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

 

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**FORM 10-Q**

 

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

 

**For thequarterly period ended September 27, 2007**

 

**Commissionfile number 001-31315**

 

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**Regal Entertainment Group**

(Exact name of Registrant asSpecified in Its Charter)

 

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

 

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

 

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—129,518,915 sharesoutstanding at November 2, 2007

 

Class B Common Stock—23,708,639 sharesoutstanding at November 2, 2007

 

 

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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**

 

**Item 1.    FINANCIAL STATEMENTS**

 

**REGALENTERTAINMENT GROUP**

 

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

**(inmillions, except share data)**

 
| ** **                                                                                                                                                                                              | ** ** | **September 27, 2007** | ** ** | **December 28, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                              |       |                             |       |                            |       |
| CURRENT ASSETS:                                                                                                                                                                                         |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                               |       | $                                | 382.7      |                            | $          | 162.2 |   |
| Trade and other receivables, net                                                                                                                                                                        |       | 8.7                              |       | 59.8                            |       |
| Inventories                                                                                                                                                                                             |       | 8.0                              |       | 8.0                             |       |
| Prepaid expenses and other current assets                                                                                                                                                               |       | 15.5                             |       | 1.8                             |       |
| Assets held for sale                                                                                                                                                                                    |       | 7.1                              |       | 8.6                             |       |
| Deferred income tax asset                                                                                                                                                                               |       | 0.9                              |       | 0.6                             |       |
| TOTAL CURRENT ASSETS                                                                                                                                                                                    |       | 422.9                            |       | 241.0                           |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                                 |       |                             |       |                            |       |
| Land                                                                                                                                                                                                    |       | 122.7                            |       | 133.2                           |       |
| Buildings and leasehold improvements                                                                                                                                                                    |       | 1,689.8                          |       | 1,667.3                         |       |
| Equipment                                                                                                                                                                                               |       | 873.9                            |       | 852.6                           |       |
| Construction in progress                                                                                                                                                                                |       | 24.2                             |       | 31.7                            |       |
| Total property and equipment                                                                                                                                                                            |       | 2,710.6                          |       | 2,684.8                         |       |
| Accumulated depreciation and amortization                                                                                                                                                               |       | (873.2                           | )          | (763.0                          | )          |
| TOTAL PROPERTY AND EQUIPMENT, NET                                                                                                                                                                       |       | 1,837.4                          |       | 1,921.8                         |       |
| GOODWILL                                                                                                                                                                                                |       | 186.0                            |       | 214.9                           |       |
| DEFERRED INCOME TAX ASSET                                                                                                                                                                               |       | 96.1                             |       | 21.4                            |       |
| OTHER NON-CURRENT ASSETS                                                                                                                                                                                |       | 51.1                             |       | 69.7                            |       |
| TOTAL ASSETS                                                                                                                                                                                            |       | $                                | 2,593.5    |                            | $          | 2,468.8 |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                         |       |                             |       |                            |       |
| CURRENT LIABILITIES:                                                                                                                                                                                    |       |                             |       |                            |       |
| Current portion of debt obligations                                                                                                                                                                     |       | $                                | 146.3      |                            | $          | 146.2 |   |
| Accounts payable                                                                                                                                                                                        |       | 108.3                            |       | 168.1                           |       |
| Accrued expenses                                                                                                                                                                                        |       | 48.7                             |       | 61.1                            |       |
| Income taxes payable                                                                                                                                                                                    |       | 42.4                             |       | 52.3                            |       |
| Deferred revenue                                                                                                                                                                                        |       | 88.7                             |       | 99.4                            |       |
| Interest payable                                                                                                                                                                                        |       | 29.2                             |       | 29.2                            |       |
| TOTAL CURRENT LIABILITIES                                                                                                                                                                               |       | 463.6                            |       | 556.3                           |       |
| LONG-TERM DEBT                                                                                                                                                                                          |       | 1,722.4                          |       | 1,735.3                         |       |
| LEASE FINANCING ARRANGEMENTS                                                                                                                                                                            |       | 82.8                             |       | 85.8                            |       |
| CAPITAL LEASE OBLIGATIONS                                                                                                                                                                               |       | 19.3                             |       | 20.6                            |       |
| NON-CURRENT DEFERRED REVENUE                                                                                                                                                                            |       | 280.8                            |       | —                          |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                                           |       | 117.2                            |       | 91.1                            |       |
| TOTAL LIABILITIES                                                                                                                                                                                       |       | 2,686.1                          |       | 2,489.1                         |       |
| MINORITY INTEREST                                                                                                                                                                                       |       | 0.5                              |       | 1.9                             |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                                             |       |                             |       |                            |       |
| Class A common stock, $0.001 par  value; 500,000,000 shares authorized, 129,481,204 and 126,448,479 shares  issued and outstanding at September 27, 2007 and December 28, 2006,  respectively |       | 0.1                              |       | 0.1                             |       |
| Class B common stock, $0.001 par  value; 200,000,000 shares authorized, 23,708,639 and 23,908,639 shares issued  and outstanding at September 27, 2007 and December 28, 2006,  respectively   |       | —                           |       | —                          |       |
| Preferred stock, $0.001 par value;  50,000,000 shares authorized; none issued and outstanding                                                                                                           |       | —                           |       | —                          |       |
| Additional paid in capital (deficit)                                                                                                                                                                    |       | (162.2                           | )          | (66.1                           | )          |
| Retained earnings                                                                                                                                                                                       |       | 65.3                             |       | 30.2                            |       |
| Accumulated other comprehensive income, net                                                                                                                                                             |       | 3.7                              |       | 13.6                            |       |
| TOTAL STOCKHOLDERS’ DEFICIT                                                                                                                                                                        |       | (93.1                            | )          | (22.2                           | )          |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                        |       | $                                | 2,593.5    |                            | $          | 2,468.8 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

3

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**REGALENTERTAINMENT GROUP**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                                                                                                                                                                                                                                                          | ** ** | **Quarter Ended  September 27, 2007** | ** ** | **Quarter Ended  September 28, 2006** | ** ** | **Three Quarters  Ended  September 27, 2007** | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| REVENUES:                                                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Admissions                                                                                                                                                                                                                                                                          |       | $                                                    | 515.8      |                                                 | $          | 450.6                                                        |       | $                                                            | 1,400.4    |   | $ | 1,295.1 |   |
| Concessions                                                                                                                                                                                                                                                                         |       | 210.9                                                |       | 181.0                                                |       | 576.6                                                        |       | 524.8                                                        |       |
| Other operating revenue                                                                                                                                                                                                                                                             |       | 26.2                                                 |       | 44.1                                                 |       | 84.3                                                         |       | 125.5                                                        |       |
| TOTAL REVENUE                                                                                                                                                                                                                                                                       |       | 752.9                                                |       | 675.7                                                |       | 2,061.3                                                      |       | 1,945.4                                                      |       |
| OPERATING EXPENSES:                                                                                                                                                                                                                                                                 |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Film rental and advertising costs                                                                                                                                                                                                                                                   |       | 279.4                                                |       | 241.1                                                |       | 749.8                                                        |       | 682.7                                                        |       |
| Cost of concessions                                                                                                                                                                                                                                                                 |       | 29.3                                                 |       | 27.7                                                 |       | 82.2                                                         |       | 80.6                                                         |       |
| Rent expense                                                                                                                                                                                                                                                                        |       | 85.6                                                 |       | 81.0                                                 |       | 249.9                                                        |       | 238.4                                                        |       |
| Other operating expenses                                                                                                                                                                                                                                                            |       | 183.8                                                |       | 174.0                                                |       | 524.9                                                        |       | 501.2                                                        |       |
| General and administrative expenses  (including share-based compensation of $1.1 and $2.2 for the quarters ended  September 27, 2007 and September 28, 2006, respectively, and $4.6 and $6.3  for the three quarters ended September 27, 2007 and September 28, 2006, respectively) |       | 15.3                                                 |       | 16.7                                                 |       | 48.1                                                         |       | 49.7                                                         |       |
| Depreciation and amortization                                                                                                                                                                                                                                                       |       | 45.6                                                 |       | 49.1                                                 |       | 138.0                                                        |       | 149.5                                                        |       |
| Net (gain) loss on disposal and impairment  of operating assets                                                                                                                                                                                                                     |       | (3.6                                                 | )          | 2.0                                                  |       | (0.8                                                         | )          | 12.8                                                         |       |
| Equity in earnings of joint venture  including former employee compensation                                                                                                                                                                                                         |       | 0.1                                                  |       | 0.6                                                  |       | 3.8                                                          |       | 7.3                                                          |       |
| TOTAL OPERATING EXPENSES                                                                                                                                                                                                                                                            |       | 635.5                                                |       | 592.2                                                |       | 1,795.9                                                      |       | 1,722.2                                                      |       |
| INCOME FROM OPERATIONS                                                                                                                                                                                                                                                              |       | 117.4                                                |       | 83.5                                                 |       | 265.4                                                        |       | 223.2                                                        |       |
| OTHER EXPENSE (INCOME):                                                                                                                                                                                                                                                             |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Interest expense, net                                                                                                                                                                                                                                                               |       | 27.8                                                 |       | 31.7                                                 |       | 84.3                                                         |       | 92.2                                                         |       |
| Gain on NCM transaction (Note 3)                                                                                                                                                                                                                                                    |       | —                                               |       | —                                               |       | (350.7                                                       | )          | —                                                       |       |
| Gain on sale of Fandango interest                                                                                                                                                                                                                                                   |       | (0.3                                                 | )          | —                                               |       | (28.6                                                        | )          | —                                                       |       |
| Earnings recognized from NCM                                                                                                                                                                                                                                                        |       | (7.1                                                 | )          | —                                               |       | (9.3                                                         | )          | —                                                       |       |
| Minority interest in earnings of  consolidated subsidiaries and other                                                                                                                                                                                                               |       | 0.2                                                  |       | (0.1                                                 | )          | 0.4                                                          |       | —                                                       |       |
| Loss on extinguishment of debt                                                                                                                                                                                                                                                      |       | —                                               |       | 3.1                                                  |       | —                                                       |       | 35.6                                                         |       |
| TOTAL OTHER EXPENSE (INCOME), NET                                                                                                                                                                                                                                                   |       | 20.6                                                 |       | 34.7                                                 |       | (303.9                                                       | )          | 127.8                                                        |       |
| INCOME BEFORE INCOME TAXES                                                                                                                                                                                                                                                          |       | 96.8                                                 |       | 48.8                                                 |       | 569.3                                                        |       | 95.4                                                         |       |
| PROVISION FOR INCOME TAXES                                                                                                                                                                                                                                                          |       | 38.8                                                 |       | 19.5                                                 |       | 229.5                                                        |       | 38.3                                                         |       |
| NET INCOME                                                                                                                                                                                                                                                                          |       | $                                                    | 58.0       |                                                 | $          | 29.3                                                         |       | $                                                            | 339.8      |   | $ | 57.1 |   |
| EARNINGS PER SHARE:                                                                                                                                                                                                                                                                 |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Basic                                                                                                                                                                                                                                                                               |       | $                                                    | 0.38       |                                                 | $          | 0.20                                                         |       | $                                                            | 2.24       |   | $ | 0.38 |   |
| Diluted                                                                                                                                                                                                                                                                             |       | $                                                    | 0.36       |                                                 | $          | 0.19                                                         |       | $                                                            | 2.13       |   | $ | 0.37 |   |
| AVERAGE SHARES OUTSTANDING (in thousands)                                                                                                                                                                                                                                           |       |                                                 |       |                                                 |       |                                                         |       |                                                         |       |
| Basic                                                                                                                                                                                                                                                                               |       | 152,683                                              |       | 149,429                                              |       | 151,590                                                      |       | 148,739                                                      |       |
| Diluted                                                                                                                                                                                                                                                                             |       | 160,532                                              |       | 154,473                                              |       | 159,297                                                      |       | 154,993                                                      |       |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**REGALENTERTAINMENT GROUP**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inmillions)**

 
| ** **                                                                       | ** ** | **Three Quarters  Ended  September 27, 2007** | ** ** | **Three Quarters  Ended  September 28,  2006** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |       |                                                         |       |                                                     |       |
| Net income                                                                       |       | $                                                            | 339.8      |                                                     | $          | 57.1 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:   |       |                                                         |       |                                                     |       |
| Depreciation and amortization                                                    |       | 138.0                                                        |       | 149.5                                                    |       |
| Share-based compensation expense                                                 |       | 4.6                                                          |       | 6.3                                                      |       |
| Minority interest in earnings of  consolidated subsidiaries                      |       | 0.1                                                          |       | —                                                   |       |
| Deferred income tax benefit                                                      |       | (46.1                                                        | )          | (10.1                                                    | )          |
| Net (gain) loss on disposal and impairment  of operating assets                  |       | (0.8                                                         | )          | 12.8                                                     |       |
| Equity in earnings of joint venture  including former employee compensation      |       | 3.8                                                          |       | 7.3                                                      |       |
| Gain on sale of Fandango interest                                                |       | (28.6                                                        | )          | —                                                   |       |
| Non-cash gain on NCM transaction                                                 |       | (3.4                                                         | )          | —                                                   |       |
| Net loss on purchase of partnership  interests                                   |       | 0.2                                                          |       | —                                                   |       |
| Loss on extinguishment of debt                                                   |       | —                                                       |       | 35.6                                                     |       |
| Non-cash rent expense                                                            |       | 6.9                                                          |       | 8.1                                                      |       |
| Changes in operating assets and liabilities  (excluding effects of acquisition): |       |                                                         |       |                                                     |       |
| Trade and other receivables                                                      |       | 51.1                                                         |       | 24.2                                                     |       |
| Inventories                                                                      |       | 0.1                                                          |       | 0.4                                                      |       |
| Prepaid expenses and other current assets                                        |       | (7.1                                                         | )          | (5.9                                                     | )          |
| Accounts payable                                                                 |       | (59.8                                                        | )          | (86.8                                                    | )          |
| Income taxes payable                                                             |       | 15.6                                                         |       | (9.2                                                     | )          |
| Deferred revenue                                                                 |       | 270.0                                                        |       | (18.6                                                    | )          |
| Accrued expenses and other liabilities                                           |       | (11.0                                                        | )          | (14.6                                                    | )          |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                        |       | 673.4                                                        |       | 156.1                                                    |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |       |                                                         |       |                                                     |       |
| Capital expenditures                                                             |       | (82.0                                                        | )          | (84.7                                                    | )          |
| Proceeds from disposition of assets                                              |       | 31.9                                                         |       | 6.3                                                      |       |
| Proceeds from sale of Fandango interest                                          |       | 28.6                                                         |       | —                                                   |       |
| Purchase of partnership interests, net of  cash acquired                         |       | (1.1                                                         | )          | —                                                   |       |
| Dividends received from partnership                                              |       | 0.3                                                          |       | —                                                   |       |
| Investment in DCIP                                                               |       | (1.5                                                         | )          | —                                                   |       |
| Cash used for acquisitions, net of cash  acquired                                |       | —                                                       |       | (34.1                                                    | )          |
| NET CASH USED IN INVESTING ACTIVITIES                                            |       | (23.8                                                        | )          | (112.5                                                   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |       |                                                         |       |                                                     |       |
| Cash used to pay dividends                                                       |       | (439.1                                                       | )          | (134.5                                                   | )          |
| Proceeds from stock option exercises                                             |       | 15.3                                                         |       | 12.4                                                     |       |
| Net payments on long term obligations                                            |       | (17.0                                                        | )          | (15.0                                                    | )          |
| Cash used to settle conversions of  convertible notes                            |       | (0.1                                                         | )          | (147.0                                                   | )          |
| Net proceeds attributable to convertible  note hedge and warrant                 |       | —                                                       |       | 17.3                                                     |       |
| Excess tax benefits from share-based  payment arrangements                       |       | 14.4                                                         |       | 10.1                                                     |       |
| Payment of debt acquisition costs and other                                      |       | (2.6                                                         | )          | (3.2                                                     | )          |
| Proceeds from Regal Cinemas senior credit  facility                              |       | —                                                       |       | 100.0                                                    |       |
| NET CASH USED IN FINANCING ACTIVITIES                                            |       | (429.1                                                       | )          | (159.9                                                   | )          |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                            |       | 220.5                                                        |       | (116.3                                                   | )          |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                |       | 162.2                                                        |       | 196.3                                                    |       |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       |       | $                                                            | 382.7      |                                                     | $          | 80.0 |   |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                              |       |                                                         |       |                                                     |       |
| Cash paid for income taxes, net of refunds  received                             |       | $                                                            | 240.5      |                                                     | $          | 50.1 |   |
| Cash paid for interest                                                           |       | $                                                            | 96.0       |                                                     | $          | 90.8 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**REGALENTERTAINMENT 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”) and United Artists Theatre Company (“United Artists”).The terms Regal or the Company, REH, Regal Cinemas, RCI, Edwards, RegalCineMedia or RCM, Hoyts and United Artists shall be deemed to include therespective subsidiaries of such entities when used in discussions includedherein regarding the current operations or assets of such entities.

 

Regal operates the largest theatre circuit in theUnited States, consisting of 6,355 screens in 526 theatres in 39 states and theDistrict of Columbia as of September 27, 2007.  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 27, 2007, 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 28, 2006, please refer to Note 1 to theconsolidated financial statements included in Part II, Item 8 of ourannual report on Form 10-K filed on February 26, 2007 with theSecurities and Exchange Commission (the “Commission”) (File No. 001-31315)for the fiscal year ended December 28, 2006.

 

On March 29, 2005, Regal and AMCEntertainment Inc. (“AMC”) announced the combination of the operations ofRCM and AMC’s subsidiary, National Cinema Network, Inc. (“NCN”), into anew joint venture company known as National CineMedia, LLC (“National CineMedia”).On July 15, 2005, Cinemark, Inc. (“Cinemark”), through a wholly ownedsubsidiary, acquired a 20.7% interest in National CineMedia. OnFebruary 13, 2007, National CineMedia, Inc. (“NCM Inc.”), a newly formedentity that serves as the sole manager of National CineMedia, completed aninitial public offering, or IPO, of its common stock. In connection with theIPO of NCM Inc., Regal CineMedia Holdings, LLC (“RCH”), a wholly ownedsubsidiary of RCM, AMC and Cinemark amended and restated the operatingagreement of National CineMedia and other ancillary agreements.  Asdiscussed further in Note 3—“Investment in National CineMedia, LLC,” as aresult of the transactions completed in connection with the IPO, the Companyrecognized a gain of approximately $350.7 million during the quarter endedMarch 29, 2007.

 

During the three quarters ended September 27, 2007, theCompany sold its equity interest in Fandango, Inc. (“Fandango”) for proceeds of$28.6 million.  As a result of this transaction, the Company recognized again on the sale of approximately $28.6 million ($17.2 million aftertax).  In connection with the sale, the Company agreed to amend itsexisting contract with Fandango in exchange for an amendment fee totaling $5.5million.  This amount has been recorded as deferred revenue and will beamortized to revenue on a straight-line basis over the six year term of theamendment.

 

During the three quarters ended September 27, 2007,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 $137.1 million in the aggregate.  In addition, onMarch 5, 2007, Regal declared an extraordinary cash dividend of $2.00 per shareon each outstanding share of its Class A and Class B common stock, includingoutstanding restricted stock. Stockholders of record at the close of businesson March 28, 2007 were paid this dividend on April 13, 2007. The dividend wasrecorded as a $302.0 million increase to stockholders’ deficit upondeclaration.

 

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Total comprehensive income for the quarters endedSeptember 27, 2007 and September 28, 2006 was $48.9 million and$20.1 million, respectively.  Total comprehensive income for thethree quarters ended September 27, 2007 and September 28, 2006 was $329.9million and $59.6 million, respectively.  Total comprehensive incomeconsists of net income and other comprehensive income (loss), net of tax,related to the change in the aggregate unrealized gain (loss) on the Company’sinterest rate swap arrangements during each of the quarters and three quartersended September 27, 2007 and September 28, 2006. The Company’s interest rateswap arrangements are further described in Note 4—“Debt Obligations.”

 

The Company has prepared the unaudited condensedconsolidated balance sheet as of September 27, 2007 and the unaudited condensedconsolidated statements of income and cash flows in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and the rules and regulations of the Commission.Accordingly, certain information and footnote disclosures typically included inan annual report have been condensed or omitted for this quarterly report. Inthe opinion of management, all adjustments (which include only normal recurringadjustments) necessary to present fairly in all material respects the financialposition, results of operations and cash flows for all periods presented havebeen made. The December 28, 2006 unaudited condensed consolidated balancesheet information is derived from the audited consolidated financial statementsof the Company included in its annual report on Form 10-K for the fiscalyear ended December 28, 2006. These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto. The results of operationsfor the quarter and three quarters ended September 27, 2007 are not necessarilyindicative of the operating results that may be achieved for the full 2007fiscal year.

 

Certain reclassifications have been made to the 2006financial statements to conform to the 2007 presentation.

 

**2. RECENT ACQUISITIONS**

 

***Acquisition offour AMC Entertainment Inc. Theatres***

 

On September 15, 2006, the Company acquired fourtheatres with a total of 58 screens from AMC.  The Company purchased twoof these AMC theatres representing 26 screens for approximately $34.1 millionin cash, subject to post-closing adjustments, and acquired the other two AMCtheatres representing 32 screens in exchange for two Regal theatres consistingof 32 screens.  As of the acquisition date, the exchanged Regal theatreshad a net book value of approximately $5.4 million.  The Company accountedfor the exchange of theatre assets as a non-monetary transaction in accordancewith FAS 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No.29” and as such, allocated the net book value of the Regal theatres to theexchanged AMC theatres.  Total cash paid of approximately $34.1 millionwas directly allocated to the other two AMC theatres using the purchase methodof accounting.  Accordingly, the total cash purchase price was allocatedto the assets acquired and liabilities assumed for both of the respectivetheatre locations based on management’s judgment of the estimated fair valuesat the date of acquisition. The results of operations of the four acquiredtheatres have been included in the Company’s consolidated financial statementsfor periods subsequent to the acquisition date.

 

The following is a summary of the allocation of theaggregate cash purchase price to the estimated fair values of the assetsacquired and liabilities assumed at the respective dates of acquisition (inmillions):

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

 

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**3. INVESTMENT IN NATIONAL CINEMEDIA, LLC**

 

***Formation ofNational CineMedia, LLC***

 

On March 29, 2005, Regal and AMC announced thecombination of the operations of RCM and AMC’s subsidiary, NCN, into a newjoint venture company known as National CineMedia. On July 15, 2005,Cinemark, through a wholly owned subsidiary, acquired a 20.7% interest inNational CineMedia.  National CineMedia focuses on the expansion ofin-theatre advertising and the creation of complementary business lines thatleverage 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.

 

Pursuant to the other documents entered into inconnection with the joint venture transaction, AMC and Regal, through theirsubsidiaries, retained all advertising contracts signed on or before the closeof business on March 31, 2005, and Cinemark retained all advertising contractssigned on or before the close of business on July 15, 2005, subject to anadministrative fee (32% during fiscal 2006 through the date of the IPO of NCMInc.) payable to National CineMedia to service such contracts. For the periodfrom December 29, 2006 through February 12, 2007 and the quarter endedSeptember 28, 2006, administrative fees paid to National CineMedia with respectto these contracts totaled less than $0.1 million (on less than$0.1 million of revenue) and $0.7 million (on $2.3 million of revenue),respectively.  Revenues and expenses attributable to these advertisingcontracts were recorded as a component of other operating revenues and otheroperating expenses in the Company’s financial statements. For contracts signedby National CineMedia after the close of business on March 31, 2005through February 12, 2007, AMC and Regal, and with respect to advertisingcontracts signed after the close of business on July 15, 2005, Cinemark,through their respective subsidiaries, received revenue from National CineMediawith respect to advertising and event services at their respective theatresthrough an agreed upon formula as well as equity in income/loss of NationalCineMedia. Such formula was based on the weighted average number of screensowned by and the number of theatre patrons of the applicable exhibitor’stheatres for any measurement period.  During the period from December 29,2006 through February 12, 2007, the Company recorded $6.2 million ofadvertising revenues and $0.4 million****ofother revenues derived from these contracts, which are presented as a componentof other operating revenues in the Company’s financial statements. During thequarter ended September 28, 2006, the Company recorded $18.3 million ofadvertising revenues and $0.8 million of other revenues derived from thesecontracts. For the period from December 29, 2006 through February 12, 2007 andthe quarter ended September 28, 2006, the Company recorded a loss of$2.0 million and a gain of $0.2 million, respectively, representing itsshare of the net loss/income of National CineMedia. As of December 28,2006, RCH owned 45.4% of the Class A Units of National CineMedia, AMC, assuccessor in interest to NCN, owned 26.3% of the Class A Units of NationalCineMedia and Cinemark owned 28.3% of the Class A Units of NationalCineMedia.  See “Initial Public Offering of National CineMedia, Inc. andOther Developments” below for a discussion of related amounts for the periodfrom February 13, 2007 through September 27, 2007.

 

As described in Note 4 to the consolidated financialstatements included in our annual report on Form 10-K for the fiscal yearended December 28, 2006, in connection with the formation of NationalCineMedia, on May 11, 2005, RCI adopted and approved the RCI Severance PlanFor 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 

 

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commencementof employment with National CineMedia. Each employee’s termination ofemployment with RCM was effective as of the close of business on May 24,2005 and commencement of employment with National CineMedia was effective as ofMay 25, 2005. Under the terms of and subject to the conditions of theSeverance Plan, each eligible employee who participates in the Severance Planis, at the times set forth in the Severance Plan, entitled to cash paymentsbased on the value of Regal’s Class A common stock on May 24, 2005 ascalculated pursuant to the terms of the Severance Plan.  As the SeverancePlan provides for payments over future periods that are contingent uponcontinued employment with National CineMedia, the cost of the Severance Planwill be recorded as an expense over the remaining required service periods.During the quarters ended September 27, 2007 and September 28, 2006, theCompany recorded total severance expense of approximately $0.1 million and$0.8 million, respectively, including payments in lieu of dividends,related to the Severance Plan.  In addition, during the three quartersended September 27, 2007 and September 28, 2006, the Company recorded totalseverance expense of approximately $1.8 million and $3.2 million,respectively.

 

***Initial PublicOffering of National CineMedia, Inc. and Other Developments***

 

On February 13, 2007, NCM Inc., a newly formedentity that serves as the sole manager of National CineMedia, completed an IPOof its common stock. NCM Inc. sold 38.0 million shares of its common stock for$21 per share in the IPO, less underwriting discounts and expenses.  NCMInc. used a portion of the net proceeds from the IPO to acquire newly issuedcommon units from National CineMedia.  As a result of the NCM Inc.’sacquisition of common units in National CineMedia, the Company recognized achange in interest gain of approximately $182.7 million along with acorresponding increase in the Company’s equity investment in NationalCineMedia.

 

In connection with the completion of the IPO, RCIamended and restated its existing exhibitor services agreement (“ESA”) withNational CineMedia, whereby in exchange for its pro rata share of the IPOproceeds (approximately $281.0 million), RCI agreed to a modification ofNational CineMedia’s payment obligation under the ESA. The modification extendedthe term of the ESA to 30 years, provided National CineMedia with a five yearright of first refusal beginning one year prior to the end of the term andchanged the basis upon which Regal is paid by National CineMedia from apercentage of revenues associated with advertising contracts entered into byNational CineMedia to a monthly theatre access fee. The theatre access fee iscomposed of a fixed $0.07 payment per patron which will increase by 8% everyfive years starting at the end of fiscal 2011 and a fixed $800 payment perdigital screen each year, which will increase by 5% annually starting at theend of fiscal 2007. Also, with respect to any on-screen advertising timeprovided by us to our beverage concessionaire, RCI is required to purchase suchtime from National CineMedia at a negotiated rate. In addition, we receivemandatory quarterly distributions of any excess cash from National CineMedia.

 

The amount we received for agreeing to the ESAmodification was approximately $281.0 million, which represents the estimatedfair value of the ESA modification payment.  We estimated the fair valueof the ESA payment based upon a valuation performed by the Company with theassistance of third party specialists.  This amount has been recorded asdeferred revenue and will be amortized to advertising revenue over the30 year term of the agreement following the units of revenuemethod.   Under the units of revenue method, amortization for aperiod is calculated by computing a ratio of the proceeds received from the ESAmodification payment to the total expected decrease in revenues due to entryinto the new ESA over the 30 year term of the agreement and then applying thatratio to the current period’s expected decrease in revenues due to entry intothe new ESA. During the quarter ended September 27, 2007 and the period fromFebruary 13, 2007 through September 27, 2007, the Company recognized $0.6million and $1.5 million, respectively of advertising revenue utilizing theunits of revenue amortization method.

 

At the closing of the IPO, the underwritersexercised their over-allotment option to purchase an additional 4.0 millionshares of common stock of NCM Inc. at the initial offering price of $21 pershare, less underwriting discounts and commissions. In connection with thisover-allotment option exercise,Regal, AMC and Cinemark each sold to NCM Inc. common units of NationalCineMedia on a pro rata basis at the initial offering price of $21 per share,less underwriting discounts and expenses. Regal sold 

 

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approximately1.6 million common units to NCM Inc. for proceeds of approximately $32.2million and recognized a gain on the sale of such units of approximately $19.3million.  Upon completion of this sale of common units and as of September27, 2007, Regal held approximately 21.2 million common units of NationalCineMedia, or a 22.6% interest.

 

Upon the closing of the IPO, National CineMediaentered into a $725 million term loan facility, the net proceeds of which wereused to redeem preferred units issued to each of Regal, AMC and Cinemark on apro rata basis pursuant to a recapitalization of National CineMedia prior tocompletion of the IPO. We received approximately $315.1 million as a result ofthe preferred unit redemption. Upon redemption by National CineMedia of thepreferred units, the Company applied such cash distributions from NationalCineMedia by (1) reducing its equity investment in National CineMedia fromapproximately $166.4 million to zero and (2) recording distributions in excessof the investment balance in National CineMedia of approximately $148.7 millionas a gain.  Because the investment (and net advances) in NationalCineMedia has been reduced to zero, we will not provide for any additional lossesas we have not guaranteed obligations of National CineMedia and we are nototherwise committed to provide further financial support for NationalCineMedia.  In addition, during future periods, the Company will notrecognize its share of any undistributed equity in the earnings of NationalCineMedia until National CineMedia’s future net earnings equal or exceed theamount of the above excess distribution.  Until such time, equity earningswill be recognized only to the extent that the Company receives cashdistributions from National CineMedia. During the quarter ended September 27,2007, the Company received $7.1 million in cash distributions from NationalCineMedia. As a result, $7.1 million in****equityearnings were recognized during the quarter ended September 27, 2007.

 

After the payment of current taxes, net proceedsfrom these transactions are expected to total approximately $445.0 million. TheCompany used a portion of the net proceeds to fund an extraordinary cashdividend of $2.00 per share on each outstanding share of its Class A andClass B common stock, or approximately $302.0 million in the aggregate.Stockholders of record at the close of business on March 28, 2007 were paidthis dividend on April 13, 2007.

 

We account for our investment in National CineMediafollowing the equity method of accounting.  The changes in the carryingamount of our investment in National CineMedia for the three quarters endedSeptember 27, 2007 are as follows (in millions): 

 
| ** **                                                                          | ** ** | **Investment in  National CineMedia, LLC** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Balance as of December 28, 2006                                                     |       | $                                                         | (1.5       | ) |
| Equity in loss of National CineMedia  (December 29, 2006 through February 12, 2007) |       | (2.0                                                      | )          |
| Gain on change in interest                                                          |       | 182.7                                                     |       |
| Net book value of units sold in  over-allotment                                     |       | (12.8                                                     | )          |
| Redemption of preferred units                                                       |       | (166.4                                                    | )          |
| Earnings recognized from National CineMedia                                         |       | 9.3                                                       |       |
| Distributions from National CineMedia                                               |       | (9.3                                                      | )          |
| Balance as of September 27, 2007                                                    |       | $                                                         | —     |   |

 

As a result of the ESA amendment and relatedmodification payment for the quarter ended September 27, 2007 and for theperiod from February 13, 2007 through September 27, 2007, theatre access feesand other revenues received from National CineMedia, offset by the purchase ofon-screen advertising time from National CineMedia for on-screen advertising timeprovided to our beverage concessionaire, totaled approximately $1.8 million and$5.3 million, respectively.  This amount is presented as a component ofother operating revenues in the Company’s financial statements.  As ofSeptember 27, 2007, approximately $1.5 million and $1.3 million due from/toNational CineMedia were included in “Trade and other receivables, net” and “Accountspayable,” respectively.  As of December 28, 2006, approximately $25.4million and $0.7 million due from/to National CineMedia were included in “Tradeand other receivables, net” and “Accounts payable,” respectively.

 

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**4. DEBT OBLIGATIONS**

 

Debt obligations at September 27, 2007 andDecember 28, 2006 consist of the following (in millions):

 
| ** **                                                                                                                           | ** ** | **September 27, 2007** | ** ** | **December 28, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Regal 33/4%  Convertible Senior Notes                                                                                                |       | $                                | 123.7      |                            | $          | 123.7 |   |
| Regal Cinemas Senior Credit Facility                                                                                                 |       | 1,687.3                          |       | 1,700.0                         |       |
| Regal Cinemas 93/8%  Senior Subordinated Notes                                                                                       |       | 51.5                             |       | 51.5                            |       |
| Lease financing arrangements, weighted  average interest rate of 11.15%, maturing in various installments through  January 2021 |       | 86.7                             |       | 89.4                            |       |
| Capital lease obligations, 8.5% to 10.3%,  maturing in various installments through December 2017                               |       | 20.8                             |       | 22.4                            |       |
| Other                                                                                                                                |       | 0.8                              |       | 0.9                             |       |
|                                                                                                                                 |       |                             |       |                            |       |
| Total debt obligations                                                                                                               |       | 1,970.8                          |       | 1,987.9                         |       |
| Less current portion                                                                                                                 |       | (146.3                           | )          | (146.2                          | )          |
|                                                                                                                                 |       |                             |       |                            |       |
| Total debt obligations, net of current  maturities                                                                                   |       | $                                | 1,824.5    |                            | $          | 1,841.7 |   |

*** ***

***Regal 33⁄4%Convertible Senior Notes***—On May 28, 2003, Regal issued $240.0 million aggregateprincipal amount of 33⁄4% Convertible Senior Notes due May 15, 2008 (the “ConvertibleSenior Notes”). Interest on the Convertible Senior Notes is payablesemi-annually in arrears on May 15 and November 15 of each year,beginning November 15, 2003. The Convertible Senior Notes are seniorunsecured obligations of Regal and rank on parity with all of our existing andfuture senior unsecured indebtedness and prior to all of our subordinatedindebtedness. The Convertible Senior Notes are effectively subordinated to allof our future secured indebtedness to the extent of the assets securing thatindebtedness and to any indebtedness and other liabilities of our subsidiaries.None of our subsidiaries have guaranteed any of our obligations with respect tothe Convertible Senior Notes.  Our note holders have the option to converttheir Convertible Senior Notes, in whole or in part, into shares of ourClass A common stock at any time prior to maturity, 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.

 

On September 27, 2007, at the then currentconversion price of $12.7460 per share (which conversion price has been and maybe further adjusted pursuant to the antidilution provisions of the ConvertibleSenior Notes 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 78.4560 shares of our Class A commonstock. Upon conversion, we may elect to deliver cash in lieu of shares ofClass A common stock or a combination of cash and shares of Class Acommon stock. As explained below, with respect to the par amount of theconversion obligation, we intend to deliver cash to note holders uponconversion. The conversion price and the number of shares delivered onconversion are subject to adjustment upon certain events.

 

In connection with the issuance of the ConvertibleSenior Notes, we used approximately $18.8 million of the net proceeds ofthe offering to enter into convertible note hedge and warrant transactions withrespect to our Class A common stock to reduce the potential dilution fromconversion of the Convertible Senior Notes. Under the terms of the convertiblenote hedge arrangement (the “Convertible Note Hedge”) with Credit Suisse FirstBoston (“CSFB”), we paid $36.2 million for a forward purchase optioncontract under which we are entitled to purchase from CSFB a fixed number ofshares of our Class A common stock (at September 27, 2007, at a price pershare of $12.7460). 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 implicitconversion price of shares issued under the Convertible Senior Notes, a numberof shares equal to the shares that we issue to a note holder upon conversion.Settlement terms of this forward purchase option allow the Company to electcash or share settlement based on the settlement option it chooses in settlingthe conversion feature of the Convertible Senior Notes. We accounted for the 

 

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ConvertibleNote Hedge pursuant to the guidance in EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in a Company’s OwnStock.” Accordingly, the $36.2 million purchase price of the forward stockpurchase option contract was recorded as an increase to consolidated stockholders’deficit.

 

We also sold to CSFB a warrant (the “Warrant”) topurchase shares of our Class A common stock. The Warrant is currentlyexercisable for 9,705,008 shares of our Class A common stock at aSeptember 27, 2007 exercise price of $14.7069 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 in cash from CSFB in return for the saleof this forward share purchase option contract. CSFB cannot exercise theWarrant unless and until a conversion event occurs. We have the option ofsettling the Warrant in cash or shares of our Class A common stock. Weaccounted for the sale of the Warrant as the sale of a permanent equityinstrument pursuant to the guidance in EITF 00-19. Accordingly, the$17.4 million sales price of the forward stock purchase option contractwas recorded as a debit to consolidated stockholders’ deficit.

 

The Convertible Note Hedge and the Warrant allow usto acquire sufficient Class A common shares from CSFB to meet ourobligation to deliver Class A common shares upon conversion by the noteholder, unless the Class A common share price exceeds $14.7069 (as ofSeptember 27, 2007). When the fair value of our Class A common sharesexceeds such price, the equity contracts no longer have an offsetting economicimpact, and accordingly will no longer be effective as a hedge of the dilutiveimpact of possible 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 accreted valueof the Convertible Senior Notes will be settled in cash upon the conversion,only the conversion spread (the excess conversion value over the accretedvalue), which may be settled in stock, will result in potential dilution in ourearnings-per-share computations.

 

As of September 27, 2007, our note holders had theright, at their option, to convert their Convertible Senior Notes, in whole orin part, into shares of our Class A common stock, subject to certainlimitations, at the current conversion price of $12.7460. This conversion option,coupled with the Company’s stated policy to settle any conversion by remittingto the note holder the accreted value of the note in cash, resulted in theclassification of the $123.7 million principal amount of the ConvertibleSenior Notes as a current liability on the accompanying unaudited condensedconsolidated balance sheet as of September 27, 2007.

 

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 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 theconversions in the third quarter of 2006, the Company recorded an additional$3.1 million loss on debt extinguishment.

 

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

 

***Regal CinemasFifth Amended and Restated Credit Agreement***—On October 27, 2006, Regal Cinemasentered into a fifth amended and restated credit agreement (the “Amended SeniorCredit Facility”) with Credit Suisse, Cayman Islands Branch (as successor toCSFB), as Administrative Agent and the other lenders party thereto, whichconsists of a term loan facility (the “Term Facility”) in an aggregate originalprincipal amount of $1,700.0 million and a revolving credit facility (the “RevolvingFacility”) in an aggregate principal amount of up to $100.0 million. TheRevolving Facility has a separate sublimit of $10.0 million for short-termloans and a sublimit of $30.0 million for letters of credit. The principalbalance of the Term Facility in the Amended Senior Credit Facility was higherthan the term loan balance in the prior credit facility, and such higherprincipal balance resulted in net proceeds of $21.2 million from the AmendedSenior Credit Facility which were set aside for general corporate purposes.Upon the execution of the Amended Senior Credit Facility, Regal recognized aloss on debt extinguishment of approximately $2.3 million, including $0.8million of third party costs. In addition, approximately $19.2 million ofnew debt acquisition costs were recorded in connection with consummation of theAmended Senior Credit Facility.

 

The Term Facility will mature on October 27,2013 and the Revolving Facility will mature on October 27, 2011. Interestis payable (a) in the case of base rate loans, quarterly in arrears, and(b) in the case of Eurodollar rate loans, at the end of each interestperiod, but in no event less often than every three months. The TermFacility amortizes in equal quarterly installments in an aggregate annualamount equal to 1.0% of the original principal amount of the Term Facilityduring the first six years thereof, with the balance payable in two equalinstallments, the first on June 30, 2013 and the second onOctober 27, 2013.

 

Borrowings under the Amended Senior Credit Facilitybear interest, at Regal Cinemas’ option, at either a base rate or an AdjustedEurodollar Rate (as defined in the Amended Senior Credit Facility) plus, ineach case, an applicable margin. As of September 27, 2007 and December 28,2006, borrowings of $1,687.3 million and $1,700.0 million,respectively, were outstanding under the Term Facility at an effective interestrate of 6.28% (as of September 27, 2007) and 6.23% (as of December 28, 2006),after the impact of the interest rate swaps is taken into account.

 

Under the Amended Senior Credit Facility, RegalCinemas also established an additional term loan facility (“New IncrementalTerm Facility”) which amends and restates the existing incremental termfacility. Under the terms of the New Incremental Term Facility, Regal Cinemasmay borrow up to $200.0 million in additional funds that would be treated as aterm loan under the Amended Senior Credit Facility without the need to obtainconsent from any lender or any party to the Amended Senior Credit Facility.Borrowing under the New Incremental Term Facility is subject to the satisfactionof certain conditions set forth in the facility, including, but not limited to,obtaining commitments from one or more lenders to fund such additional amounts.At Regal Cinemas’ option, borrowings under the New Incremental Term Facilitybear interest at an Adjusted Eurodollar Rate or a base rate plus, in eithercase, an applicable margin that is established at the time commitments for theNew Incremental Term Facility are obtained. Proceeds of Regal Cinemas’borrowings under the New Incremental Term Facility are to be used solely tofund, or reimburse Regal Cinemas for funding, distributions to the Company forthe purpose of redeeming, repurchasing, acquiring or otherwise settling theconversion of all or a portion of the Convertible Senior Notes.

 

The Amended Senior Credit Facility is furtherdescribed in Note 5 to the consolidated financial statements included inour annual report on Form 10-K for the fiscal year ended December 28,2006.

 

***Interest Rate Swaps***—As described in Note 5 to theconsolidated financial statements included in our annual report onForm 10-K for the fiscal year ended December 28, 2006, during 2004and 2005, Regal Cinemas entered into a total of five hedging relationships viafive distinct interest rate swap agreements to hedge approximately$1,100.0 million of variable rate liabilities. On June 30, 2007, one ofour interest rate swaps designated to hedge approximately $200.0 million ofvariable rate debt obligations matured. On August 9, 2007, Regal Cinemasentered into two additional hedging relationships via two distinct interest 

 

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rateswap agreements with maturity terms of two years each and require Regal Cinemasto pay interest at a fixed rate of 4.944% and receive interest at a variablerate. These interest rate swaps were designated to hedge approximately$200.0 million of variable rate debt obligations.

 

Asof September 27, 2007, the aggregate fair value of the six interest rate swapswas determined to be approximately $6.1 million, which has been recordedas a component of “Other Non-Current Assets” with a corresponding amount of$3.7 million, net of tax, recorded to “Accumulated Other ComprehensiveIncome.” The interest rate swaps exhibited no ineffectiveness for the quartersand three quarters ended September 27, 2007 and September 28, 2006.

 

***Other Long-TermObligations—***Allother long-term obligations (including the 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 28, 2006 andincorporated by reference herein.

 

**5. INCOME TAXES**

 

Effective December 29, 2006, the Company adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109” (“FIN 48”).  Relativeto the implementation of FIN 48, the Company recognized a $12.4 millionreduction of its recorded liabilities with a corresponding $7.1 milliondecrease to non-current deferred tax assets, a $1.6 million decrease togoodwill and a $3.7 million increase in retained earnings.

 

As of September 27, 2007 and December 28, 2006, thegross amount of unrecognized tax benefits was $40.0 million and $32.5 million,respectively.  The increase in gross unrecognized tax benefits of $7.5million during the three quarters ended September 27, 2007 primarily relates tostate tax positions that the Company anticipates taking on future tax returnsrelative to activity occurring during the quarters.  Additionally,exclusive of interest and penalties, it is reasonably possible that grossunrecognized tax benefits associated with state tax positions will decreasebetween $0.5 million and $1.5 million within the next twelve months due theexpiration of the statute of limitations.  The total net unrecognized taxbenefits that would affect the effective tax rate if recognized were $7.3million and $2.4 million as of September 27, 2007 and December 28, 2006, respectively. The remaining unrecognized tax benefits as of such dates would impact goodwillif recognized.

 

The Company recognizes interest and penaltiesaccrued related to unrecognized tax benefits as a component of income taxexpense. Effective with the adoption of FIN 48, the Company accrued grossinterest and penalties of approximately $3.2 million.  As of September 27,2007, the Company has accrued gross interest and penalties of approximately$4.0 million.

 

The provision for income taxes of $38.8 million and$19.5 million for the quarters ended September 27, 2007 and September 28, 2006,respectively, reflect effective tax rates of approximately 40.1% and 40.0%,respectively.  The provision for income taxes of $229.5 million and $38.3million for the three quarters ended September 27, 2007 and September 28, 2006,respectively, reflect effective tax rates of approximately 40.3% and 40.1%,respectively.  The effective tax rates for the quarters and three quartersended September 27, 2007 and September 28, 2006 reflect the impact of certainnon-deductible expenses.  The increase in the effective tax rate for thethree quarters ended September 27, 2007 is primarily attributable to the statetax impact associated with the transactions completed in connection with theIPO of NCM Inc. described in Note 3—“Investment in National CineMedia, LLC.

 

In assessing the realizable value of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which these temporary differences becomedeductible. The Company has recorded a valuation allowance against deferred taxassets, totaling $11.7 million and $36.6 million as of September 27, 2007 andDecember 28, 2006, respectively,as management believes it is more likely than not that certain 

 

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deferredtax assets will not be realized in future tax periods. Approximately $8.8million and $33.7 million of the valuation allowance relate to pre-acquisitiondeferred tax assets of Edwards and United Artists as of September 27, 2007 andDecember 28, 2006, respectively. Future reductions in the valuation allowanceassociated with a change in management’s determination of the Company’s abilityto realize these deferred tax assets will reduce recorded goodwill related tosuch acquisitions.  During the quarter ended March 29, 2007, as a resultof the NCM Inc. IPO transaction, management determined that the Company wouldmore likely than not realize certain pre-acquisition deferred tax assets ofUnited Artists.  Accordingly, the valuation allowance associated with suchpre-acquisition deferred tax assets and goodwill were reduced by $24.9 millionduring the quarter ended March 29, 2007.

 

The Company and its subsidiaries collectively fileincome tax returns in the U.S. federal jurisdiction and various statejurisdictions.  In June 2005, the Company was notified that the InternalRevenue Service (“IRS”) would examine its 2002 and 2003 federal income taxreturns. During October 2005, the IRS completed its examination of the Company’sfederal tax returns for such years and the Company and the IRS agreed tocertain adjustments to the Company’s 2002 and 2003 federal tax returns. Suchadjustments did not have a material impact on the Company’s provision forincome taxes.  The Company is no longer subject to U.S. federalexaminations by tax authorities for years before 2004, and with limitedexceptions, is no longer subject to state income tax examinations before2003.  However, the taxing authorities still have the ability to reviewthe propriety of tax attributes created in closed tax years if such taxattributes are utilized in an open tax year.

 

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

 

***Capital Stock***

 

As of September 27, 2007,the Company’s authorized capital stock consisted of:

 

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

 

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

 

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

 

Of the authorized shares of Class A commonstock, 18.0 million shares were sold in connection with the Company’sinitial public offering in May 2002. The Company’s Class A commonstock is listed on the New York Stock Exchange under the trading symbol “RGC.”As of September 27, 2007, 129,481,204****sharesof Class A common stock were outstanding. Of the authorized shares ofClass B common stock, 23,708,639 shares were outstanding as of September27, 2007, all of which are held by Anschutz Company (“Anschutz”). Each share ofClass B common stock converts into one share of Class A common stockat the option of the holder or upon certain transfers of a holder’sClass B common stock. Each holder of Class B common stock is entitledto ten votes for each outstanding share of Class B common stock owned bythat stockholder on every matter properly submitted to the stockholders fortheir vote. Of the authorized shares of the preferred stock, no shares wereissued and outstanding as of September 27, 2007.  The Class A commonstock is entitled to one vote for each outstanding share of Class A commonstock on every matter properly submitted to the stockholders for a vote. Exceptas required by law, the Class A and Class B common stock votetogether as a single class on all matters submitted to the stockholders. Thematerial terms and provisions of the Company’s certificate of incorporationaffecting the relative rights of the Class A common stock and theClass B common stock are described in Note 9 to the financialstatements included in our annual report on Form 10-K for the fiscal yearended December 28, 2006.

 

***Share RepurchaseProgram***

 

During 2004, the Company’s board of directorsauthorized a share repurchase program, which provided for the authorization torepurchase up to $50.0 million of the Company’s outstanding Class A

 

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commonstock within a twelve month period. During the quarter ended June 30, 2005, theCompany repurchased 520,386 shares of its outstanding Class A common stockat an aggregate cost of approximately $10.0 million.  The Company’sboard of directors extended the share repurchase program during the quarterended September 27, 2007 for an additional twelve month period. Accordingly,the Company can repurchase up to an additional $40.0 million under theshare repurchase program through September 2008. The Company made norepurchases of its outstanding Class A common stock during the quartersand three quarters ended September 27, 2007 and September 28, 2006. Repurchasescan be made from time to time as market conditions warrant, through open marketpurchases, negotiated transactions, or in such a manner deemed appropriate bythe Company. Treasury shares are retired upon repurchase. At retirement, theCompany records treasury stock purchases at cost with any excess of cost overpar value recorded as a reduction of additional paid-in capital.

 

***Warrants***

 

Other than disclosed in Note 4—“DebtObligations” and Note 9—“Earnings Per Share,” no warrants to acquire theCompany’s Class A or Class B common stock were outstanding as of September 27,2007.

 

***Share-BasedCompensation***

 

In 2002, the Company established the Incentive Planwhich provides for the granting of incentive stock options and non-qualifiedstock options to officers, employees and consultants of the Company. Asdescribed below under “Restricted Stock” and “Performance Share Units” theIncentive Plan also provides for grants of restricted stock and performanceshares that are subject to restrictions and risks of forfeiture. Readers shouldrefer to Note 9 to the financial statements included in our annual reporton Form  10-K for the fiscal year ended December 28, 2006for additional information related to these awards and the Incentive Plan.

 

Effective December 30, 2005, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123 (revised), “Share-BasedPayment” (“SFAS 123R”) utilizing the modified prospective approach.

 

*Stock Options*

 

On March 5, 2007, Regal declared anextraordinary cash dividend of $2.00 per share on each outstanding share of itsClass A and Class B common stock. Stockholders of record at the closeof business on March 28, 2007 were paid this dividend on April 13,2007.   In connection with the extraordinary cash dividend andpursuant to the antidilution adjustment terms of the Incentive Plan, the exerciseprice and the number of shares of Class A common stock subject to optionsheld by the Company’s option holders were adjusted to prevent dilution andrestore their economic position to that existing immediately before theextraordinary dividend. The antidilution adjustments made with respect to suchoptions resulted in a decrease in the range of exercise prices, from $2.4407 to$16.1768 per share, an increase in the aggregate number of shares issuable uponexercise of such options by 269,213, and an increase in the total number ofauthorized shares under the Incentive Plan to 18,269,213. As of September 27,2007 and after giving effect to the antidilution adjustments, the Company hadoutstanding options to purchase a total of 694,187 shares of Class A commonstock under the Incentive Plan, and 3,063,409 shares remaining available forfuture issuance under the Incentive Plan. Stock option information presentedherein has been adjusted to give effect to the extraordinary dividend. Therewere no accounting consequences for changes made to reduce the exercise pricesand increase the number of shares underlying options as a result of theextraordinary cash dividend because (1) the aggregate intrinsic value ofthe awards immediately after the extraordinary dividend was not greater thanthe aggregate intrinsic value of the awards immediately before theextraordinary dividend and (2) the ratio of the exercise price per shareto the market value per share was not reduced.

 

There were no stock options granted during thequarters and three quarters ended September 27, 2007 and September 28,2006.  During the quarters ended September 27, 2007 and September 28,2006, the Company recognized approximately $0.1 million and $1.6 million,respectively, of share-based

 

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compensationexpense related to stock options.  During the three quarters endedSeptember 27, 2007 and September 28, 2006, the Company recognized approximately$1.3 million and $4.9 million, respectively, of share-based compensationexpense related to stock options.  Such expense is presented as acomponent of general and administrative expenses for the quarters and threequarters ended September 27, 2007 and September 28, 2006.  At September27, 2007, there was $0.5 million of unrecognized compensation cost relatedto these share-based payments.

 

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 27, 2007, ourunaudited condensed consolidated statement of cash flows reflects$14.4 million of excess tax benefits as financing cash flows. Netcash proceeds from the exercise of stock options were $15.3 million forthe three quarters ended September 27, 2007.   The actual income taxbenefit realized from stock option exercises is $17.0 million for the sameperiod.  For the three quarters ended September 28, 2006, our unauditedcondensed consolidated statement of cash flows reflects $10.1 million ofexcess tax benefits as financing cash flows. Net cash proceeds from theexercise of stock options were $12.4 million for the three quarters endedSeptember 28, 2006.   The actual income tax benefit realized fromstock option exercises was $12.3 million for the same period.

 

The following table represents stock option activityfor the three quarters ended September 27, 2007: 

 
| ** **                                                                                                                                            | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Contract Life** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
|                                                                                                                                                  |       |                       |       |                                        |       |                                       |       |
| Outstanding options at beginning of period                                                                                                            |       | 3,095,601                  |       | $                                           | 7.03       |                                       | 5.48Yrs    |   |
| Granted                                                                                                                                               |       | —                     |       | —                                      |       |                                       |       |
| Exercised                                                                                                                                             |       | (2,667,898                 | )          | 5.72                                        |       |                                       |       |
| Forfeited                                                                                                                                             |       | (2,729                     | )          | 17.38                                       |       |                                       |       |
| Antidilution adjustments made to  outstanding options in connection with the extraordinary dividend declared  during the quarter ended March 29, 2007 |       | 269,213                    |       | 6.36                                        | ** ** | ** **                                 | ** ** |
| Outstanding options at end of period                                                                                                                  |       | 694,187                    |       | $                                           | 9.29       |                                       | 5.03Yrs    |   |
| Exercisable options at end of period                                                                                                                  |       | 595,895                    |       | $                                           | 8.42       |                                       | 4.82Yrs    |   |

* *

*Restricted Stock*

 

As described in Note 9 to the financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 28, 2006, the Company maintains a restricted stock program whichprovides for restricted stock awards to officers, directors and key employees.Under the restricted stock program, shares of Class A common stock of theCompany may be granted at nominal cost to officers, directors and keyemployees, subject to a continued employment restriction. On January 10, 2007,164,647 shares were granted under the restricted stock program at nominal costto officers, key employees and certain directors.  The closing price ofour Class A common stock on the date of grant was $22.25 per share. On August8, 2007 and September 5, 2007, a total of 7,846 shares were granted in theaggregate under the restricted stock program at nominal cost to certainnewly-elected directors. The closing price of our Class A common stock was$20.98 per share on August 8, 2007 and $22.40 per share on September 5,2007.

During the quarters ended September 27, 2007 andSeptember 28, 2006, the Company recognized 

 

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approximately$0.7 million and $0.4 million, respectively, of share-based compensationexpense related to restricted share grants.  During the three quartersended September 27, 2007 and September 28, 2006, the Company recognizedapproximately $2.2 million and $1.1 million, respectively, of share-basedcompensation expense related to restricted share grants. Such expense ispresented as a component of general and administrative expenses. Thecompensation expense for these awards was determined based on the market priceof our stock at the date of grant applied to the total numbers of shares thatwere anticipated to fully vest.

 

The following table represents the shares ofrestricted stock that were granted and outstanding as of September 27, 2007 andSeptember 28, 2006:

 
| ** **                      | ** ** | **Three Quarters  Ended  September 27, 2007** | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
|                            |       |                                                         |       |                                                         |       |
| Restricted stock:               |       |                                                         |       |                                                         |       |
| Granted during the period ended |       | 172,493                                                      |       | 229,990                                                      |       |
| Outstanding, as of              |       | 487,519                                                      |       | 152,180                                                      |       |

 

During the three quarters ended September 27, 2007,the Company paid three cash dividends of $0.30 on each share of outstandingrestricted stock totaling approximately $0.4 million.  In addition,on March 5, 2007, Regal declared an extraordinary cash dividend of $2.00per share on each outstanding restricted share. Restricted stockholders ofrecord at the close of business on March 28, 2007 were paid this dividend onApril 13, 2007.  The restricted stock dividend was recorded as a $1.0million increase to stockholders’ deficit upon declaration.

 

*Performance Share Units*

 

As described in Note 9 to the financial statementsincluded in our annual report on Form 10-K for the fiscal year endedDecember 28, 2006, the Incentive Plan also provides for grants in the formof performance share units to officers, directors and key employees.Performance share agreements are entered into between the Company and eachgrantee of performance share units (each a “Performance Agreement”). Pursuantto the terms and conditions of the Performance Agreement, grantees will beissued shares of restricted common stock of the Company in an amount determinedby the attainment of Company performance criteria set forth in the PerformanceAgreement. The shares of restricted common stock received upon attainment ofthe performance criteria will be subject to further vesting over a period oftime, provided the grantee remains a service provider to the Company duringsuch period.

 

On January 10, 2007, 188,789 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 $22.25 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 average annual total shareholder return(stock price appreciation plus dividend yield) attained (“TSRA”) on Regal’sClass A common stock on January 10, 2010 (the third anniversary of thegrant date) to the target TSRA set forth in the Performance Agreement. A targetnumber of shares of restricted common stock to be earned by each eligiblegrantee has been established with respect to the 2007 performance share grantsand is primarily based on the grantee’s employee classification and base compensation,referred to as “target long-term incentive” (“Target LTI”) below. In addition,these awards are subject to an additional one-year vesting requirement. TheCompany has developed a performance range around the target TSRA and the numberof shares of restricted stock that will be issued will be based on actual TSRA,according to 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                                        |       |

 

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Since the performance shares contain a market conditionwhich should be reflected in the grant date fair value of an award inaccordance with the provisions of SFAS 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 stipulatedin the award grant and calculates the fairmarket value for the performance shares granted. On January 10, 2007, theaggregate fair value of the 2007 performance share awards was determined to be$1.8 million, which includes related dividends on shares ultimately earnedand paid on January 10, 2010. The fair value of the performance share awardswill be amortized as compensation expense over the expected term of the awards.The key assumptions used for valuing the 2007 performance share awards follow:

 
| Measurement date                     |   | 1/10/2007 |   |
|--------------------------------------|--------|-----------|--------|
| Measurement date closing stock price |   | $         | 22.25  |   |
| Expected volatility                  |   | 18.3      | %      |
| Risk-free interest rate              |   | 4.72      | %      |
| Expected dividend yield              |   | 5.39      | %      |
|                                      |        |           |        |  |

 

Expected volatility is based on historicalvolatility of the Company’s dividend adjusted common stock price measured dailyover a three year period ending on January 10, 2007.  The risk-freeinterest rate is set equal to the yield on three-year (constant maturity) U.S.Government bonds as of January 10, 2007. The expected dividend yield assumptionis based on the Company’s history and expectation of future dividend payouts.The dividend yield is included in the calculation of returns for measurementagainst the performance goals defined above.

 

During the quarters ended September 27, 2007 andSeptember 28, 2006, the Company recognized approximately $0.3 million and $0.2million, respectively, of share-based compensation expense related toperformance share grants.  During the three quarters ended September 27,2007 and September 28, 2006, the Company recognized approximately $1.1 millionand $0.3 million, respectively, of share-based compensation expense related toperformance share grants.  Such expense is presented as a component ofgeneral and administrative expenses. The following tables summarize informationabout the Company’s performance shares activity: 

 
| ** **                           | ** ** | **Three Quarters  Ended  September 27, 2007** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------|------------|
| Number of performance shares:        |       |                                                         |       |
| Outstanding at beginning of year     |       | 383,310                                                      |       |
| Granted (based on target TSRA)       |       | 188,789                                                      |       |
| Forfeited                            |       | (2,961                                                       | )          |
| Outstanding as of September 27, 2007 |       | 569,138                                                      |       |

 

The above table does not reflect the maximum orminimum number of shares of restricted stock contingently issuable. Anadditional 426,854 shares of restricted stock could be issued providing themaximum TSRA is met.

 

**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 28,2006.

 

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***Other***

 

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 us or our subsidiaries allegingthat a number of our theatres with stadium seating violated the ADA becausethese theatres allegedly failed to provide wheelchair-bound patrons with linesof sight comparable to those available to other members of the general publicand denied persons in wheelchairs access to the stadium portion of thetheatres. On June 8, 2005, Regal reached an agreement with the DOJresolving and dismissing the private litigants’ claims and all claims made bythe United States under the ADA. Over the next three years, we anticipate thatwe will incur capital costs to modify our theatres in accordance with the DOJsettlement arrangements in the aggregate of up to $5.0 million. From timeto time, we receive claims that the stadium seating offered by our theatresallegedly violates the ADA. In these instances, we seek to resolve or dismissthese claims based on the terms of the DOJ settlement or under applicable ADAstandards.

 

In addition, we, from time to time, receive lettersfrom the attorneys general of states in which we operate theatres regardinginvestigation into the accessibility of our theatres to persons with visual orhearing impairments. We believe we provide the members of the visually andhearing impaired communities with reasonable access to the movie-goingexperience.

 

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

 

On or about January 3, 2007, suit was initiatedagainst the Company in Federal Court, Central District of California, styled, *Bateman, individually and on behalf of all otherssimilarly situated, v. Regal Cinemas, Inc. and United Artists TheatreCircuit, Inc., et al.,* alleging violations of the Fair andAccurate Transaction Act, for allegedly printing expiration dates and creditcard numbers on customer receipts. The plaintiff seeks to represent a class ofindividuals allegedly harmed by this alleged practice. The complaint seeksactual damages and/or statutory damages of at least one hundred dollars or upto one thousand dollars per violation, and attorney fees and costs. We believewe are in substantial compliance with all applicable federal and state lawsgoverning these trade practices.

 

RCI is a defendant in a few remaining claims arisingfrom its decision to file voluntary petitions for bankruptcy relief. We and ourvarious subsidiary corporations are also presently involved in various legalproceedings arising in the ordinary course of our business operations,including personal injury claims, employment and contractual matters and otherdisputes. We believe we have adequately provided for the settlement of suchmatters. Management believes any additional liability with respect to theseclaims and disputes will not be material in the aggregate to our consolidatedfinancial position, results of operations or cash flows.

 

**8. RELATED PARTY TRANSACTIONS**

 

During the quarter and three quarters endedSeptember 27, 2007, Regal Cinemas, incurred approximately $1.0 million and$3.1 million, respectively, of expenses payable to an Anschutz affiliate,

 

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QwestCommunications and its subsidiaries, for telecommunication services. Inaddition, Regal Cinemas incurred approximately $0.1 million and $0.2million, respectively, of expenses payable to Anschutz affiliates for certainadvertising services during the quarter and three quarters ended September 27,2007. Related party amounts for the quarter and three quarters ended September28, 2006 were comparable to the 2007 amounts.

 

During the quarters and three quarters ended September27, 2007 and September 28, 2006, Regal Cinemas received less than$0.1 million, respectively, from an Anschutz affiliate for rent and otherexpenses related to a theatre facility.  In addition, during the threequarters ended September 28, 2006, Regal received less than $0.1 million fortravel costs incurred during 2005 on behalf of an Anschutz affiliate.

 

During 2005 and 2006, National CineMedia enteredinto various lease assignment and sublease arrangements with RCM pursuant towhich National CineMedia leases its regional offices in Eden Prairie,Minnesota, Chicago, Illinois and New York, New York.  The amounts paid byNational CineMedia under these arrangements totaled approximately $0.2 millionfor the quarter ended September 27, 2007.  Related party amounts for thesearrangements for the quarter ended September 28, 2006 were comparable to the2007 amounts.

 

Regal has held ongoing discussions with an Anschutzaffiliate regarding a new theatre development located in Los Angeles,California.  As of September 27, 2007, Regal contemplates entering into amanagement agreement with the Anschutz affiliate to manage the theatre site ontheir behalf.  The ultimate financial terms of the management agreementwill be approved by the board of directors.  As of September 27, 2007,****Regal has incurred approximately $0.6million of out of pocket costs (primarily for legal fees and architecturalplans) in connection with the project.  During the quarter ended September27, 2007, the Anschutz affiliate reimbursed Regal for such fees and acquiredthe architectural plans at cost, for an aggregate total of $0.6 million.

 

**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, the Convertible Note Hedge and Warrant and restricted stock using thetreasury stock method. The components of basic and diluted earnings per shareare as follows (in millions, except share and per share data):

 
| ** **                                           | ** ** | **Quarter Ended**

**September 27, 2007** | ** ** | **Quarter Ended  September 28, 2006** | ** ** | **Three Quarters  Ended  September 27, 2007** | ** ** | **Three Quarters  Ended  September 28, 2006** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Net income                                           |       | $                                                        | 58.0       |                                                 | $          | 29.3                                                         |       | $                                                            | 339.8      |   | $ | 57.1 |   |
| Weighted average shares outstanding (in  thousands): |       |                                                     |       |                                                 |       |                                                         |       |                                                         |       |
| Basic:                                               |       | 152,683                                                  |       | 149,429                                              |       | 151,590                                                      |       | 148,739                                                      |       |
| Add common stock equivalents                         |       | 7,849                                                    |       | 5,044                                                |       | 7,707                                                        |       | 6,254                                                        |       |
|                                                 |       |                                                     |       |                                                 |       |                                                         |       |                                                         |       |
| Diluted:                                             |       | 160,532                                                  |       | 154,473                                              |       | 159,297                                                      |       | 154,993                                                      |       |
| Earnings per share                                   |       |                                                     |       |                                                 |       |                                                         |       |                                                         |       |
| Basic:                                               |       | $                                                        | 0.38       |                                                 | $          | 0.20                                                         |       | $                                                            | 2.24       |   | $ | 0.38 |   |
| Diluted:                                             |       | $                                                        | 0.36       |                                                 | $          | 0.19                                                         |       | $                                                            | 2.13       |   | $ | 0.37 |   |

 

Common stock equivalents consist principally ofstock options, restricted stock and the impact of the conversion spread andWarrant described below. There were no antidilutive common stock equivalentsoutstanding as of September 27, 2007 and September 28, 2006.

 

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The Convertible Senior Notes discussed inNote 4— “Debt Obligations” allow us to settle any conversion, and weintend to settle any conversion, by remitting to the note holder the accretedvalue of the note in cash, while settling the conversion spread in either cash,shares of our Class A common stock or a combination of stock and cash. Theaccounting for convertible debt with such settlement features is addressed inthe consensus reached by the EITF with respect to the accounting for InstrumentC as set forth in EITF 90-19, “Convertible Bonds with Issuer Option to Settlefor Cash Upon Conversion.” It is our intent to settle the Convertible SeniorNotes’ conversion obligations consistent with Instrument C. Because theaccreted value of the Convertible Senior Notes will be settled in cash upon theconversion, only the conversion spread, which may be settled in stock, willresult in potential dilution in our earnings-per-share computations undercurrent accounting standards.  As of September 27, 2007, our note holdershad the right, at their option, to convert their Convertible Senior Notes, inwhole or in part, into shares of our Class A common stock, subject tocertain limitations, at the then conversion price of $12.7460. Utilizing thetreasury stock method, the conversion spread resulted in dilution ofapproximately 3.9 million shares and 2.2 million shares in our dilutedearnings per share computations for the quarters ended September 27, 2007 andSeptember 28, 2006, respectively.

 

In addition, as described in Note 4—“Debt Obligations,”we entered into the Convertible Note Hedge and sold the Warrant which, incombination, have the effect of reducing the dilutive impact of the ConvertibleSenior Notes by increasing the effective conversion price for these notes fromour economic perspective to $14.7069 at September 27, 2007. SFAS No. 128, “EarningsPer Share” (“SFAS 128”) however, requires us to analyze the impact of theConvertible Note Hedge and Warrant on diluted earnings per share separately. Asa result, the purchase of the Convertible Note Hedge is excluded because itsimpact will always be antidilutive. SFAS 128 further requires that theimpact of the sale of the Warrant be computed using the treasury stock method.The Warrant resulted in dilution of approximately 3.1 million shares and1.2 million shares in our diluted earnings per share computations for thequarters ended September 27, 2007 and September 28, 2006, respectively. As ofSeptember 27, 2007, the maximum number of shares that could potentially beincluded under the Warrant is 9.7 million.

 

**10. RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS 157”). Among otherrequirements, SFAS 157 defines fair value and establishes a framework formeasuring fair value and also expands disclosure about the use of fair value tomeasure assets and liabilities. SFAS 157 is effective beginning the firstfiscal year that begins after November 15, 2007. The Company continues toevaluate the adoption of SFAS 157 and its impact on the Company’s consolidatedfinancial position, cash flows and results of operations.

 

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).SFAS 159 permits entities to choose to measure certain financial instrumentsand other eligible items at fair value when the items are not otherwisecurrently required to be measured at fair value. Under SFAS 159, the decisionto measure items at fair value is made at specified election dates on anirrevocable instrument-by-instrument basis. Entities electing the fair valueoption would be required to recognize changes in fair value in earnings and toexpense upfront cost and fees associated with the item for which the fair valueoption is elected. Entities electing the fair value option are required todistinguish, on the face of the statement of financial position, the fair valueof assets and liabilities for which the fair value option has been elected andsimilar assets and liabilities measured using another measurement attribute. Ifelected, SFAS 159 will be effective as of the beginning of the first fiscalyear that begins after November 15, 2007, with earlier adoption permitted ifall of the requirements of SFAS 157 are adopted. The impact of the adoption ofSFAS 159 will be dependent on the extent to which we choose to elect to measureeligible items at fair value.

 

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**11. SUBSEQUENT EVENTS**

 

On October 25, 2007, 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 20, 2007, to stockholders of record on December 12, 2007.

 

**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 February 26, 2007 with the Commission (FileNo. 001-31315) for the Company’s fiscal year ended December 28, 2006. Thefollowing discussion**and analysis should be read in conjunction with theunaudited condensed consolidated financial statements and notes theretoincluded herein.*

 

**The Company**

 

We conduct our operations through our wholly ownedsubsidiaries. We operate the largest and most geographically diverse theatrecircuit in the United States, consisting of 6,355 screens in 526 theatres in 39states and the District of Columbia as of September 27, 2007. We believe thesize, reach and quality of our theatre circuit provide an exceptional platformto realize economies of scale from our theatre operations.  We alsomaintain an investment in National CineMedia, which has primarily concentratedits efforts on the expansion of in-theatre advertising and the creation ofcomplementary business lines that leverage the existing operating personnel,asset and customer bases of its theatrical exhibition partners, which includesus, AMC and Cinemark.  The Company manages its business under onereportable segment: theatre exhibition operations.

 

We generate revenues primarily from admissions andconcessions 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 such filmrental costs generally increase as the admissions revenues generated by a filmincrease. Because we purchase certain concession items, such as fountain drinksand popcorn, in bulk and not pre-packaged for individual servings, we are ableto improve our margins by negotiating volume discounts. Other operatingexpenses consist primarily of theatre labor and occupancy costs.

 

As described in further detail in Note 1 to theconsolidated financial statements included Part II, Item 8 of ourannual report on Form 10-K for the fiscal year ended December 28, 2006,the Company’s financial statements reflect the results of operations from thedates the Anschutz Corporation and its subsidiaries acquired controlling equityinterests in United Artists, Edwards and Regal Cinemas and includes subsequentacquisitions, which have been included in the Company’s financial statementsfor periods subsequent to the respective acquisition dates.

 

On March 29, 2005, Regal and AMC announced thecombination of the operations of RCM and AMC’s subsidiary, NCN, into a newjoint venture company, National CineMedia. On July 15, 2005, Cinemark,through a wholly owned subsidiary, acquired a 20.7% interest in NationalCineMedia. On February 13, 2007, NCM Inc., a newly formed entity thatserves as the sole manager of National 

 

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CineMedia,completed an IPO of its common stock. In connection with the IPO of NCM Inc.,RCH, AMC and Cinemark amended and restated the operating agreement of NationalCineMedia and other ancillary agreements.  As discussed further in Note 3—“Investmentin National CineMedia, LLC,” as a result of the transactions completed inconnection with the IPO, the Company recognized a gain of approximately $350.7million during the quarter ended March 29, 2007.

 

On February 12, 2007, we, along with AMC andCinemark, entered into a joint venture company known as Digital CinemaImplementation Partners, LLC, a Delaware limited liability company (“DCIP”), toexplore the possibility of implementing digital cinema in our theatres and tocreate a financing model and establish agreements with major motion picturestudios for the implementation of digital cinema. Travis Reid, former presidentand chief executive officer of Loews Theatres, is the chief executive officerof DCIP and DCIP has engaged J.P. Morgan Securities Inc. to assist with thereview of a business plan for digital cinema and with identifying andevaluating potential financing and capital structure alternatives. Futuredigital cinema developments will be managed by DCIP, subject to the approval ofus, AMC and Cinemark.  The Company’s investment (consisting of contributedcash) in DCIP totaled approximately $1.5 million as of September 27, 2007. Asof September 27, 2007, we expect to install digital cinema systems in our newtheatres during the fourth fiscal quarter of 2007.  In addition, we expectto begin converting our existing theatres from 35 mm film projection to digitalprojection during the first half of 2008 and intend to complete the conversionof our circuit in approximately three to four years.  DCIP is continuingto work with film studios and financial institutions to negotiate and finalizethe related financing plans.

 

During the three quarters ended September 27, 2007,the Company sold its equity interest in Fandango for proceeds of $28.6million.  As a result of this transaction, the Company recognized a gainon the sale of approximately $28.6 million ($17.2 million after tax).  Inconnection with the sale, the Company agreed to amend its existing contractwith Fandango in exchange for an amendment fee totaling $5.5 million. This amount has been recorded as deferred revenue and will be amortized torevenue on a straight-line basis over the six year term of the amendment.

 

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 28, 2006 and “Results of Operations”below.

 

**Results of Operations**

 

The third fiscal quarter of 2007 was a successfulquarter for the industry and the Company. Based on our review of industrysources, national box office revenues for the time period that corresponds toRegal’s third fiscal quarter of 2007 were estimated to have increased byapproximately 15% in comparison to the third fiscal quarter of 2006.  Theindustry achieved these results with ticket price increases and strongattendance from key third quarter 2007 film releases, such as *Transformers, Harry Potter & the Order of The Phoenix, The BourneUltimatum* and*Ratatouille*andother top-tier films exhibited during the quarter.

 

Our total revenue for the quarter ended September27, 2007 (“Q3 2007 Period”) was $752.9 million, consisting of $515.8million of admissions revenues, $210.9 million from concessions revenues and$26.2 million of other operating revenues, and represented a 11.4% increasefrom total revenues of $675.7 million for the quarter ended September 28,2006 (“Q3 2006 Period”).

 

Our Q3 2007 Period admissions revenues, whichincreased by approximately 14.5% over the Q3 2006 Period, were favorablyimpacted by an 8.5% increase in attendance coupled with a 5.5% increase inaverage ticket prices. The increase in the Q3 2007 Period attendance wasprimarily attributable to strong attendance from key Q3 2007 Period filmreleases, such as *Transformers, Harry Potter & the Orderof the Phoenix, The Bourne Ultimatum*and*Ratatouille*and other top-tier films exhibited during the quarter. Our Q3 2007Period attendance also benefited from approximately 168 new screens added sincethe end of the Q3 2006 Period and the 58 screens acquired from AMC on September15, 2006, partially offset by the closure of approximately 199****underperforming screens subsequent to the end of the Q32006 period. The increase in the Q3 2007 Period average ticket price wasprimarily attributable to periodic pricing reviews conducted by the Company,which includes analysis of various factors, including general inflationary 

 

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trendsand local market conditions, and the mix of film product exhibited during theQ3 2007 Period. Based on our review of certain industry sources, the increasein our admissions revenues was in line with the industry’s results for the Q32007 Period as compared to the Q3 2006 Period.

 

In addition, during the Q3 2007 Period, weexperienced growth in average concessions revenues per patron and a decline inother operating revenues. The growth in average concessions revenues per patronwas primarily attributable to price increases, concession-friendly filmsexhibited during the Q3 2007 Period, such as*Transformers, HarryPotter & the Order of the Phoenix*and*Ratatouille*and a favorable mix ofconcession products sold during the Q3 2007 Period.  The decrease in otheroperating revenues in the Q3 2007 Period was primarily attributable to amodification of the payment arrangement with National CineMedia (effective uponconsummation of the IPO of NCM Inc. on February 13, 2007) described in furtherdetail under Note 3—“Investment in National CineMedia, LLC.”

 

Income from operations increased 40.6% to$117.4 million for the Q3 2007 Period compared to $83.5 million inthe Q3 2006 Period. The net increase in income from operations during the Q32007 Period was primarily attributable to incremental admissions andconcessions revenues described above, partially offset by lower other operatingrevenues and increases in certain operating expense items described in furtherdetail below. Net income increased to $58.0 million in the Q3 2007 Periodcompared to net income of $29.3 million in the Q3 2006 Period. Earningsper diluted share also increased to $0.36 for the Q3 2007 Period compared to$0.19 during the Q3 2006 Period.  The increases in net income and earningsper diluted share were primarily due to the increase in operating income asdescribed above, a reduction of net interest expense, the impact of earningsrecognized from NCM, and the impact of a $3.1 million loss ($1.9 million afterrelated tax effects) on debt extinguishment recorded in the Q3 2006 Period inconnection with conversions of a portion of the Company’s Convertible SeniorNotes.

 

During the Q3 2007 Period and the three quarters endedSeptember 27, 2007 (“Fiscal 2007 Period”), we continued to make progress withrespect to the following strategic initiatives:

 

•                  On February 13, 2007, NCM Inc. completedan IPO of its common stock.  NCM Inc. sold 38.0 million shares of itscommon stock for $21 per share in the IPO, less underwriting discounts andexpenses.  In connection with the series of transactions completed inconnection with the IPO, we received gross proceeds totaling $628.3million.  After the payment of current taxes, net proceeds from thesetransactions are expected to total approximately $445.0 million. The Companyused a portion of the net proceeds to fund an extraordinary cash dividend of$2.00 per share on each outstanding share of its Class A and Class Bcommon stock, including outstanding restricted stock, or approximately $302.0million in the aggregate.  Stockholders of record at the close of businesson March 28, 2007 were paid this $302.0 million dividend on April 13,2007.  We are currently exploring alternatives for use of the remainingproceeds, and may use some or all of the remaining proceeds for strategicacquisitions, stock repurchases or other corporate uses.  See Note 3—“Investmentin National CineMedia, LLC” for additional discussion of these transactions.

 

•                  During the three quarters ended September 27,2007, the Company sold its equity interest in Fandango for proceeds ofapproximately $28.6 million.  As a result of this transaction, the Companyrecognized a gain on the sale of approximately $28.6 million ($17.2 millionafter tax).  In connection with the sale, the Company agreed to amend itsexisting contract with Fandango in exchange for an amendment fee totaling $5.5million.

 

•                  We demonstrated our commitment to providingincremental value to our stockholders. Total cash dividends distributed to ourstockholders during the Fiscal 2007 Period totaled approximately$439.1 million, including an extraordinary cash dividend of $2.00 pershare on each outstanding share of its Class A and Class B common stock, includingoutstanding restricted stock.

 

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•                  We opened 5 new theatres with 59 screens andclosed 8 underperforming theatres with 72 screens, ending the Q3 2007 Periodwith 526 theaters and 6,355 screens.

 

The following table sets forth the percentage oftotal revenues represented by certain items included in our consolidatedstatements of income for the Q3 2007 Period, the Q3 2006 Period, the Fiscal2007 Period and the three quarters ended September 28, 2006 (“Fiscal 2006Period”) (dollars and attendance in millions, except average ticket prices andaverage concessions per patron):

 
| ** **                                                                                                                                                                                                                                                | ** ** | **Q3 2007 Period** | ** ** | **Q3 2006 Period** | ** ** | **Fiscal 2007 Period** | ** ** | **Fiscal 2006 Period** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **$**                        | ** ** | **% of  Revenue**       | ** ** | **$**                            | ** ** | **% of  Revenue**           | ** ** | **$** | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                                                                                                                                                                                                 |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Admissions                                                                                                                                                                                                                                                |       | $                            | 515.8      |                         | 68.5       | %                                | $          | 450.6                            |       | 66.7 | % | $ | 1,400.4 |   | 67.9 | % | $ | 1,295.1 |   | 66.6 | % |
| Concessions                                                                                                                                                                                                                                               |       | 210.9                        |       | 28.0                         |       | 181.0                            |       | 26.8                             |       | 576.6 |   | 28.0 |   | 524.8 |   | 27.0 |   |
| Other operating revenue                                                                                                                                                                                                                                   |       | 26.2                         |       | 3.5                          |       | 44.1                             |       | 6.5                              |       | 84.3 |   | 4.1 |   | 125.5 |   | 6.4 |   |
|                                                                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total revenue                                                                                                                                                                                                                                             |       | 752.9                        |       | 100.0                        |       | 675.7                            |       | 100.0                            |       | 2,061.3 |   | 100.0 |   | 1,945.4 |   | 100.0 |   |
| Operating expenses:                                                                                                                                                                                                                                       |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Film rental and advertising costs(1)                                                                                                                                                                                                                      |       | 279.4                        |       | 54.2                         |       | 241.1                            |       | 53.5                             |       | 749.8 |   | 53.5 |   | 682.7 |   | 52.7 |   |
| Cost of concessions(2)                                                                                                                                                                                                                                    |       | 29.3                         |       | 13.9                         |       | 27.7                             |       | 15.3                             |       | 82.2 |   | 14.3 |   | 80.6 |   | 15.4 |   |
| Rent expense(3)                                                                                                                                                                                                                                           |       | 85.6                         |       | 11.4                         |       | 81.0                             |       | 12.0                             |       | 249.9 |   | 12.1 |   | 238.4 |   | 12.3 |   |
| Other operating expenses(3)                                                                                                                                                                                                                               |       | 183.8                        |       | 24.4                         |       | 174.0                            |       | 25.8                             |       | 524.9 |   | 25.5 |   | 501.2 |   | 25.8 |   |
| General and administrative expenses  (including share-based compensation expense of $1.1 and $2.2 for the Q3 2007  Period and the Q3 2006 Period, respectively and $4.6 and $6.3 for the Fiscal  2007 Period and the Fiscal 2006 Period, respectively)(3) |       | 15.3                         |       | 2.0                          |       | 16.7                             |       | 2.5                              |       | 48.1 |   | 2.3 |   | 49.7 |   | 2.6 |   |
| Depreciation and amortization(3)                                                                                                                                                                                                                          |       | 45.6                         |       | 6.1                          |       | 49.1                             |       | 7.3                              |       | 138.0 |   | 6.7 |   | 149.5 |   | 7.7 |   |
| Net (gain) loss on disposal and impairment  of operating assets(3)                                                                                                                                                                                        |       | (3.6                         | )          | (0.5                         | )          | 2.0                              |       | 0.3                              |       | (0.8 | ) | — |   | 12.8 |   | 0.7 |   |
| Equity in earnings of joint venture  including former employee compensation(3)                                                                                                                                                                            |       | 0.1                          |       | —                       |       | 0.6                              |       | 0.1                              |       | 3.8 |   | 0.2 |   | 7.3 |   | 0.4 |   |
|                                                                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Total operating expenses(3)                                                                                                                                                                                                                               |       | 635.5                        |       | 84.4                         |       | 592.2                            |       | 87.6                             |       | 1,795.9 |   | 87.1 |   | 1,722.2 |   | 88.5 |   |
|                                                                                                                                                                                                                                                      |       |                         |       |                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income from operations(3)                                                                                                                                                                                                                                 |       | 117.4                        |       | 15.6                         |       | 83.5                             |       | 12.4                             |       | 265.4 |   | 12.9 |   | 223.2 |   | 11.5 |   |
| Interest expense, net(3)                                                                                                                                                                                                                                  |       | 27.8                         |       | 3.7                          |       | 31.7                             |       | 4.7                              |       | 84.3 |   | 4.1 |   | 92.2 |   | 4.7 |   |
| Gain on NCM transaction(3)                                                                                                                                                                                                                                |       | —                       |       | —                       |       | —                           |       | —                           |       | 350.7 |   | 17.0 |   | — |   | — |   |
| Gain on sale of Fandango interest(3)                                                                                                                                                                                                                      |       | 0.3                          |       | —                       |       | —                           |       | —                           |       | 28.6 |   | 1.4 |   | — |   | — |   |
| Loss on debt extinguishment(3)                                                                                                                                                                                                                            |       | —                       |       | —                       |       | 3.1                              |       | 0.5                              |       | — |   | — |   | 35.6 |   | 18.3 |   |
| Provision for income taxes(3)                                                                                                                                                                                                                             |       | 38.8                         |       | 0.5                          |       | 19.5                             |       | 2.9                              |       | 229.5 |   | 11.1 |   | 38.3 |   | 2.0 |   |
| Net income(3)                                                                                                                                                                                                                                             |       | 58.0                         |       | 7.7                          |       | 29.3                             |       | 4.3                              |       | 339.8 |   | 16.5 |   | 57.1 |   | 3.0 |   |
| Attendance                                                                                                                                                                                                                                                |       | 69.3                         |       |                         | *          | 63.9                             |       |                             | *          | 189.6 |   |   | * | 187.1 |   |   | * |
| Average ticket price(4)                                                                                                                                                                                                                                   |       | $                            | 7.44       |                         |       | *                                | $          | 7.05                             |       |   | * | $ | 7.39 |   |   | * | $ | 6.92 |   |   | * |
| Average concessions per patron(5)                                                                                                                                                                                                                         |       | $                            | 3.04       |                         |       | *                                | $          | 2.83                             |       |   | * | $ | 3.04 |   |   | * | $ | 2.80 |   |   | * |

 

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*                                         *Not meaningful*

 

(1)                                  Percentage of revenues calculated as apercentage of admissions revenues.

 

(2)                                  Percentage of revenues calculated as apercentage of concessions revenues.

 

(3)                                  Percentage of revenues calculated as apercentage of total revenues.

 

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(4)                                  Calculated as admissions revenue/attendance.

 

(5)                                  Calculated as concessions revenue/attendance.

 

***Q3 2007 Period Compared to Q3 2006Period and Fiscal 2007 Period compared to Fiscal 2006 Period***

 

***Admissions***

 

During the Q3 2007 Period, total admissions revenuesincreased $65.2 million, or 14.5%, to $515.8 million, from$450.6 million for the Q3 2006 Period.  Total admissions revenuesincreased $105.3 million during the Fiscal 2007 Period, or 8.1%, to$1,400.4 million, from $1,295.1 million for the Fiscal 2006Period.  Our Q3 2007 Period admissions revenues were favorably impacted byan 8.5% increase in attendance coupled with a 5.5% increase in average ticketprices.  Our Fiscal 2007 Period admissions revenues were also favorablyimpacted by a 6.8% increase in average ticket prices and a 1.3% increase inattendance.  The increase in the Q3 2007 Period and the Fiscal 2007 Periodaverage ticket prices was primarily attributable to periodic pricing reviewsconducted by the Company, which includes analysis of various factors, includinggeneral inflationary trends and local market conditions, and the mix of filmproduct exhibited during the Q3 2007 Period and the Fiscal 2007 Period. The increasein the Q3 2007 Period and the Fiscal 2007 Period attendance was primarilyattributable to strong attendance from key 2007 film releases, such as *Spider-Man 3, Transformers, Pirates of the Caribbean: At World’s End, Shrek the Third*and *Harry Potter& the Order of the Phoenix,*along with other top-tier films exhibited during the Q3 2007 Period andthe Fiscal 2007 Period. Our Q3 2007 Period and Fiscal 2007 Periodattendance also benefited from approximately 168 new screens added since theend of the Q3 2006 Period and the 58 screens acquired from AMC on September 15,2006, partially offset by the closure of approximately 199****underperformingscreens subsequent to the end of the Q3 2006 period. Based on our review ofcertain industry sources, the increase in our admissions revenues was in linewith the industry’s results for the Q3 2007 Period and the Fiscal 2007 Periodas compared to the Q3 2006 Period and Fiscal 2006 Period.

 

***Concessions***

 

Total concessions revenues increased$29.9 million, or 16.5%, to $210.9 million for the Q3 2007 Period,from $181.0 million for the Q3 2006 Period.  During the Fiscal 2007Period, total concessions revenues increased $51.8 million, or 9.9%, to$576.6 million, from $524.8 million for the Fiscal 2006 Period. The increase in concessions revenues in the Q3 2007 Period and the Fiscal 2007Period was due to a 7.4% increase and 8.6% increase, respectively, in averageconcessions per patron, coupled with the aforementioned Q3 2007 Period andFiscal 2007 Period increases in attendance.  The growth in averageconcessions revenues per patron for the Q3 2007 Period and the Fiscal 2007Period was primarily attributable to price increases, concession-friendly filmsexhibited during fiscal 2007, such as*Spider-Man 3,Transformers, Pirates of theCaribbean: At World’s End, Shrek the Third*and***Harry Potter & the Order of the Phoenix,*and a favorable mix ofconcession products sold during the Q3 2007 Period and the Fiscal 2007 Period.

 

***Other OperatingRevenues***

 

Total other operating revenues decreased$17.9 million, or 40.6%, to $26.2 million for the Q3 2007 Period,from $44.1 million for the Q3 2006 Period.  During the Fiscal 2007Period, total other operating revenues decreased $41.2 million, or 32.8%,to $84.3 million, from $125.5 million for the Fiscal 2006Period.  Included in other operating revenues are the theatre access feespaid by National CineMedia, offset by the purchase of on-screen advertisingtime from National CineMedia for on-screen advertising time provided by us to ourbeverage concessionaire, marketing revenues from our vendor marketing programsand other theatre revenues. The decrease in other operating revenues in the Q32007 Period and Fiscal 2007 Period was primarily attributable to a modificationof the payment arrangement with National CineMedia (effective upon consummationof the IPO of NCM Inc. on February 13, 2007) described in further detail underNote 3—“Investment in National CineMedia, LLC.”

 

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***Film Rental and Advertising Costs***

 

During the Q3 2007 Period, film rental andadvertising costs as a percentage of admissions revenues increased to 54.2% ascompared to 53.5% in the Q3 2006 Period.  Film rental and advertisingcosts as a percentage of admissions revenues increased to 53.5% during theFiscal 2007 Period as compared to 52.7% in the Fiscal 2006 Period.  Theincreases in film rental and advertising costs as a percentage of box officerevenues during the Q3 2007 Period and the Fiscal 2007 Period were primarilythe result of a higher percentage of box office revenues generated by the top10 films exhibited during the Q3 2007 Period and Fiscal 2007 Period.

 

***Cost ofConcessions***

 

Cost of concessions as a percentage of concessionsrevenues decreased to 13.9% in the Q3 2007 Period as compared to 15.3% in theQ3 2006 Period.  During the Fiscal 2007 Period, cost of concessions as apercentage of concessions revenues decreased to 14.3% as compared to 15.4% inthe Fiscal 2006 Period. The decrease in the cost of concessions as a percentageof concessions revenues during the Q3 2007 Period and the Fiscal 2007 Periodwas primarily related to increases in concession prices coupled with the mix ofconcession products sold during such periods.

 

***Rent Expense***

 

During the Q3 2007 Period, rent expense increased$4.6 million, or 5.7%, to $85.6 million in the Q3 2007 Period,from $81.0 million in the Q3 2006 Period.  Rent expense increased$11.5 million, or 4.8%, to $249.9 million in the Fiscal 2007 Period,from $238.4 million in the Fiscal 2006 Period.  The increase in rentexpense in the Q3 2007 Period and the Fiscal 2007 Period was primarilyattributable to general inflationary increases along with incremental rent fromthe inclusion of 168 new screens added since the end of the Q3 2006 Period andthe 58 screens acquired from AMC during the third fiscal quarter of 2006,partially offset by the closure of approximately 199 underperforming screenssubsequent to the end of the Q3 2006 Period.

 

***Other OperatingExpenses***

 

Other operating expenses increased approximately$9.8 million, or 5.6%, to $183.8 million in the Q3 2007 Period, from $174.0million in the Q3 2006 Period and increased approximately $23.7 million, or4.7%, to $524.9 million in the Fiscal 2007 Period, from $501.2 million in theFiscal 2006 Period.  The increase in total other operating expenses duringthe Q3 2007 Period and the Fiscal 2007 Period was primarily attributable toincreases in variable costs related to increased attendance and increased laborand non-rent occupancy costs, partially offset by a decrease in expenses ofNational CineMedia, due to a modification of the payment arrangement withNational CineMedia (effective upon consummation of the IPO of NCM Inc. onFebruary 13, 2007) described in further detail under Note 3— “Investment inNational CineMedia, LLC.” Increases in labor costs were primarily the result ofstate minimum wage increases, coupled with normal inflationary increases.

 

***General andAdministrative Expenses***

 

General and administrative expenses decreased$1.4 million, or 8.4%, to $15.3 million during the Q3 2007 Period,from $16.7 million in the Q3 2006 Period.  As a percentage of totalrevenues, general and administrative expenses decreased to 2.0% during the Q3 2007Period from 2.5% in the Q3 2006 Period.  During the Fiscal 2007 Period,general and administrative expenses decreased $1.6 million, or 3.2%, to$48.1 million, from $49.7 million in the Fiscal 2006 Period.  Asa percentage of total revenues, general and administrative expenses decreasedto 2.3% in the Fiscal 2007 Period from 2.6% in the Fiscal 2006Period.  The decrease in general and administrative expenses during the Q32007 Period and the Fiscal 2007 Period as compared to the Q3 2006 Period andthe Fiscal 2006 Period, respectively, was primarily attributable to a reductionof legal and professional fees during the Q3 2007 Period and the Fiscal 2007Period.

 

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***Depreciation andAmortization***

 

For the Q3 2007 Period, depreciation andamortization decreased $3.5 million, or 7.1%, to $45.6 million, from$49.1 million in the Q3 2006 Period.  Depreciation and amortizationdecreased $11.5 million, or 7.7%, to $138.0 million during the Fiscal2007 Period, from $149.5 million in the Fiscal 2006 Period.  Thedecrease in depreciation and amortization expense during the Q3 2007 Period andthe Fiscal 2007 Period was primarily due to a greater percentage of fullydepreciated fixed assets (primarily NCM-related equipment) during the Q3 2007Period and the Fiscal 2007 Period as compared to the Q3 2006 Period and theFiscal 2006 Period, respectively.

 

***Income fromOperations***

 

Income from operations totaled approximately$117.4 million for the Q3 2007 Period, which represents an increase of $33.9 million,or 40.6%, from $83.5 million in the Q3 2006 Period.  For the Fiscal2007 Period, income from operations totaled approximately $265.4 million,which represents an increase of $42.2 million, or 18.9%, from $223.2 millionin the Fiscal 2006 Period. The increase in income from operations during the Q32007 Period and the Fiscal 2007 Period was primarily attributable toincremental admissions and concessions revenues described above, coupled withdecreases in certain operating expense items such as depreciation andamortization, equity in earnings of joint venture including former employeecompensation and loss on disposal and impairment of operating assets, partiallyoffset by decreases in other operating revenues and increases in film andadvertising costs, rent expense, and other operating expenses.

 

***Interest Expense,net***

 

Net interest expense decreased $3.9 million, or12.3%, to $27.8 million in the Q3 2007 Period, from $31.7 million inthe Q3 2006 Period.  During the Fiscal 2007 Period, net interestexpense decreased $7.9 million, or 8.6%, to $84.3 million, from$92.2 million in the Fiscal 2006 Period.  The decrease innet interest expense during the Q3 2007 Period and the Fiscal 2007 Period ascompared to the Q3 2006 Period and the Fiscal 2006 Period was principally dueto incremental interest income from a higher outstanding cash balance duringthe Q3 2007 Period and the Fiscal 2007 Period resulting from transactionscompleted in connection with the IPO of NCM Inc. (see Note 3—“Investmentin National CineMedia, LLC” for further discussion).

 

***Income Taxes***

 

The provision for income taxes of $38.8 million and$19.5 million for the Q3 2007 Period and the Q3 2006 Period, respectively,reflect effective tax rates of approximately 40.1% and 40.0%, respectively. The provision for income taxes of $229.5 million and $38.3 million for theFiscal 2007 Period and the Fiscal 2006 Period, respectively, reflect effectivetax rates of approximately 40.3% and 40.1%, respectively.  The increase inthe effective tax rate for the Fiscal 2007 Period was primarily attributable tothe state tax impact associated with the transactions completed in connectionwith the IPO of NCM Inc.

 

***Net Income***

 

During the Q3 2007 Period, net income totaled$58.0 million, which represents an increase of $28.7 million, from$29.3 million in the Q3 2006 Period.  Net income totaled$339.8 million during the Fiscal 2007 Period, which represents an increaseof $282.7 million, from $57.1 million in the Fiscal 2006Period.  The increase in net income for the Q3 2007 Period was primarilydue to the increase in operating income as described above, a reduction of netinterest expense, the impact of earnings recognized from NCM, and the impact ofa $3.1 million loss ($1.9 million after related tax effects) on debtextinguishment recorded in the Q3 2006 Period in connection with conversions ofa portion of the Company’s Convertible Senior Notes.  The increase in netincome for the Fiscal 2007 Period was primarily attributable to an increase inoperating income described above, an approximate $209.0 million gain, net ofrelated tax effects,****recorded inthe Fiscal 2007 Period resulting from transactions completed in connection withthe IPO of NCM Inc. (see Note 3—“Investment in National CineMedia, LLC”for further discussion), the 

 

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$17.2million gain, net of related tax effects, received in connection with the saleof the Company’s equity interest in Fandango and the impact of a $35.6 millionloss ($21.4 million after related tax effects) on debt extinguishment recordedin the Fiscal 2006 Period in connection with conversions of a portion of theCompany’s Convertible Senior Notes.

 

***Cash Flows***

 

The following table summarizes certain cash flowdata for the Fiscal 2007 Period and the Fiscal 2006 Period (in millions):

 
| ** **                                            | ** ** | **Fiscal 2007 Period** | ** ** | **Fiscal 2006 Period** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Net cash provided by operating activities             |       | $                                | 673.4      |                             | $          | 156.1 |   |
| Net cash used in investing activities                 |       | (23.8                            | )          | (112.5                           | )          |
| Net cash used in financing activities                 |       | (429.1                           | )          | (159.9                           | )          |
|                                                  |       |                             |       |                             |       |
| Net increase (decrease) in cash and cash  equivalents |       | $                                | 220.5      |                             | $          | (116.3 | ) |

 

*Fiscal 2007 Period Compared to Fiscal 2006 Period*

 

Net cash flows generated from operating activitiesincreased by approximately $517.3 million to approximately$673.4 million for the Fiscal 2007 Period from approximately$156.1 million for the Fiscal 2006 Period.  The increase in net cashflows generated from operating activities for the Fiscal 2007 Period wasprimarily attributable to the transactions completed in connection with the IPOof NCM Inc. (see Note 3—“Investment in National CineMedia, LLC” for furtherdiscussion).****The $628.3 million of grossproceeds received in connection with the NCM Inc. IPO transaction resulted inan increase in net income of approximately $209.0 million, a non-cash gain ofapproximately $3.4 million, an increase in deferred revenue ofapproximately $281.0 million (before related amortization of $1.5 million forthe Fiscal 2007 Period), an increase in deferred income tax benefit ofapproximately $43.0 million, an increase in income taxes payable ofapproximately $184.7 million (before tax payments of approximately$139.1 million for the Fiscal 2007 Period).  In addition to thesechanges in cash flows from operating activities, the increase in net income andthe timing of other Fiscal 2007 Period vendor payments positively impacted cashflows from operating activities, resulting in the $517.3 million netincrease in net cash provided by operating activities for the Fiscal 2007Period.

 

Net cash flows used in investing activities totaledapproximately $23.8 million for the Fiscal 2007 Period compared to cashflows used in investing activities of approximately $112.5 million for theFiscal 2006 Period. Contributing to the decrease in cash flows used ininvesting activities was $28.6 million of proceeds received in connection withthe sale of the Company’s equity interest in Fandango during the Fiscal 2007Period and greater proceeds of approximately $25.6 million from the dispositionof assets effected during the Fiscal 2007 Period. In addition, the Fiscal 2006Period included cash used for acquisitions totaling approximately $34.1million.

 

Net cash flows used in financing activities wereapproximately $429.1 million for the Fiscal 2007 Period compared to cash flowsused in financing activities of approximately $159.9 million for theFiscal 2006 Period. The net increase in cash flows used in financing activitiesduring the Fiscal 2007 Period was primarily attributable to $304.6 million ofincremental dividends paid to shareholders (including an extraordinary cashdividend of $2.00 per share on each outstanding share of its Class A andClass B common stock, including outstanding restricted stock, orapproximately $302.0 million in the aggregate) during the Fiscal 2007 Period ascompared to the Fiscal 2006 Period, coupled with a $100.0 million reduction inborrowings from the Regal Cinemas senior credit facility during the Fiscal 2007Period, partially offset by less net cash used to settle conversions of theCompany’s Convertible Senior Notes, greater proceeds from stock optionexercises and greater excess tax benefits from share-based payment arrangementsduring the Fiscal 2007 Period as compared to the Fiscal 2006 Period.

 

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**Liquidity and Capital Resources**

 

On a consolidated basis, we expect our primary usesof cash to be for operating expenses, capital expenditures, general corporatepurposes related to corporate operations, debt service, share repurchases andthe Company’s quarterly dividend payments. The principal sources of liquidityare cash generated from operations, cash on hand, and borrowings under ourAmended Senior Credit Facility described below. Under the terms of the AmendedSenior Credit Facility, Regal Cinemas is restricted as to how much it canadvance or distribute to Regal, its indirect parent. Since Regal is a holdingcompany with no significant assets other than the stock of its subsidiaries,this restriction could impact Regal’s ability to effect future debt or dividendpayments, pay corporate expenses or redeem or convert for cash its ConvertibleSenior Notes.

 

Our revenues are generally collected in cash throughadmissions and concessions revenues. Our operating expenses are primarilyrelated to film and advertising costs, rent and occupancy, and payroll. Filmcosts are ordinarily paid to distributors within 30 days following receiptof admissions revenues and the cost of the Company’s concessions are generallypaid to vendors approximately 30 days from purchase. Our currentliabilities generally include items that will become due within twelvemonths.  In addition,fromtime to time, we use cash from operations and borrowings to fund dividends inexcess of net income and cash flows from operating activities less cash flowsfrom investing and financing activities.  As a result, at any given time,our balance sheet may reflect a working 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’s internalrate of return targets. We currently expect capital expenditures for theatredevelopment, replacement, expansion, upgrading and replacements to be in therange of approximately $115.0 million to $130.0 million in fiscalyear 2007, exclusive of acquisitions. Such capital expenditures are expected tobe partially funded through asset dispositions conducted during the normalcourse of our business. During the Fiscal 2007 Period, we investedapproximately $82.0 million in capital expenditures.

 

For a discussion of the series of significantfinancing transactions which have occurred through December 28, 2006,please refer to “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Liquidity and Capital Resources” contained in Part II,Item 7 of our annual report on Form 10-K filed on February 26, 2007 withthe Commission (File No. 001-31315) for the fiscal year ended December 28,2006.

 

As described in Note 3—“Investment in NationalCineMedia, LLC,” in connection with the formation of National CineMedia, onMay 11, 2005, RCI adopted and approved a Severance Plan for RCM employeeswho held an unvested option to purchase shares of Regal’s Class A commonstock or shares of Regal’s restricted Class A common stock pursuant to theterms of the Incentive Plan immediately prior to such employee’s termination ofemployment with RCM and commencement of employment with National CineMedia.During the Fiscal 2007 Period, the Company recorded total severance expense ofapproximately $1.8 million, including payments in lieu of dividends,related to the Severance Plan.

 

On February 13, 2007, NCM Inc., a newly formedentity that serves as the sole manager of National CineMedia, completed an IPOof its common stock. NCM Inc. sold 38.0 million shares of its common stock for$21 per share in the IPO, less underwriting discounts and expenses.  NCMInc. used a portion of the net proceeds from the IPO to acquire newly issuedcommon units from National CineMedia.

 

In connection with the completion of the IPO, RCIamended and restated its ESA with National CineMedia, whereby in exchange forits pro rata share of the IPO proceeds, RCI agreed to a modification ofNational CineMedia’s payment obligation under the existing services agreement.The modification 

 

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extendedthe term of the ESA to 30 years, provided National CineMedia with a five yearright of first refusal beginning one year prior to the end of the term andchanged the basis upon which Regal is paid by National CineMedia from apercentage of revenues associated with advertising contracts entered into byNational CineMedia to a monthly theatre access fee. The theatre access fee iscomposed of a fixed $0.07 payment per patron which will increase by 8% everyfive years starting at the end of fiscal 2011 and a fixed $800 payment perdigital screen each year, which will increase by 5% annually starting at theend of fiscal 2007. Also, with respect to any on-screen advertising timeprovided by us to our beverage concessionaire, Regal is required to purchasesuch time from National CineMedia at a negotiated rate. In addition, we receivemandatory quarterly distributions of any excess cash from National CineMedia.In addition, National CineMedia paid the net proceeds to each of Regal, AMC andCinemark in exchange for modifying payment obligations for access to theirrespective theatres, for which Regal received a payment of approximately $281.0million, which represents the estimated fair value of the ESA modificationpayment.  We estimated the fair value of the ESA payment based upon avaluation performed by the Company with the assistance of third partyspecialists.  This amount has been recorded as deferred revenue and willbe amortized to advertising revenue over the 30 year term of the agreementfollowing the units of revenue method.

 

At the closing of the IPO, the underwritersexercised their over-allotment option to purchase an additional 4.0 millionshares of common stock of NCM Inc. at the initial offering price of $21 pershare, less underwriting discounts and commissions. In connection with thisover-allotment option exercise, Regal, AMC and Cinemark each sold to NCM Inc.common units of National CineMedia on a pro rata basis at the initial offeringprice of $21 per share, less underwriting discounts and expenses. Regal soldapproximately 1.6 million common units to NCM Inc. for proceeds ofapproximately $32.2 million.  Upon completion of this sale of common unitsand as of September 27, 2007, Regal held approximately 21.2 million commonunits of National CineMedia, or a 22.6% interest.

 

Upon the closing of the IPO, National CineMediaentered into a $725 million term loan facility, the net proceeds of which wereused to redeem preferred units issued to each of Regal, AMC and Cinemark on apro rata basis pursuant to a recapitalization of National CineMedia prior tocompletion of the IPO. We received approximately $315.1 million as a result ofthe preferred unit redemption.

 

After the payment of current taxes, net proceedsfrom these transactions are expected to total approximately $445.0 million. TheCompany used a portion of the net proceeds to fund an extraordinary cashdividend of $2.00 per share on each outstanding share of its Class A andClass B common stock, or approximately $302.0 million in the aggregate.Stockholders of record at the close of business on March 28, 2007 were paidthis dividend on April 13, 2007.  The Company is currently exploringalternatives for use of the remaining proceeds, and may use some or all of theremaining proceeds for strategic acquisitions, stock repurchases or othercorporate uses.

 

During the three quarters ended September 27, 2007,the Company sold its equity interest in Fandango for proceeds of$28.6 million.  As a result of this transaction, the Companyrecognized a gain on the sale of approximately $28.6 million ($17.2 millionafter tax).  In connection with the sale, the Company agreed to amend itsexisting contract with Fandango in exchange for an amendment fee totaling $5.5million.  This amount has been recorded as deferred revenue and will beamortized to revenue on a straight-line basis over the six year term of theamendment.

 

Regal paid three quarterly cash dividends of $0.30per share on each outstanding share of the Company’s Class A andClass B common stock, including outstanding restricted stock (seeNote 6—“Capital Stock and Share-Based Compensation”), or approximately$137.1 million in the aggregate, during the Fiscal 2007 Period.  Inaddition, on March 5, 2007, Regal declared an extraordinary cash dividend of$2.00 per share on each outstanding share of its Class A and Class B commonstock, including outstanding restricted stock. Stockholders of record at theclose of business on March 28, 2007 were paid this dividend on April 13,2007.  Finally, on October 25, 2007, the Company declared a cash dividendof $0.30 per share on each share of the Company’s Class A and Class Bcommon stock (including outstanding restricted stock), payable on December 20,2007, to stockholders of record on December 12, 2007.  These dividendshave been or will be funded through cash flow from operations and availablecash on hand. We, at the 

 

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discretionof the board of directors and subject to applicable law, anticipate payingregular quarterly dividends on our Class A and Class B common stockfor the foreseeable future. The amount, if any, of the dividends to be paid inthe future will depend upon our then available cash, anticipated cash needs,overall financial condition, loan agreement restrictions, future prospects forearnings and cash flows, as well as other relevant factors.

 

As of September 27, 2007, the holders of ourConvertible Senior Notes had the right, at their option, to convert theirConvertible Senior Notes, in whole or in part, into shares of our Class Acommon stock, subject to certain limitations, at the then existing conversionprice per share. The Convertible Senior Notes allow us to settle any conversion,and we have the ability and intent to settle any conversion, by remitting tothe note holder the accreted value of the note in cash plus the conversionspread (the excess conversion value over the accreted value) in either cash,shares of our Class A common stock or a combination of stock and cash.

 

On October 27, 2006, Regal Cinemas entered intothe Amended Senior Credit Facility which consists of the Term Facility in anaggregate original principal amount of $1,700.0 million and the RevolvingFacility in an aggregate principal amount of up to $100.0 million. TheRevolving Facility has a separate sublimit of $10.0 million for short-termloans and a sublimit of $30.0 million for letters of credit. The Term Facilitywill mature on October 27, 2013 and the Revolving Facility will mature onOctober 27, 2011.

 

The terms of the Amended Senior Credit Facilityinclude an option for Regal Cinemas to request the establishment of the NewIncremental Term Loan in a principal amount of up to $200.0 million.  TheNew Incremental Term Loan is only available if Regal is able to obtain thecommitments of new or existing lenders that are willing to provide funding forsuch New Incremental Term Loan and Regal Cinemas is able to satisfy certainconditions set forth in the Amended Senior Credit Facility. Any suchcommitments that are obtained and the loans thereunder would be treated as asecured term loan under the Amended Senior Credit Facility without the need toobtain consent from any lender or any party to the Amended Senior CreditFacility. Proceeds of Regal Cinemas’ borrowings under the New Incremental TermLoan are to be used solely to fund, or reimburse Regal Cinemas for funding,distributions to the Company for the purpose of redeeming, repurchasing,acquiring or otherwise settling the conversion of all or a portion of theConvertible Senior Notes. For a detailed summary of other material terms of theAmended Senior Credit Facility, please refer to the information provided underNote 5 to the consolidated financial statements included in Part II, Item8 of our annual report on Form 10-K for the fiscal year ended December 28,2006.

 

                As ofSeptember 27, 2007, we had approximately $1,687.3 million aggregate principalamount outstanding under the Term Facility, $123.7 million aggregate principalamount outstanding under Convertible Senior Notes and $51.5 million aggregateprincipal amount outstanding under the Regal Cinemas 93⁄8% SeniorSubordinated Notes. As of September 27, 2007, we had approximately $0.8 millionoutstanding in letters of credit, leaving approximately $99.2 million availablefor drawing under the Revolving Facility. The aggregate carrying amounts and fairvalues of the Term Facility and the Convertible Senior Notes as of September27, 2007 were $1,811.0 million and $1,855.1 million, respectively. Theaggregate carrying amounts and fair values of these financial instruments atDecember 28, 2006 were $1,823.7 million and $1,883.8 million,respectively.  The fair values of theTerm Facility were estimated based on quoted market prices as of September 27,2007 and December 28, 2006. The associated interest rates are based on floatingrates identified by reference to market rates and are assumed to approximatefair value. The fair values of the Convertible Senior Notes were estimatedbased on quoted market prices as of September 27, 2007 and December 28, 2006.

 

EBITDA (earnings before interest, taxes,depreciation and amortization) was approximately $170.2 million, or 22.6%of total revenues, for the Q3 2007 Period and $129.6 million, or 19.2% of totalrevenues, for the Q3 2006 Period.  For the Fiscal 2007 Period, EBITDA wasapproximately $791.6 million, or 38.4% of total revenues as compared to $337.1million, or 17.3% of total revenues for the Fiscal 2006 Period.  Theincrease in EBITDA for the Q3 2007 Period is primarily due to the increase inoperating income as described above, a reduction of net interest expense, increasedequity earnings from NCM, and the impact of a $3.1 million loss ($1.9 millionafter related tax effects) on debt extinguishment recorded in the Q3 2006Period in connection with conversions of the Company’s Convertible SeniorNotes.  The increase in EBITDA for the Fiscal 2007 Period was primarilyattributable to an increase in operating income described above, an approximate$209.0 million gain, net of related tax effects,****recorded in the Fiscal 2007 Period resulting fromtransactions completed in connection with the IPO of NCM Inc. (see Note 3—“Investmentin National CineMedia, LLC” for further discussion), the $17.2 million gain,net of related tax effects, received in connection with the sale of the Company’sequity interest in Fandango and the impact of a $35.6 million loss ($21.4million after related tax effects) on debt extinguishment recorded 

 

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inthe Fiscal 2006 Period in connection with conversions of a portion of theCompany’s Convertible Senior Notes.  The Company uses EBITDA as asupplemental liquidity measure because we find it useful to understand andevaluate our capacity, excluding the impact of interest, taxes, and non-cashdepreciation and amortization charges, for servicing our debt, paying dividendsand otherwise meeting our cash needs, prior to our consideration of the impactsof other potential sources and uses of cash, such as working capital items. Webelieve that EBITDA is useful to investors for these purposes as well. EBITDA should not be considered an alternative to, or more meaningful than, netcash provided by operating activities, as determined in accordance withaccounting principles generally accepted in the United States of America(GAAP), since it omits the impact of interest, taxes and changes in workingcapital that use or provide cash (such as receivables, payables andinventories) as well as the sources or uses of cashassociated with changes in other balancesheet items (such as long-term loss accruals and deferred items).  BecauseEBITDA excludes depreciation and amortization, EBITDA does not reflect any cashrequirements for the replacement of the assets being depreciated and amortized,which assets will often have to be replaced in the future. Further, EBITDA,because it also does not reflect the impact of debt service, cash dividends,capital expenditures and other cash commitments from time to time as describedin more detail elsewhere in this quarterly report on Form 10-Q, doesnot represent how much discretionary cash we have available for otherpurposes.  Nonetheless, EBITDA is a key measure expected by and useful toour fixed income investors, rating agencies and the banking community all ofwhom believe, and we concur, that these measures are critical to the capitalmarkets’ analysis of our ability to service debt, fund capital expenditures,pay dividends and otherwise meet cash needs, respectively. We also evaluateEBITDA because it is clear that movements in these non-GAAP measures impact ourability to attract financing and pay dividends.  EBITDA, as calculated,may not be comparable to similarly titled measures reported by other companies.A reconciliation of EBITDA to net cash provided by operating activities iscalculated as follows (in millions): 

 
| ** **                                  | ** ** | **Q3 2007 Period** | ** ** | **Q3 2006 Period** | ** ** | **Fiscal 2007  Period** | ** ** | **Fiscal 2006  Period** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| EBITDA                                      |       | $                            | 170.2      |                         | $          | 129.6                        |       | $                            | 791.6      |   | $ | 337.1 |   |
| Interest expense, net                       |       | (27.8                        | )          | (31.7                        | )          | (84.3                        | )          | (92.2                        | )          |
| Provision for income taxes                  |       | (38.8                        | )          | (19.5                        | )          | (229.5                       | )          | (38.3                        | )          |
| Deferred income taxes                       |       | 0.7                          |       | (5.3                         | )          | (46.1                        | )          | (10.1                        | )          |
| Changes in operating assets and liabilities |       | (74.0                        | )          | (63.3                        | )          | 258.9                        |       | (110.5                       | )          |
| Loss on debt extinguishment                 |       | —                       |       | 3.1                          |       | —                       |       | 35.6                         |       |
| Gain on sale of Fandango interest           |       | (0.3                         | )          | —                       |       | (28.6                        | )          | —                       |       |
| Other items, net                            |       | 0.1                          |       | 7.4                          |       | 11.4                         |       | 34.5                         |       |
|                                        |       |                         |       |                         |       |                         |       |                         |       |
| Net cash provided by operating activities   |       | $                            | 30.1       |                         | $          | 20.3                         |       | $                            | 673.4      |   | $ | 156.1 |   |

 

**Contractual Cash Obligations and Commitments**

 

For a summary of our contractual cash obligationsand commitments as of December 28, 2006, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Contractual Cash Obligations and Commitments” contained in ourannual report on Form 10-K for the fiscal year ended December 28,2006. As of September 27, 2007, there were no material changes outside theordinary course of our business in our contractual cash obligations andcommitments. We believe that the amount of cash and cash equivalents on hand,cash flow expected from operations and availability under our RevolvingFacility will be adequate for the Company to execute its business strategy andmeet anticipated requirements for lease obligations, capital expenditures,working capital and debt service for the next twelve 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, 

 

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“Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Estimates” contained in our annual report onForm 10-K for the fiscal year ended December 28, 2006 andincorporated by reference herein. September 27, 2007, there were no significantchanges in our critical accounting policies or 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 ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s market risk is confined to interestrate exposure of its and its wholly owned subsidiaries’ debt obligations thatbear interest based on floating rates. The Amended Senior Credit Facilityprovides variable rate interest that could be adversely affected by an increasein interest rates. Borrowings under the prior term facility bore and the TermFacility bear interest, at Regal Cinemas’ option, at either an Adjusted EurodollarRate or the base rate plus, in each case, an applicable margin.

 

Duringthe years ended December 29, 2005 and December 30, 2004, Regal Cinemas enteredinto five distinct hedging relationships via five separate interest rate swapagreements with final maturity terms ranging from three to five years for thepurpose of hedging an aggregate of approximately $1,100.0 million of itsvariable rate debt obligations. 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 5to the consolidated financial statements included in Part II, Item 8of our annual report on Form 10-K for the fiscal year endedDecember 28, 2006, which is incorporated herein by reference. On June 30,2007, one of our interest rate swaps designated to hedge approximately $200.0million of variable rate debt obligations matured. On August 9, 2007, RegalCinemas entered into two additional hedging relationships via two distinctinterest rate swap agreements with maturity terms of two years each and requireRegal Cinemas to pay interest at a fixed rate of 4.944% and receive interest ata variable rate. These interest rate swaps were designated to hedgeapproximately $200.0 million of variable rate debt obligations.

 

As of September 27, 2007 and September 28, 2006,borrowings of $1,687.3 million and $1,700.0 million, respectivelywere outstanding under the Term Facility and the prior term facility,respectively, at an effective interest rate of 6.28% (as of September 27, 2007)and 6.23% (as of December 28, 2006), after the impact of the interest rateswaps is taken into account. A hypothetical change of 10% in the Company’seffective interest rate under the Term Facility as of September 27, 2007, wouldincrease or decrease interest expense by $2.6 million for the quarterended September 27, 2007.

 

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**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 Commission under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified by the Commission’srules and forms, and that information is accumulated and communicated to ourmanagement, including our principal executive, principal financial andprincipal accounting officers (whom we refer to in this periodic report as ourCertifying Officers), as appropriate to allow timely decisions regardingrequired disclosure. Our management evaluated, with the participation of ourCertifying Officers, the effectiveness of our disclosure controls andprocedures as of September 27, 2007, pursuant to Rule 13a-15(b) underthe Exchange Act. Based upon that evaluation, our Certifying Officers concludedthat, as of September 27, 2007, our disclosure controls and procedures wereeffective.

 

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

 

 

**PARTII—OTHER INFORMATION**

 

**Item 1. LEGAL PROCEEDINGS**

 

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

 

**Item 1A. RISK FACTORS**

 

There have been no material changes from riskfactors as previously disclosed in our annual report on Form 10-K filed onFebruary 26, 2007 with the Commission (File No. 001-31315) for the fiscalyear ended December 28, 2006.

 

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**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 6, 2007 | By:                           | /s/  MICHAEL  L. CAMPBELL |   |
|                    |                          | Michael  L.Campbell** |
|                    |                          | *Chief Executive Officer (Principal* |
|                    |                          | *Executive Officer)* |
|                    |                          | * * |
| Date:  November 6, 2007 | By:                           | /s/  AMY  E. MILES |   |
|                    |                          | Amy  E. Miles |
|                    |                          | *Executive Vice President and Chief* |
|                    |                          | *Financial Officer (Principal Financial* |
|                    |                          | *Officer)* |
|                    |                          | * * |
| Date:  November 6, 2007 | 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.                                           |

 

 

39

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