid on Regal’s Class A common stock times the number of shares of suchrestricted stock. Each such Participant will receive these payments in lieu ofdividend distributions until the date that each such Participant’s restrictedstock would have vested in accordance with the Incentive Plan. Solely forpurposes of the calculation of such payments with respect to restricted stock,in the event of any stock dividend, stock split or other change in thecorporate structure affecting Regal’s Class A common stock, there shall bean equitable proportionate adjustment to the number of shares of restrictedstock held by each Participant immediately prior to his or her termination ofemployment with RCM.

 

Each Participant’s cash payment will vest accordingto the year and date on which such unvested options and restricted stock heldby such Participant would have vested pursuant to the terms of the IncentivePlan and the related award agreement 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 restricted stockwere forfeited.  The total cost of the Severance Plan, including paymentsin lieu of dividend distributions on restricted stock, is estimated to be inthe range of approximately $15.0 million to $16.0 million. Pursuantto the terms of the National CineMedia arrangements, approximately$4.0 million of such costs associated with the Severance Plan were fundedby National CineMedia. As the Severance Plan provides for payments over futureperiods that are contingent upon continued employment with National CineMedia,the cost of the Severance Plan will be recorded as an expense over theremaining required service periods. During the quarter ended June 29, 2006, theCompany recorded total severance expense of approximately $0.8 million,including less than $0.1 million of payments in lieu of dividends, relatedto the Severance Plan.

 

As part of the joint venture transaction, RCH, NCNand Cinemark, or their respective affiliates, entered into a number ofancillary agreements, including a Limited Liability Company OperatingAgreement, as amended (the “Operating Agreement”), in order to set forth theirrespective rights and obligations as members in connection with their interestsin National CineMedia. The Operating Agreement provides that the board ofdirectors of National CineMedia consists of ten members including threedirectors designated by NCN, three directors designated by RCH, three directorsdesignated by Cinemark’s wholly owned subsidiary, and Kurt Hall, the Chairmanand Chief Executive Officer of National CineMedia. The Operating Agreement alsoprovides that all actions of National CineMedia’s board of directors requirethe vote of nine directors.

 

**4. DEBT OBLIGATIONS**

 

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

 
| ** **                                                                                               | ** ** | **June 29, 2006** | ** ** | **December 29 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------|------------|
| Regal 33/4% Convertible Senior Notes                                                                     |       | $                 | 135.6      |                      | $          | 240.0 |   |
| Regal Cinemas Senior Credit Facility                                                                     |       | 1,667.9           |       | 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 |       | 91.0              |       | 92.6                      |       |
| Capital lease obligations, 8.5% to 10.3%,  maturing in various installments through December 2017   |       | 23.1              |       | 23.5                      |       |
| Other                                                                                                    |       | 1.0               |       | 1.0                       |       |
|                                                                                                     |       |              |       |                      |       |
| Total debt obligations                                                                                   |       | 1,970.1           |       | 1,984.5                   |       |
| Less current portion                                                                                     |       | (157.9            | )          | (260.4                    | )          |
|                                                                                                     |       |              |       |                      |       |
| Total debt obligations, net of current maturities                                                        |       | $                 | 1,812.2    |                      | $          | 1,724.1 |   |

 

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***Regal 33/4%Convertible Senior Notes***—On May 28, 2003, Regal issued $240.0 million aggregateprincipal amount of 33⁄4% Convertible Senior Notes due May 15, 2008 (the “ConvertibleSenior Notes”). Interest on the Convertible Senior Notes is payablesemi-annually in arrears on May 15 and November 15 of each year,beginning November 15, 2003. The Convertible Senior Notes are seniorunsecured obligations of Regal and rank on parity with all of our existing andfuture senior unsecured indebtedness and prior to all of our subordinatedindebtedness. The Convertible Senior Notes are effectively subordinated to allof our future secured indebtedness to the extent of the assets securing thatindebtedness and to any indebtedness and other liabilities of our subsidiaries.None of our subsidiaries have guaranteed any of our obligations with respect tothe Convertible Senior Notes. On or after May 15, 2007, our note holderswill have the option to convert their Convertible Senior Notes, in whole or inpart, into shares of our Class A common stock at any time prior to maturity,subject to certain limitations, unless previously purchased by us at the noteholder’s option upon a change in control, at the then existing conversion priceper share.  Prior to May 15, 2007, our note holders have the right,at their option, to convert their Convertible Senior Notes, in whole or inpart, into shares of our Class A common stock, subject to certainlimitations, unless previously purchased by us at the note holder’s option upona change in control, at the then existing conversion price per share, subjectto further adjustments described below, if:

 

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

 

•                  we distribute to all or substantially allholders of our common stock certain rights entitling them to purchase commonstock at less than the closing sale price of our Class A common stock onthe day preceding 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, mergeror sale of all or substantially all of our assets or a change in controloccurs, in each case, pursuant to which our common stock would be convertedinto cash, stock or other property unless, in the case of a consolidation ormerger, all of the consideration, excluding cash payments for fractional sharesand cash payments made pursuant to dissenters’ appraisal rights, in such mergeror consolidation consists of shares of common stock, American Depositary Sharesor other 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 convertible solely into such common stock orother certificates representing common equity interests; or

 

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

 

On June 29, 2006, at the then current conversionprice of $14.7678 per share (which conversion price has been and may be furtheradjusted pursuant to the antidilution provisions of the Convertible SeniorNotes in connection with the payment by Regal of dividends on its commonstock), each $1,000 of aggregate principal amount of Convertible Senior Notesis convertible into approximately 67.7149 shares of our Class A commonstock. Upon conversion, we may elect to deliver cash in lieu of shares ofClass A common stock or a combination of cash and shares of Class Acommon stock. As explained below, with respect to the par amount of theconversion obligation, we intend to deliver cash to note holders uponconversion. The conversion price and the number of shares delivered onconversion are subject to adjustment upon certain events.

 

In connection with the issuance of the ConvertibleSenior Notes, we used approximately $18.8 million of the net proceeds ofthe offering to enter into convertible note hedge and warrant transactions withrespect to our Class A common stock to reduce the potential dilution fromconversion of the Convertible Senior Notes. Under the terms of the convertiblenote hedge arrangement (the “Convertible Note Hedge”) with Credit Suisse FirstBoston (“CSFB”), we paid $36.2 million for a forward purchase optioncontract under which we are entitled to purchase from CSFB a fixed number ofshares of our Class A common stock (at June 29, 2006 at a price per shareof $14.7678). In the event of the conversion of the Convertible Senior Notes,this forward purchase option contract allows us to purchase, at a fixed priceequal to the implicit conversion price of shares issued under the ConvertibleSenior Notes, a number of shares equal to the shares that we issue to a noteholder upon conversion. Settlement terms of this forward purchase option allowthe Company to elect cash or share settlement based on the settlement option itchooses in settling the conversion feature of the Convertible Senior Notes. Weaccounted for the Convertible Note Hedge pursuant to the guidance in EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in a Company’s Own Stock.” Accordingly, the$36.2 million purchase price of the forward stock purchase option contractwas recorded as a reduction of consolidated stockholders’ equity.

 

We also sold to CSFB a warrant (the “Warrant”) topurchase shares of our Class A common stock. The Warrant is currentlyexercisable for 9,185,458 shares of our Class A common stock at a June 29,2006 exercise price of $17.0398 per share (which exercise price has been andmay be further adjusted pursuant to the antidilution provisions of the Warrantin connection with the payment by Regal of dividends on its common stock). Wereceived $17.4 million cash from CSFB in return for the sale of thisforward share purchase option contract. CSFB cannot exercise the Warrant unlessand until a conversion event occurs. We have the option of settling the Warrantin cash or shares of our Class A common stock. We accounted for the saleof the Warrant as the sale of a permanent equity instrument pursuant to theguidance in EITF 00-19. Accordingly, the $17.4 million sales price of theforward stock purchase option contract was recorded as a credit to consolidatedstockholders’ equity.

 

The Convertible Note Hedge and the Warrant allow usto acquire sufficient Class A common shares from CSFB to meet ourobligation to deliver Class A common shares upon conversion by the noteholder, unless the Class A common share price exceeds $17.0398 (as of June29, 2006). When the fair value of our Class A common shares exceeds suchprice, the equity contracts no longer have an offsetting economic impact, andaccordingly will no longer be effective as a hedge of the dilutive impact ofpossible conversion.

 

The Convertible Senior Notes allow us to settle anyconversion, and we intend to settle any conversion, by remitting to the noteholder the accreted value of the note in cash plus the conversion spread (theexcess conversion value over the accreted value) in either cash, shares of ourClass A common stock or a combination of stock and cash. The accounting forconvertible debt with such settlement features is addressed in the consensusreached by the EITF with respect to the accounting for Instrument C as setforth in EITF 90-19, “Convertible Bonds with Issuer Option to Settle for CashUpon Conversion.” It is our intent to settle the Convertible Senior Notes’conversion obligations consistent with Instrument C. Because the 

 

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accretedvalue of the Convertible Senior Notes will be settled in 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.

 

On June 29, 2006, the closing sale price of ourClass A common stock was $20.60, which exceeded 110% of the then currentconversion price of $14.7678. Accordingly, as of June 29, 2006, our noteholders had the right, at their option, to convert their Convertible SeniorNotes, in whole or in part, into shares of our Class A common stock,subject to certain limitations, at the current conversion price of $14.7678.This conversion option, coupled with the Company’s stated policy to settle anyconversion by remitting to the note holder the accreted value of the note in cash,resulted in the classification of the $135.6 million principal amount ofthe Convertible Senior Notes as a current liability on the accompanyingconsolidated balance sheet as of June 29, 2006. The future balance sheetclassification of this liability (i.e., current versus non-currentpresentation) will be monitored at each quarterly reporting date, and will bedetermined based on an analysis of the various conversion rights describedabove.

 

On March 28, 2005, one of the holders of theConvertible Senior Notes exercised its conversion right with respect to $1,000principal amount of the notes held by it, and the Company settled the entireconversion in cash. On April 5, 2005, the Company filed a complaint in theDelaware Court of Chancery to resolve a question that has arisen about theterminology used in the Indenture, dated as of May 28, 2003, as amended April5, 2005 (the “Indenture”), between the Company and U.S. Bank NationalAssociation (the “Trustee”) regarding the Convertible Senior Notes’ conversionprice adjustment mechanism. See Note 7—“Commitments and Contingencies” forfurther discussion of this matter.

 

During the quarter ended March 30, 2006, holders of $4.4 millionin principal amount of Convertible Senior Notes exercised their conversionrights. The Company elected to settle these conversions entirely in cash forapproximately $5.3 million. As a result of these conversions, the Companyrecorded a $0.9 million****loss on debtextinguishment during the quarter ended March 30, 2006. In addition, during thequarter ended June 29, 2006 holders of approximately $100.0 million inprincipal amount of Convertible Senior Notes exercised their conversion rights,and the Company also settled these conversions entirely in cash forapproximately $130.3 million. As a result of the conversions in the secondquarter of 2006, the Company recorded a $31.6 million loss on debtextinguishment (including a related $1.3 million write-off of unamortized debtissue costs) during the quarter ended June 29, 2006.

 

In connection with the above conversions, theCompany received net proceeds of approximately $16.1 million from CSFBattributable to the Convertible Note Hedge and the Warrant.  Such proceedswere also recorded as an increase to additional paid-in capital.

 

***Regal CinemasSenior Credit Facility***—On June 14, 2006, Regal Cinemas entered into a fifth amendment (the“Fifth Amendment”) to its Fourth Amended and Restated Credit Agreement, datedas of May 10, 2004, as first amended as of July 27, 2004, as second amended asof November 24, 2004, as third amended as of September 26, 2005 and as fourthamended on March 9, 2006 (as amended, including by the Fifth Amendment, the“Senior Credit Facility”) with Credit Suisse, Cayman Islands Branch (f/k/aCredit Suisse First Boston, acting through its Cayman Islands Branch), asAdministrative Agent. Borrowings under the term loan facility (“Term Facility”)and revolving loan facility under the Senior Credit Facility bear interest, atRegal Cinemas’ option, at either an adjusted Eurodollar rate or the base rateplus, in each case, an applicable margin. Effective March 9, 2006, theapplicable margin was reduced from 2.00% to 1.75% on the Term Facility. Theapplicable margin will be further reduced to 1.50% if the consolidated leverageratio of Regal Cinemas is maintained at 3.0 or less.

 

Regal Cinemas entered into the Fifth Amendment toestablish an incremental term facility (the “Incremental Term Facility”),pursuant to which Regal Cinemas may borrow up to $200 million in additionalfunds that would be treated as a term loan under the Senior Credit Facilitywithout the need to obtain consent from any lender party to the Senior CreditFacility.  Borrowing under the Incremental Term 

 

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Facility is subject to thesatisfaction of certain conditions set forth in the facility, including, butnot limited to, obtaining commitments from one or more lenders to fund suchadditional amounts. Proceeds of Regal Cinemas’ borrowings under the IncrementalTerm Facility are to be used solely to fund, or reimburse Regal Cinemas forfunding, distributions to the Company for the purpose of redeeming,repurchasing, acquiring or otherwise settling the conversion of all or aportion of the Convertible Senior Notes.

 

On June 14, 2006, Regal Cinemas obtained commitmentsand borrowed $100 million under the Incremental Term Facility, the net proceedsof which were used to reimburse Regal Cinemas for amounts previouslydistributed to the Company to fund the Company’s settlement of the conversionof approximately $100.0 million aggregate principal amount of ConvertibleSenior Notes for approximately $114.9 million in cash (net ofapproximately $15.4 million funded by CSFB).

 

Consistent with the existing term loans, theapplicable margin assessed on Eurodollar rate borrowings under the IncrementalTerm Facility is 1.75%, which will be reduced to 1.50% if the consolidatedleverage ratio of Regal Cinemas is maintained at 3.0 or less.  Thematurity date for the Incremental Term Facility is November 10, 2010. As ofJune 29, 2006 and December 29, 2005, borrowings of $1,667.9 millionand $1,575.9 million, respectively were outstanding under the TermFacility at effective interest rates of 6.1% (as of June 29, 2006) and 6.0% (asof December 29, 2005), after the impact of the interest rate swaps istaken into account.

 

The Senior Credit Facility is further described inNote 5 to the consolidated financial statements included in our annualreport on Form 10-K for the fiscal year ended December 29, 2005 and, assuch discussion is amended by the discussion herein, is incorporated byreference herein.

 

***Interest RateSwaps***—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 Cinemas entered into a total of five hedgingrelationships via five distinct interest rate swap agreements to hedgeapproximately $1.1 billion of variable rate liabilities under the Senior CreditFacility.

 

As of June 29, 2006, the aggregate fair value of thefive interest rate swaps was determined to be approximately $39.3 million,which has been recorded as a component of “Other Non-Current Assets” with acorresponding amount of $23.8 million, net of tax, recorded to “AccumulatedOther Comprehensive Income.” The interest rate swaps exhibited noineffectiveness for the quarters and two quarters ended June 29, 2006 and June30, 2005.

 

***Other Long-TermObligations***—Allother long-term obligations (including the Regal Cinemas 93/8% Senior Subordinated Notes) not explicitlydiscussed herein are described in Note 5 to the consolidated financialstatements included in our annual report on Form 10-K for the fiscal yearended December 29, 2005 and incorporated by reference herein.

 

**5. INCOME TAXES**

 

The provision for income taxes of $11.3 millionand $17.1 million****for thequarters ended June 29, 2006 and June 30, 2005, respectively, reflect effectivetax rates of approximately 40.5% and 39.3%, respectively. The provision forincome taxes of $18.8 million and $25.6 million****for the two quarters ended June 29, 2006and June 30, 2005, respectively, reflect effective tax rates of approximately40.3% and 39.3%, respectively. The effective tax rates for the quarters and twoquarters ended June 29, 2006 and June 30, 2005 reflect the impact of certainnon-deductible expenses. The increase in the effective tax rate for the quarterand two quarters ended June 29, 2006 is primarily attributable to settlementswith state taxing authorities and the accrual of interest expense associatedwith tax uncertainties.

 

In assessing the realizable value of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which these temporary differences becomedeductible. The Company has recorded a valuation allowance against deferred taxassets at June 29, 2006 and December 29, 2005, totaling $37.4 million asmanagement believes 

 

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itis more likely than not that certain deferred tax assets will not be realizedin future tax periods. As of June 29, 2006 and December 29, 2005,$33.7 million of the valuation allowance relates to pre-acquisitiondeferred tax assets of Hoyts, Edwards and United Artists. Accordingly, futurereductions in the valuation allowance associated with a change in management’sdetermination of the Company’s ability to realize these deferred tax assetswill reduce recorded goodwill related to such acquisitions.

 

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

 

***Capital Stock***

 

Asof June 29, 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 authorized shares of Class A commonstock, 18,000,000 shares were sold in connection with the Company’s initialpublic offering in May 2002. The Company’s Class A common stock islisted on the New York Stock Exchange under the trading symbol “RGC.” As ofJune 29, 2006, 68,186,006 shares of Class A common stock were outstanding.Of the authorized shares of Class B common stock, 81,936,967 shares wereoutstanding as of June 29, 2006, all of which are held by Anschutz Company(“Anschutz”) and OCM Principal Opportunities Fund II, L.P. and its subsidiaries.Each share of Class B common stock converts into one share of Class Acommon stock at the option of the holder or upon certain transfers of aholder’s Class B common stock. Each holder of Class B common stock isentitled to ten votes for each outstanding share of Class B common stockowned by that stockholder on every matter properly submitted to thestockholders for their vote. The Class A common stock is entitled to onevote for each outstanding share of Class A common stock on every matter properlysubmitted to the stockholders for a vote. Except as required by law, theClass A and Class B common stock vote together as a single class onall matters submitted to the stockholders for a vote. Of the authorized sharesof the preferred stock, no shares are issued and outstanding as of June 29,2006. 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***

 

During the quarter ended September 30, 2004,the Company’s board of directors authorized a share repurchase program, which providedfor the authorization to repurchase up to $50.0 million of the Company’soutstanding Class A common stock within a twelve month period. During thequarter ended June 30, 2005, the Company repurchased 520,386 shares of itsoutstanding Class 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 or two quarters ended June 29,2006. Repurchases can be made from time to time as market conditions warrant,through open market purchases, negotiated transactions, or in such a mannerdeemed appropriate by the Company. Treasury shares are retired upon repurchase.At retirement, the Company records treasury stock purchases at cost with anyexcess of cost over par value recorded as a reduction of additional paid-incapital.

 

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***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 June 29, 2006.

 

***Share-BasedCompensation***

 

In 2002, the Company established the Incentive Planwhich provides for the granting of incentive stock options and non-qualifiedstock options to officers, employees and consultants of the Company. Asdescribed below under “Restricted Stock,” the Incentive Plan also provides forgrants of restricted stock that are subject to restrictions and risks offorfeiture. Readers should refer to Note 9 to the financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 29, 2005 for additional information related to these awards andthe Incentive Plan.

 

 EffectiveDecember 30, 2005, the Company adopted Statement of Financial AccountingStandards No. 123 (revised), “Share-Based Payment” (SFAS 123R) utilizingthe modified prospective approach. Prior to the adoption of SFAS 123R, weaccounted for stock option grants in accordance with Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”(the intrinsic value method), and accordingly, recognized no compensationexpense for those stock options having an exercise price equal to the marketvalue of the Company’s Class A common stock on the date of the grant.

 

 Under themodified prospective approach, SFAS 123R applies to awards that wereoutstanding on December 30, 2005 and to new awards and the modification,repurchase or cancellation of awards after December 30, 2005.  Under themodified prospective approach, compensation cost recognized in the firstquarter 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 werenot restated to reflect the impact of adopting the new standard.

 

On November 10, 2005, the FASB issued FASBStaff Position No. FAS 123(R)-3, “Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards.” The Company haselected to adopt the alternative transition method provided in this FASB StaffPosition for calculating the tax effects of share-based compensation pursuantto SFAS 123R. The alternative transition method includes a simplified method toestablish the beginning balance of the additional paid-in capital pool (APICpool) related to the tax effects of employee share-based compensation, which isavailable to absorb tax deficiencies recognized subsequent to the adoption ofSFAS 123R.

 

 As a resultof adopting SFAS 123R on December 30, 2005, our income before income taxes, netincome and diluted earnings per share for the quarter ended June 29, 2006, were$0.9 million, $0.5 million, $0.01 lower, respectively, than if we hadcontinued to account for share-based compensation under APB Opinion No. 25(“APB 25”) for our stock option grants.  Basic earnings per share for thequarter ended June 29, 2006 would have been the same as the reported amount hadthe Company continued to apply APB 25. For the two quarters ended June 29, 2006our income before income taxes, net income, basic earnings per share anddiluted earnings per share were $1.6 million, $1.0 million, $0.01 and $0.01 less,respectively, than if we had continued to account for shared-based compensationunder APB 25 for our stock option grants.

 

*Stock Options*

 

We use the Black-Scholes option pricing model toestimate the fair value of our stock option awards with the assumptions notedin the following table for each of the quarters and two quarters ended June 29,2006 and June 30, 2005:

 

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| Expected volatility                 |   | 38.0-39.0 | %      |
|-------------------------------------|--------|-----------|--------|
| Expected life of options (in years) |   | 7.5       |   |
| Risk-free interest rate             |   | 3.0-4.9   | %      |
| Dividend yield                      |   | 3.0-4.5   | %      |

 

Expected volatility is based on historicalvolatility of the Company’s common stock price.  The expected term ofoptions granted is derived using the midpoint of the average vesting period andcontractual life of the stock options. The risk-free interest rate assumptionis based upon observed interest rates appropriate for the terms of theCompany’s employee stock options. The Company does not target a specificdividend yield for its dividend payments but is required to assume a dividendyield as an input to the Black-Scholes model. The dividend yield assumption isbased on the Company’s history and expectation of future dividend payouts andmay be subject to substantial change in the future. There were no stock optionsgranted during the quarters and two quarters ended June 29, 2006 and June 30,2005.

 

As share-based compensation expense recognized inthe unaudited condensed consolidated statement of income for the quarter andtwo quarters ended June 29, 2006 is based on awards ultimately expected tovest, it should be reduced for estimated forfeitures.  SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.  Inthe Company’s pro forma information required under SFAS 123 for the periodsprior to fiscal 2006, the Company accounted for forfeitures as they occurred.

 

During the quarter and two quarters ended June 29,2006, the Company recognized approximately $1.6 million and $3.3 million ofshare-based compensation expense related to stock options.  Such expenseis presented as a component of general and administrative expenses for thequarter and two quarters ended June 29, 2006. At June 29, 2006, there was$4.9 million of unrecognized compensation cost related to share-basedpayments which is expected to be recognized over a weighted-average period of0.74 years.

 

We receive a tax deduction for certain stock optionexercises during the period the options are exercised, generally for the excessof the price at which the stock is sold over the exercise price of theoptions.  Prior to adoption of SFAS 123R, we reported all tax benefitsresulting from the exercise of stock options as operating cash flows in ourconsolidated statements of cash flows. In accordance with SFAS 123R, we arerequired to report excess tax benefits from the award of equity instruments asfinancing cash flows.  Excess tax benefits are recorded when a deductionreported for tax return purposes for an award of equity instruments exceeds thecumulative compensation cost for the instruments recognized for financial reportingpurposes.  For the two quarters ended June 29, 2006, our unauditedcondensed consolidated statement of cash flows reflects $9.9 million ofexcess tax benefits as financing cash flows rather than operating cashflows.  Net cash proceeds from the exercise of stock options were$11.9 million for the two quarters ended June 29, 2006. The actual incometax benefit realized from stock option exercises is $12.1 million for the sameperiod.

 

The following table represents stock option activityfor the two quarters ended June 29, 2006:

 
| ** **                                 | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Contract Life** | ** ** |
|--------------------------------------------|------------|----------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | ** **           | ** ** | ** **                           | ** ** | ** **                          | ** ** |
| Outstanding options at beginning of period |       | 5,943,986            |       | $                                    | 6.43       |                                |       |   |
| Granted                                    |       | —               |       | —                               |       |                                |       |
| Exercised                                  |       | (2,178,294           | )          | 5.49                                 |       |                                |       |
| Forfeited                                  |       | (16,903              | )          | 14.02                                | ** ** | ** **                          | ** ** |
| Outstanding options at end of period       |       | 3,748,789            |       | $                                    | 6.95       |                                | 5.97 Yrs   |   |
| Outstanding exercisable at end of period   |       | 1,306,649            |       | $                                    | 7.43       |                                | 5.96 Yrs   |   |

 

Shares available for future stock option grants toemployees and directors under the Incentive Plan were approximately 3.4 millionat June 29, 2006.  The aggregate intrinsic value of options outstanding atJune 29, 2006 was $51.2 million, and the aggregate intrinsic value ofoptions exercisable was $17.2 million. Total intrinsic value of optionsexercised was $30.9 million and $31.7 million for the two quarters endedJune 29, 2006 and June 30, 2005.

 

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The following table summarizes our nonvested stockoption activity for the two quarters ended June 29, 2006:

 
| ** **                                     | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Grant-Date Fair Value** | ** ** |
|------------------------------------------------|------------|----------------------|------------|---------------------------------------------|------------|
| Nonvested stock options at beginning of period |       | 5,017,954            |       | $                                           | 2.98       |   |
| Granted                                        |       | —               |       | —                                      |       |
| Vested                                         |       | (2,564,332           | )          | 2.95                                        |       |
| Forfeited                                      |       | (11,482              | )          | 4.86                                        |       |
| Nonvested stock options at end of period       |       | 2,442,140            |       | $                                           | 3.01       |   |

 

Prior to adopting the provisions of SFAS 123R, theCompany recorded estimated compensation expense for employee stock optionsbased upon their intrinsic value on the date of grant pursuant to AccountingPrinciples Board Opinion 25 (APB 25), “Accounting for Stock Issued toEmployees” and provided the required pro forma disclosures of SFAS 123. For purposes of pro forma disclosures under SFAS 123 for the quarter and twoquarters June 30, 2005, the estimated fair value of the share-based awards wasassumed to be amortized to expense over their vesting periods. The pro formaeffects of recognizing estimated compensation expense under the fair valuemethod on net income and earnings per common share were as follows (in millions,except per share data):

 
| ** **                                                                                          | ** ** | **Quarter   Ended  June 30, 2005** | ** ** | **Two   Quarters   Ended June   30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------|------------|
| Net income:                                                                                         |       |                               |       |                                       |       |
| As reported                                                                                         |       | $                                  | 26.4       |                                       | $          | 39.5 |   |
| Add: Share-based employee compensation  reported in net income, net of taxes                        |       | 0.7                                |       | 1.6                                        |       |
| Deduct: Share-based employee compensation  under the fair value method for all awards, net of taxes |       | 0.7                                |       | (1.0                                       | )          |
|                                                                                                |       |                               |       |                                       |       |
| Pro forma                                                                                           |       | $                                  | 27.8       |                                       | $          | 40.1 |   |
|                                                                                                |       |                               |       |                                       |       |
| Basic earnings per share:                                                                           |       |                               |       |                                       |       |
| As reported                                                                                         |       | $                                  | 0.18       |                                       | $          | 0.27 |   |
| Add: Share-based employee compensation reported  in net income, net of taxes                        |       | 0.01                               |       | 0.02                                       |       |
| Deduct: Share-based employee compensation  under the fair value method for all awards, net of taxes |       | —                             |       | (0.01                                      | )          |
| Pro forma                                                                                           |       | $                                  | 0.19       |                                       | $          | 0.28 |   |
|                                                                                                |       |                               |       |                                       |       |
| Diluted earnings per share:                                                                         |       |                               |       |                                       |       |
| As reported                                                                                         |       | $                                  | 0.17       |                                       | $          | 0.26 |   |
| Add: Share-based employee compensation  reported in net income, net of taxes                        |       | 0.01                               |       | 0.01                                       |       |
| Deduct: Share-based employee compensation  under the fair value method for all awards, net of taxes |       | —                             |       | (0.01                                      | )          |
|                                                                                                |       |                               |       |                                       |       |
| Pro forma                                                                                           |       | $                                  | 0.18       |                                       | $          | 0.26 |   |

 

*Restricted Stock*

 

As described in Note 9 to the financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 29, 2005, the Company implemented a restricted stock program toprovide for restricted stock awards to officers, directors and key employees.Under the restricted stock program, 

 

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commonstock of the Company may be granted at nominal cost to officers, directors andkey employees, subject to a continued employment restriction. The restrictionis fulfilled upon continued employment for a specified number of years(typically one to four years after the award date) and as such restrictionslapse, the award immediately vests. In addition, we will receive a tax deductionwhen restricted stock vests. The plan participants are entitled to cashdividends and to vote their respective shares, although the sale and transferof such shares is prohibited during the restricted period. The shares are alsosubject to the terms and conditions of the Incentive Plan. On February 11,2005, 229,990 shares were granted under the restricted stock program at nominalcost to officers and key employees.  The closing price of our Class Acommon stock on the date of grant was $19.90 per share. On March 7, 2006,169,689 shares were granted under the restricted stock program at nominal costto officers, directors and key employees.  The closing price of our ClassA common stock on the date of grant was $18.67 per share. On April 25, 2006 andJune 6, 2006, 11,618 shares were granted in the aggregate under the restrictedstock program at nominal cost to a key employee and certain directors. The closing price of our Class A common stock was $20.51 per share on April 25,2006 and $19.28 per share on June 6, 2006.

 

During the quarter and two quarters ended June 29,2006, the Company recognized approximately $0.4 million and $0.7 million,respectively, of share-based compensation expense related to these restrictedshare grants.  Such expense is presented as a component of general andadministrative expenses for the quarter and two quarters ended June 29,2006.  The compensation expense for these awards was determined based onthe market price of our stock at the date of grant applied to the total numbersof shares that were anticipated to fully vest. As of June 29, 2006, we haveunrecognized compensation expense of $5.1 million associated with theseawards. Upon adoption of SFAS 123R, the cumulative effect of a change inaccounting 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 table represents the shares ofrestricted stock that were granted and outstanding as of June 29, 2006 and June30, 2005:

 
| ** **                      | ** ** | **Two Quarters ended  June 29, 2006** | ** ** | **Two Quarters ended  June 30, 2005** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
|                            |       |                                  |       |                                  |       |
| Restricted stock:               |       |                                  |       |                                  |       |
| Granted during the period ended |       | 181,307                               |       | 229,990                               |       |
| Outstanding, as of              |       | 332,017                               |       | 152,470                               |       |

 

The aggregate intrinsic value of restricted stockoutstanding as of June 29, 2006 was $6.4 million.  During the two quartersended June 29, 2006, the Company paid two cash dividends of $0.30 on each shareof outstanding restricted stock totaling less than $0.2 million.

 

*Performance Share Units*

 

The Incentive Plan also provides for grantsin the form of performance share units to officers, directors and keyemployees. Performance share agreements will be entered into between theCompany and each grantee of performance share units, a form of which agreement(the “Performance Agreement”) was filed as an exhibit to our currentreport on Form 8-K filed on May 5, 2006 with the Securities and ExchangeCommission (File No. 001-31315), and is incorporated herein by reference.Pursuant to the terms and conditions of the Performance Agreement, granteeswill be issued shares of restricted common stock of the Company in an amountdetermined by the attainment of Company performance criteria set forth in the PerformanceAgreement. The performance criteria are tied to the average annual totalshareholder returns (stock price appreciation plus dividend yield) attained(“TSRA”) by the Company for each full twelve month period ending on the yearlyanniversary of the grant date through the applicable calculation date (subjectto the provisions contained in the Performance Agreement relating to thegrantee’s death, disability, retirement, termination without or without causeor the occurrence of a change of control).  The shares of restrictedcommon stock received upon attainment of 

 

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the performance criteria will be subject to further vesting over aperiod of time, provided the grantee remains a service provider to the Companyduring such period.  Pursuant to the Performance Agreement, on thecalculation date, the grantee will be entitled to receive a payment in anamount equal to the dividends paid by the Company with respect to a share ofits Class A common stock from the grant date through the calculation date,multiplied by the number of shares of restricted common stock, if any, thegrantee receives pursuant to the Performance Agreement.

 

On June 1, 2006, 402,150 performance shares weregranted under our restricted stock program at nominal cost to officers and keyemployees.  The closing price of our Class A common stock on the date ofgrant was $19.40 per share. Each performance share represents the right toreceive from 0% to 175% of the target numbers of shares of restricted commonstock. The number of shares of restricted common stock earned will bedetermined by comparing the actual TSRA on Regal’s Class A common stock onJune 1, 2009 (the third anniversary of the grant date) to the target TSRAset forth in the Performance Agreement. A target number of shares of restrictedcommon stock to be earned by each eligible grantee has been established withrespect to the 2006 performance share grants and is primarily based on the grantee’semployee classification and base compensation, referred to as “target long-termincentive” (“Target LTI”) below. In addition, these awards are subject to anadditional one-year vesting requirement. The Company has developed aperformance range around the target TSRA and the number of shares of restrictedstock that will be issued will be based on actual TSRA, according to thefollowing schedule:

 

| **Average Annual Shareholder Return** | ** ** | **Target Shares of Restricted Stock** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| 12.5% < TSRA < 15.0%            |       | 50% of Target LTI                     |       |
|                                  |       |                                  |       |
| 15.0% < TSRA < 17.5%            |       | 100% of Target LTI                    |       |
|                                  |       |                                  |       |
| 17.5% < TSRA < 20.0%            |       | 125% of Target LTI                    |       |
|                                  |       |                                  |       |
| 20.0% < TSRA < 25.0%            |       | 150% of Target LTI                    |       |
|                                  |       |                                  |       |
| 25.0% < TSRA                       |       | 175% of Target LTI                    |       |

 

Since the performance shares contain a marketcondition which should be reflected in the grant date fair value of an award inaccordance with the provisions of FAS 123R, the performance shares weremeasured on the date of grant using a Monte Carlo simulation model. TheMonte Carlo simulation model utilizes multiple input variables that determinethe probability of satisfying the market condition stipulated in the awardgrant and calculates the fair market value for the performance shares granted. OnJune 1, 2006, the aggregate fair value of the performance share awards wasdetermined to be $3.4 million, which includes related dividends on sharesultimately earned and paid on June 1, 2009. The fair value of the performanceshare awards will be amortized as compensation expense over the expected termsof the awards, which range from 3 to 4 years. During the quarter and twoquarters ended June 29, 2006, the Company recognized approximately $0.1 millionof share-based compensation expense related to these performance shares. Such expense is presented as a component of general and administrative expensesfor the quarter and two quarters ended June 29, 2006. As of June 29, 2006,there was $3.3 million of unrecognized compensation cost related to theperformance shares. The key assumptions used for valuing performance sharesfollow:

 

| ** **                           | ** ** | **Quarter Ended  June 29, 2006** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| Measurement date                     |       | 6/1/2006                         |       |
| Measurement date closing stock price |       | $                                | 19.40      |   |
| Expected volatility                  |       | 18.8                             | %          |
| Risk-free interest rate              |       | 5.02                             | %          |
| Expected dividend yield              |       | 6.2                              | %          |
|                                      |            |                                  |            |  |

 

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Expected volatility is based on historicalvolatility of the Company’s common stock price measured daily over a three yearperiod ending on June 1, 2006, adjusted for dividends.  The risk-freeinterest rate is set equal to the yield on three-year (constant maturity) U.S.Government bonds as of June 1, 2006. The expected dividend yield assumption isbased on the Company’s history and expectation of future dividend payouts andmay be subject to substantial change in the future. The dividend yield isincluded in the calculation of returns for measurement against the performancegoals defined above.

 

The following tables summarize information about theperformance shares activity: 

 

| ** **                       | ** ** | **Two Quarters Ended  June 29, 2006** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| Number of performance shares:    |       |                                  |       |
| Outstanding at beginning of year |       | —                                |       |
| Granted (based on target TSRA)   |       | 402,150                               |       |
| Forfeited                        |       | (1,020                                | )          |
| Outstanding as of June 29, 2006  |       | 401,130                               |       |

 

The above table does not include the maximum orminimum number of shares of restricted stock contingently issuable. Anadditional 300,848 shares of restricted stock could be issued providing themaximum TSRA is met. The aggregate intrinsic value of performance share awardsoutstanding as of June 29, 2006 was $3.3 million (fair value of awards).

 

**7. COMMITMENTS AND CONTINGENCIES**

 

***Sale-Leaseback Transactions***

 

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 jury trialin 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 otherthings, a declaration that the Defendants’ conduct is in violation of antitrustlaws, damages, and equitable relief enjoining Defendants from engaging infuture anticompetitive 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 lasthalf of 2006.

 

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Our theatres must comply with Title III of theAmericans with Disabilities Act of 1990 (the “ADA”) to the extent that suchproperties are “public accommodations” and/or “commercial facilities” asdefined by the ADA. Compliance with the ADA requires that public accommodations“reasonably accommodate” individuals with disabilities and that newconstruction or alterations made to “commercial facilities” conform toaccessibility guidelines unless “structurally impracticable” for newconstruction or technically infeasible for alterations. Non-compliance with theADA could result in the imposition of injunctive relief, fines, awards ofdamages to private litigants and additional capital expenditures to remedy suchnon-compliance.

 

United Artists and several of its subsidiaries andUATG are subject to a consent decree arising from a lawsuit captioned ConnieArnold et. al. v. United Artists Theatre Circuit, Inc. et. al. (the“Arnold Decree”). The plaintiffs alleged nationwide violations with the ADA forfailure to remove barriers to access at existing theatres in a timely manner.In 1996, the parties involved in the case entered into a settlement agreementin which United Artists agreed to remove physical barriers to access at itstheatres prior to July 2001. In January 2001, the settlementagreement was amended, among other things, to extend the completion date forbarrier removal to July 2006 and require minimum expenditures of $250,000a year for barrier removal.

 

In prior years, private litigants and the Departmentof Justice (the “DOJ”) had filed claims against Regal or its subsidiariesalleging that a number of our theatres with stadium seating violated the ADAbecause these theatres failed to provide wheelchair-bound patrons with lines ofsight comparable to those available to other members of the general public anddenied persons in wheelchairs access to the stadium portion of the theatres. OnJune 8, 2005, Regal reached an agreement with the DOJ resolving anddismissing these claims of private litigants and all claims made by the UnitedStates under the ADA. Over the next five years, the Company anticipates that itwill incur capital costs to modify its theatres in accordance with thesettlement arrangements (including the Arnold Decree) in the aggregate of up to$15.0 million.

 

From time to time, we have received letters from theattorneys general of states in which we operate theatres regardinginvestigation into the accessibility of our theatres to persons with visual orhearing impairments. We believe we provide the members of the visually andhearing impaired communities with reasonable access to the movie-goingexperience.

 

We believe that we are in substantial compliancewith all current applicable regulations relating to accommodations for thedisabled. We intend to comply with future regulations in this regard, andexcept as set forth above, we do not currently anticipate that compliance willrequire us to expend substantial funds. Our theatre operations are also subjectto federal, state and local laws governing such matters as wages, workingconditions, citizenship and health and sanitation requirements. We believe thatwe are in substantial compliance with all of such laws.

 

On April 5, 2005, the Company filed a complaintin the Delaware Court of Chancery against Amaranth LLC, Amaranth Advisors,L.L.C. and Nicholas M. Maounis (collectively, “Amaranth”), individually, and asrepresentatives of a class of all holders of the Convertible Senior Notesissued pursuant to the Indenture.  On March 21, 2005, Amaranth fileda Schedule 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.

 

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OnApril 12, 2006, after full briefing, the Delaware Court of Chancery issued anopinion granting the Company’s motion to certify a defendant class of allholders of the Convertible Senior Notes, and to certify Amaranth as an adequateclass representative.

 

RCI is a defendant in a number of claims arisingfrom its decision to file voluntary petitions for bankruptcy relief and toclose theatre locations or to cease construction of theatres on sites for whichsuch entities had contractual obligations to lease such property. We and ourvarious subsidiary corporations are also presently involved in various legalproceedings arising in the ordinary course of our business operations,including personal injury claims, employment and contractual matters and otherdisputes. We believe we have adequately provided for the settlement of suchmatters. Management believes any additional liability with respect to the aboveproceedings will not be material in the aggregate to our consolidated financialposition, results of operations or cash flows.

 

**8. RELATED PARTY TRANSACTIONS**

 

During the quarter ended June 29, 2006, RegalCinemas, incurred approximately $0.9 million of expenses payable to anAnschutz affiliate, Qwest Communications and its subsidiaries, fortelecommunication services. In addition, Regal Cinemas incurred approximately$0.1 million of expenses payable to Anschutz affiliates for certainadvertising services.

 

During the quarter ended June 29, 2006, RegalCinemas received less than $0.1 million from an Anschutz affiliate forrent and other expenses related to a theatre facility.

 

**9. EARNINGS PER SHARE**

 

Basic earnings per share is computed on the basis ofthe weighted average number of the common shares outstanding. Diluted earningsper share is computed on the basis of the weighted average number of commonshares outstanding plus the effect of potentially dilutive common stockoptions, warrants and restricted stock using the treasury stock method. Thecomponents of basic and diluted earnings per share are as follows: 

 
| ** **                                          | ** ** | **Quarter Ended  June 29, 2006** | ** ** | **Quarter Ended  June 30, 2005** | ** ** | **Two Quarters  Ended  June 29, 2006** | ** ** | **Two Quarters  Ended  June 30, 2005** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Net income (in millions)                            |       | $                                | 16.6       |                             | $          | 26.4                                   |       | $                                      | 27.8       |   | $ | 39.5 |   |
| Weighted average shares outstanding (in thousands): |       |                             |       |                             |       |                                   |       |                                   |       |
| Basic:                                              |       | 149,016                          |       | 145,955                          |       | 148,394                                |       | 145,486                                |       |
| Add common stock equivalents                        |       | 7,447                            |       | 9,021                            |       | 6,859                                  |       | 8,847                                  |       |
|                                                |       |                             |       |                             |       |                                   |       |                                   |       |
| Diluted:                                            |       | 156,463                          |       | 154,976                          |       | 155,253                                |       | 154,333                                |       |
| Earnings per share                                  |       |                             |       |                             |       |                                   |       |                                   |       |
| Basic:                                              |       | $                                | 0.11       |                             | $          | 0.18                                   |       | $                                      | 0.19       |   | $ | 0.27 |   |
| Diluted:                                            |       | $                                | 0.11       |                             | $          | 0.17                                   |       | $                                      | 0.18       |   | $ | 0.26 |   |

 

Common stock equivalents consist principally ofstock options, warrants and restricted stock. There were no antidilutive stockoptions, warrants or restricted stock outstanding as of June 29, 2006 and June30, 2005.

 

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The Convertible Senior Notes discussed inNote 4—“Debt Obligations” allow us to settle any conversion, and we intendto settle any conversion, by remitting to the note holder the accreted value ofthe note in cash, while settling the conversion spread in either cash, sharesof our Class A common stock or a combination of stock and cash. The accountingfor convertible debt with such settlement features is addressed in theconsensus reached by the EITF with respect to the accounting for Instrument Cas set forth in EITF 90-19, “Convertible Bonds with Issuer Option to Settle forCash Upon Conversion.” 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 in cash upon the conversion,only the conversion spread, which may be settled in stock, will result inpotential dilution in our earnings-per-share computations under currentaccounting standards. On June 29, 2006, the closing sale price of ourClass A common stock was $20.60, which exceeded 110% of the then currentconversion price of $14.7678 on the Convertible Senior Notes. Accordingly, asof June 29, 2006, our note holders had the right, at their option, to converttheir Convertible Senior Notes, in whole or in part, into shares of ourClass A common stock, subject to certain limitations, at the thenconversion price of $14.7678. Utilizing the treasury stock method, theconversion spread resulted in dilution of approximately 3.5 million sharesin our diluted earnings per share computations for the quarters ended June 29,2006 and June 30, 2005.

 

In addition, as described in Note 4—“DebtObligations,” we entered into the Convertible Note Hedge and sold the Warrantwhich, in combination, have the effect of reducing the dilutive impact of theConvertible Senior Notes by increasing the effective conversion price for thesenotes from our economic perspective to $17.0398 at June 29, 2006. SFASNo. 128, “Earnings Per Share,” however, requires us to analyze the impactof the Convertible Note Hedge and Warrant on diluted earnings per shareseparately. As a result, the purchase of the Convertible Note Hedge is excludedbecause its impact will always be antidilutive. SFAS No. 128 furtherrequires that the impact of the sale of the Warrant be computed using thetreasury stock method. The Warrant resulted in dilution of approximately1.9 million shares and 1.5 million shares in our diluted earnings pershare computations for the quarters ended June 29, 2006 and June 30, 2005,respectively. As of June 29, 2006, the maximum number of shares that couldpotentially be included under the Warrant is 9.2 million.

 

**10. RECENT ACCOUNTING PRONOUNCEMENTS**

** **

During 2003, the FASB issued an Exposure Draftentitled, “Earnings per Share, an amendment of SFAS No. 128.” Followingthe Exposure Draft, the FASB made additional changes to the requirements ofSFAS No. 128, but did not make significant changes to the other issuesaddressed in that Exposure Draft. Thereafter, a revised Exposure Draft (the“proposed Statement”) that addresses the additional changes to the requirementsof SFAS No. 128 was issued on September 30, 2005. The proposedStatement would amend SFAS No. 128 to clarify guidance for mandatorilyconvertible instruments, the treasury stock method, contingently issuableshares and contracts that may be settled in cash or shares. The proposedStatement would require that when an entity has issued a contract that may besettled either in shares or in cash at the entity’s option, the entity shouldpresume that the contract will be settled in shares, if the effect to earningsper share is dilutive. That presumption may not be overcome, regardless of pastpractice or stated policy to the contrary. As a result, shares that would beissued upon the assumed conversion of the Convertible Senior Notes would be includedin diluted earnings per share to the extent dilutive using the “if-converted”method. The comment period for the proposed Statement ended onNovember 30, 2005. Upon adoption, all prior period earnings per share datawould be adjusted to conform to the provisions of the proposed Statement. Hadthe provisions of the proposed Statement been effective for the reportingperiods included herein, diluted earnings per share for the quarter and twoquarters ended June 29, 2006 and the quarter ended June 30, 2005 would havebeen the same as the reported amounts and diluted earnings per share for thetwo quarters ended June 30, 2005 would have been $0.01 lower than the reportedamount. The Company is evaluating the proposed Statement and potentialalternative courses of action it might pursue, if any, with respect to theConvertible Senior Notes to address the impact of the proposed Statement.

 

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During June 2006, the FASB issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109.” This Interpretation clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes” and prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This Interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.

 

The evaluation of a tax position in accordance withthis Interpretation is a two-step process. The first step is recognition: Theenterprise determines whether it is more likely than not that a tax positionwill be sustained upon examination, including resolution of any related appealsor litigation processes, based on the technical merits of the position. Inevaluating whether a tax position has met the more-likely-than-not recognitionthreshold, the enterprise should presume that the position will be examined bythe appropriate taxing authority that would have full knowledge of all relevantinformation. The second step is measurement: A tax position that meets themore-likely-than-not recognition threshold is measured to determine the amountof benefit to recognize in the financial statements. The tax position ismeasured at the largest amount of benefit that is greater than 50 percent likelyof being realized upon ultimate settlement. Differences between tax positionstaken in a tax return and amounts recognized in the financial statements willgenerally result in (1) an increase in a liability for income taxes payable or(2) a reduction of an income tax refund receivable or a reduction in a deferredtax asset or an increase in a deferred tax liability or both (1) and (2). ThisInterpretation is effective for fiscal years beginning after December 15, 2006.The Company is currently evaluating the impact the Interpretation may have onits consolidated financial position, cash flows and results of operations.

 

**11. SUBSEQUENT EVENTS**

 

On July 31, 2006, the Company declared a cashdividend of $0.30 per share on each share of the Company’s Class A andClass B common stock (including outstanding restricted stock), payable onSeptember 19, 2006, to stockholders of record on September 11, 2006.

 

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

 

*Some of the information in thisQuarterly Report on Form 10-Q includes “forward-looking statements” withinthe meaning of Section 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-looking statements” by words like “may,” “will,” “should,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or“continue” or the negative of those words and other comparable words. Theseforward-looking statements involve risks and uncertainties. Our actual resultscould differ materially from those indicated in these statements as a result ofcertain factors as more fully discussed under the heading “Risk Factors”contained in our annual report on Form 10-K filed on March 14, 2006with the Securities and Exchange Commission (File No. 001-31315) for theCompany’s fiscal year ended December 29, 2005. The following discussion andanalysis should be read in conjunction with the unaudited condensedconsolidated financial statements and notes thereto included herein.*

 

**The Company**

** **

We conduct our operations primarily through ourwholly owned subsidiaries. We operate the largest and most geographicallydiverse theatre circuit in the United States, consisting of 6,383 screens in542 theatres in 40 states and the District of Columbia as of June 29, 2006. Webelieve the size, reach and quality of our theatre circuit provide anexceptional platform to realize economies of scale from our theatre 

 

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operations. As of June 29, 2006, the Company managed its business under one reportablesegment: theatre exhibition operations.

 

We also maintain an investment in NationalCineMedia, 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”).

 

We generate revenues primarily from admissions andconcession sales. Additional revenues are generated by our vendor marketingprograms and electronic video games located adjacent to the lobbies of certainof our theatres. In addition, National CineMedia provides us with revenues fromits sale of on-screen advertising, rental of theatres for business meetings andconcerts and other events. Film rental costs depend on a variety of factorsincluding the prospects of a film and the popularity of a film and generallyincrease as the admissions revenue generated by a film increases. Because wepurchase certain concession items, such as fountain drinks and popcorn, in bulkand not pre-packaged for individual servings, we are able to improve ourmargins by negotiating volume discounts. Other operating expenses consistprimarily of theatre labor and occupancy costs.

 

Regal was created through a series of transactionsduring 2001 and 2002. The Anschutz Corporation and its subsidiaries(“Anschutz”) acquired controlling equity interests in United Artists TheatreCompany (“United Artists”) (our predecessor for accounting purposes) upon theemergence from bankruptcy reorganization on March 2, 2001 of the UnitedArtists Bankrupt Entities (as defined in Note 1 to the consolidatedfinancial statements included in Part II, Item 8 of our annual reporton Form 10-K for the fiscal year ended December 29, 2005). In the samemanner, on September 29, 2001, Anschutz acquired controlling equityinterests in the Edwards 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).On January 29, 2002, Anschutz acquired a controlling equity interest inRegal Cinemas, Inc. (“RCI”) when the Regal Cinemas, Inc. BankruptEntities (as defined in Note 1 to the consolidated financial statementsincluded in Part II, Item 8 of our annual report on Form 10-Kfor the fiscal year ended December 29, 2005) emerged from bankruptcyreorganization. Anschutz exchanged its controlling equity interest in RCI for acontrolling equity interest in Regal Cinemas Corporation (“Regal Cinemas”)immediately thereafter. Regal acquired the controlling equity interests ofUnited Artists, Edwards Theatres, Inc., Regal Cinemas and Regal CineMediaCorporation (“Regal CineMedia” or “RCM”) through a series of transactionsdescribed in further detail in Note 1 to the consolidated financial statementsincluded Part II, Item 8 of our annual report on Form 10-K forthe fiscal year ended December 29, 2005.

 

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 have been included inthe Company’s consolidated financial statements for periods subsequent to therespective acquisition dates.

 

On March 29, 2005, Regal and AMC announced thecombination of the operations of RCM and AMC’s subsidiary, National CinemaNetwork, Inc. (“NCN”), into a new joint venture company, National CineMedia .On July 15, 2005, Cinemark, through a wholly owned subsidiary, acquired a20.7% interest in National CineMedia. As a result, as of June 29, 2006, RegalCineMedia Holdings, LLC, a wholly owned subsidiary of RCM, owned 49.9% of theClass A Units of National CineMedia, NCN owned 29.4% of the Class AUnits of National CineMedia and Cinemark owned 20.7% of the Class A Unitsof National CineMedia. Pursuant to the joint venture transaction, AMC andRegal, through their subsidiaries, retained all advertising contracts signed onor before the close of business on March 31, 2005, and Cinemark retainedall advertising contracts signed on or before the close of business onJuly 15, 2005, subject to an administrative fee payable to NationalCineMedia to service such contracts. 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 toadvertising and event services at the theatres of National CineMedia partnersand other third party exhibition companies, 

 

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throughan agreed upon formula based generally on screen count and attendance. SeeNote 3—“Formation of National CineMedia, LLC,” for further discussion ofthis joint venture arrangement.

 

For a summary of industry trends as well as otherrisks 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**

 

The second fiscal quarter of 2006 was a solidquarter for the industry and the Company.  Based on our review of industrysources, national box office revenues were estimated to have increased from7.5% to 8% during the second fiscal quarter of 2006 in comparison to the secondfiscal quarter of 2005.  The industry achieved these results with robustattendance and ticket price increases in spite of a family-oriented film mixwhich moderated the industry’s average admissions revenue per patron. Inaddition, the success of such certain family-oriented and concession-friendlyfilms exhibited during the second fiscal quarter of 2006 contributed to anincrease in average concessions revenues per patron.

 

 Our totalrevenue for the quarter ended June 29, 2006 (“Q2 2006 Period”) was$684.6 million, consisting of $452.5 million of admissions revenues,$185.2 million from concessions revenues and $46.9 million of other operatingrevenues, and represented a 6.5% increase over total revenues of$643.1 million for the quarter ended June 30, 2005 (“Q2 2005 Period”).

 

Our Q2 2006 Period admissions revenues werefavorably impacted by a 6.5% increase in attendance coupled with a 1.2%increase in average ticket prices. The increase in our Q2 2006 Periodattendance was primarily attributable to a strong second quarter box office ledby the overall breadth of the Q2 2006 Period film slate. Our Q2 2006 Periodattendance was impacted by the 230 screens acquired from Eastern FederalCorporation on July 21, 2005 and approximately 143 new screens added sincethe end of the Q2 2005 Period, offset by the closure of approximately 365screens subsequent to the end of the Q2 2005 period. Since the Eastern FederalCorporation acquisition occurred subsequent to the Q2 2005 Period, the resultsof operations of such theatres were not included in the Q2 2005 Period results.See Note 2—“Acquisitions” to the unaudited condensed consolidatedfinancial statements for additional information regarding this acquisition. Theincrease in the Q2 2006 Period average ticket price was primarily attributableto periodic pricing reviews conducted by the Company, which includes analysisof various factors, including general inflationary trends and local marketconditions. Based on our review of certain industry sources, the increase inour per screen admissions revenues approximated the industry’s results for theQ2 2006 Period as compared to the Q2 2005 Period.

 

In addition, during the Q2 2006 Period, weexperienced 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 certainsize changes) and the success of certain family-oriented andconcession-friendly films exhibited during the Q2 2006 Period.  Thedecrease in other operating revenues in the Q2 2006 Period was primarilyattributable to the revenues generated from National CineMedia being less thangenerated in the Q2 2005 Period due to the payment arrangement described infurther detail under Note 3—“Formation of National CineMedia, LLC.” Such decreases were partially offset by increased revenues related to ourvendor marketing programs and incremental other theatre revenues.

 

Income from operations increased 24.1% to$89.0 million for the Q2 2006 Period compared to $71.7 million in theQ2 2005 Period. Net income decreased to $16.6 million in the Q2 2006Period compared to net income of $26.4 million in the Q2 2005 Period.Earnings per diluted share also decreased to $0.11 for the Q2 2006 Periodcompared to $0.17 during the Q2 2005 Period. EBITDA was $108.0 million forthe Q2 2006 Period, a decrease of 10.5% from $120.7 million in the Q2 2005Period and represented an EBITDA margin of 15.8%. The increase in income fromoperations is primarily due to incremental admissions and concessions revenuesdue to the growth in attendance and increases in average 

 

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ticketprices and average concessions per patron, partially offset by increases incertain expense items described in further detail below.  The decrease innet income and earnings per diluted share during the Q2 2006 Period is primarilyattributable to incremental interest expense and the impact of a $31.6 millionloss on debt extinguishment (including a related $1.3 million write-off ofunamortized debt issue costs) recorded in connection with conversions of approximately$100.0 million in principal amount of  the Company’s Convertible Senior Notes (seeNote 4—“Debt Obligations” for further discussion), partially offset by anincrease in operating income described below. A tabular reconciliation of netincome to EBITDA and net cash provided by operating activities is providedbelow under “Results of Operations—EBITDA.”

 

During the quarter and two quarters ended June 29,2006, we made progress with certain of our strategic initiatives:

 

•                  We demonstrated our commitment to providingincremental value to our stockholders. Total cash dividends distributed to ourstockholders during the two quarters ended June 29, 2006 (the “Fiscal 2006Period”) totaled approximately $89.5 million.

 

•                  In addition, we opened 3 new theatres with 40screens and closed 7 theaters with 72 screens, ending the Q2 2006 Period with542 theaters and 6,383 screens.

 

The following table sets forth the percentage oftotal revenues represented by certain items included in our consolidatedstatements of income for the Q2 2006 Period, the Q2 2005 Period, the Fiscal2006 Period and the two quarters ended June 30, 2005 (“Fiscal 2005 Period”)(dollars and attendance in millions, except average ticket prices and averageconcession per patron):  

 
| ** **                                                                                                                                                                                                                | ** ** | **Q2 2006  Period** | ** ** | **Q2 2005  Period** | ** ** | **Fiscal  2006 Period** | ** ** | **Fiscal  2005 Period** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **$**               | ** ** | **% of  Revenue**   | ** ** | **$**                   | ** ** | **% of  Revenue**       | ** ** | **$** | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                                                                                                                                                                 |       |                |       |                |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Admissions                                                                                                                                                                                                                |       | $                   | 452.5      |                | 66.1       | %                       | $          | 419.7                   |       | 65.3 | % | $ | 844.5 |   | 66.5 | % | $ | 808.5 |   | 66.3 | % |
| Concessions                                                                                                                                                                                                               |       | 185.2               |       | 27.1                |       | 171.6                   |       | 26.7                    |       | 343.8 |   | 27.1 |   | 321.2 |   | 26.3 |   |
| Other  operating revenue                                                                                                                                                                                                  |       | 46.9                |       | 6.8                 |       | 51.8                    |       | 8.0                     |       | 81.4 |   | 6.4 |   | 90.4 |   | 7.4 |   |
|                                                                                                                                                                                                                      |       |                |       |                |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Total  revenue                                                                                                                                                                                                            |       | 684.6               |       | 100.0               |       | 643.1                   |       | 100.0                   |       | 1,269.7 |   | 100.0 |   | 1,220.1 |   | 100.0 |   |
| Operating  expenses:                                                                                                                                                                                                      |       |                |       |                |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Film  rental and advertising costs(1)                                                                                                                                                                                     |       | 244.6               |       | 54.1                |       | 234.2                   |       | 55.8                    |       | 441.6 |   | 52.3 |   | 433.1 |   | 53.6 |   |
| Cost  of concessions(2)                                                                                                                                                                                                   |       | 28.8                |       | 15.6                |       | 25.0                    |       | 14.6                    |       | 52.9 |   | 15.4 |   | 47.4 |   | 14.8 |   |
| Rent  expense(3)                                                                                                                                                                                                          |       | 79.8                |       | 11.7                |       | 76.8                    |       | 11.9                    |       | 157.4 |   | 12.4 |   | 151.3 |   | 12.4 |   |
| Other  operating expenses(3)                                                                                                                                                                                              |       | 168.6               |       | 24.6                |       | 166.8                   |       | 25.9                    |       | 327.2 |   | 25.8 |   | 328.6 |   | 26.9 |   |
| General  and administrative expenses (including share-based compensation expense of  $2.1 and $1.3 for the Q2 2006 Period and the Q2 2005 Period and $4.1 and $2.8  for the Fiscal 2006 Period and Fiscal 2005 Period)(3) |       | 17.1                |       | 2.5                 |       | 15.9                    |       | 2.4                     |       | 33.0 |   | 2.6 |   | 34.7 |   | 2.9 |   |
| Depreciation  and amortization(3)                                                                                                                                                                                         |       | 50.7                |       | 7.4                 |       | 48.9                    |       | 7.6                     |       | 100.4 |   | 7.9 |   | 97.1 |   | 8.0 |   |
| Net  loss on disposal and impairment of operating assets(3)                                                                                                                                                               |       | 5.1                 |       | 0.7                 |       | 1.3                     |       | 0.2                     |       | 10.8 |   | 0.9 |   | 4.2 |   | 0.3 |   |
| Equity  in loss (income) of joint venture including former employee compensation(3)                                                                                                                                       |       | 0.9                 |       | 0.1                 |       | 2.5                     |       | 0.4                     |       | 6.7 |   | 0.5 |   | 2.5 |   | 0.2 |   |
|                                                                                                                                                                                                                      |       |                |       |                |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Total  operating expenses(3)                                                                                                                                                                                              |       | 595.6               |       | 87.0                |       | 571.4                   |       | 88.9                    |       | 1,130.0 |   | 89.0 |   | 1,098.9 |   | 90.1 |   |
|                                                                                                                                                                                                                      |       |                |       |                |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Income  from operations(3)                                                                                                                                                                                                |       | 89.0                |       | 13.0                |       | 71.7                    |       | 11.1                    |       | 139.7 |   | 11.0 |   | 121.2 |   | 9.9 |   |
| Interest  expense, net(3)                                                                                                                                                                                                 |       | 29.4                |       | 4.3                 |       | 28.3                    |       | 4.4                     |       | 60.5 |   | 4.8 |   | 56.2 |   | 4.6 |   |
| Provision  for income taxes(3)                                                                                                                                                                                            |       | 11.3                |       | 1.7                 |       | 17.1                    |       | 2.7                     |       | 18.8 |   | 1.5 |   | 25.6 |   | 2.1 |   |
| Net  income(3)                                                                                                                                                                                                            |       | 16.6                |       | 2.4                 |       | 26.4                    |       | 4.1                     |       | 27.8 |   | 2.2 |   | 39.5 |   | 3.2 |   |
| EBITDA(3),(4)                                                                                                                                                                                                             |       | $                   | 108.0      |                | 15.8       | %                       | $          | 120.7                   |       | 18.8 | % | $ | 207.5 |   | 16.3 | % | $ | 218.4 |   | 17.9 | % |
| Attendance                                                                                                                                                                                                                |       | 65.2                |       |                | *          | 61.2                    |       |                    | *          | 123.2 |   |   | * | 119.8 |   |   | * |
| Average  ticket price(5)                                                                                                                                                                                                  |       | $                   | 6.94       |                |       | *                       | $          | 6.86                    |       |   | * | $ | 6.85 |   |   | * | $ | 6.75 |   |   | * |
| Average  concession per patron(6)                                                                                                                                                                                         |       | $                   | 2.84       |                |       | *                       | $          | 2.80                    |       |   | * | $ | 2.79 |   |   | * | $ | 2.68 |   |   | * |

 

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**Not meaningful*(1) Percentage of revenues calculated as a percentage of admissions revenues.(2) Percentage of revenues calculated as a percentage of concessions revenues.(3) Percentage of revenues calculated as a percentage of total revenues.(4) EBITDA represents earnings before interest, taxes, depreciation andamortization. See “—Results of Operations—EBITDA” below for a tabularreconciliation of net income to EBITDA and net cash provided by operatingactivities.(5) Calculated as admissions revenue/attendance.(6) Calculated as concessions revenue/attendance.

 

***Q2 2006 Period Compared to Q2 2005Period and Fiscal 2006 Period compared to Fiscal 2005 Period***

*** ***

***Admissions***

 

Total admissions revenues increased$32.8 million, or 7.8%, to $452.5 million for the Q2 2006 Period,from $419.7 million for the Q2 2005 Period. During the Fiscal 2006 Period,total admissions revenues increased $36.0 million, or 4.5%, to$844.5 million, from $808.5 million for the Fiscal 2005 Period. OurQ2 2006 Period and Fiscal 2006 Period box office results were favorablyimpacted by a 6.5% and 2.8% increase in attendance, respectively, coupled witha 1.2% and 1.5% increase, respectively, in average ticket prices. The increasein the Q2 2006 Period and Fiscal 2006 Period attendance was primarilyattributable to a strong second quarter box office led by the overall breadthof the Q2 2006 Period film slate. Our Q2 2006 Period and Fiscal 2006 Periodattendance was impacted by the 230 screens acquired from Eastern FederalCorporation on July 21, 2005 and approximately 143 new screens added sincethe end of the Q2 2005 Period, offset by the closure of approximately 365screens subsequent to the end of the Q2 2005 period. Since the Eastern FederalCorporation acquisition occurred subsequent to the Q2 2005 Period, the resultsof operations of such theatres were not included in the Q2 2005 Period or theFiscal 2005 Period results. See Note 2—“Acquisitions” to the unauditedcondensed consolidated financial statements for additional information regardingthis acquisition. The increase in the Q2 2006 and Fiscal 2006 Period averageticket price was primarily attributable to periodic pricing reviews conductedby the Company, which includes analysis of various factors, including generalinflationary trends and local market conditions. Based on our review of certainindustry sources, the increase in our per screen admissions revenuesapproximated the industry’s results for the Q2 2006 Period and the Fiscal 2006Period as compared to the Q2 2005 Period and Fiscal 2005 Period.

 

***Concessions***

 

Total concessions revenues increased$13.6 million, or 7.9%, to $185.2 million for the Q2 2006 Period,from $171.6 million for the Q2 2005 Period. During the Fiscal 2006 Period,total concessions revenues increased $22.6 million, or 7.0%, to$343.8 million, from $321.2 million for the Fiscal 2005 Period. Theincrease in concessions revenues in the Q2 2006 Period and the Fiscal 2006Period compared to the Q2 2005 Period and the Fiscal 2005 Period was due to a1.4% and 4.1% increase, respectively, in average concessions per patron,coupled with the aforementioned Q2 2006 Period and Fiscal 2006 Period increasein attendance. The increase in the Fiscal 2006 Period concessions revenue andaverage concessions per patron and to a lesser extent, the Q2 2006 Periodconcessions revenue and average concessions per patron was primarilyattributable to changes in our concessions product mix (including certain sizechanges). The success of certain family-oriented and concession-friendly filmsexhibited benefited both the Q2 2006 Period and the Fiscal 2006 period.

 

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***Other OperatingRevenues***

 

Total other operating revenues decreased$4.9 million, or 9.5%, to $46.9 million for the Q2 2006 Period, from$51.8 million for the Q2 2005 Period. During the Fiscal 2006 Period, totalother operating revenues decreased $9.0 million, or 10.0%, to $81.4 million,from $90.4 million for the Fiscal 2005 Period. Included in other operatingrevenues are on-screen advertising revenues, business meetings and concertevent revenues generated by Regal CineMedia prior to the formation of theNational CineMedia on March 29, 2005, the activities of the National CineMediajoint venture subsequent to its formation, marketing revenues from our vendormarketing programs and game revenues.  The decrease in other operatingrevenues in the Q2 2006 Period and the Fiscal 2006 Period was primarilyattributable to the revenues generated from National CineMedia being less thangenerated in the Q2 2005 Period and Fiscal 2005 Period due to the paymentarrangement described in further detail under Note 3—“Formation ofNational CineMedia, LLC.”  Such decreaseswere partially offset by increased revenues related to our vendor marketing programsand incremental other theatre revenues.

 

***Film Rental andAdvertising Costs***

 

During the Q2 2006 Period, film rental andadvertising costs as a percentage of admissions revenues decreased to 54.1% ascompared to 55.8% in the Q2 2005 Period. During the Fiscal 2006 Period, filmrental and advertising costs as a percentage of admissions revenues decreasedto 52.3% as compared to 53.6% in the Fiscal 2005 Period. The decreases in filmrental and advertising costs as a percentage of box office revenues during theQ2 2006 Period and the Fiscal 2006 Period was primarily the result of filmproduct mix and higher film rental costs associated with certain 2005 filmssuch as *Star Wars: Episode III—Revenge ofthe Sith*.

 

***Cost ofConcessions***

 

Cost of concessions as a percentage of concessionsrevenues increased to 15.6% in the Q2 2006 Period as compared to 14.6% in theQ2 2005 Period. During the Fiscal 2006 Period, cost of concessions as apercentage of concessions revenues increased to 15.4% as compared to 14.8% in theFiscal 2005 Period. The increase in the cost of concessions as a percentage ofconcession revenues was primarily related to a greater percentage of lowermargin concession items in the overall mix of concession product sold duringthe Q2 2006 Period and the Fiscal 2006 Period as compared to the Q2 2005 Periodand the Fiscal 2005 Period.

 

***Rent Expense***

 

Rentexpense increased $3.0 million or 3.9% to $79.8 million in the Q22006 Period, from $76.8 million in the Q2 2005 Period. During the Fiscal2006 Period, rent expense increased $6.1 million or 4.0% to$157.4 million in the Fiscal 2006 Period, from $151.3 million in theFiscal 2005 Period. The increase in rent expense in the Q2 2006 Period and theFiscal 2006 Period was primarily attributable to general inflationary increasesalong with incremental rent from the inclusion of the theatres purchased fromR/C Theatres and Eastern Federal Corporation, partially offset by the closureof approximately 365 screens since the end of the Q2 2005 period

 

***Other OperatingExpenses***

 

Other operating expenses as a percentage of totalrevenues decreased to 24.6% in the Q2 2006 Period, from 25.9% in the Q2 2005Period and decreased to 25.8% in the Fiscal 2006 Period, from 26.9% in theFiscal 2005 Period. The decrease in total other operating expenses as apercentage of total revenues in the Q2 2006 Period and the Fiscal 2006 Periodwas primarily attributable to the expenses generated from National CineMediabeing less than generated in the Q2 2005 Period due to the payment arrangementdescribed in further detail under Note 3—“Formation of National CineMedia,LLC,” partially offset by an increase in certain non-rent occupancy costs andcertain other operating costs.

 

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***General andAdministrative Expenses***

 

General and administrative expenses increased$1.2 million, or 7.5%, to $17.1 million during the Q2 2006 Period,from $15.9 million in the Q2 2005 Period. During the Fiscal 2006 Period,general and administrative expenses decreased $1.7 million, or 4.9%, to$33.0 million, from $34.7 million in the Fiscal 2005 Period. As apercentage of total revenues, general and administrative expenses increased to2.5% during the Q2 2006 Period, from 2.4% in the Q2 2005 Period and decreasedto 2.6% in the Fiscal 2006 Period, from 2.9% in the Fiscal 2005 Period. Theincrease in general and administrative expenses during the Q2 2006 Period wasprimarily attributable to an increase in share-based compensation expenseprimarily resulting from the Company’s adoption of Statement of FinancialAccounting Standards No. 123 (revised), “Share-Based Payment” (“FAS 123R”)effective December 30, 2005 (see Note 6—“Capital Stock and Share-BasedCompensation” for further discussion). The decrease in general and administrativeexpenses during the Fiscal 2006 Period as compared to the Fiscal 2005 Periodwas 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 primarilyresulting from the Company’s adoption of FAS 123R.

 

***Depreciation andAmortization***

 

Depreciation and amortization increased$1.8 million, or 3.7%, to $50.7 million in the Q2 2006 Period, from$48.9 million in the Q2 2005 Period. For the Fiscal 2006 Period,depreciation and amortization increased $3.3 million, or 3.4%, to$100.4 million, from $97.1 million in the Fiscal 2005 Period. Theincrease in depreciation and amortization during the Q2 2006 Period and theFiscal 2006 Period was primarily due to incremental depreciation andamortization from the inclusion of the theatres purchased from R/C Theatres andEastern Federal Corporation, which exceeded the depreciation and amortizationcosts of the 365 screens closed subsequent to the end of the Q2 2005 Period.

 

***Income fromOperations***

 

Income from operations totaled approximately$89.0 million for the Q2 2006 Period, which represents an increase of$17.3 million or 24.1%, from $71.7 million in the Q2 2005 Period. Forthe Fiscal 2006 Period, income from operations totaled approximately$139.7 million, which represents an increase of $18.5 million or15.3%, from $121.2 million in the Fiscal 2005 Period. The net increase inincome from operations during the Q2 2006 Period and the Fiscal 2006 Period wasprimarily attributable to incremental admissions and concessions revenuesdescribed above, largely offset by increases in certain operating expense itemssuch as rent, depreciation and amortization, a greater net loss on the disposaland impairment of operating assets and incremental costs of concessions.

 

***Interest Expense***

 

Net interest expense increased $1.1 million, or3.9%, to $29.4 million in the Q2 2006 Period, from $28.3 million inthe Q2 2005 Period. For the Fiscal 2006 Period, net interest expense increased$4.3 million, or 7.7%, to $60.5 million, from $56.2 million inthe Fiscal 2005 Period. The increase in net interest expense during the Q2 2006Period and Fiscal 2006 Period as compared to the Q2 2005 Period and the Fiscal2005 Period was principally due to a higher effective interest rate on RegalCinemas’ term loan facility (the “Term Facility”) under Regal Cinemas’ FourthAmended and Restated Credit Agreement, dated as of May 10, 2004, as first amendedas of July 27, 2004, as second amended as of November 24, 2004, as thirdamended as of September 26, 2005, as fourth amended as of March 9, 2006 and asfifth amended as of June 14, 2006 (the “Senior Credit Facility”).

 

***Income Taxes***

 

The provision for income taxes of $11.3 millionand $17.1 million****for the Q22006 Period and the Q2 2005 Period, respectively, reflect effective tax ratesof approximately 40.5% and 39.3%, respectively. The provision for income taxesof $18.8 million and $25.6 million****forthe Fiscal 2006 Period and the Fiscal 2005 Period, respectively, reflecteffective tax rates of approximately 40.3% and 39.3%, respectively. The

 

30

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effectivetax rates for the Q2 2006 Period, the Q2 2005 Period, the Fiscal 2006 Periodand the Fiscal 2005 Period reflect the impact of certain non-deductibleexpenses. The increase in the effective tax rates for the Q2 2006 Period andthe Fiscal 2006 Period was primarily attributable to settlements with state taxingauthorities and the accrual of interest expense associated with taxuncertainties.

 

***Net Income***

 

Netincome totaled $16.6 million for the Q2 2006 Period, which represents adecrease of $9.8 million, from $26.4 million in the Q2 2005 Period.During the Fiscal 2006 Period, net income totaled $27.8 million, whichrepresents a decrease of $11.7 million, from $39.5 million in theFiscal 2005 Period. The decrease in net income for the Q2 2006 Period and theFiscal 2006 Period was primarily attributable to the impact of a $31.6 millionloss on debt extinguishment (including a related $1.3 million write-off ofunamortized debt issue costs) recorded in the Q2 2006 Period in connection withconversions of approximately $100.0 million in principal amount of  the Company’s Convertible Senior Notes (seeNote 4—“Debt Obligations” for further discussion), partially offset by anincrease in operating income described above.

 

***EBITDA***

 

EBITDA (earnings before interest, taxes,depreciation and amortization) was approximately $108.0 million, or 15.8%of total revenues for the Q2 2006 Period and $120.7 million, or 18.8% oftotal revenues, for the Q2 2005 Period. EBITDA was approximately$207.5 million, or 16.3% of total revenues for the Fiscal 2006 Period and$218.4 million, or 17.9% of total revenues, for the Fiscal 2005 Period.The decrease in EBITDA for the Q2 2006 Period and the Fiscal 2006 Period wasprimarily attributable to the impact of a $31.6 million loss on debtextinguishment (including a related $1.3 million write-off of related debtissue costs) recorded in the Q2 2006 Period in connection with conversions of approximately$100.0 million in principal amount of the Company’s Convertible SeniorNotes (see Note 4—“Debt Obligations” for further discussion), partiallyoffset by an increase in operating income described above. We believe EBITDAprovides a useful measure of liquidity and financial performance for ourinvestors because EBITDA is an industry comparative measure of liquidity andfinancial performance prior to the payment of interest and taxes and because itis a primary financial measure used by management to assess our performance andliquidity. EBITDA is not a measurement of liquidity or financial performanceunder accounting principles generally accepted in the United States of Americaand should not be considered in isolation or construed as a substitute for netincome or other operations data or cash flow data prepared in accordance withaccounting principles generally accepted in the United States of America forpurposes of analyzing our profitability or liquidity. In addition, not allfunds depicted by EBITDA are available for management’s discretionary use. Forexample, a substantial portion of such funds are subject to contractualrestrictions and functional requirements for debt service, fund necessarycapital expenditures and to meet other commitments from time to time asdescribed in more detail elsewhere in this quarterly report on Form 10-Q.EBITDA, as calculated, may not be comparable to similarly titled measuresreported by other companies. A reconciliation of net income to EBITDA and netcash provided by operating activities is calculated as follows (in millions): 

 
| ** **                                  | ** ** | **Q2 2006 Period** | ** ** | **Q2 2005 Period** | ** ** | **Fiscal 2006 Period** | ** ** | **Fiscal 2005 Period** | ** ** |
|---------------------------------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|------------------------|------------|
| Net income                                  |       | $                  | 16.6       |               | $          | 26.4                   |       | $                      | 27.8       |   | $ | 39.5 |   |
| Interest expense, net                       |       | 29.4               |       | 28.3               |       | 60.5                   |       | 56.2                   |       |
| Provision for income taxes                  |       | 11.3               |       | 17.1               |       | 18.8                   |       | 25.6                   |       |
| Depreciation and amortization               |       | 50.7               |       | 48.9               |       | 100.4                  |       | 97.1                   |       |
|                                        |       |               |       |               |       |                   |       |                   |       |
| EBITDA                                      |       | 108.0              |       | 120.7              |       | 207.5                  |       | 218.4                  |       |
| Interest expense, net                       |       | (29.4              | )          | (28.3              | )          | (60.5                  | )          | (56.2                  | )          |
| Provision for income taxes                  |       | (11.3              | )          | (17.1              | )          | (18.8                  | )          | (25.6                  | )          |
| Deferred income taxes                       |       | (3.7               | )          | (2.3               | )          | (4.8                   | )          | (3.8                   | )          |
| Changes in operating assets and liabilities |       | 11.5               |       | 21.8               |       | (41.8                  | )          | (15.2                  | )          |
| Loss on debt extinguishment                 |       | 31.6               |       | —             |       | 32.5                   |       | —                 |       |
| Other items, net                            |       | 8.2                |       | 5.0                |       | 21.7                   |       | 9.4                    |       |
|                                        |       |               |       |               |       |                   |       |                   |       |
| Net cash provided by operating activities   |       | $                  | 114.9      |               | $          | 99.8                   |       | $                      | 135.8      |   | $ | 127.0 |   |

 

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***Cash Flows***

*** ***

The following table summarizes certain cash flowdata for the Fiscal 2006 Period and the Fiscal 2005 Period (in millions): 

 
| ** **                                | ** ** | **Fiscal 2006 Period** | ** ** | **Fiscal 2005 Period** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Net cash provided by operating activities |       | 135.8                  |       | 127.0                  |       |
| Net cash used in investing activities     |       | (50.4                  | )          | (95.2                  | )          |
| Net cash used in financing activities     |       | (100.5                 | )          | (97.7                  | )          |
|                                      |       |                   |       |                   |       |
| Net decrease in cash and cash equivalents |       | (15.1                  | )          | (65.9                  | )          |

* *

*Fiscal 2006 Period Compared toFiscal 2005 Period*

 

Net cash flows generated from operating activitieswere approximately $135.8 million for the Fiscal 2006 Period, whichrepresents an increase of $8.8 million compared to $127.0 million in theFiscal 2005 Period. Fiscal 2006 Period net cash flows generated from operatingactivities were impacted by several factors including an increase in totalrevenues due primarily to increases in attendance coupled with increases inaverage ticket prices and average concessions per patron, offset by increasesin certain expense items.  An approximate $47.1 million increase inadjustments (primarily loss on extinguishment of debt, equity in loss of jointventure including former employee compensation and a greater loss on disposaland impairment of operating assets) to reconcile net income to cash provided byoperating activities, partially offset by a $11.7 million decrease in netincome and a $26.6 million reduction of changes in operating assets andliabilities contributed to the net increase in net cash provided by operatingactivities. The net decrease in the changes in operating assets and liabilitiesand other working capital items was primarily related to the timing of certainvendor payments and income tax payments (including a reclassification of excesstax benefits from share based payment arrangements to cash flows used infinancing activities discussed further in Note 6—“Capital Stock andShare-Based Compensation”), partially offset by increases in trade and otherreceivables and decreases in certain accrued expenses.

 

Net cash flows used in investing activities totaledapproximately $50.4 million for the Fiscal 2006 Period compared to cashflows used in investing activities of approximately $95.2 million for theFiscal 2005 Period. Contributing to the decrease in cash flows used ininvesting activities was the purchase of R/C Theatres during the Fiscal 2005Period, a $19.9 million decrease in capital expenditures during the Fiscal2006 Period, which was primarily attributable to the timing of certain capitalprojects during the Fiscal 2006 Period, partially offset by fewer proceeds fromthe disposition of assets during the Fiscal 2006 Period as compared the Fiscal2005 Period.

 

Net cash flows used in financing activities wereapproximately $100.5 million for the Fiscal 2006 Period compared to cashflows used in financing activities of approximately $97.7 million for theFiscal 2005 Period. The net increase in cash flows used in financing activitiesduring the Fiscal 2006 Period was primarily attributable to net cash used tosettle conversions of approximately $100.0 million in principal amount of  the Company’s Convertible Senior Notes,partially offset by additional borrowings from the Regal Cinemas Senior CreditFacility and the reclassification of excess tax benefits from share basedpayment arrangements from cash flows from operating activities discussedfurther in Note 6—“Capital Stock and Share-Based Compensation.”

 

**Liquidity and Capital Resources**

 

On a consolidated basis, we expect our primary usesof cash to be for operating expenses, capital expenditures, general corporatepurposes related to corporate operations, debt service, share repurchases andthe Company’s quarterly dividend payments. The principal sources of liquidityare cash generated from operations, cash on hand, our new incremental termfacility (the “Incremental Term Facility”) provided for 

 

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underthe Senior Credit Facility and the revolving facility (the “RevolvingFacility”) provided for under the Senior Credit Facility. Under the terms of theSenior Credit Facility, Regal Cinemas is restricted as to how much it canadvance or distribute to Regal, its indirect parent. Since Regal is a holdingcompany with no significant assets other than its subsidiaries, thisrestriction could impact Regal’s ability to effect future debt or dividendpayments, pay corporate expenses or redeem or convert into cash its ConvertibleSenior Notes.

 

Our revenues are generally collected in cash throughadmissions and concessions revenues. Our operating expenses are primarilyrelated to film and advertising costs, rent and occupancy, and payroll. Filmcosts are ordinarily paid to distributors within 30 days following receiptof admissions revenues and the cost of the Company’s concessions are generallypaid to vendors approximately 30 days from purchase. Our currentliabilities generally include items that will become due within twelve monthsand, as a result, at any given time, our balance sheet is likely to reflect aworking capital deficit.

 

We fund the cost of capital expenditures throughinternally generated cash flows, cash on hand, proceeds from disposition ofassets and financing activities. Our capital requirements have historicallyarisen principally in connection with acquisitions of theatres, new theatre construction,adding new screens to existing theatres, upgrading the Company’s theatrefacilities and replacing equipment. We intend to continue to grow our theatrecircuit through selective expansion and acquisition opportunities. The Companyhas a formal and intensive review procedure for the authorization of capitalprojects, with the most important financial measure of acceptability for adiscretionary 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 year 2006, exclusive of acquisitions. Such capital expenditures areexpected to be partially funded through asset dispositions conducted during thenormal course of our business. During the Fiscal 2006 Period, we investedapproximately $55.4 million in capital expenditures.

 

For a discussion of the series of significantfinancing transactions which have occurred through December 29, 2005,please refer to “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Liquidity and Capital Resources” contained inPart II, Item 7 of our annual report on Form 10-K filed on March 14,2006 with the Securities and Exchange Commission (File No. 001-31315) for thefiscal year ended December 29, 2005.

 

As described in Note 3—“Formation of NationalCineMedia, LLC,” in connection with the formation of National CineMedia, onMay 11, 2005, RCI adopted and approved a severance plan (the “SeverancePlan”) for RCM employees who held an unvested option to purchase shares ofRegal’s Class A common stock or shares of Regal’s restricted Class Acommon stock pursuant to the terms of the Regal 2002 Stock Incentive Planimmediately prior to such employee’s termination of employment with RCM andcommencement of employment with National CineMedia. During the Q2 2006 Period,the Company recorded total severance expense of approximately$0.8 million, including less than $0.1 million of payments in lieu ofdividends, related to the Severance Plan.

 

Regal paid two quarterly cash dividends of $0.30 pershare 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 $89.5 million inthe aggregate, during the two quarters ended June 29, 2006.  OnJuly 31, 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 September 19, 2006,to stockholders of record on September 11, 2006. We, at the discretion of theboard of directors and subject to applicable law, anticipate paying regularquarterly dividends on our Class A and Class B common stock for theforeseeable future. The amount, if any, of the dividends to be paid in the futurewill depend upon our then available cash, anticipated cash needs, overallfinancial condition, loan agreement restrictions, future prospects for earningsand cash flows, as well as other relevant factors.

 

33

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As of June 29, 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. During thequarter ended March 30, 2006, holders of $4.4 million in principal amountof Convertible Senior Notes exercised their conversion rights. The Company electedto settle these conversions entirely in cash for approximately $5.3 million. Asa result of these conversions, the Company recorded a $0.9 million****loss on debt extinguishment during the quarter ended March30, 2006. In addition, during the quarter ended June 29, 2006 holders of approximately$100.0 million in principal amount of Convertible Senior Notes exercised theirconversion rights, and the Company also settled these conversions entirely in cashfor approximately $130.3 million. As a result of the conversions in the secondquarter of 2006, the Company recorded a $31.6 million loss on debtextinguishment (including a related $1.3 million write-off of unamortized debtissue costs) during the quarter ended June 29, 2006.

 

In connection with the above conversions, theCompany received net proceeds of approximately $16.1 million from Credit SuisseFirst Boston (“CSFB”) attributable to the convertible note hedge arrangemententered into with CSFB and the warrant sold to CSFB in connection with theissuance of the Convertible Senior Notes.  Such proceeds were recorded asan increase to additional paid-in capital. Based upon our ability to generatecash flow from operations, our financial capacity and ability to borrow orraise capital and available cash on hand, we believe that we have the abilityto generate the liquidity necessary to settle in cash the remaining principalamount of the outstanding Convertible Senior Notes upon their conversion.

 

Under Regal Cinemas’ Senior Credit Facility asamended through June 14, 2006, Regal Cinemas has established the IncrementalTerm Facility, pursuant to which Regal Cinemas may borrow up to $200 million inadditional funds that would be treated as a term loan under the Senior CreditFacility without the need to obtain consent from any lender or any party to theSenior Credit Facility.  Borrowing under the Incremental Term Facility issubject to the satisfaction of certain conditions set forth in the facility, including,but not limited to, obtaining commitments from one or more lenders to fund suchadditional amounts. At Regal Cinemas’ option, borrowings under the IncrementalTerm Facility bear interest at an adjusted Eurodollar rate or a base rate plus,in either case, an applicable margin that is established at the timecommitments for the Incremental Term Facility are obtained.  Proceeds ofRegal Cinemas’ borrowings under the Incremental Term Facility are to be usedsolely to fund, or reimburse Regal Cinemas for funding, distributions to theCompany for the purpose of redeeming, repurchasing, acquiring or otherwisesettling the conversion of all or a portion of the Convertible Senior Notes.

 

On June 14, 2006, Regal Cinemas obtained commitmentsand borrowed $100 million under the Incremental Term Facility, the net proceedsof which were applied to reimburse Regal Cinemas for amounts previouslydistributed to the Company to fund the Company’s settlement of the conversionof approximately $100.0 million aggregate principal amount of ConvertibleSenior Notes for approximately $114.9 million in cash (net ofapproximately $15.4 million funded by CSFB).

 

As of June 29, 2006, we had approximately$1,667.9 million outstanding under the Term Facility under the SeniorCredit Facility, $135.6 million aggregate principal amount remaining underConvertible Senior Notes and $51.5 million aggregate principal amountremaining under the Regal Cinemas 93/8% Senior Subordinated Notes. As of June 29,2006, we had approximately $100.0 million available for drawing under theIncremental Term Facility and approximately $99.0 million available fordrawing under the Regal Cinemas $100.0 million Revolving Facility under theSenior Credit Facility. Regal Cinemas maintains a letter of credit sub-facilityof up to $30.0 million (of which approximately $1.0 million wasoutstanding as of June 29, 2006), which reduces availability under theRevolving Facility.

 

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**Contractual Cash Obligations and Commitments**

 

For a summary of our contractual cash obligationsand commitments as of December 29, 2005, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Contractual Cash Obligations and Commitments” contained in ourannual report on Form 10-K for the fiscal year ended December 29,2005. As of June 29, 2006, there were no material changes outside the ordinarycourse of our business in our contractual cash obligations and commitments. Webelieve that the amount of cash and cash equivalents on hand, cash flowexpected from operations and availability under our Revolving Facility will beadequate for the Company to execute its business strategy and meet anticipatedrequirements for lease obligations, capital expenditures, working capital anddebt service for the next 12 months.

 

**Critical Accounting Estimates**

 

For a discussion of accounting policies that weconsider critical to our business operations and the understanding of ourresults of operations and affect the more significant judgments and estimatesused in the preparation of our unaudited condensed consolidated financialstatements, please refer to Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Critical Accounting Estimates”contained in our annual report on Form 10-K for the fiscal year endedDecember 29, 2005 and incorporated by reference herein. As of June 29,2006, there were no significant changes in our critical accounting policies or estimationprocedures.

 

**Recent Accounting Pronouncements**

 

For a discussion of the recent accountingpronouncements relevant to our operations, please refer to the informationprovided under Note 10—“Recent Accounting Pronoucements” to the accompanyingunaudited condensed consolidated financial statements, which information isincorporated by reference herein.

 

**Seasonality**

 

The Company’s revenues are usually seasonal,coinciding with the timing of releases of motion pictures by the majordistributors. Generally, studios release the most marketable motion picturesduring the summer and the holiday seasons. The unexpected emergence of a “hit”film during other periods can alter the traditional pattern. The timing ofmovie 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 ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s market risk is confined to interestrate exposure of its and its wholly owned subsidiaries’ debt obligations thatbear interest based on floating rates. The Senior Credit Facility provides forvariable rate interest that could be adversely affected by an increase ininterest rates. Borrowings under the Term Facility bear interest, at RegalCinemas’ option, at either an adjusted Eurodollar rate or the base rate plus,in each case, an applicable margin.

 

During 2004 and 2005, Regal Cinemas entered intofive distinct hedging relationships via five separate interest rate swapagreements with final maturity terms ranging from three to five years for thepurpose of hedging an aggregate of approximately $1.1 billion of variableinterest rate risk under the Senior Credit Facility. Under the terms of theinterest rate swap agreements, Regal Cinemas pays interest at various fixedrates ranging from 3.49%—4.337% and receives interest at a variable rate basedon the 3-month LIBOR. For a further description of the swap agreements, seeNote 5 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, which is incorporated herein by reference.

 

35

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As of June 29, 2006 and December 29, 2005,borrowings of $1,667.9 million and $1,575.9 million, respectivelywere outstanding under the Term Facility at effective interest rates of 6.1%(as of June 29, 2006) and 6.0% (as of December 29, 2005), after the impactof the interest rate swaps is taken into account. A hypothetical change of 10%in the Company’s effective interest rate under the Term Facility as of June 29,2006, would increase or decrease interest expense by $2.5 million for thequarter ended June 29, 2006.

 

**Item 4. CONTROLS AND PROCEDURES**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed by us in thereports that we file or submit to the Securities and Exchange Commission underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), isrecorded, processed, summarized and reported within the time periods specifiedby the Commission’s rules and forms, and that information is accumulated andcommunicated to our management, including our principal executive, principalfinancial and principal accounting officers (whom we refer to in this periodicreport as our Certifying Officers), as appropriate to allow timely decisionsregarding required disclosure. Our management evaluated, with the participationof our Certifying Officers, the effectiveness of our disclosure controls andprocedures as of June 29, 2006, pursuant to Rule 13a-15(b) under theExchange Act. Based upon that evaluation, our Certifying Officers concludedthat, as of June 29, 2006, our disclosure controls and procedures wereeffective.

 

There were no changes in our internal control overfinancial reporting that occurred during our most recently completed fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PARTII—OTHER INFORMATION**

 

**Item 1. LEGAL PROCEEDINGS**

 

Information required to be furnished by us underthis Part II, Item 1 (Legal Proceedings) is incorporated by reference toNote 7—“Commitments and Contingencies” of our notes to the accompanyingunaudited condensed consolidated financial statements included in Part I,Item 1 (Financial Statements) of this quarterly report on Form 10-Q.

**Item 1A. RISK FACTORS**

** **

There have been no material changes from riskfactors as previously disclosed in our annual report on Form 10-K filed onMarch 14, 2006 with the Securities and Exchange Commission (FileNo. 001-31315) for the fiscal year ended December 29, 2005.

** **

**Item4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Our 2006 annual meeting of stockholders was held onMay 10, 2006 in Knoxville, Tennessee. The matters submitted for a vote atthe meeting and the related election results were are as follows:

 

1.Election of two Class I directors to serve for three-year terms on our board ofdirectors:

 
| ** **          | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|---------------------|------------|-------------|------------|--------------|------------|
| Michael L. Campbell |       | 787,696,704 |       | 120,202      |       |
| Alex Yemenidjian    |       | 787,762,454 |       | 54,452       |       |

 

Thosedirectors whose terms of office continued after the meeting were as follows:Thomas D. Bell, Craig D. Slater, StephenA. Kaplan and Nestor R.Weigand, Jr. Philip F. Anschutz resigned from our board of directorseffective at the annual meeting. Craig D. Slater resigned from our board ofdirectors as of the close of business on July 28, 2006.

 

36

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2.Ratification of the audit committees’ selection of KPMG LLP as our independentregistered public accounting firm for the fiscal year ending December 28,2006:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
| 787,773,255 |       | 29,996      |       | 13,655      |       | 0                    |       |

 

**Item 6. EXHIBITS**

 
| **Exhibit No.** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                  |   | Fifth  Amendment to Fourth Amended and Restated Credit Agreement, dated as of June  14, 2006, between Regal Cinemas Corporation 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 June 20, 2006 (Commission File No. 001-31315),  and incorporated herein by reference). |
|                 |   |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1                 |   | Form  of Performance Share 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 May 5, 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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**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:  August 8, 2006 | By:                           | /s/  MICHAEL  L. CAMPBELL |
|                  |                          | Michael  L. Campbell*Chief Executive Officer (Principal  Executive   Officer)* |
|                  |                          |   |
| Date:  August 8, 2006 | By:                           | /s/  AMY  E. MILES |
|                  |                          | Amy  E. Miles*Executive Vice President and Chief  Financial   Officer (Principal Financial Officer)* |
|                  |                          |   |
| Date:  August 8, 2006 | By:                           | /s/  DAVID  H. OWNBY |
|                  |                          | David  H. Ownby*Senior Vice President and Chief Accounting   Officer (Principal Accounting Officer)* |

 

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**REGALENTERTAINMENT GROUP**

 

**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                  |       | Fifth  Amendment to Fourth Amended and Restated Credit Agreement, dated as of June  14, 2006, between Regal Cinemas Corporation 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 June 20, 2006 (Commission File No. 001-31315),  and incorporated herein by reference). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1                 |       | Form  of Performance Share 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 May 5, 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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