| REGAL ENTERTAINMENT GROUP Item 1A RISK FACTORS Investing in our securities involves a significant degree of risk |
| In addition to the other information contained in this annual report, you should consider the following factors before investing in our securities |
| Our substantial lease and debt obligations could impair our financial condition |
| We have substantial lease and debt obligations |
| For fiscal 2005, our total rent expense and net interest expense were approximately dlra310dtta5 million and dlra117dtta3 million, respectively |
| As of December 29, 2005, we had total debt obligations of dlra1cmam984dtta5 million |
| As of December 29, 2005, we had total contractual cash obligations of approximately dlra6cmam346dtta2 million |
| For a detailed discussion of our contractual cash obligations and other commercial commitments over the next several years, refer to "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations—Contractual Cash Obligations and Commitments "e provided in Part II, Item 7 of this Form 10-K below |
| If we are unable to meet our lease and debt service obligations, we could be forced to restructure or refinance our obligations and seek additional equity financing or sell assets |
| We may be unable to restructure or refinance our obligations and obtain additional equity financing or sell assets on satisfactory terms or at all |
| As a result, inability to meet our lease and debt service obligations could cause us to default on those obligations |
| Many of our lease agreements and the agreements governing the terms of our debt obligations contain restrictive covenants that limit our ability to take specific actions or require us not to allow specific events to occur and prescribe minimum financial maintenance requirements that we must meet |
| If we violate those restrictive covenants or fail to meet the minimum financial requirements contained in a lease or debt instrument, we would be in default under that instrument, which could, in turn, result in defaults under other leases and debt instruments |
| Any such defaults could materially impair our financial condition and liquidity |
| 15 _________________________________________________________________ Our theatres operate in a competitive environment |
| The motion picture exhibition industry is fragmented and highly competitive with no significant barriers to entry |
| Theatres operated by national and regional circuits and by small independent exhibitors compete with our theatres, particularly with respect to film licensing, attracting patrons and developing new theatre sites |
| Moviegoers are generally not brand conscious and usually choose a theatre based on its location, the films showing there and its amenities |
| In recent years, motion picture exhibitors have been upgrading their asset bases to an attractive megaplex format which features stadium seating, improved projection quality and superior sound systems |
| Generally, stadium seating found in modern megaplex theatres is preferred by patrons over slope-floored multiplex theatres, which were the predominant theatre-type built prior to 1996 |
| Although, as of December 29, 2005, approximately 71prca of our screens were located in theatres featuring stadium seating, we still serve many markets with sloped-floored multiplex theatres |
| These theatres may be more vulnerable to competition than our modern megaplex theatres, and should other theatre operators choose to build and operate modern megaplex theatres in these markets, the performance of our theatres in these markets may be significantly and negatively impacted |
| In addition, should other theatre operators return to the aggressive building strategies undertaken in the late 1990apstas, our attendance, revenue and income from operations per screen could decline substantially |
| Our investment in and revenues from National CineMedia may be negatively impacted by the competitive environment in which National CineMedia operates |
| We maintain an investment in National CineMedia |
| National CineMediaapstas in-theatre advertising operations compete with other cinema advertising companies and other advertising mediums including, most notably, television, newspaper, radio and the Internet |
| There can be no guarantee that in-theatre advertising will continue to attract major advertisers or that National CineMediaapstas in-theatre advertising format will be favorably received by the theatre-going public |
| If National CineMedia is unable to generate expected sales of advertising, it may not maintain the level of profitability we hope to achieve, its results of operations may be adversely affected and our investment in and revenues from National CineMedia may be adversely impacted |
| An increase in the use of alternative film delivery methods may drive down movie theatre attendance and limit ticket prices |
| We also compete with other movie delivery vehicles, including cable television, downloads via the Internet, in-home video and DVD, satellite and pay-per-view services |
| Traditionally, when motion picture distributors licensed their products to the domestic exhibition industry, they refrained from licensing their motion pictures to these other delivery vehicles for a period of time, commonly called the theatrical release window |
| We believe that a material contraction of the current theatrical release window could significantly dilute the consumers appeal of the in-theatre motion picture offering, which could have a material adverse effect on our business and results of operations |
| We also compete for the publicapstas leisure time and disposable income with other forms of entertainment, including sporting events, concerts, live theatre and restaurants |
| We depend on motion picture production and performance |
| Our ability to operate successfully depends upon the availability, diversity and appeal of motion pictures, our ability to license motion pictures and the performance of such motion pictures in our markets |
| We mostly license first-run motion pictures, the success of which have increasingly depended on the marketing efforts of the major studios |
| Poor performance of, or any disruption in the production of (including by reason of a strike) these motion pictures, or a reduction in the marketing efforts of the 16 _________________________________________________________________ major studios, could hurt our business and results of operations |
| In addition, a change in the type and breadth of movies offered by studios may adversely affect the demographic base of moviegoers |
| We depend on our relationships with film distributors |
| The film distribution business is highly concentrated, with ten major film distributors reportedly accounting for 87prca of industry admissions revenues and 48 of the top 50 grossing films during 2004 |
| Our business depends on maintaining good relations with these distributors |
| In addition, we are dependent on our ability to negotiate commercially favorable licensing terms for first-run films |
| A deterioration in our relationship with any of the ten major film distributors could affect our ability to negotiate film licenses on favorable terms or our ability to obtain commercially successful films and, therefore, could hurt our business and results of operations |
| No assurance of a supply of motion pictures |
| The distribution of motion pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases |
| Consent decrees resulting from those cases effectively require major motion picture distributors to offer and license films to exhibitors, including us, on a film-by-film and theatre-by-theatre basis |
| Consequently, we cannot assure ourselves of a supply of motion pictures by entering into long-term arrangements with major distributors, but must compete for our licenses on a film-by-film and theatre-by-theatre basis |
| We may not benefit from our acquisition strategy |
| We may have difficulty identifying suitable acquisition candidates |
| Even if we do identify such candidates, we anticipate significant competition from other motion picture exhibitors and financial buyers when trying to acquire these candidates, and there can be no assurances that we will be able to acquire such candidates at reasonable prices or on favorable terms |
| Moreover, some of these possible buyers may be stronger financially than we are |
| As a result of this competition for limited assets, we may not succeed in acquiring suitable candidates or may have to pay more than we would prefer to make an acquisition |
| If we cannot identify or successfully acquire suitable acquisition candidates, we may not be able to successfully expand our operations and the market price of our securities could be adversely affected |
| In any acquisition, we expect to benefit from cost savings through, for example, the reduction of overhead and theatre level costs, and from revenue enhancements resulting from the acquisition |
| There can be no assurance, however, that we will be able to generate sufficient cash flow from these acquisitions to service any indebtedness incurred to finance such acquisitions or realize any other anticipated benefits |
| Nor can there be any assurance that our profitability will be improved by any one or more acquisitions |
| If we cannot generate sufficient cash flow to service debt incurred to finance an acquisition, our results of operations and profitability would be adversely affected |
| Any acquisition may involve operating risks, such as: • the difficulty of assimilating the acquired operations and personnel and integrating them into our current business; • the potential disruption of our ongoing business; • the diversion of managementapstas attention and other resources; • the possible inability of management to maintain uniform standards, controls, procedures and policies; • the risks of entering markets in which we have little or no experience; • the potential impairment of relationships with employees; 17 _________________________________________________________________ • the possibility that any liabilities we may incur or assume may prove to be more burdensome than anticipated; and • the possibility that any acquired theatres or theatre circuit operators do not perform as expected |
| Development of digital technology may increase our capital expenses |
| The industry is in the early stages of conversion from film-based media to electronic based media |
| There are a variety of constituencies associated with this anticipated change, which may significantly impact industry participants, including content providers, distributors, equipment providers and exhibitors |
| Should the conversion process rapidly accelerate and the major studios not finance the conversion as expected, we may have to raise additional capital to finance the conversion costs associated with this potential change |
| The additional capital necessary may not, however, be available to us on attractive terms, if at all |
| Furthermore, it is impossible to accurately predict how the roles and allocation of costs (including operating costs) between various industry participants will change if the industry changes from physical media to electronic media |
| We depend on our senior management |
| Our success depends upon the retention of our senior management, including Michael Campbell, our Chairman and Chief Executive Officer |
| We cannot assure you that we would be able to find qualified replacements for the individuals who make up our senior management if their services were no longer available |
| The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations |
| We do not currently maintain key-man life insurance for any of our employees |
| The loss of any member of senior management could adversely affect our ability to effectively pursue our business strategy |
| The interests of our controlling stockholder may conflict with your interests |
| Anschutz Company owns substantially all of our outstanding Class B common stock |
| Our Class A common stock has one vote per share while our Class B common stock has ten votes per share on all matters to be voted on by stockholders |
| As a result, as of December 29, 2005, Anschutz Company controlled approximately 82prca of the voting power of all of our outstanding common stock |
| For as long as Anschutz Company continues to own shares of common stock representing more than 50prca of the voting power of our common stock, it will be able to elect all of the members of our board of directors and determine the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of common stock or other equity securities and the payment of dividends on common stock |
| Anschutz Company will also have the power to prevent or cause a change in control, and could take other actions that might be desirable to Anschutz Company but not to other stockholders |
| In addition, Anschutz Company and its affiliates have controlling interests in companies in related and unrelated industries, including interests in the sports, motion picture production and music entertainment industries |
| A prolonged economic downturn could materially affect our business by reducing consumer spending on movie attendance |
| We depend on consumers voluntarily spending discretionary funds on leisure activities |
| Motion picture theatre attendance may be affected by prolonged negative trends in the general economy that adversely affect consumer spending, including such trends resulting from terrorist attacks on, or wars or threatened wars involving, the United States |
| Any reduction in consumer confidence or disposable 18 _________________________________________________________________ income in general may affect the demand for motion pictures or severely impact the motion picture production industry, which, in turn, could adversely affect our operations |
| Substantial sales of our Class A common stock could cause the market price for our Class A common stock to decline |
| We cannot predict the effect, if any, that market sales of shares of our Class A common stock or the availability of shares of our Class A common stock for sale will have on the market price of our Class A common stock prevailing from time to time |
| Sales of substantial amounts of shares of our Class A common stock in the public market, or the perception that those sales will occur, could cause the market price of our Class A common stock to decline |
| As of March 9, 2006, we had outstanding 83cmam936cmam967 shares of Class B common stock that may convert into Class A common stock on a one-for-one basis, all of which shares of common stock constitute "e restricted securities "e under the Securities Act |
| Provided the holders comply with the applicable volume limits and other conditions prescribed in Rule 144 under the Securities Act, all of these restricted securities are currently freely tradable |
| Additionally, as of March 9, 2006, approximately 4cmam753cmam816 shares of our Class A common stock are issuable upon exercise of stock options that vest and are exercisable at various dates through June 23, 2014, with exercise prices ranging from dlra2dtta6901 to dlra17dtta83 |
| Of such options, as of March 9, 2006, 2cmam151cmam256 were exercisable |
| All of such shares subject to options are registered and will be freely tradable when the option is exercised unless such shares are acquired by an affiliate of Regal, in which case the affiliate may only sell the shares subject to the volume limitations imposed by Rule 144 of the Securities Act |
| Anschutz Company, Oaktreeapstas Principal Activities Group and certain other stockholders are able to sell their shares pursuant to the registration rights that we have granted |
| We cannot predict whether substantial amounts of our Class A common stock will be sold in the open market in anticipation of, or following, any divestiture by Anschutz Company, Oaktreeapstas Principal Activities Group or our directors or executive officers of their shares of our common stock |
| Our amended and restated certificate of incorporation and our amended and restated bylaws, as amended, contain anti-takeover protections, which may discourage or prevent a takeover of our company, even if an acquisition would be beneficial to our stockholders |
| Provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as amended, as well as provisions of the Delaware General Corporation Law, could delay or make it more difficult to remove incumbent directors or for a third party to acquire us, even if a takeover would benefit our stockholders |
| 19 _________________________________________________________________ Our issuance of shares of preferred stock could delay or prevent a change of control of our company |
| Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, up to 50cmam000cmam000 shares of preferred stock, par value dlra0dtta001 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series |
| The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders are offered a premium for their shares |
| Our issuance of preferred stock could dilute the voting power of the common stockholders |
| The issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock |
| Our issuance of preferred stock could adversely affect the market value of our common stock |
| The issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive |
| For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock |
| We are a holding company dependent on our subsidiaries for our ability to service our debt and pay our dividends |
| We are a holding company with no operations of our own |
| Consequently, our ability to service our and our subsidiaries &apos debt and pay dividends on our common stock is dependent upon the earnings from the businesses conducted by our subsidiaries |
| Our subsidiaries are separate and distinct legal entities and have no obligation to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments |
| Any distribution of earnings to us from our subsidiaries, or advances or other distributions of funds by these subsidiaries to us, all of which are subject to statutory or contractual restrictions, are contingent upon the subsidiaries &apos earnings and are subject to various business considerations |
| Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of the 3^3/4prca Convertible Senior Notes due May 15, 2008 (the "e Convertible Senior Notes "e ) and our common stock to participate in those assets, will be structurally subordinated to the claims of that subsidiaryapstas creditors |
| In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us |
| Hedging transactions and other transactions |
| We have entered into convertible note hedge and warrant transactions with respect to our common stock, the exposure for which was held by Credit Suisse First Boston International at the time the Convertible Senior Notes were issued |
| The convertible note hedge and warrant transactions are expected to reduce the potential dilution from conversion of the Convertible Senior Notes |
| In 20 _________________________________________________________________ connection with these hedging arrangements, Credit Suisse First Boston International has taken positions in our Class A common stock in secondary market transactions and/or entered into various derivative transactions after the pricing of the Convertible Senior Notes |
| Such hedging arrangements could increase the price of our Class A common stock |
| Credit Suisse First Boston International is likely to modify its hedge positions from time to time prior to conversion, redemption or maturity of the Convertible Senior Notes by purchasing and selling shares of our Class A common stock, other securities of Regal or other instruments we may wish to use in connection with such hedging |
| We cannot assure you that such activity will not affect the market price of our Class A common stock |
| For further description of the convertible note hedge and warrant transactions, see Note 5 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K |