** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

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**FORM 10-Q**

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

**For the quarterly period endedSeptember 28, 2006**

**Commission file number 001-31315**

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

 

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

 

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

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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—76,418,973 sharesoutstanding at November 6, 2006

Class B Common Stock—74,208,639 sharesoutstanding at November 6, 2006

 

 

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

 

2

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**PARTI—FINANCIAL INFORMATION**

**Item1.    FINANCIAL STATEMENTS**

**REGAL ENTERTAINMENT GROUP**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS(in millions, except share data)**

 
| ** **                                                                                                                                                                                  | ** ** | **September 28, 2006** | ** ** | **December 29, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                  |       |                             |       |                            |       |
| CURRENT ASSETS:                                                                                                                                                                             |       |                             |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                  |       | $                                | 80.0       |                            | $          | 196.3 |   |
| Trade and other  receivables, net                                                                                                                                                           |       | 32.1                             |       | 55.6                            |       |
| Inventories                                                                                                                                                                                 |       | 7.4                              |       | 7.8                             |       |
| Prepaid expenses  and other current assets                                                                                                                                                  |       | 12.7                             |       | 1.3                             |       |
| Assets held for  sale                                                                                                                                                                       |       | 8.8                              |       | 0.4                             |       |
| Deferred income  tax asset                                                                                                                                                                  |       | 1.2                              |       | 1.2                             |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| TOTAL CURRENT  ASSETS                                                                                                                                                                       |       | 142.2                            |       | 262.6                           |       |
| PROPERTY AND  EQUIPMENT:                                                                                                                                                                    |       |                             |       |                            |       |
| Land                                                                                                                                                                                        |       | 133.2                            |       | 136.8                           |       |
| Buildings,  leasehold improvements and equipment                                                                                                                                            |       | 2,493.6                          |       | 2,429.4                         |       |
| Construction in  progress                                                                                                                                                                   |       | 23.6                             |       | 21.8                            |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| Total property  and equipment                                                                                                                                                               |       | 2,650.4                          |       | 2,588.0                         |       |
| Accumulated depreciation  and amortization                                                                                                                                                  |       | (718.4                           | )          | (600.3                          | )          |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| Total property and equipment, net                                                                                                                                                           |       | 1,932.0                          |       | 1,987.7                         |       |
| GOODWILL                                                                                                                                                                                    |       | 224.1                            |       | 223.8                           |       |
| Deferred income tax asset                                                                                                                                                                   |       | 5.5                              |       | —                          |       |
| OTHER  NON-CURRENT ASSETS                                                                                                                                                                   |       | 55.0                             |       | 58.7                            |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| TOTAL ASSETS                                                                                                                                                                                |       | $                                | 2,358.8    |                            | $          | 2,532.8 |   |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                     |       |                             |       |                            |       |
| CURRENT  LIABILITIES:                                                                                                                                                                       |       |                             |       |                            |       |
| Current portion  of debt obligations                                                                                                                                                        |       | $                                | 150.1      |                            | $          | 260.4 |   |
| Accounts payable                                                                                                                                                                            |       | 94.5                             |       | 181.3                           |       |
| Accrued expenses                                                                                                                                                                            |       | 80.9                             |       | 88.3                            |       |
| Income taxes  payable                                                                                                                                                                       |       | 73.6                             |       | 68.2                            |       |
| Deferred revenue                                                                                                                                                                            |       | 75.7                             |       | 94.3                            |       |
| Bankruptcy  claims and liabilities                                                                                                                                                          |       | 1.1                              |       | 1.1                             |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                                                                  |       | 475.9                            |       | 693.6                           |       |
| LONG-TERM DEBT                                                                                                                                                                              |       | 1,699.2                          |       | 1,612.3                         |       |
| LEASE FINANCING  ARRANGEMENTS                                                                                                                                                               |       | 86.7                             |       | 89.4                            |       |
| CAPITAL LEASE  OBLIGATIONS                                                                                                                                                                  |       | 20.9                             |       | 22.4                            |       |
| DEFERRED INCOME  TAX LIABILITY                                                                                                                                                              |       | —                           |       | 2.1                             |       |
| OTHER  NON-CURRENT LIABILITIES                                                                                                                                                              |       | 88.4                             |       | 81.3                            |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| TOTAL  LIABILITIES                                                                                                                                                                          |       | 2,371.1                          |       | 2,501.1                         |       |
| MINORITY  INTEREST                                                                                                                                                                          |       | 1.9                              |       | 1.8                             |       |
| STOCKHOLDERS’  EQUITY (DEFICIT):                                                                                                                                                       |       |                             |       |                            |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| Class A common  stock, $0.001 par value; 500,000,000 shares authorized, 68,246,181 and  63,426,325 shares issued and outstanding at September 28, 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 September 28, 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)                                                                                                                                                       |       | (29.9                            | )          | (22.5                           | )          |
| Retained  earnings                                                                                                                                                                          |       | 1.0                              |       | 44.6                            |       |
| Unamortized  deferred stock compensation                                                                                                                                                    |       | —                           |       | (4.4                            | )          |
| Accumulated  other comprehensive income                                                                                                                                                     |       | 14.6                             |       | 12.1                            |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| TOTAL  STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                                                  |       | (14.2                            | )          | 29.9                            |       |
|                                                                                                                                                                                        |       |                             |       |                            |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                                  |       | $                                | 2,358.8    |                            | $          | 2,532.8 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

3

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**REGAL ENTERTAINMENT GROUP**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME(in millions, except share and per share data)**
| ** **                                                                                                                                                                                                                                                     | ** ** | **Quarter Ended  September 28, 2006** | ** ** | **Quarter Ended  September 29, 2005** | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** | **Three Quarters  Ended  September 29, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| REVENUES:                                                                                                                                                                                                                                                      |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Admissions                                                                                                                                                                                                                                                     |       | $                                                    | 450.6      |                                                 | $          | 416.2                                                        |       | $                                                            | 1,295.1    |   | $ | 1,224.7 |   |
| Concessions                                                                                                                                                                                                                                                    |       | 181.0                                                |       | 164.7                                                |       | 524.8                                                        |       | 485.9                                                        |       |
| Other operating revenue                                                                                                                                                                                                                                        |       | 44.1                                                 |       | 47.5                                                 |       | 125.5                                                        |       | 137.9                                                        |       |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| TOTAL REVENUE                                                                                                                                                                                                                                                  |       | 675.7                                                |       | 628.4                                                |       | 1,945.4                                                      |       | 1,848.5                                                      |       |
| OPERATING  EXPENSES:                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Film rental and advertising costs                                                                                                                                                                                                                              |       | 241.1                                                |       | 218.5                                                |       | 682.7                                                        |       | 651.6                                                        |       |
| Cost of concessions                                                                                                                                                                                                                                            |       | 27.7                                                 |       | 24.0                                                 |       | 80.6                                                         |       | 71.4                                                         |       |
| Rent expense                                                                                                                                                                                                                                                   |       | 81.0                                                 |       | 78.3                                                 |       | 238.4                                                        |       | 229.6                                                        |       |
| Other operating expenses                                                                                                                                                                                                                                       |       | 174.0                                                |       | 172.8                                                |       | 501.2                                                        |       | 501.4                                                        |       |
| General and administrative expenses (including  share-based compensation expense of $2.2 and $1.5 for the quarters ended  September 28, 2006 and September 29, 2005 and $6.3 and $4.3 for the three  quarters ended September 28, 2006 and September 29, 2005) |       | 16.7                                                 |       | 16.1                                                 |       | 49.7                                                         |       | 50.8                                                         |       |
| Depreciation and amortization                                                                                                                                                                                                                                  |       | 49.1                                                 |       | 51.0                                                 |       | 149.5                                                        |       | 148.1                                                        |       |
| Net loss on disposal and impairment of operating  assets                                                                                                                                                                                                       |       | 2.0                                                  |       | 7.6                                                  |       | 12.8                                                         |       | 11.8                                                         |       |
| Equity in loss (income) of joint venture including  former employee compensation                                                                                                                                                                               |       | 0.6                                                  |       | 1.8                                                  |       | 7.3                                                          |       | 4.3                                                          |       |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| TOTAL OPERATING  EXPENSES                                                                                                                                                                                                                                      |       | 592.2                                                |       | 570.1                                                |       | 1,722.2                                                      |       | 1,669.0                                                      |       |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| INCOME FROM  OPERATIONS                                                                                                                                                                                                                                        |       | 83.5                                                 |       | 58.3                                                 |       | 223.2                                                        |       | 179.5                                                        |       |
| OTHER EXPENSE  (INCOME):                                                                                                                                                                                                                                       |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Interest expense, net                                                                                                                                                                                                                                          |       | 31.7                                                 |       | 29.4                                                 |       | 92.2                                                         |       | 85.6                                                         |       |
| Minority interest in loss of consolidated  subsidiaries                                                                                                                                                                                                        |       | (0.1                                                 | )          | (0.1                                                 | )          | —                                                       |       | (0.2                                                         | )          |
| Loss on debt extinguishment                                                                                                                                                                                                                                    |       | 3.1                                                  |       | —                                               |       | 35.6                                                         |       | —                                                       |       |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| TOTAL OTHER  EXPENSE, NET                                                                                                                                                                                                                                      |       | 34.7                                                 |       | 29.3                                                 |       | 127.8                                                        |       | 85.4                                                         |       |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| INCOME BEFORE  INCOME TAXES                                                                                                                                                                                                                                    |       | 48.8                                                 |       | 29.0                                                 |       | 95.4                                                         |       | 94.1                                                         |       |
| PROVISION FOR  INCOME TAXES                                                                                                                                                                                                                                    |       | 19.5                                                 |       | 11.8                                                 |       | 38.3                                                         |       | 37.4                                                         |       |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| NET INCOME                                                                                                                                                                                                                                                     |       | $                                                    | 29.3       |                                                 | $          | 17.2                                                         |       | $                                                            | 57.1       |   | $ | 56.7 |   |
|                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| EARNINGS PER  SHARE:                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Basic                                                                                                                                                                                                                                                          |       | $                                                    | 0.20       |                                                 | $          | 0.12                                                         |       | $                                                            | 0.38       |   | $ | 0.39 |   |
| Diluted                                                                                                                                                                                                                                                        |       | 0.19                                                 |       | 0.11                                                 |       | 0.37                                                         |       | 0.37                                                         |       |
| AVERAGE SHARES  OUTSTANDING (in thousands)                                                                                                                                                                                                                     |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Basic                                                                                                                                                                                                                                                          |       | 149,429                                              |       | 146,940                                              |       | 148,739                                                      |       | 145,971                                                      |       |
| Diluted                                                                                                                                                                                                                                                        |       | 154,473                                              |       | 154,080                                              |       | 154,993                                                      |       | 154,249                                                      |       |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

4

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**REGAL ENTERTAINMENT GROUP**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions)**
| ** **                                                                        | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** | **Three Quarters  Ended  September 29, 2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                            |       |                                                         |       |                                                         |       |
| Net income                                                                        |       | $                                                            | 57.1       |                                                         | $          | 56.7 |   |
| Adjustments to reconcile net income to cash provided  by operating activities:    |       |                                                         |       |                                                         |       |
| Depreciation and amortization                                                     |       | 149.5                                                        |       | 148.1                                                        |       |
| Share-based compensation expense                                                  |       | 6.3                                                          |       | 4.3                                                          |       |
| Minority interest in loss of consolidated  subsidiaries                           |       | —                                                       |       | (0.2                                                         | )          |
| Deferred income tax benefit                                                       |       | (10.1                                                        | )          | (6.8                                                         | )          |
| Net loss on disposal and impairment of operating  assets                          |       | 12.8                                                         |       | 11.8                                                         |       |
| Equity in loss of joint venture including former  employee compensation           |       | 7.3                                                          |       | 4.3                                                          |       |
| Loss on debt extinguishment                                                       |       | 35.6                                                         |       | —                                                       |       |
| Changes in operating assets and liabilities  (excluding effects of acquisitions): |       |                                                         |       |                                                         |       |
| Trade and other receivables                                                       |       | 24.2                                                         |       | 19.6                                                         |       |
| Inventories                                                                       |       | 0.4                                                          |       | 0.4                                                          |       |
| Prepaid expenses and other current assets                                         |       | (5.9                                                         | )          | (2.7                                                         | )          |
| Accounts payable                                                                  |       | (86.8                                                        | )          | (40.2                                                        | )          |
| Income taxes payable                                                              |       | (9.2                                                         | )          | 24.9                                                         |       |
| Accrued expenses and other liabilities                                            |       | (25.1                                                        | )          | (13.2                                                        | )          |
|                                                                              |       |                                                         |       |                                                         |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                        |       | 156.1                                                        |       | 207.0                                                        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                            |       |                                                         |       |                                                         |       |
| Capital expenditures                                                              |       | (84.7                                                        | )          | (103.3                                                       | )          |
| Proceeds from disposition of assets                                               |       | 6.3                                                          |       | 31.4                                                         |       |
| Cash used for acquisitions, net of cash acquired                                  |       | (34.1                                                        | )          | (156.8                                                       | )          |
|                                                                              |       |                                                         |       |                                                         |       |
| NET CASH USED IN  INVESTING ACTIVITIES                                            |       | (112.5                                                       | )          | (228.7                                                       | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                            |       |                                                         |       |                                                         |       |
| Cash used to pay dividends                                                        |       | (134.5                                                       | )          | (131.7                                                       | )          |
| Proceeds from stock option exercises                                              |       | 12.4                                                         |       | 18.1                                                         |       |
| Net payments on long term obligations                                             |       | (15.0                                                        | )          | (17.6                                                        | )          |
| Proceeds from Regal Cinemas senior credit facility                                |       | 100.0                                                        |       | —                                                       |       |
| Cash used to settle conversions of convertible notes                              |       | (147.0                                                       | )          | —                                                       |       |
| Net proceeds attributable to convertible note hedge  and warrant                  |       | 17.3                                                         |       | —                                                       |       |
| Payment of debt acquisition costs and other                                       |       | (3.2                                                         | )          | (0.6                                                         | )          |
| Excess tax benefits from share-based payment  arrangements                        |       | 10.1                                                         |       | —                                                       |       |
| Cash used to purchase treasury shares                                             |       | —                                                       |       | (10.0                                                        | )          |
| Payment on bankruptcy claims and liabilities                                      |       | —                                                       |       | (0.1                                                         | )          |
|                                                                              |       |                                                         |       |                                                         |       |
| NET CASH USED IN  FINANCING ACTIVITIES                                            |       | (159.9                                                       | )          | (141.9                                                       | )          |
|                                                                              |       |                                                         |       |                                                         |       |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                        |       | (116.3                                                       | )          | (163.6                                                       | )          |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                 |       | 196.3                                                        |       | 243.9                                                        |       |
|                                                                              |       |                                                         |       |                                                         |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                       |       | $                                                            | 80.0       |                                                         | $          | 80.3 |   |
|                                                                              |       |                                                         |       |                                                         |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                              |       |                                                         |       |                                                         |       |
| Cash paid for income taxes, net of refunds received                               |       | $                                                            | 50.1       |                                                         | $          | 20.1 |   |
|                                                                              |       |                                                         |       |                                                         |       |
| Cash paid for  interest                                                           |       | $                                                            | 90.8       |                                                         | $          | 82.3 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

5

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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 the UnitedStates, consisting of 6,386 screens in 539 theatres in 39 states and theDistrict of Columbia as of September 28, 2006.  The Company formallyoperates on a 52-week fiscal year with each quarter generally consisting of 13weeks, unless otherwise noted. The Company’s fiscal year ends on the firstThursday after December 25, which in certain years results in a53-week fiscal year.  As of September 28, 2006, the Company managed itsbusiness under one reportable 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.

On September 15, 2006, the Company acquired fourtheatres with a total of 58 screens from AMC Entertainment Inc. (“AMC”).  Regal purchased two of these AMC theatresrepresenting 26 screens for approximately $34.1 million in cash and acquiredthe other two AMC theatres in exchange for two Regal theatres consisting of 32screens.  As of the acquisition date, thesurrendered Regal theatres had a net book value of approximately $5.4million.  The Company accounted for theexchanged theatre assets as a non-monetary transaction and as such, allocatedthe net book value of the Regal theatres to the exchanged AMC theatres.  Total cash paid of approximately $34.1million was directly allocated to the other two AMC theatres using the purchasemethod of accounting.  The results of operationsof the four acquired theatres have been included in the Company’s consolidatedfinancial statements for periods subsequent to the acquisition date.  See Note 2—“Acquisitions” for furtherdiscussion of this transaction.

During the three quarters ended September 28, 2006,Regal paid three quarterly cash dividends of $0.30 on each outstanding share ofthe Company’s Class A and Class B common stock, including outstandingrestricted stock (see Note 6—“Capital Stock and Share-Based Compensation”),or approximately $134.5 million in the aggregate.

Total comprehensive income for the quarter and threequarters ended September 28, 2006 was $20.1 million and$59.6 million, respectively. Total comprehensive income for the quarterand three quarters ended September 29, 2005 was $23.7 million and$68.9 million, respectively.  Total comprehensive income consists ofnet income and other comprehensive income (loss), net of tax, related to thechange in the aggregate unrealized gain (loss) on the Company’s interest rateswap arrangements during each of the quarters and three quarters ended September28, 2006 and September 29, 2005. The Company’s interest rate swap arrangementsare further described in Note 4—“Debt Obligations.”

The Company has prepared the unaudited condensedconsolidated balance sheet as of September 28, 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

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information and the rulesand regulations of the Securities and Exchange Commission. Accordingly, certaininformation and footnote disclosures typically included in an annual reporthave been condensed or omitted for this quarterly report. In the opinion ofmanagement, all adjustments (which include only normal recurring adjustments) necessaryto present fairly in all material respects the financial position, results ofoperations and cash flows for all periods presented have been made. TheDecember 29, 2005 unaudited condensed consolidated balance sheetinformation is derived from the audited consolidated financial statements ofthe Company included in its annual report on Form 10-K for the fiscal yearended December 29, 2005. These unaudited condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto. The results of operations for thequarter and three quarters ended September 28, 2006 are not necessarilyindicative of the operating results that may be achieved for the full 2006fiscal year.

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

**2. ACQUISITIONS**

***Acquisition of four AMC Entertainment Inc.Theatres***

On September 15, 2006, the Company acquired fourtheatres with a total of 58 screens from AMC. Regal purchased two of these AMC theatres representing 26 screens forapproximately $34.1 million in cash, subject to post-closing adjustments, andacquired the other two AMC theatres representing 32 screens in exchange for twoRegal theatres consisting of 32 screens. As of the acquisition date, the surrendered Regal theatres had a netbook value of approximately $5.4 million. The Company accounted for the exchanged theatre assets as a non-monetarytransaction in accordance with Accounting Principles Board No. 29, “Accountingfor Nonmonetary Transactions” and FAS 153, “Exchanges of Nonmonetary Assets—anamendment of APB Opinion No. 29” and as such, allocated the net book value ofthe Regal theatres to the exchanged AMC theatres.  Total cash paid of approximately $34.1million was directly allocated to the other two AMC theatres using the purchasemethod of accounting.  Accordingly, thetotal cash purchase price was allocated to the assets acquired and liabilitiesassumed for both of the respective theatre locations based on management’sjudgment of the estimated fair values at the date of acquisition. The resultsof operations of the four acquired theatres have been included in the Company’sconsolidated financial statements for periods subsequent to the acquisitiondate.

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):

| Property and equipment, net |   | $      | 36.4   |   |
|-----------------------------|--------|--------|--------|--------|
| Current  liabilities        |   | (2.3   | )      |
|                        |   |   |   |
| Total purchase price        |   | $      | 34.1   |   |

 

***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 was approximately $156.7 million, including$125.2 million for the Eastern Federal Corporation acquisition. Thetransactions have been accounted for using the purchase method of accountingand, accordingly, the purchase price has been allocated to the assets acquiredand liabilities assumed for each of the respective theatre locations based ontheir estimated fair values at the dates of acquisition, with the remainingbalance allocated to goodwill. The allocation of the purchase price is based onmanagement’s judgment after evaluating several factors, including anindependent third party appraisal of certain Eastern Federal Corporation feeproperties. The

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results of operations of the acquired theatreoperations have been included in the Company’s consolidated financialstatements for periods subsequent to the respective acquisition dates.

The following is a summary of the final allocation ofthe aggregate cash purchase price to the estimated fair values of the assets acquiredand liabilities assumed at the respective dates of acquisition (in millions):

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

 

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

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 known as NationalCineMedia, LLC (“National CineMedia”).  On July 15, 2005, Cinemark,Inc. (“Cinemark”), through a wholly owned subsidiary, acquired a 20.7% interestin National CineMedia. As of September 28, 2006, RCM’s wholly owned subsidiary,Regal CineMedia Holdings, LLC (“RCH”), owned 49.9% of the Class A Units ofNational CineMedia, NCN owned 29.4% of the Class A Units of NationalCineMedia and Cinemark owned 20.7% of the Class A Units of NationalCineMedia. National CineMedia focuses on the expansion of ancillary businesses,such as in-theatre advertising and the creation of complementary business linesthat leverage the existing operating personnel, asset and customer bases of itstheatrical exhibition partners, which includes us, AMC and Cinemark. NationalCineMedia is, subject to limited exceptions, the exclusive provider ofadvertising 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 inconsideration for the issuance of equity units by National CineMedia to RCH andNCN, 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 September 28, 2006and December 29, 2005, RCH’s investment in National CineMedia totaledapproximately ($2.1 million) and $3.2 million, respectively.

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 jointventure transaction, 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%****(asof December 30, 2005) administrative fee payable to NationalCineMedia to service such contracts. For the quarter and three quarters endedSeptember 28, 2006, administrative fees paid to National CineMedia totaled$0.7 million (on $2.3 million of revenue) and $3.8 million (on$11.9 million of revenue), respectively.   For the quarter andthree quarters ended September 29, 2005, administrative fees paid to NationalCineMedia totaled $7.0 million (on $19.9 million of revenue) and $16.1 million(on $45.8 million of revenue), respectively. Revenues and expensesattributable to these advertising contracts are recorded as a component ofother operating revenues and other operating expenses in the Company’sfinancial statements. For contracts signed by National CineMedia after theclose of business on March 31, 2005, AMC and Regal, and with respect toadvertising contracts signed after the close of business on July 15, 2005,Cinemark, through their respective theatre exhibition subsidiaries, receiverevenue from National CineMedia with respect to advertising and event servicesat their respective theatres

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through an agreed upon formula as well as equity inincome/loss of National CineMedia. Such formula is based on the weightedaverage number of screens owned by and the number of theatre patrons of the applicableexhibitor’s theatres for any measurement period. During the quarter and threequarters ended September 28, 2006, the Company recorded $18.3 million and $40.8 million,respectively of advertising revenues and $0.8 million and $2.1 million,respectively of other revenues derived from these contracts, which arepresented as a component of other operating revenues in the Company’s financialstatements. During the quarter and three quarters ended September 29, 2005, theCompany recorded $5.3 million and $6.4 million, respectively ofadvertising revenues and $0.7 million and $2.0 million, respectivelyof other revenues derived from these contracts. For the quarter ended September28, 2006, the Company recorded a gain of $0.2 million, representing itsshare of the net income of National CineMedia.  As of September 28, 2006,approximately $21.9 million and $0.5 million due from/to NationalCineMedia were included in “Trade and other receivables, net” and “Accountspayable,” respectively. In addition, as of December 29, 2005, approximately$14.9 million and $2.8 million due from/to National CineMedia wereincluded in “Trade and other receivables, net” and “Accounts payable,”respectively.

On December 5, 2005, National CineMedia entered into asublease agreement with RCM pursuant to which National CineMedia subleases itsregional office in Chicago, Illinois. Both the sublease and the lease expire onJuly 31, 2009. Pursuant to the sublease, National CineMedia pays rent in anamount equal to that which would have been paid by RCM under the terms of itslease. The amounts payable by National CineMedia to the landlord for thequarter and three quarters ended September 28, 2006, were less than $0.1 million.  In addition, on January 27, 2006, NationalCineMedia entered into a sublease agreement with RCM pursuant to which NationalCineMedia subleases its regional office in New York, New York. Both thesublease and the lease expire on April 30, 2010.  Pursuant to the sublease, National CineMediapays rent to RCM in an amount equal to that which would have been paid by RCMunder the terms of its lease. The amounts payable to RCM for the quarter andthree quarters ended September 28, 2006, were approximately $0.1 million and$0.3 million, respectively. Lastly, on March 22, 2005, RCM assigned itsinterests in a sublease from Regal to National CineMedia for its regionaloffice in Woodland Hills, California. The lease and sublease expired on July31, 2006. Pursuant to the sublease, National CineMedia paid rent to Regal in anamount equal to that which would have been paid by Regal under the terms of itslease. The amounts payable to Regal for the quarter and three quarters endedSeptember 28, 2006, were, in aggregate, less than approximately $0.1million.  Related party amounts for eachof the above arrangements for the quarter and three quarters ended September29, 2005 were comparable to the 2006 amounts. 

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 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) with respectto each unvested share of restricted stock, $20.19. In addition, the SeverancePlan 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 the corporatestructure affecting Regal’s Class A common stock, there shall be anequitable proportionate adjustment to the number of shares of restricted stockheld by each Participant immediately prior to his or her termination ofemployment with RCM.

Each Participant’s cash payment will vest according tothe year and date on which such unvested options and restricted stock held bysuch Participant would have vested pursuant to the terms of the Incentive Planand the related award agreement had employment with RCM not ceased.  As aresult of the formation of National CineMedia, approximately 1.5 millionunvested options and 77,020 shares of unvested restricted stock wereforfeited.  The total cost of the Severance Plan, including payments inlieu of dividend distributions on restricted stock, is estimated to be in therange of approximately $15.0 million to $16.0 million. Pursuant tothe 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 September 28,2006, 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.

As part of the joint venture transaction, RCH, NCN andCinemark, or their respective affiliates, entered into a number of ancillaryagreements, including a Limited Liability Company Operating Agreement, asamended (the “Operating Agreement”), in order to set forth their respectiverights and obligations as members in connection with their interests inNational 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

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National CineMedia. The Operating Agreement alsoprovides that all actions of National CineMedia’s board of directors requirethe vote of nine directors.

Subsequent to the quarter ended September 28,2006, NCM Inc., a newly-formed entity that will serve as the sole manager ofNational CineMedia, announced that it filed a registration statement with theSEC for an initial public offering of up to $700 million of its commonstock, as further described in Note 11 to the accompanying unauditedcondensed financial statements.

**4. DEBT OBLIGATIONS**

Debt obligations at September 28, 2006 andDecember 29, 2005 consist of the following (in millions):
| ** **                                                                                                | ** ** | **September 28, 2006** | ** ** | **December 29, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Regal 33¤4%  Convertible Senior Notes                                                                |       | $                                | 127.4      |                            | $          | 240.0 |   |
| Regal Cinemas  Senior Credit Facility                                                                     |       | 1,663.9                          |       | 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 |       | 90.2                             |       | 92.6                            |       |
| Capital lease  obligations, 8.5% to 10.3%, maturing in various installments through  December 2017   |       | 22.9                             |       | 23.5                            |       |
| Other                                                                                                     |       | 1.0                              |       | 1.0                             |       |
|                                                                                                      |       |                             |       |                            |       |
| Total debt obligations                                                                                    |       | 1,956.9                          |       | 1,984.5                         |       |
| Less current  portion                                                                                     |       | (150.1                           | )          | (260.4                          | )          |
|                                                                                                      |       |                             |       |                            |       |
| Total debt obligations,  net of current maturities                                                        |       | $                                | 1,806.8    |                            | $          | 1,724.1 |   |

 

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***Regal 3******3******¤******4% Convertible Senior Notes******—On*** May 28,2003, Regal issued $240.0 million aggregate principal amount of 33⁄4%Convertible Senior Notes due May 15, 2008 (the “Convertible Senior Notes”).Interest on the Convertible Senior Notes is payable semi-annually in arrears onMay 15 and November 15 of each year, beginning November 15,2003. The Convertible Senior Notes are senior unsecured obligations of Regaland rank on parity with all of our existing and future senior unsecuredindebtedness and prior to all of our subordinated indebtedness. The ConvertibleSenior Notes are effectively subordinated to all of our future securedindebtedness to the extent of the assets securing that indebtedness and to anyindebtedness and other liabilities of our subsidiaries. None of oursubsidiaries have guaranteed any of our obligations with respect to theConvertible Senior Notes. On or after May 15, 2007, our note holders willhave the option to convert their Convertible Senior Notes, in whole or in part,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 saleprice of our Class A common stock on the previous trading day was 110% ormore of the then current conversion price;

·                  we distribute toall or substantially all holders of our common stock certain rights entitlingthem to purchase common stock at less than the closing sale price of ourClass A common stock on the day preceding the declaration of suchdistribution;

·                  other than theextraordinary dividend paid on July 1, 2003, we distribute to all orsubstantially all holders of our common stock cash or other assets, debtsecurities or certain rights to purchase our securities, which distribution hasa per share value as determined by our board of directors exceeding 10% of theclosing sale price of our Class A common stock on the day preceding thedeclaration of such distribution;

·                  we become aparty to a consolidation, merger or sale of all or substantially all of ourassets or a change in control occurs, in each case, pursuant to which ourcommon stock would be converted into cash, stock or other property unless, inthe case of a consolidation or merger, all of the consideration, excluding cashpayments for fractional shares and cash payments made pursuant to dissenters’appraisal rights, in such merger or consolidation consists of shares of commonstock, American Depositary Shares or other certificates representing commonequity interests traded on a United States national securities exchange orquoted on The NASDAQ Stock Market, or will be so traded or quoted when issuedor exchanged in connection with such merger or consolidation, and as a resultof such merger or consolidation the Convertible Senior Notes become convertiblesolely into such common stock or other certificates representing common equityinterests; or

·                  after any fiveconsecutive trading-day period in which the average of the trading prices forthe Convertible Senior Notes for that five trading-day period was less than

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100%of the average of the conversion values for the Convertible Senior Notes duringthat period.

On September 28, 2006, at the then current conversionprice of $14.6543 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 68.2394 shares of our Class A commonstock. Upon conversion, we may elect to deliver cash in lieu of shares of Class Acommon stock or a combination of cash and shares of Class A common stock.As explained below, with respect to the par amount of the conversionobligation, we intend to deliver cash to note holders upon conversion. Theconversion price and the number of shares delivered on conversion are subjectto 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 September 28, 2006 at a price pershare of $14.6543). In the event of the conversion of the Convertible SeniorNotes, this forward purchase option contract allows us to purchase, at a fixedprice equal to the implicit conversion price of shares issued under theConvertible Senior Notes, a number of shares equal to the shares that we issueto a note holder upon conversion. Settlement terms of this forward purchaseoption allow the Company to elect cash or share settlement based on thesettlement option it chooses in settling the conversion feature of theConvertible Senior Notes. We accounted for the Convertible Note Hedge pursuantto the guidance in EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially 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 (deficit).

We also sold to CSFB a warrant (the “Warrant”) topurchase shares of our Class A common stock. The Warrant is currentlyexercisable for 8,695,605 shares of our Class A common stock at aSeptember 28, 2006 exercise price of $16.9088 per share (which exercise pricehas been and may be further adjusted pursuant to the antidilution provisions ofthe Warrant in connection with the payment by Regal of dividends on its commonstock). We received $17.4 million cash from CSFB in return for the sale ofthis forward share purchase option contract. CSFB cannot exercise the Warrantunless and until a conversion event occurs. We have the option of settling theWarrant in cash or shares of our Class A common stock. We accounted forthe sale of the Warrant as the sale of a permanent equity instrument pursuantto the guidance in EITF 00-19. Accordingly, the $17.4 million sales priceof the forward stock purchase option contract was recorded as a credit toconsolidated stockholders’ equity (deficit).

The Convertible Note Hedge and the Warrant allow us toacquire sufficient Class A common shares from CSFB to meet our obligationto deliver Class A common shares upon conversion by the note holder,unless the Class A common share price exceeds $16.9088 (as of September28, 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 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

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accretedvalue of the Convertible Senior Notes will be settled in cash upon theconversion, only the conversion spread (the excess conversion value over theaccreted value), which may be settled in stock, will result in potentialdilution in our earnings-per-share computations.

On September 28, 2006, the closing sale price of ourClass A common stock was $19.97, which exceeded 110% of the then currentconversion price of $14.6543. Accordingly, as of September 28, 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 $14.6543.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 incash, resulted in the classification of the $127.4 million principalamount of the Convertible Senior Notes as a current liability on theaccompanying unaudited condensed consolidated balance sheet as of September 28,2006. The future balance sheet classification of this liability (i.e., currentversus non-current presentation) will be monitored at each quarterly reportingdate, and will be determined based on an analysis of the various conversionrights described above.

On March 28, 2005, a holder of the ConvertibleSenior Notes exercised its conversion right with respect to $1,000 principalamount of the notes, and the Company settled the entire conversion in cash. OnApril 5, 2005, the Company filed a complaint in the Delaware Court ofChancery to resolve a question that had arisen about the terminology used inthe Indenture, dated as of May 28, 2003, as amended April 5, 2005 (the “Indenture”),between the Company and U.S. Bank National Association (the “Trustee”)regarding the Convertible Senior Notes’ conversion price adjustmentmechanism.  On August 17, 2006, the casewas dismissed following the filing with the Delaware Court of Chancery of astipulation of dismissal. See Note 7—“Commitments and Contingencies” forfurther discussion of this matter.

During the quarter ended March 30, 2006, holders of$4.4 million in principal amount of Convertible Senior Notes exercisedtheir conversion rights. The Company elected to settle these conversionsentirely in cash for approximately $5.3 million. As a result of theseconversions, 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 ofapproximately $100.0 million in principal amount of Convertible SeniorNotes exercised their conversion rights, and the Company also settled theseconversions entirely in cash for approximately $130.3 million. As a result ofthe conversions in the second quarter of 2006, the Company recorded a $31.6million loss on debt extinguishment (including a related $1.3 million write-offof unamortized debt issue costs) during the quarter ended June 29, 2006.  Finally, during the quarter ended September28, 2006, holders of approximately $8.2 million in principal amount ofConvertible Senior Notes exercised their conversion rights, and the Companyalso settled these conversions entirely in cash for approximately $11.3million.  As a result of the conversionsin the third quarter of 2006, the Company recorded an additional $3.1 millionloss on debt extinguishment.

In connection with the above conversions, the Companyreceived net proceeds of approximately $17.3 million from CSFB attributable tothe Convertible Note Hedge and the Warrant.  Such proceeds were recordedas an increase to additional paid-in capital.

***Regal CinemasSenior Credit Facility***—On June 14, 2006, Regal Cinemasentered into a fifth amendment (the “Fifth Amendment”) to its Fourth Amendedand Restated Credit Agreement, dated as of May 10, 2004, as first amended as ofJuly 27, 2004, as second amended as of November 24, 2004, as third amended asof September 26, 2005 and as fourth amended on March 9, 2006 (as amended,including by the Fifth Amendment, the “Senior Credit Facility”) with CreditSuisse, Cayman Islands Branch (f/k/a Credit Suisse First Boston, acting throughits Cayman Islands Branch), as Administrative Agent. Borrowings under the termloan facility (“Term Facility”) and revolving loan facility under the SeniorCredit Facility bear interest, at Regal Cinemas’ option, at either an AdjustedEurodollar Rate (as defined in the Senior Credit Facility) 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

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additional funds that would be treated as a term loanunder the Senior Credit Facility without the need to obtain consent from anylender party to the Senior Credit Facility.  Borrowing under theIncremental Term Facility is subject to the satisfaction of certain conditionsset forth in the facility, including, but not limited to, obtaining commitmentsfrom one or more lenders to fund such additional amounts. Proceeds of RegalCinemas’ borrowings under the Incremental Term Facility are to be used solelyto fund, or reimburse Regal Cinemas for funding, distributions to the Companyfor the purpose of redeeming, repurchasing, acquiring or otherwise settling theconversion 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 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 ofSeptember 28, 2006 and December 29, 2005, borrowings of$1,663.9 million and $1,575.9 million, respectively, were outstandingunder the Term Facility at effective interest rates of 6.3% (as of September28, 2006) and 6.0% (as of December 29, 2005), after the impact of theinterest rate swaps is taken 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.

Subsequent to the quarter ended September 28, 2006,the Senior Credit Facility was amended and restated, as further described inNote 11 to the accompanying unaudited condensed financial statements.

***Interest Rate Swaps***—Asdescribed in Note 5 to the consolidated financial statements included inour annual report on Form 10-K for the fiscal year ended December 29,2005, during 2004 and 2005, Regal 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 September 28, 2006, the aggregate fair value ofthe five interest rate swaps was determined to be approximately$24.1 million, which has been recorded as a component of “OtherNon-Current Assets” with a corresponding amount of $14.6 million, net oftax, recorded to “Accumulated Other Comprehensive Income.” The interest rateswaps exhibited no ineffectiveness for the quarters and three quarters endedSeptember 28, 2006 and September 29, 2005.

***Other Long-TermObligations***—All other long-term obligations (includingthe Regal Cinemas 93¤8%Senior Subordinated Notes) not explicitly discussed herein are described inNote 5 to the consolidated financial statements included in our annualreport on Form 10-K for the fiscal year ended December 29, 2005 andincorporated by reference herein.

**5. INCOME TAXES**

The provision for income taxes of $19.5 millionand $11.8 million****for thequarters ended September 28, 2006 and September 29, 2005, respectively, reflecteffective tax rates of approximately 40.0% and 40.7%, respectively. Theprovision for income taxes of $38.3 million and $37.4 million****for the three quarters ended September 28,2006 and September 29, 2005, respectively, reflect effective tax rates ofapproximately 40.1% and 39.7%, respectively. The effective tax rates for thequarters and three quarters ended September 28, 2006 and September 29, 2005reflect the impact of certain non-deductible expenses.

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 ultimate

14

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realization of deferred tax assets is dependent uponthe generation of future taxable income during the periods in which these temporarydifferences become deductible. The Company has recorded a valuation allowanceagainst deferred tax assets at September 28, 2006 and December 29, 2005,totaling $37.4 million as management believes it is more likely than notthat certain deferred tax assets will not be realized in future tax periods. Asof September 28, 2006 and December 29, 2005, $33.7 million of thevaluation allowance relates to pre-acquisition deferred tax assets of Hoyts,Edwards and United Artists. Accordingly, future reductions in the valuationallowance associated with a change in management’s determination of the Company’sability to realize these deferred tax assets will reduce recorded goodwillrelated to such acquisitions.

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

***Capital Stock***

Asof September 28, 2006, the Company’s authorized capital stock consisted of:

·                  500,000,000shares of Class A common stock, par value $0.001 per share;

·                  200,000,000shares of Class B common stock, par value $0.001 per share; and

·                  50,000,000 sharesof preferred stock, par value $0.001 per share.

Of the authorized shares of Class A common stock,18,000,000 shares were sold in connection with the Company’s initial publicoffering in May 2002. The Company’s Class A common stock is listed onthe New York Stock Exchange under the trading symbol “RGC.” As of September 28,2006, 68,246,181 shares of Class A common stock were outstanding. Of theauthorized shares of Class B common stock, 81,936,967 shares wereoutstanding as of September 28, 2006, all of which are held by Anschutz Company(“Anschutz”) and OCM Principal Opportunities Fund II, L.P. and itssubsidiaries. Each share of Class B common stock converts into one shareof Class A common stock at the option of the holder or upon certaintransfers of a holder’s Class B common stock. Each holder of Class Bcommon stock is entitled to ten votes for each outstanding share ofClass B common stock owned by that stockholder on every matter properlysubmitted to the stockholders for their vote. The Class A common stock isentitled to one vote for each outstanding share of Class A common stock onevery matter properly submitted to the stockholders for a vote. Except asrequired by law, the Class A and Class B common stock vote togetheras a single class on all matters submitted to the stockholders for a vote. Ofthe authorized shares of the preferred stock, no shares are issued andoutstanding as of September 28, 2006. The material terms and provisions of theCompany’s certificate of incorporation affecting the relative rights of theClass A common stock and the Class B common stock are described inNote 9 to the financial statements included in our annual report onForm 10-K for the fiscal year ended December 29, 2005.

As further described in Note 11 to the accompanyingunaudited condensed financial statements, subsequentto the quarter ended September 28, 2006, the Company completed a secondaryoffering on behalf of OCM Principal Opportunities Fund II, L.P. of7,728,328 shares of Class A common stock.

***Share RepurchaseProgram***

During the quarter ended September 30, 2004, theCompany’s board of directors authorized a share repurchase program, whichprovided for the authorization to repurchase up to $50.0 million of theCompany’s outstanding Class A common stock within a twelve month period.During the quarter ended June 30, 2005, the Company repurchased 520,386 sharesof its outstanding Class A common stock at an aggregate cost ofapproximately $10.0 million.  TheCompany’s board of directors extended the share repurchase program during thequarters ended September 29, 2005 and September 28, 2006 for additional twelvemonth periods. Accordingly, the Company can repurchase up to an additional$40.0 million under the share repurchase program throughSeptember 2007. The Company made no repurchases of its

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outstandingClass A common stock during the quarter or three quarters ended September28, 2006. Repurchases can be made from time to time as market conditionswarrant, through open market purchases, negotiated transactions, or in such amanner deemed appropriate by the Company. Treasury shares are retired uponrepurchase. At retirement, the Company records treasury stock purchases at costwith any excess of cost over par value recorded as a reduction of additionalpaid-in capital.

***Warrants***

Other than disclosed in Note 4—“Debt Obligations”and Note 9—“Earnings Per Share,” no warrants to acquire the Company’scommon stock were outstanding as of September 28, 2006.

                      ***Share-Based Compensation***

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.

Effective December 30, 2005, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised), “Share-BasedPayment” (SFAS 123R) utilizing the modified prospective approach. Prior to theadoption of SFAS 123R, we accounted for stock option grants in accordance withAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees” (the intrinsic value method), and accordingly, recognizedno compensation expense for those stock options having an exercise price equalto the market value of the Company’s Class A common stock on the date of thegrant.

 Under the modified prospective approach, SFAS123R applies to awards that were outstanding on December 30, 2005 and to newawards and the modification, repurchase or cancellation of awards afterDecember 30, 2005.  Under the modified prospective approach, compensationcost recognized in the first quarter of fiscal 2006 includes share-basedcompensation cost for all share-based payments granted prior to, but not yetvested as of December 30, 2005, based on the grant-date fair value estimated inaccordance with the original provisions of SFAS No. 123, “Accounting forStock-Based Compensation” (SFAS 123) and recognized as expense over theremaining requisite service period. Share-based compensation cost for allshare-based payments granted subsequent to December 30, 2005 are based on thegrant-date fair value estimated in accordance with the provisions of SFAS 123Rand recognized as expense over the employee’s requisite service period. Prior periods were not restated to reflect the impact of adopting the newstandard.

On November 10, 2005, the FASB issued FASB StaffPosition No. FAS 123(R)-3, “Transition Election Related to Accounting forTax Effects of Share-Based Payment Awards.” The Company has elected to adoptthe alternative transition method provided in this FASB Staff Position forcalculating the tax effects of share-based compensation pursuant to SFAS 123R.The alternative transition method includes a simplified method to establish thebeginning balance of the additional paid-in capital pool (APIC pool) related tothe tax effects of employee share-based compensation, which is available toabsorb tax deficiencies recognized subsequent to the adoption of SFAS 123R.

As a result of adopting SFAS 123R on December 30,2005, our income before income taxes and net income for the quarter endedSeptember 28, 2006, were $0.9 million and $0.5 million lower,respectively, than if we had continued to account for share-based compensationunder APB Opinion No. 25 (“APB 25”) for our stock option grants. Basic and diluted earnings per share for the quarter ended September 28, 2006would have been the same as the reported amount had the Company continued toapply APB 25. For the three quarters ended September 28, 2006 our income beforeincome taxes, net income, basic earnings per share and diluted earnings pershare were $2.4 million, $1.5 million,****$0.01 and$0.01 less, respectively, than if we had continued to account for share-basedcompensation under APB 25 for our stock option grants.

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*Stock Options*

We use the Black-Scholes option pricing model toestimate the fair value of our stock option awards based on factors at the dateof grant. Stock compensation expense for each of the quarters and threequarters ended September 28, 2006 and September 29, 2005 was based on thefollowing assumptions at the dates the stock options were granted:

| 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 historical volatilityof the Company’s common stock price.  The expected term of options grantedis derived using the midpoint of the average vesting period and contractuallife of the stock options. The risk-free interest rate assumption is based uponobserved interest rates appropriate for the terms of the Company’s employeestock options. The Company does not target a specific dividend yield for itsdividend payments but is required to assume a dividend yield as an input to theBlack-Scholes model. The dividend yield assumption is based on the Company’shistory and expectation of future dividend payouts and may be subject tosubstantial change in the future. There were no stock options granted duringthe quarters and three quarters ended September 28, 2006 and September 29,2005.

As share-based compensation expense recognized in theunaudited condensed consolidated statement of income for the quarter and threequarters ended September 28, 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 three quarters endedSeptember 28, 2006, the Company recognized approximately $1.6 million and $4.9million of share-based compensation expense related to stock options. Such expense is presented as a component of general and administrative expensesfor the quarter and three quarters ended September 28, 2006. At September 28,2006, there was $3.4 million of unrecognized compensation cost related toshare-based payments which is expected to be recognized over a weighted-averageperiod of 0.49 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 financialreporting purposes.  For the three quarters ended September 28, 2006, ourunaudited condensed consolidated statement of cash flows reflects$10.1 million of excess tax benefits as financing cash flows rather thanoperating cash flows.  Net cash proceeds from the exercise of stockoptions were $12.4 million for the three quarters ended September 28,2006. The actual income tax benefit realized from stock option exercises is$12.3 million for the same period.

The following table represents stock option activityfor the three quarters ended September 28, 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                                   |       | (2,234,114                 | )          | 5.60                                        |       |                                       |       |
| Forfeited                                   |       | (24,051                    | )          | 13.65                                       |       |                                       |       |
| Outstanding  options at end of period       |       | 3,685,821                  |       | $                                           | 6.89       |                                       | 5.72 Yrs   |   |
| Outstanding exercisable  at end of period   |       | 1,301,105                  |       | $                                           | 7.56       |                                       | 5.73 Yrs   |   |

 

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                Shares available forfuture stock option grants to employees and directors under the Incentive Planwere approximately 3.4 million at September 28, 2006.  The aggregateintrinsic value of options outstanding at September 28, 2006 was$48.2 million, and the aggregate intrinsic value of options exercisablewas $16.1 million. Total intrinsic value of options exercised was$31.5 million and $38.9 million for the three quarters ended September 28,2006 and September 29, 2005, respectively.

The following table summarizes our nonvested stockoption activity for the three quarters ended September 28, 2006:
| ** **                                      | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|---------------------------------------------------|------------|
| Nonvested stock  options at beginning of period |       | 5,017,954                      |       | $                                                 | 2.98       |   |
| Granted                                         |       | —                         |       | —                                            |       |
| Vested                                          |       | (2,621,134                     | )          | 2.99                                              |       |
| Forfeited                                       |       | (12,104                        | )          | 4.78                                              |       |
| Nonvested stock options  at end of period       |       | 2,384,716                      |       | $                                                 | 2.96       |   |

 

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 to Employees”and provided the required pro forma disclosures of SFAS 123.  For purposesof pro forma disclosures under SFAS 123 for the quarter and three quartersended September 29, 2005, the estimated fair value of the share-based awardswas assumed to be amortized to expense over their vesting periods. The proforma effects of recognizing estimated compensation expense under the fairvalue method on net income and earnings per common share were as follows (inmillions, except per share data):

 
| ** **                                                                                          | ** ** | **Quarter Ended  September 29, 2005** | ** ** | **Three Quarters   Ended  September 29, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Net income:                                                                                         |       |                                                 |       |                                                               |       |
| As reported                                                                                         |       | $                                                    | 17.2       |                                                               | $          | 56.7 |   |
| Add: Share-based employee compensation reported in  net income, net of taxes                        |       | 0.8                                                  |       | 2.3                                                                |       |
| Deduct: Share-based employee compensation under the  fair value method for all awards, net of taxes |       | (1.4                                                 | )          | (2.3                                                               | )          |
|                                                                                                |       |                                                 |       |                                                               |       |
| Pro forma                                                                                           |       | $                                                    | 16.6       |                                                               | $          | 56.7 |   |
|                                                                                                |       |                                                 |       |                                                               |       |
| Basic earnings  per share:                                                                          |       |                                                 |       |                                                               |       |
| As reported                                                                                         |       | $                                                    | 0.12       |                                                               | $          | 0.39 |   |
| Add: Share-based employee compensation reported in  net income, net of taxes                        |       | —                                               |       | 0.02                                                               |       |
| Deduct: Share-based employee compensation under the  fair value method for all awards, net of taxes |       | (0.01                                                | )          | (0.02                                                              | )          |
| Pro forma                                                                                           |       | $                                                    | 0.11       |                                                               | $          | 0.39 |   |
|                                                                                                |       |                                                 |       |                                                               |       |
| Diluted earnings  per share:                                                                        |       |                                                 |       |                                                               |       |
| As reported                                                                                         |       | $                                                    | 0.11       |                                                               | $          | 0.37 |   |
| Add: Share-based employee compensation reported in  net income, net of taxes                        |       | —                                               |       | 0.02                                                               |       |
| Deduct: Share-based employee compensation under the  fair value method for all awards, net of taxes |       | —                                               |       | (0.02                                                              | )          |
|                                                                                                |       |                                                 |       |                                                               |       |
| Pro forma                                                                                           |       | $                                                    | 0.11       |                                                               | $          | 0.37 |   |

 

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*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. Underthe restricted stock program, common stock of the Company may be granted atnominal cost to officers, directors and key employees, subject to a continuedemployment restriction. The restriction is fulfilled upon continued employmentfor a specified number of years (typically one to four years after the awarddate) and as such restrictions lapse, the award immediately vests. In addition,we will receive a tax deduction when restricted stock vests. The planparticipants are entitled to cash dividends and to vote their respectiveshares, although the sale and transfer of such shares is prohibited during therestricted period. The shares are also subject to the terms and conditions ofthe Incentive Plan. On February 11, 2005, 229,990 shares were granted underthe restricted stock program at nominal cost to officers and keyemployees.  The closing price of our Class A common stock on the date ofgrant was $19.90 per share. On March 7, 2006, 169,689 shares were grantedunder the restricted stock program at nominal cost to officers, directors andkey employees.  The closing price of our Class A common stock on the dateof grant was $18.67 per share. On April 25, 2006, June 6, 2006 and September18, 2006, a total of 15,973 shares were granted in the aggregate under therestricted stock program at nominal cost to a key employee and certainnewly-elected directors.  The closing price of our Class A common stockwas $20.51 per share on April 25, 2006, $19.28 per share on June 6, 2006 and$19.52 per share on September 18, 2006.

During the quarter and three quarters ended September28, 2006, the Company recognized approximately $0.5 million and $1.1 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 three quarters ended September 28,2006.  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 September 28, 2006, wehave unrecognized compensation expense of $4.7 million associated withthese awards. 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 September 28, 2006 andSeptember 29, 2005:

 

|                                  | ** ** | **Three Quarters ended  September 28, 2006** | ** ** | **Three Quarters ended  September 29, 2005** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
|                             |       |                                                             |       |                                                             |       |
| Restricted  stock:               |       |                                                             |       |                                                             |       |
| Granted during  the period ended |       | 185,662                                                          |       | 229,990                                                          |       |
| Outstanding, as of               |       | 336,372                                                          |       | 152,180                                                          |       |

 

The aggregate intrinsic value of restricted stockoutstanding as of September 28, 2006 was $6.5 million.  During the three quartersended September 28, 2006, the Company paid three cash dividends of $0.30 oneach share of outstanding restricted stock totaling less than$0.3 million.

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*Performance Share Units*

The Incentive Plan also provides for grants in theform of performance share units to officers, directors and key employees.Performance share agreements will be entered into between the Company and eachgrantee of performance share units, a form of which agreement (the “PerformanceAgreement”) was filed as an exhibit to our current report on Form 8-Kfiled on May 5, 2006 with the Securities and Exchange Commission (File No.001-31315), and is incorporated herein by reference. Pursuant to the terms andconditions of the Performance Agreement, grantees will be issued shares ofrestricted common stock of the Company in an amount determined by theattainment 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 with or without cause orthe occurrence of a change of control).  The shares of restricted commonstock received upon attainment of the performance criteria will be subject tofurther vesting over a period of time, provided the grantee remains a serviceprovider to the Company during such period.  Pursuant to the PerformanceAgreement, on the calculation date, the grantee will be entitled to receive apayment in an amount equal to the dividends paid by the Company with respect toa share of its Class A common stock from the grant date through the calculationdate, multiplied by the number of shares of restricted common stock, if any,the grantee 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 thegrantee’s employee classification and base compensation, referred to as “targetlong-term incentive” (“Target LTI”) below. In addition, these awards aresubject to an additional one-year vesting requirement. The Company hasdeveloped a performance range around the target TSRA and the number of sharesof restricted stock that will be issued will be based on actual TSRA, accordingto the following 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. The MonteCarlo simulation model utilizes multiple input variables that determine theprobability of satisfying the market condition stipulated in the award grantand 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 threequarters ended September 28, 2006, the Company recognized approximately $0.2million and $0.3 million, respectively, of share-based compensation expenserelated to these performance shares.  Such expense is presented as acomponent of general and

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administrativeexpenses for the quarter and three quarters ended September 28, 2006. As ofSeptember 28, 2006, there was $3.1 million of unrecognized compensation costrelated to the performance shares. The key assumptions used for valuingperformance shares follow:

|                                       | ** ** | **Quarter Ended  September 28, 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                                                  | %          |
|                                  |       |                                                 |       |
|                                       |            |                                                      |            |  |

 

Expected volatility is based on historical volatilityof the Company’s common stock price measured daily over a three year periodending on June 1, 2006, adjusted for dividends.  The risk-free interestrate 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:

|                                       | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------|------------|
| Number of  performance shares:        |       |                                                         |       |
| Outstanding at  beginning of year     |       | —                                                       |       |
| Granted (based  on target TSRA)       |       | 402,150                                                      |       |
| Forfeited                             |       | (1,020                                                       | )          |
| Outstanding as of  September 28, 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 September 28, 2006 was $3.3 million.

**7. COMMITMENTS AND CONTINGENCIES**

***Sale-Leaseback Transactions***

The Company’s sale-leaseback transactions aredescribed in Note 6 to the consolidated financial statements included inour annual report on Form 10-K for the fiscal year ended December 29,2005.

***Other***

On March 18, 2003, ReadingInternational, Inc., Citadel Cinemas, Inc. and Sutton Hill Capital,LLC (collectively, the “Plaintiffs”) filed a complaint and demand for jurytrial in the United States District Court for the Southern District of New Yorkagainst Oaktree Capital Management LLC, Onex Corporation (“Loews”), Regal,United Artists, United Artists Theatre Circuit, Inc., Loews CineplexEntertainment Corporation, Columbia Pictures Industries, Inc., The WaltDisney Company, Universal Studios, Inc., Paramount Pictures Corporation,Metro-Goldwyn-Mayer Distribution Company, Fox Entertainment Group, Inc.,Dreamworks LLC, Stephen Kaplan and Bruce Karsh (collectively, the “Defendants”)alleging various violations by the Defendants of federal and state antitrustlaws and New York common law. The Plaintiffs allege, among other things, thatthe consolidation of the theatre industry and alleged agreements between and amongRegal, movie distributors, and Loews, have adversely impacted their ability toexhibit first-run industry-anticipated top-grossing commercial films at theirVillage East theatre in Lower Manhattan, and are seeking, among other things, adeclaration that the Defendants’ conduct is in violation of antitrust laws,damages, and equitable relief enjoining Defendants from engaging in future

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anticompetitiveconduct. On December 10, 2003, the court granted Defendants’ motion todismiss in part, thereby dismissing several of Plaintiffs’ claims anddismissing Sutton Hill as a plaintiff. On December 24, 2003, Plaintiffsamended their complaint to add Village East Limited Partnership as a Plaintiff.Management believes that the remaining allegations and claims are without meritand intends to vigorously defend against the Plaintiffs’ claims. OnJuly 29, 2005, Regal filed a motion for summary judgement as to all countsasserted against it. The motion will most likely be decided in the last half of2006.

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.

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 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 compliance withall current applicable regulations relating to accommodations for the disabled.We intend to comply with future regulations in this regard, and except as setforth above, we do not currently anticipate that compliance will require us toexpend substantial funds. Our theatre operations are also subject to federal,state and local laws governing such matters as wages, working conditions,citizenship and health and sanitation requirements. We believe that we are insubstantial 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 sought a declaratory judgment to resolve the questionthat had arisen regarding the proper calculation of the conversion priceadjustments in relation to certain of the Company’s quarterly dividends. Inorder 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.  On April 12, 2006, after full briefing, theDelaware Court of Chancery issued an opinion granting the Company’s motion tocertify a defendant class of all holders of the Convertible Senior Notes, andto certify Amaranth as an adequate class representative.

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On August 17, 2006, the Company entered into astipulation of dismissal with Amaranth LLC, Amaranth Advisors, L.L.C. andNicholas M. Maounis individually, and as representatives of a class of allholders of our Convertible Senior Notes, providing for the following: (1) thedismissal of its claims without prejudice to the defendant class and withprejudice to Amaranth, the named defendant, only; and (2) the dismissal ofAmaranth’s counterclaims, which purported to assert individual claims againstthe Company on behalf of Amaranth only, with prejudice. In addition, in thestipulation of dismissal, the parties certify that no compensation in any formhas passed directly or indirectly from the Company to Amaranth or Amaranth’sattorneys and that no promise to give any such compensation has been made. OnAugust 17, 2006, the parties submitted to the Delaware Court of Chancery andthe Court approved the stipulation of dismissal thereby dismissing the case.

RCI is a defendant in a number of claims arising fromits decision to file voluntary petitions for bankruptcy relief and to closetheatre locations or to cease construction of theatres on sites for which suchentities had contractual obligations to lease such property. We and our varioussubsidiary 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 and three quarters ended September28, 2006, Regal Cinemas, incurred approximately $1.1 million and $2.8 million,respectively of expenses payable to an Anschutz affiliate, Qwest Communicationsand its subsidiaries, for telecommunication services. In addition, RegalCinemas incurred approximately $0.1 million and $0.2 million,respectively of expenses payable to Anschutz affiliates for certain advertisingservices during the quarter and three quarters ended September 28, 2006. Duringthe quarter and three quarters ended September 28, 2006, Regal Cinemas receivedapproximately $0.1 million from an Anschutz affiliate for rent and otherexpenses related to a theatre facility. Related party amounts for the quarterand three quarters ended September 29, 2005 were comparable to the 2006amounts.

See Note 3—“Formation of National CineMedia, LLC,”for discussion of related party transactions between National CineMedia and theCompany during the quarters and three quarters ended September 28, 2006 andSeptember 29, 2005.

**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  September 28, 2006** | ** ** | **Quarter Ended  September 29, 2005** | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** | **Three Quarters  Ended  September 29, 2005** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Net income (in  millions)                            |       | $                                                    | 29.3       |                                                 | $          | 17.2                                                         |       | $                                                            | 57.1       |   | $ | 56.7 |   |
| Weighted average  shares outstanding (in thousands): |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Basic:                                               |       | 149,429                                              |       | 146,940                                              |       | 148,739                                                      |       | 145,971                                                      |       |
| Add common stock equivalents                         |       | 5,044                                                |       | 7,140                                                |       | 6,254                                                        |       | 8,278                                                        |       |
|                                                 |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Diluted:                                             |       | 154,473                                              |       | 154,080                                              |       | 154,993                                                      |       | 154,249                                                      |       |
| Earnings per  share                                  |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Basic:                                               |       | $                                                    | 0.20       |                                                 | $          | 0.12                                                         |       | $                                                            | 0.38       |   | $ | 0.39 |   |
| Diluted:                                             |       | $                                                    | 0.19       |                                                 | $          | 0.11                                                         |       | $                                                            | 0.37       |   | $ | 0.37 |   |

 

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                Common stock equivalentsconsist principally of stock options, warrants and restricted stock. There wereno antidilutive stock options, warrants or restricted stock outstanding as ofSeptember 28, 2006 and September 29, 2005.

The Convertible Senior Notes discussed in Note 4—“DebtObligations” allow us to settle any conversion, and we intend to settle anyconversion, by remitting to the note holder the accreted value of the note incash, while settling the conversion spread in either cash, shares of ourClass 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 September 28, 2006, the closing sale price of ourClass A common stock was $19.97, which exceeded 110% of the then currentconversion price of $14.6543 on the Convertible Senior Notes. Accordingly, asof September 28, 2006, our note holders had the right, at their option, toconvert their Convertible Senior Notes, in whole or in part, into shares of ourClass A common stock, subject to certain limitations, at the thenconversion price of $14.6543. Utilizing the treasury stock method, theconversion spread resulted in dilution of approximately 2.2 million sharesand 3.2 million shares in our diluted earnings per share computations for thequarters ended September 28, 2006 and September 29, 2005, respectively.

                In addition, as described inNote 4—“Debt Obligations,” we entered into the Convertible Note Hedge andsold the Warrant which, in combination, have the effect of reducing thedilutive impact of the Convertible Senior Notes by increasing the effectiveconversion price for these notes from our economic perspective to $16.9088 atSeptember 28, 2006. SFAS No. 128, “Earnings Per Share,” however, requiresus to analyze the impact of the Convertible Note Hedge and Warrant on dilutedearnings per share separately. As a result, the purchase of the ConvertibleNote Hedge is excluded because its impact will always be antidilutive. SFASNo. 128 further requires that the impact of the sale of the Warrant becomputed using the treasury stock method. The Warrant resulted in dilution ofapproximately 1.2 million shares and 1.3 million shares in ourdiluted earnings per share computations for the quarters ended September 28,2006 and September 29, 2005, respectively. As of September 28, 2006, themaximum number of shares that could potentially be included under the Warrantis 8.7 million.

**10. RECENT ACCOUNTING PRONOUNCEMENTS**

During 2003, the Financial Accounting Standards Board(“FASB”) issued an Exposure Draft entitled, “Earnings per Share, an amendmentof SFAS No. 128.” Following the Exposure Draft, the FASB made additionalchanges to the requirements of SFAS No. 128, but did not make significantchanges to the other issues addressed in that Exposure Draft. Thereafter, arevised Exposure Draft (the “proposed Statement”) that addresses the additionalchanges to the requirements of SFAS No. 128 was issued onSeptember 30, 2005. The proposed Statement would amend SFAS No. 128to clarify guidance for mandatorily convertible instruments, the treasury stockmethod, contingently issuable shares and contracts that may be settled in cashor shares. The proposed Statement would require that when an entity has issueda contract that may be settled either in shares or in cash at the entity’soption, the entity should presume that the contract will be settled in shares,if the effect to earnings per share is dilutive. That presumption may not beovercome, regardless of past practice or stated policy to the contrary. As aresult, shares that would be issued upon the assumed conversion of theConvertible Senior Notes would be included in diluted earnings per share to theextent dilutive using the “if-converted” method. The comment period for theproposed Statement ended on November 30, 2005. Upon adoption, all priorperiod earnings per share data would be adjusted to conform to the provisionsof the proposed Statement. Had the provisions of the proposed Statement beeneffective for the reporting periods included herein, diluted earnings per sharefor the quarter ended September 28, 2006 and the quarter and three quartersended September 29, 2005 would have been the same as the reported amounts and dilutedearnings per share for the three quarters ended September 28, 2006 would havebeen $0.01 lower than the reported amount. The Company is evaluating

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theproposed Statement and potential alternative courses of action it might pursue,if any, with respect to the Convertible Senior Notes to address the impact ofthe proposed Statement.

During June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109.”  This Interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes” andprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, 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 percentlikely of being realized upon ultimate settlement. Differences between taxpositions taken in a tax return and amounts recognized in the financialstatements will generally result in (1) an increase in a liability for incometaxes payable or (2) a reduction of an income tax refund receivable or areduction in a deferred tax asset or an increase in a deferred tax liability orboth (1) and (2). This Interpretation is effective for fiscal years beginningafter December 15, 2006. The Company is currently evaluating the impact theInterpretation may have on its consolidated financial position, cash flows andresults of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157 (“SFAS 157”), “Fair ValueMeasurements.” Among other requirements, SFAS 157 defines fair value andestablishes a framework for measuring fair value and also expands disclosureabout the use of fair value to measure assets and liabilities. SFAS 157 iseffective beginning the first fiscal year that begins after November 15,2007. The Company continues to evaluate the adoption of SFAS 157 and its impacton the Company’s consolidated financial position, cash flows and results ofoperations.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”). This bulletin expresses the Securitiesand Exchange Commission’s views regarding the process of quantifying financialstatement misstatements. The interpretations in this bulletin were issued toaddress diversity in practice in quantifying financial statement misstatementsand the potential under current practice for the build up of improper amountson the balance sheet. The Company will be required to adopt the provisions ofSAB 108 in its annual financial statements for fiscal year 2006. TheCompany does not believe that the adoption of SAB 108 will materiallyimpact its consolidated financial position, cash flows and results ofoperations.

**11. SUBSEQUENT EVENTS**

***Initial Public Offering of NCM Inc.***

On October 12, 2006, NCM Inc., a newly-formed entitythat will serve as the sole manager of National CineMedia, announced that itfiled a registration statement with the SEC for an initial public offering, orIPO, of up to $700 million of its common stock. Net proceeds from the IPO willbe used to acquire newly issued equity interests from National CineMedia andNational CineMedia will distribute the net proceeds to each of Regal, AMC andCinemark on a pro rata basis in connection with modifying payment obligationsfor access to our theatres. In connection with the completion of the

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* *

IPO, National CineMedia also intends to enter into anapproximately $725 million term loan facility the net proceeds of which will beused to redeem preferred units to be held by each of RCH, NCN and Cinemark on apro rata basis pursuant to a recapitalization of National CineMedia prior tocompletion of the IPO. There can be no guarantee that NCM Inc. will completethe IPO or debt transactions or that Regal will receive any or the level ofexpected proceeds.

***Regal Cinemas FifthAmended and Restated Credit Agreement***

On October 27,2006, Regal Cinemas entered into a fifth amended and restated credit agreement(the “New Senior Credit Facility”), with Credit Suisse, Cayman Islands Branch(as successor to Credit Suisse First Boston), as Administrative Agent and thelenders party thereto which amends and restates the fourth amended and restatedcredit agreement among Regal Cinemas, Credit Suisse First Boston, and thelenders party thereto.  The New SeniorCredit Facility consists of a term loan facility (the “Term Facility”) in anaggregate original principal amount of $1.7 billion and a revolving creditfacility (the “Revolving Facility”) in an aggregate principal amount of up to$100.0 million.

The Term Facilitywill mature on October 27, 2013 and the Revolving Facility will mature onOctober 27, 2011.  Interest is payable(a) in the case of base rate loans, quarterly in arrears, and (b) inthe case of Eurodollar rate loans, at the end of each interest period, but inno event less often than every 3 months. The Term Facility amortizes inequal quarterly installments in an aggregate annual amount equal to 1.0% of theoriginal principal amount of the Term Facility during the first six yearsthereof, with the balance payable in two equal installments, the first on June 30,2013 and the second on October 27, 2013.

The obligations ofRegal Cinemas are secured by, among other things, a lien on substantially allof its tangible and intangible personal property (including but not limited toaccounts receivable, inventory, equipment, general intangibles, investmentproperty, deposit and securities accounts, and intellectual property) andcertain real property. The obligations under the New Senior Credit Facility arealso guarantied by certain subsidiaries of Regal Cinemas and secured by a lienon all or substantially all of such subsidiaries’ personal property and certainreal property. The obligations are further guarantied by Regal EntertainmentHoldings, Inc., on a limited recourse basis, with such guaranty beingsecured by a lien on the capital stock of Regal Cinemas.

Borrowings underthe New Senior Credit Facility bear interest, at Regal Cinemas’ option, ateither a base rate or an Adjusted Eurodollar Rate (as defined in the New SeniorCredit Facility) plus, in each case, an applicable margin. The base rate is thehigher of Prime Rate, as determined by Credit Suisse, and the Federal FundsEffective Rate plus 0.5%.  Regal Cinemasmay elect interest periods of 1, 2, 3, 6 or (if available to all lenders)12 months for the Adjusted Eurodollar Rate. The applicable margin isdetermined according to the consolidated leverage ratio of Regal Cinemas andits subsidiaries.  Calculation ofinterest is on the basis of the actual days elapsed in a year of360 days (or 365 or 366 days, as the case may be, in the case of baserate loans based on the Prime Rate) and interest is payable at the end of eachinterest period (or quarterly in the case of base rate loans based on the PrimeRate) and, in any event, at least every 3 months.

Regal Cinemasmay prepay borrowings under the New Senior Credit Facility, in whole or inpart, in minimum amounts and subject to other conditions set forth in the NewSenior Credit Facility. Regal Cinemas is required to make mandatory prepaymentswith:

·                  50% of excesscash flow in any fiscal year (as reduced by voluntary repayments of the TermFacility), with elimination based upon achievement and maintenance of aleverage ratio of less than 3.75:1.00;

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·                  100% of thenet cash proceeds of all asset sales or other dispositions of property by RegalCinemas and its subsidiaries, subject to certain exceptions (includingreinvestment rights);

·                  100% of thenet cash proceeds of issuances of funded debt of Regal Cinemas and itssubsidiaries, subject to exceptions; and

·                  50% of thenet cash proceeds of issuances of equity securities by Regal Cinemas, includingthe net cash proceeds of capital contributions to Regal Cinemas, withelimination based upon achievement and maintenance of a leverage ratio of lessthan 3.50:1.00.

The above-describedmandatory prepayments are required to be applied pro rata to the remainingamortization payments under the Term Facility. When there are no longeroutstanding loans under the Term Facility, mandatory prepayments are to beapplied to prepay outstanding loans under the Revolving Facility with nocorresponding permanent reduction of commitments under the Revolving Facility.

The NewSenior Credit Facility includes several financial covenants including:

·                  maximumratios of (i) the sum of funded debt (net of unencumbered cash) plus theproduct of eight (8) times lease expense to (ii) consolidated EBITDAR(as defined in the New Senior Credit Facility) (initially set at 6.00:1.00 anddeclining in subsequent periods);

·                  maximumratios of funded debt (net of unencumbered cash) to consolidated EBITDA,(initially equal to 4.00:1.00 and declining in subsequent periods);

·                  minimum ratioof (i) consolidated EBITDAR to (ii) the sum of interest expense pluslease expense of 1.50 to 1.0 throughout the term of the New Senior CreditFacility; and

·                  maximumcapital expenditures not to exceed 35% of consolidated EBITDA for the priorfiscal year plus a one-year carryforward for unused amounts from the priorfiscal year.

The NewSenior Credit Facility contains customary affirmative covenants including,among other things, maintenance of corporate existence and rights; performanceof obligations; delivery of financial statements and other financialinformation; delivery of notices of default, litigation, ERISA events andmaterial adverse change; maintenance of properties; maintenance of insurance;maintenance of a rating of Regal Cinemas and of the New Senior Credit Facilityby each of Standard & Poor’s Ratings Services and Moody’s InvestorsService, Inc; compliance with laws; inspection of books and properties; furtherassurances; and payment of taxes.

The NewSenior Credit Facility also contains customary negative covenants (subject toexceptions, limitations and baskets) which limit the ability of Regal Cinemasand its subsidiaries to, among other things, incur indebtedness, grant liens,make investments or acquisitions, engage in affiliate transactions, or paydividends. These limitations will restrict the ability of Regal Cinemas to fundthe operations the Company or any subsidiary of the Company that is notdesignated as a restricted subsidiary of Regal Cinemas under the New SeniorCredit Facility.

The New Senior Credit Facility specifiescustomary events of default including, among other things, nonpayment ofprincipal, interest or other amounts; breach of certain covenants; breach ofrepresentations and warranties in any material respect; cross default and crossacceleration with respect to indebtedness in an aggregate principal amount of$25.0 million or more; bankruptcy; judgments involving liability of$25.0 million or more; ERISA events; actual or asserted invalidity ofguarantees or security

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documents; and change of control.   Upon the occurrence of an event of default,all obligations under the New Senior Credit Facility may be accelerated.

Under the New Senior Credit Facility, Regal Cinemasalso established a New Incremental Term Facility, which amends and restates theIncremental Term Facility.  Under theterms of the New Incremental Term Facility, Regal Cinemas may borrow up to $200million in additional funds that would be treated as a term loan under the NewSenior Credit Facility without the need to obtain consent from any lender orany party to the New Senior Credit Facility.  Borrowing under the New IncrementalTerm Facility is subject to the satisfaction of certain conditions set forth inthe facility, including, but not limited to, obtaining commitments from one ormore lenders to fund such additional amounts. At Regal Cinemas’ option,borrowings under the New Incremental Term Facility bear interest at an AdjustedEurodollar Rate or a base rate plus, in either case, an applicable margin thatis established at the time commitments for the New Incremental Term Facilityare obtained.  Proceeds of Regal Cinemas’ borrowings under the NewIncremental Term Facility are to be used solely to fund, or reimburse RegalCinemas for funding, 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.

The Company is currentlyevaluating the accounting implications of the loan fees related to the NewSenior Credit Facility and the remaining unamortized debt issue costsassociated with the Senior Credit Facility on its consolidated financialposition, cash flows and results of operations.

***Other Transactions***

On October 26, 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 onDecember 19, 2006, to stockholders of record on December 11, 2006.

On November 6, the Company completed a secondaryoffering of 7,728,328 shares of its Class A common stock at $20.73 pershare.  The shares were offered fromholdings of Class B common shares held by OCM PrincipalOpportunities Fund II, L.P. and its subsidiaries, andwere originally acquired by them in connection with the original exchangetransaction in April 2002 forming Regal Entertainment Group. Regal received noproceeds from the sale of shares in the offering.

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

**The Company**

We conduct our operations primarily through our whollyowned subsidiaries. We operate the largest and most geographically diversetheatre circuit in the United States, consisting of 6,386 screens in 539theatres in 39 states and the District of Columbia as of September 28, 2006. Webelieve the size, reach

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andquality of our theatre circuit provide an exceptional platform to realizeeconomies of scale from our theatre operations.  As of September 28, 2006,the Company managed its business under one reportable segment: theatreexhibition operations.

We also maintain an investment in National CineMedia,LLC (“National CineMedia) which focuses on the expansion of ancillarybusinesses, such as in-theatre advertising and complementary business linesthat 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 Theatre Company (“UnitedArtists”) (our predecessor for accounting purposes) upon the emergence frombankruptcy reorganization on March 2, 2001 of the United Artists 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). In the same manner, onSeptember 29, 2001, Anschutz acquired controlling equity interests in theEdwards 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). OnJanuary 29, 2002, Anschutz acquired a controlling equity interest in RegalCinemas, Inc. (“RCI”) when the Regal Cinemas, Inc. Bankrupt Entities(as defined in Note 1 to the consolidated financial statements included inPart II, Item 8 of our annual report on Form 10-K for the fiscalyear ended December 29, 2005) emerged from bankruptcy reorganization. Anschutzexchanged its controlling equity interest in RCI for a controlling equityinterest in Regal Cinemas Corporation (“Regal Cinemas”) immediately thereafter.Regal acquired the controlling equity interests of United Artists, EdwardsTheatres, Inc., Regal Cinemas and Regal CineMedia Corporation (“Regal CineMedia”or “RCM”) through a series of transactions described in further detail inNote 1 to the consolidated financial statements included Part II,Item 8 of our annual report on Form 10-K for the fiscal year endedDecember 29, 2005.

The results of operations of the seven theatresacquired from R/C Theatres on April 28, 2005, the 21 theatres acquiredfrom Eastern Federal Corporation on July 21, 2005 and the four theatresacquired from AMC on September 15, 2006 have been included in the Company’sconsolidated financial statements for periods subsequent to the respectiveacquisition 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 September 28, 2006,Regal CineMedia Holdings, LLC, a wholly owned subsidiary of RCM, owned 49.9% ofthe Class A Units of National CineMedia, NCN owned 29.4% of theClass A Units of National CineMedia and Cinemark owned 20.7% of theClass A Units of National CineMedia. Pursuant to 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 anadministrative fee payable to National CineMedia to service such contracts. Forcontracts signed by National CineMedia after the close of business onMarch 31, 2005, AMC and Regal, and with respect to advertising contractssigned after the close of business on July 15, 2005, Cinemark, throughtheir respective theatre exhibition subsidiaries, receive revenue from NationalCineMedia with respect to advertising and

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eventservices at the theatres of National CineMedia partners and other third partyexhibition companies, through an agreed upon formula based generally on screencount and attendance. See Note 3—“Formation of National CineMedia, LLC,”for further discussion of this 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 third fiscal quarter of 2006 was a solid quarterfor the industry and the Company.  Based on our review of industrysources, national box office revenues were estimated to have increased fromapproximately 8.0% to 8.2% during the third fiscal quarter of 2006 in comparisonto the third fiscal quarter of 2005.  The industry achieved these resultswith strong attendance coupled with ticket price increases. The success of certainfamily-oriented and concession-friendly films exhibited during the third fiscalquarter of 2006 contributed to an increase in average concessions revenues perpatron.

Our total revenue for the quarter ended September 28, 2006(“Q3 2006 Period”) was $675.7 million, consisting of $450.6 million ofadmissions revenues, $181.0 million from concessions revenues and $44.1 millionof other operating revenues, and represented a 7.5% increase over totalrevenues of $628.4 million for the quarter ended September 29, 2005 (“Q32005 Period”).

Our Q3 2006 Period admissions revenues were favorablyimpacted by a 5.4% increase in attendance coupled with a 2.6% increase inaverage ticket prices. The increase in our Q3 2006 Period attendance wasprimarily attributable to a robust third quarter box office led by the overallbreadth of the Q3 2006 Period film slate. Our Q3 2006 Period attendance wasalso benefited by approximately 201 new screens added since the end of the Q32005 Period, offset by the closure of approximately 352 screens subsequent tothe end of the Q3 2005 Period.  Theincrease in the Q3 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 exceeded the industry’s results for the Q32006 Period as compared to the Q3 2005 Period.

In addition, during the Q3 2006 Period, we experiencedgrowth in average concession revenues per patron and a slight decline in otheroperating revenues. The growth in average concession revenues per patron wasprimarily attributable to the success of certain family-oriented andconcession-friendly films such as *Pirates**of the Caribbean: Dead Man’s Chest* exhibited during the Q32006 Period.  The decrease in other operating revenues in the Q3 2006Period was primarily attributable to the revenues generated from NationalCineMedia being less than generated in the Q3 2005 Period due to the paymentarrangement described in further detail under Note 3—“Formation ofNational CineMedia, LLC.”  Such decreases were partially offset byincreased revenues related to our vendor marketing programs and incrementalother theatre revenues.

Income from operations increased 43.2% to$83.5 million for the Q3 2006 Period compared to $58.3 million in theQ3 2005 Period. Net income increased to $29.3 million in the Q3 2006Period compared to net income of $17.2 million in the Q3 2005 Period.Earnings per diluted share also increased to $0.19 for the Q3 2006 Periodcompared to $0.11 during the Q3 2005 Period. EBITDA (earnings before interest, taxes, depreciation and amortization)was $129.6 million for the Q3 2006 Period, an increase of 18.5% from$109.4 million in the Q3 2005 Period and represented an EBITDA margin of19.2%. The increase in income from operations, net income, earnings per dilutedshare and EBITDA is primarily due to incremental admissions and concessionsrevenues due to the growth in attendance and increases in average ticket pricesand average concessions per patron, partially offset by increases in certainexpense items described in further detail below.  A tabular reconciliation of net income toEBITDA and net cash provided by operating activities is provided below under “Resultsof Operations—EBITDA.”

30

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During the quarter and three quarters ended September28, 2006, we made progress with certain of our strategic initiatives:

·             We demonstrated ourcommitment to providing incremental value to our stockholders. Total cashdividends distributed to our stockholders during the three quarters endedSeptember 28, 2006 (the “Fiscal 2006 Period”) totaled approximately$134.5 million.

·             During September2006, the Company acquired four theatres with a total of 58 screens fromAMC.  Regal purchased two of these AMCtheatres representing 26 screens for approximately $34.1 million in cash,subject to post closing adjustments, and acquired the other two AMC theatresrepresenting 32 screens in exchange for two Regal theatres consisting of 32screens.

·             In addition to thetheatres acquired from AMC, we opened 1 new theatre with 16 screens and closed8 theatres with 71 screens (including the two theatres surrendered to AMC),ending the Q3 2006 Period with 539 theaters and 6,386 screens.

Subsequent to the Q3 2006 Period, the Company madefurther significant progress with its strategic initiatives. Please refer toNote 11 to the accompanying unaudited condensed financial statements for adiscussion of significant financing transactions subsequent to the Q3 2006Period.

The following table sets forth the percentage of totalrevenues represented by certain items included in our consolidated statementsof income for the Q3 2006 Period, the Q3 2005 Period, the Fiscal 2006 Periodand the three quarters ended September 29, 2005 (“Fiscal 2005 Period”) (dollarsand attendance in millions, except average ticket prices and average concessionper patron):
| ** **                                                                                                                                                                                                                | ** ** | **Q3 2006 Period** | ** ** | **Q3 2005 Period** | ** ** | **Fiscal 2006 Period** | ** ** | **Fiscal 2005 Period** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **$**                        | ** ** | **% of  Revenue**       | ** ** | **$**                            | ** ** | **% of  Revenue**           | ** ** | **$** | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                                                                                                                                                                 |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Admissions                                                                                                                                                                                                                |       | $                            | 450.6      |                         | 66.7       | %                                | $          | 416.2                            |       | 66.2 | % | $ | 1,295.1 |   | 66.6 | % | $ | 1,224.7 |   | 66.3 | % |
| Concessions                                                                                                                                                                                                               |       | 181.0                        |       | 26.8                         |       | 164.7                            |       | 26.2                             |       | 524.8 |   | 27.0 |   | 485.9 |   | 26.3 |   |
| Other operating revenue                                                                                                                                                                                                   |       | 44.1                         |       | 6.5                          |       | 47.5                             |       | 7.6                              |       | 125.5 |   | 6.4 |   | 137.9 |   | 7.4 |   |
|                                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total revenue                                                                                                                                                                                                             |       | 675.7                        |       | 100.0                        |       | 628.4                            |       | 100.0                            |       | 1,945.4 |   | 100.0 |   | 1,848.5 |   | 100.0 |   |
| Operating  expenses:                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Film rental and advertising costs(1)                                                                                                                                                                                      |       | 241.1                        |       | 53.5                         |       | 218.5                            |       | 52.5                             |       | 682.7 |   | 52.7 |   | 651.6 |   | 53.2 |   |
| Cost of concessions(2)                                                                                                                                                                                                    |       | 27.7                         |       | 15.3                         |       | 24.0                             |       | 14.6                             |       | 80.6 |   | 15.4 |   | 71.4 |   | 14.7 |   |
| Rent expense(3)                                                                                                                                                                                                           |       | 81.0                         |       | 12.0                         |       | 78.3                             |       | 12.5                             |       | 238.4 |   | 12.3 |   | 229.6 |   | 12.4 |   |
| Other operating expenses(3)                                                                                                                                                                                               |       | 174.0                        |       | 25.8                         |       | 172.8                            |       | 27.5                             |       | 501.2 |   | 25.8 |   | 501.4 |   | 27.1 |   |
| General and administrative expenses (including  share-based compensation expense of $2.2 and $1.5 for the Q3 2006 Period and  the Q3 2005 Period and $6.3 and $4.3 for the Fiscal 2006 Period and Fiscal  2005 Period)(3) |       | 16.7                         |       | 2.5                          |       | 16.1                             |       | 2.6                              |       | 49.7 |   | 2.6 |   | 50.8 |   | 2.7 |   |
| Depreciation and amortization(3)                                                                                                                                                                                          |       | 49.1                         |       | 7.3                          |       | 51.0                             |       | 8.1                              |       | 149.5 |   | 7.7 |   | 148.1 |   | 8.0 |   |
| Net loss on disposal and impairment of operating  assets(3)                                                                                                                                                               |       | 2.0                          |       | 0.3                          |       | 7.6                              |       | 1.2                              |       | 12.8 |   | 0.7 |   | 11.8 |   | 0.6 |   |
| Equity in loss (income) of joint venture including  former employee compensation(3)                                                                                                                                       |       | 0.6                          |       | 0.1                          |       | 1.8                              |       | 0.3                              |       | 7.3 |   | 0.4 |   | 4.3 |   | 0.2 |   |
|                                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total operating expenses(3)                                                                                                                                                                                               |       | 592.2                        |       | 87.6                         |       | 570.1                            |       | 90.7                             |       | 1,722.2 |   | 88.5 |   | 1,669.0 |   | 90.3 |   |
|                                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income from operations(3)                                                                                                                                                                                                 |       | 83.5                         |       | 12.4                         |       | 58.3                             |       | 9.3                              |       | 223.2 |   | 11.5 |   | 179.5 |   | 9.7 |   |
| Interest expense, net(3)                                                                                                                                                                                                  |       | 31.7                         |       | 4.7                          |       | 29.4                             |       | 4.7                              |       | 92.2 |   | 4.7 |   | 85.6 |   | 4.6 |   |
| Provision for income taxes(3)                                                                                                                                                                                             |       | 19.5                         |       | 2.9                          |       | 11.8                             |       | 1.9                              |       | 38.3 |   | 2.0 |   | 37.4 |   | 2.0 |   |
| Net income(3)                                                                                                                                                                                                             |       | 29.3                         |       | 4.3                          |       | 17.2                             |       | 2.7                              |       | 57.1 |   | 3.0 |   | 56.7 |   | 3.1 |   |
| EBITDA(3) (4)                                                                                                                                                                                                             |       | $                            | 129.6      |                         | 19.2       | %                                | $          | 109.4                            |       | 17.4 | % | $ | 337.1 |   | 17.3 | % | $ | 327.8 |   | 17.7 | % |
| Attendance                                                                                                                                                                                                                |       | 63.9                         |       | *                            |       | 60.6                             |       | *                                |       | 187.1 |   | * |   | 180.4 |   | * |   |
| Average ticket price(5)                                                                                                                                                                                                   |       | $                            | 7.05       |                         | *          |                             | $          | 6.87                             |       | * |   | $ | 6.92 |   | * |   | $ | 6.79 |   | * |   |
| Average  concession per patron(6)                                                                                                                                                                                         |       | $                            | 2.83       |                         | *          |                             | $          | 2.72                             |       | * |   | $ | 2.80 |   | * |   | $ | 2.69 |   | * |   |
|                                                                                                                                                                                                                           |            |                              |            |                              |            |                                  |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

31

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*                    *Not meaningful*

(1)             Percentageof revenues calculated as a percentage of admissions revenues.

(2)             Percentageof revenues calculated as a percentage of concessions revenues.

(3)             Percentageof revenues calculated as a percentage of total revenues.

(4)             EBITDArepresents earnings before interest, taxes, depreciation and amortization. See “—Resultsof Operations—EBITDA” below for a tabular reconciliation of net income toEBITDA and net cash provided by operating activities.

(5)             Calculatedas admissions revenue/attendance.

(6)             Calculatedas concessions revenue/attendance.

***Q3 2006 Period Compared to Q3 2005 Periodand Fiscal 2006 Period compared to Fiscal 2005 Period***

***Admissions***

Total admissions revenues increased$34.4 million, or 8.3%, to $450.6 million for the Q3 2006 Period,from $416.2 million for the Q3 2005 Period. During the Fiscal 2006 Period,total admissions revenues increased $70.4 million, or 5.7%, to $1,295.1 million,from $1,224.7 million for the Fiscal 2005 Period. Our Q3 2006 Period andFiscal 2006 Period box office results were favorably impacted by a 5.4% and3.7% increase in attendance, respectively, coupled with a 2.6% and 1.9%increase, respectively, in average ticket prices. The increase in the Q3 2006Period and Fiscal 2006 Period attendance was primarily attributable to a strongbox office led by the overall breadth of the Q3 2006 Period and Fiscal 2006Period film slate. Our Q3 2006 Period attendance was also benefited byapproximately 201 new screens added since the end of the Q3 2005 Period, offsetby the closure of approximately 352 screens subsequent to the end of the Q32005 period.  Our Fiscal 2006 Periodattendance was impacted by the above factors and the 230 screens acquired fromEastern Federal Corporation on July 21, 2005.  Since the Eastern Federal Corporationacquisition occurred during the Q3 2005 Period, the results of operations ofsuch theatres were only partially included in the Fiscal 2005 Period results.See Note 2—“Acquisitions” to the unaudited condensed consolidatedfinancial statements for additional information regarding thisacquisition.   The increase in the Q32006 and Fiscal 2006 Period average ticket price was primarily attributable toperiodic pricing reviews conducted by the Company, which includes analysis ofvarious factors, including general inflationary trends and local marketconditions. Based on our review of certain industry sources, the increase inour per screen admissions revenues exceeded the industry’s results for the Q32006 Period and the Fiscal 2006 Period as compared to the Q3 2005 Period andFiscal 2005 Period.

***Concessions***

Total concessions revenues increased$16.3 million, or 9.9%, to $181.0 million for the Q3 2006 Period,from $164.7 million for the Q3 2005 Period. During the Fiscal 2006 Period,total concessions revenues increased $38.9 million, or 8.0%, to$524.8 million, from $485.9 million for the Fiscal 2005 Period. Theincrease in concessions revenues in the Q3 2006 Period and the Fiscal 2006Period compared to the Q3 2005 Period and the Fiscal 2005 Period was due to a4.0% and 4.1% increase, respectively, in average concessions per patron,coupled with the aforementioned Q3 2006 Period and Fiscal 2006 Period increasein attendance. The increase in the Fiscal 2006 Period concessions revenue andaverage concessions per patron and was primarily attributable to changes in ourconcessions product mix (including certain size changes).  In addition, the success of certain family-orientedand concession-friendly films such as *Pirates**of the Caribbean: Dead Man’s Chest* benefited both the Q32006 Period and the Fiscal 2006 period.

***Other OperatingRevenues***

Total other operating revenues decreased$3.4 million, or 7.2%, to $44.1 million for the Q3 2006 Period, from$47.5 million for the Q3 2005 Period. During the Fiscal 2006 Period, totalother operating revenues decreased $12.4 million, or 9.0%, to $125.5million, from $137.9 million for the Fiscal 2005 Period. Included in otheroperating revenues are on-screen advertising revenues, business meetings and

32

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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 Q3 2006 Period and the Fiscal 2006 Period was primarilyattributable to the revenues generated from National CineMedia being less thangenerated in the Q3 2005 Period and Fiscal 2005 Period due to the paymentarrangement described in further detail under Note 3—“Formation ofNational CineMedia, LLC.”  Such decreases were partially offset byincreased revenues related to our vendor marketing programs and incrementalother theatre revenues.

***Film Rental andAdvertising Costs***

During the Q3 2006 Period, film rental and advertisingcosts as a percentage of admissions revenues increased to 53.5% as compared to52.5% in the Q3 2005 Period. During the Fiscal 2006 Period, film rental andadvertising costs as a percentage of admissions revenues decreased to 52.7% ascompared to 53.2% in the Fiscal 2005 Period. The increases in film rental andadvertising costs as a percentage of box office revenues during the Q3 2006Period was primarily the result of film product mix and higher film rentalcosts associated with certain Q3 2006 films. The decreases in film rental and advertising costs as a percentage ofbox office revenues during the Fiscal 2006 Period was primarily the result offilm product mix and higher film rental costs associated with certain Fiscal2005 Period films such as *Star Wars: EpisodeIII—Revenge of the Sith*.

***Cost of Concessions***

Cost of concessions as a percentage of concessionsrevenues increased to 15.3% in the Q3 2006 Period as compared to 14.6% in theQ3 2005 Period. During the Fiscal 2006 Period, cost of concessions as apercentage of concessions revenues increased to 15.4% as compared to 14.7% inthe Fiscal 2005 Period. The increase in the cost of concessions as a percentageof concession revenues was primarily related to a greater percentage of lowermargin concession items in the overall mix of concession product sold duringthe Q3 2006 Period and the Fiscal 2006 Period as compared to the Q3 2005 Periodand the Fiscal 2005 Period.

***Rent Expense***

Rent expense increased $2.7 million or 3.4% to$81.0 million in the Q3 2006 Period, from $78.3 million in the Q32005 Period. During the Fiscal 2006 Period, rent expense increased$8.8 million or 3.8% to $238.4 million in the Fiscal 2006 Period,from $229.6 million in the Fiscal 2005 Period. The increase in rent expense inthe Q3 2006 Period and the Fiscal 2006 Period was primarily attributable togeneral inflationary increases along with incremental rent from the inclusionof 201 new screens added since the end of the Q3 2005 Period, partially offsetby the closure of approximately 352 screens subsequent to the end of the Q32005 period.  In addition, the increase inrent expense for the Fiscal 2006 Period was impacted by incremental rent fromthe inclusion of the theatres purchased from R/C Theatres and Eastern FederalCorporation on July 21, 2005.

***Other OperatingExpenses***

Other operating expenses as a percentage of totalrevenues decreased to 25.8% in the Q3 2006 Period, from 27.5% in the Q3 2005Period and decreased to 25.8% in the Fiscal 2006 Period, from 27.1% in theFiscal 2005 Period. The decrease in total other operating expenses as apercentage of total revenues in the Q3 2006 Period and the Fiscal 2006 Periodwas primarily attributable to the expenses generated from National CineMediabeing less than generated due to the payment arrangement described in furtherdetail under Note 3—“Formation of National CineMedia, LLC,” partiallyoffset by an increase in certain non-rent occupancy costs and certain othervariable operating costs related to the increase in attendance.

***General andAdministrative Expenses***

33

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General and administrative expenses increased$0.6 million, or 3.7%, to $16.7 million during the Q3 2006 Period,from $16.1 million in the Q3 2005 Period. During the Fiscal 2006 Period,general and administrative expenses decreased $1.1 million, or 2.2%, to$49.7 million, from $50.8 million in the Fiscal 2005 Period. As apercentage of total revenues, general and administrative expenses decreased to2.5% during the Q3 2006 Period, from 2.6% in the Q3 2005 Period and decreasedto 2.6% in the Fiscal 2006 Period, from 2.7% in the Fiscal 2005 Period. Theincrease in general and administrative expenses during the Q3 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 andadministrative expenses during the Fiscal 2006 Period as compared to the Fiscal2005 Period was primarily attributable to a reduction of Regal CineMediageneral and administrative expenses resulting from the formation of NationalCineMedia, partially offset by an increase in share-based compensation expenseprimarily resulting from the Company’s adoption of FAS 123R.

***Depreciation andAmortization***

Depreciation and amortization decreased$1.9 million, or 3.7%, to $49.1 million in the Q3 2006 Period, from$51.0 million in the Q3 2005 Period. For the Fiscal 2006 Period,depreciation and amortization increased $1.4 million, or 0.9%, to$149.5 million, from $148.1 million in the Fiscal 2005 Period. Thedecrease in depreciation and amortization during the Q3 2006 Period wasprimarily due to the closure of 352 screens since the end of the Q3 2005 Period.  The increase in depreciation and amortizationduring the Fiscal 2006 Period was primarily due to incremental depreciation andamortization from the inclusion of the theatres purchased from R/C Theatres andEastern Federal Corporation on July 21, 2005 and the 201 new screens addedsince the end of the Q3 2005 Period, which exceeded the depreciation andamortization costs of the 352 screens closed subsequent to the end of the Q32005 Period.

***Income fromOperations***

 Income from operations totaled approximately$83.5 million for the Q3 2006 Period, which represents an increase of$25.2 million or 43.2%, from $58.3 million in the Q3 2005 Period. Forthe Fiscal 2006 Period, income from operations totaled approximately$223.2 million, which represents an increase of $43.7 million or24.3%, from $179.5 million in the Fiscal 2005 Period. The net increase inincome from operations during the Q3 2006 Period and the Fiscal 2006 Period wasprimarily attributable to incremental admissions and concessions revenues describedabove, largely offset by increases in certain operating expense items such asfilm rental and advertising, rent and incremental costs of concessions.

***Interest Expense***

 Net interest expense increased$2.3 million, or 7.8%, to $31.7 million in the Q3 2006 Period, from$29.4 million in the Q3 2005 Period. For the Fiscal 2006 Period, netinterest expense increased $6.6 million, or 7.7%, to $92.2 million,from $85.6 million in the Fiscal 2005 Period. The increase in net interestexpense during the Q3 2006 Period and Fiscal 2006 Period as compared to the Q32005 Period and the Fiscal 2005 Period was principally due to a highereffective interest rate on Regal Cinemas’ Term Facility.

 ***Income Taxes***

The provision for income taxes of $19.5 millionand $11.8 million****for the Q32006 Period and the Q3 2005 Period, respectively, reflect effective tax ratesof approximately 40.0% and 40.7%, respectively. The provision for income taxesof $38.3 million and $38.7 million****forthe Fiscal 2006 Period and the Fiscal 2005 Period, respectively, reflecteffective tax rates of approximately 40.1% and 39.7%, respectively. Theeffective tax rates reflect the impact of certain non-deductible expenses.

***Net Income***

 

34

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Net income totaled $29.3 million for the Q3 2006Period, which represents an increase of $12.1 million, from$17.2 million in the Q3 2005 Period. During the Fiscal 2006 Period, netincome totaled $57.1 million, which represents an increase of$0.4 million, from $56.7 million in the Fiscal 2005 Period. Theincrease in net income for the Q3 2006 Period and the Fiscal 2006 Period wasprimarily attributable to incremental admissions and concessions revenues dueto the growth in attendance and increases in average ticket prices and averageconcessions per patron, partially offset by the loss on debt extinguishmentrecorded in the Q3 2006 Period and the Fiscal 2006 Period in connection withconversions of a portion of the Company’s Convertible Senior Notes (see Note 4—“DebtObligations” for further discussion) and increases in certain expense itemsdescribed in further detail above.

***EBITDA***

EBITDA was approximately $129.6 million, or 19.2%of total revenues for the Q3 2006 Period and $109.4 million, or 17.4% oftotal revenues, for the Q3 2005 Period. EBITDA was approximately$337.1 million, or 17.3% of total revenues for the Fiscal 2006 Period and$327.8 million, or 17.7% of total revenues, for the Fiscal 2005 Period.The increase in EBITDA for the Q3 2006 Period and the Fiscal 2006 Period wasprimarily attributable to an increase in operating income described above,partially offset by the loss on debt extinguishment recorded in the Q3 2006Period and the Fiscal 2006 Period in connection with conversions of a portionof the Company’s Convertible Senior Notes (see Note 4—“Debt Obligations”for further discussion).  We believeEBITDA provides 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):
| ** **                                   | ** ** | **Quarter Ended  September 28, 2006** | ** ** | **Quarter Ended  September 29, 2005** | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** | **Three Quarters  Ended  September 29, 2005** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Net income                                   |       | $                                                    | 29.3       |                                                 | $          | 17.2                                                         |       | $                                                            | 57.1       |   | $ | 56.7 |   |
| Interest  expense, net                       |       | 31.7                                                 |       | 29.4                                                 |       | 92.2                                                         |       | 85.6                                                         |       |
| Provision for  income taxes                  |       | 19.5                                                 |       | 11.8                                                 |       | 38.3                                                         |       | 37.4                                                         |       |
| Depreciation and  amortization               |       | 49.1                                                 |       | 51.0                                                 |       | 149.5                                                        |       | 148.1                                                        |       |
|                                         |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| EBITDA                                       |       | 129.6                                                |       | 109.4                                                |       | 337.1                                                        |       | 327.8                                                        |       |
| Interest  expense, net                       |       | (31.7                                                | )          | (29.4                                                | )          | (92.2                                                        | )          | (85.6                                                        | )          |
| Provision for  income taxes                  |       | (19.5                                                | )          | (11.8                                                | )          | (38.3                                                        | )          | (37.4                                                        | )          |
| Deferred income  taxes                       |       | (5.3                                                 | )          | (3.0                                                 | )          | (10.1                                                        | )          | (6.8                                                         | )          |
| Changes in  operating assets and liabilities |       | (60.6                                                | )          | 4.0                                                  |       | (102.4                                                       | )          | (11.2                                                        | )          |
| Loss on debt  extinguishment                 |       | 3.1                                                  |       | —                                               |       | 35.6                                                         |       | —                                                       |       |
| Other items, net                             |       | 4.7                                                  |       | 10.8                                                 |       | 26.4                                                         |       | 20.2                                                         |       |
|                                         |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Net cash provided by  operating activities   |       | $                                                    | 20.3       |                                                 | $          | 80.0                                                         |       | $                                                            | 156.1      |   | $ | 207.0 |   |

 

***Cash Flows***

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

35

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| ** **                                 | ** ** | **Fiscal 2006  Period** | ** ** | **Fiscal 2005  Period** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Net cash  provided by operating activities |       | $                            | 156.1      |                         | $          | 207.0 |   |
| Net cash used in  investing activities     |       | (112.5                       | )          | (228.7                       | )          |
| Net cash used in  financing activities     |       | (159.9                       | )          | (141.9                       | )          |
|                                       |       |                         |       |                         |       |
| Net decrease in cash  and cash equivalents |       | $                            | (116.3     | )                            | $          | (163.6 | ) |

 

*Fiscal 2006 Period Compared toFiscal 2005 Period*

Net cash flows generated from operating activitieswere approximately $156.1 million for the Fiscal 2006 Period, whichrepresents a decrease of $50.9 million compared to $207.0 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 $39.9 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 coupled with a $0.4 million increase in net income, offsetby a $91.2 million reduction of changes in operating assets andliabilities, contributed to the net decrease 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, interest and income tax payments (including a reclassificationof excess tax benefits from share based payment arrangements to cash flows usedin financing activities discussed further in Note 6—“Capital Stock andShare-Based Compensation”), partially offset by increases in trade and otherreceivables.

Net cash flows used in investing activities totaledapproximately $112.5 million for the Fiscal 2006 Period compared to cashflows used in investing activities of approximately $228.7 million for theFiscal 2005 Period. Contributing to the decrease in cash flows used ininvesting activities was the purchase of Eastern Federal Corporation Theatresand R/C Theatres during the Fiscal 2005 Period, a $18.6 million decreasein capital expenditures during the Fiscal 2006 Period, which was primarilyattributable to the timing of capital projects during the Fiscal 2006 Period,partially offset by the acquisition of the AMC theatres described more fully inNote 2—“Acquisitions” and by fewer proceeds from the disposition of assetsduring the Fiscal 2006 Period as compared the Fiscal 2005 Period.

Net cash flowsused in financing activities were approximately $159.9 million for theFiscal 2006 Period compared to cash flows used in financing activities ofapproximately $141.9 million for the Fiscal 2005 Period. The net increasein cash flows used in financing activities during the Fiscal 2006 Period wasprimarily attributable to net cash used to settle conversions of approximately$112.6 million in principal amount of  the Company’s ConvertibleSenior Notes, partially offset by additional borrowings from the 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 uses ofcash 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 provided for under the New Senior Credit Facility and the newRevolving Facility provided for under the New Senior Credit Facility. Under theterms of the New Senior Credit Facility, Regal Cinemas is restricted as to howmuch it can advance or distribute to Regal, its indirect parent. Since Regal isa holding company 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 for cash its ConvertibleSenior Notes.

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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 theatreconstruction, adding new screens to existing theatres, upgrading the Company’stheatre facilities and replacing equipment. We intend to continue to grow ourtheatre circuit through selective expansion and acquisition opportunities. TheCompany has a formal and intensive review procedure for the authorization ofcapital projects, with the most important financial measure of acceptabilityfor a discretionary non-maintenance capital project being whether its projecteddiscounted cash flow return on investment meets or exceeds the Company’sinternal rate of return targets. We currently expect capital expenditures fortheatre development, replacement, expansion, upgrading and replacements to bein the lower end of the range of approximately $135.0 million to$150.0 million in fiscal year 2006, exclusive of acquisitions. Suchcapital expenditures are expected to be partially funded through assetdispositions conducted during the normal course of our business. During theFiscal 2006 Period, we invested approximately $84.7 million in capitalexpenditures.

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.

On September 15, 2006, the Company acquired fourtheatres with a total of 58 screens from AMC.  Regal purchased two of these AMC theatres representing 26 screens forapproximately $34.1 million in cash, subject to post-closing adjustments, andacquired the other two AMC theatres representing 32 screens in exchange for twoRegal theatres consisting of 32 screens. As of the acquisition date, the surrendered Regal theatres had a netbook value of approximately $5.4 million. The Company accounted for the exchanged theatre assets as a non-monetarytransaction and as such, allocated the net book value of the Regal theatres tothe exchanged AMC theatres.  Total cashpaid of approximately $34.1 million was directly allocated to the two AMCtheatres using the purchase method of accounting.  The results of operations of the fourtheatres have been included in the Company’s consolidated financial statementsfor periods subsequent to the acquisition date. See Note 2—“Acquisitions” for further discussion of thistransaction.

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 and commencementof employment with National CineMedia. During the Q3 2006 Period, the Companyrecorded total severance expense of approximately $0.8 million, includingless than $0.1 million of payments in lieu of dividends, related to theSeverance Plan.

Subsequent to the quarter ended September 28, 2006,NCM Inc., a newly-formed entity that will serve as the sole manager of NationalCineMedia, announced that it filed a registration statement with the SEC for aninitial public offering, or IPO, of up to $700 million of its common stock. Netproceeds from the IPO will be used to acquire newly issued equity interestsfrom National CineMedia and National CineMedia will distribute the net proceedsto each of Regal, AMC and Cinemark on a pro rata basis in connection withmodifying payment obligations for access to our theatres. In connection withthe completion of the IPO, National CineMedia also intends to enter

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into an approximately $725 million term loanfacilitythe net proceeds of which will be used to redeem preferred units to beheld by each of RCH, NCN and Cinemark on a pro rata basis pursuant to arecapitalization of National CineMedia prior to completion of the IPO. Regalexpects to receive net IPO and debt proceeds upon completion of suchtransactions of approximately $400-$450 million. Regal is currently exploringalternatives for using the IPO and debt proceeds, and may use some or all ofthe proceeds for strategic acquisitions, to reduce debt or to return value tostockholders through an extraordinary dividend, stock repurchases or othertransactions. There can be no guarantee that NCM Inc. will complete the IPO ordebt transactions or that Regal will receive any or the level of expectedproceeds.

In connection with the completion of the IPO, Regalintends to amend and restate its existing services agreement with NationalCineMedia whereby in exchange for our pro rata share of the IPO proceeds, Regalwill agree to a modification of National CineMedia’s payment obligation underthe existing agreement. The modification will extend the term of the agreementto 30 years, provide National CineMedia with a five year right of first refusalbeginning one year prior to the end of the term and change the basis upon whichRegal is paid by National CineMedia from a percentage of revenues associatedwith advertising contracts entered into by National CineMedia to a monthlytheatre access fee. The theatre access fee would be composed of a fixed paymentper patron and a fixed payment per digital screen, which would increase by 8%every five years starting at the end of fiscal 2011 for payments per patron andby 5% annually starting at the end of fiscal 2007 for payments per digitalscreen.  Also, with respect to anyon-screen advertising time provided to our beverage concessionaire, Regal wouldbe required to purchase such time from National CineMedia at a negotiatedrate.  In addition, after completion ofthe IPO, Regal expects to receive mandatory quarterly distributions of excesscash from National CineMedia. There can be no guarantee that the amendment tothe existing services agreement will occur.

Regal paid three 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 $134.5 million inthe aggregate, during the three quarters ended September 28, 2006.  OnOctober 26, 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 December 19, 2006, tostockholders of record on December 11, 2006. We, at the discretion of the boardof directors and subject to applicable law, anticipate paying regular quarterlydividends on our Class A and Class B common stock for the foreseeablefuture. The amount, if any, of the dividends to be paid in the future willdepend upon our then available cash, anticipated cash needs, overall financialcondition, loan agreement restrictions, future prospects for earnings and cashflows, as well as other relevant factors.

As of September 28, 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 excess conversionvalue over the accreted value) in either cash, shares of our Class Acommon stock or a combination of stock and cash. During the quarter ended March30, 2006, holders of $4.4 million in principal amount of ConvertibleSenior Notes exercised their conversion rights. The Company elected to settlethese conversions entirely in cash for approximately $5.3 million. As a resultof these conversions, the Company recorded a $0.9 million****loss on debt extinguishment during thequarter ended March 30, 2006. In addition, during the quarter ended June 29,2006 holders of approximately $100.0 million in principal amount ofConvertible Senior Notes exercised their conversion

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rights,and the Company also settled these conversions entirely in cash for approximately$130.3 million. As a result of the conversions in the second quarter of 2006,the Company recorded a $31.6 million loss on debt extinguishment (including arelated $1.3 million write-off of unamortized debt issue costs) during thequarter ended June 29, 2006.  Finally,during the quarter ended September 28, 2006, holders of approximately$8.2 million in principal amount of Convertible Senior Notes exercisedtheir conversion rights, and the Company also settled these conversionsentirely in cash for approximately $11.3 million.  As a result of the conversions in the thirdquarter of 2006, the Company recorded a $3.1 million loss on debtextinguishment during the quarter ended September 28, 2006.

In connection with the above conversions, the Companyreceived net proceeds of approximately $17.3 million from Credit Suisse FirstBoston (“CSFB”) attributable to the convertible note hedge arrangement enteredinto with CSFB and the warrant sold to CSFB in connection with the issuance ofthe Convertible Senior Notes.  Such proceeds were recorded as an increaseto additional paid-in capital. Based upon our ability to generate cash flowfrom operations, our financial capacity and ability to borrow or raise capitaland available cash on hand, we believe that we have the ability to generate theliquidity necessary to settle in cash the remaining principal amount of theoutstanding Convertible Senior Notes upon their conversion.

As of September 28, 2006, under Regal Cinemas’ SeniorCredit Facility as amended through June 14, 2006, Regal Cinemas has establishedthe Incremental Term Facility, pursuant to which Regal Cinemas may borrow up to$200 million in additional funds that would be treated as a term loan under theSenior Credit Facility without the need to obtain consent from any lender orany party to the Senior Credit Facility.  Borrowing under the IncrementalTerm Facility is subject to the satisfaction of certain conditions set forth inthe facility, including, but not limited to, obtaining commitments from one ormore lenders to fund such additional amounts. At Regal Cinemas’ option,borrowings under the Incremental Term Facility bear interest at an adjustedEurodollar rate or a base rate plus, in either case, an applicable margin thatis established at the time commitments for the Incremental Term Facility areobtained.  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 borrowed $100 millionunder the Senior Credit Facility, the net proceeds of which were applied toreimburse Regal Cinemas for amounts previously distributed to the Company tofund the Company’s settlement of the conversion of approximately$100.0 million aggregate principal amount of Convertible Senior Notes forapproximately $114.9 million in cash (net of approximately$15.4 million funded by CSFB).

As of September 28, 2006, we had approximately$1,663.9 million outstanding under the Term Facility under the SeniorCredit Facility, $127.4 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 ofSeptember 28, 2006, we had approximately $100.0 million available fordrawing under the Incremental Term Facility and approximately $99.0 millionavailable for drawing under the Regal Cinemas $100.0 million Revolving Facilityunder the Senior Credit Facility. At such date, Regal Cinemas also maintained aletter of credit sub-facility of up to $30.0 million (of which approximately$1.0 million was outstanding as of September 28, 2006), which reducedavailability under the Revolving Facility. Subsequent to the quarter ended September 28, 2006, Regal Cinemasreplaced its Senior Credit Facility with its New Senior Credit Facility,including a New Incremental Term Facility. Please refer to Note 11 to the accompanying unaudited condensedfinancial statements for a discussion of significant financing transactions,including a description of the New Senior Credit Facility, subsequent to thequarter ended September 28, 2006.

**Contractual Cash Obligations and Commitments**

For a summary of our contractual cash obligations andcommitments as of December 29, 2005, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of

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Operations—ContractualCash Obligations and Commitments” contained in our annual report onForm 10-K for the fiscal year ended December 29, 2005. As ofSeptember 28, 2006, there were no material changes outside the ordinary courseof our business in our contractual cash obligations and commitments. We believethat the amount of cash and cash equivalents on hand, cash flow expected fromoperations and availability under our Revolving Facility will be adequate forthe Company to execute its business strategy and meet anticipated requirementsfor lease obligations, capital expenditures, working capital and debt servicefor 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 September28, 2006, there were no significant changes in our critical accounting policiesor estimation procedures.

**Recent Accounting Pronouncements**

For a discussion of the recent accountingpronouncements relevant to our operations, please refer to the informationprovided under Note 10—“Recent Accounting Pronouncements” 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 AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The Company’s market risk is confined to interest rateexposure of its and its wholly owned subsidiaries’ debt obligations that bearinterest based on floating rates. The Senior Credit Facility provided for andthe New Senior Credit Facility provides variable rate interest that could beadversely affected by an increase in interest rates. Borrowings under the TermFacility bore and the new Term Facility bear interest, at Regal Cinemas’option, at either an adjusted Eurodollar rate or the base rate plus, in eachcase, an applicable margin.

During 2004 and 2005, Regal Cinemas entered into fivedistinct hedging relationships via five separate interest rate swap agreementswith final maturity terms ranging from three to five years for the purpose ofhedging an aggregate of approximately $1.1 billion of variable interest rate riskunder the Senior Credit Facility. Under the terms of the interest rate swapagreements, Regal Cinemas pays interest at various fixed rates ranging from3.49%—4.337% and receives interest at a variable rate based on the 3-monthLIBOR. For a further description of the swap agreements, see Note 5 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, which is incorporated herein by reference.

As of September 28, 2006 and December 29, 2005,borrowings of $1,663.9 million and $1,575.9 million, respectivelywere outstanding under the Term Facility at effective interest rates of 6.3%

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(as ofSeptember 28, 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 ofSeptember 28, 2006, would increase or decrease interest expense by$2.6 million for the quarter ended September 28, 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 September 28, 2006, pursuant to Rule 13a-15(b) underthe Exchange Act. Based upon that evaluation, our Certifying Officers concludedthat, as of September 28, 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.

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**PARTII—OTHER INFORMATION**

**Item 1. LEGAL PROCEEDINGS**

Information required to be furnished by us under thisPart 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 risk factorsas 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.

**Item 6. EXHIBITS**
| Exhibit No. | ** ** | **Exhibit Description**                                                 |
|------------------|------------|------------------------------------------------------------------------------|
| 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**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                        | ** ** | ** ** |   | **REGAL ENTERTAINMENT GROUP**                                                                      |
|------------------------|------------|------------|--------|----------------------------------------------------------------------------------------------------|
|                   |       |       |   |                                                                                               |
| Date: November 7, 2006 |       | By:        |   | /s/  MICHAEL L. CAMPBELL                                                                 |
|                   |       | * *   |   | Michael L. Campbell*Chief Executive Officer (Principal  Executive Officer)*                        |
|                   |       |       |   |                                                                                               |
| Date: November 7, 2006 |       | By:        |   | /s/  AMY E. MILES                                                                        |
|                   |       | * *   |   | Amy E. Miles*Executive Vice President and Chief  Financial Officer (Principal Financial Officer)*  |
|                   |       |       |   |                                                                                               |
| Date: November 7, 2006 |       | By:        |   | /s/  DAVID H. OWNBY                                                                      |
|                   |       | * *   |   | David H. Ownby*Senior Vice President and Chief  Accounting Officer (Principal Accounting Officer)* |

 

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** **

**REGAL ENTERTAINMENT GROUP**

**Exhibit Index**
| Exhibit No. | ** ** | **Exhibit Description**                                                 |
|------------------|------------|------------------------------------------------------------------------------|
| 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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