Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended July 2,2009**

 

**Commission file number: 001-31315**

 

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**Regal Entertainment Group**

(Exact name of Registrant as Specified in its Charter)

 

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

 

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

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

| Large  accelerated filer x                |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

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

 

Class ACommon Stock—130,291,668 shares outstanding at August 6, 2009

 

Class BCommon Stock—23,708,639 shares outstanding at August 6, 2009

 

 

 

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Table ofContents

 

**TABLE OFCONTENTS**

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

 

2

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Table ofContents

 

**PART I—FINANCIAL INFORMATION**

 

**Item 1.    FINANCIAL STATEMENTS**

 

**REGAL ENTERTAINMENT GROUP**

 

**UNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                           | ** ** | **July 2,  2009** | ** ** | **January 1,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                                                                           |       |                   |       |                      |       |
| CURRENT  ASSETS:                                                                                                                                                                                     |       |                   |       |                      |       |
| Cash  and cash equivalents                                                                                                                                                                           |       | $                      | 267.7      |                      | $          | 170.2 |   |
| Trade  and other receivables                                                                                                                                                                         |       | 43.6                   |       | 73.2                      |       |
| Inventories                                                                                                                                                                                          |       | 12.6                   |       | 8.3                       |       |
| Prepaid  expenses and other current assets                                                                                                                                                           |       | 20.8                   |       | 6.1                       |       |
| Assets  held for sale                                                                                                                                                                                |       | 0.6                    |       | 0.9                       |       |
| Deferred  income tax asset                                                                                                                                                                           |       | 12.7                   |       | 14.8                      |       |
| TOTAL  CURRENT ASSETS                                                                                                                                                                                |       | 358.0                  |       | 273.5                     |       |
| PROPERTY  AND EQUIPMENT:                                                                                                                                                                             |       |                   |       |                      |       |
| Land                                                                                                                                                                                                 |       | 118.6                  |       | 118.6                     |       |
| Buildings  and leasehold improvements                                                                                                                                                                |       | 1,921.7                |       | 1,911.5                   |       |
| Equipment                                                                                                                                                                                            |       | 1,003.5                |       | 974.5                     |       |
| Construction  in progress                                                                                                                                                                            |       | 9.5                    |       | 14.1                      |       |
| Total  property and equipment                                                                                                                                                                        |       | 3,053.3                |       | 3,018.7                   |       |
| Accumulated  depreciation and amortization                                                                                                                                                           |       | (1,163.9               | )          | (1,082.2                  | )          |
| TOTAL  PROPERTY AND EQUIPMENT, NET                                                                                                                                                                   |       | 1,889.4                |       | 1,936.5                   |       |
| GOODWILL                                                                                                                                                                                             |       | 178.8                  |       | 178.8                     |       |
| INTANGIBLE  ASSETS, NET                                                                                                                                                                              |       | 13.6                   |       | 15.5                      |       |
| DEFERRED  INCOME TAX ASSET                                                                                                                                                                           |       | 84.0                   |       | 78.2                      |       |
| OTHER  NON-CURRENT ASSETS                                                                                                                                                                            |       | 123.3                  |       | 113.3                     |       |
| TOTAL  ASSETS                                                                                                                                                                                        |       | $                      | 2,647.1    |                      | $          | 2,595.8 |   |
| **LIABILITIES AND DEFICIT**                                                                                                                                                                          |       |                   |       |                      |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                |       |                   |       |                      |       |
| Current  portion of debt obligations                                                                                                                                                                 |       | $                      | 23.9       |                      | $          | 23.4 |   |
| Accounts  payable                                                                                                                                                                                    |       | 188.3                  |       | 162.0                     |       |
| Accrued  expenses                                                                                                                                                                                    |       | 78.5                   |       | 77.8                      |       |
| Deferred  revenue                                                                                                                                                                                    |       | 100.7                  |       | 95.6                      |       |
| Interest  payable                                                                                                                                                                                    |       | 6.7                    |       | 7.4                       |       |
| TOTAL  CURRENT LIABILITIES                                                                                                                                                                           |       | 398.1                  |       | 366.2                     |       |
| LONG-TERM  DEBT, LESS CURRENT PORTION                                                                                                                                                                |       | 1,880.5                |       | 1,887.0                   |       |
| LEASE  FINANCING ARRANGEMENTS, LESS CURRENT PORTION                                                                                                                                                  |       | 74.7                   |       | 77.2                      |       |
| CAPITAL  LEASE OBLIGATIONS, LESS CURRENT PORTION                                                                                                                                                     |       | 16.0                   |       | 17.3                      |       |
| NON-CURRENT  DEFERRED REVENUE                                                                                                                                                                        |       | 344.1                  |       | 339.9                     |       |
| OTHER  NON-CURRENT LIABILITIES                                                                                                                                                                       |       | 162.1                  |       | 144.1                     |       |
| TOTAL  LIABILITIES                                                                                                                                                                                   |       | 2,875.5                |       | 2,831.7                   |       |
| DEFICIT:                                                                                                                                                                                             |       |                   |       |                      |       |
| Class A  common stock, $0.001 par value; 500,000,000 shares authorized, 130,289,668  and 129,801,284 shares issued and outstanding at July 2, 2009 and  January 1, 2009, respectively |       | 0.1                    |       | 0.1                       |       |
| Class B  common stock, $0.001 par value; 200,000,000 shares authorized, 23,708,639  shares issued and outstanding at July 2, 2009 and January 1, 2009                                 |       | —                 |       | —                    |       |
| Preferred  stock, $0.001 par value; 50,000,000 shares authorized; none issued and  outstanding                                                                                                       |       | —                 |       | —                    |       |
| Additional  paid-in capital (deficit)                                                                                                                                                                |       | (265.0                 | )          | (265.8                    | )          |
| Retained  earnings                                                                                                                                                                                   |       | 47.4                   |       | 40.1                      |       |
| Accumulated  other comprehensive loss, net                                                                                                                                                           |       | (10.4                  | )          | (9.9                      | )          |
| TOTAL  STOCKHOLDERS’ DEFICIT OF REGAL ENTERTAINMENT GROUP                                                                                                                                       |       | (227.9                 | )          | (235.5                    | )          |
| Noncontrolling  interest                                                                                                                                                                             |       | (0.5                   | )          | (0.4                      | )          |
| TOTAL  DEFICIT                                                                                                                                                                                       |       | (228.4                 | )          | (235.9                    | )          |
| TOTAL  LIABILITIES AND DEFICIT                                                                                                                                                                       |       | $                      | 2,647.1    |                      | $          | 2,595.8 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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Table of Contents

 

**REGAL ENTERTAINMENT GROUP**

 

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME**

**(in millions, except share andper share data)**

** **
| ** **                                                                                                                                                                                                                                                                       | ** ** | **Quarter  Ended  July 2, 2009** | ** ** | **Quarter  Ended  June 26, 2008** | ** ** | **Two  Quarters Ended********July 2,  2009** | ** ** | **Two  Quarters********Ended********June 26,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------|------------|
| REVENUES:                                                                                                                                                                                                                                                                        |       |                                  |       |                                   |       |                                              |       |                                                      |       |
| Admissions                                                                                                                                                                                                                                                                       |       | $                                     | 541.7      |                                   | $          | 455.7                                             |       | $                                                         | 1,001.2    |   | $ | 887.7 |   |
| Concessions                                                                                                                                                                                                                                                                      |       | 214.9                                 |       | 188.9                                  |       | 394.3                                             |       | 355.0                                                     |       |
| Other  operating revenues                                                                                                                                                                                                                                                        |       | 32.6                                  |       | 31.2                                   |       | 59.3                                              |       | 59.9                                                      |       |
| TOTAL  REVENUES                                                                                                                                                                                                                                                                  |       | 789.2                                 |       | 675.8                                  |       | 1,454.8                                           |       | 1,302.6                                                   |       |
| OPERATING  EXPENSES:                                                                                                                                                                                                                                                             |       |                                  |       |                                   |       |                                              |       |                                                      |       |
| Film  rental and advertising costs                                                                                                                                                                                                                                               |       | 293.4                                 |       | 247.0                                  |       | 523.1                                             |       | 462.9                                                     |       |
| Cost  of concessions                                                                                                                                                                                                                                                             |       | 31.7                                  |       | 25.5                                   |       | 55.7                                              |       | 48.2                                                      |       |
| Rent  expense                                                                                                                                                                                                                                                                    |       | 95.6                                  |       | 90.0                                   |       | 188.5                                             |       | 173.3                                                     |       |
| Other  operating expenses                                                                                                                                                                                                                                                        |       | 195.8                                 |       | 180.5                                  |       | 381.7                                             |       | 349.1                                                     |       |
| General  and administrative expenses (including share-based compensation of $1.0 and  $1.5 for the quarters ended July 2, 2009 and June 26, 2008,  respectively, and $2.6 and $2.9 for the two quarters ended July 2, 2009  and June 26, 2008, respectively) |       | 15.4                                  |       | 15.8                                   |       | 30.7                                              |       | 30.8                                                      |       |
| Depreciation  and amortization                                                                                                                                                                                                                                                   |       | 50.5                                  |       | 49.9                                   |       | 100.4                                             |       | 96.2                                                      |       |
| Net  loss on disposal and impairment of operating assets                                                                                                                                                                                                                         |       | 10.5                                  |       | 2.3                                    |       | 15.9                                              |       | 4.5                                                       |       |
| Joint  venture employee compensation                                                                                                                                                                                                                                             |       | —                                |       | 0.1                                    |       | —                                            |       | 0.3                                                       |       |
| TOTAL  OPERATING EXPENSES                                                                                                                                                                                                                                                        |       | 692.9                                 | ** ** | 611.1                                  |       | 1,296.0                                           | ** ** | 1,165.3                                                   |       |
| INCOME  FROM OPERATIONS                                                                                                                                                                                                                                                          |       | 96.3                                  |       | 64.7                                   |       | 158.8                                             |       | 137.3                                                     |       |
| OTHER  EXPENSE (INCOME):                                                                                                                                                                                                                                                         |       |                                  |       |                                   |       |                                              |       |                                                      |       |
| Interest  expense, net                                                                                                                                                                                                                                                           |       | 37.0                                  |       | 31.0                                   |       | 74.2                                              |       | 61.8                                                      |       |
| Loss  on extinguishment of debt                                                                                                                                                                                                                                                  |       | —                                |       | —                                 |       | —                                            |       | 3.0                                                       |       |
| Earnings  recognized from NCM                                                                                                                                                                                                                                                    |       | (8.8                                  | )          | (5.9                                   | )          | (19.4                                             | )          | (14.3                                                     | )          |
| Other,  net                                                                                                                                                                                                                                                                      |       | 0.8                                   |       | 0.7                                    |       | 1.0                                               |       | 1.3                                                       |       |
| TOTAL  OTHER EXPENSE, NET                                                                                                                                                                                                                                                        |       | 29.0                                  |       | 25.8                                   |       | 55.8                                              |       | 51.8                                                      |       |
| INCOME  BEFORE INCOME TAXES                                                                                                                                                                                                                                                      |       | 67.3                                  |       | 38.9                                   |       | 103.0                                             |       | 85.5                                                      |       |
| PROVISION  FOR INCOME TAXES                                                                                                                                                                                                                                                      |       | 26.9                                  |       | 14.7                                   |       | 41.3                                              |       | 33.8                                                      |       |
| NET  INCOME                                                                                                                                                                                                                                                                      |       | 40.4                                  |       | 24.2                                   |       | 61.7                                              |       | 51.7                                                      |       |
| NONCONTROLLING  INTEREST, NET OF TAX                                                                                                                                                                                                                                             |       | 0.1                                   |       | 0.1                                    |       | 0.1                                               |       | 0.1                                                       |       |
| NET  INCOME ATTRIBUTABLE TO CONTROLLING INTEREST                                                                                                                                                                                                                                 |       | $                                     | 40.5       |                                   | $          | 24.3                                              |       | $                                                         | 61.8       |   | $ | 51.8 |   |
| EARNINGS  PER SHARE OF CLASS A AND CLASS B COMMON STOCK:                                                                                                                                                                                                               |       |                                  |       |                                   |       |                                              |       |                                                      |       |
| Basic                                                                                                                                                                                                                                                                            |       | $                                     | 0.26       |                                   | $          | 0.16                                              |       | $                                                         | 0.40       |   | $ | 0.34 |   |
| Diluted                                                                                                                                                                                                                                                                          |       | $                                     | 0.26       |                                   | $          | 0.16                                              |       | $                                                         | 0.40       |   | $ | 0.33 |   |
| AVERAGE  SHARES OUTSTANDING (in thousands):                                                                                                                                                                                                                                      |       |                                  |       |                                   |       |                                              |       |                                                      |       |
| Basic                                                                                                                                                                                                                                                                            |       | 153,051                               |       | 152,830                                |       | 153,048                                           |       | 152,817                                                   |       |
| Diluted                                                                                                                                                                                                                                                                          |       | 154,075                               |       | 154,728                                |       | 154,084                                           |       | 156,632                                                   |       |
| Dividends  declared per common share                                                                                                                                                                                                                                             |       | $                                     | 0.18       |                                   | $          | 0.30                                              |       | $                                                         | 0.36       |   | $ | 0.60 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**REGAL ENTERTAINMENT GROUP**

 

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in millions)**

 
| ** **                                                                                                               | ** ** | **Two  Quarters  Ended  July 2, 2009** | ** ** | **Two  Quarters  Ended  June 26, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                                                   |       |                                        |       |                                         |       |
| Net  income attributable to controlling interest                                                                         |       | $                                           | 61.8       |                                         | $          | 51.8 |   |
| Adjustments  to reconcile net income attributable to controlling interest to net cash  provided by operating activities: |       |                                        |       |                                         |       |
| Depreciation  and amortization                                                                                           |       | 100.4                                       |       | 96.2                                         |       |
| Amortization  of debt discount                                                                                           |       | 2.0                                         |       | 2.2                                          |       |
| Amortization  of debt acquisition costs                                                                                  |       | 4.6                                         |       | 3.4                                          |       |
| Share-based  compensation expense                                                                                        |       | 2.6                                         |       | 2.9                                          |       |
| Noncontrolling  interest                                                                                                 |       | (0.2                                        | )          | —                                       |       |
| Deferred  income tax benefit                                                                                             |       | (4.3                                        | )          | (27.3                                        | )          |
| Net  loss on disposal and impairment of operating assets                                                                 |       | 15.9                                        |       | 4.5                                          |       |
| Equity  in earnings of non-consolidated entities                                                                         |       | 0.7                                         |       | 0.8                                          |       |
| Joint  venture employee compensation                                                                                     |       | —                                      |       | 0.3                                          |       |
| Excess  cash distribution on additional shares in NCM                                                                    |       | 3.3                                         |       | —                                       |       |
| Loss  on extinguishment of debt                                                                                          |       | —                                      |       | 3.0                                          |       |
| Non-cash  rent expense                                                                                                   |       | 3.7                                         |       | 3.7                                          |       |
| Changes  in operating assets and liabilities (excluding effects of acquisitions):                                        |       |                                        |       |                                         |       |
| Trade  and other receivables                                                                                             |       | 29.6                                        |       | 22.1                                         |       |
| Inventories                                                                                                              |       | (4.3                                        | )          | (1.4                                         | )          |
| Prepaid  expenses and other assets                                                                                       |       | (13.5                                       | )          | (1.6                                         | )          |
| Accounts  payable                                                                                                        |       | 26.3                                        |       | (18.2                                        | )          |
| Income  taxes payable                                                                                                    |       | 11.0                                        |       | 25.7                                         |       |
| Deferred  revenue                                                                                                        |       | 2.3                                         |       | (9.3                                         | )          |
| Accrued  expenses and other liabilities                                                                                  |       | (5.1                                        | )          | (2.3                                         | )          |
| NET  CASH PROVIDED BY OPERATING ACTIVITIES                                                                               |       | 236.8                                       |       | 156.5                                        |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                                                   |       |                                        |       |                                         |       |
| Capital  expenditures                                                                                                    |       | (60.9                                       | )          | (70.6                                        | )          |
| Proceeds  from disposition of assets                                                                                     |       | 0.4                                         |       | 3.3                                          |       |
| Purchase  of Consolidated Theatres, L.L.C., net of cash acquired                                                         |       | —                                      |       | (209.3                                       | )          |
| Distributions  to partnership                                                                                            |       | —                                      |       | (0.4                                         | )          |
| Investment  in DCIP                                                                                                      |       | (1.5                                        | )          | (1.0                                         | )          |
| NET  CASH USED IN INVESTING ACTIVITIES                                                                                   |       | (62.0                                       | )          | (278.0                                       | )          |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                                                   |       |                                        |       |                                         |       |
| Cash  used to pay dividends                                                                                              |       | (55.4                                       | )          | (92.1                                        | )          |
| Net  payments on long-term obligations                                                                                   |       | (11.9                                       | )          | (11.6                                        | )          |
| Cash  used to purchase treasury shares and other                                                                         |       | (0.5                                        | )          | —                                       |       |
| Proceeds  from stock option exercises                                                                                    |       | 0.1                                         |       | 0.5                                          |       |
| Payment  of debt acquisition costs and other                                                                             |       | (9.6                                        | )          | (5.1                                         | )          |
| Excess  tax benefits from share-based payment arrangements                                                               |       | —                                      |       | 0.2                                          |       |
| Net  proceeds from 33⁄4% Convertible Senior Notes hedge and warrant                                                   |       | —                                      |       | 18.9                                         |       |
| Net  proceeds from issuance of 61⁄4% Convertible Senior Notes                                                         |       | —                                      |       | 200.0                                        |       |
| Net  cash paid for 61⁄4% Convertible Senior Notes convertible note hedge and warrant                                  |       | —                                      |       | (6.6                                         | )          |
| Cash  used to redeem 33⁄4% Convertible Senior Notes                                                                   |       | —                                      |       | (194.1                                       | )          |
| NET  CASH USED IN FINANCING ACTIVITIES                                                                                   |       | (77.3                                       | )          | (89.9                                        | )          |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                    |       | 97.5                                        |       | (211.4                                       | )          |
| CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                                        |       | 170.2                                       |       | 435.2                                        |       |
| CASH  AND CASH EQUIVALENTS AT END OF PERIOD                                                                              |       | $                                           | 267.7      |                                         | $          | 223.8 |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                                                                     |       |                                        |       |                                         |       |
| Cash  paid for income taxes, net of refunds received                                                                     |       | $                                           | 13.8       |                                         | $          | 35.9 |   |
| Cash  paid for interest                                                                                                  |       | $                                           | 69.5       |                                         | $          | 62.6 |   |
| SUPPLEMENTAL  NON-CASH INVESTING ACTIVITIES:                                                                             |       |                                        |       |                                         |       |
| Additional  investment in NCM                                                                                            |       | $                                           | 7.0        |                                         | $          | 73.4 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**REGAL ENTERTAINMENT GROUP**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**JULY 2, 2009 AND JUNE 26, 2008**

 

**1. THECOMPANY AND BASIS OF PRESENTATION**

 

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

 

Regal operates thelargest theatre circuit in the United States, consisting of 6,778 screens in549 theatres in 39 states and the District of Columbia as of July 2,2009.  The Company formally operates on a 52-week fiscal year with eachquarter generally consisting of 13 weeks, unless otherwise noted. The Company’sfiscal year ends on the first Thursday after December 25, which incertain years (such as fiscal 2008) results in a 53-week fiscalyear.  As of July 2, 2009, the Company managed its business under onereportable segment: theatre exhibition operations.

 

On February 12,2007, we, along with AMC Entertainment, Inc. (“AMC”) and Cinemark, Inc.(“Cinemark”) formed a joint venture company known as Digital CinemaImplementation Partners, LLC, a Delaware limited liability company (“DCIP”),to create a financing model and establish agreements with major motion picturestudios for the implementation of digital cinema. The Company’s cumulative cashinvestment in DCIP totaled approximately $7.0 million as of July 2,2009. Such investment is included as a component of “Other Non-current Assets”in the accompanying unaudited condensed consolidated balance sheets. We accountfor our investment in DCIP following the equity method of accounting.  During the two quarters ended July 2,2009 and June 26, 2008, the Company recorded losses of $1.5 million and$1.3 million, respectively, representing its share of the net loss ofDCIP.  Such amounts are presented as acomponent of “Other, net” in the accompanying unaudited condensed consolidatedstatements of income.

 

On March 10,2008, Regal issued $200.0 million aggregate principal amount of 61⁄4%Convertible Senior Notes due March 15, 2011 (the “61⁄4% Convertible SeniorNotes”). Concurrent with the issuance of the 61⁄4% Convertible Senior Notes, weentered into simultaneous convertible note hedge and warrant transactions withrespect to our Class A common stock in order to reduce the potentialdilution from conversion of the 61⁄4% Convertible Senior Notes into shares of ourClass A common stock. The net cost of the convertible note hedge andwarrant transactions was approximately $6.6 million and is included as acomponent of equity in the accompanying unaudited condensed consolidatedbalance sheets. See Note 4—“Debt Obligations” for further descriptionof the 61⁄4% Convertible Senior Notes and the related convertible note hedge andwarrant transactions. The Company used cash on hand and a portion of the netproceeds from the issuance of the 61⁄4% Convertible Senior Notes to redeemapproximately $90.0 million principal amount of Regal’s 33⁄4% Convertible SeniorNotes due May 15, 2008 (the “33⁄4% Convertible Senior Notes”), in a seriesof privately negotiated transactions.  As a result of the earlyredemption, the Company recorded a $3.0 million loss on debt extinguishment (asretrospectively adjusted for the adoption of FASB Staff Position No. APB14-1, *Accounting for Convertible DebtInstruments That May Be Settled in Cash Upon Conversion (Including PartialCash Settlement)*(“FSP 14-1”), described below and in Note 4—“DebtObligations”) during the quarter ended March 27, 2008.  In connectionwith the early redemption, the Company received net proceeds of approximately$13.7 million from Credit Suisse International (“Credit Suisse”) attributableto the convertible note hedge and warrant transactions associated with the 33⁄4%Convertible Senior Notes described further in Note 4—“Debt Obligations.”Such proceeds were recorded as an increase to additional paid-incapital. In connection with the final maturity of the 33⁄4%  Convertible Senior Notes on May 15,2008, holders of the remaining $33.7 million in principal amount

 

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exercised theirconversion rights. The Company elected to settle these conversions entirely incash for approximately $51.4 million using the remaining proceeds from theissuance of the 61⁄4% Convertible Senior Notes.  In connection with theseconversions, the Company received net proceeds of approximately$5.2 million from Credit Suisse attributable to the convertible note hedgeand warrant transactions associated with the 33⁄4% Convertible Senior Notes. Suchproceeds were also recorded as an increase to additional paid-in capital. SeeNote 4—“Debt Obligations” for further discussion of this transaction.

 

On April 30, 2008,the Company acquired Consolidated Theatres Holdings, G.P. (“ConsolidatedTheatres”), which held a total of 28 theatres with 400 screens in Georgia,Maryland, North Carolina, South Carolina, Tennessee and Virginia. The total netcash purchase price for the acquisition was approximately $209.3 million.The results of operations of the acquired theatres have been included in theCompany’s consolidated financial statements for periods subsequent to theacquisition date. In conjunction with the closing, we entered into a finaljudgment with the Antitrust Division of the United States Department of Justice(“DOJ”), which required us to hold separate and divest ourselves of fourtheaters comprising 52 screens in North Carolina. During the quarter ended September 25,2008, the Company entered into an agreement to sell three of the four theatresand recorded impairment charges of approximately $7.9 million related tothese theatres. On October 23, 2008, the Company completed its divestitureof the three theatres.  On April 30, 2009, the Company completed itsdivestiture of the last of the four theatres. See Note 2—“Acquisition” for further discussion of this transaction.

 

For a discussionof other significant transactions which have occurred through January 1,2009, please refer to Note 1 to the consolidated financial statementsincluded in Part II, Item 8 of our annual report on Form 10-K filedon March 2, 2009 with the Securities and Exchange Commission (the “Commission”)(File No. 001-31315) for the fiscal year ended January 1, 2009.

 

As described morefully in Note 4—“Debt Obligations,” effective January 2, 2009, theCompany retrospectively adopted the provisions of FSP 14-1.  Our 61⁄4%Convertible Senior Notes and the 33⁄4% Convertible Senior Notes described in Note4 are within the scope of FSP 14-1; therefore, we retrospectively recorded thedebt portions of the 61⁄4% Convertible Senior Notes and the 33⁄4% ConvertibleSenior Notes at their fair values as of the respective dates of issuance andamortize the related debt discount into interest expense over the life of eachdebt instrument during the periods in which the debt instruments areoutstanding.  A cumulative effect of a change in accounting principle inthe amount of $8.9 million was recorded as of the beginning of fiscal 2007 (December 29,2006) with an offsetting credit to retained earnings.  The accompanyingunaudited condensed consolidated balance sheet as of January 1, 2009 andthe unaudited condensed consolidated statements of income for the quarter andtwo quarters ended June 26, 2008 presented herein have beenretrospectively adjusted to give effect to the adoption of FSP 14-1. Please refer to Note 4—“Debt Obligations” for further discussion of theadoption of FSP 14-1.

 

As discussedfurther in Note 3—“Investment in National CineMedia, LLC,” as aresult of the annual adjustment provisions of the Common Unit AdjustmentAgreement with National CineMedia, LLC (“National CineMedia”), on March 17,2009, we received from National CineMedia approximately 0.5 million newlyissued common units of National CineMedia.  This adjustment increased thenumber of National CineMedia common units held by us to approximately25.4 million and as a result, on a fully diluted basis, we own a 25.0%interest in National CineMedia, Inc. (“NCM, Inc.”) as of July 2,2009.

 

During the twoquarters ended July 2, 2009, Regal paid two quarterly cash dividends of$0.18 on each outstanding share of the Company’s Class A and Class Bcommon stock, or approximately $55.4 million in the aggregate.

 

Totalcomprehensive income for the quarters ended July 2, 2009 and June 26,2008 was $45.4 million and $28.3 million, respectively.  Totalcomprehensive income for the two quarters ended July 2, 2009 and June 26,2008 was $61.3 million and $43.7 million, respectively. Totalcomprehensive income consists of net income attributable to controllinginterest and other comprehensive loss, net of tax, related to the change in theaggregate unrealized loss on the Company’s interest rate swap arrangementsduring each of the quarters and two quarters ended July 2, 2009 and June 26,2008. The Company’s interest rate swap arrangements are further described inNote 4—“Debt Obligations.”

 

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The Company hasprepared the unaudited condensed consolidated balance sheet as of July 2,2009 and the unaudited condensed consolidated statements of income and cashflows for the quarters and two quarters ended July 2, 2009 and June 26,2008 in accordance with U.S. generally accepted accounting principles forinterim financial information and the rules and regulations of theCommission. Accordingly, certain information and footnote disclosures typicallyincluded in an annual report have been condensed or omitted for this quarterlyreport. In the opinion of management, all adjustments (which include only normalrecurring adjustments) necessary to present fairly in all material respects thefinancial position, results of operations and cash flows for all periodspresented have been made. The January 1, 2009 unaudited condensedconsolidated balance sheet information is derived from the audited consolidatedfinancial statements of the Company included in its annual report on Form 10-Kfor the fiscal year ended January 1, 2009. These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto. The results ofoperations for the quarter and two quarters ended July 2, 2009 are notnecessarily indicative of the operating results that may be achieved for thefull 2009 fiscal year.

 

**2.ACQUISITION**

 

***Acquisition of Consolidated Theatres***

 

On April 30,2008, the Company acquired Consolidated Theatres, which held a total of 28theatres with 400 screens in Georgia, Maryland, North Carolina, South Carolina,Tennessee and Virginia. The total net cash purchase price for the acquisitionwas approximately $209.3 million. In conjunction with the closing, weentered into a final judgment with the DOJ, which required us to hold separateand divest ourselves of four theaters comprising 52 screens in North Carolina.Three of the four theatres subject to the judgment were existing Regalproperties and the fourth theatre was acquired from Consolidated Theatres.Because the fourth theatre had minimal and declining cash flows at theacquisition date, none of the purchase price was allocated to the long-livedassets associated with this theatre. Our impairment review during the quarterended June 26, 2008 did not result in any impairment charges related tothese four theatres on a stand alone basis. However, during the quarter ended September 25,2008, the Company made the decision to sell three of these four theatres (twoof the Regal theatres and the Consolidated theatre) together in order topartially satisfy our divestiture requirement. As a result of agreeing to sellthe theatres as a package, we were required to evaluate the theatres forimpairment as a disposal group (as opposed to the stand alone evaluation duringthe quarter ended June 26, 2008) and accordingly, we recorded animpairment charge of $7.9 million during the quarter ended September 25,2008. On October 23, 2008, the Company completed its divestiture of thethree theatres.  On April 30, 2009, the Company completed itsdivestiture of the last of the four theatres.

 

The acquisitionhas been accounted for using the purchase method of accounting and,accordingly, the purchase price has been allocated to the assets acquired andliabilities assumed for each of the respective theatre locations based on theirestimated fair values at the date of acquisition. The allocation of thepurchase price is based on management’s judgment after evaluating severalfactors, including an independent third party valuation. The results ofoperations of the acquired theatres have been included in the Company’s consolidatedfinancial statements for periods subsequent to the acquisition date.

 

The following is asummary of the final allocation of the cash purchase price to the estimatedfair values of the assets acquired and liabilities assumed at the date ofacquisition (in millions):

 
| Current  assets              |   | $     | 1.4    |   |
|------------------------------|--------|-------|--------|--------|
| Property  and equipment, net |   | 209.9 |   |
| Intangible  assets           |   | 18.1  |   |
| Current  liabilities         |   | (11.2 | )      |
| Long-term  liabilities       |   | (8.9  | )      |
| Total  purchase price        |   | $     | 209.3  |   |

 

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The transactionincluded the acquisition of certain identifiable intangible assets, including$9.9 million related to favorable leases with a weighted average amortizationperiod of 13.1 years and approximately $8.2 million related to anon-screen advertising contract which will be amortized on a straight-line basisthrough January 2011.  During the quarter and two quarters ended July 2,2009, the Company recognized $0.9 million and $1.9 million, respectively,of amortization related to these intangible assets.  During the quarter and two quarters ended June 26,2008, the Company recognized $0.5 million of amortization related to theseintangible assets.

 

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

 

In March 2005,Regal and AMC announced the combination of the operations of Regal CineMediaCorporation (“RCM”) and AMC’s subsidiary, National Cinema Network, Inc. (“NCN”),into a new joint venture company known as National CineMedia. In July 2005,Cinemark, through a wholly owned subsidiary, acquired an interest in NationalCineMedia. National CineMedia concentrates on in-theatre advertising andcreating complementary business lines that leverage the operating personnel,asset and customer bases of its theatrical exhibition partners, which includesus, AMC and Cinemark. National CineMedia is, subject to limited exceptions, theexclusive provider of advertising and event services to Regal, AMC andCinemark.

 

As part of the March 2005joint venture transaction, RCM and NCN entered into a Contribution and UnitHolders Agreement with National CineMedia pursuant to which, among otherthings, RCM and NCN contributed assets to National CineMedia and NationalCineMedia assumed specified liabilities of RCM and NCN in consideration for theissuance of equity units by National CineMedia to RCM’s wholly-ownedsubsidiary, Regal CineMedia Holdings (“RCH”) and NCN, respectively. The assetscontributed to National CineMedia by RCM included fixed assets and agreementsas well as approximately $1.3 million in cash. The Company accounts forits investment in National CineMedia using the equity method of accounting anddid not recognize any gain or loss resulting from the initial formation of NationalCineMedia due to the Company’s continued involvement in the operations ofNational CineMedia.

 

On February 13,2007, NCM, Inc., a newly formed entity that serves as the sole manager ofNational CineMedia, completed an initial public offering, or IPO, of its commonstock. In connection with the IPO of NCM, Inc., RCM, through its whollyowned subsidiary RCH, AMC and Cinemark amended and restated the operatingagreement of National CineMedia and other ancillary agreements. In connectionwith the series of transactions completed in connection with the IPO, Regalreceived gross cash proceeds totaling approximately $628.3 million andretained a 22.6% interest in NCM, Inc. After the payment of current taxes,net cash proceeds from these transactions totaled approximately$447.4 million. The Company used a portion of the net cash proceeds tofund an extraordinary cash dividend of $2.00 per share on each outstandingshare of its Class A and Class B common stock, including outstandingrestricted stock, or approximately $302.0 million in the aggregate.Stockholders of record at the close of business on March 28, 2007 werepaid this $302.0 million dividend on April 13, 2007.  As aresult of the transactions completed in connection with the IPO, the Companyrecognized a gain of approximately $350.7 million during fiscal2007.  The formation of National CineMedia and related IPO of NCM, Inc.are further described in Note 4 to the consolidated financial statementsincluded in our annual report on Form 10-K for the fiscal year ended January 1,2009.

 

As furtherdescribed in Note 4 to the consolidated financial statements included inour annual report on Form 10-K for the fiscal year ended January 1,2009, in connection with the IPO, the joint venture partners entered into a CommonUnit Adjustment Agreement with National CineMedia. The Common Unit AdjustmentAgreement was created to account for changes in the number of theatre screensoperated by each of the joint venture partners. Pursuant to our Common UnitAdjustment Agreement, from time to time, common units of National CineMediaheld by the joint venture partners will be adjusted up or down through aformula (“common unit adjustment”) primarily based on increases or decreases inthe number of theatre screens operated and theatre attendance generated by eachjoint venture partner. The 

 

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common unit adjustment iscomputed annually, except that an earlier common unit adjustment will occur fora joint venture partner if its acquisition or disposition of theatres, in asingle transaction or cumulatively since the most recent common unitadjustment, will cause a change of two percent or more in the total annualattendance of all of the joint venture partners.

 

As a result of theannual adjustment provisions of the Common Unit Adjustment Agreement, on April 9,2008, we received from National CineMedia approximately 0.8 million newlyissued common units of National CineMedia.  On May 29, 2008, wereceived from National CineMedia approximately 2.9 million newly issuedcommon units of National CineMedia in accordance with the adjustment provisionsof the Common Unit Adjustment Agreement in connection with our acquisition ofConsolidated Theatres. Finally, on March 17, 2009, we received fromNational CineMedia approximately 0.5 million newly issued common units ofNational CineMedia in accordance with the annual adjustment provisions of theCommon Unit Adjustment Agreement.  These adjustments increased the numberof National CineMedia common units held by us to approximately25.4 million and as a result, on a fully diluted basis, we own a 25.0%interest in NCM, Inc. as of July 2, 2009.  The Company recordedthe additional units at fair value using the available closing stock prices ofNCM, Inc. as of the dates on which the units were received. Since theadditional common units received do not represent the funding of prior lossesof National CineMedia, the fair value of such units were recorded as separateinvestment tranches in National CineMedia. As a result, the Company recorded a$7.0 million increase in its investment in National CineMedia and acorresponding increase to deferred revenue during the two quarters ended July 2,2009.  This amount is being amortized to advertising revenue over theremaining term of the exhibitor services agreements (“ESA”) following the unitsof revenue method.

 

Since theadditional common units received represent separate investment tranches inNational CineMedia, any undistributed equity in the earnings of NationalCineMedia pertaining to these tranches will be recognized under the equitymethod of accounting. As a result, the Company’s share in the net income ofNational CineMedia with respect to these tranches totaled $0.8 million duringthe quarter and the two quarters ended July 2, 2009.  In addition, the Company’s share in the netincome of National CineMedia with respect to these tranches totaled $0.5million during the quarter and two quarters ended June 26, 2008. Suchamount has been included as a component of “Earnings recognized from NCM” inthe unaudited condensed consolidated financial statements.

 

The Company willnot recognize its share of any undistributed equity in the earnings of NationalCineMedia from the Company’s initial investment in National CineMedia untilNational CineMedia’s future net earnings equal or exceed the amount of theabove excess distribution. Until such time, equity earnings related to theCompany’s initial investment in National CineMedia will be recognized only tothe extent that the Company receives cash distributions from NationalCineMedia. During the two quarters ended July 2, 2009 and June 26,2008, the Company received $21.9 million and $13.8 million, respectively,in cash distributions from National CineMedia. Approximately $3.3 millionof these cash distributions received during the two quarters ended July 2,2009 were recognized as a reduction in our investment in National CineMedia.The remaining amounts were recognized in equity earnings during each of theseperiods and have been included as component of “Earnings recognized from NCM”in the accompanying unaudited condensed consolidated financial statements.  As of July 2, 2009 and January 1,2009, our investment in National CineMedia totaled approximately$77.6 million and $73.1 million, respectively.

 

As a result of theamendment to the ESA and related modification payment, the Company recognizesvarious types of other revenue from National CineMedia, including per patronand per digital screen theatre access fees, net of payments for on-screenadvertising time provided to our beverage concessionaire, other NCM revenue andamortization of upfront ESA modification fees utilizing the units of revenueamortization method. These revenues are presented as a component of otheroperating revenues in the Company’s unaudited condensed consolidated financialstatements and consist of the following amounts (in millions):

 

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| ** **                                        | ** ** | **Quarter  Ended  July 2, 2009** | ** ** | **Quarter  Ended June 26, 2008** | ** ** | **Two  Quarters********July 2,  2009** | ** ** | **Two  Quarters********June 26,  2008** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| Theatre  access fees per patron                   |       | $                                     | 4.3        |                                  | $          | 4.0                                         |       | $                                            | 8.1        |   | $ | 7.9 |   |
| Theatre  access fees per digital screen           |       | 1.3                                   |       | 1.2                                   |       | 2.6                                         |       | 2.5                                          |       |
| Other  NCM revenue                                |       | 0.6                                   |       | 0.9                                   |       | 1.3                                         |       | 1.8                                          |       |
| Amortization  of ESA modification fees            |       | 1.1                                   |       | 0.8                                   |       | 2.0                                         |       | 1.4                                          |       |
| Payments  for beverage concessionaire advertising |       | (3.9                                  | )          | (3.3                                  | )          | (7.4                                        | )          | (6.5                                         | )          |
| Total                                             |       | $                                     | 3.4        |                                  | $          | 3.6                                         |       | $                                            | 6.6        |   | $ | 7.1 |   |

 

As of July 2,2009, approximately $2.7 million and $2.2 million due from/toNational CineMedia were included in “Trade and other receivables, net” and “Accountspayable,” respectively.  As of January 1, 2009, approximately$2.3 million and $2.2 million due from/to National CineMedia wereincluded in “Trade and other receivables, net” and “Accounts payable,”respectively.

 

Summarizedunaudited condensed consolidated statement of income information for NationalCineMedia for the quarters ended April 2, 2009 and March 27, 2008 isas follows (in millions):

* *
| ** **              | ** ** | **Quarter Ended  April 2, 2009** | ** ** | **Quarter Ended  March 27, 2008** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| Revenues                |       | $                                          | 73.5       |                                        | $          | 62.7 |   |
| Income  from operations |       | 22.2                                       |       | 17.7                                        |       |
| Net  income             |       | 11.9                                       |       | 4.2                                         |       |
|                         |            |                                            |            |                                             |            |  |  |

 

As of the date ofthis quarterly report on Form 10-Q, no summarized financial informationfor National CineMedia was available for the quarter ended July 2, 2009.

 

**4. DEBTOBLIGATIONS**

 

Debt obligationsat July 2, 2009 and January 1, 2009 consist of the following (inmillions):

 
| ** **                                                                                                                           | ** ** | **July 2,  2009** | ** ** | **January 1,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Regal  61⁄4% Convertible Senior Notes, net of debt discount                                                                       |       | $                      | 192.5      |                      | $          | 190.5 |   |
| Regal  Cinemas Amended Senior Credit Facility                                                                                        |       | 1,653.3                |       | 1,661.8                   |       |
| Regal  Cinemas 93/8% Senior Subordinated Notes                                                                                       |       | 51.5                   |       | 51.5                      |       |
| Lease  financing arrangements, weighted average interest rate of 11.20%, maturing in  various installments through January 2021 |       | 79.6                   |       | 81.8                      |       |
| Capital  lease obligations, 8.5% to 10.3%, maturing in various installments through  December 2017                              |       | 17.8                   |       | 19.0                      |       |
| Other                                                                                                                                |       | 0.4                    |       | 0.3                       |       |
| Total  debt obligations                                                                                                              |       | 1,995.1                |       | 2,004.9                   |       |
| Less  current portion                                                                                                                |       | 23.9                   |       | 23.4                      |       |
| Total  debt obligations, net of current portion                                                                                      |       | $                      | 1,971.2    |                      | $          | 1,981.5 |   |

 

***Regal 6******1⁄4******% ConvertibleSenior Notes—***On March 10, 2008, Regal issued $200.0 million aggregate principalamount of the 61⁄4% Convertible Senior Notes. Interest on the 61⁄4% ConvertibleSenior Notes is payable semi-annually in arrears on March 15 and September 15of each year, beginning September 15, 2008. The 61⁄4% Convertible Senior Notesare senior unsecured obligations of Regal and rank on parity with all of ourexisting and future senior unsecured indebtedness and prior to all of oursubordinated indebtedness. The 61⁄4% Convertible Senior Notes are effectivelysubordinated to all of our future secured indebtedness to the extent of theassets securing that indebtedness and to any indebtedness and other liabilitiesof our subsidiaries. None of our subsidiaries have guaranteed any of ourobligations with respect to the 61⁄4% Convertible Senior Notes. On or after December 15,2010, our note holders will have the option to convert their 61⁄4% ConvertibleSenior Notes, in whole or in part, into shares of our

 

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Class A common stockat any time prior to maturity, subject to certain limitations, unlesspreviously purchased by us at the note holder’s option upon a fundamentalchange (as defined in the indenture to the 61⁄4% Convertible Senior Notes dated March 10,2008) at the then-existing conversion price per share. Prior to December 15,2010, our note holders have the right, at their option, to convert their 61⁄4%Convertible Senior Notes, in whole or in part, into shares of our Class Acommon stock, subject to certain limitations, unless previously purchased by usat the note holder’s option upon a fundamental change, at the then existingconversion price per share, subject to further adjustments described below, if:

 

·                  during any calendar quarter commencingafter June 30, 2008, and only during such calendar quarter, if the lastreported sale price per share of Class A common stock for at least 20trading days in the period of 30 consecutive trading days ending on the lasttrading day of the immediately preceding calendar quarter exceeds 130% of theconversion price per share of Class A common stock for the 61⁄4% ConvertibleSenior Notes on the last trading day of such immediately preceding calendarquarter;

 

·                  during the five consecutive business daysimmediately after any ten consecutive trading day period (such 10 consecutivetrading day period, the “Note Measurement Period”) in which the trading price(calculated using the trading price for each of the trading days in the NoteMeasurement Period) per $1,000 principal amount of the 61⁄4% Convertible SeniorNotes was less than 95% of the product of the last reported sale price pershare of Class A common stock and the conversion rate for each day of theNote Measurement Period as determined following a request by a holder of thenotes in accordance with the procedures described more fully in the 61⁄4%Convertible Senior Notes indenture;

 

·                  during certain periods if specifiedcorporate transactions occur or specified distributions to holders of commonstock are made, each as set forth in the 61⁄4% Convertible Senior Notes indenture(excluding certain distributions and excluding quarterly dividends not inexcess of the base dividend amount (as defined in the 61⁄4% Convertible SeniorNotes indenture)), in which case, the conversion price per share will beadjusted as set forth in the 61⁄4% Convertible Senior Notes indenture; or

 

·                  a fundamental change (as defined in the61⁄4% Convertible Senior Notes indenture) occurs, a note holder may elect toconvert all or a portion of its notes at any time commencing on the effectivedate of such transaction or 15 days prior to the anticipated effectivedate (in certain circumstances) until the latter of: (i) the day beforethe fundamental change repurchase date and (ii) 30 days following theeffective date of such transaction (but in any event prior to the close ofbusiness on the business day prior to the maturity date), in which case we willincrease the conversion rate for the notes surrendered for conversion by anumber of additional shares of Class A common stock, as set forth in thetable in the 61⁄4% Convertible Senior Notes indenture.

 

On July 2,2009, at the then-current conversion price of $23.0336 per share (whichconversion price may be adjusted pursuant to the certain events describedfurther in the 61⁄4% Convertible Senior Notes indenture), each $1,000 ofaggregate principal amount of 61⁄4% Convertible Senior Notes is convertible intoapproximately 43.4148 shares of our Class A common stock. Upon conversion,we may elect to deliver cash in lieu of shares of Class A common stock ora combination of cash and shares of Class A common stock. The conversionprice and the number of shares delivered on conversion are subject toadjustment upon certain events.

 

In connection withthe issuance of the 61⁄4% Convertible Senior Notes, we used approximately$6.6 million of the net proceeds of the offering to enter into convertiblenote hedge and warrant transactions with respect to our Class A commonstock to reduce the potential dilution from conversion of the 61⁄4% ConvertibleSenior Notes. Under the terms of the convertible note hedge arrangement (the “2008Convertible Note Hedge”) with Credit Suisse, we paid $12.6 million for aforward purchase option contract under which we are entitled to purchase fromCredit Suisse a fixed number of shares of our Class A common stock (at July 2,2009, at a price per share of $23.0336). In the event of the conversion of the61⁄4%

 

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Convertible Senior Notes,this forward purchase option contract allows us to purchase, at a fixed priceequal to the implicit conversion price of shares issued under the 61⁄4%Convertible Senior Notes, a number of shares of Class A Common stock equalto the shares that we issue to a note holder upon conversion. Settlement termsof this forward purchase option allow the Company to elect cash or sharesettlement based on the settlement option it chooses in settling the conversionfeature of the 61⁄4% Convertible Senior Notes. We accounted for the 2008 ConvertibleNote Hedge pursuant to the guidance in Emerging Issues Task Force (“EITF”)00-19, *Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in a Company’s Own Stock*(“EITF 00-19”).  Accordingly, the $12.6 million purchase price of theforward stock purchase option contract was recorded as an increase toconsolidated stockholders’ deficit.

 

We also sold toCredit Suisse a warrant (the “2008 Warrant”) to purchase shares of our Class Acommon stock. The 2008 Warrant is currently exercisable for approximately8.7 million shares of our Class A common stock at a July 2, 2009exercise price of $25.376 per share (which exercise price may be adjustedpursuant to the provisions of the 2008 Warrant). We received $6.0 millionin cash from Credit Suisse in return for the sale of this forward sharepurchase option contract. Credit Suisse cannot exercise the 2008 Warrant unlessand until a conversion event occurs. We have the option of settling the 2008Warrant in cash or shares of our Class A common stock. We accounted forthe sale of the 2008 Warrant as the sale of a permanent equity instrumentpursuant to the guidance in EITF 00-19. Accordingly, the $6.0 millionsales price of the forward stock purchase option contract was recorded as adecrease to consolidated stockholders’ deficit.

 

The 2008Convertible Note Hedge and the 2008 Warrant allow us to acquire sufficient Class Acommon shares from Credit Suisse to meet our obligation to deliver Class Acommon shares upon conversion by the note holder, unless the Class Acommon share price exceeds $25.376 (as of July 2, 2009). When the fairvalue of our Class A common shares exceeds such price, the equitycontracts no longer have an offsetting economic impact, and accordingly will nolonger be effective as a share-for-share hedge of the dilutive impact ofpossible conversion.

 

The 61⁄4%Convertible Senior Notes allow us to settle any conversion by remitting to thenote holder the accreted value of the note in cash plus the conversion spread(the excess conversion value over the accreted value) in either cash, shares ofour 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 forInstrument B as set forth in EITF 90-19, *Convertible Bonds with Issuer Option to Settle for Cash upon Conversion*.Because the accreted value of the 61⁄4% Convertible Senior Notes may be settledin cash, shares of our Class A common stock or a combination of stock andcash, the accreted value of the 61⁄4% Convertible Senior Notes is assumed to besettled in shares and will result in dilution in our earnings per sharecomputations using the if-converted method, if the effect is dilutive (seeNote 10—“Recent Accounting Pronouncements”).

 

***Regal 33⁄4% Convertible Senior Notes***—As further described in Note 5 to theconsolidated financial statements included in our annual report on Form 10-Kfor the fiscal year ended January 1, 2009, on May 28, 2003, Regalissued $240.0 million aggregate principal amount of the 33⁄4% ConvertibleSenior Notes due May 15, 2008.

 

In connection withthe issuance of the 61⁄4% Convertible Senior Notes described above, on March 5,2008 and March 10, 2008, we redeemed a total of approximately $90.0million principal amount of the 33⁄4% Convertible Senior Notes, in a series ofprivately negotiated transactions.  As a result of the early redemption,the Company recorded a $3.0 million loss on debt extinguishment (asretrospectively adjusted for the adoption of FSP 14-1 described below) duringthe quarter ended March 27, 2008.  In connection with the earlyredemption, the Company received net proceeds of approximately $13.7 millionfrom Credit Suisse attributable to the convertible note hedge (the “2003Convertible Note Hedge”) and the warrant (the “2003 Warrant”) associated withthe 33⁄4% ConvertibleSenior Notes.  Such proceeds were recorded as an increase to additionalpaid-in capital. In connection with the final maturity of the 33⁄4% ConvertibleSenior Notes on May 15, 2008, holders of the remaining $33.7 million inprincipal amount exercised their conversion rights. The Company elected tosettle these conversions entirely in cash for approximately $51.4 millionusing the remaining proceeds from the issuance of the 61⁄4% Convertible 

 

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Senior Notes.  Inconnection with these conversions, the Company received net proceeds ofapproximately $5.2 million from Credit Suisse attributable to theconvertible note hedge and warrant transactions associated with the 33⁄4% ConvertibleSenior Notes. Such proceeds were also recorded as an increase to additional paid-incapital.

 

***Adoption of FSP 14-1***

 

Effective January 2,2009, the Company retrospectively adopted the provisions of FSP 14-1, whichrequires that issuers of convertible debt instruments that may be settled incash upon conversion (including partial cash settlement) should separatelyaccount for the liability and equity (conversion feature) components of suchinstruments. As a result, interest expense should be imputed and recognizedbased upon the entity’s nonconvertible debt borrowing rate, which will resultin incremental non-cash interest expense. Prior to FSP 14-1, AccountingPrinciples Board Opinion No. 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrant*,provided that no portion of the proceeds from the issuance of the instrumentshould be attributable to the conversion feature.  Our 61⁄4% ConvertibleSenior Notes and our 33⁄4% Convertible Senior Notes are subject to FSP 14-1.

 

We have determinedthat if the liability and equity components of the 61⁄4% Convertible Senior Notesand the 33⁄4% ConvertibleSenior Notes had been separately valued at the time of their issuances on March 10,2008 and May 28, 2003, respectively, the amounts allocated to long-termdebt would have been $187.4 million (61⁄4% Convertible Senior Notes) and $203.8 million(33⁄4% ConvertibleSenior Notes), and the amounts allocated to equity would have been $12.6million and $36.2 million, respectively. The effective interest rates on the61⁄4% Convertible Senior Notes and the 33⁄4% Convertible Senior Notes (based upon theCompany’s estimated nonconvertible debt borrowing rate at the time of eachrespective issuance) would have been approximately 8.7% and 6.8%,respectively.  Effective with the January 2, 2009 adoption of FSP 14-1, interest expense (amortization of debt discount) for fiscal 2003,2004, 2005, 2006, 2007 and 2008 were increased by non-cash amounts ofapproximately $3.3 million, $6.0 million, $6.7 million, $5.7 million, $4.6million and $4.2 million, respectively.  In addition, the Companyretrospectively reduced the previously recorded loss on debt extinguishmentresulting from the early extinguishments of the 33⁄4% Convertible Senior Notes thatoccurred during fiscal 2006 and fiscal 2008 by approximately $35.1 million and$67.5 million, respectively.  After giving effect to these adjustments andthe application of the appropriate income tax benefits through the fiscal yearended December 28, 2006, a cumulative effect adjustment of $8.9 millionwas recorded as of the beginning of fiscal 2007 (December 29, 2006) with acorresponding credit to the opening balance of retained earnings.

 

During the quarterended July 2, 2009, the Company recorded approximately $1.0 million ofnon-cash interest expense on the 61⁄4% Convertible Senior Notes. The amount ofcontractual coupon interest recognized on the 61⁄4% Convertible Senior Notesduring the same period was approximately $3.1 million.  During the quarterended June 26, 2008, the Company retrospectively recorded approximately$1.0 million of non-cash interest expense for the 61⁄4% Convertible Senior Notesand the 33⁄4% ConvertibleSenior Notes. The amount of contractual coupon interest recognized on the 61⁄4%Convertible Senior Notes and the 33⁄4% Convertible Senior Notes during the sameperiod was approximately $3.3 million.  In addition, for the quarter endedJune 26, 2008, amounts previously recorded for loss on debt extinguishmentand provision for income taxes were retrospectively (reduced) increased by$(17.7) million and $6.2 million, respectively.  The resulting increase innet income attributable to controlling interest from the adoption of FSP 14-1was approximately $10.5 million for the quarter ended June 26, 2008.During the two quarters ended July 2, 2009 and June 26, 2008, theCompany retrospectively recorded approximately $2.0 million and $2.1 million,respectively, of non-cash interest expense for the 61⁄4% Convertible Senior Notesand the 33⁄4% ConvertibleSenior Notes. The amount of contractual coupon interest recognized on the 61⁄4%Convertible Senior Notes and the 33⁄4% Convertible Senior Notes during the sameperiods were approximately $6.3 million and $4.9 million, respectively. In addition, for the two quarters ended June 26, 2008, amounts previouslyrecorded for loss on debt extinguishment and provision for income taxes wereretrospectively (reduced) increased by $(67.5) million and $24.4 million,respectively.  The resulting increase in net income attributable tocontrolling interest from the adoption of FSP 14-1 was approximately $41.0million for the two quarters ended June 26, 2008. The accompanyingunaudited condensed consolidated statements of income for the quarters and twoquarters ended June 26, 2008, presented herein

 

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has been retrospectivelyadjusted to give effect to these adjustments resulting from the adoption of FSP14-1.  In addition, the accompanying unaudited condensed consolidatedbalance sheet as of January 1, 2009 presented herein has beenretrospectively adjusted to give effect to the adoption of FSP 14-1 as follows(in millions):

 
| ** **                             | ** ** | **As  of  January 1, 2009  (Previously Reported)** | ** ** | **Impact  of********FSP 14-1** | ** ** | **As  of  January 1, 2009  (As Revised for FSP 14-1)** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|
| Other  assets                          |       | $                                                       | 113.5      |                           | $          | (0.2                                                        | )          | $ | 113.3 |   |
| Non-current  deferred income tax asset |       | 81.7                                                    |       | (3.5                           | )          | 78.2                                                        |       |
| Long-term  debt, less current portion  |       | 1,896.5                                                 |       | (9.5                           | )          | 1,887.0                                                     |       |
| Additional  paid-in capital (deficit)  |       | (256.1                                                  | )          | (9.7                           | )          | (265.8                                                      | )          |
| Retained  earnings                     |       | 24.6                                                    |       | 15.5                           |       | 40.1                                                        |       |
|                                        |            |                                                         |            |                                |            |                                                             |            |  |  |  |

 

As of July 2,2009 and January 1, 2009, the carrying amounts of the $200.0 million 61⁄4%Convertible Senior Notes were approximately $192.5 million and $190.5 million,respectively, and the carrying amount of the related equity component(conversion feature) was $12.6 million.  We anticipate recordingadditional non-cash interest expense on the 61⁄4% Convertible Senior Notes in theamount of $7.5 million (the unamortized discount as of July 2, 2009)through the March 2011 maturity date of the 61⁄4% Convertible Senior Notes,thereby increasing the carrying value to $200.0 million.  As of July 2,2009, the if-converted value of the 61⁄4% Convertible Senior Notes wasapproximately $200.0 million.

 

***Regal Cinemas Fifth 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 toCredit Suisse First Boston), as Administrative Agent and the other lendersparty thereto, which consists of a term loan facility (the “Term Facility”) inan aggregate original principal amount of $1,700.0 million and a revolvingcredit facility (the “Revolving Facility”) in an aggregate principal amount ofup to $100.0 million.  Due to the bankruptcy filings by LehmanBrothers Holdings Inc. (“Lehman”) and certain of its affiliates and the suddendeterioration in the credit standing of the Lehman affiliate party to ourRevolving Facility, the aggregate principal amount available for drawing underthe Revolving Facility was reduced by $5.0 million to $95.0 million during thefiscal year ended January 1, 2009.  The Revolving Facility has aseparate sublimit of $10.0 million for short-term loans 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 on October 27,2011. Interest is payable (a) in the case of base rate loans, quarterly inarrears, and (b) in the case of Eurodollar rate loans, at the end of eachinterest period, but in no event less often than every three months. TheTerm Facility 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 on October 27,2013. The Amended Senior Credit Facility is further described in Note 5 tothe consolidated financial statements included in our annual report on Form 10-Kfor the fiscal year ended January 1, 2009.

 

On January 20,2009, Regal Cinemas entered into the First Amendment (the “Amendment”) to the AmendedSenior Credit Facility. As a result of the Amendment, either the Company, orits wholly-owned subsidiary, REH, will be permitted from time to time topurchase loans outstanding under the Amended Senior Credit Facility. TheAmendment provides that the aggregate principal amount of loans that can berepurchased shall not be more than $300.0 million and all such repurchasesshall close on or before the date that is 270 days after the FirstAmendment Effective Date (approximately October 17, 2009), as defined inthe Amendment, and sets forth the terms for implementing an offer to repurchasesuch loans (such repurchase being the “Dutch Auction.”)

 

Under theAmendment, (i) the Applicable Margin, as defined in the Amendment, forRevolving Loans under the Revolving Facility and for Term Loans under the TermFacility (each of which are determined by reference to the then-applicableConsolidated Leverage Ratio) is increased by 2.0%, (ii) Regal Cinemas’ability to elect interest periods for LIBOR borrowings is limited to interestperiods of

 

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2, 3, 6 or (if availableto all lenders) 12 months, with 1 month interest periods no longerbeing available, and (iii) Regal Cinemas may exclude a minimum of$100.0 million, but not more than $200.0 million, of SubordinatedDebt, as defined in the Amendment, that is used to repay amounts outstandingunder the Term Loan from certain financial covenant calculations.

 

The Amendment alsomodifies other financial covenants to be less restrictive as follows:

 

·                  (i) extending the time period forwhich the Maximum Consolidated Adjusted Leverage Ratio, as defined in theAmendment, may not exceed 5.75:1.00 until the 2nd fiscal quarter of 2011 and (ii) providingthat the Maximum Consolidated Adjusted Leverage Ratio may not exceed (x) 5.50:1.00from the 3rd fiscalquarter of 2011 through the 4th fiscal quarter of 2011 and (y) 5.25:1.00from the 1st fiscalquarter of 2012 and thereafter; and

 

·                  (i) extending the time period forwhich the Maximum Consolidated Leverage Ratio, as defined in the Amendment, maynot exceed 3.75:1.00 until the 2nd fiscal quarter of 2011 and (ii) providingthat the Maximum Consolidated Leverage Ratio may not exceed (x) 3.50:1.00from the 3rd fiscalquarter of 2011 through the 4th fiscal quarter of 2011 and (y) 3.25:1.00from the 1st fiscalquarter of 2012 and thereafter.

 

Upon the executionof the Amendment to the Amended Senior Credit Facility, Regal recordedapproximately $9.6 million of new debt acquisition costs and incurredapproximately $0.8 million of other third party costs.

 

Borrowings underthe Amended Senior Credit Facility bear interest, at Regal Cinemas’ option, ateither a base rate or an Adjusted Eurodollar Rate (as defined in the AmendedSenior Credit Facility) plus, in each case, an applicable margin.  As of July 2,2009 and January 1, 2009, borrowings of $1,653.3 million and$1,661.8 million, respectively, were outstanding under the Term Facilityat an effective interest rate of 6.14% (as of July 2, 2009) and 4.42% (asof January 1, 2009), after the impact of the interest rate swaps describedbelow is taken into account.

 

***Interest Rate Swaps***— As described in Note 5 to the consolidatedfinancial statements included in our annual report on Form 10-K for thefiscal year ended January 1, 2009, Regal Cinemas had three interest rateswap agreements effective as of January 1, 2009, which hedged an aggregateof approximately $700.0 million of variable rate debt obligations.  During the quarter ended April 2, 2009,Regal Cinemas entered into four additional hedging relationships via fourdistinct interest rate swap agreements with maturity terms of two to threeyears each from the respective effective dates of the swaps and require RegalCinemas to pay interest at fixed rates ranging from 2.15% to 2.53% and receiveinterest at a variable rate. These interest rate swaps were designated to hedgeapproximately $1,000.0 million of variable rate debt obligations.  Threeof these interest rate swap agreements (designated to hedge approximately$800.0 million of variable rate debt obligations) became effective during thetwo quarters ended July 2, 2009.  On June 30, 2009, one of ourinterest rate swaps designated to hedge $300.0 million of variable ratedebt obligations matured. As a result, the Company’s effective interest rateswap agreements hedge an aggregate of approximately $1,200.0 million ofvariable rate debt obligations as of July 2, 2009 at an effective rate ofapproximately 6.82%.

 

On September 15,2008, because of the sudden deterioration in the credit standing of the Lehmancounterparty to an interest rate swap agreement designated to hedgeapproximately $100.0 million of variable rate debt obligations, theCompany concluded that the hedging relationship was no longer expected to behighly effective in achieving offsetting cash flows. As a result, on September 15,2008, the hedging relationship ceased to qualify for hedge accounting underStatement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities*. For the period from September 15, 2008 through September 25,2008, the Company recognized $0.5 million (the change in fair value of theformer hedging derivative) as a reduction of interest expense in the consolidatedfinancial statements. On October 3, 2008, the Lehman counterparty filedfor bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Asa result, an event of default occurred under the provisions of the interestrate swap agreement between us and the Lehman counterparty, which effectivelyterminated the interest

 

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rate swap on October 3,2008, as indicated above. Accordingly, $1.6 million of accumulated othercomprehensive loss as of October 3, 2008 will be reclassified intoearnings in the periods during which the hedged forecasted transaction affectsearnings (i.e., when interest payments are made on the variable rate debtobligations) as an adjustment to interest expense over the remaining life ofthe two-year original hedge as long as the variable rate debt obligationsremain outstanding. During the quarter ended July 2, 2009, the Company releaseda portion of the deferred loss in accumulated other comprehensive loss byrecording interest expense (net of related tax effects) of approximately$0.4 million and a corresponding $0.4 million reduction of othercomprehensive loss. During the quarter ended July 2, 2009, the Companypaid a final termination value of approximately $2.5 million (including accruedinterest) associated with the interest rate swap.

 

Under the terms ofthe Company’s effective interest rate swap agreements as of July 2, 2009,Regal Cinemas pays interest at various fixed rates ranging from 2.22% to 4.994%and receives interest at a variable rate based on the 3-month LIBOR. The3-month LIBOR rate on each reset date determines the variable portion of theinterest rate-swaps for the following three-month period. The interest rateswaps settle any accrued interest for cash on the last day of each calendarquarter, until expiration. At such dates, the differences to be paid orreceived on the interest rate swaps will be included in interest expense. Nopremium or discount was incurred upon the Company entering into the interestrate swaps, because the pay and receive rates on the interest rate swapsrepresented prevailing rates for each counterparty at the time the interestrate swaps were entered into. The interest rate swaps qualify for cash flowhedge accounting treatment in accordance with SFAS No. 133 and as such,the Company has effectively hedged its exposure to variability in the futurecash flows attributable to the 3-month LIBOR on approximately $1,200.0 millionof variable rate obligations. The change in the fair values of the interestrate swaps is recorded on the Company’s consolidated balance sheet as an assetor liability with the effective portion of the interest rate swaps’ gains orlosses reported as a component of other comprehensive income (loss) and theineffective portion reported in earnings (interest expense). As interestexpense is accrued on the debt obligation, amounts in accumulated othercomprehensive income/loss related to the designated hedging instruments (thethree interest rate swaps) will be reclassified into earnings to obtain a netcost on the debt obligation equal to the effective yield of the fixed rate ofeach swap.

 

As of July 2,2009, the aggregate fair value of all of the Company’s interest rate swaps wasdetermined to be approximately $(16.3) million, of which $(12.3) million wasrecorded as a component of “Other Non-Current Liabilities” and $(4.0) millionhas been recorded as a component of “Accrued Expenses” with a correspondingamount of $(9.9) million, net of tax, recorded to “Accumulated OtherComprehensive Loss.”  As of January 1, 2009, the aggregate fair valueof effective interest rate swaps was determined to be approximately $(14.2)million, which was recorded as a component of “Accrued Expenses” with acorresponding amount of $(8.7) million, net of tax, recorded to “AccumulatedOther Comprehensive Loss.”  These interest rate swaps exhibited noineffectiveness during the quarters and two quarters ended July 2, 2009and June 26, 2008 and accordingly, the net losses on the swaps of $1.3million and $8.1 million, respectively, were reported as a component of othercomprehensive loss for the two quarters ended July 2, 2009 and June 26,2008.  The fair value of the Company’s interest rate swaps is based onlevel 2 inputs, as described by SFAS No. 157, *Fair Value Measurements*, which include observable inputssuch as dealer quoted prices for similar assets or liabilities, and representsthe estimated amount Regal Cinemas would receive or pay to terminate theagreements taking into consideration various factors, including currentinterest rates, credit risk and counterparty credit risk.  Thecounterparties to the Company’s interest rate swaps are major financialinstitutions.  The Company evaluates the bond ratings of the financialinstitutions and believes that credit risk is at an acceptably low level.

 

***Other Long-Term Obligations—***All other long-term obligations(including the Regal Cinemas 93/8% Senior Subordinated Notes) not explicitly discussedherein are described in Note 5 to the consolidated financial statementsincluded in our annual report on Form 10-K for the fiscal year ended January 1,2009 and incorporated by reference herein.

 

Please refer toNote 12—“Subsequent Events” for a discussion of financing transactions effectedsubsequent to the quarter ended July 2, 2009.

 

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**5.INCOME TAXES**

 

The provision forincome taxes of $26.9 million and $14.7 million for the quarters ended July 2,2009 and June 26, 2008, respectively, reflect effective tax rates ofapproximately 40.0% and 37.8%, respectively.  The provision for incometaxes of $41.3 million and $33.8 million for the two quarters ended July 2,2009 and June 26, 2008, respectively, reflect effective tax rates ofapproximately 40.1% and 39.5%, respectively.  The effective tax rates forthe quarters and two quarters ended July 2, 2009 and June 26, 2008reflect the impact of certain non-deductible expenses.  The increase inthe effective tax rate for the quarter and two quarters ended July 2, 2009is primarily attributable to the settlement of an uncertain tax position withstate taxing authorities during the quarter ended June 26, 2008.

 

In assessing therealizable value of deferred tax assets, management considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized. The ultimate realization of deferred tax assets is dependentupon the generation of future taxable income during the periods in which thesetemporary differences become deductible. The Company has recorded a valuationallowance against deferred tax assets at July 2, 2009 and January 1,2009 totaling $12.1 million, as management believes it is more likely thannot that certain deferred tax assets will not be realized in future taxperiods. Future reductions in the valuation allowance associated with a changein management’s determination of the Company’s ability to realize thesedeferred tax assets will result in a decrease in the provision for incometaxes.

 

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 tax returns.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. federal examinations bytax authorities for years before 2005, and with limited exceptions, is nolonger subject to state income tax examinations for years before 2004. However,the taxing authorities still have the ability to review the propriety of taxattributes created in closed tax years if such tax attributes are utilized inan open tax year.

 

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

 

***Capital Stock***

 

As of July 2,2009, the Company’s authorized capital stock consisted of:

 

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

 

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

 

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

 

Of the authorizedshares of Class A common stock, 18.0 million shares were sold inconnection with the Company’s initial public offering in May 2002. TheCompany’s Class A common stock is listed on the New York Stock Exchangeunder the trading symbol “RGC.” As of July 2, 2009, 130,289,668 shares of Class Acommon stock were outstanding. Of the authorized shares of Class B commonstock, 23,708,639 shares were outstanding as of July 2, 2009, all of whichare held by Anschutz Company(“Anschutz”). Each share of Class B common stockconverts into one share of Class A common stock atthe option of the holder or upon certaintransfers of a holder’s Class B common stock. Each holder of Class Bcommon stock is entitled to ten votes for each outstanding share of Class Bcommon stock owned by that stockholder on every matter

 

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properly submitted to thestockholders for their vote. Of the authorized shares of the preferred stock,no shares were issued and outstanding as of July 2, 2009. The Class Acommon stock is entitled to one vote for each outstanding share of Class Acommon stock on every matter properly submitted to the stockholders for a vote.Except as 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 the Class Bcommon stock are described in Note 10 to the consolidated financialstatements included in our annual report on Form 10-K for the fiscal yearended January 1, 2009.

 

***Share Repurchase Program***

 

During 2004, theCompany’s board of directors authorized a share repurchase program, whichprovided for the authorization to repurchase up to $50.0 million of theCompany’s outstanding Class A common stock within a twelve month period.During 2005, the Company repurchased 520,386 shares of its outstanding Class Acommon stock at an aggregate cost of approximately $10.0 million. TheCompany’s board of directors extended the share repurchase program during thefiscal year ended January 1, 2009 for an additional twelve month period.Accordingly, the Company can repurchase up to an additional $40.0 millionunder the share repurchase program through November 2009.  TheCompany made no repurchases of its outstanding Class A common stock underthe program during the quarters and two quarters ended July 2, 2009 and June 26,2008.  Repurchases can be made from time to time as market conditionswarrant, through open market purchases, negotiated transactions, or in such amanner deemed appropriate by the Company. Treasury shares are retired upon repurchase.At retirement, the Company records treasury stock purchases at cost with anyexcess of cost over par value recorded as a reduction of additional paid-incapital.

 

***Warrants***

 

Other thandisclosed in Note 4—“Debt Obligations” and Note 9—“Earnings Per Share,”no warrants to acquire the Company’s Class A or Class B common stockwere outstanding as of July 2, 2009.

 

***Share-Based Compensation***

 

In 2002, theCompany established the 2002 Stock Incentive Plan (the “Incentive Plan”) for atotal of 11,194,354 authorized shares, which provides for the granting ofincentive stock options and non-qualified stock options to officers, employeesand consultants of the Company. As described below under “Restricted Stock” and“Performance Share Units,” the Incentive Plan also provides for grants ofrestricted stock and performance shares that are subject to restrictions andrisks of forfeiture. Readers should refer to Note 10 to the consolidatedfinancial statements included in our annual report on Form 10-K forthe fiscal year ended January 1, 2009 for additional information relatedto these awards and the Incentive Plan.

 

*StockOptions*

 

In connection withthe July 1, 2003, June 2, 2004 and April 13, 2007 extraordinarycash dividendsand pursuant to the antidilution adjustment terms of the IncentivePlan, the exercise price and the number of shares of Class A common stocksubject to options held by the Company’s option holders were adjusted toprevent dilution and restore their economic position to that existingimmediately before the extraordinary dividends. The antidilution adjustmentsmade with respect to such options resulted in a decrease in the range ofexercise prices, from $2.4407 to $16.1768 per share, an increase in theaggregate number of sharesissuable upon exercise of such options by 5,185,100,and an increase in the total number of authorized shares under the IncentivePlan to 18,269,213 (after giving effect to the May 11, 2005 amendment tothe Incentive Plan, which increased the total number of shares of Class Acommon stock authorized for issuance under the Incentive Plan by 1,889,759shares). As of July 2, 2009 and after giving effect to the antidilutionadjustments and the May 11, 2005 amendment to the Incentive Plan, optionsto purchase a total of 577,193 shares of Class A common stock wereoutstanding under the Incentive Plan, and 2,067,787 shares remain available forfuture issuance under the Incentive Plan. Stock option information presentedherein has been adjusted to give effect to the extraordinary dividends. 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 dividends because (1) the aggregate intrinsic value of theawards immediately after the extraordinary dividends was not greater than theaggregate intrinsic value of

 

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the awards immediatelybefore the extraordinary dividends and (2) the ratio of the exercise priceper share to the market value per share was not reduced.

 

There were nostock options granted during the quarters and two quarters ended July 2,2009 and June 26, 2008.  During the quarters ended July 2, 2009and June 26, 2008, the Company recognized approximately $0.1 million ofshare-based compensation expense related to stock options.  Duringthe two quarters ended July 2, 2009 and June 26, 2008, the Companyrecognized approximately $0.1 million of share-based compensation expenserelated to stock options.  Such expense is presented as a componentof general and administrative expenses for the quarters and two quarters ended July 2,2009 and June 26, 2008.

 

 

We receive a taxdeduction for certain stock option exercises during the period the options areexercised, generally for the excess of the price at which the stock is soldover the exercise price of the options.  In accordance with SFAS No. 123(R),*Share-Based Payment*, 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 two quarters ended July 2, 2009, ourunaudited condensed consolidated statement of cash flows reflects less than$0.1 million of excess tax benefits as financing cash flows. Net cashproceeds from the exercise of stock options were $0.1 million for the twoquarters ended July 2, 2009. The actual income tax benefit realized fromstock option exercises was less than $0.1 million for the same period.  For the two quarters ended June 26, 2008, ourunaudited condensed consolidated statement of cash flows reflects$0.2 million of excess tax benefits as financing cash flows. Net cashproceeds from the exercise of stock options were $0.5 million for the twoquarters ended June 26, 2008. The actual income tax benefit realizedfrom stock option exercises was $0.2 million for the same period.

 

The followingtable represents stock option activity for the two quarters ended July 2,2009:

 
| ** **                                  | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Contract Life (Yrs.)** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Outstanding  options at beginning of period |       | 584,482                    |       | $                                              | 9.37       |                                                      | 3.78       |   |
| Granted                                     |       | —                     |       | —                                         |       |                                                      |       |
| Exercised                                   |       | (7,289                     | )          | 8.35                                           |       |                                                      |       |
| Forfeited                                   |       | —                     |       | —                                         |       |                                                      |       |
| Outstanding  options at end of period       |       | 577,193                    |       | 9.38                                           |       | 3.28                                                      |       |
| Exercisable  options at end of period       |       | 577,193                    |       | 9.38                                           |       | 3.28                                                      |       |
|                                             |            |                            |            |                                                |            |                                                           |            |  |

 

*RestrictedStock*

 

As described in Note 9 tothe consolidated financial statements included in our annual report on Form 10-Kfor the fiscal year ended January 1, 2009, the Company maintains theIncentive Plan which provides for restricted stock awards to officers,directors and key employees. Under the Incentive Plan, shares of Class Acommon stock of the Company may be granted at nominal cost to officers,directors andkey employees, subject to a continued employment restriction.  On January 14,2009, 371,129 restricted shares were granted under the Incentive Plan atnominal cost to officers, directors and key employees. These awards vest 25% atthe end of each year for four years in the case of officers and key employeesand vest 100% at the end of one year in the case of directors. The closingprice of our Class A common stock on the date of this grant was $10.01 pershare.  In addition, on June 30,2009, 150,489 shares were granted under the Incentive Plan at nominal cost tothe Company’s Chief Executive Officer. The closing price of our Class Acommon stock on the date of grant was $13.29 per share.  All of the restricted shares subject to thisaward vest on June 30, 2013.

 

During the quarter ended April 2,2009, the Company withheld approximately 37,576 shares of restricted stock atan aggregate cost of approximately $0.4 million, as permitted by the applicableequity award agreements, to satisfy employee tax withholding requirementsrelated to the vesting of restricted stock awards.

 

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During each of thequarters ended July 2, 2009 and June 26, 2008, the Company recognizedapproximately $0.9 million of share-based compensation expense related torestricted share grants. During the two quarters ended July 2, 2009and June 26, 2008, the Company recognized approximately $1.8 million and$1.9 million, respectively, of share-based compensation expense related torestricted share grants.  Such expense is presented as a component ofgeneral and administrative expenses. The compensation expense for theseawards was determined based on the market price of our stock at the date ofgrant applied to the total numbers of shares that were anticipated to fullyvest.  As of July 2, 2009, we have unrecognized compensation expenseof $7.3 million associated with restricted stock awards.

 

The followingtable represents the restricted stock activity for the two quarters ended July 2,2009:

 
| ** **                       | ** ** | **Two  Quarters  Ended  July 2, 2009** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| Unvested  at beginning of period |       | 637,615                                     |       |
| Granted  during the period       |       | 521,618                                     |       |
| Vested  during the period        |       | (172,371                                    | )          |
| Forfeited  during the period     |       | (2,947                                      | )          |
| Unvested  at end of period       |       | 983,915                                     |       |

 

During the twoquarters ended July 2, 2009, the Company paid two cash dividends of $0.18on each share of outstanding restricted stock totaling approximately$0.3 million.  During the two quarters ended June 26, 2008, theCompany paid two cash dividends of $0.30 on each share of outstandingrestricted stock totaling approximately $0.4 million.

 

*PerformanceShare Units*

 

The Incentive Planalso provides for grants in the form of performance share units to officers,directors and key employees. Performance share agreements are entered intobetween the Company and each grantee of performance share units (each a “PerformanceAgreement”).  Our 2006 Performance Agreement covered performance sharegrants in the fiscal years ended December 28, 2006, December 27, 2007and January 1, 2009, and is described in Note 9 to the consolidatedfinancial statements included in our annual report on Form 10-K for thefiscal year ended January 1, 2009.

 

In 2009, weadopted an amended and restated form of Performance Agreement.  On January 14,2009, 401,907 performance shares were granted pursuant to the 2009 PerformanceAgreement, at nominal cost to officers and key employees. Under the 2009Performance Agreement, which is described in the section entitled “CompensationDiscussion and Analysis — Elements of Compensation — Performance Shares,” ofour 2009 proxy statement, each performance share represents the right toreceive from 0% to 150% of the target numbers of shares of restricted Class Acommon stock. The number of shares of restricted common stock earned will bedetermined based on the attainment of specified performance goals by January 14,2012 (the third anniversary of the grant date) set forth in the PerformanceAgreement. The shares are subject to the terms and conditions of the IncentivePlan. The closing price of our Class A common stock on the date of thisgrant was $10.01 per share.

 

Pursuant to theterms and conditions of the 2006 and 2009 Performance Agreements, grantees willbe issued shares of restricted commonstock of the Company in an amount determined by the attainment of Companyperformance criteria set forth in such Performance Agreement. The shares ofrestricted common stock received upon attainment of the performance criteriawill be subject to further vesting over a period of time, provided the granteeremains a service provider to the Company during such period.

 

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During thequarters ended July 2, 2009 and July 26, 2008, the Company recognizedapproximately $0.1 million and $0.5 million, respectively, of share-basedcompensation expense related to performance share grants. During thequarter ended July 2, 2009, 175,860 shares were effectively cancelled as aresult of performance criteria not being met for certain performance shareawards granted on June 1, 2006. During the two quarters ended July 2,2009 and July 26, 2008, the Company recognized approximately $0.8 millionand $0.9 million, respectively, of share-based compensation expense related toperformance share grants.  Such expenseis presented as a component of general and administrative expenses.

 

The followingtable summarizes information about the Company’s number of performance sharesfor the two quarters ended July 2, 2009:

 
| ** **                       | ** ** | **Two  Quarters  Ended  July 2, 2009** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| Unvested  at beginning of period |       | 793,005                                     |       |
| Granted  (based on target)       |       | 401,907                                     |       |
| Cancelled/forfeited              |       | (182,412                                    | )          |
| Unvested  at end of period       |       | 1,012,500                                   |       |

 

The above tabledoes not reflect the maximum or minimum number of shares of restricted stockcontingently issuable. An additional 659,054 shares of restricted stock couldbe issued providing the performance criteria maximums are met.

 

**7.COMMITMENTS AND CONTINGENCIES**

 

***Acquisition of Consolidated Theatres***

 

As described inNote 2—“Acquisition,” in conjunction with the closing of ConsolidatedTheatres, we entered into a final judgment with the DOJ, which required us tohold separate and divest ourselves of four theaters comprising 52 screens inNorth Carolina. During the fiscal year ended January 1, 2009, the Companyentered into an agreement to sell three of the four theatres. On October 23,2008, the Company completed its divestiture of the three theatres.  On April 30,2009, the Company completed its divestiture of the last of the four theatres.

 

***Other***

 

Our theatres mustcomply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”)to the extent that such properties are “public accommodations” and/or “commercialfacilities” as defined by the ADA. Compliance with the ADA requires that publicaccommodations “reasonably accommodate” individuals with disabilities and thatnew construction 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 DOJ had filed claims against us or our subsidiariesallegingthat anumber of our theatres with stadium seating violated the ADA because thesetheatres allegedly failed to provide wheelchair-bound patrons with lines ofsight comparable to those available to other members of the general public anddenied persons in wheelchairs access to the stadium portion of the theatres. OnJune 8, 2005, Regal reached an agreement with the DOJ resolving anddismissing the private litigants’ claims and all claims made by the UnitedStates under the ADA. From time to time, we receive claims that the stadiumseating offered by our theatres allegedly violates the ADA. In these instances,we seek to resolve or dismiss these claims based on the terms of the DOJsettlement or under applicable ADA standards.

 

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In addition, we,from time to time, receive letters from the attorneys general of states inwhich we operate theatres regarding investigation into the accessibility of ourtheatres to persons with visual or hearing impairments. We believe we providethe members of the visually and hearing impaired communities with reasonableaccess to the movie-going experience.

 

We believe that weare in substantial compliance with all current applicable regulations relating toaccommodations for the disabled. We intend to comply with future regulations inthis regard, and except as set forth above, we do not currently anticipate thatcompliance will require us to expend substantial funds. Our theatre operationsare also subject to federal, state and local laws governing such matters aswages, working conditions, citizenship and health and sanitation requirements.We believe that we are in substantial compliance with all of such laws.

 

On or about January 3,2007, suit was initiated against the Company in Federal Court, CentralDistrict 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 andAccurateTransactionAct, for allegedly printing expiration dates and credit card numbers oncustomer receipts. The plaintiff sought to represent a class of individualsallegedly harmed by this alleged practice. The complaint sought actual damagesand/or statutory damages of at least one hundred dollars or up to one thousanddollars per violation, and attorney fees and costs. We believe we are insubstantial compliance with all applicable federal and state laws governingthese trade practices. On November 21, 2008, the court entered an order ofdismissal of the complaint in its entirety, without prejudice, with each partyto bear their own costs.

 

We and our varioussubsidiary corporations are also presently involved in various legalproceedings arising in the ordinary course of our business operations,including personal injury claims, employment and contractual matters and otherdisputes. We believe we have adequately provided for the settlement of suchmatters. Management believes any additional liability with respect to 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 thequarters ended July 2, 2009 and June 26, 2008, Regal Cinemas incurredcapitalized costs of $0.1 million and $9.8 million, respectively, to QwestCommunications and its subsidiaries for network infrastructure upgrades. RegalCinemas incurred approximately $1.5 million and $1.6 million, respectively,of expenses payable to Qwest Communications and its subsidiaries fortelecommunication and network monitoring services during the quarters ended July 2,2009 and June 26, 2008.  In addition, Regal Cinemas incurredapproximately $0.1 million of expenses payable to Anschutz affiliates forcertain advertising services during each of the quarters ended July 2,2009 and June 26, 2008.  Also,during the quarters ended July 2, 2009 and June 26, 2008, RegalCinemas received less than $0.1 million from an Anschutz affiliate forrent and other expenses related to a theatre facility.

 

During the twoquarters ended July 2, 2009 and June 26, 2008, Regal Cinemas incurredcapitalized costs of $0.1 million and $12.1 million, respectively, toQwest Communications and its subsidiaries for network infrastructure upgrades.Regal Cinemas incurred approximately $3.5 million and $2.7 million,respectively, of expenses payable to Qwest Communications and its subsidiariesfor telecommunication and network monitoring services during the two quartersended July 2, 2009 and June 26, 2008.  In addition, RegalCinemas incurred approximately $0.2 million and $0.1 million,respectively, of expenses payable to Anschutz affiliates for certainadvertising services during the two quarters ended July 2, 2009 and June 26,2008.  Also, during the two quartersended July 2, 2009 and June 26, 2008, Regal Cinemas received lessthan $0.1 million from an Anschutz affiliate for rent and other expensesrelated to a theatre facility.

 

Regal entered intoa management agreement with an Anschutz affiliate to manage a Los Angeles,California theatre site on their behalf. The ultimate financial terms of themanagement agreement were approved by the Company’s board of directors, and themanagement fee payable to Regal will be based on a percentage of revenuesgenerated by the theatre, subject to a minimum annual fee payable to Regalregardless of revenues generated. The theatre is scheduled to open in late2009.

 

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**9.EARNINGS PER SHARE**

 

We computeearnings per share of Class A and Class B common stock in accordancewithSFAS No. 128,*Earnings per Share* using thetwo-class method. Under the provisions of SFAS No. 128, basic earnings pershare is computed using the weighted average number of common sharesoutstanding during the period. Diluted earnings per share is computed using theweighted average number of common shares and, if dilutive, common stockequivalents outstanding during the period. Potential common stock equivalentsconsist of the incremental common shares issuable upon the exercise of commonstock options, restricted stock and performance shares, the conversion spreadon the 33⁄4% Convertible Senior Notes, the 2003 Warrant, the assumed conversionof the 61⁄4% Convertible Senior Notes and the 2008 Warrant issued in connectionwith the 61⁄4% Convertible Senior Notes. The dilutive effect of outstanding stockoptions, restricted shares and performance shares, the conversion spread on the33⁄4% Convertible Senior Notes, the 2003 Warrant and the 2008 Warrant issued inconnection with the 61⁄4% Convertible Senior Notes is reflected in dilutedearnings per share by application of the treasury-stock method. The dilutiveeffect of assumed conversion of the 61⁄4% Convertible Senior Notes is reflectedin diluted earnings per share by application of the if-converted method. Inaddition, the computation of the diluted earnings per share of Class Acommon stock assumes the conversion of Class B common stock, while thediluted earnings per share of Class B common stock does not assume theconversion of those shares.

 

The rights,including the liquidation and dividend rights, of the holders of our Class Aand Class B common stock are identical, except with respect to voting. Inaccordance with EITF 03-6, *ParticipatingSecurities and the Two-Class Method under FASB Statement No. 128,*the undistributed earnings for the periods presented are allocated based on thecontractual participation rights of the Class A and Class B commonshares as if the earnings for the periods presented had been distributed. Asthe liquidation and dividend rights are identical, the undistributed earningsare allocated on a proportionate basis. Further, as we assume the conversion ofClass B common stock in the computation of the diluted earnings per shareof Class A common stock, the undistributed earnings are equal to netincome attributable to controlling interest for that computation.

 

The followingtable sets forth the computation of basic and diluted earnings per share of Class Aand Class B common stock (in millions, except share and per share data):

 
| ** **                                                                                               | ** ** | **Quarter ended  July 2, 2009** | ** ** | **Quarter ended  June 26, 2008** | ** ** | **Two  Quarters ended  July 2, 2009** | ** ** | **Two  Quarters ended  June 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **Class A**                          | ** ** | **Class B**                                | ** ** | **Class A**                                | ** ** | **Class B**                                      | ** ** | **Class A** | ** ** | **Class B** | ** ** | **Class A** | ** ** | **Class B** | ** ** |
| Basic earnings per share:                                                                                |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Numerator:                                                                                               |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Allocation of undistributed earnings                                                                     |       | $                                         | 34.2       |                                            | $          | 6.3                                             |       | $                                                     | 20.5       |   | $ | 3.8 |   | $ | 52.2 |   | $ | 9.6 |   | $ | 43.8 |   | $ | 8.0 | ** ** |
|                                                                                                     |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Denominator:                                                                                             |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding (in  thousands)                                               |       | 129,342                                   |       | 23,709                                          |       | 129,121                                         |       | 23,709                                                |       | 129,339 |   | 23,709 |   | 129,108 |   | 23,709 |   |
|                                                                                                     |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Basic earnings per share                                                                                 |       | $                                         | 0.26       |                                            | $          | 0.26                                            |       | $                                                     | 0.16       |   | $ | 0.16 |   | $ | 0.40 |   | $ | 0.40 |   | $ | 0.34 |   | $ | 0.34 |   |
| Diluted earnings per share:                                                                              |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Numerator:                                                                                               |       |                                      |       |                                            |       |                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Allocation of undistributed earnings for basic  computation                                              |       | $                                         | 34.2       |                                            | $          | 6.3                                             |       | $                                                     | 20.5       |   | $ | 3.8 |   | $ | 52.2 |   | $ | 9.6 |   | $ | 43.8 |   | $ | 8.0 |   |
| Reallocation of undistributed earnings as a result  of conversion of Class B to Class A shares |       | 6.3                                       |       | —                                          |       | 3.8                                             |       | —                                                |       | 9.6 |   | — |   | 8.0 |   | — |   |

 

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| Reallocation of undistributed earnings to  Class B shares for effect of other dilutive securities |   | —  |   | — |   | —  |   | — |   | —  |   | (0.1   | )      | —  |   | (0.2   | )      |
|--------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|
| Interest expense on 61⁄4% Convertible Senior Notes                                                  |   | —  | (1)    | — |   | —  | (1)    | — |   | —  |   | — |   | —  |   | — |   |
| Allocation of undistributed earnings                                                                   |   | $       | 40.5   |   | $      | 6.3     |   | $      | 24.3   |    | $      | 3.8    |   | $       | 61.8   |   | $      | 9.5 |   | $ | 51.8 |   | $ | 7.8 |   |
| Denominator:                                                                                           |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |
| Number of shares used in basic computation (in  thousands)                                             |   | 129,342 |   | 23,709 |   | 129,121 |   | 23,709 |   | 129,339 |   | 23,709 |   | 129,108 |   | 23,709 |   |
| Weighted average effect of dilutive securities (in  thousands)                                         |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |
| Add:                                                                                                   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |
| Conversion of Class B to Class A common  shares outstanding                                  |   | 23,709  |   |   |   | 23,709  |   | — |   | 23,709  |   |   |   | 23,709  |   | — |   |
| Stock options                                                                                          |   | 150     |   |   |   | 213     |   | — |   | 137     |   |   |   | 219     |   | — |   |
| Restricted stock and performance shares                                                                |   | 874     |   |   |   | 812     |   | — |   | 899     |   |   |   | 868     |   | — |   |
| Conversion spread on 33⁄4% Convertible Senior Notes  and the 2003 Warrant                           |   | —  |   |   |   | 873     |   | — |   | —  |   |   |   | 2,728   |   | — |   |
| Conversion of 61⁄4% Convertible Senior Notes                                                        |   | —  | (1)    |   |   | —  | (1)    | — |   | —  | (1)    |   |   | —  | (1)    | — |   |
|                                                                                                   |   |    |   |   |   |    |   |   |   |    |   |   |   |    |   |   |   |
| Number of shares used in per share computations (in  thousands)                                        |   | 154,075 |   | 23,709 |   | 154,728 |   | 23,709 |   | 154,084 |   | 23,709 |   | 156,632 |   | 23,709 |   |
| Diluted earnings per share                                                                             |   | $       | 0.26   |   | $      | 0.26    |   | $      | 0.16   |    | $      | 0.16   |   | $       | 0.40   |   | $      | 0.40 |   | $ | 0.33 |   | $ | 0.33 |   |

 

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(1)          No amount reported as the impact on earnings per shareof Class A common stock would have been antidilutive.

 

**10.RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007,the FASB issued SFAS No. 141(R), *BusinessCombinations*. SFASNo. 141(R) requires all businesscombinations completed after the effective date to be accounted for by applyingthe acquisition method (previously referred to as the purchase method). SFAS No. 141(R) expandsthe definition of transactions and events that qualify as businesscombinations; requires that the acquired assets and liabilities, includingcontingencies, be recorded at the fair value determined on the acquisition dateand changes thereafter reflected in revenue, not goodwill; changes therecognition timing for restructuring costs; and requires acquisition costs tobe expensed as incurred. Future reductions in the valuation allowance recordedrelative to pre-acquisition periods will result in a decrease in the provisionfor income taxes. In addition, with respect to uncertain tax positions, changesin the amount of tax benefit recognized relative to pre-acquisition periodswill result in an increase/decrease in the provision for income taxes (seeNote 5—“Income Taxes” for further discussion).  The adoption of SFAS No. 141(R) didnot have a material impact on the Company’s consolidated financial position,cash flows or results of operations.

 

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In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterest in Consolidated Financial Statements*. SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.Specifically, this statement requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financial statementsand separate from the parent’s equity. The amount of net income attributable tothe noncontrolling interest will be included in consolidated net income on theface of the income statement. SFAS No. 160 clarifies that changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, this statement requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the fair value of the noncontrollingequity investment on the deconsolidation date. SFAS No. 160 also includesexpanded disclosure requirements regarding the interests of the parent and itsnoncontrolling interest. SFAS No. 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The Company adopted SFAS No. 160during the quarter ended April 2, 2009.  The adoption had the effectof reclassifying amounts previously classified under “minority interest”(approximately $(0.4) million as of January 1, 2009) to a component ofequity under “noncontrolling interest” in the accompanying unaudited condensedconsolidated balance sheets.  Amounts previously classified under “minorityinterest in earnings of consolidated subsidiaries” are now classified as “noncontrollinginterest” and presented net of tax below “net income” to arrive at “net incomeattributable to controlling interest” in the accompanying unaudited condensedstatements of income.

 

In March 2008,the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* which amendsSFAS No. 133, and requires companies with derivative instruments todisclose information about how and why a company uses derivative instruments,how derivative instruments and related hedged items are accounted for underSFAS No. 133, and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance, and cash flows.The required disclosures include the fair value of derivative instruments andtheir gains or losses in tabular format, information about credit-risk-relatedcontingent features in derivative agreements, counterparty credit risk, and thecompany’s strategies and objectives for using derivative instruments. TheStatement expands the current disclosure framework in SFAS No. 133. The Company adopted SFAS No. 161 during the quarter ended April 2,2009.  The adoption of SFAS No. 161 had no impact on the Company’sconsolidated financial position, cash flows or results of operations.

 

In May 2009,the FASB issued SFAS 165, *Subsequent Events*,which establishes reporting and disclosure requirements based on the existenceof conditions at the date of the balance sheet for events or transactions thatoccurred after the balance sheet date but before the financial statements areissued or are available to be issued. Companies are required to disclose thedate through which subsequent events have been evaluated and whether that dateis the date the financial statements were issued or were available to beissued. The Company adopted SFAS No. 165 as of July 2, 2009 and hasincluded certain disclosures in Note 12 – “Subsequent Events.”

 

During June 2009, the FASB issued SFAS No. 167,*Amendments to FASB Interpretation No. 46(R) *whichis to be adopted as of the beginning of its first annual reporting period thatbegins after November 15, 2009, and interim and annual reporting periodsthereafter.  SFAS No. 167 amendsFASB Interpretation No. 46(R), *Consolidation of VariableInterest Entities an interpretation of ARB No. 51* (“FIN 46(R)”)to require an enterprise to perform an analysis to determine whether theenterprise’s variable interest or interests give it a controlling financialinterest in a variable interest entity. This analysis identifies the primarybeneficiary of a variable interest entity as the enterprise that has both ofthe following characteristics:

 

a.               The power to direct the activities of a variableinterest entity that most significantly impact the entity’s economicperformance; and

 

b.              The obligation to absorb losses of the entity thatcould potentially be significant to the variable interest entity or the rightto receive benefits from the entity that could potentially be significant tothe variable interest entity.

 

Additionally, anenterprise is required to assess whether it has an implicit financialresponsibility to ensure that a variable interest entity operates as designedwhen determining whether it has the power to direct the activities of thevariable interest entity that most significantly impact the entity’s economicperformance. SFAS No. 167 amends FIN 46(R) to require ongoingreassessments of whether an enterprise is the primary beneficiary of a variableinterest entity. SFAS No. 167 amends FIN 46(R) to add an additionalreconsideration event for determining whether an entity is a variable interestentity when any changes in facts and circumstances occur such that the holdersof the equity investment at risk, as a group,

 

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lose the power fromvoting rights or similar rights of those investments to direct the activitiesof the entity that most significantly impact the entity’s economicperformance.  SFAS No. 167 amendsFIN 46(R) to require enhanced disclosures that will provide users offinancial statements with more transparent information about an enterprise’sinvolvement in a variable interest entity. The enhanced disclosures arerequired for any enterprise that holds a variable interest in a variableinterest entity.  The Company isevaluating the adoption of SFAS No. 167 and its impact on the Company’sconsolidated financial position, cash flows and results of operations.

 

In June 2009,the FASB issued SFAS No. 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally Accepted AccountingPrinciples.*  SFAS No. 168will become the single source of authoritative nongovernmental U.S. generallyaccepted accounting principles (GAAP), superseding existing FASB, AmericanInstitute of Certified Public Accountants, Emerging Issues Task Force, andrelated accounting literature. SFAS No. 168 reorganizes the thousands ofGAAP pronouncements into roughly 90 accounting topics and displays them using aconsistent structure. Also included is relevant Commission guidance organizedusing the same topical structure in separate sections. SFAS No. 168 willbe effective for financial statements issued for reporting periods that endafter September 15, 2009. This will have an impact on the Company’sfinancial statements since all future references to authoritative accountingliterature will be references in accordance with SFAS No. 168.

 

**11. FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Themethods and assumptions used to estimate the fair value of each class offinancial instrument are as follows:

 

*Cashand cash equivalents, accounts receivable, accounts payable and accruedliabilities:*

 

Thecarrying amounts approximate fair value because of the short maturity of theseinstruments.

 

*Longterm obligations, excluding capital lease obligations and lease financingarrangements:*

 

Thefair value of the Amended Senior Credit Facility described in Note 4—“DebtObligations,” which consists of the Term Facility and the Revolving Facility,is estimated based on quoted market prices as of July 2, 2009 and January 1,2009. The associated interest rates are based on floating rates identified byreference to market rates and are assumed to approximate fair value. The fairvalues of the 61⁄4% Convertible Senior Notes, the 33⁄4% Convertible Senior Notesand Senior Subordinated Notes are estimated based on quoted market prices forthese issuances as of July 2, 2009 and January 1, 2009. The fairvalue of the Company’s other debt obligations were based on recent financingtransactions for similar debt issuances and carrying value approximates fairvalue. The aggregate carrying amounts and fair values of long-term debt at July 2,2009 and January 1, 2009 consist of the following:

 
| ** **       | ** ** | **July 2,  2009** | ** ** | **January 1,  2009** | ** ** |
|------------------|------------|------------------------|------------|---------------------------|------------|
| ** **       | ** ** | **(In  millions)**     | ** ** |
| Carrying  amount |       | $                      | 1,897.6    |                      | $          | 1,913.6 |   |
| Fair  value      |       | $                      | 1,847.5    |                      | $          | 1,506.3 |   |

 

**12.SUBSEQUENT EVENTS**

 

Subsequent eventshave been evaluated through August 11, 2009, which is the date the financialstatements were issued.

 

***Issuance of Regal Cinemas Senior Notes***

 

On July 9,2009, the Company, Regal Cinemas and certain subsidiaries of Regal Cinemasnamed as guarantors therein, entered into a Purchase Agreement (the “PurchaseAgreement”) with Credit Suisse Securities (USA) LLC, as the representative (the“Representative”) of the initial purchasers named on Schedule A thereto (the “InitialPurchasers”), with respect to Regal Cinema’s issuance and sale of $400.0million in aggregate principal amount of 8.625% Senior Notes due 2019 (the “Notes”).

 

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On July 15,2009, $400.0 million in aggregate principal amount of the Notes were sold tothe Initial Purchasers at a price equal to 97.561% of their face value. TheNotes are to be resold by the Initial Purchasers pursuant to Rule 144A andRegulation S of the Securities Act of 1933, as amended (the “Securities Act”).The Notes are governed by an indenture, dated as of July 15, 2009 (the “Indenture”),between Regal Cinemas, the Company and certain subsidiaries of Regal Cinemasnamed as guarantors therein and U.S. Bank National Association, as trustee (the“Trustee”). The Notes will bear interest at a rate of 8.625% per year, payablesemiannually in arrears in cash on July 15 and January 15 of each year,commencing on January 15, 2010. The Notes will mature on July 15,2019.

 

The net proceedsfrom the offering, after deducting the Initial Purchasers’ discount and theestimated offering expenses payable by the Company, were approximately $381.3million. The Company used all of the net proceeds of the offering to repay aportion of the Amended Senior Credit Facility. In connection with this repayment, the Company is currently evaluatingthe accounting implications of a portion of unamortized debt issue costsassociated with the Amended Senior Credit Facility on its consolidatedfinancial position, cash flows and results of operations.

 

The Notes will beRegal Cinemas’ general senior unsecured obligations and they will: (i) rankequally in right of payment with all of its existing and future seniorunsecured indebtedness; (ii) rank senior in right of payment to all ofRegal Cinemas’ existing and future subordinated indebtedness, including itsexisting 93/8%Senior Subordinated Notes; (iii) be effectively subordinated to all of itsexisting and future secured indebtedness, including all borrowings under theAmended Senior Credit Facility, to the extent of the value of the collateralsecuring such indebtedness; and (iv) be structurally subordinated to allexisting and future indebtedness and other liabilities of any of itssubsidiaries that is not a guarantor of the Notes.

 

The Notes will befully and unconditionally guaranteed on a joint and several senior unsecuredbasis (the “Guarantees”) by the Companyand all of Regal Cinemas’ existing and future domestic restricted subsidiariesthat guarantee its other indebtedness (collectively, the “Guarantors”). TheGuarantees will be the Guarantors’ general senior unsecured obligations andthey will: (i) rank equally in right of payment with all of the Guarantors’existing and future senior unsecured indebtedness, including the Company’s61⁄4% Convertible Senior Notes; (ii) ranksenior in right of payment to all of the Guarantors’ existing and futuresubordinated indebtedness, including the guarantees of Regal Cinemas’ existing93/8%Senior Subordinated Notes; (iii) be effectively subordinated to all of theGuarantors’ existing and future secured indebtedness, including the guaranteesunder the Amended Senior Credit Facility, to the extent of the value of thecollateral securing such indebtedness; and (iv) be structurallysubordinated to all existing and future indebtedness and other liabilities ofany of the Guarantors’ subsidiaries that is not a guarantor of the Notes.

 

Prior to July 15,2014, Regal Cinemas may redeem all or any part of the Notes at its option at100% of the principal amount plus a make-whole premium.  Regal Cinemas may redeem the Notes in wholeor in part at any time on or after July 15, 2014 at the followingredemption prices: (i) during 2014, 104.313%, (ii) during 2015,102.875%, (iii) during 2016, 101.438% and (iv) 2017 and thereafter,100.000%, of the principal amount thereof, plus accrued and unpaid interest, ifany, to the redemption date. In addition, prior to July 15, 2012, RegalCinemas may redeem up to 35% of the original aggregate principal amount ofNotes from the net proceeds of certain equity offerings at a redemption priceof 108.625% of principal amount thereof, plus accrued and unpaid interest, ifany, to the redemption date.

 

If Regal Cinemasundergoes a change of control (as defined in the Indenture), holders mayrequire Regal Cinemas to repurchase all or a portion of their Notes at a priceequal to 101% of the principal amount of the Notes being repurchased, plusaccrued and unpaid interest, if any, to the repurchase date.

 

The Indenturecontains covenants that limit Regal Cinemas’ (and its restricted subsidiaries’)ability to, among other things: (i) incur additional indebtedness; (ii) paydividends on or make other distributions in respect of its capital stock,purchase or redeem capital stock, or purchase, redeem or otherwise acquireor retire certain subordinated obligations; (iii) enter intocertain transactions with

 

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affiliates; (iv) permit, directly  or indirectly, it to create,incur, or suffer to exist any lien, except in certaincircumstances; (v) create or permitencumbrances or restrictions on its ability to pay dividends ormake distributions on its capital stock, make loans or advances to itssubsidiaries (or from its subsidiaries to Regal Cinemas), or transferany properties or assets to its subsidiaries (or from its subsidiaries toRegal Cinemas); and (vi) merge or consolidate with other companies ortransfer all or substantially all of its assets. The Indenture also requiresany of Regal Cinemas’ subsidiaries guaranteeing certain indebtedness of RegalCinemas or any Guarantor after the Notes are issued to execute asupplemental indenture by which it guarantees payment of principal and intereston the Notes on a senior unsecured basis. Note, however, that thesecovenants are subject to a number of important limitations and exceptions. TheIndenture contains other customary terms, including, but not limited to, eventsof default, which, if any of them occurs, would permit or require theprincipal, premium, if any, interest and any other monetary obligations on allthe then outstanding Notes to be due and payable immediately.

 

On July 15,2009, in connection with the sale of the Notes, Regal Cinemas and theGuarantors entered into a registration rights agreement with the InitialPurchasers (the “Registration Rights Agreement”) of the Notes.  Under the Registration Rights Agreement,Regal Cinemas has agreed to consummate an exchange offer pursuant to aneffective registration statement filed with the Commission to allow purchasersof the Notes to exchange the Notes for a new issue of substantially identicaldebt securities registered under the Securities Act (the “Exchange Notes”).Further, under certain circumstances described in the Registration RightsAgreement, Regal Cinemas has agreed to file a shelf registration statement tocover resales of the Exchange Notes (the “Exchange Offer Registration Statement”).  Specifically, Regal Cinemas has agreed tofile within 90 days after July 15, 2009, the Exchange Offer RegistrationStatement, use its reasonable best efforts to have declared effective theExchange Offer Registration Statement within 150 days after July 15, 2009and use its reasonable best efforts, subject to applicable law, to consummatethe exchange offer within 30 business days thereafter. If Regal Cinemas failsto comply with these time periods or with certain other obligations in theRegistration Rights Agreement (a “Registration Default”), then the annualinterest rate on the Notes will increase by 0.25% per year for each subsequent90-day period during which the Registration Default continues, up to a maximumadditional interest rate of 0.50% per year over 8.625% If the RegistrationDefault is corrected, then the applicable interest rate on such Notes willrevert to 8.625%.

 

***Other***

 

On July 30,2009, the Company declared a cash dividend of $0.18 per share on each share ofthe Company’s Class A and Class B common stock (including outstandingrestricted stock), payable on September 18, 2009, to stockholders ofrecord on September 10, 2009.

 

**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Someof the information in this Quarterly Report on Form 10-Q includes “forward-looking**statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements other thanstatements of historical facts included in this Form 10-Q, including,without limitation, certain statements under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”, may constituteforward-looking statements. In some cases you can identify these “forward-lookingstatements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue” or the negativeof those words and other comparable words. These forward-looking statementsinvolve risks and uncertainties. Our actual results could differ materiallyfrom those indicated in these statements as a result of certain factors as morefully discussed under the heading “Risk Factors” contained in our annual reporton Form 10-K filed on March 2, 2009 with the Commission (File No. 001-31315)for the Company’s fiscal year ended January 1, 2009. The followingdiscussion**and*

 

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*analysisshould be read in conjunction with the unaudited condensed consolidated financialstatements and notes thereto included herein.*

 

**TheCompany**

 

We conduct ouroperations through our wholly owned subsidiaries. We operate the largestand most geographically diverse theatre circuit in the United States,consisting of 6,778 screens in 549 theatres in 39 states and the District ofColumbia as of July 2, 2009. We believe the size, reach and quality of ourtheatre circuit provide an exceptional platform to realize economies of scalefrom our theatre operations. We also maintain an investment in NationalCineMedia, which concentrates on in-theatre advertising and creatingcomplementary business lines that leverage the operating personnel, asset andcustomer bases of its theatrical exhibition partners, which include us, AMC andCinemark. The Company manages its business under one reportable segment:theatre exhibition operations.

 

We generaterevenues primarily from admissions and concession sales. Additional revenuesare generated by our vendor marketing programs, unredeemed gift certificatesand various other activities in our theatres. In addition, National CineMediaprovides us with a theatre access fee associated with revenues generated 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, the popularity and box office revenues of afilm, and such film rental costs generally increase as the admissions revenuesgenerated by a film increase. Because we purchase certain concession items,such as fountain drinks and popcorn, in bulk and not pre-packaged forindividual servings, we are able to improve our margins by negotiating volumediscounts. Other operating expenses consist primarily of theatre labor andoccupancy costs.

 

On February 12,2007, we, along with AMC and Cinemark, formed DCIP, to create a financing modeland establish agreements with major motion picture studios for theimplementation of digital cinema. Future digital cinema developments will bemanaged by DCIP, subject to the approval of us, AMC and Cinemark. Each ofRegal, AMC and Cinemark has an equal ownership and voting interest in DCIP.Recently, DCIP announced the execution of long-term deployment agreements withsix film studios. DCIP is continuing to work with film studios and financialinstitutions to negotiate and finalize the related financing plans that wouldprovide for a wide-scale studio-financed conversion to digital projection. Uponcompletion, we are prepared to begin converting our existing theatres from 35mm film projection to digital projection and intend to complete the conversionof our entire circuit in approximately three to four years.

 

As discussedfurther in Note 3—“Investment in National CineMedia, LLC,” as a resultof the annual adjustment provisions of the Common Unit Adjustment Agreementwith National CineMedia, on April 9, 2008, we received from NationalCineMedia approximately 0.8 million newly issued common units of NationalCineMedia. Further, on May 29, 2008, we received from National CineMediaapproximately 2.9 million newly issued common units of National CineMediain accordance with the adjustment provisions of the Common Unit AdjustmentAgreement in connection with our acquisition of Consolidated Theatres. Finally,on March 17, 2009, we received from National CineMedia approximately0.5 million newly issued common units of National CineMedia in accordancewith the annual adjustment provisions of the Common Unit AdjustmentAgreement.  These adjustments increased the number of National CineMediacommon units held by us to approximately 25.4 million and as a result, ona fully diluted basis, we own a 25.0% interest in NCM, Inc. as of July 2,2009.

 

On March 10,2008, Regal issued $200.0 million aggregate principal amount of 61⁄4%Convertible Senior Notes. Concurrent with the issuance of the 61⁄4% ConvertibleSenior Notes, we entered into simultaneous convertible note hedge and warranttransactions with respect to our Class A common stock in order to reducethe potential dilution from conversion of the 61⁄4% Convertible Senior Notes intoshares of our Class A common stock. The net cost of the convertible notehedge and warrant transactions was approximately $6.6 million and isincluded as a component of equity in the accompanying unaudited condensedconsolidated balance sheets. See Note 4—“Debt Obligations” forfurther description of the 61⁄4% Convertible Senior Notes and the relatedconvertible note hedge and warrant transactions. The Company

 

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used cash on hand and aportion of the net proceeds from the issuance of the 61⁄4% Convertible SeniorNotes to redeem approximately $90.0 million principal amount of Regal’s 33⁄4%Convertible Senior Notes due May 15, 2008, in a series of privatelynegotiated transactions.  As a result of the early redemption, the Companyrecorded a $3.0 million loss on debt extinguishment (as retrospectively adjustedfor the adoption of FSP 14-1 described in Note 4—“Debt Obligations”)during the quarter ended March 27, 2008.  In connection with theearly redemption, the Company received net proceeds of approximately $13.7million from Credit Suisse attributable to the convertible note hedge andwarrant transactions associated with the 33⁄4% Convertible Senior Notes describedfurther in Note 4—“Debt Obligations.” Such proceeds were recorded as anincrease to additional paid-in capital. In connection with the finalmaturity of the 33⁄4% Convertible Senior Notes on May 15, 2008, holders ofthe remaining $33.7 million in principal amount exercised their conversionrights. The Company elected to settle these conversions entirely in cash forapproximately $51.4 million using the remaining proceeds from the issuanceof the 61⁄4% Convertible Senior Notes.  In connection with theseconversions, the Company received net proceeds of approximately$5.2 million from Credit Suisse attributable to the convertible note hedgeand warrant transactions associated with the 33⁄4% Convertible Senior Notes. Suchproceeds were also recorded as an increase to additional paid-incapital. See Note 4—“Debt Obligations” for further discussion of thistransaction.

 

On April 30,2008, the Company acquired Consolidated Theatres, which held a total of 28theatres with 400 screens in Georgia, Maryland, North Carolina, South Carolina,Tennessee and Virginia. The total net cash purchase price for the acquisitionwas approximately $209.3 million. The results of operations of theacquired theatres have been included in the Company’s consolidated financialstatements for periods subsequent to the acquisition date. In conjunction withthe closing, we entered into a final judgment with the DOJ, which required us tohold separate and divest ourselves of four theaters comprising 52 screens inNorth Carolina. During the quarter ended September 25, 2008, the Companyentered into an agreement to sell three of the four theatres and recordedimpairment charges of approximately $7.9 million related to thesetheatres. On October 23, 2008, the Company completed its divestiture ofthe three theatres.  On April 30, 2009, the Company completed itsdivestiture of the last of the four theatres. See Note 2 “Acquisition” forfurther discussion of this transaction.

 

For a summary ofindustry trends as well as other risks and uncertainties relevant to theCompany, see “Business—Industry Overview and Trends” and “Risk Factors”contained in our annual report on Form 10-K for the fiscal year ended January 1,2009 and “Results of Operations” below.

 

**RecentDevelopments**

 

Please refer toNote 12 to the unaudited condensed consolidated financial statements includedin Part 1, Item 1 of this Form 10-Q for a discussion of the issuanceof Regal Cinemas Senior Notes subsequent to the quarter ended July 2,2009.

 

**Resultsof Operations**

 

Based on ourreview of industry sources, national box office revenues for the time periodthat corresponds to Regal’s second fiscal quarter of 2009 were estimated to haveincreased by approximately 20% in comparison to the second fiscal quarter of2008.  The industry’s box office results were positively impacted byticket price increases and the breadth of key films released in the secondquarter of 2009, which included strong attendance from releases such as*Star Trek, Transformers: Revenge of the Fallen, Up,Hangover*and*X-Men Origins: Wolverine*.

 

Our total revenuesfor the quarter ended July 2, 2009 (“Q2 2009 Period”) were$789.2 million and consisted of $541.7 million of admissionsrevenues, $214.9 million of concessions revenues and $32.6 million ofother operating revenues, and increased 16.8% from total revenues of$675.8 million for the quarter ended June 26, 2008 (“Q2 2008 Period”).

 

During the Q2 2009Period, total admissions revenues increased $86.0 million, or 18.9%, to $541.7million, from $455.7 million in the Q2 2008 Period due to an 11.1% increase inattendance and a 7.1% increase in average ticket prices.   We believe that the overall increase inattendance during the Q2

 

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2009 Period was primarilya result of incremental attendance from the breadth of key films exhibitedduring the quarter, the full benefit of three months of operations from the 400screens acquired from Consolidated Theatres on April 30, 2008 (as comparedto two months in the Q2 2008 Period) and a shift in our Q2 2009 Period fiscalcalendar, which resulted in several days from the traditionally robustattendance week of July 4th being included in the Q2 2009 Period, but notthe Q2 2008 Period.  Price increasesidentified during our ongoing periodic pricing reviews (which include analysisof various factors such as general inflationary trends and local marketconditions) along with an increase in the percentage of our admissions revenuesgenerated by premium priced IMAX and 3D films exhibited during the Q2 2009Period were the primary drivers of the increase in our Q2 2009 Period averageticket price. Based on our review of certain industry sources, the increase inour admissions revenues on a per screen basis was slightly less than theindustry’s results for the Q2 2009 Period as compared to the Q2 2008 Period. Webelieve the less than industry increase in admissions revenues on a per screenbasis was attributable to various factors including film product performanceand geographical differences, incremental screens from regional theatrecircuits and our allocation of capital during such periods.

 

In addition,during the Q2 2009 Period, we experienced increases in total concessionsrevenues and other operating revenues.  Total concessions revenues andaverage concessions revenues per patron during the Q2 2009 Period in comparisonto the Q2 2008 Period were positively impacted by price increases and aconcession friendly mix of film product exhibited during the Q2 2009 Period.The increase in other operating revenues for the Q2 2009 Period was primarily attributableto increased revenues from our vendor marketing programs driven by our 11.1%gain in attendance.

 

Income fromoperations totaled $96.3 million during the Q2 2009 Period, which represents anincrease of $31.6 million, or 48.8%, from $64.7 million in the Q2 2008Period.  The increase in income from operations during the Q2 2009 Periodwas primarily attributable to the aforementioned increases in admissions,concessions and other operating revenues.  In addition, we experiencedincreases in film and advertising expense, cost of concessions, rent expense,other operating expenses and net loss on disposal and impairment of operatingassets, partially offset by slight reductions in general and administrativeexpenses during the Q2 2009 Period.  TheCompany reported net income attributable to controlling interest of$40.5 million in the Q2 2009 Period compared to net income attributable tocontrolling interest of $24.3 million in the Q2 2008 Period. Dilutedearnings per share of Class A and Class B common stock was $0.26 inthe Q2 2009 Period compared to $0.16 during the Q2 2008 Period. The increasesin net income attributable to controlling interest and diluted earnings pershare of Class A and Class B common stock were primarily due to anincrease in operating income and incremental earnings recognized from NationalCineMedia, partially offset by incremental interest expense.

 

During the twoquarters ended July 2, 2009 (the “Fiscal 2009 Period”), we continued tomake progress with respect to the following strategic initiatives:

 

·                  We demonstrated our commitment to providingincremental value to our stockholders. Total cash dividends distributed to ourstockholders during the Fiscal 2009 Period totaled approximately$55.4 million.

 

·                  We opened 4 theatres with 43 screens and closed 7underperforming theatres with 66 screens, ending the Fiscal 2009 Period with549 theaters and 6,778 screens.

 

·                  Finally, we continued to expand our use of newtechnologies to enhance the movie-going experience and broaden our contentofferings. Through July 2, 2009, we operated 40 IMAX screens, 26 of whichare digital 3D capable and operated 273 additional screens outfitted withdigital 3D projection systems.  Inaddition, we plan to add an additional 150 digital 3D projection systems in thesecond half of fiscal 2009 and expect to have these systems in operation forthe upcoming holiday season.  Once ourdigital cinema rollout is completed, we expect to increase our total digital 3Dscreen count to approximately 1,500.

 

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The followingtable sets forth the percentage of total revenues represented by certain itemsincluded in our unaudited condensedconsolidated statements of income for the Q2 2009 Period, the Q2 2008 Period,the Fiscal 2009 Period and the two quarters ended June 26, 2008 (the “Fiscal2008 Period”) (dollars and attendance in millions, except average ticket pricesand average concessions revenues per patron):

 
| ** **                                                                                                                                                                                                                                                  | ** ** | **Q2 2009 Period** | ** ** | **Q2 2008 Period** | ** ** | **Fiscal  2009 Period** | ** ** | **Fiscal  2008 Period** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                                                                                  | ** ** | **$**                        | ** ** | **% of  Revenue**       | ** ** | **$**                   | ** ** | **% of  Revenue**  | ** ** | **$** | ** ** | **% of  Revenue** | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
| Revenues:                                                                                                                                                                                                                                                   |       |                         |       |                         |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Admissions                                                                                                                                                                                                                                                  |       | $                            | 541.7      |                         | 68.6       | %                       | $          | 455.7                   |       | 67.4 | % | $ | 1,001.2 |   | 68.8 |   | $ | 887.7 |   | 68.1 |   |
| Concessions                                                                                                                                                                                                                                                 |       | 214.9                        |       | 27.2                         |       | 188.9                   |       | 28.0                    |       | 394.3 |   | 27.1 |   | 355.0 |   | 27.3 |   |
| Other operating revenues                                                                                                                                                                                                                                    |       | 32.6                         |       | 4.2                          |       | 31.2                    |       | 4.6                     |       | 59.3 |   | 4.1 |   | 59.9 |   | 4.6 |   |
| Total revenues                                                                                                                                                                                                                                              |       | 789.2                        |       | 100.0                        |       | 675.8                   |       | 100.0                   |       | 1,454.8 |   | 100.0 |   | 1,302.6 |   | 100.0 |   |
| Operating expenses:                                                                                                                                                                                                                                         |       |                         |       |                         |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Film rental and advertising costs(1)                                                                                                                                                                                                                        |       | 293.4                        |       | 54.2                         |       | 247.0                   |       | 54.2                    |       | 523.1 |   | 52.2 |   | 462.9 |   | 52.1 |   |
| Cost of concessions(2)                                                                                                                                                                                                                                      |       | 31.7                         |       | 14.8                         |       | 25.5                    |       | 13.5                    |       | 55.7 |   | 14.1 |   | 48.2 |   | 13.6 |   |
| Rent expense(3)                                                                                                                                                                                                                                             |       | 95.6                         |       | 12.1                         |       | 90.0                    |       | 13.3                    |       | 188.5 |   | 13.0 |   | 173.3 |   | 13.3 |   |
| Other operating expenses(3)                                                                                                                                                                                                                                 |       | 195.8                        |       | 24.8                         |       | 180.5                   |       | 26.7                    |       | 381.7 |   | 26.2 |   | 349.1 |   | 26.8 |   |
| General and administrative expenses (including  share-based compensation expense of $1.0 and $1.5 for the Q2 2009 Period and  the Q2 2008 Period, respectively, and $2.6 and $2.9 for the Fiscal 2009  Period and the Fiscal 2008 Period, respectively) (3) |       | 15.4                         |       | 2.0                          |       | 15.8                    |       | 2.3                     |       | 30.7 |   | 2.1 |   | 30.8 |   | 2.4 |   |
| Depreciation and amortization(3)                                                                                                                                                                                                                            |       | 50.5                         |       | 6.4                          |       | 49.9                    |       | 7.4                     |       | 100.4 |   | 6.9 |   | 96.2 |   | 7.4 |   |
| Net loss on disposal and impairment of operating  assets(3)                                                                                                                                                                                                 |       | 10.5                         |       | 1.3                          |       | 2.3                     |       | 0.3                     |       | 15.9 |   | 1.1 |   | 4.5 |   | 0.3 |   |
| Joint venture employee compensation(3)                                                                                                                                                                                                                      |       | —                       |       | —                       |       | 0.1                     |       | —                  |       | — |   | — |   | 0.3 |   | — |   |
| Total operating expenses(3)                                                                                                                                                                                                                                 |       | 692.9                        |       | 87.8                         |       | 611.1                   |       | 90.4                    |       | 1,296.0 |   | 89.1 |   | 1,165.3 |   | 89.5 |   |
| Income from operations(3)                                                                                                                                                                                                                                   |       | 96.3                         |       | 12.2                         |       | 64.7                    |       | 9.6                     |       | 158.8 |   | 10.9 |   | 137.3 |   | 10.5 |   |
| Interest expense, net(3)                                                                                                                                                                                                                                    |       | 37.0                         |       | 4.7                          |       | 31.0                    |       | 4.6                     |       | 74.2 |   | 5.1 |   | 61.8 |   | 4.7 |   |
| Earnings recognized from NCM(3)                                                                                                                                                                                                                             |       | (8.8                         | )          | 1.1                          |       | (5.9                    | )          | 0.9                     |       | (19.4 | ) | 1.3 |   | (14.3 | ) | 1.1 |   |
| Loss on debt extinguishment(3)                                                                                                                                                                                                                              |       | —                       |       | —                       |       | —                  |       | —                  |       | — |   | — |   | 3.0 |   | 0.2 |   |
| Provision for income taxes(3)                                                                                                                                                                                                                               |       | 26.9                         |       | 3.4                          |       | 14.7                    |       | 2.2                     |       | 41.3 |   | 2.8 |   | 33.8 |   | 2.6 |   |
| Net income attributable to controlling interest(3)                                                                                                                                                                                                          |       | $                            | 40.5       |                         | 5.1        |                    | $          | 24.3                    |       | 3.6 |   | $ | 61.8 |   | 4.2 |   | $ | 51.8 |   | 4.0 |   |
| Attendance                                                                                                                                                                                                                                                  |       | 66.3                         |       | *                            |       | 59.7                    |       | *                       |       | 124.5 |   | * |   | 116.6 |   | * |   |
| Average ticket price(4)                                                                                                                                                                                                                                     |       | $                            | 8.17       |                         | *          |                    | $          | 7.63                    |       | * |   | $ | 8.04 |   | * |   | $ | 7.61 |   | * |   |
| Average concessions  revenues per patron(5)                                                                                                                                                                                                                 |       | $                            | 3.24       |                         | *          |                    | $          | 3.16                    |       | * |   | $ | 3.17 |   | * |   | $ | 3.04 |   | * |   |

 

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*   *Not meaningful*

(1) Percentage ofrevenues calculated as a percentage of admissions revenues.

(2) Percentage ofrevenues calculated as a percentage of concessions revenues.

(3) Percentage ofrevenues calculated as a percentage of total revenues.

(4) Calculated asadmissions revenues/attendance.

(5) Calculated asconcessions revenues/attendance.

 

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***Q2 2009 Period Compared to Q2 2008 Period and Fiscal 2009Period Compared to Fiscal 2008 Period***

 

***Admissions***

 

Total admissionsrevenues increased $86.0 million during the Q2 2009 Period, or 18.9%, to $541.7million, from $455.7 million in the Q2 2008 Period due to an 11.1% increase inattendance and a 7.1% increase in average ticket prices.  During the Fiscal 2009 Period, totaladmissions revenues increased $113.5 million, or 12.8%, to$1,001.2 million, from $887.7 million for the Fiscal 2008Period.   An attendance increase of 6.8% coupled with a 5.7% increasein our average ticket price led to the favorable increase in the Fiscal 2009Period admissions revenues.  We believe that the overall increase inattendance during the Q2 2009 Period and the Fiscal 2009 Period was primarily aresult of incremental attendance from the breadth of key films exhibited duringthese periods coupled with the full benefit of the inclusion of 400 screensacquired from Consolidated Theatres on April 30, 2008 (as compared to twomonths in the Q2 2008 Period and Fiscal 2008 Period).  In addition, the Q2 2009 Period alsobenefited from a shift in our Q2 2009 Period fiscal calendar, which resulted inseveral days from the traditionally robust attendance week of July 4thbeing included in the Q2 2009 Period, but not the Q2 2008 Period.  Despite the favorable shift in the Q2 2009Period fiscal calendar, the Fiscal 2009 Period’s gain in attendance wasnegatively impacted by a shift in our Fiscal 2009 Period fiscal calendar, whichresulted in several days from the traditionally high attendance week betweenChristmas and New Years Day being included in the Fiscal 2008 Period, but notthe Fiscal 2009 Period.  Price increases identified during ourongoing periodic pricing reviews (which include analysis of various factorssuch as general inflationary trends and local market conditions) along with anincrease in the percentage of our admissions revenues generated by premiumpriced IMAX and 3D films exhibited during the Q2 2009 Period and the Fiscal2009 Period were the primary drivers of the increase in our Q2 2009 Period andFiscal 2009 Period average ticket prices. Based on our review of certain industrysources, the increase in our admissions revenues on a per screen basis wasslightly less than the industry’s results for the Q2 2009 Period and Fiscal2009 Period as compared to the Q2 2008 Period and the Fiscal 2008 Period. Webelieve the less than industry increase in admissions revenues on a per screenbasis was attributable to various factors including film product performanceand geographical differences, incremental screens from regional theatrecircuits and our allocation of capital during such periods.

 

***Concessions***

 

During the Q2 2009Period, total concessions revenues increased $26.0 million, or 13.8%, to$214.9 million, from $188.9 million for the Q2 2008 Period.  Total concessions revenues increased $39.3million, or 11.1%, to $394.3 million in the Fiscal 2009 Period, from $355.0million in the Fiscal 2008 Period.   Average concessions revenues perpatron during the Q2 2009 Period increased 2.5%, to $3.24, from $3.16 for theQ2 2008 Period and increased 4.3%, to $3.17 in the Fiscal 2009 Period, from$3.04 in the Fiscal 2008 Period.  Theincreases in total concessions revenues during the Q2 2009 Period and theFiscal 2009 Period were attributable to the aforementioned increase inattendance during such periods coupled with increases in average concessionsrevenues per patron.  The increase inaverage concessions revenues per patron for the Q2 2009 Period and the Fiscal2009 Period were primarily a result of price increases and the concessionfriendly mix of film product exhibited during such periods.

 

***Other Operating Revenues***

 

Other operatingrevenues increased $1.4 million, or 4.5%, to $32.6 million for the Q22009 Period, from $31.2 million for the Q2 2008 Period.  During the Fiscal 2009 Period, otheroperating revenues decreased $0.6 million, or 1.0%, to $59.3 million, from$59.9 million in the Fiscal 2008 Period.   Included in other operatingrevenues are the theatre access fees paid by National CineMedia (net ofpayments for on-screen advertising time provided to our beverage concessionaire),marketing revenues from our vendor marketing programs and other theatrerevenues, including revenue related to unredeemed gift certificates anddiscount tickets. The increase in other operating revenues during the Q2 2009Period was primarily attributable to an increase in marketing revenues from ourvendor marketing programs driven by our 11.1% gain in attendance.  The decrease in other operating revenuesduring the Fiscal 2009 Period was attributable

 

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to decreases in revenuesrelated to unredeemed gift certificates and discount tickets and other theatrerevenues, partially offset by an increase in marketing revenues from our vendormarketing programs.

 

***Film Rental and Advertising Costs***

 

Film rental andadvertising costs as a percentage of admissions revenues was approximately54.2% and 52.2% during the Q2 2009 Period and the Fiscal 2009 Period,respectively, which was consistent with that of the Q2 2008 Period and theFiscal 2008 Period.

 

***Cost of Concessions***

 

Cost ofconcessions increased $6.2 million, or 24.3%, during the Q2 2009 Period ascompared to the Q2 2008 Period. During the Fiscal 2009 Period, cost of concessionsincreased $7.5 million, or 15.6% as compared to the Fiscal 2009 Period.  Cost of concessions as a percentage of concessionsrevenues for the Q2 2009 Period were approximately 14.8% compared to 13.5% forthe Q2 2008 Period and for the Fiscal 2009 Period, cost of concessions as apercentage of concessions revenues were approximately 14.1% compared to 13.6%for the Fiscal 2008 Period.  The increasein cost of concessions as a percentage of concessions revenues during the Q22009 Period and the Fiscal 2009 Period was primarily related to a decrease inthe amount of vendor marketing revenue recorded as a reduction of cost ofconcessions.

 

***Rent Expense***

 

During the Q2 2009Period, rent expense increased $5.6 million, or 6.2%, to$95.6 million, from $90.0 million in the Q2 2008 Period. Rent expenseincreased by $15.2 million, or 8.8% to $188.5 million in the Fiscal 2009Period, from $173.3 million in the Fiscal 2008 Period.   Such increases were primarily due to the fullimpact of Consolidated Theatres during the Q2 2009 Period and the Fiscal 2009Period and to a lesser extent, general inflationary increases.

 

***Other Operating Expenses***

 

Other operatingexpenses increased $15.3 million, or 8.5%, to $195.8 million in theQ2 2009 Period, from $180.5 million in the Q2 2008 Period.  During the Fiscal 2009 Period, otheroperating expenses increased $32.6 million, or 9.3%, to $381.7 million, from$349.1 million in the Fiscal 2008 Period. Such increases were primarily due to increased variable payroll costsrelated to the increase in attendance, increased costs associated with higherIMAX and 3D film revenues, the full impact of Consolidated Theatres during theQ2 2009 Period and the Fiscal 2009 Period and general inflationary increases.

 

***General and Administrative Expenses***

 

General andadministrative expenses decreased $0.4 million, or 2.5%, to$15.4 million during the Q2 2009 Period as compared to $15.8 millionin the Q2 2008 Period. As a percentage of total revenues, general andadministrative expenses decreased to 2.0% during the Q2 2009 Period as comparedto 2.3% in the Q2 2008 Period.  For theFiscal 2009 Period, general and administrative expenses decreased$0.1 million, or 0.3%, to $30.7 million as compared to $30.8 millionin the Fiscal 2008 Period. As a percentage of total revenues, general andadministrative expenses decreased to 2.1% during the Fiscal 2009 Period ascompared to 2.4% in the Fiscal 2008 Period. The slight decrease in general and administrative expenses during the Q22009 Period and the Fiscal 2009 Period was primarily attributable to decreasesin legal and professional fees and share-based compensation expense during suchperiods.

 

***Depreciation and Amortization***

 

For the Q2 2009Period, depreciation and amortization expense increased $0.6 million, or1.2%, to $50.5 million, from $49.9 million in the Q2 2008Period.  Depreciation and amortizationexpense increased $4.2 million, or 4.4%, to $100.4 million for the Fiscal 2009Period, from $96.2 million in the Fiscal 2008 Period.  Such increases were primarily due to the fullimpact of Consolidated Theatres during the Q2 2009 Period and the Fiscal 2009Period.

 

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***Income from Operations***

 

Income fromoperations totaled $96.3 million during the Q2 2009 Period, whichrepresents an increase of $31.6 million, or 48.8%, from $64.7 millionin the Q2 2008 Period.  During the Fiscal2009 Period, income from operations increased $21.5 million, or 15.7%, to$158.8 million, from $137.3 million in the Fiscal 2008 Period.  The increase in income from operations duringthe Q2 2009 Period and the Fiscal 2009 Period was primarily attributable to theincreases in admissions and concessions revenues mentioned above.  Inaddition, we experienced increases in film and advertising expense, cost ofconcessions, rent expense, other operating expenses and net loss on disposaland impairment of operating assets, partially offset by slight reductions ingeneral and administrative expenses during the Q2 2009 Period and the Fiscal2009 Period.

 

***Interest Expense, net***

 

During the Q2 2009Period, net interest expense increased $6.0 million, or 19.4%, to $37.0million, from $31.0 million in the Q2 2008 Period. Net interest expensetotaled $74.2 million for the Fiscal 2009 Period, which represents an increaseof $12.4 million, or 20.1% from that of the Fiscal 2008 Period.  The increase in net interest expense duringthe Q2 2009 Period and the Fiscal 2009 Period was principally due to lessinterest income ($0.3 million and $1.7 million, respectively, for theQ2 2009 Period and Q2 2008 Period and $0.6 million and $4.7 million,respectively, for the Fiscal 2009 Period and the Fiscal 2008 Period) from a loweraverage cash balance outstanding as a result of the $209.3 millionacquisition of Consolidated Theatres during the second fiscal quarter of 2008,incremental interest expense from the Fiscal 2008 Period issuance of the$200.0 million 61⁄4% Convertible Senior Notes and a higher effectiveinterest rate on our term facility as a result of the Amendment to the AmendedSenior Credit Facility during the first quarter of fiscal 2009.

 

***Earnings Recognized from NCM***

 

The Companyrecorded $9.5 million and $5.4 million, respectively, in cashdistributions from National CineMedia during the Q2 2009 Period and Q2 2008Period. Approximately $1.5 million of these cash distributions receivedduring the Q2 2009 Period were recognized as a reduction in our investment inNational CineMedia. The Company recorded $21.9 million and$13.8 million, respectively, in cash distributions from National CineMediaduring the Fiscal 2009 Period and Fiscal 2008 Period. Approximately$3.3 million of these cash distributions received during the Fiscal 2009Period were recognized as a reduction in our investment in National CineMedia.In addition, during the Q2 2009 Period and Q2 2008 Period, the Company recordedan additional $0.8 million and $0.5 million, respectively, of equity earningswith respect to newly issued common units received from National CineMediaduring such periods.  As a result, duringthe Q2 2009 Period, the Q2 2008 Period, the Fiscal 2009 Period and the Fiscal2008 Period, the Company recognized $8.8 million, $5.9 million, $19.4million and $14.3 million, respectively, of earnings from NationalCineMedia.  Such amounts are presented as “Earnings recognized from NCM”in the unaudited condensed consolidated financial statements.

 

***Income Taxes***

 

The provision forincome taxes of $26.9 million and $14.7 million for the Q2 2009 Period and theQ2 2008 Period, respectively, reflect effective tax rates of approximately40.0% and 37.8%, respectively.  The provision for income taxes of $41.3million and $33.8 million for the Fiscal 2009 Period and the Fiscal 2008Period, respectively, reflect effective tax rates of approximately 40.1% and39.5%, respectively. The increase in the effective tax rate for the Q2 2009Period and the Fiscal 2009 Period was primarily attributable to the impact of asettlement of an uncertain tax position with state taxing authorities duringthe Q2 2008 Period. The effective tax rates for the Q2 2009 Period, the Q2 2008Period, the Fiscal 2009 Period and the Fiscal 2008 Period also reflect theimpact of certain non-deductible expenses.

 

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***Net Income Attributable to Controlling Interest***

 

During the Q2 2009Period, net income attributable to controlling interest totaled$40.5 million, which represents an increase of $16.2 million, fromnet income attributable to controlling interest of $24.3 million in the Q22008 Period.  Net income attributable tocontrolling interest totaled $61.8 million for the Fiscal 2009 Period,which represents an increase of $10.0 million, from net incomeattributable to controlling interest of $51.8 million for the Fiscal 2008Period.  The increase in net incomeattributable to controlling interest for the Q2 2009 Period and the Fiscal 2009Period was primarily attributable to an increase in operating income and theimpact of incremental earnings recognized from National CineMedia describedabove, partially offset by incremental interest expense during such periods.

 

***Cash Flows***

 

The followingtable summarizes certain cash flow data for the Fiscal 2009 Period and theFiscal 2008 Period (in millions):

 
| ** **                                            | ** ** | **Fiscal  2009 Period** | ** ** | **Fiscal  2008 Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net  cash provided by operating activities            |       | $                       | 236.8      |                    | $          | 156.5 |   |
| Net  cash used in investing activities                |       | (62.0                   | )          | (278.0                  | )          |
| Net  cash used in financing activities                |       | (77.3                   | )          | (89.9                   | )          |
| Net  increase (decrease) in cash and cash equivalents |       | $                       |  97.5 |                    | $          | (211.4 | ) |

 

*Fiscal2009 Period Compared to Fiscal 2008 Period*

 

Net cash flows providedby operating activities increased by approximately $80.3 million toapproximately $236.8 million for the Fiscal 2009 Period from approximately$156.5 million for the Fiscal 2008 Period. The increase in net cash flowsgenerated from operating activities for the Fiscal 2009 Period was primarilyattributable to an increase in total revenues due primarily to an increase inattendance, coupled with increases in average ticket prices and averageconcessions revenues per patron, partially offset by increases in variousexpense items.  In addition to these changes in cash flows, the timing ofother Fiscal 2009 Period vendor and income tax payments also positivelyimpacted cash flows from operating activities.

 

Net cash flowsused in investing activities totaled approximately $62.0 million for theFiscal 2009 Period compared to cash flows used in investing activities ofapproximately $278.0 million for the Fiscal 2008 Period. Contributing tothe decrease in cash flows used in investing activities during the Fiscal 2009Period was the impact of the $209.3 million acquisition of ConsolidatedTheatres during the Fiscal 2008 Period coupled with less capital expendituresof approximately $9.7 million during the Fiscal 2009 Period, partiallyoffset by less proceeds from the disposition of assets of approximately$2.9 million during the Fiscal 2009 Period.

 

Net cash flowsused in financing activities were approximately $77.3 million for theFiscal 2009 Period compared to cash flows used in financing activities of approximately$89.9 million for the Fiscal 2008 Period. The net decrease in cash flowsused in financing activities during the Fiscal 2009 Period was primarilyattributable to a $36.7 million reduction of dividends paid to shareholdersduring the Fiscal 2009 Period as compared to the Fiscal 2008 Period, partiallyoffset by the impact of the proceeds received in connection with the issuanceof $200.0 million 61/4% Convertible Senior Notes during theFiscal 2008 Period (net of cash used to redeem approximately $123.7 millionprincipal amount of the 33/4% Convertible Senior Notes during theFiscal 2008 Period), net cash proceeds associated with the 2008 ConvertibleNote Hedge and 2008 Warrant transactions during the Fiscal 2008 Period andincremental debt acquisition costs incurred during the Fiscal 2009 Period.

 

**Liquidityand Capital Resources**

 

On a consolidatedbasis, we expect our primary uses of cash to be for operating expenses, capital

 

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expenditures, generalcorporate purposes related to corporate operations, debt service and theCompany’s quarterly dividend payments. The principal sources of liquidity arecash generated from operations, cash on hand and borrowings under the AmendedSenior Credit Facility described below. Under the terms of the Amended SeniorCredit Facility and the Regal Cinemas Senior Notes issued subsequent to thequarter ended July 2, 2009, Regal Cinemas is restricted as to how much itcan advance or distribute to Regal, its indirect parent. Since Regal is aholding company with no significant assets other than the stock ofsubsidiaries, this restriction could impact Regal’s ability to effect future debtor dividend payments, pay corporate expenses or redeem or convert for cash its61⁄4% Convertible Senior Notes.

 

Our revenues aregenerated principally through admissions and concessions sales with proceedsreceived in cash or via credit cards at the point of sale. Our operatingexpenses are primarily related to film and advertising costs, rent andoccupancy, and payroll. Film costs are ordinarily paid to distributors within30 days following receipt of admissions revenues and the cost of theCompany’s concessions are generally paid to vendors approximately 30 to35 days from purchase. Our current liabilities generally include itemsthat will become due within twelve months. In addition, from time to time, weuse cash from operations and borrowings to fund dividends in excess of netincome attributable to controlling interest and cash flows from operatingactivities less cash flows from investing and other financing activities. As aresult, at any given time, our balance sheet may reflect a working capital deficit.

 

We fund the costof capital expenditures through internally generated cash flows, cash on hand, proceedsfrom disposition of assets and financing activities. Our capital requirementshave historically arisen principally in connection with acquisitions oftheatres, new theatre construction, adding new screens to existing theatres,upgrading the Company’s theatre facilities (including digital 3D and IMAX®screens) and replacing equipment.

 

The costs ofimplementing digital projection in our theatres will be primarily funded byDCIP.  DCIP and its members have yet to execute definitive agreementsconcerning the extent of such funding, but based on current negotiations, weexpect DCIP to fund the implementation of digital projection through virtualprint fees from motion picture studios. We will bear operating and maintenancecosts with respect to digital projection systems in our theatres, which weexpect to be similar to what we currently spend on our conventional filmprojectors.  Since the digital cinema deployment has progressed at aslower rate than expected, we have made incremental investments indigital projectors and 3D projection techology to selectively add 3D capable digital projection systems toour circuit to captureincremental 3D admissions revenues.  Tothat end, we plan to add an additional 150 digital 3D projection systems in the secondhalf of fiscal 2009 and expect to have these systems in operation for theupcoming holiday season with the ultimate goal of contributing these systems to DCIP once financing is secured.  Finally, we are also exploring with DCIPpotential alternatives to the current DCIP financing plans.  Should the conversion process to digital cinemarapidly accelerate and the major studios not cover the cost of the conversionas expected, we may have to incur additional capital expenditures associatedwith this potential change. 

 

We believe theinstallation of digital projection systems, when combined with 3D technology orIMAX® theatre systems, will allow us to offer our patrons premium 3D and largeformat movie experiences, which we believe will generate incremental revenuefor the Company.  We remain optimistic regarding the benefits of digitalcinema primarily as it relates to future growth potential associated with 3Dfilm product and other 3D content and are pleased to see growing support of 3Dand IMAX® film product by the major studios.

 

We intend tocontinue to grow our theatre circuit through selective expansion andacquisition opportunities. The Company has a formal and intensive reviewprocedure for the authorization of capital projects, with the most importantfinancial measure of acceptability for a discretionary non-maintenance capitalproject being whether its projected discounted cash flow return on investmentmeets or exceeds the Company’s internal rate of return targets. We currentlyexpect capital expenditures for theatre development, replacement, expansion,upgrading and replacements to be in the range of approximately$85.0 million to $100.0 million in fiscal year 2009, exclusive ofacquisitions. Such capital expenditures are expected to be partially fundedthrough asset dispositions conducted during the normal course of our business.During the Fiscal 2009 Period, we invested approximately $60.9 million incapital expenditures.

 

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For a discussionof other significant financing transactions which have occurred through January 1,2009, please refer to “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” containedin Part II, Item 7 of our annual report on Form 10-K for the fiscalyear ended January 1, 2009.

 

On March 10,2008, Regal issued $200.0 million aggregate principal amount of 61⁄4%Convertible Senior Notes. Concurrent with the issuance of the 61⁄4% ConvertibleSenior Notes, we entered into simultaneous convertible note hedge and warranttransactions with respect to our Class A common stock in order to reducethe potential dilution from conversion of the 61⁄4% Convertible Senior Notes intoshares of our Class A common stock. The net cost of the convertible notehedge and warrant transactions was approximately $6.6 million and isincluded as a component of equity in the accompanying unaudited condensedconsolidated balance sheets. See Note 4—“Debt Obligations” forfurther description of the 61⁄4% Convertible Senior Notes and the relatedconvertible note hedge and warrant transactions. The Company used cash on handand a portion of the net proceeds from the issuance of the 61⁄4% ConvertibleSenior Notes to redeem approximately $90.0 million principal amount of Regal’s33⁄4% Convertible Senior Notes due May 15, 2008, in a series of privatelynegotiated transactions.  As a result of the early redemption, the Companyrecorded a $3.0 million loss on debt extinguishment (as retrospectivelyadjusted for the adoption of FSP 14-1 described in Note 4—“DebtObligations”) during the quarter ended March 27, 2008.  In connectionwith the early redemption, the Company received net proceeds of approximately$13.7 million from Credit Suisse attributable to the convertible note hedge andwarrant transactions associated with the 33⁄4% Convertible Senior Notes describedfurther in Note 4—“Debt Obligations.” Such proceeds were recorded as anincrease to additional paid-in capital. In connection with the finalmaturity of the 33⁄4% Convertible Senior Notes on May 15, 2008, holders ofthe remaining $33.7 million in principal amount exercised their conversionrights. The Company elected to settle these conversions entirely in cash forapproximately $51.4 million using the remaining proceeds from the issuanceof the 61⁄4% Convertible Senior Notes.  In connection with theseconversions, the Company received net proceeds of approximately$5.2 million from Credit Suisse attributable to the convertible note hedgeand warrant transactions associated with the 33⁄4% Convertible Senior Notes. Suchproceeds were also recorded as an increase to additional paid-incapital. See Note 4—“Debt Obligations” for further discussion of thistransaction.

 

On April 30,2008, the Company acquired Consolidated Theatres, which held a total of 28theatres with 400 screens in Georgia, Maryland, North Carolina, South Carolina,Tennessee and Virginia. The total net cash purchase price for the acquisitionwas approximately $209.3 million. The results of operations of theacquired theatres have been included in the Company’s consolidated financialstatements for periods subsequent to the acquisition date. In conjunction withthe closing, we entered into a final judgment with the DOJ, which required usto hold separate and divest ourselves of four theaters comprising 52 screens inNorth Carolina. During the quarter ended September 25, 2008, the Companyentered into an agreement to sell three of the four theatres and recordedimpairment charges of approximately $7.9 million related to thesetheatres. On October 23, 2008, the Company completed its divestiture ofthe three theatres.  On April 30, 2009, the Company completed itsdivestiture of the last of the four theatres. See Note 2 “Acquisition” for further discussion of this transaction.

 

As described morefully in Note 3—“Investment in National CineMedia, LLC,” on April 9,2008, we received from National CineMedia approximately 0.8 million newlyissued common units of National CineMedia.  On May 29, 2008, wereceived from National CineMedia approximately 2.9 million newly issued commonunits of National CineMedia in accordance with the adjustment provisions of theCommon Unit Adjustment Agreement for our increase in screens in connection withour acquisition of Consolidated Theatres. Finally, on March 17, 2009, wereceived from National CineMedia approximately 0.5 million newly issuedcommon units of National CineMedia in accordance with the annual adjustmentprovisions of the Common Unit Adjustment Agreement.  These adjustmentsincreased the number of National CineMedia common units held by us toapproximately 25.4 million and as a result, on a fully diluted basis, weown a 25.0% interest in NCM, Inc. as of July 2, 2009.

 

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Regal Cinemasmaintains its Amended Senior Credit Facility, which consists of the TermFacility in an aggregate original principal amount of $1,700.0 million andthe Revolving Facility in an aggregate principal amount of up to$100.0 million. Due to the bankruptcy filings by Lehman and certain of itsaffiliates and the sudden deterioration in the credit standing of the Lehmanaffiliate party to our Revolving Facility, the aggregate principal amountavailable for drawing under the Revolving Facility was reduced by$5.0 million to $95.0 million during fiscal 2008. The RevolvingFacility has a separate sublimit of $10.0 million for short-term loans anda sublimit of $30.0 million for letters of credit. The Term Facility willmature on October 27, 2013 and the Revolving Facility will mature on October 27,2011.

 

As described morefully Note 4—“Debt Obligations,” on January 20, 2009, Regal Cinemasentered into the First Amendment to the Amended Senior Credit Facility. As aresult of the Amendment, either the Company, or its wholly-owned subsidiary,REH, will be permitted from time to time to purchase loans outstanding underthe Amended Senior Credit Facility. The Amendment provides that the aggregateprincipal amount of loans that can be repurchased shall not be more than$300.0 million and all such repurchases shall close on or beforeapproximately October 17, 2009 and sets forth the terms for implementing aDutch Auction. There can be no assurance that the Company will conduct a DutchAuction or that, if the Company conducts one, the Company will be able tosuccessfully purchase loans at a price less than their aggregate principalamount.  Under the Amendment, (i) the Applicable Margin, as definedin the Amendment, for Revolving Loans under the Revolving Facility and for TermLoans under the Term Facility (each of which are determined by reference to thethen-applicable Consolidated Leverage Ratio) is increased by 2.0%, (ii) RegalCinemas’ ability to elect interest periods for LIBOR borrowings is limited tointerest periods of 2, 3, 6 or (if available to all lenders) 12 months,with 1 month interest periods no longer being available, and (iii) RegalCinemas may exclude a minimum of $100.0 million, but not more than$200.0 million, of Subordinated Debt, as defined in the Amendment, that isused to repay amounts outstanding under the Term Loan from certain financialcovenant calculations.

 

As of July 2,2009, we had approximately $1,653.3 million aggregate principal amount outstandingunder the Term Facility, $200.0 million aggregate principal amountoutstanding under the 61⁄4% Convertible Senior Notes, and $51.5 millionaggregate principal amount outstanding under the Regal Cinemas 93/8% SeniorSubordinated Notes. As of July 2, 2009, we had approximately$2.7 million outstanding in letters of credit, leaving approximately$92.3 million available for drawing under the Revolving Facility.  Please refer to Note 12 to the unauditedcondensed consolidated financial statements included in Part 1, Item 1 ofthis Form 10-Q for a discussion of the issuance of Regal Cinemas SeniorNotes subsequent to the quarter ended July 2, 2009.

 

As described inNote 5 to the consolidated financial statements included in our annualreport on Form 10-K for the fiscal year ended January 1, 2009, RegalCinemas had three interest rate swap agreements effective as of January 1,2009, which hedged an aggregate of approximately $700.0 million ofvariable rate debt obligations.  Duringthe quarter ended April 2, 2009, Regal Cinemas entered into fouradditional hedging relationships via four distinct interest rate swapagreements with maturity terms of two to three years each from the respectiveeffective dates of the swaps and require Regal Cinemas to pay interest at fixedrates ranging from 2.15% to 2.53% and receive interest at a variable rate.These interest rate swaps were designated to hedge approximately $1,000.0million of variable rate debt obligations.  Three of these interest rateswap agreements (designated to hedge approximately $800.0 million of variablerate debt obligations) became effective during the two quarters ended July 2,2009.  On June 30, 2009, one of our interest rate swaps designated tohedge $300.0 million of variable rate debt obligations matured. As aresult, the Company’s effective interest rate swap agreements hedge anaggregate of approximately $1,200.0 million of variable rate debt obligationsas July 2, 2009 at an effective rate of approximately 6.82%.

 

On September 15,2008, because of the sudden deterioration in the credit standing of the Lehmancounterparty to an interest rate swap agreement designated to hedgeapproximately $100.0 million of variable rate debt obligations, theCompany concluded that the hedging relationship was no longer expected to behighly effective in achieving offsetting cash flows. As a result, on September 15,2008, the hedging relationship ceased to qualify for hedge accounting underSFAS No. 133. On October 3, 2008, the Lehman counterparty filed forbankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. As aresult, an

 

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event of default occurredunder the provisions of the interest rate swap agreement between us and theLehman counterparty, which effectively terminated the interest rate swap on October 3,2008.  During the quarter ended July 2,2009, the Company paid a final termination value of approximately $2.5 million(including accrued interest) associated with the interest rate swap.

 

Regal paid twoquarterly cash dividends of $0.18 per share on each outstanding share of theCompany’s Class A and Class B common stock, or approximately$55.4 million in the aggregate, during the Fiscal 2009 Period. Further, on July 30, 2009, the Company declared a cash dividend of $0.18per share on each share of the Company’s Class A and Class B commonstock (including outstanding restricted stock), payable on September 18,2009, to stockholders of record on September 10, 2009.  Thesedividends have been or will be funded through cash flow from operations andavailable cash on hand. We, at the discretion of the board of directors andsubject to applicable law, anticipate paying regular quarterly dividends on ourClass A and Class B common stock for the foreseeable future. Theamount, if any, of the dividends to be paid in the future will depend upon ourthen available cash, anticipated cash needs, overall financial condition, loanagreement restrictions, future prospects for earnings and cash flows, as wellas other relevant factors.

 

EBITDA (earningsbefore interest, taxes, depreciation, and amortization) was approximately $154.9 millionand $119.9 million for the Q2 2009 Period and the Q2 2008 Period,respectively and approximately $277.7 million and $243.6 million for the Fiscal2009 Period and Fiscal 2008 Period, respectively. The increase in EBITDA duringthe Q2 2009 Period and Fiscal 2009 Period was primarily attributable toincreases in operating income during such periods.  The Company uses EBITDA as a supplementalliquidity measure because we find it useful to understand and evaluate ourcapacity, excluding the impact of interest, taxes, and non-cash depreciationand amortization charges, for servicing our debt, paying dividends andotherwise meeting our cash needs, prior to our consideration of the impacts ofother potential sources and uses of cash, such as working capital items. Webelieve that EBITDA is useful to investors for these purposes as well. EBITDAshould not be considered an alternative to, or more meaningful than, net cashprovided by operating activities, as determined in accordance with U.S.generally accepted accounting principles (“GAAP”), since it omits the impact ofinterest, taxes and changes in working capital that use or provide cash (suchas receivables, payables and inventories) as well as the sources or uses ofcash associated with changes in other balance sheet items (such as long-termloss accruals and deferred items). Because EBITDA excludes depreciation andamortization, EBITDA does not reflect any cash requirements for the replacementof the assets being depreciated and amortized, which assets will often have tobe replaced in the future. Further, EBITDA, because it also does not reflectthe impact of debt service, income taxes, cash dividends, capital expendituresand other cash commitments from time to time as described in more detailelsewhere in this quarterly report on Form 10-Q, does not represent howmuch discretionary cash we have available for other purposes. Nonetheless,EBITDA is a key measure expected by and useful to our fixed income investors,rating agencies and the banking community all of whom believe, and we concur,that these measures are critical to the capital markets’ analysis of ourability to service debt, fund capital expenditures, pay dividends and otherwisemeet cash needs, respectively. We also evaluate EBITDA because it is clear thatmovements in these non-GAAP measures impact our ability to attract financingand pay dividends. EBITDA, as calculated, may not be comparable to similarlytitled measures reported by other companies. A reconciliation of EBITDA to netcash provided by operating activities is calculated as follows (in millions):

 
| ** **                                   | ** ** | **Q2 2009 Period** | ** ** | **Q2 2008 Period** | ** ** | **Fiscal  2009 Period** | ** ** | **Fiscal  2008 Period** | ** **  |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|-------------------------|------------|-------------------------|-------------|
| EBITDA                                       |       | $                            | 154.9      |                         | $          |  119.9             |       | $                       |  277.7 |   | $ |  243.6 |   |
| Interest  expense, net                       |       | (37.0                        | )          | (31.0                        | )          | (74.2                   | )          | (61.8                   | )           |
| Provision  for income taxes                  |       | (26.9                        | )          | (14.7                        | )          | (41.3                   | )          | (33.8                   | )           |
| Deferred  income taxes                       |       | (2.7                         | )          | (28.0                        | )          | (4.3                    | )          | (27.3                   | )           |
| Changes  in operating assets and liabilities |       | 41.9                         |       | 30.0                         |       | 46.3                    |       | 15.0                    |        |
| Loss  on debt extinguishment                 |       | —                       |       | —                       |       | —                  |       | 3.0                     |        |
| Other  items, net                            |       | 18.2                         |       | 9.1                          |       | 32.6                    |       | 17.8                    |        |
| Net  cash provided by operating activities   |       | $                            | 148.4      |                         | $          |  85.3              |       | $                       |  236.8 |   | $ |  156.5 |   |

 

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**ContractualCash Obligations and Commitments**

 

For a summary ofour contractual cash obligations and commitments and off-balance sheetarrangements as of January 1, 2009, 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 January 1,2009.  As of July 2, 2009, there were no material changes outside theordinary course of our business in our contractual cash obligations andcommitments.  Please refer to Note 12 tothe unaudited condensed consolidated financial statements included in Part 1,Item 1 of this Form 10-Q for a discussion of the issuance of Regal CinemasSenior Notes subsequent to the quarter ended July 2, 2009.  We believe that the amount of cash and cashequivalents on hand, cash flow expected from operations and availability underour Revolving Facility will be adequate for the Company to execute its businessstrategy and meet anticipated requirements for lease obligations, capitalexpenditures, working capital and debt service for the next 12 months.

 

**CriticalAccounting Estimates**

 

For a discussionof accounting policies that we consider critical to our business operations andthe understanding of our results of operations and affect the more significantjudgments and estimates used in the preparation of our unaudited condensedconsolidated financial statements, please refer to Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Estimates” contained in our annual report on Form 10-Kfor the fiscal year ended January 1, 2009 and incorporated by referenceherein.  As of July 2, 2009, there were no significant changes in ourcritical accounting policies or estimation procedures.

 

**RecentAccounting Pronouncements**

 

For a discussionof the recent accounting pronouncements relevant to our operations, pleaserefer to the information provided under Note 10—“Recent AccountingPronouncements” to the accompanying unaudited condensed consolidated financialstatements, which information is incorporated by reference herein.

 

**Seasonality**

 

The Company’srevenues are usually seasonal, coinciding with the timing of releases of motionpictures by the major distributors. Generally, studios release the mostmarketable motion pictures during the summer and the holiday seasons. Theunexpected emergence of a “hit” film during other periods can alter thetraditional pattern. The timing of movie releases can have a significant effecton the Company’s results of operations, and the results of one quarter are notnecessarily indicative of the results for the next or any other quarter. Theseasonality of motion picture exhibition, however, has become less pronouncedas studios are releasing motion pictures somewhat more evenly throughout theyear.

 

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

The Company’smarket risk is confined to interest rate exposure of its and its wholly ownedsubsidiaries’ debt obligations that bear interest based on floating rates. TheAmended Senior Credit Facility provides variable rate interest that could be adverselyaffected by an increase in interest rates. Borrowings under the Term Facilitybear interest, at Regal Cinemas’ option, at either an adjusted Eurodollar rate(as defined in the Amended Senior Credit Facility) or the base rate plus, ineach case, an applicable margin.

 

Under the terms ofthe Company’s effective interest rate swap agreements (which hedge an aggregateof approximately $1,200.0 million of variable rate debt obligations as of July 2,2009) described in Note 4—“Debt Obligations,” Regal Cinemas pays interestat various fixed rates ranging from 2.22% to 4.994% and receives interest at avariable rate based on the 3-month LIBOR.  Please refer to Note 12 to theunaudited condensed consolidated financial statements included in Part 1,Item 1 of this Form 10-Q for a discussion of the issuance of Regal CinemasSenior Notes subsequent to the quarter ended July 2, 2009.

 

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As of July 2,2009 and January 1, 2009, borrowings of $1,653.3 million and$1,661.8 million, respectively, were outstanding under the Term Facilityand the prior term facility, respectively, at an effective interest rate of6.14% (as of July 2, 2009) and 4.42% (as of January 1, 2009), afterthe impact of the interest rate swaps is taken into account. A hypotheticalchange of 10% in the Company’s effective interest rate under the Term Facilityas of July 2, 2009, would increase or decrease interest expense by$2.5 million****for the quarter ended July 2,2009.

 

**Item 4. CONTROLS AND PROCEDURES**

 

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit to theCommission under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, processed, summarized and reported within the time periodsspecified by the Commission’s rules and forms, and that information isaccumulated and communicated to our management, including our principalexecutive, principal financial and principal accounting officers (whom we referto in this periodic report as our Certifying Officers), as appropriate to allowtimely decisions regarding required disclosure. Our management evaluated, withthe participation of our Certifying Officers, the effectiveness of ourdisclosure controls and procedures as of July 2, 2009, pursuant to Rule 13a-15(b) underthe Exchange Act. Based upon that evaluation, our Certifying Officers concludedthat, as of July 2, 2009, our disclosure controls and procedures wereeffective.

 

There were nochanges in our internal control over financial reporting that occurred duringour most recently completed fiscal quarter that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1. LEGAL PROCEEDINGS**

 

Informationrequired to be furnished by us under this Part II, Item 1 (LegalProceedings) is incorporated by reference to Note 7—“Commitments andContingencies” of our notes to the accompanying unaudited condensedconsolidated financial statements included in Part I, Item 1 (FinancialStatements) of this quarterly report on Form 10-Q.

 

**Item 1A. RISK FACTORS**

 

There have been nomaterial changes from risk factors as previously disclosed in our annual reporton Form 10-K filed on March 2, 2009 with the Commission (File No. 001-31315)for the fiscal year ended January 1, 2009.

 

**Item 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Our 2009 annual meeting of stockholders was held on May 6,2009 in Knoxville, Tennessee. The matters submitted for a vote at the meetingand the related election results were are as follows:

 

1.  Election of three Class I directors toserve for three-year terms on our board of directors:

 
| ** **          | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|---------------------|------------|-------------|------------|--------------|------------|
|                |       |        |       |         |       |
| Charles E. Brymer   |       | 352,586,483 |       | 350,032      |       |
| Michael L. Campbell |       | 349,889,319 |       | 3,047,196    |       |
| Alex Yemenidjian    |       | 352,336,129 |       | 600,386      |       |

 

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Those Directors whose terms of office continued afterthe meeting were as follows: Thomas D. Bell, Jr., Stephen A. Kaplan, DavidE. Keyte, Lee M. Thomas, Jack Tyrrell and Nestor R. Weigand, Jr.

 

2.               Ratification of the Audit Committees’ selection ofKPMG LLP as our independent registered public accounting firm for the fiscalyear ending December 31, 2009:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
|        |       |        |       |        |       |                 |       |
| 352,856,096 |       | 68,259      |       | 12,159      |       | —               |       |

 

**Item 6. EXHIBITS**

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                 |       | Indenture, dated July 15, 2009, by  and between Regal Cinemas Corporation, Regal Entertainment Group, certain  subsidiaries of Regal Cinemas Corporation listed as guarantors on the  signature pages thereto and U.S. Bank National Association, including the  form of 8.625% Senior Note due 2019 (included as Exhibit A to the  Indenture) (filed as exhibit 4.1 to Registrant’s Current Report on  Form 8-K (Commission File No. 001-31315) on July 15, 2009, and  incorporated by reference herein) |
| 4.2                 |       | Registration Rights Agreement, dated  July 15, 2009, by and between Regal Cinemas Corporation, Regal  Entertainment Group, certain subsidiaries of Regal Cinemas Corporation listed  as on the signature pages thereto and the initial purchasers listed  therein (filed as exhibit 4.2 to Registrant’s Current Report on Form 8-K  (Commission File No. 001-31315) on July 15, 2009, and incorporated  by reference herein)                                                                                   |
| 10.1                |       | Purchase Agreement, dated July 9,  2009, among Regal Cinemas Corporation, Regal Entertainment Group, certain  subsidiaries of Regal Cinemas Corporation listed as guarantors on the  signature pages thereto and Credit Suisse Securities (USA) LLC, as  representatives of the initial purchasers listed on Schedule A thereto (filed  as exhibit 10.1 to Registrant’s Current Report on Form 8-K (Commission  File No. 001-31315) on July 15, 2009, and incorporated by reference  herein)                   |
| 10.2                |       | Amended and Restated Employment Agreement,  dated May 5, 2009, by and between Regal Entertainment Group and Michael  L. Campbell (filed as exhibit 10.1 to Registrant’s Current Report on  Form 8-K (Commission File No. 001-31315) on May 6, 2009, and  incorporated by reference herein)                                                                                                                                                                                                                          |
| 10.3                |       | Amended and Restated Employment Agreement,  dated May 5, 2009, by and between Regal Entertainment Group and Amy E.  Miles (filed as exhibit 10.2 to Registrant’s Current Report on Form 8-K  (Commission File No. 001-31315) on May 6, 2009, and incorporated by  reference herein)                                                                                                                                                                                                                                 |
| 10.4                |       | Amended and Restated Employment Agreement,  dated May 5, 2009, by and between Regal Entertainment Group and Gregory  W. Dunn (filed as exhibit 10.3 to Registrant’s Current Report on  Form 8-K (Commission File No. 001-31315) on May 6, 2009, and  incorporated by reference herein)                                                                                                                                                                                                                              |
| 10.5                |       | Employment Agreement, dated May 5,  2009, by and between Regal Entertainment Group and David H. Ownby (filed as  exhibit 10.4 to Registrant’s Current Report on Form 8-K (Commission File  No. 001-31315) on May 6, 2009, and incorporated by reference  herein)                                                                                                                                                                                                                                                    |
| 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 therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| ** **                  | **REGAL  ENTERTAINMENT GROUP** |
|-----------------------------|--------------------------------|
|                        |                           |
| Date: August 11,  2009 | By:                            | /s/  AMY E.  MILES |
|                        |                           | Amy E. Miles |
|                        |                           | *Chief  Executive Officer (Principal Executive Officer)* |
|                        |                           |   |
| Date: August 11,  2009 | By:                            | /s/  DAVID H.  OWNBY |
|                        |                           | David H. Ownby |
|                        |                           | *Executive  Vice President, Chief* |
|                        |                           | *Financial  Officer and Treasurer (Principal Financial Officer and Principal Accounting  Officer)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                 |       | Indenture, dated July 15, 2009, by  and between Regal Cinemas Corporation, Regal Entertainment Group, certain  subsidiaries of Regal Cinemas Corporation listed as guarantors on the  signature pages thereto and U.S. Bank National Association, including  the form of 8.625% Senior Note due 2019 (included as Exhibit A to the  Indenture) (filed as exhibit 4.1 to Registrant’s Current Report on  Form 8-K (Commission File No. 001-31315) on July 15, 2009, and  incorporated by reference herein) |
| 4.2                 |       | Registration Rights Agreement, dated  July 15, 2009, by and between Regal Cinemas Corporation, Regal  Entertainment Group, certain subsidiaries of Regal Cinemas Corporation listed  as on the signature pages thereto and the initial purchasers listed  therein (filed as exhibit 4.2 to Registrant’s Current Report on Form 8-K  (Commission File No. 001-31315) on July 15, 2009, and incorporated  by reference herein)                                                                                   |
| 10.1                |       | Purchase Agreement, dated July 9,  2009, among Regal Cinemas Corporation, Regal Entertainment Group, certain  subsidiaries of Regal Cinemas Corporation listed as guarantors on the  signature pages thereto and Credit Suisse Securities (USA) LLC, as  representatives of the initial purchasers listed on Schedule A thereto (filed  as exhibit 10.1 to Registrant’s Current Report on Form 8-K (Commission File  No. 001-31315) on July 15, 2009, and incorporated by reference  herein)                   |
| 10.2                |       | Amended and Restated Employment Agreement,  dated May 5, 2009, by and between Regal Entertainment Group and Michael  L. Campbell (filed as exhibit 10.1 to Registrant’s Current Report on Form 8-K  (Commission File No. 001-31315) on May 6, 2009, and incorporated by  reference herein)                                                                                                                                                                                                                          |
| 10.3                |       | Amended and Restated Employment Agreement,  dated May 5, 2009, by and between Regal Entertainment Group and Amy E.  Miles (filed as exhibit 10.2 to Registrant’s Current Report on Form 8-K  (Commission File No. 001-31315) on May 6, 2009, and incorporated by  reference herein)                                                                                                                                                                                                                                 |
| 10.4                |       | Amended and Restated Employment Agreement,  dated May 5, 2009, by and between Regal Entertainment Group and Gregory  W. Dunn (filed as exhibit 10.3 to Registrant’s Current Report on  Form 8-K (Commission File No. 001-31315) on May 6, 2009, and  incorporated by reference herein)                                                                                                                                                                                                                              |
| 10.5                |       | Employment Agreement, dated May 5,  2009, by and between Regal Entertainment Group and David H. Ownby (filed as  exhibit 10.4 to Registrant’s Current Report on Form 8-K (Commission File  No. 001-31315) on May 6, 2009, and incorporated by reference  herein)                                                                                                                                                                                                                                                    |
| 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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